Contracts Outline for Professor Claus
This outline is probably most useful for the summaries of the cases
Contracts
Professor L. Claus
I.
Contracts
A.
Contracts are promises that are legally enforceable.
B.
Formation of a contract requires two basic elements:
i)
Consideration
ii)
Mutual Assent
II.
Freedom of Contract and Public Policy
(1)
In the Matter of Baby “M”
(2)
Marvin v. Marvin
III.
Remedies for Breach of Contract (Damages)
A.
Notes
i)
Remedies are usually monetary damages awarded to the
injured party when a contract is broken.
B.
The Three Damage Interests (alternative)
(1)
Restitution or quasi-contract damages
(a)
Restitutionary damages are based on the reasonable value
of a benefit conferred.
Restitutionary damages are commonly used in three situations
(i)
Where a party has conferred a benefit under a contract
that turns out to be unenforceable because of some defense.
(ii)
Where there was an enforceable contract and a breach,
but the contract was a losing one for the innocent party, and she is better off
with restitution damages than with expectation damages.
(iii)
Where no contract was formed, but a benefit was
conferred in a precontractual stage when the parties believed they had concluded
or would conclude a contract.
(2)
Reliance
(a)
Reliance damages are based on the nonbreaching party’s
costs and have the purpose of putting the nonbreaching party in the position he
would have been in had the promise not been made.
(b)
Restatement
(Second) of Contracts s. 349 ( at p. 117)
(3)
Expectation
(a)
Expectation damages are based on the contract price and
have the purpose of placing the victim of a breach in the position he would have
been in if the promise had been performed.
Expectation damages give the injured party the benefit of the bargain and
are usually used where the broken promise is enforceable because it was part of
a bargain.
(b)
The primary calculation for expectation damages is as
follows: Add to the measure of
damages anything the injured party would have if the contract had been
performed, but does not have now.
Subtract what the injured party has, but would not have had if the contract had
been performed.
See
Restatement (Second) of Contracts s. 347
(at p. 68)
(i)
Incidental damages are comprised of elements such as the
cost of shipping goods to and from a buyer who has wrongfully rejected the
goods, the costs of storing and insuring goods pending resale after a buyer
wrongfully rejects them, and or the cost of going to the market to purchase
substitute goods. If the injured
party incurs such incidental damages, they are normally added to the expectation
damages to which he is entitled.
(4)
Hawkins v. McGee (p. 9)
(a)
Hawkins sued McGee, a doctor, for not making his hand
perfect after he had operated on it.
The court ruled that the true measure of damages was the difference between the
value of the goods as they would have been if the warranty as to the quality had
been true and the actual value at the time of the sale.
Pain and suffering were not factored into the damages because they had
nothing to do with the difference in value.
The true measure of damages in this case was therefore the difference
between the perfect hand promised by Dr. McGee and the value of the hand in its
present condition.
(5)
Nurse v. Barns (p. 10)
(a)
Reliance damages
(b)
Nurse paid Barnes 10lbs to use iron mills for six
months. Barns breached after Nurse
had invested raw materials of approximately 500lbs.
The jury awarded Nurse 500lbs as a result of the breach and the judge
affirmed. The judge reasoned that
special damages above and beyond the 10lbs consideration could be awarded as a
consequence of breach.
(6)
Restatement
(Second) of Contracts s. 347 (at p. 68)
(a)
Expectation
interest defined (subject to limitations in s. 350-353)
(7)
Tongish v. Thomas (p. 12)
(a)
Tongish entered into a contract to sell sunflower seeds
to Decatur Coop Association, but due to extenuating circumstances in the
marketplace that caused the price of sunflower seeds to rise dramatically,
Tongish breached his contract with Coop in order to sell his seeds to Thomas at
a much higher price. Coop brought
action against Tongish for breach.
The court ruled that the damages to Coop were more than just the lose of
profits, and that in an action for the breach of contract for the sale of goods,
the proper measure of damages is the difference between the market value of the
goods and the price of the goods as agreed upon by the parties.
The rational of the court was to discourage people from breaching
contracts. By awarding Decatur Coop
the difference between the market value of the goods and the price of goods as
agreed to, instead of merely awarding Decatur Coop its lost profit, the court
discourages the breach of contracts
(b)
Note that Tongish committed an efficient breach and that
all parties would have been better off if the court had awarded Decatur Coop its
lost profits.
C.
Three Limitations on Damages
i)
Remoteness or Foreseeability of Harm
(1)
For a loss to be recoverable, it must be foreseeable in
one of two ways (yes to either)
(a)
What losses would people think of?
(i)
Objective test-what would a typical intelligent person
think of?
(b)
Are there any special circumstances that the breaching
party knew about?
(2)
Restatement
(Second) of Contracts s. 351 (p. 101) Unforseeability and Related Limitations on
Damages
(3)
Hadley v. Baxendale (p. 13)
(a)
Consequential damages can be recovered only if, at the
time the contract was made, the defendant had reason to foresee the damages as a
probably consequence of the breach.
(b)
Hadley owned a mill and needed the crank shaft replaced.
Hadley contracted with Baxendale, a courier, for the delivery of a new
shaft. The clerk for Baxendale was
told that the shaft was a necessity and that it was needed immediately.
The clerk told Hadley that if the shaft were delivered before noon, it
should arrive the next day. Hadley
delivered the shaft before noon, but Baxendale took several days to deliver.
Hadley brought action against Baxendale, claiming that Baxendale had
breached his duty to deliver. Hadley
sued for the loss of profits resulting in the mill being down.
The court ruled that Hadley was not able to recover damages for lost
profits. An injured party is only
able to recover the measure of damages that both parties may reasonably foresee
as a result of the breach. Where
special circumstances exist that would give rise to damages in excess of those
damages that are reasonably foreseeable, the defendant must have been informed
of the special circumstances.
Baxendale was not informed.
(c)
Having the more
legally sophisticated party default forces the less sophisticated party to get
information.
(4)
Hector Martinez and Co. v. Southern Pacific
Transportation Co. (p. 14)
(a)
(5)
Morrow v. First National Bank of
(a)
Morrow sought damages from First National Bank for
losses incurred by the burglary of their coin collection, as a result of First
National’s failure to notify them as to the availability of three safety deposit
boxes. The court ruled that First
National Bank was not liable for the value of the stolen coins.
In an action for consequential damages, under the “tacit agreement test,”
the plaintiff must demonstrate that the defendant expressly assumed
responsibility for the plaintiff’s sustaining special damages as a result of the
defendant’s breach.
(i)
Better reasoning:
The promise that was broken was not part of the security boxes.
It was a gratuitous promise to tell when the boxes were available.
ii)
Certainty of Harm
(1)
Damages can be recovered only if their amount is
reasonable certain of computation.
(2)
(a)
Dempsey had contracted with the Chicago Coliseum Club to
fight Willis. Dempsey later
repudiated the contract and fought Tunney, whereby Chicago Coliseum Club brought
suit for breach against Dempsey. An
aggrieved party may not recover special damages (lost profits) unless such
damages are definite and certain.
Costs incurred in preparing a contract are not recoverable because such costs
are part of the negotiations which each party must bear and which do not
naturally flow from a breach of contract.
Attorney fees and court costs are not recoverable unless provided for in
the contract. Costs incurred in
preparing for the performance of a contract are recoverable.
(i)
Reliance implies concept of costs incurred.
(3)
Anglia Telvision Ltd. v. Reed (p. 17)
(a)
Uncertaintly about expectation, assume injured party has
broken even
(b)
(4)
Mistletoe Express Service v. Locke (p.18)
(a)
Locke sought damages for expenses incurred in
preparation of performance pursuant to a contract with Mistletoe Express
Service. The court ruled that where
one party to a contract makes expenditures in preparation for performance under
the contract, the proper measure of damages for breach includes the recovery of
her investment in order to return her to the position she would have enjoyed had
the contract been performed. Since
lOcke would have failed to make a profit if the contract had been fully
performed by the parties, she is not placed in position superior to the one she
would have been in had the contract been executed.
However, since Mistletoe failed to sustain its burden in demonstrating
the amount of that loss, that unknown amount cannot be used to reduce Locke’s
damages.
iii)
Avoidability of Harm (onus on breacher)
(1)
Duty to mitigate
(a)
An injured party is not permitted to recover damages
that could have been avoided by reasonable efforts.
(2)
1677 Virtue and Bird
(a)
Plaintiff contracted to carry goods to town-didn’t meet
for six hours, horse was left in the rain during this time and died.
Court does not award plaintiff damages because the plaintiff could have
avoided the harm.
(3)
(a)
A contractor is under a duty to not add to the owner’s
damages by continuing to work after
the owner breaches the contract.
(b)
(4)
Shirley Maclaine Parker v. Twentieth Century-Fox Film
Corp. (p. 20)
(a)
How important differences between jobs are to employee,
a subjective test.
(b)
20th Century Fox contracted with Ms. Parker
to star in a musical film called “Bloomer Girl.”
Fox decided not to produce the film and instead offered Ms. Parker a part
in a Western Style movie for the same amount of money.
Ms. Parker refused this other role and sued for the money she would have
made off of the original film. The
court awarded Ms. Parker damages.
Projected earnings from other employment opportunities only offset damages if
the other employment was substantially similar to that of which the employee has
been deprived. In this case, the
western film and the musical were not substantially similar (shooting location
also changed) and judgment was in favor of Ms. Parker.
(5)
Neri v. Retail Marine Corp. (p. 21)
(a)
Lost volume doctrine UCC 2-708
(i)
A seller who can accommodate more than one buyer and for
whom a buyer’s breach does not release the goods for sale to another customer;
in such a case, the appropriate measure of damages is the net profit the seller
would have earned pursuant to the sale.
(b)
Retail Marine sought the recoup lost profits under a
contract for the sale of a boat to Neri.
Neri contracted to buy a boat.
After laying down the deposit, Neri was hospitalized and Neri’s lawyer
sent a letter to Retail Marine rescinding the contract.
Marine had already ordered the boat and refused to refund the deposit.
The court ruled that the subsequent sale of the boat to another buyer was
not in replacement of, but was rather in addition to the original sale.
The court held that Neri may recover his deposit, minus Retail Marine’s
lost profit, and proven incidental damages (storing the boat).
iv)
Contracting Around the Default Rules of Damages
(1)
Express Limitations of Consequential and Incidental
Damages
(a)
UCC §2-719
(2)
Liquidated Damages vs. Penalty Clauses
(a)
A liquidated damage provision is a provision in a
contract that fixes the amount of damages that will be recoverable in the event
of a breach. The enforceability of
such a provision depends on whether the court finds it to be a valid liquidated
damages provision or a penalty. If
the court determines that the provision is a penalty, then it is not
enforceable, and the injured party is limited to whatever damages she can prove.
(b)
Kemble v. Farren
(i)
Farren agreed to perform in Kemble’s theater.
Their contract provided that if either party breached the contract, he
would pay £1,000 damages and that this was not a penalty.
Farren breached and Kemble sued to collect the full £1,000.
The court held that there is nothing illegal or unreasonable about
parties, by mutual agreement, fixing the amount to be paid for breach on an
agreement when the damages which will result from the breach are uncertain in
nature. The court ruled against
Kemble holding that where a contract provides that a very large sum is to become
immediately payable for any breach, however minor, the court will direct the
jury to assess the real damages sustained as a result of the breach.
(c)
Wassenaar v. Towne Hotel
(i)
Wassenaar had entered into an employment contract with
his employer, Towne Hotel and the contract contained a liquidated damages
clause. When Towne Hotel terminated
his employment before the expiration of the contract, Wassenar successfully sued
to enforce the damage clause granting him a sum equal to the remainder of his
salary. The court ruled in favor of
Wassenar, holding that the stipulated damages clause is a valid provision for
liquidated damages and therefore Wassenar’s subsequent earnings do not reduce
the damages award.
(d)
Lake River Corp. v. Carborundum Co. (Posner)
(i)
Applicable state law requires that a liquidated damages
clause, in order to be enforceable, must be a reasonable estimation at the time
of contracting of the probable damages from breach, and the need for estimation
must be based on the likely difficulty of assessing the actual damages suffered
in the event of breach; otherwise such a clause is void as a penalty.
(3)
Punitive Damages and Arbitration Clauses
(a)
As a general rule, punitive damages are not available as
a remedy for breach of contract, partly on the theory that such a policy would
jeopardize the stability and predictability of commercial transactions.
(i)
The exceptions to this rule are as follows
1.
Tort
a.
Punitive damages are available if the conduct
constituting the breach is independently a tort, has tortuous elements, or is
fraudulent or outrageous.
b.
Putative damages may be available for a breach of the
duty of good faith, on the theory that a breach of good faith is tortious
(b)
Garrity v. Lyle Stuart, Inc.
(i)
Garrity, an author, sought to confirm an arbitrator’s
award granting her both compensatory and punitive damages resulting from
publisher Lyle Stuart’s wrongful withholding of royalties from the sales of her
books. The court ruled that an
arbitrator does not have the authority to award punitive damages.
The court further stated that the power to award punitive damages is
necessarily retained by the state.
(c)
Willoughby Roofing & Supply Co. v. Kajima
International, Inc.
(i)
An arbitrator has no power to award punitive damages,
even if agreed upon by the parties.
IV.
Other Remedies and Causes of Action (are damages an
adequate remedy?)
A.
Specific Performance and Injunctions
i)
Specific performance in an equitable remedy in which the
court orders a breaching party to perform.
Specific performance is available only where damages are not an adequate
remedy at law.
(1)
Specific performance will not be awarded where there is
(a)
Impossibility
(b)
Difficulty of enforcement
(c)
Proportionality
ii)
Contracts for Land
(1)
Rather than seeking damages, the buyer of real estate is
entitled to the remedy of specific performance, in the form of a decree ordering
the seller to execute a deed in the buyer’s favor.
Damages are considered an inadequate remedy because every piece of land
is unique to some extent and because the value of land is always to some extent
conjectural.
(2)
Loveless v. Diehl
(a)
The Diehls sought specific performance of an agreement
for the sale of a farm they leased from the Lovelesses pursuant to an option
contract. The court ruled in favor
of Diehl and held that in a contract for the sale of real property, the court
may award the remedy of specific performance as a matter of course irrespective
of the adequacy of the remedies at law.
iii)
Contracts for Goods (injured party must prove goods are
unique UCC 2-716)
(1)
The traditional test for determining a buyer’s right to
specific performance in a contract for the sale of goods was whether the goods
were “unique.” The UCC has expanded
this rule. The onus is on the buyer
to prove such goods are unique.
(a)
UCC 2-716 gives the buyer a right to specific
performance “where the goods are unique or in other proper circumstances.”
(2)
Cumbest v. Harris
(a)
Cumbest and Harris entered into two agreements, one for
the sale of stereo equipment belonging to Cumbest, and an option allowing
Cumbest to repurchase the equipment by a specified date.
Although Cumbest made every effort to repay the loan by the end of the
option period, Harris deliberately avoided receipt of the payment.
Cumbest then initiated a suit for specific performance.
The court ruled in favor of Cumbest, holding that while generally the
court will not order specific performance for the sale of an item of personal
property unless there is no sufficient remedy at law, the stereo in this case
was sufficiently unique as it had taken many years to assemble and contained
several unavailable parts.
(3)
Scholl v. Hartzell
(a)
Scholl initiated an action in replevin in order to
specifically enforce an executory contract for the sale of a 1962 Corvette.
The court denied specific performance because they determined that the
Corvette was not sufficiently unique.
(4)
Sedmak v. Charlie’s Chevrolet, Inc
(a)
The Sedmaks sought specific performance of an oral
agreement to purchase a limited edition Corvette automobile from Charlie’s
Chevrolet. The court ordered
specific performance since the Corvette was a limited production model and the
Corvette was tailored to the Sedmak’s requests.
iv)
Contracts for Personal Services (policy) (injured party
must prove uniqueness)
(1)
The Case of Mary Clark, A Woman of Colour
(a)
Clark claimed that she was illegally indentured to
(2)
Lumley v. Wagner
(a)
Wagner was under contract to perform at a Lumley’s
theater. While under contract with
Lumley, she entered into another contract with Gye to perform at his theater for
more money. The court ruled in favor
of Lumley, holding that the court may grant a negative injunction restraining
the party rendering the service from performing at any for any other employer
during the contract period.
(3)
Ford v. Jermon
(a)
Ford sought specific performance of an agreement whereby
Jermon was to perform exclusively at his theater for a specified period.
The court ruled in favor of Jermon, holding that the court may not grant
specific performance of a contract for the rendering of personal services,
thereby compelling the individual to perform exclusively for the employer for a
specified time period.
(4)
Duff v. Russell
(a)
Duff, an opera producer, sought to enjoin Russell, a
well known opera performer, from performing for another producer when she was
under contract with him. The court
ruled in favor of Duff, holding that absent a reasonable excuse, a party to a
personal services contract may be enjoined from performing alternate services.
(5)
(a)
The Dallas Cowboys Football Club, to whom Harris was
under contract, sought to prevent him from playing for a team in a rival
football league. The court ruled in favor
of
B.
Restitution—Damage Interest and Cause of Action (non
contractual remedy, material breach)
i)
Restitution for Breach of Contract
(1)
Bush v. Canfield (p. 38)
(a)
Bush, as part of a sales contract, advanced $5,000 to
Canfield for the sale of flour.
Canfield failed to deliver the flour.
At the time of the contract, the price had been $7.00 per barrel, but at
the time of delivery, the price had fallen to $5.50, therefore Bush would have
lost money had the contract been performed.
The court held that the measure of damages for failure to deliver goods
is the amount advanced by the buyer, plus interest.
ii)
Restitution to the Party in Breach
(1)
Under modern law, even a party who is in material
breach, and therefore could not sue on the contract, may be able to bring an
action to recover the value of the benefits she has conferred on the other
party, subject to an offset for the innocent party’s damages.
(2)
Britton v. Turner (p. 39)
(a)
Britton contracted to work for Turner for one year at
the end of which he would receive payment of $120.
Britton quit after just over nine months and Turner refused to bay
Britton for his services. Even
though Britton was in breach of his contract, the court held that he could
recover in quantum meruit for his services to the degree which such services are
greater than the damages incurred by the breach.
(3)
Vines v. Orchard Hills, Inc. (p. 40)
(a)
Vines reneged on a land sale contract after making a
down payment, which Orchard Hills kept as liquidated damages.
The court held that a party breaching a land sale contract may recover
the down payment if he can prove that no damages were inflicted upon the seller
at the time of the breach. If the
non breaching party suffered no damages, they would be unjustly enriched by
keeping the liquidated damages.
iii)
Restitution and “Quasi-Contract”
(1)
Under the principle of unjust enrichment or quasi
contract, in a variety of cases liability may be imposed on a person who
receives a benefit form another, even in the absence of a promise to pay for the
benefit. A plaintiff can recover in
restitution or quasi contract if he can show that:
(a)
He has conferred a benefit on the defendant
(b)
He conferred the benefit with the expectation that he
would be paid its value
(c)
The defendant knew or had reason to know of the
plaintiff expectation
(d)
The defendant would be unjustly enriched if he were
allowed to retain the benefit without paying its value.
(2)
Cotnam v. Wisdom (p. 41)
(a)
(3)
Martin v. Little, Brown and Co. (p. 42)
(a)
Where people are perfectly capable of contracting, and
they don’t, the court must infer that they didn’t mean to.
(b)
Martin gratuitously informed Little, Brown and Co about
an act of plagiarism and then demanded compensation.
The court held that one who volunteers information to another to the
other’s benefit has not formed a contract.
The court held that an implied in fact contract arises when the actions
of the parties demonstrate a contract like relationship in the absence of a
genuine contract. Such a situation
does not occur when one party performs gratuitiously, as Martin did here.
C.
Tortious Interference with Contract (interferer is being
malicious)
(1)
Lumley v. Gye
(a)
One who induces a party to breach a contract may be
liable to the other contracting party for his damages resulting therefrom.
(2)
Texaco v. Pennzoil
(a)
Pennzoil sought to hold Texaco liable for interfering
with its contract with Getty Oil, despite Texaco’s contention that it was
unaware that a contract had existed.
The court ruled in favor of Pennzoil, holding that a party may be liable for
interference with contractual rights even if he believes that the agreement
giving rise to the contractual duty is not legally binding.
V.
Reaching an Agreement
A.
Revoking an Offer
i)
A revocation is a retraction of an offer by the offeror.
The general rule is that a revocation terminates the offeree’s power of
acceptance, provided of course that the offer has no already been accepted.
(1)
A revocation is effective only when received by the
offeree [Rest. 2d s. 42]
(2)
Firm offer UCC 2-205
(a)
A firm offer is an offer that by its express or implied
terms is to remain open for a certain period.
The general rule is that a revocation of a firm offer, prior to the
expiration of the period during which it was to remain open, has the same effect
as the revocation of an ordinary offer, namely the revocation terminates the
power of acceptance.
(b)
A firm offer is not revocable if the offeror should have
reasonably foreseen that the offer would induce reliance by the offeree prior to
acceptance, and such reliance occurs (Drennan v. Star Paving).
(3)
Exception: Dickenson v. Dodds
(a)
Dickenson v. Dodds
(i)
One June 10, Dodds offers to sell real property to
Dickenson for 800l, the offer to be held open until June 12.
On June 11, Dickenson learns from his own agent that Dodds has sold the
property to a third party. On June
12,
B.
The Objective Theory of Assent
i)
The object theory of contracts is what a reasonable
person to whom an expression, either in words or conduct, has been addressed
would understand the expression to mean.
(1)
Embry v. Hargadine, McKittrick Dry Goods Co. (p. 47)
(a)
Embry, seeking renewal of his employment contract,
contended that Hagardine, McKittrick’s president had made a statement to hi that
communicated acceptance, even htough Hagardine contended that he had not meant
to do so. The court ruled in favor
of Embry, holding that the meeting of the minds that is essential to the
formation of a contract is not determined by the secret intention of the
parties, but rather by their expressed intention.
(2)
Lucy v. Zehmer (p. 48)
(a)
Lucy offers to buy Zehmer’s farm for $50,000 cash.
Zehmer accepts the offer in jest, believing Lucy does not have the money.
The two parties work out the terms of the contract and Zehmer writes out
the contract on the back of a restaurant check.
Zehmer and his wife sign the restaurant check.
Lucy tries to enforce the contract.
The court rules that the contract is enforceable holding that even if
Zehmer did not subjectively intend to sell the farm, the contract is binding
because Lucy actually and reasonably believed
it to be a serious transaction.
C.
What is an Offer?
i)
An offer is an expression of present willingness to
enter into a bargain, made in such a way that a reasonable person in the shoes
of the person to whom the expression is addressed would believe that he would
conclude a bargain merely by giving assent in the manner required by the
expression.
(a)
There are two essential elements for an offer.
To be sufficient as an offer there must be
(i)
Intent to enter into a bargain
(ii)
Definiteness of terms
ii)
Preliminary Negotiations
(1)
The fact that an expression looks toward a bargain does
not make the expression an offer if it is clear from the language or
circumstances that the expression reflects merely intent to begin negotiations.
Such expressions are called preliminary negotiations.
(2)
Nebraska Seed Co. v. Harsh (p. 49)
(a)
Harsh was a seed farmer who forwarded a letter to
Nebraska Seed Co. stating that he had 1800 or thereabouts bushels of millet that
he wished to sell for $2.25 per hundredweight.
iii)
Written Memorial Contemplated
(1)
Empro Manufacturing Co. v. Ball-Co Manufacturing,
Inc. (p. 51)
(a)
Empro and Ball-Co signed a letter of intent containing
the general provisions of the sale of Ball-Co’s assets to Empro.
When Ball-Co started negotiating with someone else, Empro sued,
contending that the letter of intent bound Ball-Co to sell only to Empro.
The court ruled in favor of Ball-Co, holding that parties who have made
their pact “subject to” a later definitive agreement have manifested an intent
NOT to be bound. The letter also
contains the term “general terms and conditions” which implies that each side
retained the right to make changes.
D.
What is an Acceptance?
i)
Acceptance by Correspondence—The Mailbox Rule (default
rule, Rest. 2d. 56, 68)
(1)
Acceptance is effective when it is dispatched as opposed
to when it reaches the offeror.
ii)
Acceptance
by Performance of “Unilateral” Contracts
(1)
An offer that calls for acceptance by performance of an
act is known as an offer for a unilateral contract.
Such an offer can be accepted only by performance and not by a promise.
(2)
Carlill v. Carbolic Smoke Ball Co.(p. 55)
(a)
Carbolic Smoke Ball Co. placed an advertisement offering
a sum to any person who became ill after using its product, upon which Ms.
Carlill became ill and tried to collect.
The court ruled in favor of Ms. Carlill holding that a continuing offer
may be accepted by performance of the condition named in the offer.
(b)
What made it a real offer?
(i)
Appeared legitimate, money deposited in bank
(ii)
Somebody seeing the add would think it was a real
promise
(3)
White v. Corliss & Tifft (p. 57)
(a)
An offer that requires acceptance by a promise can be
accepted only by a promise, not by an act.
iii)
Acceptance by Silence
(1)
The general rule is that silence of an offeree does not
constitute acceptance.
(2)
Exception to silence rule:
Offeree leads offeror to believe that silence will constitute acceptance:
(a)
(i)
VI.
The Doctrine of Consideration
A.
Consideration is required to make a contract
enforceable.
B.
Historical Origins of the Doctrine
i)
Benefit/Detriment Approach
(1)
Consideration used to be defined as either a benefit
received by the party promising to perform, or a detriment incurred by the party
to whom performance was promised.
C.
The Bargain Theory of Consideration
i)
A bargain is an exchange of promises, acts, or both, in
which each party views what she gives as the price of what she gets.
As a general rule, a bargain constitutes consideration, and hence
bargained for promises are enforceable.
(1)
The bargain theory of consideration equates
consideration with a bargain.
ii)
Distinguishing Bargains from Gratuitous Promises
(1)
A donative or gratuitious promise is a promise to make a
gift. The general rule is that a
donative promise is unenforceable because there is a lack of consideration.
(2)
Johnson v.
(a)
(3)
Hamer v. Sidway (p. 107)
(a)
Uncle promises to pay nephew $5000 to abstain from
smoking, drinking, swearing, and gambling until the age of 21.
Nephew agrees and abstains from doing any of the aforementioned
activities. Uncle refused to pay.
The court ruled that the Uncle must pay because a waiver of a legal right
at the request of another party may serve as sufficient consideration for a
promise.
iii)
Past Consideration
(1)
A promise is said to be given for moral or past
consideration when the promisor’s motivation for making the promise is a past
benefit to the promisor or detriment to the promisee that gave rise to a moral
obligation, but not a legal obligation for compensation.
(2)
The traditional rule is that a promise based on moral or
past consideration is simply a gratuitous promise and is therefore
unenforceable. There is no bargain
or consideration.
(3)
There are THREE important exceptions to the traditional
rule:
(a)
A promise to pay a debt barred by the statute of
limitations
(b)
A promise to perform a voidable obligation
(c)
A promise to pay a debt discharged by bankruptcy
(4)
(a)
iv)
Moral Consideration
(1)
Mills v. Wyman (p. 109)
(a)
When Levi, Wyman’s adult son, returned from a sea voyage
he fell ill and Mills, acting as a good Samaritan provided food and shelter to
Levi and cared for him until he died.
After Levi’s death, Wyman wrote Mills a letter promising to pay for the
expenses associated with taking care of Levi.
Wyman later refused to pay and Mills subsequently brought suit.
The court held that no contract existed and that the general position
that moral obligation is sufficient consideration for an express promise is
limited to cases where good or valuable consideration previously existed. Note:
no material benefit was conferred in this case.
(2)
Webb v. McGowin (p. 110-111)
(a)
Webb saves the life of McGowin, but sustains serious
injuries during the rescue. McGowin
promises to pay Webb a bimonthly stipend for the rest of Webb’s life.
McGowin pays Webb the stipend for more than eight years, but on McGowin’s
death, his estate refuses to continue the payments to Webb.
The court holds that McGowin’s promise is binding because the promise to
pay was based on a material benefit to the promisor that constituted valid
consideration. (objective benefit to promisor, possibility of unjust enrichment,
restitution recovery, intention to enforce a later promise)
(3)
Modern ruling from Webb v. McGowin seems to be
that a promise based on moral obligation is enforceable, even if it does not
fall within one of the three core exceptions, if the promise is based on a
material benefit that was previously conferred by the promisee upon the
promisor, provided the benefit gave rise to an obligation to make compensation.
[Rest. 2d. s.86]
D.
Contract Modification and the Preexisting Duty Rule
i)
The promise or performance of an act that the promisor
has a preexisting legal duty to perform does not constitute consideration.
ii)
Preexisting Contractual Duties
(1)
Performance of preexisting contractual duty for
increased payment
(a)
Where A an B have a contract and A refuses to perform
unless B pays more than originally promised, A’s new promise to perform (or A’s
performance) does not constitute consideration for B’s promise to pay a greater
amount than originally promised.
(2)
Stilk v. Myrick
(a)
Due to the desertion of other sailors, Captain Myrick
offered Stilk and the other crewman additional money to complete the voyage.
Myrick later refused to pay.
The court held that modifications to employment contracts which are occasioned
by emergency or duress are unenforceable.
Where crew members have signed on for a voyage and are obligated to
complete it, there is no consideration for an oral agreement to pay additional
wages for performing, under emergency conditions, the duties already required of
them.
(3)
(a)
Domenico hired seamen in
(4)
A new promise to pay is enforceable if unanticipated
circumstances arise that make modification of the original contract terms fair
and equitable.
(5)
Brian Construction and Development Co. v. Brighenti
(??UCC-2-209)
(a)
Brian had subcontracted with Brighenti for the providing
all of the foundation work for a building.
Included in the contract was a term that stated that Brighenti agreed to
do “everything requisite and necessary to finish the entire work properly.”
Brighenti discovered the remains of another building at the excavation
site. This discovery was
unanticipated by both parties and would have required considerably more work
than expected. The parties
renegotiated to increase the amount of money Brighenti would receive.
Brighenti then stopped work after several days and Brian brought a breach
of contract action against Brighenti.
The court ruled in favor of Brian.
Although it is an accepted principle that when a party agrees to perform
an obligation which he is already obliged to perform, albeit for a different
price, the second agreement does not constitute a valid contract.
The doctrine of unforeseen circumstances provides an exception to the
general rule. Under the doctrine of
unforeseen circumstances, when such circumstances make the performance of a
contract unduly burdensome, the parties may agree, in view of the changed
conditions, to an adjustment in price.
The new agreement will constitute a valid contract.
E.
Adequacy of Consideration
(1)
Newman & Snell’s State Bank v. Hunter
(a)
(2)
Dyer v. National By-Products, Inc.
(a)
Dyer agreed with his employer National By-Products not
to litigate a claim against it for a work-related personal injury if he was
allowed to return to his former position as a foreman.
The court ruled in favor of Dyer, holding that if a person who in good
faith believes he has a legal claim promises to forbear or in fact forbears from
pursuing the claim, he has provided sufficient consideration for a return
promise even if the claim turns out to be wholly ill-founded.
VII.
Intention to Be Legally Bound
A.
Using Formalities to Manifest and Intention to be
Legally Bound
i)
The Seal
(1)
Aller v. Aller
(a)
A voluntary written agreement under seal is binding when
there was no consideration intended by the parties, so long as the parties are
identified in the document and the document is delivered.
ii)
Nominal Consideration
(1)
Nominal considerations are an exception to the general
rule that a bargain constitutes consideration.
(2)
Nominal consideration involves transactions that are
bargains in form but not in substance.
A transaction is said to involve nominal consideration when a promisor
falsely casts her promise in the form of a bargain with the promise in an
attempt to make the promise enforceable.
In reality such a promise lacks substance and consideration because
neither party views each promised performance as the price of the other.
(3)
Schnell v. Nell
(a)
Schnell agreed to give Nell $200 out of the love and
respect he had for his wife in return for Nell paying Schnell one cent.
Nell also agreed to forebear any claim he might have against the deceased
estate. The court held that nominal
consideration will normally not make a donative promise enforceable, and thus no
contract between the two parties existed.
iii)
Recitals
(1)
Smith v. Wheeler
(a)
Wheeler gave smith a one year option to buy some
property. The agreement recited that
a payment of one dollar was made, but both parties agreed that the consideration
cited in the agreement was never paid.
Smith tried to enforce the option and Wheeler filed a complaint.
The court ruled that the recital of one dollar was consideration for an
option contract and gives rise to a promise to pay which can be enforced by
another party.
iv)
Written Expression of Intention to be Legally Bound
(1)
Thomas v. First National Bank of
(a)
Restatement 21
(b)
Thomas wrote a check and the next day went to the bank
and signed a “Request to Stop Payment” form in order to void the check.
The form included a disclaimer that released the Bank from any liability
in the event that the check should be inadvertently paid by it.
The bank accidentally paid the check and Thomas sued.
The court ruled in favor of the bank, holding that a stipulation
releasing a bank from liability on paying a check in disregard of a stop payment
request constitutes a valid enforceable contract.
The rule of freedom of contract will prevail since Thomas assented to the
terms limiting the Bank’s liability.
(2)
Kay v. Kay
(a)
Mr. Kay agreed to be legally bound to support Mrs. Kay
when they separated, but after a few years he stopped paying and argued that the
agreement was not supported by consideration.
The court held that the absence of consideration does not render a
separation agreement unenforceable where the agreement provides that the
promisor intends to be legally bound.
(3)
Federal Deposit Insurance Corp. v. Barness
(a)
Barness signed a promissory note to a bank of which he
was a shareholder. Barness claimed
that he had received no benefit in return for his signature and that there was
no consideration for the note. After
the bank was closed, the FDIC sought to enforce payment on the note. FDIC
claimed that since the note expressly stated that, “the undersigned promises to
pay,” this constituted a statement to be legally bound.
The court held that a signed promise is
not invalid for lack of consideration if the writing also contains an additional
express statement that the signer intends to be legally bound.
B.
Lack of Intention to Be Legally Bound
(1)
Ferrera v. A. C. Nielsen
(a)
VIII.
The Doctrine of Promissory Estoppel (Rest. 90)
i)
The principle that reliance may make a promise
enforceable.
ii)
If a donative promise induces reliance by the promisee
in a manner that the promisor should reasonably have expected, the promise will
be legally enforceable, at least to the extent of the reliance.
B.
The Development of Promissory Estoppel as a Substitute
for Consideration
i)
Family Promises
(1)
Ricketts v. Scothorn (p. 127)
(a)
Scothorn quit her job in reliance on her grandfather’s
granting of a note payable to her and sued his estate for payment on the note
after his death. The court ruled in
favor of Scothorn, holding that even though the note was given without
consideration, Scothorn was entitled to the money because she had relied on the
promise to her detriment. When the
payee changes her position to her disadvantage, in reliance on a promise, a
right of action on the promise arises.
ii)
Promises to Convey Land
(1)
Greiner v. Greiner (p. 128)
(a)
Frank Greiner moved back home in reliance on his
mother’s promise to give him eighty acres of land.
Frank made expenditures to improve the land, relying on his mothers
promise. The court ruled in favor of
Frank Greiner, holding that a promise which the promisor should reasonably
expect t induce action or forbearance of a definite and substantial character on
the part of the promisee and which does induce such action or forebearance is
binding if injustice can be avoided only by enforcement of the promise.
iii)
Charitable Subscriptions
(1)
(a)
A donor agreed to pay
iv)
Promises of a Pension
(1)
Feinberg v. Pfeiffer Co. (p. 130)
(a)
Pfeiffer promised to pay Feinberg a set pension of $200
per month when Feinberg retired, and Feinberg relied on this promise to her
detriment. The court ruled in favor
of Feinberg, holding that a promise which the promisor should reasonably expect
to induce action or forbearance of a definite and substantial character on the
part of the promisee and which does induce such an action or forbearance is
binding if injustice can be avoided only by enforcement of the promise.
(See Restatement §90)
v)
Construction Bids
(1)
Putting a contract out for a bid is usually not deemed
to be an offer. However, the bids
submitted in response usually are considered offers.
(2)
James Baird Co. v. Gimbel Bros., Inc (p. 131)
(a)
(3)
Drennan v. Star Paving Co. (p. 132)
(a)
In formulating a bid to the
(b)
Such reasonable reliance cases are often called firm
offers.
(i)
A firm offer is an offer that by its express or implied
terms is to remain open for a certain period.
(e.g. you have two weeks whether to decide to accept)
C.
Promissory Estoppel as an Alternative to Breach of
Contract (reliance awarded)
(1)
Goodman v. Dicker (p. 133)
(a)
Local parts distributors promised to supply prospective
franchisees with radios under a franchise agreement with Emerson Radio Corp.
Franchisees were told that the franchise would be granted and induced to
incur expenses in preparing to do business.
No radios were delivered and notice was later given that the franchise
would not be granted. The court held
in favor of Goodman (the franchisees).
Justice and fair dealing require that one who by his language or conduct
leads another to do what he would have not otherwise have done, shall not
subject such a person to loss or injury by disappointing the expectations upon
which he acted. In this case the
proper measure of damages is the loss sustained by expenditures made in reliance
upon the assurance of a dealer franchise and not any consequential damages for
loss of possible profits.
(2)
Hoffman v. Red Owl Stores, Inc. (p. 134)
(a)
The Hoffmans sought damages they incurred in selling
their business and relocating based on their reliance on an alleged promise made
to them by Red Owl Stores to furnish them with a franchise.
D.
Some Modern Applications and Limits of Promissory
Estoppel
i)
Promise
(1)
Blatt v.
(a)
When the national legal society of the Order of the Coif
refused to grant Blatt membership, he claimed he had detrimentally relied on its
promises of membership eligibility.
The court ruled in favor of USC, holding that the action or forbearance induced
by the promisor must be definite and substantial in character to invoke the
doctrine of promissory estoppel to enforce a promise.
Furthermore the promise was that if Blatt fulfilled the necessary
requirements, he would be eligible for consideration of admission into the Order
of the Coif, and the record shows that Blatt was considered for membership.
IX.
Discerning the Agreement
A.
Interpreting the Meaning of the Terms
B.
Why would a court need more than a dictionary?
i)
Special terms
ii)
Ambiguity
iii)
Vagueness
iv)
The courts first job is to try to work out whether
parties understood the contract in the same way, is there an actual meeting of
the minds?
v)
What type of evidence do we look at to guage the
understanding of the contract by both parties?
(1)
Course of performance-what actions did both parties
undertake in regards to the promise?
(2)
Course of dealing
(3)
Usages of trade-how words are used in the particular
area/trade/business absent evidence of the contrary
(4)
Negotiations that led to the deal
(5)
Intratextual Analysis- look at a vague promise in
context of the larger contract
vi)
Stupid wins over evil
(1)
If one party sees two meanings in a contract and they
prefer one over the other to their advantage and they know that the other party
has a different understanding the evil party will lose and the “stupid” party
(i.e. the party that did not know) will get the meaning.
vii)
Three ways of working out ambiguous contracts
(1)
Prove that both parties had a shared subjective meaning
(2)
One party knew and only one party knew of difference in
meaning
(3)
What a reasonable person would have thought
viii)
Ambiguous Terms
(1)
Raffles v. Wichelhaus (p. 67)
(a)
Raffles contracted to sell cotton to Wichelhaus to be
delivered from
(2)
Oswald v. Allen (p. 68)
(a)
Dr. Oswald negotiated to purchase two sets of rare coins
from Mrs. Allen, who believed that her Swiss Coin Collection alone was being
purchased. The court held that Ms.
Allen could get out of the contract.
When any terms used to express an agreement are ambivalent and the parties
understand it in different ways, there cannot be a contract unless one of them
should have been aware of the others understanding.
There was no meeting of the minds and no contract.
This case illustrates the concept of a mutual mistake.
If each party makes a mistake on a basic fact of the agreement, then
either party may use the mistake as a way to avoid the exchange.
(3)
Weinberg v. Edelstein (p. 69)
(a)
Weinberg sued Edelstein to stop Edelstein’s sale of
skirts and blouses that looked like two-piece dresses.
The court ruled in favor of Edelstein holding that he was selling skirts
and blouses originating in the sportswear industry and hence was not selling
dresses in violation of the lease. A
restrictive covenant is construed strictly against the person seeking its
enforcement when the intent of the restriction is not clear.
(4)
Frigailment Importing
(a)
Frigailment ordered a large quantity of “chicken” from
BNS, intending to buy young chicken suitable for broiling and frying, but BNS
believed, in considering the weights ordered at the prices fixed by the parties,
that the order could be filled with older chicken, suitable for stewing only,
and termed “fowl” by Frigailment.
The court ruled against Frigailment, holding that the party who seeks to
interpret the terms of the contract in a sense narrower than their everyday use
bears the burden of persuasion to so show, and if that party fails to support
its burden, it faces a dismissal of its complaint.
C.
Filling Gaps in the Terms
i)
Illusory Promises
(1)
An illusory promise is a statement that has the form of
a promise, but not the substance. An
illusory promise does not limit one’s future options.
An illusory promise is an apparent commitment that actually leaves a free
way out. For example, “I will buy
wheat from you at $10 a bushel insofar as I want to buy wheat from you at that
price.”
(2)
If one party makes an illusory promise in exchange for
another’s real promise, neither party is bound.
The party exchanging the real promise for the illusory promise is not
receiving anything in return, hence there is no consideration and no contract.
(a)
Common types of illusory promises
(i)
Promise to do an act “if I want to.”
(ii)
Right to terminate at will without notice
(3)
New York Central Iron Works Co. v. United States
Radiator Co. (p.73)
(a)
New York Central Iron Works Co. contracted with United
States Radiator Co. to supply all of New York Central’s radiator needs for the
year 1899. New York Central’s demand
for radiators was far in excess of what United States Radiator estimated and
they were unable and unwilling to fulfill their contract with New York Central.
U.S. Radiator contended that a mutual mistake as to the amount of
radiators excused their performance.
The court denied this defense and held that a buyer in a supply contract may
enforce the contract even if its requirements increase beyond the parties’
contemplation so long as the buyer’s needs are genuine and he is not merely
speculating in the material.
(4)
Eastern Air Lines v. Gulf Oil Corp (p. 74)
(a)
Gulf Oil Corp was to furnish jet fuel to Eastern
Airlines based on an alleged five year requirements contract.
When the price of fuel rose, Gulf Oil demanded that Eastern pay more for
the fuel. Eastern sued seeking
enforcement of the contract. The
court held that the contract was enforceable.
(5)
Wood v. Lucy, Lady Duff Gordon (p. 75)
(a)
UCC 2-306
(b)
Wood agreed with Lucy, Lady Duff Gordon to receive an
exclusive right for one year to endorse designs with Lucy’s name and to market
all her fashion designs, for which she would receive one-half the profits.
Lucy broke the contract by placing her endorsement on designs without
Woods knowledge. The court held that
although the contract did not precisely state that Wood had promised to use
reasonable efforts to place Lucy’s endorsement and market her designs; such a
promise can be implied. The
implication arises from the circumstances.
(c)
The implied promise serves as consideration just as if
it were an explicit promise. (e.g. a promise to use ‘reasonable efforts’ or
‘best efforts.’)
X.
Written Manifestations of Assent
A.
Interpreting a Writing—The Parol Evidence Rule
i)
The parol evidence rule provides that parol evidence
will not be admitted to vary, add to, or contradict a written contract that
constitutes an integration.
(1)
A written contract constitutes an integration if the
parties to the contract intended the writing to be the final and complete
expression of their agreement.
(2)
If there is a writing that is an integration, evidence
of an alleged earlier oral or written agreement that is within the scope of the
writing, or evidence of an alleged contemporaneous oral agreement that is within
the scope of the writing, constitutes parol evidence.
ii)
A contract must be in writing for the parol evidence
rule to apply. If the contract is
oral, any prior or contemporaneous oral or written agreements may be used to
explain it.
iii)
Thompson v. Libbey
(1)
Libbey argued that Thompson’s agreement to sell his logs
contained a verbal warranty of quality, which Thompson breached.
The court ruled in favor of Thompson holding that parol contemporaneous
evidence is inadmissible to contradict or vary the terms of a valid written
instrument.
iv)
Brown v. Oliver
(1)
Brown wanted to recover possession of hotel furniture
located inside a hotel on land bought by Brown from Oliver.
The court held that parol evidence that bears upon the question of the
intent of the parties to integrate their transaction into a writing may be
admitted when the writing does not conclusively establish the intent.
v)
Pacific Gas and Electric Co. v. G. W. Thomas Drayage
& Rigging Co.
(1)
Thomas contracted to repair Pacific’s steam turbine and
to perform work at its own risk and expense and to indemnify Pacific against all
loss and damage. Thomas also agreed
not to procure less than $50k insurance to cover liability for injury to
property. But when the turbine rotor
was damaged, Pacific claimed it was covered under the policy while Thomas said
it was only to cover injury by third parties.
The court ruled in favor of Thomas, holding that extrinsic evidence for
the purpose of showing the intent of the parties could be excluded only when it
is feasible to determine the meaning of the words from the instrument alone.
vi)
(1)
Trident entered into a loan agreement with
B.
Reforming a Writing—Mistakes in Integration
i)
The Travelers Insurance Co. v. Bailey
(1)
A clerical error was made on Bailey’s life insurance
policy that was not caught until thirty years after its issuance.
C.
Requiring a Writing—Statute of Frauds (Rest. 131,
UCC-2-201)
i)
The Statute and Its Exceptions
(1)
The following contracts must be in writing
(a)
Contracts for the sale of an interest in land
(b)
Contracts in consideration of marriage
(c)
Contracts that cannot be performed within one year of
making
(d)
Contracts for the sale of goods for $500 or more not
fitting any of the UCC exceptions
(e)
Suretyship contracts, (i.e. contracts where the promisor
guarantees a third party’s obligation to the third party’s creditor)
(2)
The basic purpose of the statue of frauds is to prevent
fraud and perjury by persons who might falsely claim that a contract was made,
when it was not.
(3)
Boone v. Coe
(a)
Boone and J.T. Coe sued J.F. Coe to recover damages for
breach of a parol contract to allow cultivation of land and allow for residence
on the land to begin at a future date for one year.
The court held in favor of J.T. Coe, holding that damages cannot be
recovered for violation of a contract within the Statute of Frauds.
The Statute of Frauds provides that no action shall be brought to charge
anyone on any agreement which is not to be performed within one year from the
making, unless there is some writing which is signed by the party to be charged.
(4)
Riley v. Capital Airlines, Inc.
(a)
Restatement 139
(b)
Riley alleged a five year contract to supply water
methanol to Capital Airlines.
ii)
Satisfying the Requirement of a Signature
(1)
Parma Tile Mosaic & Marble Co. v. Estate of Fred
Short
(a)
Any symbol or signature, whether written, printed, or
stamped, will satisfy the writing requirement of the Statute of Frauds so long
as the intent to be bound is demonstrated.
XI.
Performance
A.
The Implied Duty of Good Faith Performance
(1)
Goldberg 168-05 Corp. v. Levy (p. 144)
(a)
Goldberg sought damages for unpaid rental payments based
on Levy’s intentional diversion of profits so as to reduce his rental payments
under a lease agreement and trigger a provision allowing him to terminate his
contract. The court ruled in favor
of Goldberg, holding that a covenant of good faith and fair dealing is inherent
in every contract, requiring a party to a commercial lease that requires part of
the rental payments be based on a percentage of gross receipts utilize his best
efforts in order to generate earnings.
(2)
Mutual Life Insurance Co. of
(a)
Mutual sought rental payments owed to it by Tailored
Woman based on a percentage generated by its fur department.
Tailored entered into a lease with Mutual whereby Tailored would pay
Mutual 4% of all gross receipts over 1.2 million dollars.
Tailored signed another lease with Mutual for more space, but this lease
did not stipulate any terms regarding a percentage of gross receipts.
Tailored then moved its lucrative fur department to the newly leased
premises. Mutual sued and the court
denied their contention, holding that in the absence of fraud or deception, the
tenant may conduct its business in accordance with the general lease provision
in any manner it deems appropriate.
The court did not view the relocation of the fur department to the third floor
as an intentional circumvention of the percentage lease clause.
(3)
Stop & Shop, Inc. v. Ganem (p. 146)
(a)
Ganem sought to compel lesee Stop & Shop to continue
operating a market on premises pursuant to a commercial lease agreement
providing for minimum fixed yearly payments plus a percentage of gross sales.
The court ruled in favor of Stop & Shop, holding that the court will no
imply a covenant to continue operations for a specific purpose, or for any
purpose at all, into a commercial lease agreement providing for a portion of the
rent to be determined based on the gross sales of the business conducted
therein.
XII.
Conditions
A.
An event or state of the world that must occur before a
party to a contract has a duty to perform is known as a condition.
i)
A condition can be an event or state of the world that
must occur or fail to occur before a party has a duty to perform under a
contract; or
ii)
An event or state of the world the occurrence or
nonoccurrence of which releases a party from its duty to perform under a
contract.
B.
The Effect of a Condition
i)
Inman v. Clyde Hall Drilling
(1)
Clyde Hall employed Inman under a contract which
provided that a thirdy-day written notice of claim had to be given to the
company as an express condition precedent to a remedy.
The court ruled in favor of Clyde Hall, holding that an express condition
precedent to give notice before filing suit under a contract must be fulfilled
before suit is filed.
C.
What if Events are Conditions?
i)
Is the Event a Condition, a Promise, or Both?
(1)
Howard v. Federal Crop Insurance Corp. (p. 155)
(a)
Federal Crop claimed that Howard’s violation of a
condition precedent negated its obligation to pay.
The court ruled in favor of Howard, holding that where it is doubtful
whether words create a promise or an express condition, they are usually
interpreted as creating a promise, thereby avoiding forfeiture.
ii)
Is the Event a Condition, a Promise, or Neither?
(ambiguity of term…then it’s just a promise)
(1)
Chirchella v. Erwin (p. 156)
(a)
The Erwins had contracted to buy a house from the
Chirchellas. The Chircellas were
planning on moving into a new home sometime in October, but when the new home
wasn’t completed in time, they refused to sell their old home, claiming that
their moving into a new home was a condition to the sale of their old home.
The court ruled in favor of the Erwins, holding that the question of
whether a stipulation in a contract constitutes a condition precedent is one of
construction dependent on the intent of the parties.
The language in controversy here did not meet the definition of a
condition precedent.
D.
Avoiding Conditions
i)
Waiver and Estoppel
(1)
(a)
West paid Clark only $2 per page for writing a legal
treatise, and Clark demanded the $6 per page he had been promised if he quit
drinking, alleging that West had no objected when he continued to drink.
The court ruled in favor of
ii)
Excuse to Prevent Forfeiture (insurance, late filing
claim example)
(1)
J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc.
(a)
Cross Bay negligently failed to give lessor JNA Realty
Corp. notice of intent to exercise a lease renewal option.
The court ruled in favor of
XIII.
Breach
A.
Constructive Conditions
(1)
(a)
Preston agreed to sell his business to
(2)
Morton v. Lamb
(a)
Lamb had agreed to deliver some corn to Morton for
payment at the time of delivery.
Lamb did not deliver the corn because Morton did not say he was ready to pay for
it. When Morton sued for
non-delivery, Lamb asserted that Morton could not maintain an action for
non-delivery of the corn without averring that he was ready to pay for it.
The court ruled in favor of Lamb, holding that where two concurrent acts
are to be done, the party who sues the other for non performance must aver that
he had performed, or was ready to perform his part of the contract.
(3)
Jacob & Youngs v.
(a)
(b)
Disproportionality
(c)
If kent could prove pipes weren’t same, cost of
completion
B.
Prospective Nonperformance
i)
Anticipatory Repudiation
(1)
If either party to a contract, in advance of the time
set for performance, repudiates the contract, the repudiation excuses the other
party from holding himself ready to perform, rendering performance, or tendering
performance. In addition, the
innocent party may generally treat anticipatory repudiation as a present
material breach of contract, and bring an immediate action for the entire value
of the promised performance. UCC
2-610
(2)
The general rule in cases of anticipatory repudiation is
that the injured party must act promptly to mitigate damages after learning of
the repudiation.
(3)
Albert Hochster v. Edgar De La Tour (breached at that
moment)
(a)
Before Hochster was due to perform his contract of
employment for De La Tour, De La Tour announced his intention to repudiate the
contract, whereupon Hochster immediately commenced an action for breach of
contract. The court ruled in favor
of Hochster, holding that a party to a contract who renounces his intention to
perform may not complain if the other party, instead of waiting until
performance is due, elects to sue immediately for breach of contract.
(4)
Harrell v. Sea Colony, Inc.
(a)
Upon Harrell’s request for termination of a land sale
contract,
ii)
Adequate Assurances of Performance
(1)
UCC 2-609
(a)
A failure to provide adequate assurances within a
reasonable time not exceeding thirty days after a receipt of a justified demand
for such assurances constitutes repudiation.
(2)
Scott v. Crown
(a)
Scott suspended shipments of wheat which Crown had
ordered because it learned from the Department of Agriculture that there were
active complaints against Crown from other farmers and because Crown had failed
to respond to Scott’s inquiries about timely payment for previous deliveries.
The court ruled in favor of Crown holding that Scott’s action were an
anticipatory repudiation which allowed Crown to cancel the contracts and resort
to Buyer’s remedies. When reasonable
grounds for insecurity arise with respect to the performance of a party under a
commercial contract, the other party may in writing demand adequate assurance of
due performance and if commercially reasonable may suspend any performance for
which he has not received the agreed return.
iii)
Material Breach
(1)
A material breach has two effects
(a)
It gives rise to an immediate cause of action for breach
of the entire contract
(b)
It excuses further performance by the innocent party
(2)
If a breach is material, the injured party may
(a)
Sue for damages resulting from the breach but let the
contract continue; or
(b)
Terminate the contract and sue the breacher for breach
of the whole contract
(3)
B&B Equipment Co. v. Bowen
(a)
Bowen, a discharged employee, alleged that B&B could not
rescind his contract because the major purpose of the contract was the purpose
of stock and not his employment. The
court ruled in favor of B&B, holding that Bowen was in material breach.
A rescission of a contract for breach by the other party must relate to a
vital provision going to the very substance or root of the agreement, and cannot
relate to a subordinate or incidental matter.
(4)
Lane Enterprises, Inc. v. L.B. Foster Co.
(a)
Circling, avoiding harm, both parties trying to be
innocent
(b)
When Foster, a general contractor, failed to make full
payment for part performance on a construction subcontract to coat metal bridge
components to prevent corrosion, Lane argued that Foster had breached the
agreement. The court ruled in favor of Foster.
The ratio of the part performed to the part to be performed is an
important question in determining material breach.
Applying the materiality test set fourth in Restatement §241, failing to
pay only 5% of the total contract price would not constitute a material breach.
Lane’s failure to give Foster adequate assurance of performance of the
second stage of the agreement amounted to an anticipatory breach.
Foster is therefore entitled to recover the cost of finding another
contractor, which is to be offset by the amount Foster withheld from lane.
C.
Cost of Completion v. Diminution in Value:
The Expectation Interest Revisited
(1)
(a)
A provision in a lease for land which stated that the
sand and gravel were to be removed to a uniform grade was breached by Wunder.
The court ruled in favor of
(2)
Peevyhouse v. Garland Coal Mining Co.
(a)
XIV.
Lack of Contractual Capacity (Defense)
A.
Deficiencies in Contractual Capacity
i)
Incompetence
(1)
The traditional rule is that a person lacks the mental
capacity to contract only if his mental processes are so deficient that he lacks
understanding of the nature, purpose, and effect of the transaction.
(2)
Restatement rule for incapacity [ Rest. 2d 15]
(a)
A party lacks capacity if
(i)
He is unable to act in a reasonable manner, and
(ii)
The other party has reason to know of his condition
(3)
Ortelere v. Teachers’ Retirement Board of
(a)
Mr. Ortelere sought to have his wife’s election of a
retirement benefits invalidated due to her mental incompetence.
The court ruled in favor of Mr. Ortelere holding that contracts of a
mentally incompetent person are voidable.
The question is whether the in disso affected as to render the person
wholly and absolutely incompetent to comprehend and understand the nature of the
contract. This test is qualified by
the person’s ability to make a rational judgment concerning the particular
transaction.
ii)
Infancy
(1)
A contract made by an infant or minor (somebody under
the age of 18—unless married or in the military) is voidable at the minor’s
option, although the minor may enforce the contract against the adult.
(2)
Webster Street Partnership, LTD. v.
(a)
Sheridan and Wilwerding, entered into a lease with
Webster Street Partnership, LTD.
Both Sheridan and Wilwerding were minors at the time the contract was
formed. Webster was aware that
Sheridan and Wilwerding were minors.
Sheridan and Wilwerding broke the lease and Webster sued to enfoce.
The court ruled in favor of
(b)
Necessaries includes food, clothing, shelter, and
whatever else is needed for the minor’s subsistence, health, comfort, or
education, taking into account consideration of the minor’s age, status, and
condition in life.
(c)
Brooke Shields v. Gross
(i)
Brook Shields posed for photographs when she was ten,
which she later sought to prevent from being republished.
The court ruled against Brooke Shields and held that an infant may not
disaffirm a prior unrestricted consent executed on her behalf by her parent.
XV.
Obtaining Assent by Improper Means
A.
Misrepresentation (False representation of existing
fact, may give right to affirmative right to sue for damages—tort of deceit or
in contract term of contract in addition totally separate, as a defense as a way
to avoid liability two categories fraudulent (lack confidence in truth of what
he is saying, intend statement to induce) and material (did representor know
that it would induce particular representee, and one more thing)
i)
Fradulent Misrepresentation is distinguished by the
mental state of the misrepresentor
(1)
Must think that
I hope this gets me the contract; and intend representation to induce
representee to enter contract
(2)
Must know he is lying
B.
Cases
(1)
Halpert v. Rosenthal (p. 176)
(a)
Rosenthal refused to go through with an agreement for
the purchase of Halpert’s termite ridden house.
The court ruled in favor of Rosenthal, holding that rescission of a
contract is available for an innocent misrepresentation of a material fact.
Misrepresentation is any manifestation by one to another that amounts to
an assertion not in accordance with the facts.
(2)
Byers v. Federal Land Co.
(a)
Byers brought suit to have a land sale contract canceled
due to misrepresentations made by Federal Land Co.
The court held that an honest opinion as to the monetary value of
property, stated as an opinion, is not fraudulent misrepresentation.
(3)
Vokes v. Arthur Murray, Inc. (undue influence)
(a)
Vokes was continually persuaded to purchase thousands of
hours of dance instruction from Arthur Murray, Inc.
The court ruled in favor of Vokes, holding that where one party has
superior knowledge, statements made within the area of such knowledge may be
treated as statements of fact. An
example would be that one has the right to rely on the opinions of doctors,
lawyers, etc., and Vokes extends
such reasonable reliance to experts or those highly knowledgeable in a field
which plaintiff is generally unfamiliar.
C.
Duress (forcing to choose between two things of which he
has a legal right, no reasonable alternative to entering in contract, threat
that is itself illegal)
i)
Two Clear Instances
(1)
Offereing between choice of legal rights
(2)
Non-illegal threat, i.e. a threat to do something legal
(blackmail)
(3)
Hackley v. Headley
(a)
Headley performed work for Hackley and because of
economic necessity, he accepted a lesser compensation than that to which he felt
himself entitled. The court held
that a transaction is voidable because of duress only when one of the parties
thereto is forced to act in a manner inconsistent with his own free will.
(4)
Austin Instrument v. Loral Corp.
(a)
(5)
(a)
D.
Undue Influence
i)
Undue influence is unfair persuasion of a party, A, who
is under the domination of the person exercising the persuasion, B, or who by
virtue of the relation between then is justified in assuming that B will not act
in a manner inconsistent with A’s welfare.
If a party’s assent is induced by the other party’s undue influence, the
contract is voidable by the victim.
(1)
Odorizzi v.
(a)
Odorizzi sought to rescind his resignation from his
position as a teacher in the
E.
Unconscionablility
i)
One would allege unconscionability if they could not
allege another more concrete defense.
(1)
Example, if you can’t prove misrepresentation, , public
policy, duress, undue influence, infancy, incapacity, etc… then go for
unconscionability.
ii)
Two kinds
(1)
Substantive, won’t be enforced ever on “terms” in
contract, example is Baby M
(2)
Procedural, defect in the bargaining process, one of the
parties must be close to incapable and the other party must be evil.
iii)
UCC 2-302
(1)
Williams v. Walker-Thomas Furniture Co.
(a)
Walker Thomas sold to Williams furniture burdened by a
cross collateral clause and, subsequent to Williams default, sought to replevy
all goods previously purchased by Williams.
The court held such a contract unconscionable and that the defense of
unconsionability to action on a contract is judicially recognized.
(b)
Brutal terminology, oppressive because buyer was making
very bad decisions and seller knew about it, unfair surprise-draconian provision
(c)
What do we do with an unconscionable term?
(d)
Market conditions, monopoly v. non monopoly
(2)
Wille v. Southwestern Bell Telephone Co.
(a)
Southwestern failed to include the Wille’s correct
information in the yellow pages, and Wille brings suit to recover for lost
profits and costs of additional advertising he incurred to correct the error.
The court ruled in favor of Southwestern, holding that the terms of the
contract were not unconscionable.
The terms of the contract were clearly printed and written in common words and
Wille, an experienced businessman who had used the yellow pages for 13 years,
had reason to be familiar with such form contracts.
F.
Identifying the Terms of the Agreement
i)
Form Contracts or “Contracts of Adhesion”
(1)
When hidden and not read, should not make it into a
contract
(2)
Carnival Cruise Lines v. Shute
(a)
The Shutes sought to file suit in the district court for
the Western District of Washington against Carnival for injuries sustained while
on one of its ships, in violation of the forum-selection clause contained in
their ticket contracts. The court
ruled in favor of Carnival Cruise lines, holding that a nonnegotiated
forum-selection clause contained in a standard contract is enforceable where the
court determines it meets the requirements of fairness.
XVI.
Failure of a Basic Assumption
A.
Mistakes of Present Existing Facts
i)
Mutual Mistake (made by both parties at time contract
was made, who bears risk?)
(1)
A mutual mistake occurs where the parties made a
contract under a shared mistake concerning a basic assumption of fact on which
the contract was made. In contract
law the term mutual mistake normally refers to a mistaken assumption shared by
both parties as to the conditions of the outside world.
In such cases, the adversely affected party is normally entitled to
rescission unless he bore the risk of the mistake.
(2)
Sherwood v.
(a)
(3)
Nestor v. Michigan Land & Iron Co.
(a)
(4)
Wood v. Boynton
(a)
Boynton purchased an uncut stone from Wood for $1;
neither party realized the stone was a diamond worth $700.
The court ruled in favor of Boynton, holding that in the absence of fraud
on the part of the vendee, a mutual mistake as to the nature and value of a
thing sold will not afford a basis for rescission of the contract of sale.
(b)
Who has possession of the item?
(5)
Lenawee
(a)
Mr. and Mrs. Pickles sought the rescission of a land
sale contract they had entered into with Mr. and Mrs. Messerly following the
condemnation of the property by the Lenawee County Board of Health.
The court ruled in favor of Messerly holding that where both parties to a
contract are mutually mistaken as to a basic supposition upon which the
agreement was predicated, thereby affecting the parties’ obligations pursuant to
the contract, the court may grant the equitable remedy of rescission where the
particular circumstances warrant such a remedy.
Since the Pickles bought the house with an “as is” clause, they accepted
the house in its present condition and this acceptance encompasses all defects
known and unknown existing on the property.
ii)
Unilateral Mistake and the Duty to Disclose (some way
party that is not mistaken is a bad guy)
(1)
A unilateral mistake occurs when something goes wrong
with the mental machinery of one of the parties, as where of the parties makes a
mistake in computation. Such a
mistake is a ground for rescission by the mistaken party if the nonmistaken
party knew or should have known of the mistake.
(2)
Tyra v. Cheney
(a)
Tyra submitted a bid to Cheney to perform the roofing
and sheet metal work under Cheney’s contract.
Tyra submitted an oral bid and he was told to submit it in written form.
When Tyra submitted his written bid, he mistakenly omitted an item valued
at $963. The court ruled in favor of
Tyra, holding that where one party to a contract is unilaterally mistaken as to
an essential contract term, and the other party is aware of his error, the
agreement fails to constitute a binding contract and is hence unenforceable.
(3)
Laidlaw v. Organ
(a)
External event
(b)
A party to an agreement who has exclusive knowledge of
extrinsic circumstances that might influence the price of the commodity is not
under a duty to disclose such knowledge to the other party where the information
is freely available.
(4)
Baseball Card Case
B.
Changed Circumstances
i)
Impossibility and Impracticability
(1)
Paradine v. Jane
(a)
Tenant sought to avoid payment of rent pursuant to a
lease agreement with landlord on the basis that he has been ousted from
possession of the premises. Where a
party to a contract agrees to perform certain obligations, he is not relieved of
his contractual duties by the occurrence of an extraneous event rendering the
other party’s performance impossible.
(2)
(a)
(3)
Eastern Air Lines v. Gulf Oil Corp
(a)
Gulf Oil Corp was to furnish airline fuel to Eastern for
five years under an alleged requirements contract.
The court ruled in favor of Eastern, holding that a requirements contract
is binding where the purchaser has an operating business.
ii)
Frustration of Purposes
(1)
Krell v. Henry
(a)
Henry failed to pay the balance of money owed to Krell
pursuant to an agreement to rent his flat in order to view the coronation of
Edward VII, due to the cancellation of the ceremony.
The court ruled in favor of Henry, holding that where the performance of
a contract becomes impossible due to a change in circumstances thereby altering
the basis of the agreement, the parties may be excused from performance of their
contractual obligations.
(2)
Lloyd v. Murphy
(a)
Murphy sought termination of his lease to utilize
specific property for the sale of new automobiles, on the basis that the
conducting of such business was frustrated by war conditions.
The court ruled in favor of Lloyd, holding that because the risk was
foreseeable and because the banning of the sale of automobiles did not
completely serve to destroy the purpose of the contract, the agreement was still
binding on both parties. The
doctrine of frustration of purposes requires that where the primary purpose of a
contract has been completely negated by circumstances that were no reasonably
foreseeable to the parties at the time the contract was entered, the parties may
be excused from performance.
C.
Allocation of Risk in Long-Term Contracts
(1)
Aluminum Company of
(a)
(2)
Northern Indiana Public Service Co. v. Carbon County
Coal Co.