Contracts Outline Fall 2014: Kordana

CONTRACTS OUTLINE of 27

Contracts Outline Fall 2014: Kordana

Don't be a jerk, fetishist and/or freakazoid

ELEMENTS OF A CONTRACT 1. Mutual intent 2. Consideration (or promissory estoppel or material benefit) 3. Capacity 4. Sufficient definiteness 5. No fraudulent/against public policy 6. Not unconscionable

K=win/win In remedies: talk about property and liability rule protection, Coase, and what are we doing around here, incentives and social waste ROADMAP FOR CONTRACT LAW I. Introduction to Implied in Fact Contracts and the Restitution Interest

a. Bailey v. West (R.I, 1969) i. Bailey boarded a horse on his farm when ownership of said horse was in question. West

would not pay; he did not own the horse. Bailey sued. Put in volunteer box=loses ii. Timeline: T0=horse is dropped off. T1=ownership clarified although the horse remains.

(For some reason the parties testify in a non self-‐interested way – West says T0-‐T1 is two to three months and Bailey says one to two months. Kordana thinks the judge screwed up the timeline).

iii. TC splits the baby, giving payment for a reasonable period of time. T1 matters to TC. iv. Court here does not care when T1 is and does not split the baby.

b. Law of Agency: To what extent should principles be responsible for the actions of their agents? i. Even though the agent screwed up, the legal issue is between the principle and the third

party. ii. West acts through agents but he is still liable for when his agent makes a mistake. Most

agents would be judgement proof. iii. Need the third parties to trust agents.

c. Least Cost Avoider: liability is imposed on the party that could have prevented damages from occurring at the lowest cost.

i. KK agrees with Paolino’s outcome but for a different reason: Bailey was the least cost avoider – should have picked up the phone and clarified (‘lift your little pinkie finger dude’).

d. Implied in Fact: Not written or oral but still real. i. Intent: Mutual intent is inferred based on the circumstances, which, according to the

ordinary course of dealing and the common understanding of men, shows a mutual intent to contract.

1. If the promises of the parties are inferred from their acts or conduct, or from words that are not explicitly words of agreement, the contract is said to be implied in fact.

ii. KK thinks Bailey was implied in fact (disagrees with Paolino). It is reasonable to think that you will get paid even when there is an ownership dispute.


e. Implied in Law (aka Quasi Contract): Law of restitution/law of unjust enrichment – not a real contract, and not about mutual intent

i. When one party is required to compensate another for a benefit conferred in order to avoid unjust enrichment.

1. The existence of a benefit does not automatically mean that you owe money -‐ Officious intermeddler (squidgy man)

ii. Three prongs P must show: 1. Benefit Conferred 2. Benefit Appreciated – knowledge of expectation to be paid 3. Benefit Accepted – D would be unjustly enriched if allowed to retain benefit

without paying its value. iii. Bailey has a good case for quasi contract, but called a volunteer so put in a different box.

II. Introduction to Contract Formation and the Objective Theory of Intent

a. RST 2d: § 12: Capacity to Contract i. A person lacks capacity if he is unable to act in a reasonable manner and the other

person has reason to know his condition ii. Voidability: power to void contract if no capacity

b. RST 2d: § 16: Intoxicated Persons i. The test is whether the person who was so intoxicated as to be unable to understand the

nature, purpose and effect of what he was doing. c. Lucy v. Zehmer (Va. 1954)

i. D writes a contract to sell farm on a napkin, when P tries to enforce it, D claims he was drunk and only joking.

ii. Issue: is a party bound if he acts like he assents to an agreement, even if he did not really mean it?

iii. H/R: Yes. If a party to the contract has reasonable belief that the other party has the requisite intent to enter into the agreement when he does not, the contract is still enforceable.

d. Anti-‐opportunitism rules: prevent those who have knowledge of lack of capacity or intoxication from exploiting that knowledge.

e. Objective Theory of Contracts: pays attention to the facts a third party could observe. Important to look at outward and manifest intention rather than secret intention.

i. Mutual assent. Mutual Assent is necessary for contract formation and is determined under the objective theory of intent – what a reasonable person to whom an expression is made would understand the expression to mean. Not about subjective intent or subjective interpretations

ii. Rationale: protection of parties’ reasonable expectations for certainty in business transactions

iii. Application: there is sufficient manifestation of assent whenever a party uses an expression that he knows (or has reason to know) the other party would reasonably interpret as an offer or acceptance and the other party does so interpret it.

f. Reliance i. Enforce K that are supposed to be win-‐win because of reliance

1. Make investments 2. Change behaviour

ii. Lucy tries to manufacture reliance by his actions about town the following day


III. Introduction to Incomplete Contracts and the Role of the Courts a. Walker v. Keith

i. Facts: Walker was a landlord who leased a piece of property with an option to renew. The option did not contain a fixed price, but rather that rent would be set at the time reflected by comparative business conditions. Parties could not agree down the line.

ii. Issue: was the option to renew enforceable? iii. Holding: No, the renewal option was merely an unenforceable agreement to agree. iv. Kordana comments:

1. Strange that the court mentions the meeting of the minds (subjectivity) 2. Why is this court unwilling to fulfil its typical role in contract law which is to fill

in gaps in contracts (which are inevitable)? b. Stability: We want future business transactions to be incentivised to have stability.

i. It is a foreseeable possibility that if we renew the lease we need to talk about rent. This gap is not a remote possibility, but is foreseeable.

ii. Least Cost Avoider: one reason Clay throws them out of his courtroom is that the parties have not “lifted their little pinkie fingers” to fill in the gap and say what rent is.

1. On page 5 in the judges words: “as a practical matter, courts will sometimes assert their right not to be imposed upon.”

2. Either say what rent is or come up with a formula, but if you “are going to be total lazy bastards get the hell out of my courtroom.”

3. Most judges will fill most gaps most of the time. 4. The judge in this case sees a gap that is so big he does not believe the parties

intended to contract. c. Indefiniteness Doctrine: to be enforceable a contact must have a certain minimal level of

definiteness, need to agree on certain crucial elements. i. An apparent bargain will not be enforced if it is found to be too indefinite: (1) its terms

are so incomplete or uncertain that they show that the parties did not regard themselves as having completed a contract. (2) Even if it seems that the parties regarded themselves as having completed a contract, it is so indefinite that a court cannot determine its material terms with reasonable certainty or fashion an appropriate remedy for breach.

ii. The mere fact that an agreement leaves gaps does not render it fatally indefinite; almost all contracts have gaps that the court can fill through the process of implication.

iii. In regard to Walker: 1. If the parties attempt to define the price though a standard that is itself

indefinite, the traditional approach is to refuse enforcement on the ground that in such cases it cannot be inferred that the parties indented a reasonable price.

iv. Least cost avoider: listening to experts could fill the gap but that is costly. The parties could have figured this out by contracting more specifically. The parties are the least cost avoiders by covering the basics. Beyond basics (e.g. Canadian invasion) the judge would be the least cost avoider – it is expensive to contract over every possible future event.

d. UCC § 2-‐305: Open Price Term i. On its face liberalises the enforcement of open price terms. Attentive to interests of

businessmen ii. Can conclude a contract without price; default to reasonable price at time of delivery iii. As long as the parties intend to make a binding contract, their agreement to agree does

not make contract too indefinite.


IV. Introduction to Contractual performance and the Role of Fault. a. Jacob & Youngs v. Kent (NY 1921)

i. Facts: in contract to build house D. requested Reading Pipe. A pipe of the same quality was installed instead. P would have to tear down substantial parts of the completed structure to replace pipes, so refused and sought final payment. Kent refused. P sues.

ii. The mistake was trivial and innocent. The remedy is this case is liability rule protection and not property rule protection. Property rule protection (tear down the wall) will result in a lot of social waste, and there is no significant difference in the quality of the pipe. Liability rule protection just requires a cheque for the difference.

1. If you want to be idiosyncratic be more explicit. A Kleenex could mean high quality facial tissue and not Kleenex™

iii. Punch back to dissent: plumbing is not a matter of aesthetics but one of mere utility. It is not weird to care about the Corinthian column because that is aesthetic, but it is weird to care about comparable quality of pipes in the walls. (Whatever dude, don’t be a Reading Pipe fetishist).

b. Substantial Performance i. Significance: a party can bring suit on the contract as a P for expectation damages even

though he has breached the contract by not rendering a perfect performance. 1. Offset: D is entitled to offset any remedy against him by the amount of damages

he incurred as a result of Ps breach. ii. What constitutes substantial performance?

1. A question of fact to be governed by the circumstances of each case. 2. Does the performance meet the essential purpose of the contract? Some factors

a. The extent the contracted for benefits that the innocent party has received.

b. The extent to which damages will be an adequate compensation for breach

c. The extent to which forfeiture will occur if the doctrine is not applied. d. The extent to which the breach was wrongful or in bad faith.

iii. Damages: 1. Cost of completion: the amount that it would cost to repair the deficiency. 2. Diminution in value: if the repair would involve substantial economic waste or if the

cost-‐of-‐completion damages would be disproportionate to the end to be served, the measure of damages will be the amount by which the deficiency in the performance diminishes the value of the performance.

V. Introduction to Damages and the Role of Substitute Performance.

a. Duty to mitigate: Under UCC § 2-‐708, the measure of damages for repudiation by the buyer is the difference between the contract price and the market price at the time and place for tender. If the seller breaches, the buyer may either cover (make a good faith purchase within a reasonable time) or recover damages. i. An injured party is not permitted to recover damages that could have been avoided by

reasonable efforts. 1. Contracts for the sale of goods: under the U.C.C. if the seller fails to deliver the

buyer has a right to cover. If a buyer fails to cover, she will be barred from recovering any consequential damages that she could have prevented by covering. Similarly, if the buyer repudiates the contract prior to delivery, the seller cannot run up the damages by incurring freight charged for packing, delivery and so forth.


ii. Expenses incurred in a reasonable effort to mitigate damages are recoverable as incidental damages, whether or not the effort was successful.

b. Globe Refining Co. v. Landa Cotton Oil Co. i. P is a victim of a contract breach for the purchase of oil. For lack of oil he wants

consequential damages. 1. Holmes: a contract is a promise to do something or to pay damages

ii. The measure of damages: (Market Price – Contract Price) + incidentals. iii. How to fill contract gaps: default rules:

1. Hypothetical contracting: what would reasonable people have contracted for 2. Penalty Defaults: incentive based (people need to think about this more) – see

Walker v. Keith iv. Incidentals

1. Be reasonable in covering. Don’t return from TX without the oil. 2. You would have had to bear the cost of the trip from KY to TX either way so that is

not covered. c. The expectation damages rule operates to deprive the ‘loser’ of any benefit from indulging in

non-‐cooperative conduct and reciprocally, gives the winner his due. The gamble is fair for both parties, and the rule has a consistent and important role in making cooperative relations feasible and in promoting efficient resource allocation

d. Expectancy damages versus reliance damages i. Start at 0, contract gives you 1. If you rely and it’s to your detriment, you are left at -‐1. ii. Expectancy is 2 iii. Reliance is 1: it returns you to the point you would be at had you not made the contract.

e. RST 2d §344 Purposes of Remedies i. (a) Expectation interest ii. (b) Reliance interest iii. (c) Restitution interest

f. The Efficient Breach i. There should be an incentive to breach when it would be efficient. Restitution is punitive

and takes this incentive away ii. Pareto move (someone is better off but no one is worse off)

VI. Introduction to Contract Defences and the Role of Inequality.

a. Williams v. Walker-‐Thomas Furniture Co. i. Unconscionable: the cross collateralisation clause. If Ms. Williams buys a series of items,

she can never pay off one of them unless she pays off all of them ii. Risk: at T0 the furniture company is the one going out on a limb and bearing the risk and

the risk shifts over time: at T4 Williams could lose it all for lack of $1. iii. Dissent: concerned that if you vindicate Ms. Williams you restrict the poor’s access to

credit. iv. There was an absence of meaningful choice and unfair terms:

1. Lack of bargaining power 2. Lack of education 3. Fine Print

v. A pushback at the dissent: any credit is taking the floor; we do not want people to fall below the floor – below the social minimum. Also credit is risky and if they fall below the floor we have to pick them back up.


b. Black Letter Law: Contract term can be knocked out as unconscionable if it is procedurally unconscionable (bargaining power, lack of evidence, fine print) or substantially unconscionable (term is unreasonable).

i. UCC § 2-‐302: unconscionable Contract or Clause: if a court as a matter of law finds a contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

ii. Procedural unconscionability: 1. Where a party who drafts the contract includes a term in the contract, having

reason to know that the term does not accord with the other party’s fair expectations and that the other party will not notice the term

2. Unfair bargaining positions 3. Unfair surprise: contrary to reasonable expectations as to what provisions a

contract of the general type would involve the term is not pointed out and explained, or is written in obscure language.

iii. Substantive unconscionability: 1. Contract terms that are unconscionable without regard to the bargaining process

because they are lopsided iv. RST 2d § 208: unconscionable Contract or Term

1. It is possible for a contract to be oppressive taken as a whole, despite the fact that there is no weakness in the bargaining process, but adds that unconscionability ordinarily involves other factors as well as overall imbalance.

THE BARGAIN THEORY OF CONTRACT I. Introduction to Consideration: Gratuitous Promises

a. Must have to have an enforceable contract b. Benefit Detriment Test

i. Either benefit to promisor or detriment to promisee c. Bargain For Theory:

i. Both parties agree to an exchange – giving something up ii. Equivalence not required (consider circumstances) iii. Each giving up something to get what they want iv. Mutual obligation v. RST 2d § 71: Majority rule for bargain for case

1. To constitute consideration, a performance or a return promise must be bargained for

2. We have a bargain if you view this as an unfortunate price that someone has to pay to get whatever result

3. Different then the benefit/detriment test: because it's a little more constrictive.

d. If the promise was given as part of a bargain: i. Was it nominal? A bargain in form but not in substance-‐unenforceable ii. Was the bargain based on a promise to surrender or forbear from asserting a

legal claim? – if in good faith=enforceable iii. Illusory promise: a statement that appeared to be a promise but does not

commit the promisor to any more than what he might later desire to do=unenforceable


e. If the promise was not given as a bargain, unenforceable unless another possibility may make it so:

i. Reliance: did the promisee rely to his detriment ii. Past consideration: not consideration iii. Waiver: iv. Form: was the promise in some special legal form, such as under seal in a state

that still recognized the binding force of the seal f. Hamer v. Sidway

i. Consideration because the nephew suffered a detriment. He gave up his legal right to drink, smoke and swear.

ii. Because it is a subjective test, it does not matter that the performance did not provide a benefit to the promisor

iii. KK – thinks what is really going on here is bankruptcy fraud g. Kirksey v. Kirksey

i. From a house to a hut to the street was the course of Ms. Kirksey’s retreat. She could not recover from her in-‐law (her lover?) Who’d nakedly promised a suite.

ii. Gave up homesteading – D wants her to give up her land because it is “unhealthy” and society is “bad”

1. D’s offer: if you come and see me, I will put you up. Expresses himself diffidently to express he is not bargaining.

iii. The difference between a bargain and a gift: 1. Put a condition on the gift – you have to make some effort to receive it

versus a bargain in which you are exchanging one thing for another. iv. Promises to make gifts are not enforceable because they lack consideration.

h. In re Green i. Contracts under seal: in the absence of a statute a promise is binding without

consideration if it is in writing and sealed – RST 2d § 95 1. If you write down the promise to pay for something in writing, then it

means more than saying it. 2. There is a cautionary function of consideration: formalism. It is enforced

when you go through the entire process. It is a way of protecting the promisor from saying and sticking to something that they weren’t even all that formal about initiating. There has to be a display of commitment.

3. The Channelling Function/Evidentiary Function: by channelling we promote the evidentiary function. It’s channelling someone to make that formalism, because we want that person to be able to rely. The law channels you to provide the evidence – this is why we have the seal

4. If you mean it, write it down *Lucy 5. What constitutes a seal? Comment (b) ‘written’

ii. Past consideration is no consideration i. Wolford v. Powers

i. Wolford trying to enforce the promissory note through the estate. Theory-‐ just a promise to make a gift, no consideration. Lower court agreed. Supreme Court Reversed

ii. If you are a §71 guy, it’s obvious that there was consideration: he had a legal right to name the kid and gave up that right, it was the unfortunate price both parties had to pay.

j. Bataskis v. Demotsis


i. Most states have usury laws that prevent the lending of money at an outrageous rate.

ii. Not unconscionable because of Social policy: war-‐torn country, induced to bargain.

iii. Demotsis knew that he was only getting $25 but was lying to meet state usury laws – the only way that this decision makes sense.

iv. If we think you were really bargaining, we will enforce the contract.

II. Promissory Estoppel a. RST 2d §90: Promise reasonably inducing action or Forbearance.

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

b. Ricketts v. Scothorn i. Grandfather gives granddaughter money. Was it foreseeable that she would

retire? ii. Intra-‐Familial Promises

1. Shame sanctions (non-‐legal sanctions) among families create obligations, unenforceable

2. Non-‐legal sanctions disappear when promisor dies. Thanks to dead guy rule she can sue the estate.

3. Dead guy rule: courts don’t enforce promises to make gifts among family members when promisor is alive but are willing to enforce against dead guy.

a. The promise did not revoke or withdraw the future gift promise during his lifetime, he meant to hold it. If he did revoke, willing to suffer non-‐legal sanctions, therefore P should lose.

iii. Court recognises that there was no consideration because the note was not conditioned on her quitting

1. Did not view giving her the promissory note as the unfortunate price he had to pay for her to quit

iv. But even though there is no consideration, there is promissory estoppel, which is a substitute for consideration because of reliance.

c. Feinberg v. Pfeiffer i. Told her she could retire when she wanted, receive $200 a month, cut pension ii. Long term employee, BoD resolution: strange language (hope and desire) more

consistent with giving a gift rather than a firm obligation. iii. There is no consideration because they are not requiring anything of her. Past

consideration is no consideration and they do not view this as the unfortunate price they have to pay. But they will still lose because PE.

iv. “The implied promise to complete being the consideration for the original promise” – the court fills the gap by implying a promise.

v. Under §90, must show definite and substantial reliance. d. Hoffman v. Red Owl Stores

i. PE as Tort – no definiteness (see Walker v. Keith) but relied to detriment so tort. Not p.e. as consideration


ii. They induce him to buy a grocery store to get some experience to be qualified to get to the franchise. He must bear the cost of his own experience

iii. But then “everything is ready to go, get your money together and we are all set” – that is the tort and now they are on the hook.

1. Sells grocery store in reliance on that a. Fire sale: may not have gotten fair market price.

e. Allegheny College i. Dead guy rule

1. If you die without repudiating, then legal sanction 2. Dead guy rule is wrong here

ii. D made a pledge to Allegheny College – uses consideration but also gift iii. Rst §90 (2) charitable contributions – held up. iv. Normally, colleges will not sue people who renege on their promise to donate.

f. Former Rule -‐ Reliance irrelevant i. Often a donative promise is relied upon by the promisee. The rule at one time

was that reliance was irrelevant; a donative promise was unenforceable even if it was relied upon. (Kirksey)

g. Modern Rule i. If a donative promise induces reliance by the promisee in a manner that the

promisor should reasonable have expected, the promise will be legally enforceable, at least to the extent of the reliance. (Feinberg v. Pfeiffer Co.)

ii. The principle of promissory estoppel: if a promisee has relied on a donative promise, for reasons of justice the promisor should be estopped (prevented) from pleading lack of consideration. Under modern law and practice, reliance is viewed as either a substitute for consideration (bargain) or as consideration itself (a promise is enforceable).

iii. RST § 90 1. Remedy may be limited to the extent of reliance. "The remedy granted

for the breach may be limited as justice requires" 2. Substantial reliance not required: enough that the promisor should have

reasonably expected that the promise would induce reliance h. Reliance as consideration: a relied upon donative promise is enforceable despite the

absence of consideration i. Actual reliance ii. Foreseeability

III. Material Benefit Rule

a. Webb v. McGowin (Ala. 1935) – Webb saves McGowin’s life, promises to pay for life. i. 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.

1. Aka green eyeshade guy comes in and says screw Webb, it looks like it was just a gift

2. Under Bargain-‐For test: there is no consideration. McGowin did not view promising the pension as the unfortunate price he had to pay to prevent the block from falling – past consideration is not consideration

3. BUT – TRANSACTION COSTS: we are not in ‘freeze-‐frame’ world. There was no time to strike a bargain.


4. Material Benefit Rule turns the No to a Yes. I want to live in a world were people feel comfortable to save me.

ii. Past consideration (saving his life) coupled with promise to pay. 1. The subsequent promise to pay is significant -‐ it resolves the concern

that caused us not to allow the squeegee man to recover because we don’t know if he really did confer a benefit. The subsequent promise to pay allows the recipient of the benefit to put a value on it.

2. McGowin puts a value on it that was not indefinite. iii. McGowin’s promise is binding because the promise to pay was based on a

material benefit to the promisor that constituted valid consideration. b. In General: the principles that govern past or moral consideration are still in the process

of development. The emerging modern rule is that a promise based on a moral obligation is enforceable if the promises is based on a material benefit (usually meaning an economic benefit) that was previously conferred by the promisee upon the promisor, provided the benefit gave rise to an obligation – even if only a moral obligation – to make compensation.

i. RST 2d. § 86: “a promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice” but it is not blinding “to the extent that its value is disproportionate to the benefit.”

ii. Statues of Modern Rule: 1. Because the modern rule adopted in the R.2d is still emerging, some

courts continue to follow the traditional rule and hold that a promise based on moral or past consideration is unenforceable unless it is a promise to pay a debt barred by either the statute of limitations or discharge in bankruptcy or a promise to perform a voidable obligation.

c. Exception to consideration i. Past consideration along with promise to pay = enforceable ii. Conjunction of quasi contract and promise to pay iii. Implicit request: “save me” is implied, not gratuitous iv. Subsequent Promise v. RST 2d. § 90: Cautionary Function: don’t allow when only promised in the

moment out of guilt, use caution, take account of guilt. NEGOTIATION AND FORMATION OF THE CONTRACT I. ELEMENT: Offer and Acceptance. R.2d §§24, 30, 50, 42, 26-‐7, 57, 59

a. Do not always have to identify an explicit offer and acceptance to show intent to contact. b. RST 2d § 24: Offer Defined: An offer is the manifestation of willingness to enter into a bargain,

so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

c. Adverts are usually not offers, unless facts and circumstances make it reasonable to assume that accepting is enough. i. Lefkowitz v. Great Minneapolis Surplus Store (1957) – Lapin and house rules

1. Exception to the general rule that adverts are normally deemed to be only invitations to deal.

a. If the advert is definite in its terms, and either (i) the circumstances clearly indicate an intention to make a bargain, (ii) the advert invites those whom it is addressed to take a specific action without further communication, or (iii) over acceptance is unlikely.


2. Law: An advert may be converted to an offer when it promises something in exchange for clear, definite action, and leaves nothing open for negotiation.

3. Otherwise, an advert is an invitation for an offer. 4. What is really going on here: Lefkowitz owns the other fur stores in the area.

a. K – why does he win on the second Sat? He knows what the house rule is by then.

d. RST 2d. § 30: Form of Acceptance Invited (1) An offer may invite or require acceptance to be made by an affirmative answer in words, or by performing or refraining from performing a specified act, or may empower the offeree to make a selection of terms in his acceptance. (2) Unless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable in the circumstances.

e. RST 2d § 50: Acceptance of Offer Defined; Acceptance by Performance; Acceptance by

Promise (1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. (2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise. (3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise.

f. Assent/Acceptance can be manifested by the execution of a written document, or by an oral

expression of agreement, or perhaps simply by commencement of the performance that the offer calls for.

g. Mirror Image rule

a. At c/l, an acceptance had to be a “mirror image” of the offer. If the purported acceptance deviated from the offer in any way, even in an immaterial way, it was deemed a qualified or conditional acceptance and did not form a contract; instead it is a counteroffer.

b. Davis v. Satrom (1986) -‐ talks to buy a mobile home park fall through i. Classic example of c/l doctrine. Davis is nuts to think he has a contract. ii. Letter of intent = offer iii. Counteroffer kills the offer. Only one offer in place at any time iv. RST 2d §42: revocation by communication v. UCC § 2-‐207: attempts to try give a more reasonable answer than the practice

of shooting documents at each other. c. Ardente v. Horan (1976) – accepts purchase agreement, wants dining set included –

trying to claim can accept the house plus the furniture? No contract dude i. RST 2d. §§ 26-‐27 ii. “Difficult to replace” – veiled threat to walk away. Jerky. Quibbling acceptance.

Not mirror image. iii. RST 2d. § 22: not adding another link to the chain of necessary requirements.

Offer and acceptance is the typical means we use to show manifestation of mutual assent.

iv. RST 2d. § 57: Effect of Equivocal Acceptance:


Where notification is essential to acceptance by promise, the offeror is not bound by an acceptance in equivocal terms unless he reasonably understands it as an acceptance.

v. RST 2d. § 59: Purported Acceptance Which Adds Qualifications A reply to an offer which purports to accept it but is conditional on the offeror's assent to terms additional to or different from those offered is not an acceptance but is a counter-‐offer.

vi. RST 2d. § 22 Mode of Assent: Offer and Acceptance (1) The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties. (2) A manifestation of mutual assent may be made even though neither offer nor acceptance can be identified and even though the moment of formation cannot be determined.

h. Raffles v. Wichelhaus (Court of Exchequer 1864) –The Peerless Rule – for want of an October peerless, my kingdom was lost. a. Where an expression of two equally reasonable meanings, and each party understands

the expression differently. b. Both parties used the term ‘ex ship Peerless,” each thinking there was only one ship

Peerless when there were two and each intended a different one. c. The rule in such cases is that if both parties subjectively attach different, equally

reasonable, interpretations to their expression, no contract is formed. i. Note: limited to cases where two or more meaning are equally reasonable. If an

expression is susceptible of two or more meanings, but only one meaning is reasonable or one is more reasonable than the other, the objective theory of contracts prevailed and interpretation is based on the reasonable meaning.

d. BUT, K’s interpretation i. This was a fairly casual contract. Did not even contract about delivery date,

peerless was mentioned incase ship got lost. ii. D wants to walk away because he regrets entering into it (price spike due to war

in US at time, cotton from South was not exported). South losing, prices falling, Lawyer finds way out of contract.

e. R.2d. § 20 -‐ Effect of Misunderstanding (K hates this)

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

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

If both no, contract is void – get out of my courtroom (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if

(a) That party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) That party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party


i. Evert-‐tite Roofing Corp v. Green (1955) – does roofing commence when trucks leave or work

starts? a. Both are jerks – both should have picked up the phone. b. But, the Green’s are the true LCA. We need the law to go anti-‐Green even though

roofing co were jerks. There is no ability for Roofing co to just cover. i. Therefore, must protect expectancy interest – RST 2d. § 344(a) ii. Have to give both lost profits and costs iii. Should you split the baby? Give reliance but not expectancy to give incentives to

roofing co to contact consumer first.

II. Subcontractor formation Problem a. RST 2d. §87 (2): Option Contract

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

b. Baird v. Gimbel (2d Cir 1933) i. Gen Contractor relied on Gen Sub Contractor Bid to Penn Government and then

received contract. ii. Gen Contractor is not in position to accept sub contractors bid until after it was

awarded the contract. Gen has to rely before they can accept. iii. Tech D sub contractor withdraws before bed it accepted, but K thinks should not

be allowed to withdraw. iv. Gen is being reasonable in its reliance, and according to § 82, if it is reasonable

for you to rely; you have the option without the payment of consideration. 1. Reasonable: if obviously a type it would not be unreasonable. If all bids

are in 69K-‐72K and one for 7,000, obviously not reasonable to rely on that one.

c. Drennan v. Star Paving (Ca. 1958) i. Builder, a gen contractor, wants to make a bid on a school construction job,

requests plumbing subcontractors to give bids. This request is not an offer to the subcontractors.

ii. But bids by the subcontractors are offers to Builder. iii. Reliance: a firm offer is irrevocable if the offeror should have reasonably

foreseen that the offer would induce reliance by the offeree prior to acceptance, and such reliance occurs.

III. Negotiation and Closure

a. RST 2d 27: Existence of Contract Where Written Memorial is Contemplated Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof, but the circumstances may show that the agreements are preliminary negotiations

b. Arnold Palmer v. Fuqua (6th Cir. 1976) – sign memo of intent, but leave many terms open

i. P golf co filed for breach against D golf equipment manufacturer. Their agreement was culminated in a doc named “memorandum of intent.” DC ruled for D. COA Rev&Rem.


ii. To determine intent to be bound, look at entirety of circumstance, full document, relevant circumstances, extrinsic evidence.

c. Empro (7th Cir 1989) – letter from Empro about agreement to work together, want to work with others

i. No liability – not even a signature, looks at language of document only ii. Easterbrook is satisfied to determine intent solely from the language of the document

(remain in all four corners of the document). iii. Arnold is willing to override explicit language in the document by looking at all facts

and circumstances. d. Reliance: if it is the kind of thing that is normally associated with pre-‐contractual

negotiations, you lose.

IV. Battle of the Forms If the contract is for a sale of goods, the UCC is the governing law.

a. Attack: i. Was the contract definite? 2-‐204: a contract will not fail for indefiniteness if clear

parties intended to make a contract ii. Was the form a counter-‐offer? For it to be, the offeree must demonstrate an

unwillingness to proceed with the transaction unless the additional or different terms are included in the contract. If not, you are in (2), but Zemke puts us in three.

b. Introduction: i. Definitions:

1. Merchant: UCC 2-‐104: someone with knowledge or skill in something 2. Goods: UCC 2-‐105: all things that are movable at the time of identification to

the sale other than money. ii. Common law rule: LAST SHOT DOCTRINE: terms that govern are the ones that were

sent last iii. Before you enter UCC 2-‐207 world, you have to be in the ‘conditional acceptance’ box

and not the ‘counter-‐offer’ box. (if counter offer – c/l) iv. Also, look to UCC 2-‐204 about contract formation v. Addresses the battle of the forms, but in 2-‐207, there is no requirement that you need

two forms.

c. Statue: § 2-‐207. Additional Terms in Acceptance or Confirmation. (WILL BE ON FINAL) (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms. (2) The additional terms (modern rule diff terms get in) are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it; or (this will almost never be true if we are litigating about it). (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract (such as the fact that they have started to perform) is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. (no acceptance, but performance). In such case the terms of the particular contract consist of those terms on


which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act. A clever lawyer will say their contracts where expressly conditional, thereby getting them to 3.

d. Official Comments: i. OC 3. Whether or not additional or different terms will become part of the agreement

depends upon the provisions of subsection (2). If they are such as materially to alter the original bargain, they will not be included unless expressly agreed to by the other party. If, however, they are terms which would not so change the bargain they will be incorporated unless notice of objection to them has already been given or is given within a reasonable time

ii. OC 6. If no answer is received within a reasonable time after additional terms are proposed, it is both fair and commercially sound to assume that their inclusion has been assented to. Where clauses on confirming forms sent by both parties conflict each party must be assumed to object to a clause of the other conflicting with one on the confirmation sent by himself. As a result the requirement that there be notice of objection which is found in subsection (2) is satisfied and the conflicting terms do not become a part of the contract. The contract then consists of the terms originally expressly agreed to, terms on which the confirmations agree, and terms supplied by this Act, including subsection (2).

iii. OC 7 (KNOCK OUT RULE): In such cases, where the writings of the parties do not establish a contract, it is not necessary to determine which act or document constituted the offer and which the acceptance. See Section 2-‐204. The only question is what terms are included in the contract, and subsection (3) furnishes the governing rule.

e. What about language of additional terms in (2) -‐ Three ways to interpret 2-‐207:

i. (1) Official comment 3 determined that, in spite of the omission, different terms are to be analyzed under 2-‐207(2).

ii. (2) The omission was identical, however once an offeror addresses the subject, it implicitly objects to variance of that subject, thereby obviating the need to refer to “different” terms. These two produce the same result (i.e. first shot).

iii. (3) From comment 6: different terms cancel each other out and the existing applicable code provision stand in their place. 2-‐207 was designed to avoid the common law result that gave the advantage to the party sending the last form, we cannot conclude that the statute was intended to shift that advantage to the party sending the first form.

f. Gardner Zemke -‐ Issue of warranty air con chillers, conflicting terms

i. Contract conditions on acceptance of warranty, but court says no because form is pre-‐printed, so not expressly conditional.

ii. At c/l, the mirror image rule applied to the formation of contracts and the terms of the acceptance had to exactly imitate or mirror the terms of the offer. If the accepting terms were different from or additional to those in the offer, the result was a counteroffer, not an acceptance.

iii. However, the drafters of the code intended to change the common law in an attempt to conform contract law to modern day business transactions. Where preprinted forms are used to structure deals, they rarely mirror each other, and yet the parties usually assume they have a binding contract and act accordingly.


iv. Where merchants exchange preprinted forms and the essential contract terms agree, a contract is formed under section 2-‐207(1). A responding document will fall outside the provisions of section 2-‐207(1) and be a counteroffer only when its terms radically differ from the offer, or when “acceptance is expressly made conditional on assent to the additional or different terms.” 1. The court concluded that the “expressly conditional” provision of 2-‐207(1) was

intended to apply only to an acceptance, which clearly reveals that the offeree is unwilling to proceed with the transaction unless he is assured of the offeror’s assent to the additional or different terms therein.

a. Q: Did he clearly and unequivocally communicate to the offeror that its willingness to enter into a bargain was conditioned on the offeror’s assent to the additional or different terms.

b. Boilerplate contracts will not be expressly conditional, therefore not counteroffers.

g. K’s summary i. §2-‐207(1) – before the comma, repudiates mirror image rule. After comma, last shot

doctrine. ii. §2-‐207(2) – turns the last shot doctrine into the first shot doctrine iii. §2-‐207(3) – knock out rule. iv. Default rules: course of dealings and course of trade

V. The Software Problem and Rolling Contracts

a. UCC § 2-‐204. Formation in General. (1) A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract. (2) An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined. (3) Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

b. Form contract problem

i. In general form contracts are enforceable, unless they have an unconscionable term. ii. Reason: (1) backstops of unconscionability and (2) competition

1. Competition is not perfect protection for consumers, but in general imperfect competition will beat imperfect judges.

2. Ultimately, there will be higher transaction costs born by consumers if (2) is rejected.

iii. RST 2d § 211(3) and Comment F: standard form contracts (3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement. 1. Official comment F: terms excluded: not bound to terms that are beyond

reasonable expectation. This is a standard, not a rule, but it makes sense. K: Lets not revert to cave man society; we need some standard form contracts around here!

c. Rolling Contracts problem: i. E.G. Geico


ii. Consumer or purchaser enters into the contract with things such as price, quantity and delivery date settled. Later, the contract is delivered.

iii. K doesn’t think the difference here matters – no one in fact reads contracts 1. Form contracts (Best Buy) are about adhesion (take it or leave it) 2. Rolling contracts are about timing

d. Box top license scenario: three options: i. Offer and acceptance already occurred over the phone ii. License is an acceptance with additional terms iii. Phone is preliminary negotiation and box top is offer. Opening the box and keeping is

an acceptance. e. Step-‐Saver:

i. Agreement to transact over the phone, follow up with written purchase order, only warranty is on box top when delivered. (Does UCC govern? Software a good or service?)

ii. Court says contract made on the phone, box top just proposed additions 1. 2-‐204(3): even though one or more terms is left open the contract can be

accepted if there is reasonable basis for providing the remedy. 2. Not crucial to the fact that there is a contract to determine when exactly one was

formed. 3. Was the box top licence a counter offer?

a. If price, quantity and delivery date are different = counter offer. Warranty is a conditional acceptance. Tests: i. Counter Offer: Is the response a conditional acceptance to the extent

it states a term that materially alters the contractual obligations solely to the disadvantage of the offeror?

ii. Conditional Acceptance: uses key words for phrases, e.g. these terms are the only ones upon which we will accept orders. (K thinks this is illogical – how seriously do you want to take pre-‐printed forms)

4. Back up test: Wisdom is not persuaded the TSL would not have gone through with the deal if the warranty term had been rejected.

iii. Conclusion: TSL’s warranties are just proposals for addition to contract. 1. TSL’s C’ does not get in, step saver is entitled to C” 2. C” is default, which can come from c/l or UCC. 3. UCC remedies will replace the c/l remedies. 4. If step saver had term C, UCC 2-‐207(1) would apply. Since no, (2) and (3) give us

the same answer – knock out C’ and make it C”. f. Hill v. Gateway – term requiring arbitration, inconvenient for consumer.

i. Easterbrook being a weirdo by not using 2-‐207 because only one form (not called battle of the forms dude) and by allowing the terms to get in.

ii. Reasoning – high transaction costs without the enforcement. iii. K thinks there should be a higher standard of reasonableness about the arbitration

clause.

VI. Reasonable Expectations a. Reasonable expectations is really only relevant or robust in insurance law. b. C&J Fertilizer – insurance policy weird definition of burglary

i. Burglary definition: risk allocation: the insurance company does not want to assign risks to itself when the LCA is the company insured.


ii. It is reasonable for the insurance company to have the rule, but the rule misfired – it was not an inside job.

iii. Forcing the insurance company to call attention to its idiosyncratic terms reduces transaction costs.

THE NECESSITY AND EFFECT OF A WRITING

I. Statute of Frauds U.C.C. § 2-‐201: Formal Requirements, Statute of Frauds

1) Except as otherwise provided, a contract for sale of goods for $500 or more, is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.

2) Between merchants, if within reasonable time, a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of (1) against such party unless written notice of objection to its contents is given within 10 days after it is received

3) A contract which does not satisfy requirements of (1) but which is valid in other respects, is enforceable:

a. If the goods are to be specially manufactured for the buyer… b. If the party against whom enforcement is sought admits in his pleading that a

contract for sale was made… c. With respect to goods for which payment has been made and accepted or which

have been received and accepted a. In general: absent a statute that provides otherwise, oral contracts are enforceable.

However, the Statute of Frauds requires certain types of contracts to be memorialised in a writing signed by “the party to be charged” (i.e. by the party against whom enforcement of the contract is sought). i. Terminology

1. “Within the statute” -‐ If an oral contract falls within one of the categories of contracts that must be memorialised in a writing under the SOF

a. i.e. the SOF is a defence to enforcement of the contract, unless some expectation applies.

b. Unenforceable against a party who has not signed a written memo containing the contracts material terms

2. “Taken out of the Statute” – if an exception does apply, i.e. the statute is not a defence.

ii. Purpose: prevent fraud and perjury by persons who might falsely claim that a contract was made.

iii. Types of contracts that must be memorialised in writing: (1) Contracts for the sale of an interest in land; (2) contracts for the sale of goods (now covered by the UCC); (3) contracts in consideration of marriage; (4) contracts not to be performed within one year from the making thereof, and (5) contracts of suretyship

b. Contracts for the sale of goods – UCC § 2-‐201 i. A contract for the sale of any goods for the price of $500 or more must be supported

by a writing. ii. “Goods” Defined: includes all tangible movable property. It does not include intangible

securities or service. iii. Exceptions: when an oral contract for the sale of goods for $500 or more will be

enforced:


1. Receipt and acceptance of goods: the buyer received and accepts all or part of the goods

2. Part Payment 3. Special Manufacture: the contract calls for the manufacture of special goods for

the buyer not suitable for sale to others in the ordinary course of the seller’s business, and the seller makes either a “substantial beginning” in the manufacture of the goods or “commitments” for their procurement.

4. No objection to confirmation: the contract is between merchants; within a reasonable time a written confirmation, which satisfies the SOF as to the sender, is sent; and the party receiving the confirmation does not dispatch a written objection thereto within 10 days. [U.C.C. § 2-‐201(2)]

5. Admission: the contract is admitted by the party against whom enforcement is sought “in his pleadings or testimony in court.” [UCC § 2-‐201(3)(b)]

iv. Modifications 1. A modification of a contract for the sale of goods is within the SOF if the new

agreement that results from putting together the original contract and the modification is within the statute.

c. Contracts that cannot be performed within one year of making i. The one-‐year period begins at the date the contract is made, not when performance is

promised.

d. Klewin – shook hands and agreed at dinner meeting that Klewin would serve as construction manager for the project i. Flagship was dissatisfied after the first part – wanted a new manager ii. Whether agreement is under SOF – whether it could possibly be completed within one

year – does not need to be written down iii. K hates this – there should be some incentives here, and there seems to be a difference

between the phase one and the phase two contract. Also, it is obvious that this could not be completed within one year – but since indefinite, through a tortured interpretation, enforces. It is weird; some judges seem to be on a crusade against SOF.

e. Migerobe – loss leader watch sale turns bitter i. Court allows them to sting together documents from their filing cabinets, one of which

is signed, to have an enforceable contract ii. Again, SOF doesn’t work the way it should. iii. K is not nearly as outraged by this case as by Klewin, but “I thought that the purpose of

SOF was to get people to write down their contracts, not stitch together stuff from their filing cabinets.”

f. Conagra -‐ oral agreement for sale of wheat – not followed through, Conagra covers i. We are clearly between merchants. Big farmer.

1. Normally do not want silence to an assent -‐ it makes the offeror less of a master of the offer.

2. But we change that c/l rule between merchants -‐ trying to promote communication (bailey)

3. If ConAgra is nice and send a confirmation, the Nierenberg’s are supposed to play ball -‐ lift their little pinkie finger and talk! K likes this -‐ as long as it is just between merchants!

4. (Note an email can constitute a signature – modern world).


ii. Official comment 1 The required writing need not contain all the material terms of the contract and such material terms as are stated need not be precisely stated. All that is required is that the writing afford a basis for believing that the offered oral evidence rests on a real transaction. It may be written in lead pencil on a scratch pad. It need not indicate which party is the buyer and which the seller.

g. Lige Dickson i. For roughly a decade, paving contractor purchases asphalt from union. ii. Course of dealing: Lige gets a contract, telephones Union and place an order. The

practice/course of dealing is that after telephonic order, Lige received a written invoice from union. Although there is writing in place, they do not otherwise have a contract. 1. When price of oil drifts up, union gives Lige price protection. 2. At t0, Lige contracts with homeowner, at t1 Lige contracts with union, t2 Lige

does the paving. 3. Union will offer asphalt at t0 price, because Lige contracted with homeowner

when the price of oil was at t0 and so union covers the loss. Given the spike in oil in ‘73, union finds internalising the loss of the t0-‐t1 price difference (which is a practice, not something written down) as too costly.

4. As a result Lige will lose money on a bunch of contracts they entered into at t0. Lige is upset over their loss and they sue seeking the enforcement in price protection that they have been receiving for the past several years (course of dealing). It would be an enforceable oral contract, except that it is within the SOF – over $500 – there has to be a writing signed by union and there is not.

iii. Therefore, SOF says that not enforceable. 1. Finally, the SOF works the way, from my armchair, I thought it was supposed to

work. 2. Who better bore the risk? LCA analysis: difficult to say -‐ need to know more

about the industry. Who should the lose fall on? It is best to allow the smaller business to take the loss, rather than Union who would have to cover everyone and go out of business.

h. K Commentary: Likes SOF. Without it, there will be opportunity for a buyer or seller to opportunistically exit. Therefore, no one would contract and we would be at (0, 0). World with SOF gets us to (1, 1).

II. Parol Evidence Rule

a. The Rule: parol evidence will not be admitted to vary, add to, or contradict a written contract that constitutes an integration.

b. Governs the effect of a written agreement on any prior oral or written agreements between the parties. i. A full and final expression of the parties agreement may not be supplemented or

contradicted by any oral or written agreements made prior 1. Does not bar evidence of oral agreement after the writing 2. Does not bar evidence about the meaning the parties intended to give to

contract terms c. General notes:

i. Parol evidence rule divides into three kinds: unintegrated agreements, partially integrated and fully integrated agreements.


1. Unintegrated writing -‐ no privileging of the written document. It is relevant but so is all your oral testimony. For example, the cocktail napkin scrawl setting out business negotiation is an unintegrated agreement.

2. A partially integrated agreement is more formal, and because more formal, parol evidence will privilege it over oral testimony that contradicts it. BUT oral testimony that supplements it is admissible.

a. For example, A and B are the final word on A and B. We could still have oral evidence of C and D, but not evidence that says not A and B. A clever lawyer can always cast a ‘not B’ into a C.

b. Normally, a partially integrated agreement is something that looks like it is more formal, i.e. typed up.

c. You privilege the written A and B, exclude not A and not B, but can supplement C and D.

3. A fully integrated document: a conclusion that it is the final and complete agreement between the parties. Never allow testimony of C and D. Consists of whatever terms the parties have written down and then sub in default rules when necessary

a. A fully integrated agreement will have a merger clause – ‘this is the final and complete agreement between the parties.’ Just like there was the question in Zemke, but will contracts won’t normally show full integration? Better have it specific and upfront rather than buried.

ii. The default is partially integrated. Only if they seem to really mean it is it fully integrated, and only super informal (contract napkin) agreements are unintegrated.

iii. C/l has an additional test on whether C can get in on a partially integrated agreement -‐natural omission test. R2d §216(2).

d. Natural omission test: i. Parol evidence is admissible of it concerns a term that would naturally be omitted from

the agreement. ii. Under the R.2d. §216, a term will be treated as naturally omitted if

1. The term does not conflict with the written integration 2. The term concerns a subject that similarly situated parties would not ordinarily

be expected to include in the written agreement. e. UCC says it gets in as a default unless it is the sort of thing that naturally would have been

excluded. If you cannot say whether it would have been omitted, it gets in. f. UCC § 2-‐202: Final Written Expression (movable)-‐ try to tweak the parol evidence rule for

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

• By course of dealing or usage of trade or by course of performance • By evidence of consistent additional terms unless the court finds the writing

to have been intended also as a complete and exclusive statement of terms of the agreement

i. Not contracted (not A or B) but can be explained or supplemented (C or D). g. Mitchill: icehouse case

i. Buys the property, just a standard form contract for sales of real property. The standard form does not contemplate agreements about adjacent properties.


1. Perhaps that is why it is natural to omit it, because it is not standard to discuss adjacent properties

2. Received oral contract for the tearing down of icehouse. She sues seeking to enforce the oral promise. Have a contract for sale of farm between Lath and Mitchill, which has terms such as price, quantity and delivery date, and she wants to bring in term Z. there is no reason to think this is complete (no merger clause) but it is more formal.

3. Therefore, partially integrated agreement and the natural omission test will be applied.

ii. ANDREWS: I understand it will be over and under conclusive but on the whole it works for the good. As a pragmatic matter, generally follow tradition, but when need be pay attention to social concerns. Always trying to do good. Utilitarian.

iii. Three conditions must exist before an oral agreement can vary the written contract: 1. The agreement in form be a collateral one (side agreement) -‐ met here 2. Must not contradict written contract -‐ seems met here -‐ Z term and not A or B 3. Not ordinarily expect to be embodied -‐ that is to say natural omission test.

a. Comes down to this. Would it be natural to omit icehouse. Who knows? Seems like a cultural thing. It was standard form contract (for) but seems kind of unusual and therefore not the sort of thing you would naturally omit (against).

b. K doesn't know so he hates natural omission test. MISTAKE AND EXCUSE

I. In general: Mistake in contract law falls into five categories: (1) mutual mistake; (2) unilateral mistake; (3) mistake in transcription; (4) misunderstanding; (5) mistake in transmission

II. Mutual Mistake – a mistaken assumption shared by both parties as to the conditions of the outside world. a. Modern rule: where parties enter into a contract under a mutual mistake concerning a basic

assumption of fact on which the contract was made, the contract is voidable by the adversely affected party if the mistake has a material effect on the agreed exchange and the adversely affected party did not bear the risk that the assumption was mistaken. [R.2d. § 152]

III. Sherwood v. Walker a. Facts: not-‐so-‐barren cow sold at lower cost than worth. b. Held: Judgement for D. court found parties misapprehension regarding the barren

nature of the cow went to the substance of the agreement. Agreement was therefore void.

c. Dissent: no evidence that the P did not understand what he was buying. As such, he may not have been mistaken in what he was buying and should have been able to recover.

d. Class Notes: i. K doesn’t like mutual mistake doctrine. Best justification he can find:

1. T0 – T1: cow sold but marshans invade (new unexpected world, contract should not hold).

ii. D’s violating Meta rule 1, they regret having sold cow at lower cost. iii. The trial court gets it right. iv. EFFICENT BREACH:

1. Although 99% chance that the cow is barren, 1% chance that it could be a barren producing cow.


a. Therefore, if Sherwood brought the cow as a lottery ticket, no reason to take it away just because it paid off.

2. Reward the smarter person – makes for better economics, stronger society. Doing the opposite is wasteful:

a. Greek Vase example: Expertise of the guy buying the vase wins over the seller who casually acquired it and is using it as an umbrella holder. The expert does not have to disclose his carefully acquired expertise, even though seller may have to disclose casually acquired info. Want to protect expertise and not raise transaction costs.

3. Create incentives! We don’t want the seller to opportunistically breach for his own mistake

IV. Krell v. Henry a. Facts: D rented a flat to watch coronation of the King, paid deposit but coronation got

cancelled, D not liable for remaining balance. b. Held: when the subject of the contract is frustrated non-‐performance of one of the

parties is excused. c. Class notes: K likes this case!

i. LCA: cheaper risk bearer is the guy renting out the apartment, not the guy renting it (who bears very little risk).

1. P only bears the transaction cost of having to reschedule the renting out of the apartment.

2. LOWEST-‐COST RISK BEARER: Assign the risk to the party who bears the lowest risk cost.

ii. Should he get the deposit back? It depends on the role the deposit is playing. 1. Hostage taker: if passport given to preserve option, give back passport.

But monetary deposit’s could be doing different things 2. To ensure against backing out: D didn’t technically back out. 3. Split the baby: let P keep deposit. Allow D not to pay remainder.

V. Foreseeablity and Excuse a. If it was a foreseeable risk, mistake/excuse does not apply

i. Why would you magically assign the unforeseeable risk to someone who does not bear the foreseeable risk? This is why K hates this.

b. When asking to be excused, it is normally due to unforeseen circumstances. Therefore, it is up to the Rhetorical skills of the parties to convince the court as to what was foreseeable.

c. General v. Specific i. General: the more general terms you use to describe the unforeseen

circumstance, the more foreseeable it will seem 1. Columbian coffee to Seattle shipping example: You contracted at a fixed

shipping cost; it is foreseeable that your shipping costs would increase for various reasons (labour, petrol, geographic, etc.) You would not be seeking excuse if your fixed shipping costs went down. You should have gone with variable.

ii. Specific: the more specific, the more unforeseeable 1. Was it foreseeable that right wing monarchs in Panama would seize

power and close down the canal?


REMEDIES I. Attack:

a. The measure of damages: (Market Price – Contract Price) + incidentals. b. What are they asking for? c. Is it reasonable? d. Should it be expectation, reliance or restitution e. What about liability rule/property rule protection? Sheeping and Dogging f. Does it even matter – Coase

II. RST 2d §344 Purposes of Remedies

(a) His “expectation interest,” which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, (b) His “reliance interest,” which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or (c) His “restitution interest,” which is his interest in having restored to him any benefit that he has conferred on the other party.

III. RST § 359 Effect of Adequacy of Damages

(1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party. (2) The adequacy of the damage remedy for failure to render one part of the performance due does not preclude specific performance or injunction as to the contract as a whole. (3) Specific performance or an injunction will not be refused merely because there is a remedy for breach other than damages, but such a remedy may be considered in exercising discretion under the rule stated in § 357.

IV. RST § 360 Factors Affecting Adequacy of Damages In determining whether the remedy in damages would be adequate, the following circumstances are significant:

(a) The difficulty of proving damages with reasonable certainty, (b) The difficulty of procuring a suitable substitute performance by means of money awarded as damages, and (c) The likelihood that an award of damages could not be collected.

V. Default in contract law is expectancy damages.

a. From an ex-‐anti perspective, you want the promise to be reliable, but not more reliable than it is worth. Punitive damages would raise transaction costs.

i. Prefer $100 rule with expectancy damages, but not $120 with punitive. I want the promise to be sufficiently reliable but don’t want to overpay for reliable because I don't need super duper reliability and am not willing to pay for it.

VI. Freund a. Facts: D contracted to publish a book written by P. P delivered manuscript and received

advance, but D merged and refused to publish book. b. Option for damages: (1) loss of promotion, (2) royalties, (3) cost of publication.

i. Problem with (3): if you have a contract with oxford university press that they will publish your book, they breach, and give you cost of publication. That doesn’t fulfill you. There is prestige in the publishing that is not reflected in the cost of publication.


1. It’s like giving your heirloom watch to a watch repair man and then he wants to give you an objective value -‐ no give me my watch back!

ii. Better remedy: specific performance (getting a book published is more personal than other types of coverage).

iii. K also likes remedy (2) -‐ this is not his first book, look at history. If his previous sales were $70K, 80K and 90K, it’s not unrealistic to say 80 as opposed to 0.

1. Also, interlibrary purchasing: Look and see who buys Washington square documents in respect to interlibrary purchasing.

2. Also, civil discovery -‐ if there was email within co about what his percentage should be with respect to royalties calculating his past sales.

II. Peevyhouse -‐ do they deserve property or liability rule protection?

About sheeping v. dogging; Coase and liability rule protection. Some cynicism that your choice will even matter.

a. Facts: Ps leased their farmland to D for strip-‐mining on the condition that D fill in the holes D made after the completion of the mining. D did not fill the holes.

b. Law: Damages for breach of contract cannot be so excessive that they cause economic waste.

i. Case law, statute and Restatement limit damages to those that do not cause economic waste or to those damages where the costs involved are not disproportional to the end obtained. Ps may not gain more in damages for a breach of contract that actual performance is worth.

ii. It is unlikely that a reasonable landowner would spend $29,000 to increase the value of a piece of land by $300.

c. Choose liability rule protection: not perform, pay objective value of damage -‐ $300. d. Comes down to what are we doing around here? If we are strip mining we don't destroy

50 acres of land. On the other hand, if we are in a war with Canada and we are losing, liability rule protection.

e. Endowment effect: mug and candy bar example: if give half the room a mug and half the room a candy bar: very few people will transact even given the chance, people attach a sentimental value to what they were given in 30 sec.

f. Coase: The society might value strip mining versus property, so all that will change is allocation of wealth. In property rule protection, the Peevyhouses are richer. In liability rule protection, the mining company is richer. It doesn't matter which you choose, just affects distribution.

III. Hadley v. Baxendale:

a. Facts: Involves a mill that lost profits due to the delay in delivery of a new crank shaft. b. Law: unless special circumstances are clearly communicated, damages resulting from a

breach of contract should be only those that may be fairly and reasonably considered at the time the contract was made.

c. Takeaway: you are treated as normal guy. If you are idiosyncratic, and didn’t have a spare shaft, reveal yourself and I will charge you more.

d. ALREADY EMMESHED IN LAW: you are not a jerk if the rule is property rule protection so respecting rights when put a check in the mail.


*Calabresi Article: Property 1. Three types of protection:

1. Property Rule Protection – your right in the property is alienable a. You can sell it, but it allows you to place a high price on the item; do not have to

sell for an objective value. b. Can gift it c. Robust State protection and illegitimate boarder crossings: if you come into my

garage and steal my car I call the cops (robust – criminal law; illegitimate – non-‐consensual).

2. Liability Rule Protection a. Weaker state protection: the violator only needs to drop a cheque in the mail

based on the objective value of my property. i. If the car is in your garage, property rule protection. If on the street liability

rule protection. b. The transaction costs are to high to have property rule protection on the car you

drive on the road amongst society. (E.g. someone might fabricate the sentimental value of their car).

3. Inalienability a. Robust Protection b. Can gift, but cannot sell c. E.G. body parts, sexual services

2. The choice between liability rule protection (damages) and property rule protection (specific performance) is at dispute in many cases.

3. Calabresi creates a fourth rule for dealing with polluters: a. Three traditional ways:

i. Don’t pollute: property rule protection to enjoyers 1. This does not mean no pollution -‐ property rule protection is alienable. 2. The enjoyers can sell their rights to the polluters (i.e. the polluters pay

the enjoyers to not call the EPA) ii. Pollution is ok: property rule protection for polluters

1. Some polluters may sell their rights to the enjoyers. iii. Tax pollution: liability rule protection for enjoyers

1. Force the polluter to internalise the cost of pollution and hopefully the polluter will take cost justified steps because at some point that will be cheaper then paying the tax

2. Cannot pollute unless you pay the tax. b. Calabresi’s fourth way:

i. Liability rule protection for polluters 1. Realise that stopping the pollution will be a social benefit – here is a

cheque to stop 2. Came to the nuisance: pig farm example: pig farm was already there

and the city came to him. Give him a cheque to bring about the social outcome to avoid holdouts.

ii. KK – what are we doing around here: are we dogging or are we sheeping?

Coase Theorem: In theory: if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property. In practice transaction costs or poorly defined property rights can prevent Coasian bargaining.


1. Coase Theorem 1: the law does not matter to substantive outcomes – what matters is the bargaining between people.

a. Assumptions to Coase Theorem 1: i. Legal entitlements alienable ii. No wealth effects

1. Of course there will be wealth effects, whoever has the initial entitlement by the allocation will be wealthier than the person who has to buy it.

iii. No bargaining or transaction costs 1. Freeloaders 2. Information costs

2. Coase Theorem 2: what does the law say? What rights are alienable? Coase Theorem 1 does not need law because it makes those assumptions.

a. RST 344 (a) over 344 (c) is Coase Theorem 2=minimisation of transaction costs. DOES IT MATTER: The society might value strip mining versus property, so all that will change is allocation of wealth. In property rule protection, the Peevyhouses are richer. In liability rule protection, the mining company is richer. It doesn't matter which you choose, just affects distribution.

Contracts Outline Fall 2014: Kordana

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