Contract Law Contract Law Rules, Cases, and Problems Second Edition
Pro --- essor Seth C. Oranburg
Pro --- essor o --- Law
University o --- New Hampshire
Franklin Pierce School o --- Law
Director Program on Organizations, Business, and Markets
Classical Liberal Institute at NYU Law
Juris Doctor
University o --- Chicago Law School
CAROLINA ACADEMIC PRESS
Durham, North Carolina
Copyright © 2025 Seth C. Oranburg All Rights Reserved
ISBN: 978-1-5310-3380-4 eISBN: 978-1-5310-3381-1 LCCN: 2025939720
Carolina Academic Press 700 Kent Street Durham, NC 27701 (919) 489-7486 www.cap-press.com
Printed in the United States o
America To Talia, my partner in the greatest contract o — li — e: marriage. Contents
Acknowledgmentsxxv
Online Materials xxvii
Pre
acexxix
Chapter 1 | What Is Contract Law? 3 A. Origins o — Contract Law 4 B. Law and Equity 6 C. The Restatement o — Contracts 13 D. The Uni — orm Commercial Code 15 E. Why Does Contract Law Exist? 16 1. Economic E —
iciency 17 2. Reliance 18 3. Fairness 19 4. Autonomy 19 5. Additional Theories 20 6. Theory Meets Practice 20 F. Objectivity and Subjectivity 21 G. Re — lections on Contract Law 25
Chapter 2 | What Is a Contract? 27 Rules28 A. Contract 28 B. Promise 28 C. Agreements and Bargains 30 D. Bargain Contracts and Non-Bargain Contracts 31 E. Distinguishing Common Law Contracts — rom UCC Contracts 33 Cases35 Steinberg v. Chicago Medical School 35 Re — lection38 Discussion39
vii
viii Contents
Pappas v. Bever 40 Re — lection42 Discussion42 Problem 2.1. Contract, Agreement, or Bargain? 42 Problem 2.2. The Monster and the Beast 43 Problem 2.3. Li — elong Employment 43
module i | mutual assent
Chapter 3 | Bargains47 Rules48 A. Bargain Contracts 48 B. Non-Bargain Contracts 48 1. Formal Contracts 49 2. Contracts without Consideration 50 C. Mani — estation o — Mutual Assent 51 D. Misunderstanding: Failure o — Mutual Assent 52 E. Re — lections on Bargains 54 Cases54 Lucy v. Zehmer 55 Re — lection61 Discussion62 Ra —
les v. Wichelhaus 63 Re — lection64 Discussion65 Problem 3.1. Can Machines Form Mutual Assent? 65 Problem 3.2. Misunderstanding the Triangle 66
Chapter 4 | O
ers69 Rules70 A. Preliminary Negotiations 70 B. Certainty 72 C. Advertisements as O —
ers 72 D. Catalogs as O —
ers 76 E. Bids as O —
ers 76 F. O —
ers — or Rewards (Unilateral Contracts) 77 G. Re — lections on O —
ers 78 Cases80 Le — kowitz v. Great Minneapolis Surplus Store, Inc. 81 Re — lection83 Discussion84 Contents ix
Leonard v. Pepsico, Inc. 85 Re — lection94 Discussion94 Academy Chicago Publishers v. Cheever 95 Re — lection98 Discussion98 Problem 4.1. Lexus Advertisement 98 Problem 4.2. Volvo Advertisement 99 Problem 4.3. De — inite Commission 99
Chapter 5 | Termination o
the O —
er 101 Rules102 A. Rejection 102 B. Countero —
er 103 C. Revocation 104 D. Revocation o — General O —
er 105 E. Lapse o — Time 106 F. Death or Incapacity o — the O —
eror or O —
eree 107 G. Irrevocability 108 1. Traditional Option Contracts with Consideration 108 2. Merchant’s “Firm O —
er” under the UCC 109 3. The Part-Per — ormance Doctrine — Unilateral Contracts 110 4. Option Contracts Based on Detrimental Reliance Rather than Consideration 112 H. Re — lections on Termination o — the O —
er 113 Cases114 Smaligo v. Fireman’s Fund Insurance Co. 114 Re — lection115 Discussion115 Yaros v. Trustees o — University o — Pennsylvania 116 Re — lection122 Discussion123 Problem 5.1. The Prisoners’ Rejection and the Master Plan 123 Problem 5.2. A MINI Lapse 124 Problem 5.3. Docked Out Settlement124
Chapter 6 | Acceptance127 Rules128 A. Acceptance under the Common Law: The Mirror-Image Rule 128 B. Acceptance under the UCC: Battle o — the Forms 130 1. Formation 131 a. Additional Terms 132 b. Di — — erent Terms 132 x Contents
2. The Fate o --- Additional Terms 132
a. Additional Terms Excluded Where at Least One Party
Is Not a Merchant 132
b. Additional Terms Included Where Both Parties Are Merchants 133
3. The Fate o --- Di --- --- erent Terms 133
a. The Knock-Out Rule (Majority View) 133
b. The Last-Shot Rule (Minority View) 134
4. Conduct-Based Contracts 134
5. Conclusions on the Battle o --- the Forms 135 C. The Mailbox Rule 136
1. Modern Applications o --- the Mailbox Rule 137
2. Traditional Applications o --- the Mailbox Rule 138 D. Re --- lections on Acceptance 140 Cases140 State Department o --- Transportation v. Providence & Worcester
Railroad Co. 141
Re --- lection146
Discussion146 Flender Corp. v. Tippins International, Inc. 148
Re --- lection150
Discussion150 Problem 6.1. Primo Ladders 150 Problem 6.2. An Earnest Letter 151 Problem 6.3. Conditional Acceptance o --- a Court Order 151
module ii | consideration and its alternatives
Chapter 7 | Consideration155 Rules157 A. The Historical Bene — it/Detriment Theory 157 B. The Modern Bargained-For Exchange Theory 159 C. Gratuitous Promises Are Not Supported by Consideration 161 D. Conditional Gi — ts Are Not Supported by Consideration 161 E. Past Consideration Is Not Consideration 163 F. Illusory Promises Are Not Consideration 164 G. Nominal Consideration Is Not Consideration 167 H. Re — lections on Consideration 168 Cases168 Hamer v. Sidway 169 Re — lection171 Discussion172 Contents xi
Pennsy Supply, Inc. v. American Ash Recycling Corp. 173 Re — lection177 Discussion178 Problem 7.1. An Aunt’s Promise 178 Problem 7.2. Betty and the Bene — it 178 Problem 7.3. Shi — ting Sands 179
Chapter 8 | Promissory Estoppel 181 Rules182 A. Theory o — Promissory Estoppel 182 B. Elements o — Promissory Estoppel 183 1. The Promise 184 2. Reliance 185 3. Detriment 186 C. Justice: The Ultimate Requirement 187 D. Charitable Subscriptions 188 E. Re — lections on Promissory Estoppel 190 Cases192 Ricketts v. Scothorn 192 Re — lection195 Discussion195 Conrad v. Fields 195 Re — lection199 Discussion199 Otten v. Otten 200 Re — lection204 Discussion204 Maryland National Bank v. United Jewish Appeal Federation o — Greater Washington, Inc. 205 Re — lection214 Discussion215 Problem 8.1. Escaped Bull 215 Problem 8.2. Plantations Steel 215
Chapter 9 | Promissory Restitution 217 Rules220 A. Promise to Pay — or Bene — it Received 220 B. Promise to Correct a Mistake 221 C. Promise to Pay — or Emergency Services and Necessaries 222 D. Promise to Pay — or a Past Gi — t 223 E. Promise to Pay — or an Unpaid Contract 225 F. Promise to Pay — or an Unen — orceable Contract 227 G. Re — lections on Promissory Restitution 228 xii Contents
Cases229 Mills v. Wyman 229 Re — lection232 Discussion233 Drake v. Bell 235 Re — lection237 Discussion237 Webb v. McGowin 238 Re — lection241 Discussion242 Haynes Chemical Corp. v. Staples & Staples 243 Re — lection248 Discussion249 Edson v. Poppe 251 Re — lection252 Discussion253 Muir v. Kane 253 Re — lection258 Discussion258 Problem 9.1. IRAC Edson 259 Problem 9.2. Annihilation o — Consideration 259
module iii | de --- enses
Chapter 10 | The Statute o
Frauds 263 Rules264 A. Classes o — Contracts Requiring Signed Writing (MYLEGS) 264 1. Executor/Administrator 265 2. Suretyship 266 3. Marriage 267 4. Land 268 5. Year 269 6. Goods 270 B. Satis — action o — the Statute o — Frauds 272 1. Memorandum 273 2. Several Writings 274 3. Signature 275 4. Loss or Destruction o — a Memorandum 276 C. Exceptions to the Statute o — Frauds 277 1. Promissory Estoppel 277 2. Part Per — ormance o — Land Transactions 279 3. UCC Exceptions — or Goods Transactions 280 Contents xiii
a. “Merchant’s Con --- irmatory Memo” Exception 280
b. “Special Manu --- acture” Exception 281
c. “Party-Admission” Exception 283
d. “Goods-or-Payment-Accepted” Exception 284 D. Re --- lections on the Statute o --- Frauds 285 Cases285 McIntosh v. Murphy 286
Re --- lection291
Discussion292 Sterling v. Taylor 293
Re --- lection303
Discussion304 Problem 10.1. Perpetuating Frauds 304 Problem 10.2. Frauds Policy 304 Problem 10.3. UCC Frauds 305 Problem 10.4. Misty Wedding 305
Chapter 11 | Mistake307 Rules308 A. Mutual Mistake 308 B. Unilateral Mistake 311 C. Mistranscription 313 D. Re — lections on Mistake 314 Cases316 Wood v. Boynton 316 Re — lection319 Discussion320 Sherwood v. Walker 321 Re — lection322 Discussion323 DePrince v. Starboard Cruise Services, Inc. 323 Re — lection325 Discussion326 Problem 11.1. A Mistaken Dream 326 Problem 11.2. A Foundational Mistake 327 Problem 11.3. A Policy Mistake 328
Chapter 12 | Improper Bargaining 329 Rules329 A. Misrepresentation 329 1. Fraudulent Misrepresentation 330 a. False Assertion 331 b. Scienter (Knowledge o — Wrongdoing) 331 c. Intent to Induce Reliance 331 xiv Contents
d. Actual Inducement 332
e. Justi --- iable Reliance 332
2. Material Misrepresentation 332
3. Concealment as Misrepresentation 333
a. An Act o --- Concealment 333
b. Knowledge or Intent 333
c. Materiality 334
d. Inducement o --- Assent 334
4. Silence as Misrepresentation 334
a. Duty to Disclose 335
b. Knowledge o --- the Fact and Its Materiality 335
c. Reliance and Inducement 335
5. Solving Misrepresentation Problems 336 B. Duress 337
1. Physical Duress 338
2. Economic Duress 340 C. Undue In --- luence 342 D. Unconscionability 343 E. Contracts Violating Public Policy 344 F. Re --- lections on Improper Bargaining 345 Cases346 Barrer v. Women’s National Bank 346
Re --- lection355
Discussion356 Hill v. Jones 357
Re --- lection362
Discussion362 Quebodeaux v. Quebodeaux 363
Re --- lection365
Discussion366 Problem 12.1. Motor Home Misrepresentation 366 Problem 12.2. The Blodgetts under Duress 367 Problem 12.3. Undue Bequest 368
Chapter 13 | Incapacity371 Rules372 A. Guardianship 372 B. In — ancy 372 C. Mental Illness 374 D. Intoxication 375 E. Re — lections on Incapacity 376 Cases377 Webster St. Partnership, Ltd. v. Sheridan 378 Contents xv
Re --- lection382
Discussion382 Estate o --- McGovern v. Commonwealth State Employees’ Retirement Bd. 383
Re --- lection390
Discussion390 Problem 13.1. The In --- ant and the Lemon 391 Problem 13.2. Bipolar Disorder and Contractual Capacity 391 Problem 13.3. The Italian Gambler 392
module iv | interpretation
Chapter 14 | Ambiguity395 Rules395 A. Ambiguity 395 1. Patent Ambiguity 396 2. Latent Ambiguity 396 B. Evidence o — Ambiguity 397 1. Intrinsic Evidence 397 2. Extrinsic Evidence 397 C. Evidence Resolving Ambiguity 398 D. Admissibility o — Evidence 399 1. Common Law Admissibility 399 2. UCC Admissibility 399 E. Steps — or Addressing Ambiguity 400 F. Why Does Ambiguity Exist in Contracts? 401 G. Re — lections on Ambiguity 402 Cases403 Frigaliment Importing Co., Ltd., v. B.N.S. International Sales Corp. 404 Re — lection409 Discussion409 Problem 14.1. IRAC Frigaliment410 Problem 14.2. Approved Location 410 Problem 14.3. Work Insurance 410 Problem 14.4. Licensing Ambiguity 411
Chapter 15 | Intrinsic Evidence 413 Rules414 A. Semantic Canons 414 1. Dictionary Meaning 414 2. Contextual Meaning 415 3. Structural Meaning 416 xvi Contents
4. Tailored Meaning 417
5. Legal Meaning 417
6. Con --- licting Meanings 418 B. Policy Canons 419
1. Good Faith 419
2. Interpretation against the Dra --- ter 420
3. Public Policy 421
4. Unconscionability 422 C. Re --- lections on Evaluation o --- Intrinsic Evidence 423 Cases424 In re Motors Liquidation Co. 425
Re --- lection430
Discussion431 Problem 15.1. Matching the Canons o --- Construction to Case
Applications431 Problem 15.2. Homeowner’s Insurance? 433 Problem 15.3. What Is a “Cartoon”? 434 Problem 15.4. Meaning o --- a Comma 435 Problem 15.5. Vesting in Retirement 435
Chapter 16 | Extrinsic Evidence 439 Rules440 A. Course o — Per — ormance 440 B. Course o — Dealing 441 C. Usage and Trade Usage 442 D. Implied Terms 444 E. Re — lections on Evaluating Extrinsic Evidence 446 Cases447 Wood v. Lucy, Lady Du —
-Gordon 448 Re — lection449 Discussion450 Fisher v. Congregation B’Nai Yitzhok 451 Re — lection454 Discussion455 Nānākuli Paving & Rock Co. v. Shell Oil Co. 457 Re — lection467 Discussion469 First National Bank o — Lawrence v. Methodist Home — or the Aged 471 Re — lection476 Discussion477 Problem 16.1. Output o — Toasted Bread 477 Problem 16.2. Requirements — or Corrugated Paper Boxes 478 Contents xvii
Chapter 17 | The Parol Evidence Rule 481 Rules482 A. Introducing the Parol Evidence Rule 482 B. The General Rule 484 C. Determining Whether There Is an Integration 485 D. Determining the Degree o — Integration 485 1. Partially Integrated Agreements 486 2. Completely Integrated Agreements 487 3. Distinguishing Complete — rom Partial Integrations 487 E. Identi — ying Exceptions 490 1. Fraud, Duress, or Mistake 490 2. Ambiguity 491 3. Collateral Agreements 492 4. Conditions Precedent 494 F. Re — lections on the Parol Evidence Rule 495 Cases496 Gianni v. R. Russell & Co. 496 Re — lection498 Discussion499 UAW-GM Human Resource Center v. KSL Recreation Corp. 501 Re — lection508 Discussion509 Sierra Diesel Injection Service, Inc. v. Burroughs Corp. 509 Re — lection512 Discussion513 Problem 17.1. Comparing the Common Law and the UCC 513 Problem 17.2. Capitol City Liquor Company 513 Problem 17.3. Middletown Concrete Products 515 Problem 17.4. Corn Delivery 516 Problem 17.5. Injury and Indemnity 517
Chapter 18 | Warranties519 Rules520 A. Express Warranties 520 B. Implied Warranty o — Merchantability 521 C. Implied Warranty o — Fitness — or a Particular Purpose 523 D. En — orcement and Remedies 525 E. Disclaimers o — Warranties 526 1. Disclaiming Implied Warranties 526 2. Disclaiming Express Warranties 527 3. Parol Evidence Rule Implications 528 F. Re — lections on Warranties 529 xviii Contents
Cases530 Daughtrey v. Ashe 531 Re — lection535 Discussion536 Carlson v. General Motors Corp. 537 Re — lection546 Discussion547 Tyson v. Ciba-Geigy Corp. 548 Re — lection551 Discussion552 Ardagh Metal Packaging USA Corp. v. American CRAFT Brewery, LLC 553 Re — lection560 Discussion561 Problem 18.1. Unsinkable Boat 561 Problem 18.2. Will It Blend? 561 Problem 18.3. Underwater Sealant 562 Problem 18.4. “As Is” 562
module v | per --- ormance and breach
Chapter 19 | Conditions565 Rules566 A. Identi — ying Conditions 566 1. Express Conditions 567 2. Implied Conditions 568 a. Implied-in-Fact Conditions 569 b. Implied-in-Law (Constructive) Conditions 570 B. Classi — ying Conditions 570 1. Conditions Precedent 571 2. Conditions Subsequent 571 3. Conditions Concurrent 573 4. Promissory Conditions 573 C. Determining Whether Conditions Are Satis — ied 575 D. Failure o — Conditions 576 E. Excuse or Waiver 577 1. Excuse by Courts 577 2. Waiver by Parties 578 F. Conditions o — Satis — action 579 G. Re — lections on Conditions 581 Contents xix
Cases582 Morrison v. Bare 583 Re — lection589 Discussion590 Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc. 591 Re — lection595 Discussion596 Morin Building Products Co., Inc. v. Baystone Construction, Inc. 597 Re — lection601 Discussion602 Problem 19.1. Renewal o — a Restaurant Lease 602 Problem 19.2. Financial Satis — action 603
Chapter 20 | Substantial Per
ormance and Material Breach 605 Rules607 A. Analyzing De — ective Per — ormance under Common Law 607 1. Identi — ying the Breach 607 2. Evaluating Materiality 608 3. Withholding Payment 609 4. Cancelling the Contract 610 5. Summary o — Common Law Framework 611 B. Analyzing De — ective Per — ormance under the UCC 611 1. Per — ect Tender Rule: UCC § 2-601 612 2. Seller’s Right to Cure: UCC § 2-508 612 3. Revocation o — Acceptance 613 4. Installment Contracts: UCC § 2-612 613 5. Comparing UCC to Common Law 613 6. Summary o — the UCC Framework 613 C. Re — lections on Per — ormance 614 Cases615 Kingston v. Preston 615 Re — lection617 Discussion617 Jacob & Youngs, Inc. v. Kent 618 Re — lection622 Discussion623 Khiterer v. Bell 624 Re — lection628 Discussion629 Problem 20.1. Direct Timber Shipment 629 Problem 20.2. Sewer System 630 Problem 20.3. Newspaper Stock 631 xx Contents
Chapter 21 | Repudiation635 Rules636 A. Repudiation 636 1. Determining Whether a Statement Is a Repudiation 636 2. Determining Whether an Action Is a Repudiation 637 3. Applying the Impact o — Repudiation 638 B. Reasonable Insecurity and the Demand — or Adequate Assurances 638 1. Grounds — or Insecurity 638 2. Demanding Assurances: Proportionality 639 3. Failure to Assure as Repudiation 639 4. Retraction Repudiation 640 C. Re — lections on Repudiation 641 Cases642 McCloskey & Co. v. Minweld Steel Co. 643 Re — lection646 Discussion647 Hornell Brewing Co., Inc. v. Spry 647 Re — lection654 Discussion654 Problem 21.1. The Rumored Bankruptcy 654 Problem 21.2. Circuit Boards 655 Problem 21.3. “No Use” — or the Space 655
Chapter 22 | Excuse657 Rules658 A. Foreseeability 658 B. Common Law Doctrines o — Excuse 659 1. Impossibility 659 2. Impracticability 660 3. Frustration o — Purpose 661 C. Excuse under the UCC 661 1. Casualty to Identi — ied Goods 662 2. Failure o — Presupposed Conditions (UCC § 2-615) 662 3. Procedural Requirements 663 4. Di —
erences between the UCC and Common Law 663 D. Force Majeure Clauses and Contractual Risk Allocation 663 E. Re — lections on Excuse 666 Cases667 Taylor v. Caldwell 668 Re — lection670 Discussion670 Krell v. Henry 671 Re — lection674 Contents xxi
Discussion675 Transatlantic Financing Corp. v. United States 676
Re --- lection680
Discussion680 Adbar, L.C. v. New Beginnings C-Star 681
Re --- lection683
Discussion684 Problem 22.1. Super Bowl LV 685 Problem 22.2. Lot Number 1285 687 Problem 22.3. Excessive Rain 687
Chapter 23 | Modi
ication and Discharge 689 Rules690 A. Changing Contractual Obligations 690 1. The Preexisting Duty Rule 691 2. Modern Relaxation o — the Preexisting Duty Rule 692 3. Modi — ications under the UCC 693 4. Modi — ication Doctrines 694 a. Substituted Contracts 695 b. Substituted Per — ormance 695 c. Accord and Satis — action 695 B. Changing Contractual Parties 696 1. Assignment 696 2. Delegation 697 3. Novation 697 C. Ending Contractual Obligations 698 1. Rescission 698 2. Release 699 3. Renunciation 699 4. Cancellation 700 D. Re — lections on Modi — ications and Discharge 701 Cases701 Alaska Packers’ Association v. Domenico 701 Re — lection706 Discussion706 Angel v. Murray 708 Re — lection713 Discussion713 Birdsall v. Saucier 714 Re — lection720 Discussion720 Problem 23.1. Fair and Reasonable Modi — ication 720 Problem 23.2. Accord and Satis — action 720 xxii Contents
module vi | remedies
Chapter 24 | Money Damages
or Nonper — ormance 727 Rules728 A. Expectation Damages 728 1. Direct Expectation Damages (Direct Loss in Value) 728 2. Incidental Damages 729 3. Consequential Damages 730 4. Costs Avoided 731 B. Reliance Damages 732 C. UCC Remedies 734 1. Buyer’s Remedies 734 a. Cover 734 b. Market Price Damages 735 c. Incidental and Consequential Damages 736 2. Seller’s Remedies 736 a. Resale Damages 737 b. Market Price Damages 737 c. Lost Pro — its 738 D. Re — lections on Money Damages — or Nonper — ormance 739 Cases740 Hawkins v. McGee 741 Re — lection744 Discussion745 Problem 24.1. Dynamo Products 745 Problem 24.2. Joe the Plumber 746 Problem 24.3. Gateway Packaging 746 Problem 24.4. The Oysters 746
Chapter 25 | Money Damages
or De — ective Per — ormance 747 Rules748 A. Loss in Value Revisited 748 1. Cost o — Completion 748 2. Diminution in Value 749 3. Economic Waste 750 4. Substantial Per — ormance and Material Breach 751 5. Conclusion: Deciding between “Diminution in Value” or “Cost o — Repair” 752 B. UCC Provisions — or De — ective Per — ormance 752 1. Buyer’s Remedies — or De — ective Per — ormance by Seller 753 a. Buyer’s Right to Reject Noncon — orming Goods 753 b. Revocation o — Acceptance 754 Contents xxiii
c. Di ---
erence-in-Value Damages (Price Adjustment) 755 d. Incidental and Consequential Damages 756 2. Seller’s Ability to Provide — or Alternative Remedies through Contract 757 C. Re — lections on Money Damages — or De — ective Per — ormance 758 Cases759 Peevyhouse v. Garland Coal & Mining Co. 759 Re — lection761 Discussion762 North American Foreign Trading Corp. v. Direct Mail Specialist 763 Re — lection766 Discussion767 Ramirez v. Autosport 768 Re — lection774 Discussion774 Problem 25.1. Yugo Motors 774 Problem 25.2. Not-So-Elite Builders 774 Problem 25.3. Ace Printing 775 Problem 25.4. Faulty Li — t 775
Chapter 26 | Limitations on Money Damages 777 Rules778 A. Foreseeability 778 B. Certainty 779 C. Mitigation 780 D. Re — lections on Limitations on Money Damages 782 Cases783 Hadley v. Baxendale 784 Re — lection786 Discussion788 Problem 26.1 Freezer Failure 788 Problem 26.2 Jack’s Furniture 788 Problem 26.3 Shipping Servers 789 Problem 26.4 De — enses Down 789 Problem 26.5 Seeds o — Dispute 789
Chapter 27 | Alternative Remedies 791 Rules792 A. Speci — ic Per — ormance 792 B. Replevin 793 C. Injunction 793 1. Non-Compete Agreements 794 2. Non-Solicitation Agreements 794 3. Non-Disclosure Agreements 794 4. En — orceability o — Negative Covenants 795 xxiv Contents
D. Restitution 795 E. Liquidated Damages and Penalties 796 F. Liability Caps and Exculpatory Clauses 797 G. Rescission and Re — ormation 799 H. Nominal Damages 799 I. Re — lections on Alternative Remedies 800 Cases800 Bauer v. Sawyer 801 Re — lection806 Discussion807 Van Wagner Advertising Corp. v. S & M Enterprises 808 Re — lection813 Discussion814 Problem 27.1. Luxe Deposit 815 Problem 27.2. The Ink Factory 815 Problem 27.3. Pest Control 816 Problem 27.4. The Victor’s Vintage Car 816 Problem 27.5. Omega Medical 817 Problem 27.6. Green — ield Tech 817
Chapter 28 | Third-Party Bene
iciaries 819 Rules820 A. The Intent Test 820 B. Creditor and Donee Bene — iciaries 821 C. De — enses 822 D. Re — lections on Third-Party Bene — iciaries 824 Cases825 Sovereign Bank v. BJ’s Wholesale Club, Inc. 825 Re — lection833 Discussion834 Problem 28.1. Subaru Showdown 835 Problem 28.2. Irrigation Irritations 835 Problem 28.3. Sewage Saga 835 Problem 28.4. Symphony Strike 836 Problem 28.5. Insurance Intent 836
Table o
Cases 837
Index839 Acknowledgments
This book re
lects the contributions o — many individuals and institutions whose e —
orts and insights shaped its development. I am grate — ul to all who helped me de — ine my pedagogy and shape this work. Yet I owe a special debt o — gratitude to Pro — essor Camilla A. Hrdy o — Rutgers Law School. Her comments and engagement with this project were invaluable. It is no overstatement to say this book would not be as lucid, use — ul, or accessible without her substantial contributions. Thank you, Camilla. I also deeply appreciate my colleagues, students, and — amily — or their support and encouragement throughout this project. To my wi — e, Talia, your unwavering love and patience sustained and nourished me through the thousands o — hours spent on this project; thank you. To my new baby, Zeeva, thank you in advance — or your — uture patience when Daddy is working. Thanks to all my students who deeply engaged with the — irst edition. I am espe- cially thank — ul to Jonathan Agustin, Nathaniel “Nate” Ingerick, Alexandra “Lexi” Jones, Benjamin Kahn, Heather M. Olson, Amber Pavucsko, CharLee Rosini, Hannah Scha —
er, Eva C.H. Scheiwe, Natheena Tyler, and Abraham Webber — or their teaching assistance and substantial constructive — eedback. Together, we are co-creating this book — or — uture generations o — students, whom I hope will continue this work o — con- tinuous improvement in teaching and learning. I remain grate — ul to the American Law Institute — or the use o — the Restatement o —
the Law (Second) o
Contracts: Restatement o — the Law Second Contracts, copyright © 1981 by the Ameri- can Law Institute. Reprinted with permission. All rights reserved. Any errors or omissions are, o — course, my own — but I might blame ChatGPT.
xxv
Online Materials
Additional content --- or Contract Law: Rules, Cases, and Problems, Second Edition, is available on Carolina Academic Press’s Core Knowledge --- or Lawyers (CKL) website. Core Knowledge --- or Lawyers is an online teaching and testing plat --- orm that hosts practice questions and additional content --- or both instructors and students.
To learn more, please visit:
coreknowledge --- orlawyers.com Instructors may request complimentary access through the “Faculty & Instructors” link.
xxvii
Pre — ace
Welcome to Contract Law! I wrote this casebook to help you become a lawyer. Becoming a lawyer involves more than just memorizing rules. Although we will develop your ability to recall key doctrines so that you can identi --- y when --- acts raise legal issues, technology now makes it easy to --- ind out what the law is. What sets human lawyers apart is not their total recall but their capacity to spot issues, research questions, distinguish relevant --- acts, analyze arguments creatively yet rigorously, and propose solutions that achieve clients’ goals. By --- ocusing on these skills, this book treats law as a dynamic process rather than a static list o --- doctrines. Contract Law is a great place to practice these --- uture lawyering skills because con- tracts lie at the heart o --- so many legal practices. Whether you are dra --- ting engage- ment letters, negotiating settlements, or advocating --- or labor rights under collective bargaining, you will encounter contracts everywhere. You will also see them in your personal li --- e whenever you lease cars, order casebooks, or use websites. Studying how parties --- orm, interpret, and en --- orce agreements reveals why creativity and rigorous analysis are both crucial. Through each chapter, you will develop the instincts and methods needed to tackle real-world legal problems in any --- ield, and you will do this by viewing the issues through the lens o --- contract doctrine.
Typical bargain contracts arise through mutual assent and consideration. Bargains generally promote economic e ---
iciency. But courts may also en — orce some non-bargain agreements — or reasons o —
airness or reliance, or re — use to en — orce other bargains — or being unjust. Beyond determining whether a contract is en — orceable, courts decide what evidence is admissible to explain what the parties intended. Judges usually priori- tize written terms over extrinsic evidence. Even when parties agree on what a contract requires, they might argue over whether they must per — orm as promised. When a party
ails to per — orm (a “breach”), courts provide remedies. This is contract law in a nutshell. Memorizing key doctrines is necessary but not enough. You also need core legal skills so you can work with doctrines in real-world scenarios. To build these skills, this casebook invites you to read cases and statutes, break rules into simpler parts, and rebuild them into persuasive arguments. Engaging with this process trains you to think like a lawyer, preparing you — or any practice area. You will see how a minor change o — words or the — raming o —
acts can alter a result. These analytical abilities will help you in other classes, on the bar exam, and throughout your career.
xxix
xxx Pre — ace
Studying with classmates will broaden your perspective. By exchanging ideas and — eedback, you discover new insights and re — ine your arguments. This teamwork re — lects how lawyers actually work. They collaborate with colleagues, clients, judges, and opposing counsel. Developing the habit o — speaking and listening respect — ully
osters the collegiality that is central to a success — ul legal career. While this casebook is designed — or — irst-year law students, it also establishes a
oundation — or upper-level studies by introducing theories o — justice. Law is a phil- osophical balancing act, as symbolized by the scales o — justice. Contract law, — or instance, balances e —
iciency with — airness. Courts apply rules predictably so people can rely on them, and yet judges remain — lexible to reach just outcomes. This tension reveals how law adapts to human needs. It explains why contract disputes can be both technical and personal. Seeing how courts navigate this balance will give you a deeper appreciation — or law’s larger role. Theories about law’s purposes — orm law’s — ounda- tion in our society. While this book is — ocused on analyzing the law as it stands, — rom time to time, we will speci — ically investigate how contract doctrines are supported by
oundational theories o — justice. This is not only philosophically interesting but also prepares you to make sophisticated arguments — or how doctrine should change. To succeed in this endeavor, you must engage actively with this book and your course materials. Each module starts with basic ideas and builds toward more advanced ones. For instance, the module on mutual assent explores the core require- ment o — a bargain be — ore examining its speci — ic elements, like o —
er and acceptance. Doctrinal sca —
olding rises — rom the — oundation o — legal theory. As with any sound structure, this casebook’s doctrine begins with — undamental — raming, then adds increasing levels o — complexity. Cases bring this sca —
olding to li — e by showing how courts apply legal theories to actual disputes. As you read them, notice how judges and lawyers highlight di — — erent
acts, — rame issues strategically, and apply rules in novel ways. Most cases — eature two (or more) parties presenting opposing arguments, and it is not unusual to see a trial court’s decision overturned by an appellate court, then possibly reversed again by a supreme court. This illustrates how real legal problems rarely have a single “right” answer. Law can — eel nebulous compared to subjects with de — initive true/ — alse solu- tions. You may hear the joke that every legal answer is “it depends.” Your task is to
igure out on what it depends. Cases will help you see why some arguments gain trac- tion while others — ail, and they will show you how subtle — actual distinctions or legal nuances can shi — t the outcome. Problems will ask you to construct your own arguments and evaluations upon the structure o — the rules you have learned. As you have seen — rom reading cases, there is no single right way to — orm a contract argument. That is why this book does not provide written answers to essay-style questions. Sometimes you might — eel lost without a single correct solution, and that — eeling can be daunting i — you are used to academic work that prioritizes a — inal product over the process o — getting there. But this uncertainty is intentional. Working through it helps you develop the skills o —
Pre
ace xxxi
sel
-assessment and the habits o — mind required in real practice. Instead o — matching your essay response to a “right” answer, compare your reasoning with the parties’ arguments in cited court decisions or with your classmates’ solutions. You will soon realize that more than one valid path can exist — or the same dispute. I — you want to con — irm your grasp o — key doctrines, you can use the multiple-choice questions on the Carolina Academic Press Core Knowledge plat — orm. They let you see where you stand on the basics and help you identi — y areas — or — urther review. But the deeper learning will come — rom trying to reason through problems, sharing your ideas, and adjusting your arguments in light o —
eedback. Active participation is key. Write out your analysis, ask questions, and mark places that con — use you. Talk with your classmates, learn — rom their perspectives, and re — ine your reasoning. Although this process can be challenging, it mirrors the reality o —
lawyering. Real disputes are not simple, but care
ul thinking can guide you to sound conclusions. Remember that your pro — essor, your classmates, and this casebook are here to sup- port you. The work may — eel tough, but it will also be rewarding. By the end o — your studies, you will see how these doctrines, skills, and insights help you to handle the complexities o — legal practice. Together, we will explore how contract law shapes daily li — e and how your — uture role as a lawyer can shape contract law. Wishing you the best o — luck in this course o — study, /s/ Seth C. Oranburg Contract Law Chapter 1 What Is Contract Law?
Our study o
contract law naturally begins by discussing the nature, purpose, his- tory, and evolution o — contract law. Contract law’s purpose is the — oundation upon which we will construct the sca —
olding o — contract doctrine. Contract law is the law o — promises. A promise is an expression o — commitment to do (or not to do) something. Promises are the — oundation o — contract liability. With- out a promise, there is no evidence o — a voluntary agreement to be bound to. Contract law depends on this voluntariness. People create their own obligations under contract law. I — you do not want to be liable, you can choose not to — orm a contract. Thus, there is no contract liability where there is no promise. Its voluntary nature makes contract law di — — erent — rom other types o — law. Public law governs the relationship between people and the government. Public law, such as criminal or tax law, applies to everyone, whether or not they agree. You cannot opt out o — paying taxes or — ollowing criminal laws without — acing consequences. Some tax protesters have re — used to pay taxes, arguing they never consented to them. Courts have consistently rejected these arguments, and many tax protesters have been — ined or jailed — or tax evasion. Contract law, by contrast, is part o — private law. Private law governs relationships between people. It includes tort law, property law, and — amily law. Unlike public law, private law is mostly voluntary. Contract law is especially voluntary. It en — orces only the obligations people — reely choose to create. This — ocus on promises allows contract law to play a unique role. It enables indi- viduals to make agreements they can rely on. This reliability supports both personal relationships and large-scale economic activity. As we study contract law, we will explore how promises create obligations, when they are binding, and how the law balances — airness with — reedom. This will reveal why promises are essential and how contract law helps to structure modern society.
3
4 1 • What Is Contract Law?
A. Origins o --- Contract Law The law o --- contracts is ancient. It originated in several ancient civilizations across the world. It is not possible to determine which civilization was the “ --- irst” to develop a system --- or en --- orcing contracts. But, according to Pro --- essor Charles Auerbach, the old- est collection o --- contract law sources that are still used today was assembled by Rabbi Hillel in 200 B.C.E. The Jewish law o --- contract was derived --- rom the --- ive books o ---
Moses (Genesis, Exodus, Leviticus, Numbers, and Deuteronomy) and Jewish oral tra- dition. Orthodox Jewish courts still apply these laws and principles today — although the Divine principles underlying Jewish law are sometimes quite di — — erent — rom the philosophical justi — ications — or law that are accepted by modern nations. The Roman law o — contracts is no longer employed today, but, according to Pro-
essor Alan Watson, it — orms the basis — or the en — orcement o — private agreements in most o — the Western world. The earliest embodiment o — the Roman law o — contracts is probably — ound in the Twelve Tables, a set o — laws inscribed on twelve bronze tables that were created around 451 B.C.E. Those tables have apparently been destroyed, but their legacy survived. Some countries, such as South A — rica, still base their legal system on the Roman jus commune (common law). England, although it was in — luenced by Roman law, did not adopt the Roman law o — contracts wholesale. Roman law was introduced to England, along with the French language and other Continental traditions, by the Norman Conquest o —
-
But
Figure 1.1. Moses and Aaron with the Ten Commandments. Painting by Aron de Chavez (circa 1675). Public domain work. 1 • What Is Contract Law? 5
England, at that time, was not a legal tabula rasa (blank slate). Rather, commercial disputes were resolved in various local courts. This varied legal tradition, mixed with Franco-Roman in — luence, was — irst canonized by King Henry II, who pronounced a uni — ied national common law in 1154. A — ter the English Magna Carta (great charter) was instituted in 1215 to provide — or basic civil liberties and restrict the power o — the monarchy, the English Court o — Common Pleas was established to adjudicate actions between people (as opposed to actions which concerned the state or the monarch). The English Court o — Common Pleas heard contract disputes — or hundreds o — years, until it was — inally merged with the English King’s Bench, the Court o — Chancery, and the Exchequer by the Supreme Court Judicature Act o — 1873 — more than one hun- dred years a — ter the American Revolution. The American legal system is heavily in — luenced by its English predecessor. Prior to the Revolution, the British government claimed to have the sole power to create courts in the American colonies. Courts in the American colonies generally borrowed
rom English law. You will even — ind citations to the King’s Bench and other English courts in some early American case law. But even in this early period, when the colo- nies were still under English rule, the American courts began to develop their own
Figure 1.2. Roman civilians examining the Twelve Tables.
Unknown author. Public domain work.
6 1 • What Is Contract Law?
precedent and approach. As judges interpreted — and sometimes created — law to
it the needs o — American commerce, a uniquely American common law o — contracts began to develop.
B. Law and Equity Contract law is historically rooted in two distinct legal systems: law and equity. While American state courts merged these systems during the 19th century — and the Federal Rules o --- Civil Procedure in 1938 uni --- ied legal and equitable claims in --- ederal courts — important distinctions remain. For example, procedural rights, such as the entitlement to a jury trial, may depend on whether a claim is categorized as legal or equitable. Beyond procedure, these systems embody di --- --- erent philosophies about the role o ---
contract law. Like many areas o
law, contract law grapples with a central tension: the rigid application o —
ormal rules versus the pursuit o —
airness and justice in speci — ic circumstances. Understanding the history o — law and equity o —
ers valuable insight into this ongoing balancing act. In 1215, King John o — England signed the Magna Carta under pressure — rom rebel- lious barons. While the Magna Carta did not create English law — which arguably began in the Anglo-Saxon period (5th century) and evolved remarkably a — ter the Nor- man Conquest (1066) — it codi — ied the assertion that everyone, including the king, is subject to the law. Though the document primarily addressed — eudal and political issues, it also laid
oundational principles — or contract law. Notably, Chapter 41 provided protections
or merchants, ensuring their — reedom to move and trade without inter — erence: “All merchants may enter or leave England unharmed and without — ear, and may stay or travel within it, by land or water, — or purposes o — trade, — ree — rom all illegal exactions.” (Translated — rom Latin.) By a —
irming that even the king was subject to legal constraints, the Magna Carta helped create an environment where contracts could be en — orced consistently. These protections not only supported commerce but also set the stage — or the development o — the lex mercatoria (law o — merchants), a precursor to modern commercial law. Among the Magna Carta’s many provisions was Clause 17, which mandated that common pleas — civil disputes between private parties, a category we now re — er to as private law — be heard in a — ixed location rather than in the king’s itinerant court. This provision ensured greater consistency and accessibility in the administration o — justice. It led to the establishment o — the Court o — Common Pleas at Westminster Hall, which became a central venue — or resolving the disputes that de — ined medieval commerce and society. 1 • What Is Contract Law? 7
Figure 1.3. King John reluctantly a ---
ixing his seal to the Magna Carta under the watch — ul eyes o — his barons. This moment symbolizes the birth o — the rule o — law, which underpins the en — orceability o — contracts. Painting by Arthur C Michael (1945). Public domain work.
The Court o
Common Pleas primarily handled cases involving property, con- tracts, and debts. It provided a structured — orum — or addressing breaches and en — orc- ing obligations, playing a crucial role in standardizing legal principles — or agreements. This standardization helped merchants grow commerce by providing predictability in contract en — orcement. The court adhered strictly to procedural — ormalities and precedent, ensuring consistent and reliable outcomes. Its remedies, such as monetary damages, were central to the en — orcement o — contracts, o —
ering a — ramework that sup- ported trust and accountability in economic relationships. 8 1 • What Is Contract Law?
The Court o
Common Pleas also contributed signi — icantly to the development o —
the common law, a body o
judge-made legal principles established through court decisions. Additionally, the court intersected with the lex mercatoria. Despite its name (lex means law), the lex mercatoria was not a — ormal statute or guild regulation. Instead, it was a system o — commercial customs and practices created and upheld by merchants themselves. These rules governed trade transactions across regions and were en — orced in — ormally through merchant courts and arbitration. Unlike the common law, which developed through royal courts and relied on legal precedent, the lex mercatoria was designed — or e —
iciency and practicality, address- ing the immediate needs o — merchants engaged in cross-border trade. As commerce expanded in medieval England, disputes between merchants increasingly — ound their way into the king’s courts, including the Court o — Common Pleas. To address these cases, the Court o — Common Pleas began incorporating elements o — the lex mercatoria into its rulings. This integration helped bridge the gap between the in — ormal, — lexible customs o — the merchant class and the more rigid procedural
ramework o — the common law. By incorporating merchant practices, the court pro- vided greater legal certainty — or commercial transactions, laying the groundwork — or standardized principles in contract and trade law. However, the court’s strict adher- ence to — ormal rules and procedures o — ten limited its ability to address the unique needs o — merchants, particularly in cases requiring more — lexible or equitable remedies. The rigid structure and — ormal procedures o — the Court o — Common Pleas provided experienced merchants with certainty and predictability when resolving standard contractual disputes. However, not all cases — it neatly within this — ramework. When common law courts — ailed to o —
er adequate remedies — particularly in cases requiring
lexibility or — airness, also known as “equity” — individuals turned to the king himsel —
by petitioning him
or justice. As the number o — these petitions grew, it became impractical — or the monarch to address them personally. To manage this demand, the king delegated the responsibil- ity to his chie — minister, the Lord Chancellor. The Lord Chancellor, o — ten re — erred to as the “keeper o — the king’s conscience,” reviewed these cases and provided relie — based on principles o —
airness rather than the rigid rules o — common law. Over time, this practice evolved into the establishment o — the Court o — Chancery. Operating under the Lord Chancellor’s authority, the Court o — Chancery became a
ormal institution, addressing cases where common law remedies — such as monetary damages — were insu —
icient to deliver justice. This court played a pivotal role in devel- oping equitable principles, which remain integral to contract law today. While the Court o — Chancery addressed the shortcomings o — the common law courts, its in — ormality created challenges o — its own. Unlike the structured procedures o — the Court o — Common Pleas, early Chancery proceedings relied heavily on the dis- cretion o — the Lord Chancellor, who o — ten acted without clear guidelines or precedent. This in — ormality sometimes resulted in inconsistent decisions, which made it di —
icult
or parties to predict the outcomes o — their cases. 1 • What Is Contract Law? 9
Figure 1.4. The Court o
Common Pleas at work. Unknown author. Public domain work. 10 1 • What Is Contract Law?
Moreover, because the Lord Chancellor was not bound by the rules o
the common law, critics viewed the court as arbitrary and overly subjective — which are hardly the hallmarks o — equity. Petitioners o — ten relied on their ability to — rame their claims in moral or emotional terms, which raised concerns about — airness and impartiality. As the volume o — cases increased, this lack o — structure became increasingly problematic, highlighting the need — or a more — ormal and systematic approach to equity.
Figure 1.5. The Court o --- Chancery during the reign o --- George I. Painting by
Benjamin Ferrers (1732). Public domain work.
1 • What Is Contract Law? 11
The early 16th century was a pivotal period
or the Court o — Chancery, marked by the contributions o — two key — igures: Cardinal Thomas Wolsey and Sir Thomas More. Both served as Lord Chancellor and were instrumental in — ormalizing the court’s procedures and rein — orcing its role in addressing cases where the rigid remedies o —
common law courts were insu
icient. Their leadership helped shape the equitable principles that remain integral to modern contract law. Cardinal Thomas Wolsey served as Lord Chancellor — rom 1515 to 1529. Though not a trained lawyer, Wolsey recognized the importance o —
airness in delivering jus- tice. By emphasizing — airness over strict legal rules, he helped to solidi — y the Court o —
Chancery’s reputation as the
orum — or cases where legal remedies, such as monetary damages, were inadequate. However, Wolsey’s broader responsibilities as a political and ecclesiastical — igure limited his ability to implement lasting re — orms in the court’s operations. Sir Thomas More — a lawyer and the humanist scholar who wrote the political novel Utopia — succeeded Wolsey as Lord Chancellor in 1529. More brought a new level o — legal rigor to the Court o — Chancery. His tenure — ocused on streamlining the court’s processes and ensuring greater consistency in its decisions, addressing criti- cisms that Chancery had been arbitrary and overly in — ormal. More was a staunch de — ender o — the court’s equitable jurisdiction, particularly in cases involving contracts. He rein — orced the use o — remedies that common law courts could not provide, such as compelling parties to — ul — ill their contractual obligations. More established the — oundations o — modern contract law remedies, including spe- ci — ic per — ormance to convey land, injunctions to prevent actions that cause irreparable harm, and rescission to cancel contracts — ormed under — raudulent or coercive circum- stances. These remedies were essential in situations where monetary damages, the pri- mary remedy in common law, could not achieve justice. More’s contributions helped establish equity as a structured and reliable complement to common law, thus ensuring that contract law could address complex and unique disputes e —
ectively and — airly. The American colonies inherited England’s dual system o — law and equity, with separate courts handling distinct types o — cases. Courts o — law resolved disputes by applying strict legal rules and o —
ered remedies such as monetary damages. Courts o — equity, on the other hand, provided more — lexible remedies grounded in — airness, including speci — ic per — ormance, injunctions, and rescission. This separation meant that both the remedies available and the causes o — action a litigant could pursue depended on the system in which their case was — iled. A — ter independence, some states maintained separate courts — or law and equity, while others merged the two jurisdictions into a single court with the power to grant both legal and equitable remedies. Article III o — the U.S. Constitution and the Judi- ciary Act o — 1789 granted — ederal courts jurisdiction over both legal and equitable claims. Yet seeking equitable remedies required — ollowing di — — erent civil procedures until 1938, when the Federal Rules o — Civil Procedure uni — ied legal and equitable claims into a single procedural — ramework. 12 1 • What Is Contract Law?
Figure 1.6. Portrait o --- Saint Thomas More (1523). Public domain work.
This historical context underscores how American courts have preserved and adapted the principles o — law and equity to meet the evolving needs o — society, thus ensuring that — airness and predictability remain central to the legal system. It also demonstrates how American — ederalism impacts the evolution o — law. Each state establishes its own contract laws and even its own court systems. As o — 2024, Dela- ware, Mississippi, and Tennessee maintain separate courts o — equity, known as Chan- cery Courts. These courts handle matters such as trusts, estates, guardianships, and issues requiring equitable remedies like injunctions or speci — ic per — ormance. The most notable among them is Delaware, which specializes in handling corporate dis- putes and — iduciary litigation issues. While the distinction between law and equity has thus been blurred, some di —
er- ences remain. For example, equitable claims tend to require some element o — justice, whereas a legal claimant may prevail merely by meeting the standards required by law. Many equitable remedies can also be limited as justice requires. The casebook will detail how this applies when we arrive at the remedies section. Moreover, equitable claims and remedies remain exceptional and extraordinary, meaning that courts will pre — er to — ind a legal remedy and will only resort to an equi- table remedy to the extent that justice requires them to do so. Because courts still regard equitable remedies as exceptional, they will not be granted when a legal rem- edy is available. Students are encouraged to analyze legal claims and remedies — irst. Only explore equitable claims and remedies as a last resort, presenting arguments — or why justice requires imposing an equitable remedy, even in the absence o — a legal one. 1 • What Is Contract Law? 13
Figure 1.7. A humble Missouri courtroom in the mid-19th century had jurisdiction over both legal and equitable claims. This re — lects a pragmatic approach to administering justice with limited resources in the early United States. William Josiah Brickey (1852). Credit: Smithsonian American Art Museum. Public domain work.
C. The Restatement o --- Contracts America began as a British colony that imported British law, including the law o ---
contracts. A
ter the American Revolution and the — ormation o — the United States o —
America, American law began dri
ting apart — rom English law. In the early days o — the United States, states had a great deal more power relative to the — ederal government than they do today. State courts heard most contract claims, and contract law devel- oped as a matter o — state law. State law may vary, as one state is not bound to — ollow another state’s precedent. Thus, contract law developed di —
erently throughout the states. The variations in contract law among states creates some challenges — or interstate commerce. Whether having di — — erent state laws — and giving parties the right to choose among them — is good or bad — or commerce and society is the subject o — much debate in commercial law. Theory aside, there have been practical e —
orts to generalize and normalize contract law among the states, some o — which have succeeded. 14 1 • What Is Contract Law?
The leading e ---
ort to de — ine (or create) a common law that is truly common throughout America has been conducted by the American Law Institute (ALI), an organization that was — ounded in 1923 to clari — y, modernize, and otherwise improve the law. Today, the ALI dra — ts, discusses, revises, and publishes Restatements o — the Law (which are treatises on what the law is), Model Codes (which are examples o — what the law should be), and Principles o — Law (which are studies o — areas o — law thought to need re — orm). The ALI’s work is enormously in — luential in the courts and legislatures, as well as in legal scholarship and education. ALI Restatements are — requently cited by American courts as statements o — black letter law, which are propounded to be state- ments o — legal rules that are no longer subject to reasonable dispute. The — irst Restatement o — Contracts, dra — ted in the 1920s under the leadership o — Har- vard pro — essor Samuel Williston, aimed to codi — y the common law o — contracts with a — ocus on legal — ormalism. It presented contract law as a set o — clear, objective rules, emphasizing certainty and predictability. However, as American courts increasingly moved away — rom strict — ormalism in — avor o — a more — lexible, contextual approach, the — irst Restatement came to — eel outdated. These shi — ts laid the groundwork — or the development o — the Restatement (Second) o — Contracts (R2d), which embraced legal realism and sought to address the complexities o — modern contracting. The R2d was dra — ted and promulgated in 1979 as part o — a movement known as “legal realism.” This movement is based on the idea that law cannot be understood in a vacuum; rather, law is a product o — humanity and society. Practically, this approach means that a court must look — or the parties’ actual intentions when they entered into a contract, even i — the plain meaning o — what they said or wrote would reasonably be interpreted by a third party to mean something else. The R2d was principally dra — ted by Arthur Linton Corbin, a pro — essor at Yale Law School who is sometimes credited with creating the modern law school model. (The R2d was copyrighted in 1981, which is why you sometimes see the R2d dated as 1981.) Despite the R2d’s — oundations in legal realism, it increasingly — eels like a creation o — an earlier age. For example, both Restatements were created when virtually no one owned their own computer. Now we walk around with computers in our pockets, on which we can purchase goods and o —
er services. As the R2d shows its increas- ing incompatibility with a digital age, a new Restatement may prove to be necessary sometime soon. In addition, some scholars and jurists criticize R2d — or shaping and creating — instead o — merely reporting — the law. But the law changes slowly. At present, the R2d is still considered to be the best authority on what is the common law o — contracts in America. We will rely heavily on the R2d to learn contract law principles. Just keep in mind that the law o — contracts will change during your li — etime o — practice in the law. As a common law doctrine, contract law can change as judges create new precedent by deciding new cases. By practicing contract law, you can be part o — that change. 1 • What Is Contract Law? 15
D. The Uni --- orm Commercial Code
In addition to Restatements, which serve as highly persuasive treatises on what constitutes black letter common law, the ALI also produces Model Codes. These are designed as templates --- or state legislatures to use in dra --- ting statutes. In the American legal system, most contract disputes are governed by state law, meaning that each state is --- ree to cra --- t its own legal doctrines without being bound by the precedents o --- other states. While this system encourages legal experimentation and local optimization, discrepancies between state laws can create con --- usion and increase costs --- or interstate commerce. To address these challenges, the ALI developed the Uni --- orm Commercial Code (UCC) in 1952, in collaboration with the National Con --- erence o --- Commissioners on Uni --- orm State Laws (NCCUSL). The UCC was created to harmonize commercial laws across the states, providing consistency --- or businesses operating nationally. The UCC covers much more than contract law. In --- act, it is so expansive that each article could easily --- ill an entire law school course. This book, however, --- ocuses exclusively on Article 2 o --- the UCC, which governs contracts --- or the sale o --- goods. Even there, it only discusses the UCC provisions that substantially change the common law as --- ound in R2d. This avoids con --- usions and keeps the course streamlined.
Unlike the R2d, which is a persuasive authority used to clari --- y the common law, the UCC becomes binding law once enacted by state legislatures. All 50 states have adopted some version o --- the UCC, and, in doing so, have displaced earlier judicial doctrines that con --- lict with its provisions. Thus, while the R2d advises courts on what the law should be, the UCC dictates what the law is in its area o --- coverage. Courts are obligated to --- ollow the UCC when adjudicating applicable disputes. The question, then, is whether the UCC applies to a given contract. Article 2 o --- the UCC governs contracts --- or the sale o --- goods. UCC § 2-102. A “sale” is de --- ined as the passing o --- title --- rom the seller to the buyer --- or a price. UCC § 2-106(1). Sales are distinct --- rom gi --- ts, which involve the trans --- er o --- ownership with- out payment, and leases, which trans --- er possession and use o --- goods --- or a limited term without trans --- erring ownership. Goods are de --- ined as items that are movable and identi --- iable at the time the con- tract is --- ormed. UCC § 2-105(1). This includes tangible items like a ton o --- bricks or a barrel o --- monkeys. However, the UCC does not apply to services (e.g., laying the bricks or training the monkeys), nor does it apply to the sale o --- real estate (e.g., a brickworks or a zoo). Yet even this seemingly straight --- orward rule gives rise to hard cases. So --- tware,
or instance, presents a challenge. Courts have traditionally interpreted the UCC’s requirement o — “movable” to imply that goods must be tangible. Downloadable so — tware, being intangible, has generally been excluded — rom the scope o — Article 2. While a clever student might argue that downloading so — tware involves the move- ment o — electrons, courts reject this argument because the electrons themselves are 16 1 • What Is Contract Law?
not the subject o
the contract and are not identi — iable as the speci — ic content o — the transaction. However, what about so — tware sold on a disc? Some courts hold that such so — tware quali — ies as a good because the disc is a tangible, movable object that embodies the so — tware, much like a book is a tangible embodiment o — the ideas within it. Other courts take a more — ormalistic approach, — ocusing on whether the predominant pur- pose o — the transaction is the sale o — the tangible medium or the licensing o — the so — t- ware. Still others adopt a more pragmatic view, considering how the parties structured the transaction and the relative value o — the tangible and intangible elements. These di —
ering approaches lead to inconsistent interpretations, demonstrating that, even under the “Uni — orm” Commercial Code, variations in interpretation among states preserve some — ederalism within contract law. The UCC does occasionally resolve potential ambiguities through explicit provi- sions. For example, the UCC declares that the unborn young o — animals and growing crops are goods, even though they may not be identi — iable or movable at the time o — contracting. This explicit inclusion avoids disputes over whether such items — all within the scope o — Article 2. A similar explicit resolution could be applied to so — tware, but e —
orts to address this issue universally have — ailed so — ar. Attempts to expand the UCC to address so — tware and other digital products (e.g., through the proposed Article 2B or the Uni — orm Computer In — ormation Transactions Act) have been controversial and remain largely unadopted. Thus, the treatment o — so — tware and other digital goods continues to be shaped by state-by-state judicial interpretation. The UCC was a groundbreaking e —
ort to uni — y commercial law across the United States, and Article 2 remains central to contract law — or the sale o — goods. However, as the treatment o — so — tware demonstrates, the evolution o — technology and commerce o — ten outpaces legal — rameworks. Students o — contract law must navigate these com- plexities, understanding both the UCC’s provisions and the interpretive variations that arise in practice.
E. Why Does Contract Law Exist? Contract law is private law. As discussed earlier, private law governs relationships between individuals, as opposed to public law, which addresses relationships between individuals and the state. The Roman jurist Domitius Ulpianus --- amously explained, “privatum quod ad singulorum utilitatem” (“private law exists --- or the bene --- it o --- the individual”). Contract law embodies this principle by enabling individuals to make binding agreements that enhance their lives through cooperation and trade. However, the maxim “pacta sunt servanda” — “promises will be kept” — is not strictly true as a matter o --- law. While courts never impose contract liability without
1 • What Is Contract Law? 17
some promise, not all broken promises result in legal liability. Why does the law en — orce certain promises and not others? Legal scholars and courts have developed several theories to answer this question. There are — our core justi — ications — or why contracts are en — orced — economic e —
i- ciency, reliance, autonomy, and — airness. While there are many others, these — our jus- ti — ications provide a comprehensive understanding o — contract law’s purpose.
-
Economic E
iciency Economic e —
iciency is one o — the main reasons why contract law en — orces prom- ises. En — orcing contracts helps people make voluntary trades that leave both sides bet- ter o —
. When people make agreements, they do so because they expect to bene — it — rom the exchange. Contract law ensures either that promises are kept or that the party who breaks a promise compensates the other — or their loss. This reliability makes trading and planning easier and more e —
ective. For example, imagine someone buying a loa — o — bread at a bakery. Economics assumes the buyer values the bread more than the money they spend, while the bak- ery values the money more than the bread it sells. Both sides gain — rom the exchange; otherwise, they would not agree to it. This kind o — mutually bene — icial exchange is called a “gain through trade.” By en — orcing promises, contract law — acilitates gains through trade that would not otherwise occur. Everyone is made better o —
. Not all trades happen immediately. Many agreements are per — ormed over time, and this is where contract law becomes particularly important. Consider an apple
armer in Washington State and a walnut — armer in Cali — ornia. The Washington apple
armer’s harvest is ready in September, but the Cali — ornia walnut — armer’s harvest will not be ripe until late October. Without the rights and remedies o — contract law, these — armers might not trust each other enough to trade. The apple — armer might worry about shipping apples in September without a guarantee that walnuts will arrive in October. Contract law solves this problem by making promises en — orceable. I — one — armer breaks the agreement, the other can go to court to recover the value o —
the deal. This assurance allows both
armers to trade con — idently. The apple — armer avoids wasting surplus apples, and the walnut — armer enjoys — resh apples along with their nuts. Both are better o —
because contract law enables them to rely on their agreement. Contract law does more than help individual — armers. It also encourages invest- ments that bene — it others. The apple — armer might plant more trees, knowing there is a reliable market — or surplus apples. The walnut — armer might expand their orchard, con — ident they can trade extra walnuts in the — uture. These investments mean more crops are grown, — ewer resources are wasted, and both — armers pro — it. By en — orcing promises, contract law helps people exchange goods and services in ways that improve everyone’s quality o — li — e. Economists would consider this an increase in social wel — are, meaning that society as a whole becomes better o —
. 18 1 • What Is Contract Law?
Economic e
iciency does not justi — y en — orcing all contracts, however. Other rea- sons may in — luence courts to en — orce or not en — orce promises.
- Reliance Reliance is another important justi — ication — or en — orcing promises through con- tract law. Reliance theory — ocuses on protecting people who act in reliance on a promise, especially when breaking that promise actually causes harm. When some- one makes a promise, and another person reasonably relies on that promise to their detriment, contract law can step in to prevent un — air outcomes. The — ocus is not on encouraging e —
icient promises but rather on compensating — or harms caused by bro- ken promises. Imagine a homeowner hires a contractor to renovate their kitchen. The contractor promises to start work next month, so the homeowner tears out their old cabinets and appliances to prepare — or the project. I — the contractor does not show up, the home- owner is le — t with a torn-up kitchen and no way to cook. Reliance theory explains why the law might en — orce the contractor’s promise and give the homeowner a remedy. By protecting the homeowner — rom being harmed by the contractor’s broken promise, the law makes it sa — er — or people in the homeowner’s position to rely on others’ prom- ises and to take signi — icant actions based on them. This protection is not limited to commercial transactions. Reliance theory also applies in everyday situations. For example, imagine a student promises to babysit — or a — amily on Saturday night. Relying on this promise, the parents buy movie tickets and make dinner reservations. I — the student cancels at the last minute, the — amily might lose the money they spent and have to change their plans. While this may seem like a small matter, reliance theory shows how even everyday promises can a —
ect people’s lives. En — orcing these promises, when appropriate, ensures — airness and prevents unnecessary harm. Reliance theory is the main justi — ication — or the legal doctrine o — promissory estop- pel. As you will learn, promissory estoppel allows courts to en — orce promises even when there is no — ormal bargained- — or exchange and, thus, no gain through trade. For promissory estoppel to apply, the person seeking a remedy must prove they reason- ably and — oreseeably relied on a promise; that this reliance was detrimental to them in some way; and that justice requires en — orcing the promise. By protecting the interests o — people who reasonably rely on promises, contract law creates stability and encourages trust. It allows people to take risks and make big plans without — ear o — being un — airly harmed by broken commitments. Reliance theory ensures that contract law serves not only economic goals but also the — undamental need — or — airness in human relationships. 1 • What Is Contract Law? 19
- Fairness Some view contract law as a means to ensure — air outcomes. This — airness-based justi — ication — or contract law — ocuses on preventing exploitation and protecting vul- nerable parties. While other theories emphasize economic e —
iciency or the sanctity o — promising, — airness theory seeks to ensure that agreements themselves do not lead to unjust harm. The roots o —
airness theory can be traced to the courts o — equity. These courts were created to address cases where strict legal rules produced un — air results. Equity allowed judges to provide remedies based on principles o — justice rather than rigid rules. Fairness theory — ollows this tradition. It allows courts to intervene when en — orc- ing a contract would lead to an unjust outcome. Consider a tenant who signs a lease with a landlord. The lease allows the landlord to evict the tenant without notice or cause. The tenant agrees because they have no other housing options. This agreement might be valid under strict legal rules, but
airness theory — like equity — would question whether it is just. A court could strike down the clause to ensure the tenant is not un — airly harmed. Fairness theory is especially important in cases involving power imbalances. Large corporations o — ten dra — t contracts that consumers cannot negotiate. These so-called “contracts o — adhesion” are presented on a take-it-or-leave-it basis, with no ability to remove or adjust the terms. Fairness theory supports doctrines like unconscionability, which allows courts to re — use en — orcement o — one-sided terms. In this way, — airness protects weaker parties in contractual relationships. Fairness and equity share a common goal: achieving justice. Both accept that — lex- ibility is sometimes necessary to address unique cases. By prioritizing justice, — airness theory ensures that contract law serves society’s broader interests. It reminds us that contract law is not just about en — orcing promises. It is also about ensuring that those promises align with principles o — justice and equity.
-
Autonomy Autonomy theory views contract law as a way to respect individual — reedom and personal responsibility. It is rooted in classical liberalism, a philosophy that values personal liberty, individual rights, and limited government inter — erence. Classical liberalism assumes that people are best equipped to make decisions about their own lives, including the commitments they choose to undertake. Autonomy theory applies these ideas to contract law, treating contracts as voluntary agreements that re — lect personal choice and sel — -determination. Autonomy theory treats the very act o — promising as morally signi — icant and as an expression o — sel — . Honoring a promise respects both the dignity o — the person making the promise and the person relying on it. 20 1 • What Is Contract Law?
A key part o
autonomy theory is mutual consent. Contracts are only valid when all parties voluntarily agree to the terms. This means the law will not en — orce a contract
ormed through coercion, — raud, or deceit. For instance, i — the artist was tricked into signing the agreement, autonomy theory would argue against en — orcement. By requir- ing genuine consent, contract law protects individual — reedom and ensures — airness in agreements.
- Additional Theories While the core theories o — contract law — economic e —
iciency, reliance, — airness, and autonomy — provide — oundational justi — ications — or en — orcing promises, additional perspectives o —
er important critiques and insights. These perspectives highlight the complexities o — contractual relationships and the broader societal implications o — con- tract law. Relational contract theory emphasizes the importance o — context and rela- tionships in contractual agreements. Relational theory considers contracts as part o —
ongoing relationships. Distributive justice theory
ocuses on how contract law a —
ects social and economic inequalities. It argues that contract law should not only en — orce private agreements but also consider the broader implications — or — airness in society. Critical legal studies critiques contract law as a tool that rein — orces existing power structures and privileges. It argues that the law o — ten masks inequalities by treating parties as i — they have equal bargaining power when they do not. Behavioral economics challenges the assumption that individuals always act rationally in making contracts. Cognitive biases, lack o — in — ormation, and pressure can lead people to make decisions that are not in their best interest. Moral and ethical theories emphasize the intrinsic value o — keeping promises. From a moral standpoint, breaking a promise is inherently wrong, regardless o — economic or practical considerations. According to this view, contract law should re — lect ethical values like trust, integrity, and mutual respect. Utili- tarian theory argues that contract law should aim to maximize overall happiness or societal wel — are. En — orcing contracts creates predictability and trust, which supports economic growth and cooperation. These perspectives enrich the understanding o —
contract law by addressing areas that the core theories may overlook.
- Theory Meets Practice Theories o — contract law help explain why promises are en — orced and how the law balances competing values. These theories reveal the deeper purposes behind legal rules, such as encouraging economic cooperation, protecting trust in relationships, and ensuring — airness in outcomes. While this book — ocuses on what contract law is, understanding these theories o —
ers critical insights into its structure and evolution. Theories also highlight the inherent trade-o —
s in contract law. Should the law pri- oritize predictability — or businesses or — airness — or individuals? Should it honor per- sonal — reedom or guard against exploitation? These questions are not always explicitly 1 • What Is Contract Law? 21
addressed in court decisions, but the theories provide a lens
or understanding how courts navigate these tensions. Lawyers who better understand these theories are bet- ter able to sway courts to resolve these tensions in — avor o — their clients.
F. Objectivity and Subjectivity When courts interpret contracts, they must decide whether to --- ocus on the exter- nal evidence o --- what the parties expressed or the internal understanding o --- what they intended. These two approaches, the objective view and the subjective view, re --- lect contrasting philosophies about the role o --- law in interpreting human relationships. They are called “views” rather than “theories” because they describe practical meth- ods --- or interpreting agreements rather than broad explanations o --- why promises are en --- orced. The objective view relies on external evidence — what the parties said, wrote, or did — to determine their agreement. Courts --- avor this approach because it promotes predictability and stability. I --- parties know their expressed words and actions will govern, they can dra --- t contracts with greater con --- idence and avoid costly disputes. Written agreements, in particular, are o --- ten interpreted based on their plain meaning, with little room --- or evidence outside the --- our corners o --- the document. This approach simpli --- ies the court’s role and reduces the potential --- or subjective or biased decisions. By relying on what a reasonable person would understand --- rom the language o --- the contract, courts create a stable --- ramework --- or interpreting agreements, especially in commercial contexts. In contrast, the subjective view --- ocuses on uncovering the actual intentions o --- the parties. This approach considers all available evidence, including context, conduct, and negotiations, to determine what the parties truly meant. While this method can produce --- airer outcomes in some cases, it also introduces uncertainty, as courts must evaluate con --- licting evidence and determine whose understanding to prioritize. For example, imagine a buyer and a seller sign a contract --- or the sale o --- 100 widgets. The buyer later claims that during their private negotiations, the seller explicitly told them that “widgets” re --- erred to a speci --- ic, rare type o --- high-quality product. However, the written agreement simply states “widgets” without any --- urther description. Under a
ull-blown subjective approach, the court might admit not only evidence o — the verbal agreement but also the buyer’s personal testimony about their private understanding o — what “widgets” meant, even i — that understanding was never expressed to the seller. The court might prioritize the buyer’s asserted intentions, viewing the “meeting o — the minds” as requiring alignment with the buyer’s subjective interpretation o — the term. Such an approach, while potentially — air to the buyer in this scenario, creates sig- ni — icant uncertainty and undermines the stability o — contract law. It — orces courts to engage in speculative inquiries about individual parties’ unexpressed thoughts, which makes it harder — or other parties to rely on contracts as binding agreements. 22 1 • What Is Contract Law?
No signi
icant American jurisdiction today adopts this extreme — orm o — subjectivity. Courts recognize that contracts depend on mutual understanding, but they generally require that this understanding be evidenced through outward expressions — words, conduct, or context. While the subjective view does in — luence modern contract inter- pretation in speci — ic circumstances (such as in — ormal agreements or cases involving unique contexts), courts typically balance subjective evidence with objective stan- dards to maintain — airness and predictability. These approaches are best illustrated by two in — luential — igures in contract law: Samuel Williston, who championed the objective view, and Arthur Corbin, who advocated — or a more subjective approach. Their contrasting philosophies reveal the strengths and limitations o — each method, and their in — luence continues to shape how courts interpret contracts today. Samuel Williston (1861–1963) was a prominent legal scholar and a pro — essor at Harvard Law School. He is best known — or advancing the objective theory o — con- tracts, which — ocuses on external expressions o — intent. Williston argued that courts should rely on what the parties said and wrote, not on their unspoken thoughts. This approach promotes clarity and predictability in contract interpretation. Williston’s treatise, The Law o — Contracts (1920), was — oundational to the objec- tive view. He emphasized that the meaning o — a contract should be determined by how a reasonable person would interpret the parties’ words and actions. This mini- mizes the role o — subjective evidence, such as private intentions or unveri — iable tes- timony. Williston believed this approach makes contracts more reliable and easier to en — orce. As the reporter — or the — irst Restatement, Williston codi — ied his objective princi ples. The — irst Restatement directed courts to interpret contracts based on their plain language and to avoid extrinsic evidence unless ambiguity existed. This rein — orced the idea that contracts should be judged by their expressed terms. Williston also distinguished between written and oral contracts. He argued that oral contracts, like those in writing, should be strictly interpreted according to their language. Oral agreements, however, might require some — lexibility to account — or context. Despite this distinction, Williston consistently prioritized objective evidence over subjective intent. Williston’s work has had a lasting in — luence on contract law. His objective approach remains central to how courts interpret contracts, particularly in commercial settings. By — ocusing on expressed intent, Williston helped create a legal — ramework that values stability, e —
iciency, and — airness. Arthur Linton Corbin (1874–1967) was a leading legal scholar and pro — essor at Yale Law School. He is best known — or his treatise Corbin on Contracts, — irst published in 1950. Corbin’s work shaped modern contract law and heavily in — luenced the R2d. Corbin advocated a — lexible approach to contract interpretation. He believed that courts should consider the context o — an agreement and the parties’ actual intentions. 1 • What Is Contract Law? 23
Figure 1.8. Pro --- essor Samuel Williston emphasized clarity and
predictability in contract law, championing the objective approach
that relies on external expressions o --- intent. Public domain work.
While he recognized the value o
external evidence, he argued that relying solely on it could lead to un — air outcomes. In Corbin on Contracts, he emphasized that the meaning o — a contract cannot always be determined by its plain language. Instead, courts should examine the cir- cumstances surrounding the agreement. Corbin urged courts to uncover what the parties truly intended, even i — their intentions were not per — ectly expressed in writing. Corbin’s views shi — ted contract law toward a more realistic and relational per- spective. His in — luence is clear in the R2d, which re — lects his belie — that contracts must be interpreted in light o — their context. Unlike Williston, Corbin did not insist on strict adherence to — ormal language. Instead, he sought to balance — airness and predictability. Corbin’s legacy is his emphasis on achieving equitable outcomes. His approach remains a key part o — modern contract law, whose aim is to ensure that agreements re — lect the actual understanding o — the parties when evidence supports it. Today, courts generally adopt a balanced approach to contract interpretation one that blends elements o — both the objective and subjective views. This modern 24 1 • What Is Contract Law?
Figure 1.9. Arthur Corbin, a proponent o --- the subjective
approach, believed courts should uncover the parties’ true
intentions to re --- lect the relational nature o --- contracts.
Copyright © Yale Law Journal. Reprinted with permission.
approach seeks to balance the predictability and stability provided by the objective view with the — airness and — lexibility o —
ered by the subjective view. Courts typically start with the objective approach. They — irst examine the plain language o — the contract, — ocusing on the words and actions that a reasonable person would interpret as expressing the parties’ intent. This provides a clear, stable — rame- work — or en — orcing agreements, especially in commercial transactions where certainty is crucial. However, when contracts are ambiguous or when external circumstances sug- gest that the written language does not re — lect the parties’ actual understanding, courts may look beyond the words on the page. In these cases, they admit subjec- tive evidence — such as negotiations, conduct, and the broader context o — the agree- ment — to discern the parties’ true intent. This ensures that contracts are not en — orced in ways that lead to unjust or absurd results. For example, a court interpreting a contract — or “delivery by December 1” might initially assume that the phrase re — ers to the calendar date. But i — evidence shows that 1 • What Is Contract Law? 25
both parties understood it to mean “the
irst shipment date in December,” the court may adopt that interpretation to re — lect the parties’ shared intent. This mix o — objective and subjective analysis helps courts align contract en — orcement with practical realities. The R2d re — lects this modern approach. While it begins with the presumption that contracts should be interpreted based on their plain language, it acknowledges that courts may need to consider external evidence in certain situations. The R2d encour- ages judges to interpret contracts in ways that uphold both the reasonable expecta- tions o — the parties and the practical needs o — the transaction. The modern approach also re — lects the in — luence o — economic, relational, and — air- ness theories. It recognizes that contracts do not exist in isolation but are shaped by the surrounding circumstances and the relationships between the parties. Courts o — ten tailor their interpretation to ensure that agreements are en — orced in ways that promote trust and cooperation. While this approach seeks to strike a balance, it is not without criticism. Some argue that allowing subjective evidence undermines predictability, particularly in commercial contexts. Others contend that relying solely on objective evidence risks ignoring the realities o — human relationships. The modern approach attempts to navi- gate these tensions by combining the strengths o — both perspectives. By blending objective principles with subjective — lexibility, the modern approach ensures that contracts are interpreted — airly and predictably. It re — lects contract law’s evolution into a system that balances individual rights, economic e —
iciency, and rela- tional — airness.
G. Re --- lections on Contract Law
Contract law has developed over thousands o --- years to meet humanity’s need --- or trust and cooperation in trade. For millennia, courts have en --- orced private agree- ments, thereby encouraging commerce and --- ostering trust, even among strangers. This essential --- unction remains unchanged, though the doctrines and details con- tinue to evolve. Rooted in Roman law and carried through the Norman Conquest to England, contract law merged with local customs to address the needs o --- growing societies. The American colonies inherited this legal tradition but adapted it over time, developing distinct approaches as the distance --- rom England and the demands o --- a new nation shaped its evolution. Despite these historical shi --- ts, the core purpose o --- contract law has endured. It remains a system o --- voluntary liability that supports individual autonomy and eco- nomic cooperation. Central to its philosophy are two enduring principles: --- reedom to contract — the right to make binding agreements — and --- reedom --- rom contract — the right not to be bound without consent. These principles re --- lect the balance that con- tract law strikes between promoting personal choice and ensuring accountability.
26 1 • What Is Contract Law?
While the purpose o
contract law has stayed constant, its nuances and doctrines continue to change. As society and technology evolve, so too do the challenges that courts must address. Additionally, because contract law is primarily state-based, its development across the United States has created a patchwork o — variations. These di —
erences enrich the — ield but can also make it harder to identi — y universal principles. This course aims to simpli — y that complexity. By — ocusing on the common threads o — American contract law, it emphasizes the — oundational principles that transcend state lines. The goal is to equip students with a clear understanding o — what contract law is while leaving space to explore how it continues to adapt to new circumstances. The enduring legacy o — contract law lies in its ability to balance competing values: individual autonomy and — airness, predictability and — lexibility, personal rights and collective trust. As you study these principles, you are engaging with more than just legal rules — you are exploring the — ramework that shapes human cooperation, trade, and the economic relationships that sustain society. Chapter 2 What Is a Contract?
The most --- undamental question in contract law is, what is a contract? Contrary to popular belie --- , a contract need not be a written document (although some types o ---
contracts must be properly evidenced by a signed memorandum). Rather, the most basic de — inition o — a contract is a promise or set o — promises that courts will en — orce. This de — inition, in turn, requires us to de — ine what a promise is. By unpacking the
oundational de — inition in this way, we not only learn the deeper meaning o — contract law but also learn how to do the work o — contract practice. Contract practice is primarily about avoiding litigation through care — ul dra — t- ing. By thought — ully unpacking and describing terms in a manner that clari — ies and memorializes two parties’ mutual understanding, the contract lawyer adds great value to transactions that thus become more certain and less subject to dispute. You will begin to develop those skills in this — irst module, where you will be called upon to parse and explain the technical rules — ound in the R2d and UCC. These skills are applicable to the interpretation o — other treatises and statutes, such that the work you do here translates into a higher capacity — or doing legal work in other domains. But things do not always go as planned. Even care — ul dra — ting cannot eliminate every risk. Moreover, not all agreements are care — ully dra — ted, and some are not writ- ten down at all. There are many reasons — or contractual disputes to arise; and then, once again, the contract lawyer adds value by predicting how a court would evaluate the disputed agreement and advising clients on whether and how to negotiate, sue, or settle. (A settlement is a very common type o — agreement in which parties agree to give up — settle — their legal claims in exchange — or compensation). This book will speci — ically teach you how to do that work, i.e., recognize whether courts will en — orce speci — ic promises, predict how courts might interpret those promises, and identi — y what remedies courts might award — or broken promises. That learning begins with unpacking and understanding the set o — rules de — ining what a contract is and who can — orm a contract. Contract law invokes its own use o — language. Certain terms that are used in every- day parlance take on a special meaning in contract law. For example, in Webster’s Dictionary, the word “bargain” is de — ined as “something acquired by or as i — by nego- tiation.” But, under contract law, bargaining is not synonymous with or even necessar- ily related to negotiating. There — ore, it is critical to look up the legal and contractual meaning o — key terms, and not to rely on intuition or common knowledge.
27
28 2 • What Is a Contract?
Rules A. Contract The --- irst de --- inition we encounter in this course is, --- ittingly, R2d § 1, which de --- ines “contract.”
A contract is a promise or a set o --- promises --- or the breach o --- which the law
gives a remedy, or the per --- ormance o --- which the law in some way recognizes
as a duty. A contract is simply a legally binding promise or set o --- promises. Although lay persons may use the term contract to mean a writing that sets --- orth an agreement, note that a writing is not required by this de --- inition. Contracts can be written or oral. Only a --- ew speci --- ic types o --- contracts need to be evidenced by a writing, as you will learn when studying the so-called “statute o ---
rauds” in Module III, De — enses. There are several words in the de — inition o — contract which have a precise legal meaning: contract, promise, breach, remedy, per — ormance, and duty are all speci — ic legal words whose meaning may be di — — erent — rom the lay meaning. To understand the meaning o — the term “contract,” we thus have to learn the meaning o — the other terms used to de — ine it. Let us look to the R2d — or more clarity on what these terms mean in a legal sense.
B. Promise A contract is a promise or set o — promises. A bilateral contract is an exchange o — two promises. Each promise is given in exchange — or the other. A unilateral contract is a single promise given in exchange — or the completion o — a requested per — ormance. As you will learn, most promises are en — orceable as contracts only i — something is given in exchange — or the promise. This is called the “consideration.” But some promises can potentially be en — orced even i — no consideration is given in exchange — or the promise. For now, understand that, in all cases, a contract requires a promise. What, then, is a promise? “Promise” is de — ined in R2d § 2(1): A promise is a mani — estation o — intention to act or re — rain — rom acting in a speci — ied way, so made as to justi — y a promisee in understanding that a com- mitment has been made. Once again, there are special legal words here that require additional unpacking. In particular, the term “mani — estation o — intention” is probably not a term you use in everyday speech, and it certainly has a special meaning here. How can we learn the special legal meaning o — such words and phrases? Let us turn to Black’s Law Dictionary to look up the legal meaning o — words like “mani — estation.” 2 • What Is a Contract? 29
Mani --- estation. A clear sign or indication that a particular situation or --- eeling
exists; that which exhibits, displays, or reveals. What can we learn --- rom this de --- inition? A mani --- estation is an external expression — as distinguished --- rom a secret thought or an undisclosed intention. There --- ore, contract law must be concerned with outward acts and clear signs, and not with hidden secrets.
Another vital source necessary to understand the meaning o --- special legal terms is
ound in the R2d itsel — . A — ter each rule, you will — ind a series o — comments that help to explain the rule. It is o — ten necessary to read these comments so that you do not make a mistake by attributing a common or lay meaning to a special legal term or concept. Mani — estation o — intention. Many contract disputes arise because di — — erent people attach di — — erent meanings to the same words and conduct. The phrase “mani — estation o — intention” adopts an external or objective standard — or inter- preting conduct; it means the external expression o — intention as distinguished
rom undisclosed intention. R2d § 2 cmt. b. A promise is a mani — estation o — commitment to do or not to do something. The concept o — mani — estation, meaning an outward sign or expression, not a privately held thought or belie — , is central to contract law. Although a person may harbor some secret intention, contract law will judge that person’s obligations only by what clear signs or indications that person exhibits, displays, or reveals. Not all promises result in contractual obligations. As you will soon learn, parties can make gratuitous or illusory promises that are not binding as a matter o — law. Promises may be morally binding, such that breaking that promise is viewed as a sin or causes — eelings o — guilt or blame, but contract courts are not arbiters o — morality. Promises may be socially binding in that — ailing to keep them harms one’s reputation or standing in a community, but contract disputes do not pose such matters to courts. Courts en — orce only legally binding promises — and the — irst hal — o — this course is dedi- cated to answering the question o — whether a particular promise is legally binding. For example, Grandpa promises to give Grandson $100 on Grandson’s next birth- day, and Grandson promises to accept the gi — t. This is an agreement, but it is not a contract. As you will soon learn, absent speci — ic — acts (such as Grandson’s detrimental reliance on Grandpa’s promise), this agreement lacks consideration, so it will be unen-
orceable as a matter o — law. Consideration, again, is what is given in exchange — or a promise. Consideration makes that promise en — orceable as a matter o — law. You will gradually become more com — ortable with this concept as you learn to recognize those situations where a promise might be en — orceable despite the lack o — a consideration. The R2d gives — urther in — ormation about the actors involved in promising. The su —
ix “-or” is added to a verb to create a noun that re — ers to the person who does an action. The su —
ix “-ee” is added to a verb to create a noun that re — ers to the person who is a —
ected by the action. The verb “promise,” there — ore, is made into the nouns “promisor” and “promisee,” to re — er to the parties relevant to this transaction. 30 2 • What Is a Contract?
Promisor. The person mani --- esting the intention is the promisor. R2d § 2(2). A promisor is the subject o --- the promise, i.e., a promisor is the person who makes the promise. I --- that promise is legally binding, it is an obligation, and the person who made that promise may thus be termed an “obligor.”
Promisee. The person to whom the mani --- estation is addressed is the promisee.
R2d § 2(3).
A promisee is the object o --- the promise, i.e., a promisee is the person to whom a promise is made. A person to whom a legally binding promise, or obligation, is made is called an “obligee.”
Bene --- iciary. Where per --- ormance will bene --- it a person other than the promisee,
that person is a bene --- iciary. R2d § 2(4).
A bene --- iciary is a person who bene --- its --- rom a promise but is not a promisor or promisee. Such a person may also be re --- erred to as a “third-party bene --- iciary.” As you will learn in Chapter 28, such third-party bene --- iciaries may have certain rights to sue the promisor or even, in certain cases, the promisee. What have we learned --- rom these terms? We have learned that contracts are only
ormed when parties make external, outward, objectively understandable statements or take clear and unequivocal actions that demonstrate a commitment to do or not to do something. In other words, contracts are — ormed by promises. The person who makes a promise is called the “promisor.” The person who receives the promise is called the “promisee.” And a third party who bene — its — rom the promise but is not the promisee is called a “bene — iciary.”
C. Agreements and Bargains The common meaning o — the term “agreement” simply means a harmony o — opin- ion. In other words, the common usage o — the term does not require any objective mani — estation. Under the common usage, you might “agree” with a person who lives in Australia that the sky is blue despite your never having met that person. But this is not what is meant by agreement under contract law. Under contract law, an agreement is a mani — estation o — mutual assent — an outward expression o — mutual understanding between two or more persons. An agreement is active, not passive. The parties’ words and actions must objectively demonstrate their accord. The R2d § 3 states: An agreement is a mani — estation o — mutual assent on the part o — two or more persons. A bargain is an agreement to exchange promises or to exchange a promise — or a per — ormance or to exchange per — ormances. Look at the structure o — this provision. Do you notice that “agreement” and “bar- gain” are de — ined di —
erently? That means that an agreement is distinguished — rom a 2 • What Is a Contract? 31
bargain; in other words, the terms “agreement” and “bargain” must mean two di
— erent things. In particular, the de — inition o — agreement does not mention the word “prom- ise” at all. Instead, the — ocus is on whether the parties have achieved mutual assent. In contrast, the de — inition o — a bargain is an agreement to exchange promises, or to exchange a promise — or a per — ormance. This is a distinction that makes a di —
erence. The existence o — an agreement does not necessarily create a legally binding obliga- tion. For example, i — you call your — riend in Australia and discuss your shared belie —
that the sky is blue or that today is Tuesday, this is an agreement. But this is not a contract. It is not even a bargain. Indeed, it is not even a promise! A bargain, in contrast, is a subset o — agreements, in which both parties agree to do, or re — rain — rom doing, something as part o — an exchange. Not all bargains are contracts. Not all bargains are en — orceable as a matter o — law. Even i — the parties agree to exchange something o — value, this does not necessarily turn their agreement into a contract. For example, i — a hit man agrees to assassinate a targeted person — or $100,000, this is clearly a bargained- — or exchange, but courts will not en — orce obliga- tions to commit crimes, so the bargain is not a valid contract. Yet this is still a bargain because it is an agreement that takes the — orm o — an exchange o — promises. Note that the legal de — inition o — bargain makes no mention o — negotiating or hag- gling. The term “bargain” sometimes con — uses students who associate bargaining with haggling or some other process o — negotiation, but this is not what the legal term requires. Parties to a contract do not necessarily haggle or negotiate. Perhaps the symmetrical concept o — mutuality o — obligation conveys the concept o — bargained- — or exchange more naturally. For example, i — you go to the Apple store to purchase a new MacBook, you may choose to pay $200 — or the AppleCare extended warranty, but you will not — ind any opportunity to bargain with Apple regarding the price or terms o — that transaction. It is a take-it-or-leave-it o —
er. Nevertheless, you have in the technical legal sense made a bargained- — or exchange, namely, your $200 in exchange — or Apple’s extended war- ranty coverage. You will learn about warranties later, in Chapter 18.
D. Bargain Contracts and Non-Bargain Contracts As you have just learned, a contract is a legally binding promise or set o — promises. Most contracts are a special type o — bargain that consists o — an agreement to exchange promises or to exchange a promise — or a per — ormance. For example, Grandpa prom- ises Granddaughter that he will give Granddaughter $100 i — Granddaughter will clean Grandpa’s mansion. Granddaughter agrees, promising to clean Grandpa’s mansion. This is a classic bargain contract — an agreement to make an exchange o — promises, each o — which is supported by mutual assent and consideration. From Grandpa’s per- spective, his promise is to pay $100, and his consideration is getting his mansion 32 2 • What Is a Contract?
cleaned. From Granddaughter’s perspective, her promise is to clean the mansion, and her consideration is getting $100. To use the technical phrase, both promises are “sup- ported” by consideration. The classic bargain contract described above is a bilateral contract, which is de — ined as the exchange o — a promise — or a promise. Bilateral (going two ways) re — ers to the symmetrical nature o — this classic bargain contract. Each party gives a promise and gets a promise in return. Bilateral also re — ers to the two ways in which this classical contract can be — ormed: typically, a party can accept the o —
er either by promising to per — orm or by completing the per — ormance. Upon acceptance, each party gains the legal right to sue the other — or — ailure o — the promise — subject to the various limita- tions you will learn about in this book. Parties can also enter into a unilateral contract, which is de — ined as the exchange o — a promise — or per — ormance. For example, Uncle promises to give Nephew $10,000 i — Nephew quits drinking, smoking, and gambling — or the next — ive years. I — Nephew success — ully completes this requested per — ormance, then Uncle is legally obligated to make good on his promise o — the $10,000. There is a still a bargain here. From Uncle’s perspective, his promise is to pay $10,000, and his consideration is his Nephew’s spec- i — ied behavior. From Nephew’s perspective, his per — ormance is the behavior, and his consideration is $10,000. The element o — bargain remains the same. What makes the Uncle- Nephew example di — — er ent — rom the Grandpa- Granddaughter one is that Uncle did not seek Nephew’s promise. Nephew could not say “Sure thing, Uncle,” then take a swig o — vodka and sue Uncle — or $10,000. Nor could Uncle sue Nephew — or playing cards the — ollowing year. Regarding unilateral contracts, one party can accept only by — ully per — orming, while the other party is bound by promising. Unilateral (going one way) re — ers to the asymmetrical nature o — this scenario and to the — act that the o —
eree can only accept such an o —
er by com- pletely per — orming. Unlike bilateral contracts, a return promise does not create a uni- lateral contract. Instead, unilateral contracts typically take the — orm o — an o —
er o — a reward or a prize — or per — orming in some way, as the Uncle-Nephew example shows. However, the term “contract” is sometimes used to include legally en — orceable promises that are not based on a bargain and that entail no bargained- — or consider- ation. For example, Granduncle promises Grandniece that he will give Grandniece $10,000 at Grandniece’s upcoming high school graduation so that Grandniece can pay to go to college. Grandniece agrees and takes out a large loan to attend a university she could not otherwise a —
ord. I — Granduncle backs out, a court might en — orce Grandun- cle’s promise even though Grandniece gave nothing in exchange — or that promise, due to Grandniece’s detrimental reliance on Granduncle’s promise. Granduncle’s promise is not a bargain contract. But a court might nevertheless en — orce Granduncle’s prom- ise, so it might nonetheless be a contract under the de — inition put — orth in R2d § 1 (“[a] contract is a promise . . . — or the breach o — which the law gives a remedy . . . ”). We can thus distinguish between bargain contracts and non-bargain contracts. A bargain contract is an agreement between two or more parties to a bargain (an exchange) 2 • What Is a Contract? 33
which creates legally binding, en
orceable obligations between them. A bargain con- tract consists o — an exchange o — promises (a bilateral contract) or a promise to reward the other party’s per — ormance (a unilateral contract). In either case, bargain contracts must be supported by consideration (the other party’s promise or per — ormance). A non-bargain contract is a legally en — orceable promise that is not based on a bar- gain but which a court will nonetheless en — orce to avoid injustice. A non-bargain contract still requires a promise. Non-bargain contracts may lack the element o —
bargained-
or exchange (consideration), yet they are still en — orceable — or reasons o —
airness and justice. Although non-bargain contracts do not need to be supported by consideration, as bargain contracts do, they must at least include a promise which it would be unjust — or the law not to en — orce. In either case, contracts always require at least one promise. Also remember that contract law is voluntary. Unlike death or taxes, which are mandatory regardless o —
one’s intentions or actions, a person must outwardly mani
est some intention to be legally bound. The parties must agree — they must mutually assent — to the terms o —
their agreement; otherwise, they cannot have incurred a voluntary contractual obliga- tion. This means that contracts are promises that courts en — orce.
E. Distinguishing Common Law Contracts
rom UCC Contracts Thank — ully, the American Law Institute has made the work o — understanding con- tracts much easier by codi — ying it. The R2d, while not a per — ect representation o — the myriad approaches among all the states, is a reasonable approximation o — the com- mon law that is well organized and relatively easy to read. Meanwhile, the UCC has been adopted in virtually all U.S. jurisdictions, thus harmonizing the law o — sales throughout the country. This course will teach you the common law o — contracts as — ound in the R2d while pointing out where the UCC di —
ers meaning — ully — rom the common law. Your — irst task in applying this knowledge will be to determine whether the UCC applies so that you will apply the appropriate body o — law. How do you discern whether the UCC or the common law governs a contract? Most cases are easy to classi — y. As explained in the introduction, the UCC applies only to contracts — or the sale o — goods. Goods are de — ined as things that are movable and identi — iable at the time o — sale, such as bananas, electronics, or the notorious “widget.” The UCC does not govern contracts — or services, such as someone’s promise to clean your apartment or a construction company’s promise to build you a new roo — . The UCC also does not govern contracts involving real property or intellectual property, which are not movable, physical goods. In close cases, where it is unclear whether something is a contract — or the sale o —
goods or the sale o
services, most courts use the predominant purpose test, which 34 2 • What Is a Contract?
asks whether the predominant purpose o
the contract is to sell goods or to sell a service. For example, Patricia, a homeowner, and Don’s Construction Company, a contrac- tor, agree that Don will construct a new addition to Patricia’s home and that Don will supply all the materials — or this project. Does the UCC or the common law apply? The predominant purpose is the construction services, not the materials, so this is a contract — or services, and the common law applies. Evidence supporting this conclu- sion includes the contractor’s primary role (providing construction services) and the proportion o — the contract price attributable to services versus goods. For instance, i —
Patricia agreed to pay Don $150,000, and i
the materials cost $30,000, then it is clear that services predominate. In contrast, i — Greg’s Electrical Supply agreed to supply Patricia with a new television and also agreed to install the television in Patricia’s living room, this would be a contract — or the sale o — goods. Even though Greg’s is also supplying the service o — installation, the predominant purpose o — the contract is to sell Patricia a television. Evidence — or this conclusion includes the — act that electrical suppliers typically deal in sales o — electrical goods (not installation services, which is an electrician’s role) and that the value o — the television is the majority o — the contract price. Some jurisdictions recently adopted a new concept o — “hybrid transaction.” Hybrid transactions are contracts involving the sale o — both goods and non-goods compo- nents, such as services or leases. In hybrid-transaction jurisdictions, the test that courts apply to determine the governing law remains the same — the predominant purpose test — but the results may di —
er. I — the sale-o — -goods aspect predominates, the UCC applies to the entire transaction. However, i — the sale-o — -goods aspect does not predominate, the UCC applies only to the goods aspect o — the transaction, while the non-goods aspects are governed by other laws. For example, in a hybrid-transaction jurisdiction, Patricia contracts with Kathy’s Custom Carpentry to install a new set o — cabinets in her kitchen. The UCC would apply to the cabinets themselves (so Patricia would be protected by UCC-mandated warranties, such as the implied warranty o — merchantability, i — the cabinets — ailed to stay closed). However, the UCC would not apply to the installation aspect o — the transaction (e.g., i — Kathy’s — ailed to install the cabinets to level), which would instead be governed by the common law. The same concepts apply to mixed sales and leases. In a hybrid-transaction juris- diction, UCC Article 2 applies to the sales aspects, while UCC Article 2A applies to the lease aspects. For example, Sarah leases a car — rom a dealership — or $300 per month — or 36 months with an option to buy the car at the end o — the lease term — or $12,000. The UCC Article 2A provisions regarding leases will apply to issues like the lessor’s duty to maintain the vehicle or the lessee’s payment obligations. I — Sarah exercises her purchase option, the UCC Article 2 provisions on sales, such as implied warranties and delivery terms, govern the — inal trans — er o — ownership. 2 • What Is a Contract? 35
Finally, the question o
what law applies only matters where there is a contract. Again, contracts require promises. I — there is no promise, there can be no contract liability under either the common law or the UCC.
Cases
Reading Steinberg v. Chicago Medical School. The Steinberg case discusses
the legal meaning o --- the term “contract.” The background o --- the case may be
amiliar to many students: a prospective student was rejected — rom a pres- tigious medical school. Having paid an application — ee, the student-plainti —
argued that the medical school had --- ormed a contract with him and others in
a similar position. Under the terms o --- this contract, the prospective student
argued, the medical school had promised to evaluate his application --- airly
and without bias. The prospective student then argued that the school broke
its promise by evaluating his application based on his and his --- amily’s ability
to make large donations to the school. The issue be --- ore the court is whether
the application constituted a contract. The answer depends on whether the
school’s writings and conduct --- ell under the de --- inition o --- a “contract” in a legal sense.
Although contracts are usually --- ormed through a more obvious sequence o ---
o ---
er — ollowed by acceptance o — an o —
er, the de — inition o — “contract” is — lexible enough to contemplate many other situations. Even though there was no writ- ten document that said “CONTRACT” in all capital letters at the top, it is still possible that a legally binding agreement was — ormed through this application process. Read Steinberg to see how courts will evaluate such claims and how they will de — ine a contract and its key elements in the process.
Steinberg v. Chicago Medical School
69 Ill. 2d 320 (1977) DOOLEY, Justice. Robert Steinberg received a catalog, applied --- or admission to de --- endant, Chicago Medical School, --- or the academic year 1974–75, and paid a $15 --- ee. He was rejected. Steinberg --- iled a class action against the school claiming it had --- ailed to evaluate his application and those o --- other applicants according to the academic criteria in the school’s bulletin. According to the complaint [which is the initial document or “plead- ing” that starts a civil action in a court o --- law], de --- endant used nonacademic criteria, primarily the ability o --- the applicant or his --- amily to pledge or make payment o --- large sums o --- money to the school.
36 2 • What Is a Contract?
The 1974–75 bulletin distributed to prospective students contained this statement o — standards by which applicants were to be evaluated: Students are selected on the basis o — scholarship, character, and motivation without regard to race, creed, or sex. The student’s potential — or the study and practice o — medicine will be evaluated on the basis o — academic achieve- ment, Medical College Admission Test results, personal appraisals by a pre- pro — essional advisory committee or individual instructors, and the personal interview, i — requested by the Committee on Admissions. Count I o — the complaint alleged breach o — contract; count II was predicated on the Consumer Fraud and Deceptive Business Practices Act and the Uni — orm Deceptive Trade Practices Act; count III charged — raud; and count IV alleged unjust enrichment. This was sought to be brought as a class action. [A class action is a lawsuit where a single person or small group o — people represents the interests o — a larger group who are similarly situated.] Accordingly, there were the customary allegations common to such an action. The trial court dismissed the complaint — or — ailure to state a cause o — action. [Dis- missing the complaint entirely means that the plainti —
will not be able to prove the merits o — any o — its claims or “counts.”] The appellate court reversed as to count I, the contract action, and permitted it to be maintained as a limited class action. It a —
irmed the circuit court’s dismissal o — the remaining counts II, III, and IV. [Accordingly, the trial court will need to decide the contract claim on its merits.] The real questions on this appeal are: Can the — acts support a charge o — breach o —
contract? Is an action predicated on
raud maintainable? Is this a proper class-action situation? [This edited version o — the case will only include portions that are relevant to the breach o — contract claim.] On motion to dismiss we accept as true all well-pleaded — acts. [This is a civil pro- cedure concept that essentially means the court will take the — acts that the plainti —
alleges in the complaint as true and will then evaluate whether those
acts add up to a claim that, i — true, would merit legal relie — , a “remedy.”] Count I alleges Steinberg and members o — the class to which he belongs applied to de — endant and paid the $15 — ee, and that de — endant, through its brochure, described the criteria to be employed in evaluating applications, but — ailed to appraise the appli- cations on the stated criteria. On the contrary, de — endant evaluated such applications according to monetary contributions made on behal — o — those seeking admission. A contract, by ancient de — inition, is an agreement between competent parties, upon a consideration su —
icient in law, to do or not to do a particular thing. An o —
er, an acceptance and consideration are basic ingredients o — a contract. Steinberg alleges that he and others similarly situated received a brochure describ- ing the criteria that de — endant would employ in evaluating applications. He urges that 2 • What Is a Contract? 37
such constituted an invitation
or an o —
er to apply, that the — iling o — the applications constituted an o —
er to have their credentials appraised under the terms described by de — endant, and that de — endant’s voluntary reception o — the application and — ee con- stituted an acceptance, the — inal act necessary — or the creation o — a binding contract. This situation is similar to that wherein a merchant advertises goods — or sale at a
ixed price. While the advertisement itsel — is not an o —
er to contract, it constitutes an invitation to deal on the terms described in the advertisement. Although in some cases the advertisement itsel — may be an o —
er (see Le — kowitz v. Great Minneapolis Surplus Store, Inc.), usually it constitutes only an invitation to deal on the advertised terms. Only when the merchant takes the money is there an acceptance o — the o —
er to purchase. Here the description in the brochure containing the terms under which an applica- tion will be appraised constituted an invitation — or an o —
er. The tender o — the applica- tion, as well as the payment o — the — ee pursuant to the terms o — the brochure, was an o —
er to apply. Acceptance o — the application and — ee constituted acceptance o — an o —
er to apply under the criteria de — endant had established. Consideration is a basic element — or the existence o — a contract. Any act or promise which is o — bene — it to one party or disadvantage to the other is a su —
icient consid- eration to support a contract. [This is an older de — inition o — consideration that still appears in some court decisions. More modern courts will de — ine consideration as a bargained- — or exchange or mutuality o — obligation. See R2d § 71.] The application — ee was su —
icient consideration to support the agreement between the applicant and the school. De — endant contends that a — urther requisite — or contract — ormation is a meeting o —
the minds. But a subjective understanding is not requisite. It su
ices that the conduct o — the contracting parties indicates an agreement to the terms o — the alleged contract. Williston, in his work on contracts, states: “In the — ormation o — contracts it was long ago settled that secret intent was immaterial, only overt acts being considered in the determination o — such mutual assent as that branch o — the law requires. During the — irst hal — o — the nineteenth century there were many expressions which seemed to indicate the contrary. Chie — o — these was the — amiliar cliche, still reechoing in judicial dicta, that a contract requires the ‘meeting o — the minds’ o — the parties.” Here it would appear — rom the complaint that the conduct o — the parties amounted to an agreement that the application would be evaluated according to the criteria described by de — endant in its literature. De — endant urges [the case o — ] People ex rel. Tinko —
v. Northwestern University con- trols. There the plainti —
alleged that since he met the stated requirement — or admis- sion, it was the obligation o — the university to accept him. Plainti —
was — irst rejected because he was 14 years o — age. He then — iled a mandamus action [which requests a court to compel per — ormance o — a particular act; here, apparently the plainti —
was hoping the court would compel Northwestern University to admit him], and subse- quently the university denied his admission, apparently because o — the court action. 38 2 • What Is a Contract?
That decision turned on the
act that Northwestern University, a private educational institution, had reserved in its charter the right to reject any applicant — or any reason it saw — it. Here, o — course, de — endant had no such provision in its charter or in the brochure in question. But, more important, Steinberg does not seek to compel the school to admit him. The substance o — his action is that under the circumstances it was de — en- dant’s duty to appraise his application and those o — the others on the terms de — endant represented. A medical school is an institution so important to li — e in society that its conduct cannot be justi — ied by merely stating that one who does not wish to deal with it on its own terms may simply re — rain — rom dealing with it at all. As the appellate court noted in a recent case in which this de — endant was a party: A contract between a private institution and a student con — ers duties upon both parties which cannot be arbitrarily disregarded and may be judicially en — orced. Here our scope o — review is exceedingly narrow. Does the complaint set — orth — acts which could mean that de — endant contracted, under the circumstances, to appraise applicants and their applications according to the criteria it described? This is the sole inquiry on this motion to dismiss. We believe the allegations su —
ice and a —
irm the appellate court in holding count I stated a cause o — action. [Discussions regarding the tort claim o —
raud and the class action issues omitted.] The appellate court was correct in a —
irming the dismissal o — counts II [consumer
raud and deceptive practices] and IV [unjust enrichment] o — plainti —
’s complaint and in reversing the dismissal o — count I [breach o — contract] o — the complaint. It erred in a —
irming the dismissal o — count III [ — raud] and abbreviating the class represented by plainti —
. The judgment o — the appellate court is a —
irmed in part and reversed in part, and the judgment o — the circuit court o — Cook County is a —
irmed in part and reversed in part. The cause is remanded to the circuit court with directions to proceed in a manner not inconsistent with this opinion. Appellate court a —
irmed in part and reversed in part; circuit court a —
irmed in part and reversed in part; cause remanded.
Re --- lection
The Steinberg case discusses what a contract is and how it can be created. It also previews concepts that will be discussed more thoroughly throughout this course. Steinberg de --- ines a contract as “an agreement between competent parties, upon a con- sideration su ---
icient in law, to do or not to do a particular thing.” With this de — ini- tion, the court points to a contract’s most important parts, or basic ingredients: o —
er, acceptance, and consideration. 2 • What Is a Contract? 39
According to R2d § 3, an agreement is “a mani
estation o — mutual assent on the part o — two or more persons.” The Steinberg de — endant incorrectly de — ined this mani — esta- tion o — mutual assent as a “meeting o — the minds.” But as the Steinberg court points out, there does not need to be a true meeting o — the minds because the agreement is not based on a person’s secret inward intent but on their outward actions. As you will learn in our — irst several modules on contract — ormation, a student or lawyer who wishes to comprehensively analyze whether parties — ormed a valid con- tract should make the — ollowing inquiries: (1) what promise(s) did the parties make to each other; (2) was the promise which one party seeks to en — orce against the other
ramed as a de — inite o —
er to enter a contract; (3) was that o —
er accepted by the other side be — ore it was terminated; and (4) was that promise supported by a su —
icient consideration? I — a contract was — ormed, the next question is, what exactly did the parties under- take to do or not to do? A court will decide that issue by engaging in contract inter- pretation and will then inquire into whether the parties actually did those things. In other words, has the contract been breached, and, i — so, what remedies should be provided to the aggrieved party? In Steinberg, the court — ound that even though the medical school did not wish to be bound to a contract, its words and actions may nonetheless have — ormed one. The elements o — o —
er, acceptance, and consideration were present. However, the Stein- berg court le — t — or the jury the questions o — what promise(s) the school actually made to Steinberg and whether the school breached those promises. In other words, just because Steinberg and the school had a contract, this does not mean that the contract was breached.
Discussion 1. What is a meeting o --- the minds? When does a meeting o --- the minds occur? 2. Why might it be easy or di ---
icult — or a court o — law to determine whether a subjec- tive meeting o — the minds occurred?
-
Why did the Steinberg court determine that this speci
ic application constituted a contract? What does this demonstrate about the legal de — inition o — what a contract is, generally?
-
Did Chicago Medical School make any promises to its applicants? Did the appli- cants make any promises to Chicago Medical School in exchange? When answer- ing this question, make sure to cite the R2d’s de — inition o — “promise,” and use that de — inition to per — orm analysis o — whether any prospective mani — estations consti- tuted a promise. 40 2 • What Is a Contract?
Reading Pappas v. Bever. As you might already be able to see, whether a con- tract was — ormed depends on whether any promises were made. This requires a deeper understanding o — the promise itsel — . Understanding what a promise is and being able to recognize both valid and invalid contractual promises is an essential skill — or all lawyers who encounter contracts. Contracts usually take the
orm o — a mutual set o — promises to do or not to do a particular thing. But what does the law recognize as promises? The next case, Pappas, addresses the issue o — what constitutes a promise, which is a question at the heart o — contract law.
Pappas v. Bever
219 N.W.2d 720 (Iowa 1974) McCORMICK, Justice. Plainti ---
William Pappas, receiver — or Charles City College, appeals trial court’s judgment denying en — orcement o — a — undraising pledge against de — endant Sondra Bever, executor o — the estate o — Philip Bissonnette, Jr. No evidence was o —
ered bear- ing on the meaning o — the pledge instrument. The court held the instrument alone was insu —
icient to show the pledge was obligatory. We a —
irm. In relevant part the executed — orm read as — ollows: I/we intend to subscribe to the College Founder’s Fund the sum o — Five Thousand — no/100 Dollars. I intend to pay ( ) Monthly ( ) Quarterly ( ) Semi-Annually (X) Annually over 60/36 months beginning 1967. Name Philip Bissonette Address 301 — 2nd Ave. The — orm was printed except — or the blanks designating the amount o — the pledge, terms o — payment, signature and address o — the pledgor. Bissonnette paid $1,000 on the pledge in 1967 and $1,000 in 1968. The college closed in May 1968, and he made no — urther payments prior to his death May 15, 1969. The same — und-raising project and pledge — orm were involved in Pappas v. Hauser, 197 N.W.2d 607 (Iowa 1972). There the court held extrinsic evidence could be consid- ered in determining whether the parties intended the pledge to be obligatory or not. Such evidence showed the background o — the — und-raising drive, preparation o — the
orm and circumstances surrounding its execution, including statements attributed to the college’s — und-raiser to the e —
ect the pledge was only a statement o — intention and not binding. Based upon this record the court held the pledge to be nonobliga- tory. Three members o — the court concurred, specially on the ground they would 2 • What Is a Contract? 41
hold the pledge
orm as illuminated by evidence o — background and surrounding cir- cumstances were nonobligatory without resort to the — undraiser’s statements. There was no disagreement with the principle that extrinsic evidence is admissible, which throws light on the situation o — the parties, antecedent negotiations, the attending circumstances and the objects they were striving to attain. In the present case the pledge — orm stands alone, there being no evidence other than the instrument which purports to cast light on its meaning. Thus, we reach the problem not decided in the Hauser case, whether the pledge — orm standing alone is obligatory or not. Without extrinsic evidence [extrinsic evidence is evidence that comes — rom — acts and circumstances surrounding the contract and not — rom the written contract itsel — ] bearing upon the intention o — the participants, we must attempt to ascertain the meaning and legal e —
ect o — the pledge — orm by giving the language used in the instrument its common and ordinary meaning. No use — ul purpose would be served by repetition o — the authorities treating the meaning o — the word “intend” in various contexts. They are collected in Pappas v. Hauser. These authorities demonstrate that when words expressing an intention to do something in the — uture stand alone, they are not a promise and hence do not create an obligation. A mere expression o — inten- tion is not a promise. The distinction between a statement o — intention and a promise is explained in 1 Corbin on Contracts § 15 at 35 (1963):
A statement o --- intention is the mere expression o --- a state o --- mind, put in such
a --- orm as neither to invite nor to justi --- y action in reliance by another person.
A promise is also the expression o --- a state o --- mind but put in such a --- orm as to
invite reliance by another person.
The language o
the pledge — orm in this case, standing alone, shows nothing more than a statement o — intention. There is no evidence the pledge was intended to be obligatory. Even i — the language were viewed as uncertain, the conclusion is the same. In this case, we are dealing with language printed on the pledge — orm by the — und- raiser, and doubt — ul language in a written instrument is construed against the party who selected it. Plainti —
contends the — act two payments were made proves the pledge was obligatory. This is a bootstrap argument. The mere — act a person carries out in part what he said he intended to do does not convert his statement o — intention into a promise. It was plainti —
’s burden to prove the pledge was intended to be obligatory. We agree with trial court he — ailed to do so. A —
irmed. 42 2 • What Is a Contract?
Re --- lection By studying Pappas, we learn that a statement o --- intention, such as a pledge --- orm, is a “mere expression o --- a state o --- mind” and there --- ore nonobligatory. When words expressing an intention to do something in the --- uture stand alone, they are not a promise. A promise is “a mani --- estation o --- commitment to do or not to do something.” Prom- ises require mani --- estations, which are outward signs or expressions that are not pri- vately held thoughts or belie --- s. A mere expression o --- an intention is not a promise. Without the admission o --- extrinsic evidence in this case, it is impossible to deter- mine the parties’ intentions. Barring any outside evidence, by --- illing out the pledge
orm, Philip Bissonnette, Jr., only made a mere expression o — intention to donate to Charles City College. The court determined that his two prior donations did not su —
i- ciently indicate his intent to make more, especially a — ter the college closed. There — ore, the pledge was nonobligatory.
Discussion 1. What is the di ---
erence between a “promise” and a “mere statement o — intention”? How should courts distinguish between the two?
-
What legal consequences result
rom de — ining a mani — estation as a mere statement o — intention and not a promise?
-
Why did the Pappas court determine the speci
ic mani — estation in this case was not a promise but rather a mere statement o — intention? What does this teach about the general legal meaning o — the term promise? Cite and use the R2d’s de — inition o —
“promise” in conducting this analysis.
Problems Problem 2.1. Contract, Agreement, or Bargain? For each o --- the --- ollowing hypothetical situations, identi --- y whether the parties have made a promise, a contract, an agreement, a bargain, or a mere statement o --- opinion, and explain your reasoning. 1. Sarah Seller orally o ---
ers to sell Greenacre to Carlton — or $100,000, and Carl- ton orally accepts the o —
er. 2. Bob the Builder is constructing a home — or Harry Homemaker. Bob says to Harry, “I warrant that this house will never burn down.” 3. Harry Homemaker is bragging about his new house to his neighbor, Nancy. Harry says to Nancy, “This house will never burn down.” 2 • What Is a Contract? 43
4. Ernst Employer says to Wanda Worker, “I will employ you --- or a year at a sal-
ary o --- $5,000 i --- I go into business.”
5. Stephen Stargazer remarks to his --- riend Tom, “That constellation over there
is called the ‘Big Dipper.’ ” Tom replies, “Yes, that’s right.”
Problem 2.2. The Monster and the Beast The Beastie Boys, a hip-hop group, asked Zach Scaccia, a DJ known as “Z-Trip,” to create a remix o — their songs (the “Megamix”) — or — ans to download — or — ree to pro- mote the Beastie Boys’ then-upcoming album. Z-Trip was later contracted to work as a DJ — or energy-drink manu — acturer Monster Energy Co.’s (“Monster”) a — ter-party — or Monster’s annual snowboarding competition called “Ruckus in the Rockies.” Nelson Phillips, a Monster employee responsible — or planning Ruckus in the Rockies, called Z-Trip, spoke to him — or about 30 seconds, and asked i — there was any music Monster could use — or a web-edit o — the event. Z-Trip replied that there was, and Monster could download it — or — ree on his website. Later, over break — ast, the two discussed the video, and Phillips said Monster would not publish the video without Z-Trip’s approval. Phillips believed Monster had permission to use the Megamix — or Monster’s promo- tional video because it was “available — or — ree download on [Z-Trip’s] website . . . it’s there — or use. For — ree.” A — ew days later, Phillips e-mailed Z-Trip with a link to the video. Phillips explained that, once Z-Trip approved the video, Phillips would post it on Monster’s YouTube channel. Z-Trip replied with “Dope!” and asked Monster to also post a link where people could download it — or — ree. Phillips emailed Z-Trip again, telling him the video was posted, and Z-Trip again replied with “Dope!” The Beastie Boys sued Monster
or copyright in — ringement — or using the remix o — the band’s songs in Monster’s pro- motional video. Monster brought a third-party complaint (a civil procedure concept where a nonparty is brought into the case and can be held liable — or plainti —
’s claims) — or breach o — contract and — raud against Z-Trip. Monster argued that Z-Trip misrepre- sented himsel — to Monster as having the authority to license (permit the use o — ) the copyrighted material in the Megamix. Monster — urther argued that Z-Trip breached ( — ailed to per — orm) his obligations to Monster because Z-Trip promised to convey the right to use the Megamix to Monster, but Z-Trip did not have the authority to do so. Did Z-Trip promise Monster that Monster could use the Megamix — or — ree in their promotional video? See Beastie Boys v. Monster Energy Co., 983 F. Supp. 2d 338 (S.D.N.Y. 2013).
Problem 2.3. Li
elong Employment William Greene began working — or Grant Building, Inc., in 1959. Greene allegedly agreed to work at a pay rate below union scale in exchange — or a promise that Grant would employ him “ — or li — e.” 44 2 • What Is a Contract?
In 1975, Oliver Realty, Inc., took over management o
Grant Building. The presi- dent o — Oliver Realty assured all — ormer Grant employees that their existing employ- ment contracts would be honored. Greene explained the terms o — his agreement to his new supervisor. The supervisor told Greene that he would look into the matter but never got back to Greene. In 1983, Greene was — ired — rom Oliver Realty. Greene brought an action — or breach o — contract against Oliver Realty. Was a valid bargain — ormed between William Greene and Grant Building, Inc.? Was a valid bargain — ormed between William Greene and Oliver Realty, Inc.? See Greene v. Oliver Realty, Inc., 363 Pa. Super. 534 (1987), app. denied. Module I
Mutual Assent
Contractual liability is voluntary. Parties are obligated to per
orm contractual duties only when they outwardly mani — est an intention to be bound by contractual terms. This outward expression o — intent is known as mutual assent. “Assent” signi — ies the act o — expressing agreement or willingness to be bound by speci — ic terms. This outward expression can be through words, actions, or other con- duct that clearly indicates acceptance o — a bargain. Assent is judged by objective crite- ria, emphasizing what a reasonable person would interpret — rom the parties’ external behavior. “Mutual” signi — ies that both parties must express their willingness to be bound to a bargain — or either to incur legal obligations. To grasp this concept — ully, it is help — ul to preview its relationship with the concept o — “consideration,” which is detailed in the next module. Consideration ensures that en — orceable contracts are based on bargains. In legal terms, a bargain does not re — er to negotiation or haggling; rather, a bargain is an exchange in which each party receives something o — value. For example, Abe promises to wash Bob’s car, and Bob promises to pay Abe $20. For Abe, the consideration is Bob’s promise o — payment, while — or Bob, the consideration is Abe’s promise to wash the car. This mutual exchange — orms a bargain. In contrast, i — Abe promises to wash Bob’s car merely because it annoys him personally when the car is dirty, and Bob makes no reciprocal promise, this would not constitute a bargain — though it might still be en — orceable under speci — ic circumstances discussed later.
45
46 Module I • Mutual Assent
Mutual assent requires both parties to express agreement to the same bargain. In the example, Abe must express his intent to wash Bob’s car in exchange — or $20, and Bob must express his intent to pay the $20 — or the car wash. Importantly, this agree- ment is judged by their external words and actions, not by their internal, unspoken thoughts. This emphasis on outward expressions ensures the predictability and — air- ness o — contract law. Contrary to popular belie — , contract law does not require a “meeting o — the minds.” Courts assess contracts objectively, based on what the parties say and do rather than their subjective intentions. For example, i — Abe clearly states, “I will wash your car — or $20,” and Bob responds, “Deal,” their mutual assent is legally su —
icient, regardless o —
any hidden doubts or unspoken thoughts. Contracts consist o — two essential elements: mutual assent and consideration. This
undamental equation can be expressed as: Contract = Mutual Assent + Consideration Mutual assent itsel — is o — ten analyzed through three key components: o —
er, termi- nation, and acceptance. This leads to a more detailed — ormula: Contract = O —
er − Termination + Acceptance + Consideration An o —
er is a clear proposal by one party (the o —
eror) to another (the o —
eree) that mani — ests an intention to enter into a contract. To be an o —
er, it must contain the terms o — the bargain. I — material terms are missing, then it is not an o —
er but rather an invitation — or o —
ers or some other sort o — preliminary negotiations. Termination re — ers to conditions under which an o —
er can be revoked or otherwise cease to exist. While contracts are durable, o —
ers are ephemeral. To — orm a contract, the o —
eree must accept the terms o — the bargain be — ore the o —
er is terminated. Acceptance means the o —
eree’s clear and unequivocal agreement to the o —
er’s terms. There are special rules that address what happens when a purported acceptance does not strictly match all the terms o — the o —
er. Be — ore proceeding, consider why contract law — ocuses on observable actions and generally ignores states o — mind or intent. This is notably di — — erent — rom tort law, which requires intentionality — or some torts, and — rom criminal law, which requires mens rea (guilty mind) — or certain crimes. Contract law, however, asks how a reasonable person would interpret objective mani — estations. How does this di — — erent approach in the structure o — contract law evidence some di —
erence in its theoretical — oundations? Is contract law accomplishing di — — erent goals — rom tort law and criminal law? Chapter 3 Bargains
Contract
ormation generally requires parties to agree to a bargain. A bargain involves either (1) an exchange o — promises, re — erred to as a “bilateral contract,” or (2) a promise to reward the completion o — a per — ormance, known as a “unilateral contract.” Each type o — bargain re — lects di — — erent ways in which parties can establish mutual commitments, whether through promises or per — ormance. A typical bilateral contract involves two parties who promise to provide something to one another, per — orm an act — or one another, or re — rain — rom actions that the other party does not want. Crucially, each promise is given in return — or the other party’s promise, creating a mutual exchange. For example, John o —
ers to sell his Honda Civic to Henry — or $10,000, to be exchanged on Friday, and Henry agrees to purchase the car. Here, the parties have exchanged promises: John promises to deliver the car to Henry, and Henry promises to deliver the cash to John. This constitutes a bargain. It takes the — orm o — a bilateral contract because it is — ormed by an exchange o — promises. The vast majority o — contracts are bilateral bargains, where each party makes a promise as part o — a mutually agreed exchange. Bilateral contracts dominate in real- world transactions because they provide mutual assurances, allowing parties to plan their obligations with con — idence. These contracts are — ormed when parties mani — est assent to the bargain via mutual promises. In contrast, a unilateral contract is — ormed when one party promises to reward another party — or completing a speci — ic per — ormance. The contract becomes binding only upon the completion o — the requested per — ormance. For example, John promises his son a Honda Civic i — his son re — rains — rom drink- ing alcohol or using tobacco until he turns 25. Here, John’s promise to reward his son with the car is contingent upon his son’s success — ul per — ormance o — abstaining — rom these activities. This constitutes a unilateral contract because it is — ormed through the completion o — the per — ormance rather than an exchange o — promises. It is still a bargain because both parties get something they value — rom the exchange. Unilateral contracts are — ound in situations involving rewards or incentives, such as contests or prizes. Special rules pertaining to unilateral contracts, where one party promises to reward the other — or completing a per — ormance, will be discussed — urther in the next chapter on o —
ers.
47
48 3 • Bargains
Rules A. Bargain Contracts Recall the de --- inition o --- bargain: “A bargain is an agreement to exchange promises or to exchange a promise --- or a per --- ormance or to exchange per --- ormances.” R2d § 3. The typical contract requires both a bargain and consideration:
Except as stated in Subsection (2), the --- ormation o --- a contract requires a bar-
gain in which there is a mani --- estation o --- mutual assent to the exchange and a
consideration. R2d § 17(1). We will learn the details o --- the consideration doctrine later. For now, simply under- stand that consideration generally re --- ers to situations in which both parties agreed to the bargain because o --- what each expected to get --- rom the exchange. The term “con- tract,” which you read in R2d § 1, and which you should review now, generally re --- ers to R2d § 17(1) bargain contracts, which entail both a bargain and a consideration. This means that both parties must give and get something as part o --- the deal. Typically, what parties give each other in a bargain contract are promises to per-
orm in the — uture. This is also called a “bilateral contract.” In a bilateral contract, both parties are making promises to each other. The consideration doctrine requires that each party’s promise be given in exchange — or the other party’s promise. The promises are part o — a mutual exchange in which each party, ostensibly, believed they would be made better o —
. For example, building on the hypothetical above, John’s promise to sell his Honda Civic to Henry is the consideration supporting Henry’s promise to give John $10,000; and Henry’s promise to give John $10,000 is the consideration supporting John’s promise to sell Henry the car. We assume that each party is hoping to be made better o —
rom this exchange because each wants what he is promised to get more than what he promises to give. Another type o — bargain contract is the unilateral contract. This is where the o —
eree cannot accept by merely promising to per — orm in the — uture. Instead, the o —
eror makes acceptance conditional on — ull per — ormance. For example, John could say to Henry, “I — you want my car, show up at my house with the cash at noon on Friday.” A reasonable interpretation o — this statement is that John is not interested in Henry’s promise to pay; rather, he is only willing to obligate himsel — to sell the car to Henry i —
and when Henry per
orms his end o — the bargain.
B. Non-Bargain Contracts This book is principally about bargain contracts, and so, — or the most part, we will
ocus our study on bargain contracts. There are, however, exceptions to this rule. Some special cases do not require bargains. We will brie — ly discuss two types o — non- bargain contracts be — ore returning to the typical bargain contract case. 3 • Bargains 49
O ---
er
Mutual Assent
Acceptance
Contract
Consideration Bargain
Figure 3.1. Components o --- a bargain contract.
Recall that Subsection 1 o
R2d § 17 said that the — ormation o — a contract requires a bargain except as stated in Subsection 2. Now let’s look at Subsection 2. Whether or not there is a bargain a contract may be — ormed under special rules applicable to — ormal contracts or under the rules stated in §§ 82–94 [regarding contracts without consideration]. R2d § 17(2). Thus, there are two exceptions to the rule that contracts require a bargain. We discuss each in turn below. But remember, the exceptions still require there to be at least one promise, and the element o — mutual assent still generally must be present. Contractual liability is voluntary. It arises only — rom promising. Thus, while not all promises result in contractual liability, one cannot incur contractual liability without voluntarily undertaking a contractual duty by making a promise. This is true even — or non-bargain contracts.
- Formal Contracts The — irst exception to the rule that all contracts involve bargains is “ — ormal con- tracts.” Formal contracts are promises that are en — orceable, even i — they do not entail a bargained- — or consideration, because some — ormality is present. The — ive types o —
ormal contracts recognized in the R2d § 6 are: (a) contracts under seal, a historical arti — act involving the imprint o — a signet ring into wax a —
ixed to the document, which is not recognized in most modern jurisdictions; (b) recognizances, such as bail bonds; (c) negotiable instruments, such as certi — icates o — deposit, promissory notes, bearer bonds, certi — icates o — shares o — stock, and other investment securities; (d) negotiable documents, such as warehouse receipts, bills o — lading, and other documents o — title; and (e) letters o — credit, which is a promise to honor demands — or payment. 50 3 • Bargains
See generally R2d § 6.
Formal contracts, such as promises made under seal, are made en --- orceable through special processes involving special rules. We will not be studying the special rules --- or en --- orcing --- ormal contracts because those rules are beyond the scope o --- a --- irst-year contract course. They are covered in subject-matter-speci --- ic courses dealing with those particular kinds o --- agreements. Instead, we will be learning the rules that apply to the vast majority o --- contracts. You should simply be aware that there are such things as --- ormal contracts, such as letters o --- credit, which may not require consideration due to peculiarities in the historic common law o --- merchants or state statutes.
2. Contracts without Consideration The second exception is promises that are not supported by bargained- --- or consid- eration but are made en --- orceable in order to prevent injustice, according to the rules stated in R2d §§ 82–94. What are these rules?
R2d §§ 82–94 comprise the section o --- the R2d titled “Contracts without Consid- eration.” We have not yet learned the consideration doctrine, which is the subject o ---
its own entire module. But the short version is that consideration is the price paid
or a promise. R2d § 71. For example, i — you buy a cup o — co —
ee — or $3, the consideration you give to the co —
ee vendor is the price you pay — or the co —
ee ($3). Your payment o —
this price, or even simply your promise to pay this price, is the consideration support- ing the vendor’s promise to give you the co —
ee. R2d §§ 82–94, in contrast, re — er to contracts that do not entail this type o — bargained-
or exchange. As you will learn, the main reason a court would en — orce a promise in the absence o — a bargain is that justice requires the court to do so. In these cases, courts use their “equitable” powers based on principles o —
airness. There are some promises which, while not binding as bargain contracts, should be kept. For example, in the — amous case o — Kirksey v. Kirksey, 8 Ala. 131 (1845), a brother invited his wid- owed sister-in-law to move onto his land. She moved without giving him anything in exchange — or his generous gi — t. This was not a bargain because there was no exchange and the widow gave nothing in consideration — or her brother-in-law’s promise. The brother-in-law then attempted to evict the widow, who would thus become homeless and destitute, along with her children. In that case, the court en — orced the brother- in-law’s promise as a matter o — equity, or — airness, even though the legal elements o — a bargain contract were not met. We will deal with the en — orcement o — promises that do not include bargains when we learn the consideration doctrine. That module discusses two alternatives to consideration: promissory restitution, also known as “a promise made — or a bene — it previously received,” and promissory estoppel, which is sometimes called a “prom- ise reasonably including action or — orbearance.” With these exceptions set aside, we shall now proceed with our study o — the typical — ormation o — contracts through bargains. 3 • Bargains 51
C. Mani
estation o — Mutual Assent Contracts require parties to mutually assent to a bargain. It is neither necessary nor su —
icient — or two parties to privately intend to be bound by a set o — promises. Both parties must publicly mani — est their intention to — orm a contract. In other words, mutual assent, in contract law, requires an outward mani — estation o — assent — rom all parties. A mani — estation is a clear sign or indication that a particular situation or
eeling exists, or the act o — appearing or becoming clear. To express mutual assent, a party must make a promise or engage in conduct that clearly indicates their assent to enter a bargain. Mani — estation o — mutual assent to an exchange requires that each party either make a promise or begin or render a per — ormance. R2d § 18. Contract law recognizes that actions can speak louder than words. Mutual assent can be achieved even i — the parties do not exchange a single word. For instance, think o — the classic handshake as a way to seal the deal. The mani — estation o — assent may be made wholly or partly by written or spo- ken words or by other acts or by — ailure to act. R2d § 19(1). What happens when someone — alsely mani — ests assent to a contract? For example, what i — a seller — alsely states their willingness to sell you an expensive watch, and then, a — ter you agree, the seller takes the o —
er back? What i — a partner at a law — irm makes you an o —
er — or a summer job, and then, a — ter you agree and eagerly tell your
riends, the partner reveals it was only a joke? To put this another way, what happens when a party’s objective mani — estations do not match their subjective — eelings and intentions? The general rule is that courts apply an objective theory o — contract interpretation. “Objective” re — ers to externally veri — iable phenomena, whereas “subjective” re — ers to an individual’s secret thoughts or hidden — eelings. The objective theory o — contract interpretation means that mutual assent is evaluated — rom the perspective o — a “rea- sonable person,” i.e., it is based on what a reasonable person would understand the parties’ words or conduct to mean. Thus, even though contracts are sometimes re — erred to as a “meeting o — the minds,” modern courts generally do not actually require parties to subjectively agree in their minds. Courts only require that the parties mani — est assent, giving the outward sem- blance o — agreement. The term “meeting o — the minds,” because it implies a subjective agreement as well as an objective one, is not an accurate way to describe the require- ment o — mutual assent. A — ake smile has the same impact as a real one, so long as the observer cannot reasonably tell the di —
erence. Likewise, a — ake o —
er to enter a contract has the same impact as a real one, so long as the person to whom the o —
er is made cannot rea- sonably tell the di —
erence. The R2d makes this rule clear in Section 18, comment c, addressing contracts made in sham, or jest: 52 3 • Bargains
Where all the parties to what would otherwise be a bargain mani --- est an
intention that the transaction is not to be taken seriously, there is no . . .
mani --- estation o --- assent to the exchange . . . [However,] [i] --- one party is
deceived and has no reason to know o --- the joke the law takes the joker at his
word. R2d § 18 cmt. c. Contracts are a serious matter, and one should not enter contracts lightly. In the case o --- Lucy v. Zehmer, 196 Va. 493 (1954), one party claimed that the contract he wrote and the negotiations leading up to its --- ormation were just a joke. But joking is no de --- ense. I --- one o --- the parties takes the joke seriously or i --- one party is deceived and has no reason to know o --- the joke, the law takes the joker at his word. A joking contract is still a contract unless both parties are in on the joke or should at least understand that a joke is a --- oot.
In sum, while a meeting o --- the minds can be a use --- ul way to think o --- mutual assent, technically speaking, this is neither necessary nor su ---
icient — or contract — ormation. It is not enough that two parties subjectively intend to be bound by a set o — promises. Both parties must outwardly mani — est their intentions. Privately held belie — s do not impact contract — ormation i — they remain unknown to the other party.
D. Misunderstanding: Failure o
Mutual Assent The objective approach to mutual assent tends to make it easier to prove con- tract liability than a subjective approach because there is no need to prove intent to contract. Again, contracting does not require a meeting o — minds. Contracts do not require parties to mean the same thing (subjectively) but to say the same thing (objec- tively). However, sometimes mutual assent is objectively absent. A major example o — a — ailure o — mutual assent is where the parties have a — unda- mental misunderstanding about the subject matter, or the terms, o — the contract. A misunderstanding occurs where each party has a true belie — about what the contract entails, but that belie — is not shared by the other party, and neither party has any rea- son to suspect the other party’s meaning. Thus, there is no objective way — or a court to determine what they both meant. The most — amous example o — a misunderstanding in contract law is Ra —
les v. Wichelhaus (Peerless case), EWHC Exch J19 (1864), in which two parties agreed to ship cotton on a ship named Peerless, but, ironically, it turned out that there were two such ships, one departing in October and one in December. The buyer thought the contract re — erred to the Peerless departing in October, but the seller thought the contract re — erred to the Peerless departing in December. The court had no reasonable means o — determining which o — the two ships the contract re — erred to and neither party had any reason to know the other’s meaning, and so there was no mutual assent, and thus no contract. Do not con — use a misunderstanding with a mistake. As you will learn in later chap- ters on de — enses to contract — ormation, a mistake is a belie — that is not in accord with 3 • Bargains 53
the
acts, meaning it is an erroneous perception by one or both parties about some — act or state o — the world relating to the contract. A mistake, whether mutual or unilateral, may serve as a de — ense, and allow the aggrieved party to avoid or rescind the contract, unwinding it as i — it never occurred. But a mistake is di — — erent — rom a — ailure o — mutual assent due to misunderstanding. For example, a mutual mistake would exist in the Ra —
les case i — the buyer and seller o — cotton agreed that the seller would deliver cotton on a single ship named Peerless, but both erroneously believed this ship was departing in October, when in — act it was departing in December. In this counter- — actual case, both parties would have made a (mutual) mistake. Or, i — the buyer believed that the sea voyage would take no more than two months when it would in — act require at least three, and i — the seller neither knew nor cared how long it would take, then this would be a unilateral mistake. Again, in this counter-
actual, the buyer had a belie — (the voyage takes two months or less) that is not in accord with the — acts (the voyage requires at least three months). This is not a mis- understanding because there is a singular objectively veri — iable truth in this instance, and one party was simply wrong. A misunderstanding, in contrast, occurs where the parties have di — — erent but cor- rect belie — s about a material — act relating to the contract. What actually occurred in the Ra —
les case was a misunderstanding, not a mistake. Neither party was mistaken about the state o — the world. Both parties correctly understood that cotton would be shipped on a ship named Peerless, and they correctly understood when each Peerless departed. They simply disagreed over which ship named Peerless the contract re — erred to. They were, so to speak, like ships in the night. The R2d clari — ies that there is no mutual assent, and there — ore no contract, where the parties have a total misunderstanding unless one o — the parties knows or has rea- son to know o — the other party’s belie — . There is no mani — estation o — mutual assent to an exchange i — the parties attach materially di — — erent meanings to their mani — estations and . . . nei- ther party knows or has reason to know the meaning attached by the other[.] R2d § 20(1)(a).
In other words, there is mutual assent, despite an actual misunderstanding, i
one party knows or has reason to know the meaning attached by the other. Once again, we see the objective view o — contracts driving a reasonable interpretation o — parties’ understanding. The contract is — ormed based on the meaning o — the innocent party. For instance, i — the buyer in Ra —
les knew that the seller meant the Peerless departing in December, and the seller had no reason to know that the buyer meant the Peerless departing in October, then the parties would have had a contract based on the later- departing Peerless. When does a party have reason to know the other party’s meaning? According to R2d § 19 cmt. b, “A person has reason to know a — act . . . i — he has in — ormation — rom 54 3 • Bargains
which a person o
ordinary intelligence would in — er that the — act in question does or will exist.” It can be di —
icult or impossible — or a judge to determine that a party has this type o — inside knowledge. Thus, courts are — ar more likely to attempt to use contract interpretation tools to — ind an objectively correct meaning or a subjectively shared meaning, rather than announce a total — ailure o — mutual assent. We will learn how to conduct contract interpretation and resolve ambiguities in contract language in Chapter 14.
E. Re
lections on Bargains The uni — ying principle o — contract law is voluntary agreement. Parties choose whether or not to make promises. Then, contract law may require them to keep those promises. Contract law will not bind parties to promises they did not make. At the same time, contract law will bind parties to promises they appeared to make, based on an objective assessment o — their words or conduct. Be — ore you jump to the conclusion that this is un — air, recognize that other areas o —
common law — such as property, torts, and restitution — and many
orms o — statutory law will hold people responsible — or non-promissory actions. For example, a land- owner who recklessly disregards a known hazard on his property may be liable — or injuries to visitors under the law o — property. A celebrity who pro — its by promoting a baseless investment opportunity may be liable under the securities law. Contract law does not operate in a vacuum, although law school may initially give students that impression. Thus, contract law — ocuses on parties’ willingness to enter into a transaction. In general, contract law requires both parties to express this willingness under speci — ic conditions. The remainder o — this module covers those conditions, which are analyti- cally separated into three phases: o —
er, termination o — the o —
er, and acceptance o — the o —
er.
Cases
Reading Lucy v. Zehmer. The Lucy case has become a law school --- avorite due to
its color --- ul characters and vivid details, which also make it easy to remember.
But while the --- acts are --- un, it’s equally important to extract the holdings and
reasoning, which tell us how contract law will be interpreted more generally.
The central lesson in this case comes --- rom the --- act that one party claims
to have been “just blu ---
ing” when he bargained and agreed to sell his — arm. In technical terms, the seller had a subjective and privately held belie — that the bargaining was just a joke. Un — ortunately — or the seller, however, the joke was 3 • Bargains 55
not obvious to the buyer or to a third-party observer. Thus, the seller was held to his blu —
. As you read this case, think about why contract law — ocuses on objective and outward mani — estations that signi — y assent to be bound by contracts instead o —
ocusing on or including what parties privately thought or secretly believed at the time o — contract — ormation. What might be the reasoning — or the require- ment o — an objective mani — estation o — intent to be bound by contractual terms? How might commerce and the economy — unction di —
erently i — the law en — orced private opinions and secret belie — s instead o —
ocusing on what parties objec- tively say and do?
Lucy v. Zehmer
196 Va. 493 (1954) BUCHANAN, J., delivered the opinion o --- the court.
This suit was instituted by W.O. Lucy and J.C. Lucy, complainants, against A.H. Zehmer and Ida S. Zehmer, his wi --- e, de --- endants, to have speci --- ic per --- ormance o ---
a contract by which it was alleged the Zehmers had sold to W.O. Lucy a tract o
land owned by A.H. Zehmer in Dinwiddie County containing 471.6 acres, more or less, known as the Ferguson — arm, — or $50,000. J.C. Lucy, the other complainant, is a brother o — W.O. Lucy, to whom W.O. Lucy trans — erred a hal — interest in his alleged purchase. The instrument sought to be en — orced was written by A.H. Zehmer on Decem- ber 20, 1952, in these words: “We hereby agree to sell to W.O. Lucy the Ferguson Farm complete — or $50,000.00, title satis — actory to buyer,” and signed by the de — endants, A.H. Zehmer and Ida S. Zehmer. The answer o — A.H. Zehmer admitted that at the time mentioned W.O. Lucy o —
ered him $50,000 cash — or the — arm, but that he, Zehmer, considered that the o —
er was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wi — e to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to o —
er Zehmer $5 to bind the bargain, which Zehmer re — used to accept, and realizing — or the — irst time that Lucy was serious, Zehmer assured him that he had no intention o — selling the — arm and that the whole matter was a joke. Lucy le — t the premises insisting that he had purchased the — arm. Depositions were taken and the decree appealed — rom was entered holding that the complainants had — ailed to establish their right to speci — ic per — ormance and dismiss- ing their bill. The assignment o — error is to this action o — the court. W.O. Lucy, a lumberman and — armer, thus testi — ied in substance: He had known Zehmer — or — i — teen or twenty years and had been — amiliar with the Ferguson — arm — or 56 3 • Bargains
ten years. Seven or eight years ago he had o
ered Zehmer $20,000 — or the — arm which Zehmer had accepted, but the agreement was verbal and Zehmer backed out. On the night o — December 20, 1952, around eight o’clock, he took an employee to McKenney, where Zehmer lived and operated a restaurant, — illing station and motor court. While there he decided to see Zehmer and again try to buy the Ferguson — arm. He entered the restaurant and talked to Mrs. Zehmer until Zehmer came in. He asked Zehmer i — he had sold the Ferguson — arm. Zehmer replied that he had not. Lucy said, “I bet you wouldn’t take $50,000.00 — or that place.” Zehmer replied, “Yes, I would too; you wouldn’t give — i — ty.” Lucy said he would and told Zehmer to write up an agreement to that e —
ect. Zehmer took a restaurant check and wrote on the back o — it, “I do hereby agree to sell to W.O. Lucy the Ferguson Farm — or $50,000 complete.” Lucy told him he had better change it to “We” because Mrs. Zehmer would have to sign it too. Zehmer then tore up what he had written, wrote the agreement quoted above and asked Mrs. Zehmer, who was at the other end o — the counter ten or twelve — eet away, to sign it. Mrs. Zehmer said she would — or $50,000 and signed it. Zehmer brought it back and gave it to Lucy, who o —
ered him $5 which Zehmer re — used, saying, “You don’t need to give me any money, you got the agreement there signed by both o — us.” The discussion leading to the signing o — the agreement, said Lucy, lasted thirty or
orty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision — or having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the — arm was three hei — ers. Lucy took a partly — illed bottle o — whiskey into the restaurant — or the purpose o —
giving Zehmer a drink i
he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he — elt the drinks he took, he was not intoxicated, and — rom the way Zehmer handled the transaction he did not think he was either. The next day Lucy telephoned to J.C. Lucy and arranged with the latter to take a hal — interest in the purchase and pay hal — o — the price. On Monday he engaged an attorney to examine the title. The attorney reported — avorably, and Lucy wrote Zehmer stating that the title was satis — actory, that he was ready to pay the purchase price in cash and asked when Zehmer would be ready to close the deal. Zehmer replied by mailed letter, asserting that he had never agreed or intended to sell. Mr. and Mrs. Zehmer were called by the complainants as adverse witnesses. Zehmer testi — ied in substance as — ollows: He bought this — arm more than ten years ago
or $11,000. He had had twenty- — ive o —
ers, to buy it, including several — rom Lucy, who had never o —
ered any speci — ic sum o — money. He had given them all the same answer, that he was not interested in selling it. On the night be — ore Christmas, everybody and his brother came by to have a drink. He took a good many drinks during the a — ternoon and had a pint o — his own. When he entered the restaurant around eight-thirty Lucy was there and he could see that he was “pretty high.” He said to Lucy, “Boy, you got some good liquor, drinking, ain’t you?” Lucy then o —
ered him a drink. “I was already 3 • Bargains 57
high as a Georgia pine and didn’t have any better sense than to pour another great big slug out and gulp it down, and he took one too.” A — ter they had talked a while Lucy asked whether he still had the Ferguson — arm. He replied that he had not sold it and Lucy said, “I bet you wouldn’t take $50,000.00
or it.” Zehmer asked him i — he would give $50,000 and Lucy said yes. Zehmer replied, “You haven’t got $50,000 in cash.” Lucy said he did and Zehmer replied that he did not believe it. They argued “pro and con — or a long time,” mainly about “whether he had $50,000 in cash that he could put up right then and buy that — arm.” Finally, said Zehmer, Lucy told him i — he didn’t believe he had $50,000, “you sign that piece o — paper here and say you will take $50,000.00 — or the — arm.” He, Zehmer, “just grabbed the back o —
o — a guest check there” and wrote on the back o — it. At that point in his testimony Zehmer asked to see what he had written to “see i — I recognize my own handwriting.” He examined the paper and exclaimed, “Great balls o —
ire, I got ‘Firgerson’ — or Ferguson. I have got satis — actory spelled wrong. I don’t recognize that writing i — I would see it, wouldn’t know it was mine.” A — ter Zehmer had, as he described it, “scribbled this thing o —
,” Lucy said, “Get your wi — e to sign it.” Zehmer walked over to where she was and she at — irst re — used to sign but did so a — ter he told her that he “was just needling him [Lucy], and didn’t mean a thing in the world, that I was not selling the — arm.” Zehmer then “took it back over there . . . and I was still looking at the dern thing. I had the drink right there by my hand, and I reached over to get a drink, and he said, ‘Let me see it.’ He reached and picked it up, and when I looked back again, he had it in his pocket and he dropped a
ive-dollar bill over there, and he said, ‘Here is — ive dollars payment on it.’ I said, ‘Hell no, that is beer and liquor talking. I am not going to sell you the — arm. I have told you that too many times be — ore.’ ” Mrs. Zehmer testi — ied that when Lucy came into the restaurant he looked as i — he had had a drink. When Zehmer came in he took a drink out o — a bottle that Lucy handed him. She went back to help the waitress who was getting things ready — or next day. Lucy and Zehmer were talking but she did not pay too much attention to what they were saying. She heard Lucy ask Zehmer i — he had sold the Ferguson
arm, and Zehmer replied that he had not and did not want to sell it. Lucy said, “I bet you wouldn’t take $50,000 cash — or that — arm,” and Zehmer replied, “You haven’t got $50,000 cash.” Lucy said, “I can get it.” Zehmer said he might — orm a company and get it, “but you haven’t got $50,000.00 cash to pay me tonight.” Lucy asked him i — he would put it in writing that he would sell him this — arm. Zehmer then wrote on the back o — a pad, “I agree to sell the Ferguson Place to W.O. Lucy — or $50,000.00 cash.” Lucy said, “All right, get your wi — e to sign it.” Zehmer came back to where she was standing and said, “You want to put your name to this?” She said “No,” but he said in an undertone, “It is nothing but a joke,” and she signed it. She said that only one paper was written, and it said: “I hereby agree to sell,” but the “I” had been changed to “We.” However, she said she read what she signed and was then asked, “When you read ‘We hereby agree to sell to W.O. Lucy,’ what did you 58 3 • Bargains
interpret that to mean, that particular phrase?” She said she thought that was a cash sale that night; but she also said that when she read that part about “title satis — actory to buyer” she understood that i — the title was good Lucy would pay $50,000 but i — the title was bad, he would have a right to reject it, and that that was her understanding at the time she signed her name. On examination by her own counsel, she said that her husband laid this piece o —
paper down a
ter it was signed; that Lucy said to let him see it, took it, — olded it and put it in his wallet, then said to Zehmer, “Let me give you $5.00,” but Zehmer said, “No, this is liquor talking. I don’t want to sell the — arm, I have told you that I want my son to have it. This is all a joke.” Lucy then said at least twice, “Zehmer, you have sold your
arm,” wheeled around and started — or the door. He paused at the door and said, “I will bring you $50,000.00 tomorrow. No, tomorrow is Sunday. I will bring it to you Mon- day.” She said you could tell that he was drinking, and she said to her husband, “You should have taken him home,” but he said, “Well, I am just about as bad o —
as he is.” The waitress re — erred to by Mrs. Zehmer testi — ied that when Lucy — irst came in “he was mouthy.” When Zehmer came in they were laughing and joking, and she thought they took a drink or two. She was sweeping and cleaning up — or next day. She said she heard Lucy tell Zehmer, “I will give you so much — or the — arm,” and Zehmer said, “You haven’t got that much.” Lucy answered, “Oh, yes, I will give you that much.” Then “they jotted down something on paper . . . and Mr. Lucy reached over and took it, said let me see it.” He looked at it, put it in his pocket and in about a minute he le — t. She was asked whether she saw Lucy o —
er Zehmer any money and replied, “He had — ive dollars laying up there, they didn’t take it.” She said Zehmer told Lucy he didn’t want his money “because he didn’t have enough money to pay — or his property and wasn’t going to sell his — arm.” Both appeared to be drinking right much, she said. She [the waitress] repeated on cross-examination that she was busy and paying no attention to what was going on. She was some distance away and did not see either o —
them sign the paper. She was asked whether she saw Zehmer put the agreement down on the table in — ront o — Lucy, and her answer was this: “Time he got through writing whatever it was on the paper, Mr. Lucy reached over and said, ‘Let’s see it.’ He took it and put it in his pocket,” be — ore showing it to Mrs. Zehmer. Her version was that Lucy kept raising his o —
er until it got to $50,000. The de — endants insist that the evidence was ample to support their contention that the writing sought to be en — orced was prepared as a blu —
or dare to — orce Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties. It is an unusual, i — not bizarre, de — ense. When made to the writing admittedly pre- pared by one o — the de — endants and signed by both, clear evidence is required to sustain it. In his testimony Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch o — two doggoned drunks blu —
ing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testi — y in 3 • Bargains 59
detail as to what was said and what was done. It is contradicted by other evidence as to the condition o — both parties and rendered o — no weight by the testimony o — his wi — e that when Lucy le — t the restaurant, she suggested that Zehmer drive him home. The record is convincing that Zehmer was not intoxicated to the extent o — being unable to comprehend the nature and consequences o — the instrument he executed, and hence that instrument is not to be invalidated on that ground. It was in — act conceded by de — endants’ counsel in oral argument that under the evidence Zehmer was not too drunk to make a valid contract. The evidence is convincing also that Zehmer wrote two agreements, the — irst one beginning “I hereby agree to sell.” Zehmer — irst said he could not remember about that, then that “I don’t think I wrote but one out.” Mrs. Zehmer said that what he wrote was “I hereby agree,” but that the “I” was changed to “We” a — ter that night. The agreement that was written and signed is in the record and indicates no such change. Neither are the mistakes in spelling that Zehmer sought to point out readily apparent. The appearance o — the contract, the — act that it was under discussion — or — orty min- utes or more be — ore it was signed; Lucy’s objection to the — irst dra — t because it was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion o — what was to be included in the sale, the provision — or the examination o — the title, the completeness o —
the instrument that was executed, the taking possession o
it by Lucy with no request or suggestion by either o — the de — endants that he give it back, are — acts which — urnish persuasive evidence that the execution o — the contract was a serious business transac- tion rather than a casual, jesting matter as de — endants now contend. On Sunday, the day a — ter the instrument was signed on Saturday night, there was a social gathering in a home in the town o — McKenney at which there were general comments that the sale had been made. Mrs. Zehmer testi — ied that on that occasion as she passed by a group o — people, including Lucy, who were talking about the trans- action, $50,000 was mentioned, whereupon she stepped up and said, “Well, with the high-price whiskey you were drinking last night you should have paid more. That was cheap.” Lucy testi — ied that at that time Zehmer told him that he did not want to “stick” him or hold him to the agreement because he, Lucy, was too tight and didn’t know what he was doing, to which Lucy replied that he was not too tight; that he had been stuck be — ore and was going through with it. Zehmer’s version was that he said to Lucy: “I am not trying to claim it wasn’t a deal on account o — the — act the price was too low. I — I had wanted to sell $50,000.00 would be a good price, in — act I think you would get stuck at $50,000.00.” A disinterested witness testi — ied that what Zehmer said to Lucy was that “he was going to let him up o —
the deal, because he thought he was too tight, didn’t know what he was doing. Lucy said something to the e —
ect that ‘I have been stuck be — ore and I will go through with it.’ ” I — it be assumed, contrary to what we think the evidence shows, that Zehmer was jesting about selling his — arm to Lucy and that the transaction was intended by him to be a joke, nevertheless the evidence shows that Lucy did not so understand it but 60 3 • Bargains
considered it to be a serious business transaction and the contract to be binding on the Zehmers as well as on himsel — . The very next day he arranged with his brother to put up hal — the money and take a hal — interest in the land. The day a — ter that he employed an attorney to examine the title. The next night, Tuesday, he was back at Zehmer’s place and there Zehmer told him — or the — irst time, Lucy said, that he wasn’t going to sell, and he told Zehmer, “You know you sold that place — air and square.” A — ter receiv- ing the report — rom his attorney that the title was good, he wrote to Zehmer that he was ready to close the deal. Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and a good
aith sale and purchase o — the — arm. In the — ield o — contracts, as generally elsewhere,
We must look to the outward expression o --- a person as mani --- esting his inten-
tion rather than to his secret and unexpressed intention. The law imputes to
a person an intention corresponding to the reasonable meaning o --- his words
and acts.
At no time prior to the execution o --- the contract had Zehmer indicated to Lucy by word or act that he was not in earnest about selling the --- arm. They had argued about it and discussed its terms, as Zehmer admitted, --- or a long time. Lucy testi --- ied that i ---
there was any jesting it was about paying $50,000 that night. The contract and the evidence show that he was not expected to pay the money that night. Zehmer said that a — ter the writing was signed, he laid it down on the counter in — ront o — Lucy. Lucy said Zehmer handed it to him. In any event there had been what appeared to be a good — aith o —
er and a good — aith acceptance, — ollowed by the execution and apparent delivery o — a written contract. Both said that Lucy put the writing in his pocket and then o —
ered Zehmer $5 to seal the bargain. Not until then, even under the de — endants’ evidence, was anything said or done to indicate that the matter was a joke. Both o — the Zehmers testi — ied that when Zehmer asked his wi — e to sign he whispered that it was a joke so Lucy wouldn’t hear and that it was not intended that he should hear. The mental assent o — the parties is not requisite — or the — ormation o — a contract. I —
the words or other acts o
one o — the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his mani — estations is known to the other party.
The law, there --- ore, judges o --- an agreement between two persons exclusively
rom those expressions o — their intentions which are communicated between them.
An agreement or mutual assent is o
course essential to a valid contract but the law imputes to a person an intention corresponding to the reasonable meaning o — his words and acts. I — his words and acts, judged by a reasonable standard, mani — est an intention to agree, it is immaterial what may be the real but unexpressed state o — his mind. 3 • Bargains 61
So, a person cannot set up that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he intended a real agreement. Whether the writing signed by the de — endants and now sought to be en — orced by the complainants was the result o — a serious o —
er by Lucy and a serious acceptance by the de — endants or was a serious o —
er by Lucy and an acceptance in secret jest by the de — endants, in either event it constituted a binding contract o — sale between the parties. De — endants contend — urther, however, that even though a contract was made, equity should decline to en — orce it under the circumstances. These circumstances have been set — orth in detail above. They disclose some drinking by the two parties but not to an extent that they were unable to understand — ully what they were doing. There was no
raud, no misrepresentation, no sharp practice and no dealing between unequal par- ties. The — arm had been bought — or $11,000 and was assessed — or taxation at $6,300. The purchase price was $50,000. Zehmer admitted that it was a good price. There is in — act present in this case none o — the grounds usually urged against speci — ic per — ormance. Speci — ic per — ormance, it is true, is not a matter o — absolute or arbitrary right, but is addressed to the reasonable and sound discretion o — the court. But it is likewise true that the discretion which may be exercised is not an arbitrary or capricious one, but one which is controlled by the established doctrines and settled principles o — equity; and, generally, where a contract is in its nature and circumstances unobjectionable, it is as much a matter o — course — or courts o — equity to decree a speci — ic per — ormance o —
it as it is
or a court o — law to give damages — or a breach o — it. The complainants are entitled to have speci — ic per — ormance o — the contracts sued on. The decree appealed — rom is there — ore reversed and the cause is remanded — or the entry o — a proper decree requiring the de — endants to per — orm the contract in accor- dance with the prayer o — the bill. Reversed and remanded.
Re --- lection
Lucy v. Zehmer demonstrates that courts determine the existence o --- an agreement between parties by looking at their outward mani --- estations. For a contract to exist, there needs to be an agreement between the parties. The law judges that agreement based on the reasonable meaning o --- parties’ outward conduct (objective mani --- esta- tions), and not their secret inward intent (subjective belie --- s).
Thus, the court will not look at whether Zehmer was secretly joking but rather at his outward mani --- estations and whether they warranted a reasonable person in believing that Zehmer intended a real agreement. I --- you were standing behind Lucy at the restaurant, as an impartial third party, would you think that Zehmer’s conduct and words justi --- ied Lucy’s thinking that there was an agreement to sell the --- arm? The moral o --- Lucy is that contracts are not joking matters, and courts will bind parties at their word. It would be --- ar too easy to avoid deals i --- a party could simply
62 3 • Bargains
claim it was merely joking. How would a court ever prove otherwise? And i
contracts can be so easily avoided, how would people be able to rely on them such that com- merce could proceed between strangers? The rule must be that contractual intent is measured objectively, as it was in Lucy, i — contracts are to have much e —
ect at all.
Discussion 1. In Lucy, does the court inquire whether the parties subjectively and secretly intended to contract? Why or why not? 2. Think o --- any situation where a joke should not be construed as a contract. Can you distinguish that situation --- rom the --- acts o --- Lucy? 3. Contracts are o --- ten re --- erred to as a meeting o --- the minds. Did the parties have a meeting o --- the minds in this case? I --- not, what does that signi --- y about the trope that contracts are a meeting o --- the minds?
Reading Ra ---
les v. Wichelhaus. A misunderstanding is where parties have di —
erent, though correct, belie — s about some material — act related to the contract and thus — ail to reach mutual assent to the terms o — the deal. The next case is both very — amous and notoriously cryptic. The Peerless case is about a misunderstanding so — undamental that it causes a — ailure o — mutual assent. The essence o — the — acts are as — ollows. The buyer, Wichelhaus, agreed to purchase 125 bales o — Surat cotton — rom Ra —
les, a merchant in Bombay, India. Ra —
les agreed to deliver the cotton to Liverpool, England via a ship named Peerless. Contracts in those days o — ten re — erred to a speci — ic ship in order to set the agreed-upon time — or delivery. It was commonly understood that a speci — ic ship would sail at a speci — ic time. The time o — delivery can matter a great deal in certain business arrange- ments. But, in this case, the parties had a misunderstanding that went to the heart o — the contract. Unbeknownst to the parties, there was not just one ship named Peerless. Rather, there were two ships with that same name. One o — the ships Peerless was to set sail in October and the other Peerless was to sail in December. The seller (Ra —
les) apparently knew only o — the December Peerless, while the buyer (Wichelhaus) had the October Peerless in mind. 3 • Bargains 63
This is a classic example o --- a total misunderstanding, where both parties were each correct about their own version o --- the --- acts, but they did not share a
common understanding.
The --- amous Peerless case is appended below so that students can puzzle over it --- or themselves. But do not be dismayed i --- you --- ind it impenetrable, as com- mentators no less prestigious than Oliver Wendall Holmes, Samuel Williston, Arthur Corbin, and Grant Gilmore cannot seem to agree on its meaning.
Ra ---
les v. Wichelhaus 2 EWHC Exch J19 (1864) (Peerless Case) DECLARATION. For that it was agreed between the plainti —
and the de — endants, to wit, at Liverpool, that the plainti —
should sell to the de — endants, and the de — endants buy o — the plainti —
, certain goods, to wit, 125 bales o — Surat cotton, guaranteed middling — air merchant’s Dhollorah, to arrive ex “Peerless” — rom Bombay; and that the cotton should be taken
rom the quay, and that the de — endants would pay the plainti —
or the same at a certain rate, to wit, at the rate o — 17-d. per pound, within a certain time then agreed upon a — ter the arrival o — the said goods in England. Averments: that the said goods did arrive by the said ship — rom Bombay in England to wit, at Liverpool, and the plainti —
was then and there ready, and willing and o —
ered to deliver the said goods to the de — endants, &c. Breach: that the de — endants re — used to accept the said goods or pay the plainti —
or them. Plea. — That the said ship mentioned in the said agreement was meant and intended by the de — endants to be the ship called the “Peerless,” which sailed — rom Bombay, to wit, in October; and that the plainti —
was not ready and willing and did not o —
er to deliver to the de — endants any bales o — cotton which arrived by the last mentioned ship, but instead thereo — was only ready and willing and o —
ered to deliver to the de — endants 125 bales o — Surat cotton which arrived by another and di — — erent ship, which was also called the “Peerless,” and which sailed — rom Bombay, to wit, in December. [Procedural posture:] Demurrer, and joinder therein. [Opinion by Judge] MILWARD, in support o — the demurrer. The contract was 1864 — or the sale o — a number o — bales o — cotton o — a particular RAFFLES description, which the plainti —
was ready to deliver. It is immaterial by what ship the cotton was to arrive, so that it was a ship called the “Peerless.” The words “to arrive ex ‘Peerless,’ ” only mean that i — the vessel is lost on the voyage, the contract is to be at an end. [Pollock, C.B. — It would be a question — or the jury whether both par- ties meant the same ship called the “Peerless.”] That would be so i — the contract was — or the sale o — a ship called the “Peerless;” but it is — or the sale o — cotton on board a ship o —
64 3 • Bargains
that name. [Pollock, C.B. — The de
endant only bought that cotton which was to arrive by a particular ship. It may as well be said, that i — there is a contract — or the purchase o — certain goods in warehouse A, that is satis — ied by the delivery o — goods o — the same description in warehouse B.] In that case there would be goods in both warehouses; here it does not appear that the plainti —
had any goods on board the other “Peerless.” [Martin, B. — It is imposing on the de — endant a contract di — — erent — rom that which he entered into. Pollock, C.B. — It is like a contract — or the purchase o — wine coming — rom a particular estate in France or Spain, where there are two estates o — that name.] The de — endant has no right to contradict by parol evidence a written contract good upon the — ace o — it. He does not impute misrepresentation or — raud, but only says that he
ancied the ship was a di — — erent one. Intention is o — no avail, unless stated at the time o — the contract. [Pollock, C.B. — One vessel sailed in October and the other in Decem- ber.] The time o — sailing is no part o — the contract. Mellish (Cohen with him), in support o — the plea. — There is nothing on the — ace o —
the contract to shew that any particular ship called the “Peerless” was meant; but the moment it appears that two ships called the “Peerless” were about to sail — rom Bombay there is a latent ambiguity, and parol evidence may be given — or the purpose shewing that the de — endant meant one “Peerless” and the plainti —
another. That being so, there was no consensus ad idem, and there — ore no binding contract. (He was then stopped by the Court.) PER CURIAM. There must be judgment — or the de — endants.
Re --- lection
The Peerless case illustrates how a --- undamental misunderstanding about a material term can prevent the --- ormation o --- a contract because mutual assent is lacking. Imag- ine you’re adopting a dog --- rom a shelter and dra --- ting a pet adoption contract based on a description provided over the phone: a black-and-white dog weighing about 50 pounds. You reasonably envision the Border Collie you had seen on the shelter’s web- site, while the shelter employee, also reasonably, believes you’re adopting a Dalmatian matching the same description that had arrived recently and wasn’t yet listed online. Because neither party speci --- ies the dog’s breed or other unique identi --- iers, you both sign the contract believing you’ve agreed on the same animal, when, in reality, you each have di --- --- erent dogs in mind. This kind o --- misunderstanding about a material term — where both interpretations are reasonable but irreconcilable — prevents the
ormation o — a valid contract. Similarly, in Ra —
les v. Wichelhaus, each party reasonably but mistakenly believed the term “Peerless” re — erred to a di — — erent ship, leading to a
ailure o — mutual assent and an unen — orceable agreement. 3 • Bargains 65
Discussion 1. In Lucy, the court determined there was a contract, but in Peerless, the court deter- mined there was no contract. Can you distinguish --- actually between the cases and explain why these di --- --- erent --- acts should lead to a di --- --- erent legal result? 2. Identi --- y the speci --- ic misunderstanding in the Peerless case. Can you use this situa- tion to generalize about how the court will treat misunderstandings?
Problems Problem 3.1. Can Machines Form Mutual Assent?
Figure 3.2. Travel insurance vending machine in a Japanese airport.
Source: Benzoyl (Flickr), CC BY-SA 2.0.
Sadie Bernstein, a resident o
New York City, decided to travel to Miami, Florida, to get away — or the winter. On December 16, 1951, she went to Newark Airport (just outside o — New York City, in the State o — New Jersey) to purchase an airplane ticket. Just be — ore reaching the ticket counter, Bernstein observed a prominent machine with 66 3 • Bargains
a well-illuminated display o
airplanes — lying round and round. The machine was installed by the Fidelity & Casualty Company o — New York, an insurance provider. A printed placard on the machine read the — ollowing in very large block letters: DOMESTIC AIRLINE TRIP INSURANCE 25¢ FOR EACH $5,000 M AXIMUM $25,000. [This is equivalent to about $2.50 per $50,000 o — insurance up to a maximum o —
$250,000 in today’s money.] Bernstein inserted — ive quarters ($1.25) into the machine. The machine opened, and — rom inside its slot, Bernstein removed an insurance policy application — orm. She used a pen that was a —
ixed to the machine to — ill out the — orm, which included the departure and destination cities and the name o — the airline. Bernstein replaced the completed application in the slot and pressed a button labeled “SUBMIT.” The machine closed its slot and then printed out a policy that was twenty-two pages long. The — irst page o — the policy contained a clause titled “Coverage.” This provision limited coverage to “civilian scheduled airlines,” although Bernstein did not read the policy. Bernstein then went to the Miami Airlines counter and purchased a ticket — or travel
rom Newark to Miami. Three to — our — eet — rom the counter was a large sign that listed which non-scheduled airlines were permitted to conduct business in the ter- minal. Miami Airlines was listed as a non-scheduled airline, although Bernstein did not notice that sign. Bernstein boarded her — light on Miami Airlines, which, un — ortunately, crashed en route. She subsequently died in the plane crash. Her bene — iciary, Marion Lachs, sued to recover the amount o — the policy. In a lawsuit by Lachs against Fidelity to recover the amount o — the policy, should a court — ind that there was mutual assent between Bernstein and Fidelity, despite the use o — the vending machine? See Lachs v. Fid. & Cas. Co. o — New York, 118 N.E.2d 555 (N.Y. 1954).
Problem 3.2. Misunderstanding the Triangle Ernest and Evelyn Chilson owned approximately twenty acres o — land. The land, although contiguous, could be easily divided into three distinct units (see — igure). The property was divided by Butler Avenue. The largest parcel o — land was 17.3 acres and re — erred to as “Butler North.” “Butler South” was approximately 4.3 acres, and
inally, a small parcel o — land above Butler North was called “The Triangle” and was approximately 2.4 acres. The Chilsons originally acquired the property in two sepa- rate transactions, then later directed a title agency to prepare one deed — or the whole property. In December 1984, the Chilsons listed Unit 1 and Unit 2 with a broker, seeking a tenant — or a long-term lease. Daniel Hill and Craig Sha — er saw a sign and inquired 3 • Bargains 67
tdmith
[ -• 2. 4 et:r,H
• • U . 0 I C.l'U
lh1cll't' 'o::;h
:Sue.hr Avenue
4.) l (TH
i!'IIC lair Sou~b IC.
Figure 3.3. Parcel known as “the triangle.”
about the land with the broker. Hill and Sha
er obtained a copy o — the appraisal which listed the property as “15 acres o — vacant land on the north side o — Butler Avenue.” Hill and Sha — er inspected the land and submitted a letter o — intent proposing to purchase the listed property. The letter o — intent described the Triangle and Butler North. Hill and Sha — er proposed that the price o — the land be subject to an adjustment, depending on the actual acreage to be determined by a survey. The Chilsons rejected the proposal and insisted that the listing price was a “take it or leave it” o —
er. The Chilsons also re — used throughout the negotiations to include a map o — the land or provide any in — ormation about the land beyond a simple description. However, the description did not describe Butler North and the Triangle. The pro- vided description instead described Butler North and Butler South. Hill and Sha — er agreed to purchase the land — or the listed price and entered into a written contract with the Chilsons. On July 5, 1985, the escrow instructions were signed. When the Chilsons reviewed the escrow instructions, they discovered the error in the description. The Chilsons argued that they always intended to sell Butler North and the Triangle and that the description describing Butler North and Butler South was due to an error. A — ter discovering the error, the Chilsons prepared an amendment to correct the provided description, but Hill and Sha — er re — used the amendment. The Chilsons can- celed the escrow, and Hill and Sha — er sued — or speci — ic per — ormance. Was there a valid mani — estation o — mutual assent between the Chilsons and Hill and Sha — er? See Hill-Sha — er Partnership v. Chilson Family Trust, 165 Ariz. 469 (1990). Chapter 4 O —
ers
The mani
estation o — the o —
er by the o —
eror creates the “power o — acceptance” in the o —
eree. What, then, is an o —
er? Consider its de — inition: An o —
er is the mani — estation o — willingness to enter into a bargain, so made as to justi — y another person in understanding that his assent to that bargain is invited and will conclude it. R2d § 24. In simpler terms, an o —
er is a proposal to enter a voluntary bargain or exchange. This proposal is mani — ested by the o —
eror (the person who makes the o —
er) in such a way that the o —
eree (the person who receives the o —
er) reasonably believes that accepting the o —
er will create a binding contract. For example, i — a random stranger walks up to you on the street and says, “I will buy your house — or a million dollars,” this is a mani — estation o — willingness to enter into a bargain. But is it an o —
er? In other words, are you justi — ied in expecting that by responding, “I accept your o —
er,” the random stranger will pay you a million dollars — or your house? No, that would not be a reasonable conclusion under these circumstances. On the other hand, what i — you had a series o — business meetings with a lumber company that wanted to buy your — arm and use it to cut down trees — or lumber? Imagine the company would negotiate and haggle about the price, terms, closing date, title warranties, and all the many details involved in selling acreage — or many months, until your business associate — inally presented you with a written, signed statement including a de — initive price. Would that be an o —
er? Probably yes, because the cir- cumstances, including the negotiations and the clarity o — the written proposal, make it reasonable to conclude that your assent would — inalize the bargain. In contrasting these examples, remember that preliminary negotiations are not required — or a mani — estation to quali — y as an o —
er. However, the absence o — negotia- tions or any prior relationship between the parties o — ten indicates that a mani — estation is not an o —
er. Conversely, extensive negotiations that culminate in a clear and de — ini- tive mani — estation o — willingness to enter a bargain tend to justi — y the conclusion that the mani — estation invites assent to a binding agreement. Understanding the nuances o — what constitutes an o —
er is crucial to analyzing whether a binding contract has been — ormed. This chapter explores these nuances,
69
70 4 • O —
ers
ocusing on how courts evaluate the context and content o — a purported o —
er to deter- mine whether it creates the power o — acceptance in the o —
eree.
Rules A. Preliminary Negotiations The mani --- estation o --- an o ---
er usually does not spring out o — nowhere. Parties o — ten negotiate and bargain be — ore agreeing to a contract in order to clari — y their deal and extract the most value — rom it. The typical process o — contract — ormation begins with “preliminary negotiations.” As the name implies, these preliminary negotiations or discussions occur be — ore a contract is — ormed. Under the common law o — contracts, there is usually no contrac- tual liability until contract — ormation. During preliminary negotiations, the parties remain — ree to walk away — rom the deal i — they cannot come to terms. (Some scholars have argued contractual liability should not be binary — on or o —
— in this way and that there should be “pre-contractual liability” in some situations. But these sugges- tions have not been particularly in — luential on courts, which continue to view the moment o — contract — ormation as the time when contractual liability attaches.) Preliminary negotiations end when one party proposes a set o —
inal terms. The proposing party then becomes the “o —
eror,” and the receiving party becomes the “o —
eree.” Under common law, the o —
eree has two paths — orward. The o —
eree can either accept the terms, thus — orming a contract, or reject them. (Under the UCC, the o —
eree has a little more — lexibility to accept on slightly di — — erent terms, as you will learn in the section on “battle o — the — orms” in Chapter 6.) The period o — time when the o —
eree has this power to accept or reject the o —
er is called “the duration o — the power o — acceptance.” An o —
eree’s acceptance is valid only i — it is made while the o —
eree has the power o — acceptance. You will learn more about the process o —
acceptance in a later chapter. Preliminary negotiations are colloquially re — erred to as “bargaining,” but as you have now learned, the term “bargain” has a technical meaning in contract law. “Bar- gain” does not mean “haggling” or “negotiating.” In — act, many contracts are — ormed without any haggling or negotiating at all. A major example is the so-called “contract o — adhesion.” A contract o — adhesion is a non-negotiated, “take it or leave it” contract, which is dra — ted entirely by one side, without input — rom the other party. Contracts o —
adhesion are common in sales o
goods contracts and in “so — tware as a service” (SaaS) agreements, such as terms o — service on a web page or app. For example, when you sign up to use a new app, like Uber, you will agree to a con- tract called a “Terms o — Use” or a “Terms o — Service.” When you agree to these terms by clicking a box marked “I Agree,” this act demonstrates your assent and binds you 4 • O —
ers 71
to the terms in that agreement. You cannot haggle or negotiate with Uber to change those terms. You can either agree to Uber’s terms — or not use the app. This is called a “contract o — adhesion” because your only option i — you wish to use Uber’s app is to “adhere” to Uber’s terms. Neither negotiation nor haggling are required, or possible, to — orm this contract. All the law needs is — or both parties to mani — est assent to terms that contemplate some sort o — bargained- — or exchange. Here, the bargained- — or exchange is that you get to use the Uber app in exchange — or abid- ing by Uber’s terms o — service. Even though you did not bargain with Uber in the colloquial sense, this is a bargain in the legal sense because both parties agreed to the deal and both parties are getting something — rom the exchange — you are getting an app, and hope — ully a ride, and Uber is getting your agreement to its terms, and hope-
ully getting paid. Preliminary negotiations are not necessary to — orm contracts. But the presence o —
negotiations can be evidence that parties are taking the deal seriously. Prolonged bar- gaining is an expected precursor to some kinds o — deals. For example, i — you want to buy a house, you will probably engage in some bargaining be — ore making an o —
er. You might ask the seller to include the window treatments, to lower the price, or to close by a certain date. But in other situations, such as taking a cab ride or buying a cup o —
co
ee, the act o — bargaining or haggling is not an expected or necessary precursor to creating a bargained- — or exchange. Evidence regarding the extent o — negotiations, or the lack thereo — , may be relevant to determining whether a mani — estation is in — act an o —
er. I — the circumstances show that a party did not intend a communication to be an o —
er, then this is treated as a continuation o — negotiations, or what is sometimes called “an invitation to deal.” As usual, the perspective the law uses to evaluate these communications is that o —
the “reasonable person.” A mani — estation o — willingness to enter into a bargain is not an o —
er i — the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a — urther mani — estation o — assent. R2d § 26. In other words, a mani — estation is not an o —
er i — the person to whom the commu- nication is addressed knows or has reason to know that it was intended only as part o —
negotiations. For example, i
, during negotiations, a lumber man says to a — arm owner, “Would you sell your land — or $50,000?” that is probably not an o —
er. The — arm owner could not say, “Yes, we have a deal,” and thereby create a contract because the reason- able interpretation o — the lumber man’s words — in particular, his use o — the word “would” — is that the lumber man was merely inquiring about the owner’s willingness to sell — or $50,000. He was not making an o —
er to purchase at that price. In sum, distinguishing an o —
er — rom preliminary negotiations requires nuanced analysis and great attention to detail, language, and context. 72 4 • O —
ers
B. Certainty Even when a person — ully intends to make an o —
er, they may — ail to present an acceptable o —
er because o — a lack o — certainty. Even though a mani — estation o — intention is intended to be understood as an o —
er, it cannot be accepted so as to — orm a contract unless the terms o — the contract are reasonably certain. R2d § 33(1). Certainty is the opposite o — ambiguity. When an o —
er is too ambiguous, it can- not be en — orced by courts because courts would not know exactly what the parties intended to be en — orced. In — act, the ability o — courts to en — orce a promise is the test
or whether a promise is “reasonably certain” under the law. The terms o — a contract are reasonably certain i — they provide a basis — or determining the existence o — a breach and — or giving an appropriate remedy. R2d § 33(2). How much detail is required to make an o —
er certain depends on the circum- stances o — the transaction. The minimum standard o — certainty under common law requires an o —
er to include the: (1) parties, (2) subject matter, (3) quantity, and (4) price. For example, i — Maestro o —
ers to give Novice three hours o — piano lessons — or $100, that o —
er probably meets the common law standard — or reasonable certainty. The Maestro example is an o —
er even though Maestro did not speci — y the time — or per — ormance. When the contract does not call — or a speci — ic time, courts will imply that the time — or per — ormance is at a reasonable time, given the circumstances. Under the UCC, o —
ers — or sales o — goods may be valid even when lacking a price term. Courts may imply a reasonable price where goods have a clear market value. See UCC § 2-305.
C. Advertisements as O
ers Advertisements to the general public, also known as general solicitations, present a special problem in the analysis o — whether a mani — estation is an o —
er. Most advertise- ments are not o —
ers. The vast majority o — advertisements do not mani — est an intention to be bound; and they do not propose reasonably certain terms. Most advertisements are, at best, invitations to make o —
ers, or a mere quotation o —
the price at which a good or service might potentially be available
or purchase — called 4 • O —
ers 73
a “price quote.” The general rule is that ads and price quotes are not o
ers, simply because they are not intended or understood as such. Advertisements o — goods by display, sign, handbill, newspaper, radio or television are not ordinarily intended or understood as o —
ers to sell. The same is true o — catalogues, price lists and circulars, even though the terms o — sug- gested bargains may be stated in some detail. R2d § 26 cmt. b. Advertisements, as well as price quotes, also tend to lack reasonably certain terms, such as the quantity o — goods available. Incompleteness o — terms is one o — the principal reasons why advertisements and price quotations are ordinarily not interpreted as o —
ers. R2d § 26 cmt. c. In addition, advertisements do not typically identi — y a counterparty. They are not usually directed at anyone in particular. Instead, they are theoretically directed at everyone. This presents a policy problem because it is typically not possible — or every person who hears an advertisement to accept it as an o —
er. For example, i — an advertisement says “Jim’s Cupcakes — $2 each,” it is not clear how many cupcakes “Jim” is o —
ering to sell. Anyone who views this advertisement might come calling. Once Jim has sold all the cupcakes, is Jim liable to every person who walks through the door therea — ter? A store cannot reasonably be expected to stock an in — inite supply o — (physical) goods. This is the so-called “problem o — over- subscription,” and it is a major reason why courts do not typically construe advertise- ments as o —
ers. In sum, the general rule is that advertisements are not o —
ers. However, there are exceptions to this general rule. Some advertisements can rise to the level o — o —
ers. In the — amous case o — Le — kowitz v. Great Minneapolis Supply Store, 251 Minn. 188 (1957), a store published the — ollowing advertisements in a newspaper: 74 4 • O —
ers
9 A.M. DOOR JAMMERS
SATIIIDAY 9 A.M. SHARP
3BRANDNEW
FUR
COATS
Wonhto$,oo.oo ..
n,,,1111 ...,_
""' ....., ,.,_..,.
.,......,..
First Come
First Served --2se
tSll ---
lllllRllt ,tt:i.
- ,… I ll!lll!RS
~ .-=,
Figure 4.1. Fur coats advertisement in Le --- kowitz. Credit: Seth C. Oranburg.
4 • O —
ers 75
SATlllDAY 9 A.II. SHARP
2BRAND NEW PASlR
NK 3-SKIN SCARFS
Setb,9 --- ot $89.SO
Ovtthey90
S;ium:l~- e~cih S1
I1U£11Ul'IN SlllU
~ut.tu~
""°''h $ U --- SO...Sl
ARST COIIE
RSTSERVm
Figure 4.2. Pastel mink scar --- s and stole advertisement in Le --- kowitz.
Credit: Seth C. Oranburg.
In the Le
kowitz case, below, the court held that the ad — or the black lapin stole was an o —
er because the ad speci — ied the item, its value, its price, and the terms — or purchase (“ — irst come, — irst served”). The court also implied that the ad — or the — ur coat was an o —
er, too. The Le — kowitz case also previews some remedies concepts. The court — ound that expectation damages were not available — or the coat because its value (“worth to $100”) was uncertain. Unlike with the coats, the court — ound su —
icient evidence to establish the stole’s value (“worth $139.50”), allowing it to calculate expectation damages. 76 4 • O —
ers
This case is the exception that proves the rule. Advertisements are usually not o ---
ers. This advertisement was an o —
er only — or very special reasons. First, it included all essential terms — subject matter, price, and quantity. Second, it provided detailed instructions — or how someone could accept the o —
er — by showing up — irst on Saturday morning with $1. Third, it provided a mechanism — or limiting the number o — potential o —
erees — the language, “ — irst come, — irst served.” This language turned what otherwise would have been an invitation to deal into an o —
er, which the plainti —
, Le — kowitz, accepted by showing up — irst on Saturday morning with a dollar in hand. (This adver- tisement was also special because it took the — orm o — a so-called “unilateral contract,” which you will read about below.)
D. Catalogs as O
ers Since quantity is an essential term in an o —
er, catalogs — including mail-order print catalogs and websites advertising clothing or other goods — or sale — are generally not o —
ers. A typical catalog will contain a blank order — orm where a prospective buyer can
ill in details like the item number, quantity, size, and price. Only when that in — orma- tion is — illed in does the order — orm become an o —
er by the prospective buyer. A blank order — orm lacks reasonable certainty and does not mani — est an intent to be bound. But a — illed-in order — orm is o — ten an o —
er by the buyer to purchase the identi — ied goods. However, the party distributing the catalog is not bound unless they choose to be. Remember: catalogs themselves are not generally o —
ers. Instead, it is the buyer who makes the o —
er when they — ill in and submit the order — orm. When the company receives the — illed-in order — orm — rom the prospective buyer, the company has the option to accept or reject that o —
er. This is important because o — the oversubscription problem we discussed above. The company may have run out o — supplies, changed their product lineup, or revised their prices since the catalog was distributed. I — cata logs were o —
ers, then the company would risk breaching its promises whenever a customer made an order they could not — ul — ill.
E. Bids as O
ers The bidding process is a common — act patten in contract law. This can seem con — us- ing to law students who have not themselves worked in construction and contracting. But the process is actually quite intuitive. When a person, whom we will call the “owner,” decides to do some major con- struction project, that person will o — ten try to get the highest quality work done — or the lowest possible price by putting out a “request — or proposal” or a “request — or bid.” This request acts like an advertisement. It in — orms the world that the owner is looking
or construction services. Construction service providers, known as “general contrac- tors,” will then submit “bids” to do the project at a certain price. 4 • O —
ers 77
But how does the general contractor (GC) know what to bid? The GC’s goal is to organize and oversee the work, and to make a pro --- it --- or this service. So, the GC, in turn, will typically contract with project specialists known as “subcontractors,” who will themselves bid on aspects o --- the job by submitting their own proposals to do speci --- ic aspects o --- the work at a certain price.
For example, imagine Eric wants to build a swimming pool in his back yard. Eric, the owner, calls up --- our local contractors (GCs) that do swimming pool construction and asks them to submit bids. Each o --- the --- our GCs comes to Eric’s house and takes measurements. Then the GCs begin seeking subcontractors to do parts o --- the work: excavators to remove and haul away the dirt, cement layers to build the --- oundation, plumbers to install the pipework, and masons to create a mosaic border. The subcon- tractors give their bids to the GC, who adds up the bids and tacks on some additional pro --- it --- or the GC (perhaps around 15%). The GC then submits their best bid to the owner, Eric. Eric selects one o --- the GCs to do the work based on the proposed price and his perception o --- the GC’s quality and ability to get the job done on time. This bidding process is important to understand because, as you might imagine, many contract disputes involve construction contracts. Lawyers o --- ten must --- igure out at what point in the bidding process an “o ---
er” was made, and at what point a contract was — ormed. For example, imagine the plumbing subcontractor quotes $10,000 — or her work to the GC, and the GC relies on her bid when submitting the GC’s total bid to the owner. What would happen i — the GC ends up winning the contract and, thus, decides to accept the subcontractor’s bid, but the subcontractor re — uses to do the work
or the quoted $10,000 price? I — these were all binding promises, then the owner, Eric, could sue the GC, and the GC, in turn, could sue the subcontractor. But i — either the subcontractor or the GC did not make a legally cognizable o —
er, the situation changes. No liability can attach to a communication that is not, in — act, an o —
er. Courts have generally held that a request — or bids in the construction context is not an o —
er but that the bid itsel — is o — ten an o —
er. The result is that a request — or bids acts similarly to an advertisement. It is a mere invitation to deal. But a bid, once accepted, usually creates a binding contract. A separate question, which you will address in the next chapter, is whether a bid, assuming it is an o —
er, can be retracted, and thus terminated, prior to acceptance.
F. O
ers — or Rewards (Unilateral Contracts) Some o —
ers do not invite a promissory response. They do not allow acceptance by promising. Rather, these o —
ers only permit acceptance by completing the requested per — ormance. These are called “o —
ers — or unilateral contracts.” Recall that a unilateral contract is a type o — bargain contract made up o — a single promise to reward the com- pletion o — some per — ormance. A unilateral contract cannot, by de — inition, be accepted by promising to per — orm. The only way to accept an o —
er — or a unilateral contract is to do the requested per — ormance. 78 4 • O —
ers
This may sound abstract, but an example should make it clear and concrete. In 1893, the Carbolic Smoke Ball Company o —
ered a cash reward to any person who inhaled
or one month the company’s “carbolic smoke ball” product — which was advertised to prevent the — lu — but who nonetheless contracted the — lu. The company put out this o —
er in a newspaper advertisement as a “prove me wrong” test, pronouncing to read- ers that “many thousand Carbolic Smoke Balls were sold on these advertisements, but only three persons claimed the reward o — £100, thus proving conclusively that this invaluable remedy will prevent and cure the above-mentioned diseases.” Setting aside the — act that the Carbolic Smoke Ball was carcinogenic and in no way prevented or cured any disease, this advertisement is a classic example o — an o —
er — or a reward. Even when made in advertisements, as the carbolic smoke ball proposi- tion was, o —
ers — or rewards are o — ten considered legally cognizable “o —
ers” to enter unilateral contracts. Even though the o —
eree never promises to do anything, once she success — ully per — orms as requested, this act accepts the o —
er and places the o —
eror under a binding promise to give her the reward. O —
ers — or rewards overcome the usual rule that advertisements are not o —
ers, because they provide clear instructions on how to accept the o —
er (by completing the requested per — ormance) and because they generate signi — icant reliance on the part o —
anyone who sees the o
er and seeks to earn the reward by starting to per — orm. In the Carbolic Smoke Ball case, the only way to accept the o —
er, and thus earn the reward, was by (1) inhaling the Carbolic Smoke Ball — or a month and (2) contracting one o — the diseases that the product was supposed to prevent. Once an un — ortunate individual knowingly takes up this challenge and then “succeeds” by contracting the disease, they have earned the reward. The company’s promise is en — orceable as a uni- lateral contract. O —
ers that can be accepted only by completely per — orming are called “o —
ers — or unilateral contracts” because they contain only one promise — thus, the pre — ix “uni.” In contrast, bilateral contracts, which we have mostly been studying, are created through an exchange o — promises. There are at least two promises — thus, the pre — ix “bi.” O —
ers
or unilateral contracts are subject to special rules o — irrevocability, which you will learn in the next chapter on termination o — the o —
er. You will continue to learn about these two — orms o — bargain contracts as we continue our discussion o — contract — ormation.
G. Re
lections on O —
ers An o —
er is a mani — estation o — willingness to enter into a bargain. An o —
er can take the — orm o — a proposal to exchange promises or a proposal to exchange a promise — or a per — ormance. An o —
er must demonstrate that the o —
eror is presently willing to enter a bargain, and it must be distinguished — rom a mere invitation to deal or preliminary negotiations. An o —
er must contain “reasonably certain” terms indicating what the parties are agreeing to do — or each other; otherwise, a court will not be able to en — orce any resulting promises. 4 • O —
ers 79
__,!!t_iucnu.u• LOJ'.Olt nw,_____ _
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CARBOLIC ________
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SMOKE BALL CO ., .
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CARBOLIC SMOK E BALL CO., L, o.,
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Figure 4.3. Carbolic Smoke Ball advertisement. Public domain work.
It is important to recognize that this legal de
inition o — “o —
er” is narrower than the ordinary usage o — the term. For example, i — Alain says to Berta, “I will drive you to work tomorrow,” without more, this is not an o —
er, even though it seems to be an o —
er in the lay sense. Remember that legal terms have special meanings that do not always accord with their ordinary meanings. The term “promise” also has a special meaning in contract law. A promise is an expression o — commitment to do or not do a certain thing, which the o —
eree would be justi — ied in relying on. R2d § 2. This is di — — erent — rom the colloquial meaning o —
“promise.” For example, saying, “I promise that everything is going to be okay,” is not a promise under contract law because it does not include an intention to do anything speci — ic and because no one would be justi — ied in relying on this vague assurance. The maker o — this statement would incur no contractual liability i — everything is not, in
act, “okay.” By now, you should start to see the relationship between a promise and an o —
er. A promise generates a contractual obligation to — ollow through on the promise. An o —
er necessarily embeds a promise or set o — promises but is not itsel — a legally bind- ing promise until the o —
er is accepted and a contract is — ormed. O —
ers generally take the — orm o — “I promise to do X i — you promise to do Y.” The promises to do X and Y, so long as they are de — ined with su —
icient certainty, will become legal obligations i — , and only i — , this o —
er is accepted. Once an o —
er is made, this creates a “power o —
80 4 • O
ers
acceptance”
or the duration o — the o —
er. Assuming the o —
er is accepted in the cor- rect time — rame and in the correct manner, then the o —
er trans — orms into a legally en — orceable contract.
Cases
Reading Le --- kowitz v. Great Minneapolis Surplus Store, Inc. Advertisements
are generally not o ---
ers; rather, advertisements are invitations to make an o —
er. For example, i — Target places an ad in a local magazine that says “10% o —
on Xbox games” and Greg Gamer reads the advertisement, Greg should not — eel secure that the speci — ic game he has in mind will be in stock at a Target store and available — or 10 % o —
. The ad is not precise enough — or Greg to reasonably believe an o —
er has been made. No speci — ic game or number o — games is identi-
ied. The price is not clear — 10% o —
what? This advertisement is not an o —
er. Greg does not have the power o — acceptance. What i — the advertisement did speci — y a game, such as the newest version o —
Halo? And what i --- it also stated a price, say $60? This is a more speci --- ic ad, to be
sure, but it will not be enough to overcome the general rule that advertisements
are not o ---
ers. For one thing, the quantity term is still not speci — ied. Also, there is no identi — ied o —
eree, or universe o — potential o —
erees, who might accept. I —
other shoppers arrive be --- ore Greg, Target may not even have a game to sell him.
There is an oversubscription problem. The lack o --- a quantity term, and the lack
o --- a mechanism --- or limiting the number o --- potential acceptances, means the
advertisement is still not an o ---
er. But what about those “doorbuster” sales, where there is a guaranteed num- ber o — units — or sale? What i — Target advertised that the — irst — ive, ten, or twenty buyers o — the newest version o — Halo would get the game and perhaps also a limited-edition action — igure? Can this constitute an o —
er? The answer to these questions is — ound in the next case. In Le — kowitz, an advertisement clearly indicated the price, quantity, subject matter, and manner o — acceptance. It also contained the language “ — irst come, — irst served,” which put the analysis over the top by providing a clear means o — limiting the number o — potential o —
erees and solving the oversubscription problem. This ad, there — ore, constituted an o —
er that gave the plainti —
the power o — acceptance. Le — kowitz also has a — ew other lessons. For example, i — an advertisement to the general public is deemed an o —
er, that o —
er can be changed or retracted only through a similar ad. The case also explores the legal implications o — a unilateral contract, which speci — ies the actions a person must take to accept an o —
er and which can only be accepted by completing those actions. 4 • O —
ers 81
Le --- kowitz v. Great Minneapolis Surplus Store, Inc.
251 Minn. 188 (1957) MURPHY, Justice. This is an appeal --- rom an order o --- the Municipal Court o --- Minneapolis denying the motion o --- the de --- endant --- or amended --- indings o ---
act, or, in the alternative, — or a new trial. The order — or judgment awarded the plainti —
the sum o — $138.50 as damages — or breach o — contract. This case grows out o — the alleged re — usal o — the de — endant to sell to the plainti —
a certain — ur piece which it had o —
ered — or sale in a newspaper advertisement. It appears
rom the record that on April 6, 1956, the de — endant published the — ollowing adver- tisement in a Minneapolis newspaper: Saturday 9 A.M. Sharp 3 Brand New Fur Coats Worth to $100.00 First Come First Served $1 Each On April 13, the de — endant again published an advertisement in the same news- paper as — ollows: Saturday 9 A.M. 2 Brand New Pastel Mink 3-Skin Scar — s Selling — or $89.50 Out they go Saturday. Each . . . $1.00 1 Black Lapin Stole Beauti — ul, worth $139.50 . . . $1.00 First Come First Served The record supports the — indings o — the court that on each o — the Saturdays — ol- lowing the publication o — the above-described ads the plainti —
was the — irst to pre sent himsel — at the appropriate counter in the de — endant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price o — $1. On both occasions, the de — endant re — used to sell the merchandise to the plainti —
, stating on the — irst occasion that by a “house rule” the o —
er was intended — or women only and sales would not be made to men, and on the second visit that plainti —
knew de — endant’s house rules. The trial court properly disallowed plainti —
’s claim — or the value o — the — ur coats since the value o — these articles was speculative and uncertain. The only evidence o —
value was the advertisement itsel
to the e —
ect that the coats were “Worth to $100.00,” how much less being speculative especially in view o — the price — or which they were o —
ered — or sale. With re — erence to the o —
er o — the de — endant on April 13, 1956, to sell the “1 Black Lapin Stole . . . worth $139.50” the trial court held that the value o — this article was 82 4 • O —
ers
established and granted judgment in
avor o — the plainti —
or that amount less the $1 quoted purchase price.
1. The de --- endant contends that a newspaper advertisement o ---
ering items o — mer- chandise — or sale at a named price is a “unilateral o —
er” which may be withdrawn with- out notice. De — endant relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality o — goods which he wants to dispose o — at certain prices and on certain terms, such advertisements are not o —
ers which become contracts as soon as any person to whose notice they may come signi — ies his acceptance by noti — ying the other that he will take a certain quantity o —
them. Such advertisements have been construed as an invitation
or an o —
er o — sale on the terms stated, which o —
er, when received, may be accepted or rejected and which there — ore does not become a contract o — sale until accepted by the seller; and until a contract has been so made, the seller may modi — y or revoke such prices or terms. The de — endant relies principally on Cra — t v. Elder & Johnston Co. In that case, the court discussed the legal e —
ect o — an advertisement o —
ering — or sale, as a one-day special, an electric sewing machine at a named price. The view was expressed that the advertisement was “not an o —
er made to any speci — ic person but was made to the public generally. Thereby it would be properly designated as a unilateral o —
er and not being supported by any consideration could be withdrawn at will and without notice.” It is true that such an o —
er may be withdrawn be — ore acceptance. Since all o —
ers are by their nature unilateral because they are necessarily made by one party or on one side in the negotiation o — a contract, the distinction made in that decision between a unilateral o —
er and a unilateral contract is not clear. On the — acts be — ore us we are concerned with whether the advertisement constituted an o —
er, and, i — so, whether the plainti —
’s conduct constituted an acceptance. There are numerous authorities which hold that a particular advertisement in a newspaper or circular letter relating to a sale o — articles may be construed by the court as constituting an o —
er, acceptance o — which would complete a contract. The test o — whether a binding obligation may originate in advertisements addressed to the general public is “whether the — acts show that some per — ormance was promised in positive terms in return — or something requested.” The authorities above cited emphasize that, where the o —
er is clear, de — inite, and explicit, and leaves nothing open — or negotiation, it constitutes an o —
er, acceptance o — which will complete the contract. The most recent case on the subject is Johnson v. Capital City Ford Co., in which the court pointed out that a newspaper advertisement relating to the purchase and sale o — automobiles may constitute an o —
er, acceptance o —
which will consummate a contract and create an obligation in the o
eror to per — orm according to the terms o — the published o —
er. Whether in any individual instance a newspaper advertisement is an o —
er rather than an invitation to make an o —
er depends on the legal intention o — the parties and the surrounding circumstances. 4 • O —
ers 83
We are o
the view on the — acts be — ore us that the o —
er by the de — endant o — the sale o — the Lapin — ur was clear, de — inite, explicit and le — t nothing open — or negotiation. The plainti —
having success — ully managed to be the — irst one to appear at the seller’s place o — business to be served, as requested by the advertisement, and having o —
ered the stated purchase price o — the article, he was entitled to per — ormance on the part o — the de — endant. We think the trial court was correct in holding that there was in the conduct o — the parties a su —
icient mutuality o — obligation to constitute a contract o — sale.
2. The de --- endant contends that the o ---
er was modi — ied by a “house rule” to the e —
ect that only women were quali — ied to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed o — brie — ly by stating that, while an advertiser has the right at any time be — ore acceptance to modi — y his o —
er, he does not have the right, a — ter acceptance, to impose new or arbitrary condi- tions not contained in the published o —
er. A —
irmed.
Re --- lection
Advertisements are generally not o ---
ers — they are invitations to make o —
ers. For an advertisement to be an o —
er, the advertisement must be so clear and de — inite that there is nothing le — t to negotiate, and it must provide a mechanism — or solving the oversubscription problem. For example, think o — advertisements — or “Black Friday” sales. Stores like Walmart and Target advertise televisions and other electronics — or signi — icant discounts, and people begin lining up hours in advance. Imagine Walmart runs a commercial adver- tising a huge television — or 80% o —
its regular price. People may camp out all night to try to buy this television, but obviously there is no guarantee that everyone, or anyone, will leave with the tv. Walmart might have only one in stock, or possibly none in stock. It does not matter. The advertisement was not an o —
er. So Walmart will not be liable. On the other hand, imagine the advertisement said “The — irst three people to appear at the customer service desk at the Walmart in Epping, New Hampshire, on Black Friday with $100 cash in hand can purchase a NH603 model o —
lat screen television (worth $1,000) — or $100.” Like the ad in Le — kowitz, this might be su —
iciently de — inite and speci — ic that anyone who reads the advertisement would understand it to mean that the — irst person to show up at the Walmart with $100 in cash can leave with the a — orementioned TV. What i — Walmart tries to modi — y or retract their o —
er at any point be — ore acceptance? As you will learn in the next chapter, an o —
er can generally be retracted, and thus ter- minated, at any time prior to acceptance. However, in Le — kowitz, the court clari — ied that o —
ers made in advertisements cannot be retracted or modi — ied except through another advertisement to the public. You will see this rule again in the next chapter. 84 4 • O —
ers
Discussion 1. The rule o --- thumb is that advertisements are, generally, not o ---
ers. What made the ads in Le — kowitz di — — erent such that the court — ound them to be o —
ers?
-
Identi
y several advertisements that you believe are not o —
ers. What about each makes them not an o —
er? What speci — ic element(s) o — an o —
er is missing?
-
Try to locate an advertisement that is an o
er. What makes this ad di — — erent such that it rises to the level o — an o —
er?
-
Great Minneapolis Supply Store told Le
kowitz there was a “house rule” that its ad was only an o —
er to women. Why did the court — ind that Le — kowitz, a man, was allowed to accept this o —
er?
Reading Leonard v. Pepsico, Inc. The --- ollowing case is, on one level, a silly
story about an advertisement that went too --- ar. Our hapless plainti ---
was a college student turned entrepreneur who attempted to raise enough money to purchase enough Pepsi points to procure an AV-8B Harrier II jump jet.
Figure 4.4. US AV-8B Harrier II jump jet hovering. Source: D. Miller CC-A-2.0.
The interesting questions in this case are not about whether the plainti ---
got the military — ighter plane — he did not — but why he — elt so entitled to receive one, and what the legal basis was — or the denial o — his request to get one. The 4 • O —
ers 85
answer is not merely a simple matter o
public policy — although one can imag- ine good reasons why restricted munitions and military aircra — t should not be provided to the public — but rather involves some knowledge o — how catalogs and advertisements work in our system o — o —
er and acceptance. As you read on, think about what a catalog is. Is a catalog an advertisement? I — so, is it an advertisement that rises to the level o — an o —
er? I — not, when does an o —
er — irst arise — rom a catalog ordering process? Be — ore reading this case, you can watch the advertisement via this link: https://bit.ly/PepsiHarrierAd.
Leonard v. Pepsico, Inc.
88 F. Supp. 2d 116 (S.D.N.Y. 1999) KIMBA M. WOOD, District Judge.
Plainti ---
brought this action seeking, among other things, speci — ic per — ormance o —
an alleged o
er o — a Harrier Jet, — eatured in a television advertisement — or de — endant’s “Pepsi Stu —
” promotion. De — endant has moved — or summary judgment pursuant to Federal Rule o — Civil Procedure 56. For the reasons stated below, de — endant’s motion is granted. I. Background This case arises out o — a promotional campaign conducted by de — endant, the pro- ducer and distributor o — the so — t drinks Pepsi and Diet Pepsi. The promotion, entitled “Pepsi Stu —
,” encouraged consumers to collect “Pepsi Points” — rom specially marked packages o — Pepsi or Diet Pepsi and redeem these points — or merchandise — eaturing the Pepsi logo. Be — ore introducing the promotion nationally, de — endant conducted a test o — the promotion in the Paci — ic Northwest — rom October 1995 to March 1996. A Pepsi Stu —
catalog was distributed to consumers in the test market, including Washington State. Plainti —
is a resident o — Seattle, Washington. While living in Seattle, plainti —
saw the Pepsi Stu
commercial that he contends constituted an o —
er o — a Harrier Jet. A. The Alleged O —
er Because whether the television commercial constituted an o —
er is the central ques- tion in this case, the Court will describe the commercial in detail. The commercial opens upon an idyllic, suburban morning, where the chirping o — birds in sun-dappled trees welcomes a paperboy on his morning route. As the newspaper hits the stoop o —
a conventional two-story house, the tattoo o
a military drum introduces the subtitle, “MONDAY 7:58 AM.” The stirring strains o — a martial air mark the appearance o — a well-coi —
ed teenager preparing to leave — or school, dressed in a shirt emblazoned with the Pepsi logo, a red-white-and-blue ball. While the teenager con — idently preens, the military drumroll again sounds as the subtitle “T-SHIRT 75 PEPSI POINTS” scrolls across the screen. Bursting — rom his room, the teenager strides down the hallway wear- ing a leather jacket. The drumroll sounds again, as the subtitle “LEATHER JACKET 86 4 • O —
ers
1450 PEPSI POINTS” appears. The teenager opens the door o
his house and, un — azed by the glare o — the early morning sunshine, puts on a pair o — sunglasses. The drum- roll then accompanies the subtitle “SHADES 175 PEPSI POINTS.” A voiceover then intones, “Introducing the new Pepsi Stu —
catalog,” as the camera — ocuses on the cover o — the catalog. The scene then shi — ts to three young boys sitting in — ront o — a high school building. The boy in the middle is intent on his Pepsi Stu —
Catalog, while the boys on either side are each drinking Pepsi. The three boys gaze in awe at an object rushing overhead, as the military march builds to a crescendo. The Harrier Jet is not yet visible, but the observer senses the presence o — a mighty plane as the extreme winds generated by its
light create a paper maelstrom in a classroom devoted to an otherwise dull physics lesson. Finally, the Harrier Jet swings into view and lands by the side o — the school building, next to a bicycle rack. Several students run — or cover, and the velocity o — the wind strips one hapless — aculty member down to his underwear. While the — aculty member is being deprived o — his dignity, the voiceover announces: “Now the more Pepsi you drink, the more great stu —
you’re gonna get.” The teenager opens the cockpit o — the — ighter and can be seen, helmetless, holding a Pepsi. “[L]ooking very pleased with himsel — ,” the teenager exclaims, “Sure beats the bus,” and chortles. The military drumroll sounds a — inal time, as the — ollowing words appear: “HARRIER FIGHTER 7,000,000 PEPSI POINTS.” A — ew seconds later, the
ollowing appears in more stylized script: “Drink Pepsi — Get Stu —
.” With that mes- sage, the music and the commercial end with a triumphant — lourish. Inspired by this commercial, plainti —
set out to obtain a Harrier Jet. Plainti —
explains that he is “typical o
the ‘Pepsi Generation’ . . . he is young, has an adventur- ous spirit, and the notion o — obtaining a Harrier Jet appealed to him enormously.” Plainti —
consulted the Pepsi Stu —
Catalog. The Catalog — eatures youths dressed in Pepsi Stu —
regalia or enjoying Pepsi Stu —
accessories, such as “Blue Shades” (“As i —
you need another reason to look
orward to sunny days.”), “Pepsi Tees” (“Live in ‘em. Laugh in ‘em. Get in ‘em.”), “Bag o — Balls” (“Three balls. One bag. No rules.”), and “Pepsi Phone Card” (“Call your mom!”). The Catalog speci — ies the number o — Pepsi Points required to obtain promotional merchandise. The Catalog includes an Order Form which lists, on one side, — i — ty-three items o — Pepsi Stu —
merchandise redeem- able — or Pepsi Points. Conspicuously absent — rom the Order Form is any entry or description o — a Harrier Jet. The amount o — Pepsi Points required to obtain the listed merchandise ranges — rom 15 ( — or a “Jacket Tattoo” (“Sew ‘em on your jacket, not your arm.”)) to 3300 ( — or a “Fila Mountain Bike” (“Rugged. All-terrain. Exclusively — or Pepsi.”)). It should be noted that plainti —
objects to the implication that because an item was not shown in the Catalog, it was unavailable. The rear — oldout pages o — the Catalog contain directions — or redeeming Pepsi Points
or merchandise. These directions note that merchandise may be ordered “only” with the original Order Form. The Catalog notes that in the event that a consumer lacks enough Pepsi Points to obtain a desired item, additional Pepsi Points may be 4 • O —
ers 87
purchased
or ten cents each; however, at least — i — teen original Pepsi Points must accompany each order. Although plainti —
initially set out to collect 7,000,000 Pepsi Points by consuming Pepsi products, it soon became clear to him that he “would not be able to buy (let alone drink) enough Pepsi to collect the necessary Pepsi Points — ast enough.” Reevalu- ating his strategy, plainti —
“ — ocused — or the — irst time on the packaging materials in the Pepsi Stu —
promotion,” and realized that buying Pepsi Points would be a more promising option. Through acquaintances, plainti —
ultimately raised about $700,000.
B. Plainti ---
’s E —
orts to Redeem the Alleged O —
er On or about March 27, 1996, plainti —
submitted an Order Form, — i — teen original Pepsi Points, and a check — or $700,008.50. Plainti —
appears to have been represented by counsel at the time he mailed his check; the check is drawn on an account o —
plainti
’s — irst set o — attorneys. At the bottom o — the Order Form, plainti —
wrote in “1 Harrier Jet” in the “Item” column and “7,000,000” in the “Total Points” column. In a letter accompanying his submission, plainti —
stated that the check was to purchase additional Pepsi Points “expressly — or obtaining a new Harrier jet as advertised in your Pepsi Stu —
commercial.” On or about May 7, 1996, de — endant’s — ul — illment house rejected plainti —
’s submis- sion and returned the check, explaining that: The item that you have requested is not part o — the Pepsi Stu —
collection. It is not included in the catalogue or on the order — orm, and only catalogue mer- chandise can be redeemed under this program. The Harrier jet in the Pepsi commercial is — anci — ul and is simply included to create a humorous and entertaining ad. We apologize — or any misunderstand- ing or con — usion that you may have experienced and are enclosing some — ree product coupons — or your use. Plainti —
’s previous counsel responded on or about May 14, 1996, as — ollows: Your letter o — May 7, 1996 is totally unacceptable. We have reviewed the video tape o — the Pepsi Stu —
commercial . . . and it clearly o —
ers the new Harrier jet
or 7,000,000 Pepsi Points. Our client — ollowed your rules explicitly. . . . This is a — ormal demand that you honor your commitment and make imme- diate arrangements to trans — er the new Harrier jet to our client. I — we do not receive trans — er instructions within ten (10) business days o — the date o — this let- ter you will leave us no choice but to — ile an appropriate action against Pepsi . . . This letter was apparently sent onward to the advertising company responsible — or the actual commercial, BBDO New York (“BBDO”). In a letter dated May 30, 1996, BBDO Vice President Raymond E. McGovern, Jr., explained to plainti —
that: I — ind it hard to believe that you are o — the opinion that the Pepsi Stu —
com- mercial (“Commercial”) really o —
ers a new Harrier Jet. The use o — the Jet was 88 4 • O —
ers
clearly a joke that was meant to make the Commercial more humorous and
entertaining. In my opinion, no reasonable person would agree with your
analysis o --- the Commercial.
[Approximately three years o --- procedural history omitted.]
II. Discussion
[Standard --- or summary judgment omitted.]
[Choice o --- law analysis omitted.]
B. De --- endant’s Advertisement Was Not an O ---
er 1. Advertisements as O —
ers The general rule is that an advertisement does not constitute an o —
er. The Restate- ment (Second) o — Contracts explains that: Advertisements o — goods by display, sign, handbill, newspaper, radio or television are not ordinarily intended or understood as o —
ers to sell. The same is true o — catalogues, price lists and circulars, even though the terms o — sug- gested bargains may be stated in some detail. It is o — course possible to make an o —
er by an advertisement directed to the general public (see § 29), but there must ordinarily be some language o — commitment or some invitation to take action without — urther communication. Similarly, a leading treatise notes that: It is quite possible to make a de — inite and operative o —
er to buy or sell goods by advertisement, in a newspaper, by a handbill, a catalog or circular or on a placard in a store window. It is not customary to do this, however; and the presumption is the other way. . . . Such advertisements are understood to be mere requests to consider and examine and negotiate; and no one can reason- ably regard them as otherwise unless the circumstances are exceptional and the words used are very plain and clear. An advertisement is not trans — ormed into an en — orceable o —
er merely by a poten- tial o —
eree’s expression o — willingness to accept the o —
er through, among other means, completion o — an order — orm. In Mesaros v. United States, — or example, the plainti —
s sued the United States Mint
or — ailure to deliver a number o — Statue o — Liberty commemorative coins that they had ordered. When demand — or the coins proved unexpectedly robust, a number o — indi- viduals who had sent in their orders in a timely — ashion were le — t empty-handed. The court began by noting the “well-established” rule that advertisements and order — orms are “mere notices and solicitations — or o —
ers which create no power o — acceptance in the recipient.” The spurned coin collectors could not maintain a breach o — contract action because no contract would be — ormed until the advertiser accepted the order
orm and processed payment. Under these principles, plainti —
’s letter o — March 27, 4 • O —
ers 89
1996, with the Order Form and the appropriate number o
Pepsi Points, constituted the o —
er. There would be no en — orceable contract until de — endant accepted the Order Form and cashed the check. The exception to the rule that advertisements do not create any power o — acceptance in potential o —
erees is where the advertisement is “clear, de — inite, and explicit, and leaves nothing open — or negotiation,” in that circumstance, “it constitutes an o —
er, acceptance o — which will complete the contract.” In Le — kowitz, de — endant had pub- lished a newspaper announcement stating: “Saturday 9 AM Sharp, 3 Brand New Fur Coats, Worth to $100.00, First Come First Served $1 Each.” Mr. Morris Le — kowitz arrived at the store, dollar in hand, but was in — ormed that under de — endant’s “house rules,” the o —
er was open to ladies, but not gentlemen. The court ruled that because plainti —
had — ul — illed all o — the terms o — the advertisement and the advertisement was speci — ic and le — t nothing open — or negotiation, a contract had been — ormed. The present case is distinguishable — rom Le — kowitz. First, the commercial cannot be regarded in itsel — as su —
iciently de — inite, because it speci — ically reserved the details o —
the o
er to a separate writing, the Catalog. The commercial itsel — made no mention o — the steps a potential o —
eree would be required to take to accept the alleged o —
er o — a Harrier Jet. The advertisement in Le — kowitz, in contrast, “identi — ied the person who could accept.” Second, even i — the Catalog had included a Harrier Jet among the items that could be obtained by redemption o — Pepsi Points, the advertisement o — a Harrier Jet by both television commercial and catalog would still not constitute an o —
er. As the Mesaros court explained, the absence o — any words o — limitation such as “ — irst come, — irst served,” renders the alleged o —
er su —
iciently inde — inite that no con- tract could be — ormed. “A customer would not usually have reason to believe that the shopkeeper intended exposure to the risk o — a multitude o — acceptances resulting in a number o — contracts exceeding the shopkeeper’s inventory.” There was no such danger in Le — kowitz, owing to the limitation “ — irst come, — irst served.” The Court — inds, in sum, that the Harrier Jet commercial was merely an advertise- ment. The Court now turns to the line o — cases upon which plainti —
rests much o — his argument.
2. Rewards as O ---
ers In opposing the present motion, plainti —
largely relies on a di — — erent species o —
unilateral o
er, involving public o —
ers o — a reward — or per — ormance o — a speci — ied act. Because these cases generally involve public declarations regarding the e —
icacy or trustworthiness o — speci — ic products, one court has aptly characterized these authori- ties as “prove me wrong” cases. The most venerable o — these precedents is the case o — Carlill v. Carbolic Smoke Ball Co., a quote — rom which heads plainti —
’s memorandum o — law: “[I] — a person chooses to make extravagant promises . . . he probably does so because it pays him to make them, and, i — he has made them, the extravagance o — the promises is no reason in law why he should not be bound by them.” 90 4 • O —
ers
Long a staple o
law school curricula, Carbolic Smoke Ball owes its — ame not merely to “the comic and slightly mysterious object involved,” but also to its role in developing the law o — unilateral o —
ers. The case arose during the London in — luenza epidemic o —
the 1890s. Among other advertisements o
the time, — or Clarke’s World Famous Blood Mixture, Towle’s Pennyroyal and Steel Pills — or Females, Sequah’s Prairie Flower, and Epp’s Glycerin Jube-Jubes, appeared solicitations — or the Carbolic Smoke Ball. The speci — ic advertisement that Mrs. Carlill saw, and relied upon, read as — ollows: 100 £ reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic in — luenza, colds, or any diseases caused by taking cold, a — ter having used the ball three times daily — or two weeks according to the printed directions supplied with each ball. 1000 £ is deposited with the Alliance Bank, Regent Street, shewing our sincerity in the matter. During the last epidemic o — in — luenza many thousand carbolic smoke balls were sold as preventives against this disease, and in no ascertained case was the disease contracted by those using the carbolic smoke ball. “On the — aith o — this advertisement,” Mrs. Carlill purchased the smoke ball and used it as directed, but contracted in — luenza nevertheless. The lower court held that she was entitled to recover the promised reward. A —
irming the lower court’s decision, Lord Justice Lindley began by noting that the advertisement was an express promise to pay £ 100 in the event that a consumer o — the Carbolic Smoke Ball was stricken with in — luenza. The advertisement was construed as o —
ering a reward because it sought to induce per — ormance, unlike an invitation to negotiate, which seeks a reciprocal promise. As Lord Justice Lindley explained, “advertisements o —
ering rewards . . . are o —
ers to anybody who per — orms the condi- tions named in the advertisement, and anybody who does per — orm the condition accepts the o —
er.” Because Mrs. Carlill had complied with the terms o — the o —
er, yet contracted in — luenza, she was entitled to £ 100. Like Carbolic Smoke Ball, the decisions relied upon by plainti —
involve o —
ers o —
reward. Other “reward” cases underscore the distinction between typical advertisements, in which the alleged o —
er is merely an invitation to negotiate — or purchase o — commer- cial goods, and promises o — reward, in which the alleged o —
er is intended to induce a potential o —
eree to per — orm a speci — ic action, o — ten — or noncommercial reasons. James v. Turilli arose — rom a boast by de — endant that the “notorious Missouri des- perado” Jesse James had not been killed in 1882, as portrayed in song and legend, but had lived under the alias “J. Frank Dalton” at the “Jesse James Museum” operated by none other than de — endant. De — endant o —
ered $10,000 “to anyone who could prove me wrong.” The widow o — the outlaw’s son demonstrated, at trial, that the outlaw had in — act been killed in 1882. On appeal, the court held that de — endant should be liable to pay the amount o —
ered. 4 • O —
ers 91
In the present case, the Harrier Jet commercial did not direct that anyone who appeared at Pepsi headquarters with 7,000,000 Pepsi Points on the Fourth o --- July would receive a Harrier Jet. Instead, the commercial urged consumers to accumu- late Pepsi Points and to re --- er to the Catalog to determine how they could redeem their Pepsi Points. The commercial sought a reciprocal promise, expressed through acceptance o --- , and compliance with, the terms o --- the Order Form. As noted pre- viously, the Catalog contains no mention o --- the Harrier Jet. Plainti ---
states that he “noted that the Harrier Jet was not among the items described in the catalog, but this did not a —
ect [his] understanding o — the o —
er.” It should have. Carbolic Smoke Ball itsel — draws a distinction between the o —
er o — reward in that case, and typical advertisements, which are merely o —
ers to negotiate. As Lord Justice Bowen explains: It is an o —
er to become liable to any one who, be — ore it is retracted, per — orms the condition. . . . It is not like cases in which you o —
er to negotiate, or you issue advertisements that you have got a stock o — books to sell, or houses to let, in which case there is no o —
er to be bound by any contract. Such advertise- ments are o —
ers to negotiate — o —
ers to receive o —
ers — o —
ers to cha —
er, as, I think, some learned judge in one o — the cases has said. Because the alleged o —
er in this case was, at most, an advertisement to receive o —
ers rather than an o —
er o — reward, plainti —
cannot show that there was an o —
er made in the circumstances o — this case. C. An Objective, Reasonable Person Would Not Have Considered the Commercial an O —
er Plainti —
’s understanding o — the commercial as an o —
er must also be rejected because the Court — inds that no objective person could reasonably have concluded that the commercial actually o —
ered consumers a Harrier Jet. 1. Objective Reasonable Person Standard In evaluating the commercial, the Court must not consider de — endant’s subjective intent in making the commercial, or plainti —
’s subjective view o — what the commer- cial o —
ered, but what an objective, reasonable person would have understood the commercial to convey. I — it is clear that an o —
er was not serious, then no o —
er has been made: What kind o — act creates a power o — acceptance and is there — ore an o —
er? It must be an expression o — will or intention. It must be an act that leads the o —
eree reasonably to conclude that a power to create a contract is con — erred. This applies to the content o — the power as well as to the — act o — its existence. It is on this ground that we must exclude invitations to deal or acts o — mere preliminary negotiation, and acts evidently done in jest or without intent to create legal relations. 92 4 • O —
ers
An obvious joke, o --- course, would not give rise to a contract. On the other hand, i --- there is no indication that the o ---
er is “evidently in jest,” and that an objective, rea- sonable person would — ind that the o —
er was serious, then there may be a valid o —
er. [Discussion o — whether plainti —
may demand a jury trial omitted.]
3. Whether the Commercial Was “Evidently Done In Jest” Plainti ---
’s insistence that the commercial appears to be a serious o —
er requires the Court to explain why the commercial is — unny. Explaining why a joke is — unny is a daunting task; as the essayist E.B. White has remarked, “Humor can be dissected, as a — rog can, but the thing dies in the process.” The commercial is the embodiment o —
what de
endant appropriately characterizes as “zany humor.” First, the commercial suggests, as commercials o — ten do, that use o — the advertised product will trans — orm what, — or most youth, can be a — airly routine and ordinary experience. The military tattoo and stirring martial music, as well as the use o — sub- titles in a Courier — ont that scroll terse messages across the screen, such as “MONDAY 7:58 AM,” evoke military and espionage thrillers. The implication o — the commercial is that Pepsi Stu —
merchandise will inject drama and moment into hitherto unexcep- tional lives. The commercial in this case thus makes the exaggerated claims similar to those o — many television advertisements: that by consuming the — eatured clothing, car, beer, or potato chips, one will become attractive, stylish, desirable, and admired by all. A reasonable viewer would understand such advertisements as mere pu —
ery, not as statements o —
act, and re — rain — rom interpreting the promises o — the commercial as being literally true. Second, the callow youth — eatured in the commercial is a highly improbable pilot, one who could barely be trusted with the keys to his parents’ car, much less the prize aircra — t o — the United States Marine Corps. Rather than checking the — uel gauges on his aircra — t, the teenager spends his precious pre — light minutes preening. The youth’s concern — or his coi —
ure appears to extend to his — lying without a helmet. Finally, the teenager’s comment that — lying a Harrier Jet to school “sure beats the bus” evinces an improbably insouciant attitude toward the relative di —
iculty and danger o — piloting a
ighter plane in a residential area, as opposed to taking public transportation. Third, the notion o — traveling to school in a Harrier Jet is an exaggerated adolescent
antasy. In this commercial, the — antasy is underscored by how the teenager’s school- mates gape in admiration, ignoring their physics lesson. The — orce o — the wind gener- ated by the Harrier Jet blows o —
one teacher’s clothes, literally de — rocking an authority
igure. As i — to emphasize the — antastic quality o — having a Harrier Jet arrive at school, the Jet lands next to a plebeian bike rack. This — antasy is, o — course, extremely unre- alistic. No school would provide landing space — or a student’s — ighter jet, or condone the disruption the jet’s use would cause. Fourth, the primary mission o — a Harrier Jet, according to the United States Marine Corps, is to “attack and destroy sur — ace targets under day and night visual condi- tions.” Manu — actured by McDonnell Douglas, the Harrier Jet played a signi — icant 4 • O —
ers 93
role in the air o
ensive o — Operation Desert Storm in 1991. The jet is designed to carry a considerable armament load, including Sidewinder and Maverick missiles. As one news report has noted, “Fully loaded, the Harrier can — loat like a butter — ly and sting like a bee — albeit a roaring 14-ton butter — ly and a bee with 9,200 pounds o — bombs and missiles.” In light o — the Harrier Jet’s well-documented — unction in attacking and destroying sur — ace and air targets, armed reconnaissance and air inter- diction, and o —
ensive and de — ensive anti-aircra — t war — are, depiction o — such a jet as a way to get to school in the morning is clearly not serious even i — , as plainti —
con- tends, the jet is capable o — being acquired “in a — orm that eliminates [its] potential
or military use.” Fi — th, the number o — Pepsi Points the commercial mentions as required to “pur- chase” the jet is 7,000,000. To amass that number o — points, one would have to drink 7,000,000 Pepsis (or roughly 190 Pepsis a day — or the next hundred years — an unlikely possibility), or one would have to purchase approximately $700,000 worth o — Pepsi Points. The cost o — a Harrier Jet is roughly $23 million dollars, a — act o — which plainti —
was aware when he set out to gather the amount he believed necessary to accept the alleged o —
er. Even i — an objective, reasonable person were not aware o — this — act, he would conclude that purchasing a — ighter plane — or $700,000 is a deal too good to be true. Plainti —
argues that a reasonable, objective person would have understood the commercial to make a serious o —
er o — a Harrier Jet because there was “absolutely no distinction in the manner” in which the items in the commercial were presented. Plainti —
also relies upon a press release highlighting the promotional campaign, issued by de — endant, in which “[n]o mention is made by [de — endant] o — humor, or anything o — the sort.” These arguments suggest merely that the humor o — the promo- tional campaign was tongue in cheek. Humor is not limited to what Justice Cardozo called “[t]he rough and boisterous joke . . . [that] evokes its own gu —
aws.” In light o —
the obvious absurdity o
the commercial, the Court rejects plainti —
’s argument that the commercial was not clearly in jest. [Discovery dispute omitted.] [Discussion o — the applicability o — the statute o —
rauds omitted.] [Discussion o — plainti —
’s — raud claim omitted.]
III. Conclusion In sum, there are three reasons why plainti ---
’s demand cannot prevail as a matter o —
law. First, the commercial was merely an advertisement, not a unilateral o
er. Second, the tongue-in-cheek attitude o — the commercial would not cause a reasonable person to conclude that a so — t drink company would be giving away — ighter planes as part o —
a promotion. Third, there is no writing between the parties su
icient to satis — y the Statute o — Frauds. For the reasons stated above, the Court grants de — endant’s motion — or summary judgment. 94 4 • O —
ers
Re --- lection Leonard demonstrates how advertisements, especially advertisements --- or rewards, may or may not be o ---
ers. Remember that absent special circumstances, advertise- ments are generally construed to be an invitation to make an o —
er. Le — kowitz demon- strated when those special circumstances exist. Leonard, on the other hand, is a case without special circumstances. Unlike Le — kowitz, the commercial was not su —
iciently de — inite and did not include words o — limitation like “ — irst come, — irst served.” There-
ore, the advertisement is an invitation to make an o —
er, not an o —
er. Advertisements — or rewards can also rise to the status o — an o —
er. These types o —
o
ers (o —
ers — or a unilateral contract) can only be accepted by completely per — orm- ing. The plainti —
in Leonard tried to argue that the commercial was an advertisement
or a reward. The court was unconvinced and determined that the commercial was an invitation to make an o —
er and that the manner o — acceptance was — or a reciprocal promise through the order — orm. I — it were — or a reward, the advertisement would have had to direct someone to complete per — ormance to receive the reward (e.g., “You turn in the Pepsi points, you get the jet!”). Lastly, the court used the objective reasonable person standard (introduced in Lucy in the last chapter) to determine whether the o —
er (commercial ad) could be con- strued seriously. The court determined that an objectively reasonable person would have understood the commercial to be an obvious joke. Obvious jokes, like the one in the commercial, do not give rise to a contract.
Discussion 1. It may seem obvious to some that the Pepsi commercial was meant in jest, but the court still provided a thorough analysis o --- whether the ad was serious. Why did the court bother with this analysis? 2. Why did the Pepsico court determine that the ad was in jest and not to be taken seriously? 3. Pepsi provided customers like Leonard an opportunity obtain Pepsi Points they could spend via a catalog. Was the catalog an o ---
er? Why or why not?
-
I
you were the attorney — or Pepsico, would you have identi — ied any legal problems with the advertisement? With the bene — it o — hindsight, what changes, i — any, would you recommend Pepsico make to its ad to avoid unwanted legal liability? 4 • O —
ers 95
Reading Academy Chicago Publishers v. Cheever. Even when a person intends to make an o —
er, and not merely to engage in preliminary negotiations, they may — ail to present an acceptable o —
er because o — a lack o — certainty. Certainty is the opposite o — ambiguity. When an o —
er is too ambiguous, it cannot be en — orced by courts because courts would not know exactly what the parties intended to be en — orced. Cheever highlights a situation where an agreement, although detailed, was insu —
iciently certain — or a court to en — orce it. Although courts have powers to imply terms and thereby make agreements su —
iciently certain in some cases, in others, there is not enough certainty provided by the parties — rom which a court could create an en — orceable obligation.
Academy Chicago Publishers v. Cheever
144 Ill. 2d 24 (1991) HEIPLE, J.
This is a suit --- or declaratory judgment. It arose out o --- an agreement between the widow o --- the widely published author, John Cheever, and Academy Chicago Pub- lishers. Contact between the parties began in 1987 when the publisher approached Mrs. Cheever about the possibility o --- publishing a collection o --- Mr. Cheever’s short stories which, though previously published, had never been collected into a single anthology. In August o --- that year, a publishing agreement was signed which provided, in pertinent part:
Agreement made this 15th day o --- August 1987, between Academy Chicago
Publishers or any a ---
iliated entity or imprint (hereina — ter re — erred to as the Publisher) and Mary W. Cheever and Franklin H. Dennis o — the USA (here- ina — ter re — erred to as Author). Whereas the parties are desirous o — publishing and having published a certain work or works, tentatively titled The Uncollected Stories o — John Cheever (hereina — ter re — erred to as the Work): 2. The Author will deliver to the Publisher on a mutually agreeable date one copy o — the manuscript o — the Work as — inally arranged by the editor and satis — actory to the Publisher in — orm and content. 5. Within a reasonable time and a mutually agreeable date a — ter delivery o — the — inal revised manuscript, the Publisher will publish the Work at its own expense, in such style and manner and at such price as it deems best, and will keep the Work in print as long as it deems it expe- dient; but it will not be responsible — or delays caused by circumstances beyond its control. 96 4 • O —
ers
Academy and its editor, Franklin Dennis, assumed the task o
locating and procur- ing the uncollected stories and delivering them to Mrs. Cheever. Mrs. Cheever and Mr. Dennis received partial advances — or manuscript preparation. By the end o — 1987, Academy had located and delivered more than 60 uncollected stories to Mrs. Cheever. Shortly therea — ter, Mrs. Cheever in — ormed Academy in writing that she objected to the publication o — the book and attempted to return her advance. Academy — iled suit in the circuit court o — Cook County in February 1988, seeking a declaratory judgment: (1) granting Academy the exclusive right to publish the tenta- tively titled, “The Uncollected Stories o — John Cheever”; (2) designating Franklin Den- nis as the book’s editor; and (3) obligating Mrs. Cheever to deliver the manuscript — rom which the work was to be published. The trial court entered an order declaring, inter alia: (1) that the publishing agreement executed by the parties was valid and en — orce- able; (2) that Mrs. Cheever was entitled to select the short stories to be included in the manuscript — or publication; (3) that Mrs. Cheever would comply with her obligations o — good — aith and — air dealing i — she delivered a manuscript including at least 10 to 15 stories totaling at least 140 pages; (4) Academy controlled the design and — ormat o — the work to be published, but control must be exercised in cooperation with Mrs. Cheever. Academy appealed the trial court’s order, challenging particularly the declaration regarding the minimum story and page numbers — or Mrs. Cheever’s compliance with the publishing agreement, and the declaration that Academy must consult with de — en- dant on all matters o — publication o — the manuscript. The appellate court a —
irmed the decision o — the trial court with respect to the valid- ity and en — orceability o — the publishing agreement and the minimum story and page number requirements — or Mrs. Cheever’s compliance with same. The appellate court reversed the trial court’s declaration regarding control o — publication, stating that the trial court erred in considering extrinsic evidence to interpret the agreement regard- ing control o — the publication, given the explicit language o — the agreement granting exclusive control to Academy. The parties raise several issues on appeal; this matter, however, is one o — contract and we con — ine our discussion to the issue o — the validity and en — orceability o — the publishing agreement. While the trial court and the appellate court agreed that the publishing agreement constitutes a valid and en — orceable contract, we cannot concur. The principles o — con- tract state that in order — or a valid contract to be — ormed, an “o —
er must be so de — inite as to its material terms or require such de — inite terms in the acceptance that the prom- ises and per — ormances to be rendered by each party are reasonably certain.” Although the parties may have had and mani — ested the intent to make a contract, i — the content o — their agreement is unduly uncertain and inde — inite no contract is — ormed. The pertinent language o — this agreement lacks the de — inite and certain essential terms required — or the — ormation o — an en — orceable contract. A contract “is su —
iciently de — inite and certain to be en — orceable i — the court is enabled — rom the terms and provi- sions thereo — , under proper rules o — construction and applicable principles o — equity, 4 • O —
ers 97
to ascertain what the parties have agreed to do.” The provisions o
the subject pub- lishing agreement do not provide the court with a means o — determining the intent o — the parties. Trial testimony reveals that a major source o — controversy between the parties is the length and content o — the proposed book. The agreement sheds no light on the minimum or maximum number o — stories or pages necessary — or publication o — the collection, nor is there any implicit language — rom which we can glean the intentions o — the parties with respect to this essential contract term. The publishing agreement is similarly silent with respect to who will decide which stories will be included in the collection. Other omissions, ambiguities, unresolved essential terms and illusory terms are: No date certain — or delivery o — the manuscript. No de — inition o — the criteria which would render the manuscript satis — actory to the publisher either as to — orm or content. No date certain as to when publication will occur. No certainty as to style or manner in which the book will be published nor is there any indication as to the price at which such book will be sold, or the length o — time publication shall continue, all o —
which terms are le
t to the sole discretion o — the publisher. A contract may be en — orced even though some contract terms may be missing or le — t to be agreed upon, but i — the essential terms are so uncertain that there is no basis
or deciding whether the agreement has been kept or broken, there is no contract. Without setting — orth adequate terms — or compliance, the publishing agreement pro- vides no basis — or determining when breach has occurred, and, there — ore, is not a valid and en — orceable contract. An en — orceable contract must include a meeting o — the minds or mutual assent as to the terms o — the contract. It is not compelling that the parties share a subjective understanding as to the terms o — the contract; the parties’ conduct may indicate an agreement to the terms o — same. Steinberg v. Chicago Medical School. In the instant case, however, no mutual assent has been illustrated. The parties did not and do not share a common understanding o — the essential terms o — the publishing agreement. In rendering its judgment, the trial court supplied minimum terms — or Mrs. Cheev- er’s compliance, including story and page numbers. It is not uncommon — or a court to supply a missing material term, as the reasonable conclusion o — ten is that the parties intended that the term be supplied by implication. However, where the subject matter o — the contract has not been decided upon and there is no standard available — or rea- sonable implication, courts ordinarily re — use to supply the missing term. No suitable standard was available — or the trial court to apply. It is our opinion that the trial court incorrectly supplied minimum compliance terms to the publishing agreement, as the agreement did not constitute a valid and en — orceable contract to begin with. As noted above, the publishing agreement contains major unresolved uncertainties. It is not the role o — the court to rewrite the contract and spell out essential elements not included therein. In light o — our decision that there was no valid and en — orceable contract between the parties, we need not address other issues raised on appeal. For the — oregoing 98 4 • O —
ers
reasons, the decisions o
the trial and appellate courts in this declaratory judgment action are reversed. Reversed.
Re --- lection
The Cheever case was hotly contested by lower and higher courts. This contest evidences the natural tendency o --- many courts to try and make agreements en --- orce- able, especially where there has been per --- ormance by the parties. Although the court did not state things in this manner, it appears to be that the greater the amount o ---
per
ormance under a purported contract, the greater the desire o — courts to — ind a contract exists. Otherwise, we must do something else with that per — ormance, such as wrap it in a quasi-contract or repay it using restitution. In cases like this, there is a tension between pragmatism and e —
iciency, on the one hand, and rigor and veracity, on the other.
Discussion 1. The Cheever case illustrates a situation where an o ---
er is too inde — inite to en — orce. What are the minimum requirements — or the terms o — an o —
er? What must an o —
er include — or it to be en — orceable?
-
How did the lower court attempt to recti
y the inadequacies o — the contract in Cheever? Why did the higher court reject the lower court’s approach?
-
I
you were the attorney — or the publishing company, what advice would you give to ensure that — uture contracts were not unen — orceable due to inde — initeness?
Problems Problem 4.1. Lexus Advertisement A used car dealership posted an advertisement in the newspaper, advertising a used Lexus --- or the price o --- $24,000. However, the newspaper made a typographical and proo --- reading error. The retail price o --- the used Lexus was actually $34,000. Brian Donovan saw the advertisement and attempted to purchase the Lexus --- or the advertised price. When Donovan appeared at the dealership, the dealership re --- used to sell him the car --- or the advertised price, explaining that the newspaper had mis- printed the price o --- the car. Donovan then sued the dealership --- or breach o --- contract.4 • O —
ers 99
Was the advertisement an o
er? I — the advertisement was speci — ic enough to be understood as an o —
er, would the car dealership be able to modi — y the o —
er? See Donovan v. RRL Corp., 26 Cal. 4th 261, 27 P.3d 702 (2001).
Problem 4.2. Volvo Advertisement In 1966, Lee Calan Imports, an automobile dealer, advertised a 1964 Volvo Station Wagon — or sale in the newspaper. The dealership told the newspaper to advertise the car at $1,795, but the newspaper accidentally listed it at $1,095. Christopher O’Brien saw the advertisement in the newspaper and went to Lee Calan Imports to buy it at the advertised price. However, Lee Calan Imports re — used to sell the car at the price in the newspaper. Did the advertisement constitute an o —
er on the part o — Lee Calan Imports? See O’Kee — e v. Lee Calan Imports, Inc., 262 N.E.2d 758 (Ill. App. Ct. 1970).
Problem 4.3. De
inite Commission RRA is a temporary personnel agency that supplies technical employees to national laboratories and other contractors. The agency pays the employee’s wages and ben- e — its, and the contractor pays the agency — or supplying the employee. In early 1993, Richard Padilla was hired by RRA. Soon therea — ter, two disputes arose regarding Padilla’s compensation by RRA. First, he claimed breach o — an oral contract negotiated with Stan Rashkin, a vice president o —
RRA, to pay him a commission o
1% to 10% i — he procured additional contracts — or RRA. He alleged that he obtained two contracts with a total value o — $655,200 but was paid only a $750 — inder’s — ee. Second, he contended that he was paid an hourly wage below that provided by his written contract with RRA. De — endant contends that there is no contract because the alleged terms are too inde — inite. De — endant’s argument — ocuses on the absence o — a speci — ic commission rate. Padilla’s deposition testimony regarding the compensation terms was as — ollows: A: And [Rashkin] asked me what I thought on it, and I said, “Well, to me, I would like to get somewhere between one and ten percent, depending on the size o — the contract and how much o — a pro — it margin there was — or the company.” Because he says, “Oh, yeah, ten percent is pretty high, but it would all have to depend on what — you know, each contract is di — — er ent.” Like I said, depends on the billing rate and how much o — a pro — it that contract allows. Some contracts end up with a lot higher pro — it rate than other ones do. And I told Stan I understand that i — the company don’t make much, then I don’t make much; but i — the company makes a bunch, then I expect to get a lot o — it, also. And he agreed to it and — Q: He agreed to what? 100 4 • O —
ers
A: To the --- act o --- giving one to ten percent. And I told him, okay, because I
know o --- a couple o --- contracts that are coming up, and I think I can get
the people to come over to RAA. And he said it sounded very good to him
because they were just breaking into a new market at the time, and he
could use all the new contracts there that they could muster. Up to that
point, they were basically out in Los Alamos. And [Rashkin] told me then
that i --- I brought in a contract that he would get with me a --- terwards, show
me all the paperwork on it, as --- ar as how much it was, getting — actually
bringing in, where everything was going to, and then we would negotiate
the one to ten percent depending on, you know, how it came out. And I
said, “Fine, that way we can look over the --- igures and I’d know exactly why
you’re o ---
ering,” like I told him, “two, one, eight, ten, whatever.” To paraphrase, Padilla and Rashkin agreed that i — Padilla procured a contract, the two would then review the circumstances surrounding the contract and negotiate a commission o — between 1% and 10%. Is this agreement su —
iciently de — inite to be en — orceable? See Padilla v. RRA, Inc., 946 P.2d 1122 (N.M. Ct. App. 1997). Chapter 5 Termination o — the O —
er
Contracts are a bit like magic. As a sorcerer conjures a spell by intentionally speak- ing certain magic words, an ordinary person can invoke a contractual obligation through intentional words as well. Even a --- ter studying contract law --- or more than a decade, I still --- ind it awesome and power --- ul that the law allows people to create bind- ing obligations with mere words. Contracts still --- eel like magic to me. The --- irst magic moment in contract law is the creation o --- an o ---
er. As discussed in the previous chapter, once an o —
er is made, the specter o — law is invoked. An o —
er is an obligation waiting to spring into existence. We call this opportunity to create a legal obligation the “power o — acceptance.” An o —
er gives to the o —
eree a continuing power to complete the mani — estation o — mutual assent by acceptance o — the o —
er. R2d § 35(1). But o —
ers do not wait — orever. The o —
er must be accepted, in which case it trans-
orms into a binding legal obligation; otherwise, the o —
er is terminated. Once an o —
er is terminated, the power o — acceptance disappears. The o —
er cannot be accepted unless it is made anew. A contract cannot be created by acceptance o — an o —
er a — ter the power o —
acceptance has been terminated in one o --- the ways listed in R2d § 35(2). This chapter is about the termination o --- the o ---
er while it is still just an o —
er, such that a contract never comes into being. When an o —
er is made by an o —
eror, that o —
er con — ers the power o — acceptance upon the o —
eree. The ball, so to speak, is now in the o —
eree’s court. The o —
eree may choose to accept the o —
er. Acceptance is discussed in the next chapter. But otherwise, i — the o —
er is not accepted, the o —
er will eventually be terminated, destroying the power o — acceptance. There are — our methods through which an o —
er may be terminated, which are laid out in R2d § 36. An o —
eree’s power o — acceptance may be terminated by (a) rejection or counter- o —
er by the o —
eree, or (b) lapse o — time, or (c) revocation by the o —
eror, or (d) death or incapacity o — the o —
eror or o —
eree. R2d § 36(1). There are two main categories o — actions that will terminate an o —
er be — ore it can mature into a binding contract. The — irst category is a —
irmative actions taken by the
101
102 5 • Termination o — the O —
er
o
eror or the o —
eree. The o —
eror can revoke the o —
er; the o —
eree can reject the o —
er; or the o —
eree can make a countero —
er, which has the same e —
ect as a rejection. The second category involves intervening events — lapse o — time or the death o — the o —
eree. I — either o — these events occurs, this automatically terminates the o —
er without any a —
irmative action or statement by either party. An o —
er, once dead, cannot be accepted. However, either party is — ree to renew the o —
er or to make a new o —
er on the same or similar terms as the old one. Crucially, once an o —
er is accepted, it cannot be terminated. Once an o —
er is accepted, the o —
er matures into a contract. A contract is legally binding. It does not die as easily as o —
ers do. Students would be wise to watch out — or — act patterns where, — or example, an o —
eror purports to revoke an o —
er that was already accepted, or where an o —
eree accepts an o —
er, and then purports to change her mind by rejecting the o —
er. Neither action is an e —
ective termination because the o —
er has already been accepted. The issue, instead, will be en — orcement o — a binding contract, which is the topic o — the second hal — o — this book. For now, we continue examining how o —
ers are made, terminated, or accepted.
Rules A. Rejection An o ---
eree can terminate an o —
er and lose the power o — acceptance by rejecting the o —
er. An o —
eree’s power o — acceptance is terminated by his rejection o — the o —
er, unless the o —
eror has mani — ested a contrary intention. R2d § 38(1). O —
ers can be rejected either directly, where the o —
eree directly communicates to the o —
eror their intent to reject the o —
er, or indirectly, where the o —
eree’s conduct clearly demonstrates to the o —
eror that the o —
eree intends to reject the o —
er. Direct rejection occurs when the o —
eree makes a clear and unequivocal mani — esta- tion (outward sign) o — their intent to reject the o —
er, such as by saying, “No, I am not interested in that o —
er.” Once the o —
eror receives notice o — such a direct rejection, the o —
er is terminated. However, a seeming rejection will not act as such i — the o —
eror — or the o —
eree — man- i — ests “a contrary intention.” An o —
eror would mani — est a contrary intention by saying something to the e —
ect o — “You can say ‘no’ now, but I’ll give you a day to think about it, and you can get back to me tomorrow.” An o —
eree would mani — est a contrary inten- tion by stating an intention to reject the o —
er at present but also indicating that they plan to “take [the o —
er] under — urther advisement.” A mani — estation o — intention not to accept an o —
er is a rejection unless the o —
eree mani — ests an intention to take it under — urther advisement. R2d § 38(2). 5 • Termination o — the O —
er 103
Thus, the o
eree can state that she wishes to reject the o —
er — or now but plans to reconsider it at a — uture time. For instance, the o —
eree’s statement “I am not interested in that o —
er today, but I will revisit your o —
er tomorrow” will keep the o —
er alive. The power o — acceptance has not been terminated. So tomorrow, a — ter reconsideration, the o —
eree could still accept the o —
er. Whether an o —
eree mani — ests a contrary intention depends on an analysis o — spe- ci — ic — acts. For example, i — Susan o —
ers to sell her laptop to Bill — or $500 and Bill says, “I’m not interested at that price,” that is probably a rejection by Bill that terminates the o —
er. However, i — Bill says, “I’m not interested at that price, but let me get back to you a — ter pay day,” that might not terminate the o —
er because Bill has mani — ested a contrary intention. Bill seems to have mani — ested an intention to take the o —
er under
urther advisement. An indirect rejection occurs when the o —
eree’s actions reasonably indicate to the o —
eror that the o —
eree does not intend to accept the o —
er. For example, Zeke o —
ers to sell his house to Yolanda. Instead o — responding to Zeke, Yolanda, the o —
eree, goes o —
and buys a house — rom a third party, Wendy. When Zeke, the o —
eror, learns about Yolanda’s actions, Zeke may well wonder whether Yolanda’s purchase o — Wendy’s house is an indirect rejection o — his o —
er to sell her his own house. The answer matters to Zeke because he may — eel wary about selling his house to someone else while his o —
er to Yolanda is still open. To resolve this issue, the law asks whether Zeke should reasonably interpret Yolan- da’s actions as indicating an intention to reject his o —
er. Since most people only buy one house at a time, it is likely reasonable — or Zeke to see Yolanda’s purchase o — Wendy’s house as an indirect rejection o — his o —
er — through her conduct, i — not through her words. As a result, Zeke can con — idently move — orward with selling his house to some- one else. I — Yolanda comes back, in the end, to accept Zeke’s o —
er, she should not expect it to still be open. Yolanda’s power o — acceptance was terminated due to her own actions.
B. Countero
er A countero —
er — unctions as a rejection. What, then, is a “countero —
er”?
A counter-o ---
er is an o —
er made by an o —
eree to his o —
eror relating to the same matter as the original o —
er and proposing a substituted bargain di —
ering — rom that proposed by the original o —
er. R2d § 39(1).
The de
inition o — “countero —
er” has three elements. First, a countero —
er must be an o —
er. In other words, the countero —
er itsel — must meet the de — inition o — an “o —
er” under R2d § 24. O —
ers were discussed in the last chapter. Second, the countero —
er must relate to the same matter as the original o —
er. I — Kei- sha o —
ers to sell Xavier her car and Xavier responds by o —
ering to mow Keisha’s lawn, 104 5 • Termination o — the O —
er
Xavier’s statement is probably not a countero
er because it does not relate to the same matter as Keisha’s o —
er. In contrast, i — Xavier o —
ers to buy Keisha’s car — or a lower price, this would be a countero —
er because it relates to the same matter as the original o —
er. Third, the countero —
er must propose a substitute — or the original bargain. I — the purported countero —
er and the original o —
er could both be accepted at once, that is not really a countero —
er at all. Deciding whether a response to an o —
er is a countero —
er can be di —
icult and requires nuanced analysis. For example, Alpha Investors Corporation puts out an advertise- ment that states, “We will buy all outstanding shares o — Alpha stock — or a reasonable price.” This is probably not an o —
er but an invitation — or o —
ers because advertisements usually are not o —
ers and the price is indeterminate here. Ivana, an owner o — shares in Alpha, emails Alpha with her own o —
er, writing, “I will sell you hal — o — my shares — or $100 each.” Alpha replies to Ivana’s o —
er, “Will you sell your other hal —
or $110 each?” Does Alpha’s reply, o —
ering to buy the other hal — o — Ivana’s shares, terminate Ivana’s o —
er with respect to the — irst hal — o — her shares? Probably not. Alpha’s response does not technically appear to be a countero —
er, because Alpha’s proposal (although it relates to the same matter as Ivana’s) is not strictly a substitute — or Ivana’s o —
er. Rather, Alpha’s o —
er is a new o —
er that is a complement to Ivana’s original o —
er. Thus, regard- less o — whether Ivana is interested in Alpha’s new o —
er, Alpha could still therea — ter accept Ivana’s original o —
er to purchase the — irst hal — o — Ivana’s shares — or $100 each. Once again, these are de — ault rules. They can be altered by the parties. As with rejections, it is possible — or either o — the parties to mani — est a contrary intention and keep an o —
er open despite a seeming countero —
er.
An o ---
eree’s power o — acceptance is terminated by his making o — a counter-o —
er, unless the o —
eror has mani — ested a contrary intention or unless the counter- o —
er mani — ests a contrary intention o — the o —
eree. R2d § 39(2).
For example, i
Ivana responds to Alpha’s o —
er above by saying, “I would love to sell you my shares, but that price is too low. Without terminating your o —
er, I’d like to propose a higher price.” This would not terminate the o —
er because Ivana clearly mani — ested her intention to hold the original o —
er open. In sum, the R2d makes clear that a countero —
er generally — unctions as a rejection. This is actually not the most di —
icult part o — the rule. The most di —
icult part o — the rule is determining whether what appears to be a countero —
er is in — act an acceptance. That distinction will be discussed in detail in the next chapter.
C. Revocation Recall the maxim that the o —
eror is “the master o — the bargain.” The o —
eror sets the terms by making the o —
er. The general rule is that the o —
eror can revoke that o —
er at any time prior to acceptance. 5 • Termination o — the O —
er 105
An o ---
eree’s power o — acceptance is terminated when the o —
eree receives — rom the o —
eror a mani — estation o — an intention not to enter into the proposed con- tract. R2d § 42.
Most o
ers are — reely revocable, meaning that the power o — acceptance terminates when an o —
eror revokes an o —
er. Note that the process o — revocation requires the o —
eree to receive notice o — the revocation. Moreover, the revocation is not e —
ective, and the power o — acceptance is still available, until the o —
eree receives actual or con- structive notice o — revocation. Actual or express revocation does not require the o —
eror to use magic words such as “I revoke.”
The word “revoke” is not essential to a revocation. Any clear mani --- estation o ---
unwillingness to enter into the proposed bargain is su ---
icient. Thus a statement that property o —
ered — or sale has been otherwise disposed o — is a revocation. R2d § 42 cmt. d.
For example, Aileen o ---
ers to sell her house to Brendan. Be — ore Brendan accepts, Aileen calls Brendan and says to him, “I am — eeling really nervous about selling my house, and I might not want to go through with this transaction.” The reasonable interpretation o — this conversation is that Aileen has revoked her o —
er, and so Bren- dan’s power o — acceptance is terminated. Constructive notice or indirect communication o — revocation occurs where an o —
eror takes an action that is inconsistent with the o —
er.
An o ---
eree’s power o — acceptance is terminated when the o —
eror takes de — inite action inconsistent with an intention to enter into the proposed contract and the o —
eree acquires reliable in — ormation to that e —
ect. R2d § 43.
For example, i --- Aileen o ---
ers to sell her house to Brendan but then puts a sign on her property that says “sold” be — ore Brendan accepts, then Aileen has indirectly communicated that the o —
er is revoked. The revocation is e —
ective when Brendan is in — ormed o — the action. For example, i — Brendan drives by the house and sees the “sold” sign at 2 p.m. on Tuesday, then his power o — acceptance is terminated at 2 p.m. on Tuesday. A — ter that time, Brendan cannot accept Aileen’s o —
er.
D. Revocation o
General O —
er Advertisements are usually not o —
ers, as you learned in the last chapter, because they typically do not mani — est an intent to be bound and o — ten lack material terms. However, in rare cases where advertisements are deemed o —
ers, such as in Le — kowitz v. Great Minneapolis Supply Store, 86 N.W.2d 689 (Minn. 1957), special rules govern their revocation. O —
ers made to the public through advertisements or other general noti — ications are known as “general o —
ers.” 106 5 • Termination o — the O —
er
When an o
er is made by advertisement or another general noti — ication to the public or an inde — inite number o — persons, the o —
eree’s power o — acceptance is ter- minated when the o —
eror provides notice o — revocation by means equivalent to or better than the original o —
er’s publicity. R2d § 46 requires that revocation o — a general o —
er match or exceed the reach o — the original communication. This ensures that all potential o —
erees have an opportunity to receive notice o — revocation. Personal notice to individual o —
erees, while potentially e —
ective in narrow circumstances, is generally insu —
icient — or revoking a general o —
er unless it is clearly the most e —
ective means o —
providing notice. This principle was at issue in Le — kowitz. The store advertised — ur coats — or $1 on a
irst-come, — irst-served basis. Le — kowitz validly accepted the — irst o —
er by arriving at the store with $1 in hand. A — ter acceptance, the store attempted to impose a “house rule” that the o —
er applied only to women. The court — ound that this rule had no e —
ect because Le — kowitz had already accepted the o —
er, — orming a binding contract. On a subsequent occasion, Le — kowitz returned to accept a similar advertisement o —
ering a mink stole — or $1. This time, the store claimed that Le — kowitz’s actual knowl- edge o — the house rule prevented his acceptance. However, the court ruled that the store’s attempt to impose the house rule was ine —
ective because it — ailed to provide public notice equivalent to the original advertisement. Personal notice to Le — kowitz did not su —
ice to revoke or alter the general o —
er, as it — ailed to in — orm the broader audience targeted by the original advertisement. The Restatement rein — orces these principles. Comment b to R2d § 46 explains that general o —
ers require revocation through public means reasonably calculated to reach the same audience. Illustration 1 demonstrates that, in rare cases, personal notice may be appropriate i — it is the most e —
ective means available. However, this is an exception, not the rule. For most general o —
ers, personal notice does not satis — y the requirement o — general noti — ication. The key takeaway is that revocation o — a general o —
er must provide notice com- parable to the original o —
er’s publicity. Attempts to revoke or alter the terms o — a general o —
er must use similar public methods to ensure — airness and prevent selective en — orcement. Personal notice alone is insu —
icient unless clearly demonstrated as the best means o — reaching all potential o —
erees.
E. Lapse o
Time Remember that there are two categories o — methods — or terminating o —
ers. The — irst is where the o —
eror or the o —
eree takes some a —
irmative action to terminate the o —
er. The second is where, without any a —
irmative action by either party and without notice to either party, some intervening event automatically terminates the o —
er. The main way an o —
er automatically terminates is through lapse o — time. O —
ers do not last — orever. Once an o —
er is made, how long does it last be — ore the o —
eree can no longer accept it? O —
erors are the masters o — their bargains, so they can speci — y when 5 • Termination o — the O —
er 107
their o
ers will expire. I — the o —
eror says, “You have three days to accept the o —
er,” then a speci — ied time was given, and the o —
er will terminate a — ter three days. What happens i — no time is speci — ied? I — no time is speci — ied, then the o —
er lapses a — ter a “reasonable time.” What constitutes a reasonable time is o — ten a — actual ques- tion because it can vary depending on the circumstances in a case. An o —
eree’s power o — acceptance is terminated at the time speci — ied in the o —
er, or, i — no time is speci — ied, at the end o — a reasonable time. R2d § 41(1). A common — act pattern is where an o —
er is made in — ace-to- — ace conversation. Gen- erally, when o —
ers are made during a — ace-to- — ace conversation, the o —
er terminates at the end o — that conversation. This is known as the “conversation rule.” However, as you will see in Yaros v. Trustees o — University o — Pennsylvania, 742 A.2d 1118 (Pa. Super. Ct. 1999), below, the conversation rule is not always dispositive. I — it reasonably appears that the o —
eror or o —
eree intends to keep the o —
er alive beyond the conversation, then the o —
er is not terminated. In Yaros, the critical language was: “You’ve got to get back to me.” The conversation rule includes both — ace-to- — ace negotiations and discussions over the telephone. It probably applies equally to any other live communication, like Face- Time, Zoom, or VR, but these new technologies have not yet been thoroughly tested in courts.
F. Death or Incapacity o
the O —
eror or O —
eree The second way an o —
er automatically terminates, without any a —
irmative action by either party, is through the death or incapacity o — the o —
eror or o —
eree. The death or incapacity o — either terminates an o —
er even i — the other party has no notice o — this event. An o —
eree’s power o — acceptance is terminated when the o —
eree or o —
eror dies or is deprived o — legal capacity to enter into the proposed contract. R2d § 48. This rule, although still — ollowed in most jurisdictions, is out o — sync with the other rules regarding termination o — the power o — acceptance, which all turn on reasonable notice o — the termination. It appears that this rule is a holdover — rom a now-outdated notion that contracts require a subjective meeting o — the minds. Obviously, a subjective meeting o — the minds is impossible i — one o — those minds is now dead or incapacitated. Modern contract law generally uses an objective standard, asking how a reasonable person would interpret mani — estations, but this rule does not — it with that reasoning. Perhaps the rule remains good law because it seems un — air to hold an estate liable
or o —
ers made by a decedent that were not accepted during the decedent’s li — etime. But this rule is on shaky ground. Some state legislatures have overturned it with stat- utes that allow banks and collection agencies to accept o —
ers a — ter the death o — the o —
eror. And courts have re — used to obey this rule on equitable grounds. 108 5 • Termination o — the O —
er
Since it seems possible that this rule is eroding, lawyers can make arguments why this rule should or should not be — ollowed. For example, i — the application o — the death-o — -o —
eree rule means that a widow does not receive a payout — rom an insur- ance company, the widow’s attorney might present — acts that tend to show this result is un — air, and that argument might prevail.
G. Irrevocability The general rule is that the o —
eror is the “master o — the bargain” and can at any time prior to acceptance revoke the o —
er at will. However, o —
ers can be made irrevocable, such that they cannot be revoked or terminated by any o — the methods listed in R2d § 36. There are — our ways in which an o —
er can be made irrevocable: (1) option contracts supported by “consideration”; (2) merchant’s “ — irm o —
er” under the UCC; (3) the part-per — ormance doctrine, which applies to o —
ers — or “unilateral con- tracts”; and (4) option contracts that result — rom detrimental reliance by the o —
eree. You can remember these methods o — irrevocability through the simple acronym “OFUR” (option, — irm, unilateral, reliance) which might remind you o — Le — kowitz’s
ur coat.
- Traditional Option Contracts with Consideration The traditional way to make an o —
er irrevocable is to — orm an option contract. An option contract is a separate contract, created using the usual rules o — contract — orma- tion, in which the o —
eror promises not to revoke their o —
er and the o —
eree provides consideration in exchange — or this promise. According to R2d § 25, an option contract is “a promise which meets the require- ments — or the — ormation o — a contract and limits the promisor’s power to revoke an o —
er.” For example, i — Aileen o —
ers to sell her house to Brendan, Brendan might bargain — or time to consider Aileen’s o —
er. Brendan could say, “I will pay you $100 i —
you will keep your o
er open — or one week.” I — Aileen accepts Brendan’s o —
er, they create an option contract that limits Aileen’s power to revoke her o —
er — or the agreed period. Option contracts require an o —
er, acceptance, and consideration, like any other contract. However, the key distinction lies in their — unction. The primary purpose o —
an option contract is to make the underlying o
er irrevocable — or a speci — ic period, thereby creating a protected window during which the o —
eree can decide whether to accept the underlying o —
er. 5 • Termination o — the O —
er 109
Another unique aspect o
option contracts is their treatment o — consideration. While consideration in a typical contract must re — lect a genuine exchange o — value, option contracts allow — or nominal consideration — a legal — iction designed to make the promise en — orceable. For example, a promise to hold an o —
er open — or one week in exchange — or twenty- — ive cents is su —
icient to create a binding option contract, even though twenty- — ive cents is trivial in comparison to the value o — the underlying property. Courts who — ollow R2d acknowledge the su —
iciency o — nominal consideration in option contracts — or practical reasons. Option contracts serve to — acilitate negotia- tions and business dealings by securing the availability o — the underlying o —
er without requiring signi — icant — inancial commitment at the outset. This contrasts with general bargained- — or exchange contracts, where consideration must represent a meaning-
ul reciprocal obligation. As explained in R2d § 87, nominal consideration su —
ices because the promise to hold the o —
er open is the — ocus, not the adequacy o — the payment. For instance, in Baumer v. United States, 580 F.2d 863 (5th Cir. 1978), the court upheld an option to buy real estate despite the optionee’s — ailure to deliver the one dollar recited as consideration. The court reasoned that the recital created an implied promise to pay, which satis — ied the consideration requirement. Similarly, in Carter Oil Co. v. Owen, 27 F. Supp. 74 (N.D. Ill. 1939), the court rea —
irmed that any valuable consideration, even i — nominal, binds an option agreement. These cases illustrate how the — lexibility o — nominal consideration ensures that option contracts can — unction e —
ectively, without overly burdensome — ormalities. Option contracts also have special rules governing termination. According to R2d § 37, “the power o — acceptance under an option contract is not terminated by rejec- tion or countero —
er, by revocation, or by death or incapacity o — the o —
eror, unless the requirements are met — or the discharge o — a contractual duty.” This rein — orces the robust protection provided to the o —
eree during the option period. Option contracts can be written or oral, provided the statute o —
rauds does not apply to the underlying agreement. Their essential purpose is to ensure stability in negotiations, making them a critical tool in business and legal practice.
-
Merchant’s “Firm O
er” under the UCC In addition to traditional option contracts supported by consideration, the UCC provides another way to make an o —
er irrevocable — speci — ically — or merchants. Recall that the UCC applies to transactions involving the sale o — goods. Goods are de — ined as movable and identi — iable items at the time o — sale. Certain UCC provisions, including the — irm o —
er rule, apply exclusively to mer- chants. The UCC de — ines two types o — merchants: (1) persons who regularly deal in goods o — the kind involved in the transaction (narrow sense), or (2) persons who, by their occupation, hold themselves out as having knowledge or skill peculiar to the 110 5 • Termination o — the O —
er
goods or transaction in question, or who hire an agent with such expertise (broad sense). See UCC § 2-104. A person can be a merchant either by dealing in speci — ic goods or by demonstrating pro — essional expertise in the practices o — the trade. The — irm-o —
er rule is a merchant-speci — ic provision. An o —
er by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, — or lack o — con- sideration, during the time stated or i — no time is stated — or a reasonable time, but in no event may such period o — irrevocability exceed three months; but any such term o — assurance on a — orm supplied by the o —
eree must be separately signed by the o —
eror. NH UCC § 2-205. A — irm o —
er — unctions similarly to an option contract in that it makes an o —
er irrevocable — or a period o — time. However, unlike traditional option contracts, the
irm o —
er does not require consideration — rom the o —
eree. I — a merchant provides a binding assurance to hold an o —
er open in a signed writing, they are bound by that promise — even without receiving compensation. For example, imagine a merchant named Che — Co, which sells restaurant equip- ment, o —
ers to sell an espresso machine to a ca — é owner — or $3,000. In a signed letter, Che — Co states that the o —
er will remain open — or 30 days to give the ca — é owner time to decide. Under UCC § 2-205, Che — Co’s promise to hold the o —
er open is binding, and it cannot revoke the o —
er during the 30-day period, even though the ca — é owner has not paid Che — Co any consideration to keep the o —
er open. I — no speci — ic time period is stated in a — irm o —
er, the UCC provides that the o —
er remains open — or a “reasonable time.” However, the irrevocability period cannot exceed three months under any circumstances. A — ter the speci — ied or reasonable time period ends, the o —
er becomes revocable unless renewed by the o —
eror. The — irm-o —
er rule is designed to — acilitate commercial transactions by ensuring that merchants can rely on binding assurances without the — ormalities o — consider- ation while also imposing reasonable limits on the duration o — irrevocability.
-
The Part-Per
ormance Doctrine — Unilateral Contracts Recall the distinction between a unilateral contract and a bilateral contract. Most o —
ers can be accepted either by promising to per — orm or by actually per — orming, which typically generates an implied promise to complete the per — ormance. This results in a bilateral contract — ormed through an exchange o — promises on both sides. See R2d § 62. For example, suppose your neighbor says, “I will give you $20 to mow my lawn by Friday.” You can accept this o —
er by saying, “Okay, I will do that.” Your promise to mow the lawn creates an obligation to complete the task, and your neighbor is likewise obligated to pay you. Alternatively, you could accept the o —
er by beginning 5 • Termination o — the O —
er 111
to mow the lawn, which constitutes an implied promise to
inish the job by Friday. In either case, the contract is bilateral, — ormed through the exchange o — promises. Now consider a di — — erent case. Your neighbor says, “I will give you $20 i — you mow my lawn by Friday, and I’ll only pay you a — ter you — inish mowing the lawn to my satis — action.” This is an o —
er — or a unilateral contract. Here, only one side takes on a promissory obligation — your neighbor’s promise to pay upon satis — actory comple- tion. You cannot accept the o —
er by promising to mow the lawn. Instead, the o —
er invites acceptance solely through per — ormance. This creates both an opportunity and a risk — or the o —
eree. On the one hand, you are — ree to decide whether or not to per — orm, as you are under no obligation to mow the lawn until you actually begin the task. On the other hand, the o —
eror remains — ree to revoke the o —
er at any time prior to your acceptance, leaving you vulnerable to losing the bene — it o — the contract even a — ter you’ve started to per — orm. For instance, i — you begin mowing the lawn on Thursday and, just be — ore you — inish, your neighbor says, “Never mind, I revoke the o —
er,” the law historically would have allowed such a revocation because you had not yet completed per — ormance. The un — airness o — this rule led to the development o — the part-per — ormance doc- trine, now codi — ied in R2d § 45. This section provides: Where an o —
er invites an o —
eree to accept by rendering a per — ormance and does not invite a promissory acceptance, an option contract is created when the o —
eree tenders or begins the invited per — ormance or tenders a beginning o — it. Under this doctrine, once the o —
eree begins per — ormance, an option contract is created. This option contract binds the o —
eror to keep the o —
er open — or a reasonable time, giving the o —
eree the opportunity to complete the per — ormance and — orm the unilateral contract. For example, i — Susan posts a notice o —
ering a $1,000 reward — or the return o — her lost dog, this is an o —
er — or a unilateral contract. You cannot accept the o —
er by calling Susan and promising to — ind the dog; acceptance occurs only by — inding and returning the dog. I — you — ind the dog and are walking toward Susan’s house to return it, Susan cannot revoke the o —
er upon seeing your approach. Your partial per — ormance o — the requested task creates an option contract, preventing Susan — rom revoking the o —
er and ensuring that you have a reasonable time to complete the task. Similarly, i — you start mowing your neighbor’s lawn, your per — ormance generates an option contract obligating the neighbor to keep the o —
er open until you have had a reasonable opportunity to complete the job. The speci — ied time period — Friday, in this case — de — ines what is reasonable. However, the doctrine does not protect mere preparation to per — orm. I — you only walk toward your neighbor’s house with the intent to start mowing, the neighbor may still revoke the o —
er because you have not yet begun the per — ormance. 112 5 • Termination o — the O —
er
The part-per
ormance doctrine balances the interests o — both parties by ensur- ing — airness in unilateral contracts. It protects o —
erees who invest time and e —
ort in reliance on the o —
er while preserving the — lexibility inherent in the unilateral con- tract structure. However, it applies only a — ter per — ormance has begun, rein — orcing the principle that preparation alone is insu —
icient to bind the o —
eror.
- Option Contracts Based on Detrimental Reliance Rather than Consideration The — inal way to make an o —
er irrevocable is through detrimental reliance, a princi ple that extends beyond the part-per — ormance doctrine. At its core, this approach is rooted in the concept o — reliance. Under the general rule, courts en — orce option contracts only i — they are supported by consideration — a bargained- — or exchange where the o —
eror receives something o — value in return — or their promise to hold the o —
er open. However, in some cases, courts protect o —
ers — rom revocation even without consideration. This occurs when the o —
eree reasonably relies on the o —
eror’s assurances and su —
ers a detriment as a result. Reliance re — ers to a situation where one party reasonably depends on the promise o — another and takes action based on that dependence. Detrimental reliance occurs when the action taken in reliance worsens the relying party’s position. Courts o — ten en — orce promises that lack consideration when detrimental reliance is present, treat- ing reliance as a substitute — or consideration. This principle applies to the — ormation o — option contracts as well. Even though option contracts typically require consideration to be binding, an o —
er may become irrevocable through detrimental reliance i — the o —
eree takes signi — icant action based on the o —
er. The Restatement (Second) o — Contracts articulates this principle in § 87(2): An o —
er which the o —
eror should reasonably expect to induce action or — or- bearance o — a substantial character on the part o — the o —
eree be — ore acceptance and which does induce such action or — orbearance is binding as an option contract to the extent necessary to avoid injustice. Consider this example: Aileen o —
ers to sell her house to Brendan and says, “I will give you one week to think about it.” Aileen’s promise to keep the o —
er open is unsup- ported by consideration; she receives nothing in return. Ordinarily, she could revoke her o —
er at any time be — ore Brendan accepts, as her promise is unen — orceable — or lack o — consideration. Now imagine Brendan takes signi — icant steps in reliance on Aileen’s promise. For instance, he mortgages his own house to raise the cash to buy Aileen’s property. In doing so, Brendan incurs closing costs, damages his credit score, and expends sig- ni — icant time and e —
ort. I — Aileen decides to revoke her o —
er be — ore the week is up, Brendan is le — t worse o —
. 5 • Termination o — the O —
er 113
In this situation, Brendan’s detrimental reliance could make Aileen’s promise en — orceable as a reliance-based option contract. The key question would be whether Brendan’s actions were reasonable and whether a reasonable person in Brendan’s position would have taken such steps based on Aileen’s promise to hold the o —
er open. It is critical to distinguish reliance-based option contracts — rom standard option contracts supported by consideration. Courts almost always en — orce valid option contracts with consideration, as they represent a bargained- — or exchange. By con- trast, reliance-based option contracts are en — orced only when justice so requires. Brendan’s likelihood o — success in court is much higher i — he paid Aileen — or her promise to keep the o —
er open. Without payment, Brendan must rely on the court’s equitable discretion and its assessment o — whether his reliance justi — ies en — orcement o — the promise. This distinction highlights the discretionary nature o — reliance-based en — orcement. While courts recognize reliance as a substitute — or consideration, they impose limits to ensure — airness. Only reasonable and substantial reliance will trans — orm an o —
er into an irrevocable option contract.
H. Re
lections on Termination o — the O —
er O —
ers are ephemeral. They quickly mature into contracts or decay into nothing. O —
ers have a natural hal — -li — e; they lapse and dissolve into non-o —
ers a — ter a reason- able time. But o —
ers may also be terminated by action — either by the o —
eror or the o —
eree. The o —
eror, as the master o — the bargain, retains the power to revoke the o —
er unless it has become irrevocable through an option contract, a — irm o —
er, part per — ormance, or detrimental reliance. The o —
eree, too, can terminate the o —
er, by providing the o —
eror with reasonable notice o — rejection or countero —
er. When an o —
er is terminated by either party, the termination becomes e —
ective upon notice to the other. Notice can be actual, as when the o —
eror explicitly com- municates that the o —
er is withdrawn, or constructive, as when the o —
eree learns that the o —
eror has sold the subject matter to someone else. Timing is critical in these situations. I — the o —
eree accepts the o —
er be — ore receiving notice o — its termination, the acceptance creates a binding contract. This principle is explored — urther in the “mailbox rule,” discussed in the chapter on acceptance. An exception to the notice requirement arises when either party dies or becomes incapacitated. Death or incapacity immediately terminates an o —
er, even without notice to the other party. This rule may seem inconsistent with the modern objective view o — contract — ormation, where the — ocus is on outward mani — estations o — intent. Yet, the automatic termination rule persists, re — lecting the historical roots o — contract law in subjective theories o — mutual agreement. To summarize, an o —
er creates a power o — acceptance in the o —
eree when it is received. This power is extinguished when the o —
eree receives a revocation, or when 114 5 • Termination o — the O —
er
the o
eror receives a rejection or countero —
er. The power o — acceptance also termi- nates automatically upon lapse o — the o —
er or the death or incapacity o — either party. Once the power o — acceptance is terminated, the o —
er can no longer be accepted. But as long as the o —
er remains alive, the o —
eree may accept it by sending a valid acceptance, as you will learn in the next chapter.
Cases
Reading Smaligo v. Fireman’s Fund Insurance Co. Direct rejection may be
easy to identi --- y where a party makes a clear and unequivocal mani --- estation,
such as a statement that the party does not intend to accept an o ---
er. The harder case, however, arises where a party’s actions may constitute an indi- rect rejection. The Smaligo case illustrates a situation where a party may have indirectly rejected an o —
er to settle a lawsuit by taking an action that may be considered inconsistent with entertaining a settlement o —
er. As you read this case, think about what sorts o — actions the plainti —
s (the Smaligos) might have taken that would still have kept the settlement o —
er open and what other actions they could have taken that would mani — est their intention to termi- nate the o —
er.
Smaligo v. Fireman’s Fund Insurance Co.
432 Pa. 133 (1968)
[On March 27, 1967, during a weekend stay with her parents, Elizabeth Smaligo was struck and killed by a hit-and-run driver in North Versailles Township. She was 37 years old. Michael and Mary Smaligo, Elizabeth’s parents, made a claim against their insurance company under the terms o --- the Uninsured Motorist Provisions o ---
an automobile liability policy that had been issued to them by that company wherein the company had agreed to pay “all sums which the insured or his legal representative shall be legally entitled to recover as damages.” The company re — used to pay the $9,750.00 requested by the Smaligos in settlement. On July 27, 1967, the company noti — ied the Smaligos’ counsel by a letter that stated:] We [Fireman’s Insurance Fund] concede that there is a settlement value to the case but that it is not worth $9,750, as demanded by you. In an e —
ort to avoid
urther expenses and time to both, I will now make an o —
er to conclude this claim on an amicable basis and — or the sum o — $7,500, which you may convey to your clients. I — the o —
er o — $7,500 is not acceptable, I would then suggest that your arbitration papers be prepared as we have no intention o — increasing this o —
er, — eeling that it is — air and just to all parties concerned. 5 • Termination o — the O —
er 115
On August 30, 1967, Smaligos’ counsel made a demand
or arbitration to the American Arbitration Association. A hearing was held on December 18, 1967, which resulted in the arbitrator awarding only $243. The Smaligos argued that there was an o —
er and acceptance o — a settlement in the amount o — $7,500. However, we are constrained to agree with the reasoning o — the lower court that, when the Smaligos — iled — or arbitration o — the dispute, they rejected the o —
er o — settlement. The letter quoted o —
ering the $7,500 clearly stated that the company was “now” o —
ering the same and that i — it is not acceptable then Smaligos should proceed to arbitration. By proceeding to arbitration, the Smaligos showed the o —
er was not acceptable and such conduct clearly showed that the Smaligos did not intend to accept the o —
er nor take it under — urther advisement.
Re --- lection Smaligo illustrates how an o ---
er is indirectly rejected based on conduct inconsistent with the o —
er. R2d § 38 states: A mani — estation o — intention not to accept an o —
er is a rejection unless the o —
eree mani — ests an intention to take it under — urther advisement. In this case, the insurance company clearly o —
ered the Smaligos $7,500 and explained that i — the Smaligos — ound this amount unacceptable, they could proceed with arbitration, but the insurance company would not be increasing the o —
er. The Smaligos chose to proceed with arbitration, there — ore rejecting the o —
er — rom the insurance company. The Smaligos made it clear that they — ound the amount unaccept- able and showed no intent to take the o —
er under — urther advisement. The important takeaway — rom this case is that o —
ers can be indirectly rejected. O —
ers can be rejected by a mani — estation o — intent not to accept.
Discussion 1. How can o ---
ers be rejected? Can you distinguish between an express versus an implied rejection?
-
Why should rejection terminate the power o
acceptance? Consider how a rejec- tion impacts the o —
eror and what a reasonable o —
eror might do upon receiving a rejection.
-
Why did the Smaligos’
iling — or arbitration implicitly reject the Insurance Fund’s o —
er to settle the case? What else might the Smaligos have done to avoid terminat- ing their power o — acceptance? 116 5 • Termination o — the O —
er
Reading Yaros v. Trustees o
University o — Pennsylvania. The o —
eror, the mas- ter o — the bargain, can stipulate — or how long an o —
er is available — or acceptance. But what happens i — no time was stipulated? I — the o —
eror does not stipulate the duration o — the o —
er, then the o —
er lapses a — ter a reasonable time. What constitutes a reasonable amount o — time is o — ten a — actual question because it can vary depending on the circumstances in a case. As you read the Yaros case below, pay attention to how the court determined what a reasonable amount o —
time should have been, given the situation and whether o
ers always end at the end o — conversations. This case also introduces the “conversation rule” while simultaneously providing an exception to it.
Yaros v. Trustees o --- University o --- Pennsylvania
742 A.2d 1118 (Pa. Super. Ct. 1999) ORIE MELVIN, J.: This is an appeal --- rom an Order entered February 22, 1999, granting appellee Dr. Nancy Yaros’s Motion to En --- orce Settlement against appellant, the Trustees o ---
the University o
Pennsylvania (“University”). For the reasons that — ollow, we a —
irm. The record reveals Dr. Yaros brought a negligence action against the University a — ter she — ell at one o — its ice skating rinks. Trial was held be — ore the Honorable Paul Ribner. At trial, attorney Richard P. Haaz represented Dr. Yaros. Counsel — or the University was John Orlando. Also present was Erika Gross, who was the liability administrator
or the University. Testimony began on January 26, 1998. On that date, the University o —
ered Dr. Yaros a settlement o —
er o — $750,000.00. Attorney Haaz in — ormed Attorney Orlando that Dr. Yaros would accept $1.5 million in settlement up until the time she testi — ied, a — ter which she would not settle — or any amount. The trial continued, two de — ense witnesses took the stand, and then Dr. Yaros testi — ied. No settlement was reached at that time. On January 29, 1998, a — ter the conclusion o — testimony, the University o —
ered Dr. Yaros $750,000.00 in settlement. Attorney Orlando made the o —
er to Attorney Haaz during a ten minute recess prior to closing arguments. At the close o — the con- versation Attorney Orlando told Attorney Haaz “you’ve got to get back to me.” When he made this statement, Attorney Orlando looked at the clock and placed his palms sideward. No time limitations regarding the o —
er were communicated, nor was it indicated that the o —
er was only open until closing arguments began. Attorney Haaz stated he would talk to his client now. A — ter the o —
er was made Attorney Haaz le — t the courtroom to speak to his client. Attorney Orlando also le — t the courtroom to go to the men’s restroom. Attorney Haaz returned to the courtroom without Dr. Yaros, who was in the restroom. Attorney Haaz asked the trial court — or two minutes to speak to his client be — ore closings, to which the court agreed. At that time Attorney Orlando assumed Attorney Haaz had not discussed the o —
er with Dr. Yaros. 5 • Termination o — the O —
er 117
Upon Dr. Yaros’s return, Attorney Haaz did not con
er with her and closing argu- ments commenced immediately. Earlier that day, Judge Ribner in — ormed both coun- sel he expected closing arguments to be — inished by 5:00 p.m. so he could charge the jury the next day. During the University’s closing, Dr. Yaros authorized Attor- ney Haaz to accept the o —
er. A — ter the University ended its closing, Attorney Haaz gave his rebuttal. At a sidebar con — erence — ollowing closings Attorney Haaz stated Dr. Yaros accepted the University’s settlement o —
er. Attorney Orlando replied by stating, “I don’t know i — it’s still there, judge.” The next day, prior to jury deliberations Dr. Yaros orally moved to en — orce the settlement. Judge Ribner denied the motion pending evidentiary hearings on the matter and the jury’s verdict. The jury came back with a de — ense verdict. Following trial, Dr. Yaros — iled a Motion — or Post-Trial Relie — and a Motion to En — orce Settlement. One evidentiary hearing was held be — ore Judge Ribner. However, upon his retirement the case was reassigned to the Honorable Sandra Mazer Moss, who conducted hearings on January 12 and 15, 1999. On Febru- ary 22, 1999, Judge Mazer Moss granted Dr. Yaros’s Motion to En — orce Settlement. This timely appeal — ollowed. On appeal, the University raises several allegations o — error in connection with the trial court’s en — orcement o — the settlement. It presents the — ollowing issues — or our review: 1. Whether the Trial Court erred in granting [Dr. Yaros’s] Motion to En — orce Settlement, which overturns a unanimous jury verdict — or [the University], even though the Trial Court — ailed to apply the proper legal standard — or determining whether there was a valid and en — orceable settlement agreement between the parties? 2. Whether the Trial Court erred in granting [Dr. Yaros’s] Motion to En — orce Settlement, even though, as a matter o — law, [Dr. Yaros’s] conduct constituted a rejection o — the settlement o —
er? 3. Whether the Trial Court erred in granting [Dr. Yaros’s] Motion to En — orce Settlement, even though, as a matter o — law, [Dr. Yaros] did not accept the settlement o —
er within a reasonable time under the circumstances, and there-
ore allowed the o —
er to lapse? 4. Whether the Trial Court’s — actual — inding that [Dr. Yaros] accepted the Uni- versity’s o —
er within a reasonable period o — time was against the weight o — the evidence, capricious and erroneous as a matter o — law? We — irst address the University’s contention the trial court — ailed to apply the proper legal standard in determining whether there was a valid and en — orceable settlement. Initially, we note the University’s — irst claim on appeal challenges the trial court’s con- clusions o — law. When reviewing questions o — law, our scope o — review is plenary. Thus, we are — ree to draw our own in — erences and reach our own conclusions. “I — a trial court erred in its application o — the law, [we] will correct the error.” The trial court — ound the University’s o —
er was not withdrawn and Dr. Yaros accepted it within a reasonable amount o — time under the circumstances. In analyzing 118 5 • Termination o — the O —
er
whether this was a valid and en
orceable settlement agreement the trial court relied upon the standards set — orth in Vaskie v. West American Ins. Co., wherein this Court stated: Under such circumstances, i.e. where an o —
er does not speci — y an expiration date or otherwise limit the allowable time — or acceptance, it is both hornbook law and well-established in Pennsylvania that the o —
er is deemed to be out- standing — or a reasonable period o — time. The University asserts the above legal standard is only a general rule. It maintains the “conversation rule” as stated in Restatement (Second) Contracts § 41, comment d governs. That comment provides as — ollows: d. Direct negotiations. Where the parties bargain — ace to — ace or over the tele- phone, the time — or acceptance does not ordinarily extend beyond the end o —
the conversation unless a contrary intention is indicated. A contrary intention
may be indicated by express words or by the circumstances. For example, the
delivery o --- a written o ---
er to the o —
eree, or an expectation that some action will be taken be — ore acceptance, may indicate that a delayed acceptance is invited. Our Court has adopted the legal standard enunciated in comment d; Textron, Inc. v. Froelich (stating “an oral o —
er ordinarily terminates at the end o — the conversation”); and Boyd v. Merchants’ and Farmers’ Peanut Co. (stating “[w]hen an o —
er is made to another orally and he goes away without accepting it, it would seem that ordinarily the o —
er would be considered as having lapsed”). In Textron, the Court acknowledged that this standard does not preclude the pos- sibility that an oral o —
er continues past the conversation and noted the general rule that i — no time is speci — ied, the o —
er terminates at the end o — a reasonable amount o —
time. Furthermore, the Court stated while there may be times when a judge could
ind as a matter o — law that an oral o —
er terminates with the end o — the conversation, i — there is any doubt as to what is a reasonable interpretation, the decision should be le — t to the — act — inder. The University insists that because o — the — ace-to- — ace nature o —
the negotiations, the o
er terminated at the end o — the conversation between counsel or at the very latest at the beginning o — closing arguments. Because the parties’ counsel conducted — ace-to- — ace negotiations it appears com- ment d initially provides the more on point legal standard; however, this does not a —
ect the trial court’s ultimate decision. The o —
er by the University clearly extended beyond the end o — counsels’ conversation, during the court recess when Attorney Haaz walked out o — the courtroom to speak with his client about the settlement o —
er. A contrary intention was clearly indicated by Attorney Orlando when he ended the conversation with Attorney Haaz by stating “get back to me.” Thus, the time — or acceptance by Dr. Yaros extended beyond the end o — the conversation between the parties’ attorneys. The question that then arises is how long was the o —
er open. The University maintains it intended the o —
er was only open until the beginning o — closing 5 • Termination o — the O —
er 119
arguments, and such intention was clear. It submits that although Attorney Orlando did not articulate explicitly a de — inite time limit — or Dr. Yaros’s acceptance, its inten- tion was mani — ested by the — act closing arguments were imminent, the established pattern o — including an event condition with a settlement o —
er, and the verbal and non-verbal expressions used. The en — orceability o — settlement agreements is determined according to principles o — contract law. “[I]n the case o — a disputed oral contract, what was said and done by the parties as well as what was intended by what was said and done by them are questions o —
act.” We — ind preposterous the University’s assertion that its intention regarding the time limitation o — the o —
er was clear. The trial court made a — actual determination that no time or event conditions were ever placed on the settlement o —
er. Here, the duration o — the o —
er was not even clear to its trial counsel Attorney Orlando or its risk manager, Erika Gross. A — ter Dr. Yaros accepted the o —
er Attorney Orlando stated, “I don’t know i — it’s still there, judge.” Certainly, i — Attorney Orlando, the o —
eror, was unclear o — whether the o —
er was still open a — ter closing arguments were complete, it’s incredulous to argue the o —
eree, Dr. Yaros, was clearly aware that the o —
er would lapse once closing arguments began. Moreover, we reject the Univer- sity’s claim that verbal and non-verbal conduct made the time limitation o — the o —
er apparent. The University argues Attorney Orlando’s statement “you’ve got to get back to me” can only be interpreted as “you’ve got to get back to me with an answer as soon as possible — which is, when we both come back into the courtroom: you — rom your discussion with your client and I — rom the Men’s Room, so we can conclude this negotiation in the next — ew minutes be — ore closings.” We will not reject the trial court’s
indings in — avor o — such a strained interpretation o — the statement, “you’ve got to get back to me,” or conduct like Attorney Haaz’s statement that he needed two minutes to speak with his client and Attorney Orlando’s non-verbal act o — looking at the clock and “put[ting] [his] palms sidewards.” Additionally, the University makes much o — the — act that Dr. Yaros had earlier dur- ing the trial imposed an event condition on a settlement o —
er. During trial Attorney Haaz in — ormed Attorney Orlando that Dr. Yaros would accept a settlement in a certain dollar amount only up until the time she testi — ied. The University now maintains this established a pattern o — including an event condition with a settlement o —
er. While the prior course o — dealings between the parties is instructive, in this case it cuts against the University’s argument. In the parties’ prior course o — dealings, Dr. Yaros and her counsel explicitly in — ormed the University o — the event condition. There was no such explanation when the University made its o —
er just prior to closing argu- ments. Moreover, the o —
er remained open during the course o — several witnesses’ testimony. Under such circumstances, the prior course o — dealing between the parties did not establish closing argument was an event which would terminate the o —
er. The University next argues Dr. Yaros’s conduct constituted a rejection o — the o —
er. Speci — ically, it maintains that because Attorney Haaz did not con — er with Dr. Yaros 120 5 • Termination o — the O —
er
when she returned to the courtroom just prior to closings and because Dr. Yaros par- ticipated in closing and rebuttal arguments without accepting the o —
er, it was justi — ied in in — erring she had in — act rejected the o —
er. The trial court — ound Dr. Yaros never rejected the o —
er. The court — urther rebu —
ed the University’s contention that it could in — er its o —
er had been rejected when closing arguments commenced. An o —
er is rejected when the o —
eror is justi — ied in in — erring — rom the words or conduct o — the o —
eree that the o —
eree intends not to accept the o —
er or to take it under — urther advisement. In Smaligo, an insurance company made a settlement o —
er in — orming the o —
eree plainti —
s that proceeding — orward with the case would be viewed as a rejection. The plainti —
s proceeded to arbitration. This Court agreed with the trial court that plainti —
s’ action clearly showed that they did not intend to accept the o —
er. Unlike Smaligo, this is not a situation where the o —
eree was placed on notice that certain conduct would constitute a rejection o — the o —
er. While an o —
eree need not be put on speci — ic notice that certain conduct will be viewed by the o —
eror as a rejection o — the o —
er, not all conduct can justi — y an o —
eror in in — erring that the o —
er has been rejected. In this case we can — ind no error in the trial court’s — inding that the University was not justi — ied in in — erring that proceeding to closing arguments would constitute a rejection o — the settlement o —
er. There is no per se rule that commencing with closing arguments constitutes a rejection o — a settlement o —
er. Nor do we wish to create one here. It would produce a situation where an o —
eror would have the un — air advantage o — unilaterally asserting a — ter the o —
er has been accepted that an unspeci — ied, unde — ined and uncommunicated event at trial constituted a rejection. Moreover, we agree with Dr. Yaros’s observation that since the University believed she had not had an opportunity to consult with her counsel and was unaware o — the settlement o —
er, it would not be justi — ied in in — erring that proceeding to closing arguments constituted a rejection o — the o —
er. How the University could interpret the actions o — Dr. Yaros and Attorney Haaz as a rejection o — its o —
er when the University was under the impression Dr. Yaros was unaware o —
the o
er at that time is beyond our understanding. The University — inally argues the settlement o —
er lapsed because, as a matter o — law, Dr. Yaros did not accept it within a reasonable amount o — time. It submits the trial court’s — actual — inding that Dr. Yaros accepted the o —
er within a reasonable amount o —
time was against the weight o
the evidence. Where an o —
er does not speci — y an expi- ration date or otherwise limit the allowable time — or acceptance, the o —
er is deemed to be outstanding — or a reasonable period o — time. In Vaskie, this Court examined the issue o — whether reasonableness is a question o — law or o —
act: What is a reasonable time is ordinarily a question o —
act to be decided by the jury and is dependent upon the numerous circumstances surrounding the transaction. Such circumstances as the nature o — the contract, the relationship or situation o — the parties and their course o — dealing, and usages o — the par ticular business are all relevant. 5 • Termination o — the O —
er 121
However, there are situations where the question o --- what is a reasonable time --- or acceptance may be decided by the court as a matter o --- law. As stated in Boyd:
What is a reasonable time --- or acceptance is a question o --- law --- or the court in
such commercial transactions as happen in the same way, day a --- ter day, and
present the question upon the same data in continually recurring instances; and
where the time taken is so clearly reasonable or unreasonable that there can be
no question o --- doubt as to the proper answer to the question. Where the answer
to the question is one dependent on many di --- --- erent circumstances, which do not
continually recur in other cases o --- like character, and with respect to which no
certain rule o --- law could be laid down, the question is one o ---
act — or the jury. A — ter holding numerous evidentiary hearings, the trial court treated this issue as a question o —
act, — inding the time period was reasonable under the circumstances. The University believes this is a question o — law because trials happen in the same manner every day in the sense that the signi — icant events o — trial such as opening arguments, the presentation o — evidence, and closing arguments proceed in the same manner in every trial. While trials do commence in the same manner, “the course and nature o — settlement negotiations varies greatly — rom case to case.” There are individual cir- cumstances distinct to this case, such as when and how the o —
er was made, which will not necessarily continually recur in other cases. Thus, we believe the trial court was correct in treating this as a question o —
act. As a reviewing court we will not disturb the — indings o — a trial judge sitting as the
inder o —
act unless there is a determination that those — indings are not based upon competent evidence. In reviewing the trial court’s — indings, the victorious party is entitled to have the evidence viewed in the light most — avorable to him and all the evidence must be taken as true and all un — avorable in — erences rejected. Moreover, the trial court’s decision should not be overturned unless the trial court’s — actual — indings were capricious or against the weight o — the evidence. In support o — its contention that a reasonable amount o — time to accept the o —
er had lapsed, the University rehashes the same arguments we have already addressed. The University maintains, although it did not articulate explicitly a de — inite time limit
or acceptance, it limited the duration o — the o —
er through its words and body lan- guage. As we have already — ound such conduct would not put Dr. Yaros on notice o —
any event condition on the o
er, we will not discuss it — urther. The University also submits the seventy minutes Dr. Yaros took to accept the o —
er was unreasonable in light o — the — act the o —
er occurred during trial. It maintains there is an urgency that accompanies a response when an o —
er is made during the course o — trial, and in such a context the actual amount o — minutes — rom o —
er to acceptance is irrelevant. In e —
ect, the University maintains where an o —
er is made immediately be — ore closing arguments it is unreasonable — or the o —
er to stay open beyond the com- mencement o — closings, which in this case occurred approximately ten minutes a — ter the o —
er was made. 122 5 • Termination o — the O —
er
In this regard the University makes much o --- the trial court’s --- inding that clos- ing arguments are not signi --- icant trial court events, instead arguing that “academic research, the wisdom o --- modern trial practitioners and more than two thousand years o --- jurisprudential history” require us to vacate the trial court’s order. The University’s argument is misplaced because the trial court made its observation regarding the signi --- icance o --- closings to address the University’s argument that a rejection could be in --- erred when Dr. Yaros participated in closings. Whether or not closing arguments are signi --- icant trial events does not support the University’s contention that the occur- rence o --- closing arguments automatically causes a settlement o ---
er to lapse. There are many signi — icant events during the course o — a trial. Settlement o —
ers are accepted at all stages o — trial. Even assuming a closing argument is a signi — icant trial event, such an occurrence does not necessarily determine whether an o —
eree accepted an o —
er within a reasonable period o — time. It is but one consideration. Here, the trial court — ound the o —
er was accepted within a reasonable amount o —
time under the circumstances. We will not disturb that
inding. Under the — acts o —
this case, we cannot say the trial court erred in
inding Dr. Yaros accepted the o —
er within a reasonable amount o — time or such a — inding was against the weight o — the evidence. In conclusion, we — ind no abuse o — discretion or error o — law in the trial court’s en — orcement o — the settlement. Order a —
irmed.
Re --- lection Yaros --- eatures a particularly interesting discussion on whether an o ---
er ordinarily lapses at the end o — a conversation. The general rule is that an o —
er ends along with the conversation that started it, unless circumstances indicate otherwise. I — a Dunder Mi —
lin sales representative calls you and asks whether you would like to purchase ten reams o — paper — or a special discount o — 20%, you cannot necessarily call back next week and expect that deal to still be available. But, o — course, it all depends on the circumstances. I — that is the third time in as many weeks that the representative called you with the same special price, a court would probably consider it reasonable i — you called back an hour a — ter the third call to accept the o —
er. The Yaros court likewise held that, although the conversation rule is a use — ul de — ault, not all o —
ers lapse at the end o — a — ace-to- — ace exchange. In Yaros, one lawyer made a settlement o —
er to opposing counsel during a brie — trial recess, ending the conversation with the words, “you’ve got to get back to me.” The o —
eror later argued that the o —
er terminated when the conversation ended or at the start o — closing argu- ments. But the court was unconvinced. The phrase “get back to me” was ambiguous, and the surrounding circumstances — including the absence o — an express time limit and the expectation that lawyers consult with their clients be — ore accepting settlement o —
ers — le — t room — or reasonable disagreement. Summary judgment was there — ore inappropriate. The court upheld the trial court’s — inding that the o —
er remained open 5 • Termination o — the O —
er 123
and had been accepted within a reasonable time, showing that the conversation rule can yield to context and interpretation. The case also nicely re — lects R2d § 41’s reasoning. The rule — or when an o —
er lapses is that it terminates at the time speci — ied in the o —
er or, i — unspeci — ied, it terminates at the end o — a reasonable time. A reasonable time may be until the end o — a meeting or phone call, but this is not necessarily the end o — an o —
er. An o —
eror who wishes to avoid contractual liability — or an o —
er should make it clear when the o —
er has expired. Other wise, there is room to argue that an acceptance was made within a reasonable time.
Discussion 1. What is the conversation rule? Is this rule based on --- ormal legal principles or a realistic understanding o --- parties’ likely intentions? 2. What --- acts in the Yaros case indicate whether the conversation rule applies here? What did you learn --- rom this speci --- ic case about when the conversation rule applies more generally? 3. When the conversation rule does not apply, what other events or happenings, aside
rom the end o — a conversation, should cause an o —
er to lapse?
Problems Problem 5.1. The Prisoners’ Rejection and the Master Plan In early 1978, prisoners at the Washington State Re --- ormatory --- iled a class action on behal --- o --- all present and --- uture Re --- ormatory inmates, alleging that the conditions o --- their con --- inement were unconstitutional. A trial date was set --- or January 15, 1981. As o --- ten happens on the eve be --- ore trial, the parties sought to reach a last-minute agreement be --- ore the trial began, and this was apparently e ---
ective. On January 13, the parties gave notice o — a mutual settlement, and the trial was canceled. On Janu- ary 19, a proposed consent decree was issued by the Washington State Re — ormatory. The proposed consent decree (a type o — settlement that — unctions as a contract and which must be approved by a judge) provided that the Re — ormatory would reduce its population — rom 865 to 656 over the course o — two years. However, there was an error in the consent decree. The State’s plan provided that the Re — ormatory’s population reduction would be accomplished by March 1, 1983, instead o — April 1, 1983. On February 13, 1981, the State submitted a revised consent decree listing April 1, 1983, as the deadline — or the reduction. On February 26, the prisoners moved — or approval o — the consent decree with the March 1 date intact. The State moved — or modi — ication o — the decree to incorporate the April 1 date. 124 5 • Termination o — the O —
er
On March 4, 1981, the magistrate denied both the State’s and the prisoners’ motions, — inding there had been no meeting o — the minds with respect to a key term o — the agreement and there — ore no contract had been — ormed. On May 15, 1981, the prisoners — iled a notice stating that they accepted the o —
er o —
settlement embodied in the proposed decree submitted by the State on February 13, which was the decree that listed April 1 as the deadline — or reduction, not March 1. Did the prisoners reject the decree that listed April 1 as the deadline — or the reduction when they moved to approve the master plan with the March 1 deadline? See Collins v. Thompson, 679 F.2d 168 (9th Cir. 1982).
Problem 5.2. A MINI Lapse MINI is a British automotive marque that is now owned by the German automo- tive company BMW. BMW designed, manu — actured, sold, and serviced MINI cars through its dealer network. Mini Works, a company that is not in BMW’s dealer net- work, sold and serviced pre-owned MINI cars. BMW contacted Mini Works and o —
ered to re — rain — rom — iling a lawsuit seeking monetary relie — i — Mini Works agreed in writing to cease and desist using MINI trademarks. BMW’s letter stated: It is our client’s hope that this matter can be amicably resolved and that it will have your cooperation in discontinuing use o — BMW’s trademarks. Speci — i- cally, BMW requests that you: (1) Promptly drop “MINI” — rom your trade name and domain names; (2) Cease and desist any and all other trademark use o — MINI marks on your websites or elsewhere; (3) Countersign and return the acknowledgment on page 4 o — this letter, by June 21, 2007. I — your company meets BMW’s request to cease and desist, then BMW will consider the matter closed and will not seek monetary or other relie — regard- ing this matter — rom you or your company. We look — orward to your response by June 21. On July 3, 2007, Mini Works signed and returned the acknowledgment. BMW sued Mini Works in an attempt to en — orce the settlement agreement because Mini Works continued to in — ringe on its trademarks. Mini Works argued that BMW’s o —
er expired on its own terms, and they could not have accepted it. Did BMW’s o —
er lapse by the time that Mini Works returned the letter? See BMW o — N.A., LLC v. Mini Works, LLC, 166 F. Supp. 3d 976 (D. Ariz. 2010).
Problem 5.3. Docked Out Settlement Jason Varney is a master dock builder and was the star o — a cable television show called Docked Out. He is also the president and sole shareholder o — plainti —
Varney 5 • Termination o — the O —
er 125
Entertainment Group, Inc. (collectively, “Varney”). Avon Plastics Inc. manu
actures products used to build docks. In 2016, Varney and Avon entered into a written Endorsement Agreement, under which Mr. Varney agreed to promote Avon’s brand and products and allow Avon to use his name and likeness — or two years in exchange — or payment. The contract allowed Avon to terminate the contract early i — Docked Out was no longer broadcast on television. It also contained a prevailing party attorney’s — ee provision (meaning that the losing party in any litigation must pay the winning party’s attorney’s — ees). Midway through the contract term, Docked Out was canceled. Avon then unilat- erally terminated the agreement and stopped paying Varney. Varney challenged the termination because Docked Out reruns remained available — or viewing on the inter- net. A debate between the parties ensued regarding the meaning o — the contractual term “broadcast.” Varney claimed that reruns counted as broadcasting, while Avon argued that they did not. The parties were unable to resolve their di —
erences, and Avon re — used to pay Varney any more money. Varney responded by suing Avon — or $250,000, which is the amount Varney claimed Avon still owed under the Endorse- ment Agreement. Just be — ore the lawsuit went to trial, Varney sent Avon a settlement o —
er in the — orm o — a letter in which Varney o —
ered to voluntarily dismiss his lawsuit in exchange — or Avon’s paying Varney $190,000. Three days later, be — ore Avon replied, Varney sent a second letter in which he “clari — ied . . . that his o —
er is contingent on Avon entering into a stipulated judgment in — avor o — Varney,” e —
ectively stating that Varney was the prevailing party in the suit. The next day, Avon initiated a wire trans — er on a Monday
or $190,000 exactly, and then Varney voluntarily dismissed its suit. Varney accepted the wire trans — er and then sued Avon — or $60,000 in attorney’s
ees. Avon re — used to pay these — ees, arguing that it accepted Varney’s initial o —
er to settle, and — urther arguing that the common meaning o — settlement does not contem- plate that either party wins, and, there — ore, Varney is not entitled to attorney’s — ees. Varney counter-argued that his second letter implicitly revoked his — irst o —
er and replaced it with his second o —
er so that Avon’s acceptance o — the — irst o —
er was ine —
ec tive, and that Avon accepted his second o —
er to pay the settlement plus attorney’s — ees. How should a court rule on the question o — whether Avon owes Varney attorney’s
ees? See Varney Ent. Group, Inc. v. Avon Plastics, Inc., 275 Cal. Rptr. 3d 394 (Cal. App. 4th Dist. 2011). Chapter 6 Acceptance
When an o
er to contract is made, it creates the “power o — acceptance” in the o —
eree. This power is not in — inite — it can be terminated by various methods, as dis- cussed in Chapter 5. However, as long as the power o — acceptance remains, the o —
eree can create a binding contract by sending an acceptance to the o —
eror. A valid acceptance completes the process o — contract — ormation, instantly trans-
orming an o —
er into a contract. This chapter explores how to determine whether and when that magic moment o — contract — ormation occurs. Sometimes, the moment o — acceptance is straight — orward. For a simple o —
er with
ew terms, a clear “I agree” or “I accept” seals the deal. For instance, i — Aaron says to Benjamin, “Will you commit to purchasing my Honda Civic next Tuesday — or $10,000 cash?” and Benjamin immediately replies, “I do,” the contract is — ormed as soon as Benjamin speaks. Simple o —
er, simple acceptance. In the real world o — commerce, however, o —
ers o — ten include more complex terms, such as promises, warranties, or conditions. (You will learn in Chapter 18 that a war- ranty is a contractual assurance about the — uture quality, condition, or per — ormance o — something, and in Chapter 19, that a condition is an event that triggers or relieves a contractual duty.) With added complexity, the process o — acceptance becomes less obvious. For example, i — Caitlin says to Deltona, “Will you commit to purchasing my Honda Civic next Tuesday — or $10,000 cash?” and Deltona replies, “I’ll bring the cash on Wednesday,” it’s unclear whether Deltona’s response is an acceptance that creates a contract or a countero —
er that rejects Caitlin’s original terms and proposes new ones. The distinction between acceptance and countero —
er is one o — the most important— and challenging — concepts in this chapter. An acceptance creates a binding contract, while a countero —
er terminates the original o —
er and replaces it with a new one. To complicate matters, the common law and the UCC approach this distinction di —
erently. There is also an important timing issue to address early in this chapter: the di —
er- ence between when an action is sent and when it is received. O —
ers become e —
ec- tive when received by the o —
eree — a — ter all, you cannot accept an o —
er you do not know about. Similarly, rejections, countero —
ers, and revocations take e —
ect only when received by the other party. But acceptance is di — — erent. Under the mailbox rule (or dispatch rule), an acceptance generally becomes e —
ective the moment it is
127
128 6 • Acceptanc
dispatched — when it leaves the o
eree’s possession. For example, i — an o —
eree mails a letter o — acceptance, the contract is — ormed as soon as the letter is sent, even i — it takes days to arrive. This rule originated during the era o — paper mail but still applies in modern communications and remains relevant on the bar exam. We will cover its details in this chapter.
Rules A. Acceptance under the Common Law: The Mirror-Image Rule
The mirror-image rule is a common law rule that requires the o ---
eree’s acceptance to “mirror” the o —
er by matching its terms exactly. This rule is based on the premise that the o —
eror is “the master o — the o —
er” and gets to control its terms. The o —
eree, in order to accept the o —
er, must match all its terms exactly in the acceptance. The acceptance must truly be the mirror image o — the o —
er. Acceptance o — an o —
er is a mani — estation o — assent to the terms thereo — made by the o —
eree in a manner invited or required by the o —
er. R2d § 50(1). An acceptance must comply with the requirements o — the o —
er as to the prom- ise to be made or the per — ormance to be rendered. R2d § 58. Under the common law, the o —
eree cannot change any o — the terms o — the o —
er when accepting; otherwise, the acceptance will not be valid. A purported acceptance which changes the terms o — the o —
er, or a so-called “conditional acceptance” — which conditions the o —
eree’s acceptance upon the o —
eror’s acceptance o — new terms — is not an acceptance at all. It is a countero —
er: A reply to an o —
er which purports to accept it but is conditional on the o —
er- or’s assent to terms additional to or di — — erent — rom those o —
ered is not an acceptance but is a counter-o —
er. R2d § 59. In the past, courts applied the mirror image rule strictly and required the terms o — the o —
er and acceptance to match exactly. For example, in the 1867 case o — Myers v. Smith, 48 Barb. 614, the o —
eror wrote an o —
er to sell malt “delivered on the boat at Weedsport.” The o —
eree responded by letter accepting and stating that the malt was to be “deliverable by boat on Weedsport.” The words “delivered” and “deliverable” were not synonymous and deemed di — — erent enough that it was a “mani — est variance o —
the terms o
the o —
er.” The New York Supreme Court — ound that the use o — the word “deliverable” in the purported acceptance made that a countero —
er, such that no con- tract was — ormed, because “delivered” and “deliverable” are not strict mirror images. Likewise, in the 1886 case o — Minneapolis & St. Louis Railway Co. v. Columbus Rolling-Mill Co., 119 U.S. 149, the iron mill o —
ered to sell 2,000 to 5,000 tons o — iron 6 • Acceptanc 129
rails at $54 per ton to the railway. The railway responded via telegram requesting an order o — one thousand two hundred tons o — iron rails. The United States Supreme Court determined that the response was a rejection — not an acceptance — because it varied the number o — tons. Modern courts are not quite as strict in their application o — the mirror image rule. For example, the R2d takes the position that, i — a purported acceptance merely “requests” a change to the terms o — the o —
er, without demanding such a change, then this can act as an acceptance or at least keep the o —
er alive without terminating it. An acceptance which requests a change or addition to the terms o — the o —
er is not thereby invalidated unless the acceptance is made to depend on an assent to the changed or added terms. R2d § 61. For example, i — the o —
er is — or twenty- — our hours o — babysitting at the rate o — $20 per hour, an o —
eree could accept this o —
er, unequivocally mani — esting agreement to the basic terms, but simultaneously request that the o —
eror consider a slightly lesser number o —
hours o
babysitting — say, twenty hours. This would act as an acceptance o — the original o —
er but also give the o —
eror the opportunity to agree to the twenty-hour term instead o — the twenty- — our-hour term, as the o —
eror chooses. In contrast, i — the o —
eree indicates that her acceptance depends on (is conditional upon) the o —
eror’s assent to the twenty- hour term, then this would not be a valid acceptance. It would be a countero —
er.
Modern Mirror Image Rule Example: P & W Railroad. You’ve already encoun- tered Providence & Worcester Railroad as an example o — the modern, more
lexible approach to the mirror image rule — and it’s o — ten cited — or that relaxed standard. But let’s look more closely — not just at what the court held, but why it might have reached that conclusion, and what this case reveals about how courts apply contract doctrine in the — ace o — strategic behavior. At — irst glance, the case seems to relax the mirror image rule. The State o — Rhode Island accepted a statutory o —
er — rom the railroad company to buy land, but its response included two minor modi — ications: (1) correcting the buyer’s name, and (2) noting that the seller need not remove railroad tracks as the original o —
er stated. The railroad argued that these changes made the state’s letter a countero —
er, not a valid acceptance. But the court disagreed. It — ound both changes immaterial: one merely — ixed an obvious clerical issue, and the other relieved the railroad o — a costly obligation. But step back. Why was the railroad trying so hard to invalidate the state’s acceptance? The answer lies in context. A statute gave the state a right o —
irst re — usal, requiring the railroad to o —
er the land to the state be — ore selling it to anyone else. The railroad had already lined up a private sale and was hoping the state wouldn’t buy. When the state tried to accept, the railroad reached — or a technical escape hatch: the mirror image rule. 130 6 • Acceptanc
The court saw what was happening. It acknowledged the acceptance wasn’t a per — ect mirror image, but re — used to let — ormal doctrine be weaponized to avoid a statutory obligation. Instead, invoking the “rules o — common sense,” the court upheld the state’s acceptance. The deeper lesson o — Providence & Worcester Railroad is that courts may apply seemingly rigid rules like the mirror image rule with — lexibility — especially to prevent opportunism or bad- — aith tactics. The case doesn’t reject the mirror image rule outright. But it reminds us that context matters. The rule must yield when strict application would — rustrate statutory purpose, undermine — airness, or allow one party to game the system. In short: contract law isn’t just about — ormal precision — it’s about how rules operate in practice, where — acts, — airness, and strategy o — ten shape the outcome.
B. Acceptance under the UCC: Battle o — the Forms Under the common law, the mirror image rule requires that the terms o — the acceptance exactly match the terms o — the o —
er. Any deviation constitutes a countero — -
er, rather than an acceptance, leaving no contract unless the original o —
eror explicitly agrees to the new terms. While some jurisdictions occasionally adopt a more lenient approach, the mirror image rule imposes a high standard — or acceptance o — o —
ers. The UCC rejects this strict rule in — avor o — a more — lexible — ramework under § 2-207, o — ten re — erred to as the “battle o — the — orms.” This provision — acilitates the — ormation o — binding contracts — or the sale o — goods even when the exchanged — orms — such as a purchase order and an invoice — contain di — — erent or additional terms. By recognizing that businesses o — ten intend to proceed with transactions despite minor discrepancies, § 2-207 reduces the risk o — transactional deadlock caused by rigid adherence to the common law rule. The battle o — the — orms deals with situations where parties exchange non-matching
orms — — or example, a purchase order speci — ying “disputes to be resolved by arbi- tration in New York” and an invoice stating “disputes to be resolved by arbitration in Cali — ornia” — but still proceed with the transaction without a — inalized written agreement. This situation commonly arises because merchants o — ten use preprinted, standard — orms containing generic, boilerplate language, which are designed to — avor their own interests. As a result, the o —
er and acceptance — requently include con — lict- ing terms. Under the common law mirror image rule, there would be no contract in such a scenario, as the terms do not match. However, under the UCC’s battle o — the — orms, a contract can still be — ormed i — there is a “de — inite and seasonable expression o —
acceptance,” as long as the acceptance is not expressly made conditional on assent 6 • Acceptanc 131
to the additional or di
— erent terms. The challenge then becomes determining what terms govern the contract. UCC § 2-207 — acilitates the — ormation o — contracts even when the terms in the exchanged — orms are not identical, recognizing that businesses o — ten intend to pro- ceed with agreements despite minor discrepancies. While it solves the problem o —
having no contract where one is clearly intended, it introduces the challenge o
deter- mining what that contract requires. Correctly applying UCC § 2-207 requires not only proceeding care — ully through its applicable provisions but also recognizing how di — — erent jurisdictions interpret some aspects o — the battle o — the — orms di —
erently.
- Formation The — irst subsection addresses whether a contract has been — ormed. A contract arises i — there is a “de — inite and seasonable expression o — acceptance” or a written con — irmation, even i — the acceptance includes terms that di —
er — rom or add to the o —
er, unless the acceptance is explicitly made conditional on the o —
eror’s assent to those terms. This — lexibility ensures that minor discrepancies in the — orms — such as di —
erences in boilerplate terms — do not prevent the creation o — a binding contract. It shi — ts the
ocus — rom achieving per — ect alignment o — terms to identi — ying whether the core terms re — lect agreement and whether the parties intended to proceed with the transaction. For example, a grocery store sends a purchase order — or “15 dozen peaches at $250, delivery within 10 days.” The — armer responds with an acknowledgment — orm stating, “Agreed: 15 dozen peaches at $250, delivery within 7–10 days.” Despite the slight di — -
erence in the delivery window, this is a de — inite and seasonable acceptance because it re — lects agreement on the material terms: quantity, price, and general timing o —
delivery. An acceptance — ails to — orm a contract i — it includes terms that materially change the o —
er and i — it makes the acceptance conditional on the o —
eror’s agreement to those changes. In such cases, the response is treated as a countero —
er, not an acceptance. For example, a buyer submits a purchase order — or “500 chairs at $50 each, deliv- ery within 30 days.” The seller responds with an acknowledgment — orm stating, “We accept your order — or 500 chairs at $50 each, delivery within 30 days, but only i — you agree that all disputes will be resolved by arbitration in Cali — ornia.” Here, the seller’s purported acceptance is expressly conditional on the buyer’s assent to the arbitration clause. This constitutes a countero —
er, not an acceptance. Until the buyer explicitly agrees to the arbitration clause, no contract is — ormed under UCC § 2-207(1), so no — urther analysis o — the terms is necessary. I — there is a contract, then the next step is to analyze which terms govern the con- tract. To do this, it is important to distinguish between additional terms and di — — erent terms, as their treatment under the UCC varies. 132 6 • Acceptanc
a. Additional Terms Additional terms are provisions included in the acceptance that address topics not covered in the original o ---
er. These terms supplement the contract and do not directly con — lict with the terms in the o —
er. Suppose the purchase order — or peaches is silent on the time o — day — or delivery, but the acknowledgment adds, “Delivery must be made between 9 a.m. and 5 p.m.” This time-o — -day speci — ication is an additional term because it introduces a new detail not addressed in the original o —
er. The UCC speci — ies how to handle additional terms in subsection (2), discussed below.
b. Di --- --- erent Terms
Di --- --- erent terms are provisions in the acceptance that contradict terms in the origi- nal o ---
er. These terms address the same topic as a term in the o —
er but propose a di —
erent resolution. In the peaches example, the purchase order speci — ies delivery within ten days, while the acknowledgment speci — ies delivery within seven to ten days. Because both terms address the same topic (delivery timing) and propose con — licting conditions, the sell- er’s provision constitutes a di — — erent term. The UCC does not speci — ically discuss how to handle di — — erent terms. This ambigu- ity led to a split in judicial interpretation, which is also discussed below.
-
The Fate o
Additional Terms Once a contract is — ormed under § 2-207(1), the next question is whether any additional terms included in the o —
eree’s acceptance become part o — the agree- ment. UCC § 2-207(2) provides di — — erent rules depending on whether the parties are merchants.
a. Additional Terms Excluded Where at Least
One Party Is Not a Merchant I --- one or both parties are not merchants, then additional terms in the acceptance are treated as mere proposals to modi --- y the contract. These proposals do not become part o --- the agreement unless the o ---
eror explicitly agrees to them. For example, a consumer orders a laptop — rom a retailer, including a purchase order that speci — ies a — ourteen-day return policy. The retailer’s con — irmation slip states, “Returns accepted only within 7 days.” Because the consumer is not a merchant, the retailer’s seven-day return policy is a proposed modi — ication, not automatically part o — the contract. Unless the consumer explicitly agrees to the change, the original
ourteen-day policy governs. 6 • Acceptanc 133
b. Additional Terms Included Where
Both Parties Are Merchants When both parties are merchants, additional terms in the acceptance automati- cally become part o --- the contract unless one o --- the --- ollowing exceptions applies:
(a) The o ---
er expressly limits acceptance to its terms. I — the o —
er includes language such as “This order is subject to the terms stated herein, and no additional terms will be accepted,” the additional terms are excluded. (b) The additional term materially alters the contract. A term materially alters the contract i — it would result in surprise or hardship to the o —
eror without their explicit awareness. For instance, terms like “disclaimers o —
warranties,” changes in liability allocation, or
orum selection clauses o — ten quali — y as material alterations. For example, a buyer’s purchase order speci — ies “Delivery within 30 days” and makes no mention o — liability. The seller’s acknowledgment includes a clause stating, “Seller is not liable — or any delays.” Because this clause shi — ts a signi — icant risk to the buyer, it would likely be considered a material alteration and excluded unless explicitly agreed to. Conversely, a buyer’s purchase order speci — ies “Delivery by common carrier.” The seller’s acknowledgment adds, “Seller will select the carrier.” This is a minor adjust- ment and does not cause undue surprise or hardship, so it becomes part o — the con- tract unless the o —
eror objects. (c) The o —
eror objects to the additional terms within a reasonable time. I — the o —
eror noti — ies the o —
eree promptly that they object to the additional terms, those terms are excluded. The UCC does not de — ine what constitutes a “reasonable time,” so the determination depends on the context o — the transaction and industry norms.
-
The Fate o
Di — — erent Terms While UCC § 2-207(2) explicitly governs additional terms, it does not directly address how to handle di — — erent terms — those that contradict terms in the original o —
er. The lack o — clear statutory guidance has led courts to adopt di — — erent approaches
or resolving con — licts between terms.
a. The Knock-Out Rule (Majority View) Under the knock-out rule, con --- licting terms in the o ---
er and acceptance cancel each other out, or “knock each other out,” and are replaced by de — ault rules — rom the UCC (gap — illers). This approach treats the con — licting terms as evidence that the parties
ailed to agree on that speci — ic issue. By eliminating the con — licting terms, the knock- out rule ensures that neither party’s term prevails over the other. 134 6 • Acceptanc
For example, a buyer’s purchase order states, “Disputes to be resolved in New York courts,” while the seller’s acknowledgment — orm states, “Disputes to be resolved in Cali — ornia courts.” Under the knock-out rule, both terms are excluded — rom the con- tract, and a court would rely on UCC gap — illers or general jurisdictional principles to resolve disputes. The knock-out rule is the prevailing interpretation among courts, as it aligns with the UCC’s intent to resolve disagreements pragmatically and maintain the validity o —
the contract.
b. The Last-Shot Rule (Minority View) The last-shot rule is a common law doctrine that predates the UCC. Under this rule, the terms o --- the last document exchanged be --- ore per --- ormance govern the contract. Courts applying the last-shot rule e ---
ectively hold that by per — orming a — ter receiving the — inal — orm, the other party implicitly assents to its terms, regardless o — any con — licts with prior documents. This rule creates a “winner-takes-all” result — or the party that sent the — inal document, o — ten — ailing to account — or the mutual intent o — the parties and sometimes leading to un — air outcomes. For example, a buyer sends a purchase order — or one hundred widgets, speci — ying that disputes must be resolved in New York courts. The seller’s acknowledgment — orm includes a con — licting term requiring arbitration in Cali — ornia. The seller ships the widgets, and the buyer accepts them. Under the last-shot rule, the seller’s term pre- vails because it was included in the — inal document exchanged be — ore per — ormance. Although UCC § 2-207 was designed to displace rigid common law rules like the last-shot rule, some courts still revert to it in limited circumstances. Speci — ically, the last-shot rule may apply (1) where the UCC does not apply (e.g., service contracts) or (2) where per — ormance is viewed as assent. In cases involving “conduct-based” contracts, a court may interpret the parties’ per — ormance as implicit agreement to the terms in the — inal document. Here, the last- shot rule could theoretically make the — inal document the governing document. While the last-shot rule persists in some cases, it is generally inconsistent with the UCC’s objectives, which — avor resolving con — licting terms through more equitable mechanisms like the knock-out rule. Most courts addressing con — licting terms under UCC § 2-207 have moved away — rom the last-shot rule in — avor o — approaches that align more closely with the mutual intent o — the parties, even in cases o — acceptance by per — ormance.
- Conduct-Based Contracts When the parties’ writings — ail to establish a contract under UCC § 2-207(1) — — or example, because one party’s acceptance is conditional on the other party’s agreeing to additional or di — — erent terms — a contract may still be — ormed through the parties’ 6 • Acceptanc 135
conduct. UCC § 2-207(3) governs these conduct-based contracts,
ocusing on the actions o — the parties rather than on their written communications. Under § 2-207(3), i — the parties proceed with per — ormance (e.g., the seller delivers the goods, and the buyer pays — or them) despite unresolved con — licts in their — orms, then a contract may be — ormed based on their conduct. The terms o — the contract are determined as — ollows by two rules: Agreed Terms Remain. The contract includes the terms on which the par- ties’ — orms agree. Con — licting or Missing Terms “Fall Out.” Any con — licting terms or terms le — t unresolved by the parties’ — orms are excluded — rom the contract. These gaps are — illed by UCC de — ault provisions, known as gap — illers, which supply reasonable and neutral terms. For example, a buyer sends a purchase order speci — ying “Delivery within 30 days.” The seller responds with an acknowledgment — orm speci — ying “Delivery within 60 days, disputes resolved by arbitration.” The buyer replies to the seller, stating, “We cannot agree to the 60-day delivery term or the arbitration clause.” However, despite this rejection o — the modi — ied terms, the buyer allows the seller to proceed with deliv- ery. The seller delivers the goods on day 45, and the buyer accepts and pays — or them. Here, the parties’ writings do not — orm a contract under § 2-207(1) because the buyer did not assent to the seller’s modi — ied delivery term. However, their conduct — delivery and payment — establishes a contract under § 2-207(3). The agreed terms include the quantity and price, while the delivery time — rame and arbitration clause “ — all out.” UCC gap — illers, such as “reasonable time” — or delivery, supply the missing terms. Although § 2-207(3) o — ten results in con — licting terms’ being excluded, it is distinct
rom the knock-out rule. The knock-out rule speci — ically addresses how con — licting terms are treated when a contract is — ormed through writings under § 2-207(1) or (2). In contrast, § 2-207(3) applies when the — orms do not establish a contract at all and the agreement arises solely — rom the parties’ actions. Conduct-based contracts under § 2-207(3) re — lect the UCC’s pragmatic approach to contract — ormation. By — ocusing on the parties’ intent as demonstrated through their per — ormance, § 2-207(3) ensures that agreements are recognized even when the
orms are irreconcilable. However, it also emphasizes that con — licting terms will not be imposed unless expressly agreed upon, preserving — airness and neutrality in com- mercial transactions.
-
Conclusions on the Battle o
the Forms The UCC’s — lexible approach to contract — ormation promotes commercial e —
i- ciency by reducing the potential — or transactional deadlocks caused by minor dis- crepancies. However, it also introduces complexity, which requires care — ul attention 136 6 • Acceptanc
to the interplay among statutory language, judicial interpretation, and the practical realities o — commercial transactions. The distinction between “knock out” and “ — all out” emphasizes the importance o — understanding when con — licting terms cancel each other versus when terms are excluded due to a lack o — agreement. Students should be prepared to analyze these nuances to navigate the challenges o — modern contracting e —
ectively.
C. The Mailbox Rule The so-called “mailbox rule,” also known as the “dispatch rule,” governs the timing o — acceptance in contract — ormation when parties communicate using time-delayed methods, such as mail. Under this rule, an acceptance is valid upon dispatch, “as soon as put out o — the o —
eree’s possession,” not upon receipt, provided that the acceptance is properly addressed, stamped, and sent. See R2d § 63(a). Unless the o —
er provides otherwise, an acceptance made in a manner and by a medium invited by the o —
er is operative and completes the mani — estation o — mutual assent as soon as it is dispatched, regardless o — whether it ever reaches the o —
eror. This rule — acilitates contract — ormation by reducing uncertainty — or o —
erees who rely on their acceptance being e —
ective once sent. The mailbox rule has many limitations and exceptions:
• It applies only to acceptances and only when there is a time delay between the
dispatch and receipt o --- the communication. It does not apply to other com-
munications in the contract --- ormation process, such as o ---
ers, revocations, rejections, or countero —
ers. These other communications are e —
ective only upon receipt by the other party. See R2d § 66. • It does not apply to — ace-to- — ace conversations, phone calls, or other — orms o —
nearly instantaneous communication. In such cases, acceptance is generally
valid only upon receipt. See R2d § 64.
• It does not apply to option contracts. An acceptance under an option contract
is not e ---
ective upon dispatch but only when received by the o —
eror. Courts reason that because option contracts o — ten involve strict time limits, the risk o —
delay must rest with the o ---
eree, who has the burden o — ensuring the acceptance arrives in time. See R2d § 63(b). • It no longer applies when the o —
eree dispatches a rejection or countero —
er be — ore dispatching an acceptance; in that case, whichever communication the o —
eror receives — irst governs. See R2d § 40. • It is a de — ault rule that parties can modi — y. For example, an o —
eror can speci — y that acceptance is valid only upon receipt. In such cases, the acceptance is not e —
ective until the o —
eror receives it. See R2d § 63(a) (“. . . unless the o —
er provides otherwise.”). 6 • Acceptanc 137
• Its application may be limited as justice requires. When the o ---
eree sends an acceptance but then sends a rejection or countero —
er, and the o —
eror receives the rejection or countero —
er — irst and reasonably relies on it, the o —
eree may be estopped — rom en — orcing the original acceptance. This principle protects the o —
eror — rom detrimental reliance caused by con — licting communications. See R2d § 63 illustration 7. Setting aside such exceptions, most mailbox-rule problems can usually be resolved simply by remembering that most o — the communications during the contract — orma- tion process are e —
ective upon receipt, except — or acceptances sent by time-delayed mail, which are valid upon dispatch. I — you remember the rule that acceptances are e —
ective when they are sent, and everything else is e —
ective when received, then you can work out most mailbox-rule problems.
-
Modern Applications o
the Mailbox Rule The traditional mailbox rule, which deems an acceptance e —
ective upon dispatch rather than receipt, — aces signi — icant challenges when applied to modern — orms o — com- munication such as email, text messages, and instant messaging. While the rule was designed — or time-delayed methods like postal mail, the near-instantaneous nature o — electronic communication demands a reevaluation o — its application. Courts have taken varied approaches, which re — lects an ongoing legal and technological evolution. In the context o — digital correspondence, the presumption o — receipt upon dis- patch is less widely applied. Courts o — ten — avor the time-o — -receipt rule — or electronic communications, rejecting the mailbox rule due to the instantaneous or near- instantaneous nature o — these mediums. For example, in In re Bruce, 610 B.R. 603 (Bankr. E.D. Wis. 2019), the court applied the time-o — -receipt rule to electronic com- munications, holding the sender responsible i — receipt did not occur. See also Miller v. Plain Dealer Publ’g Co., 2015-Ohio-1016 (Ct. App.) (holding that the mailbox rule provides a rebuttable presumption o — receipt — or postal mail but does not apply to email communications; emphasizing that even i — an analogous rule — or email existed, the presumption o — receipt could be rebutted by evidence o — non-receipt or circum- stances within the control o — the party claiming the notice was not received, such as
ailure to update an email address.) Some courts emphasize the immediacy o — digital communication, likening it to
ace-to- — ace or telephone conversations, where acceptance is e —
ective only upon receipt. Trinity Homes, L.L.C. v. Fang, 63 Va. Cir. 409 (Cir. Ct. 2003) (holding that the mailbox rule applies to — acsimile transmissions, treating a — axed acceptance as e —
ec- tive upon dispatch i — properly transmitted; however, the court concluded the sender
ailed to prove by a preponderance o — the evidence that the — acsimile was success — ully transmitted, highlighting the importance o — transmission logs or veri — ication in estab- lishing compliance with the rule), supports this approach, as it aligns with principles in R2d § 64 — or near-instantaneous two-way communication. 138 6 • Acceptanc
The
unctionality o — spam — ilters has been considered when rebutting the presump- tion o — receipt. Courts recognize that the aggressiveness o — a recipient’s spam — ilter or the sender’s email address triggering such — ilters can serve as evidence to rebut presumptions o — receipt. See Aitken v. Communs. Workers o — Am., 496 F. Supp. 2d 653 (E.D. Va. 2007) (holding that spam — ilters blocking email communications could serve as evidence to rebut the presumption o — receipt under the mailbox rule, emphasizing that the presumption is not absolute and can be challenged by showing that the mes- sage was not actually received); Anania v. McDonough, 1 F.4th 1019 (Fed. Cir. 2021) (emphasizing that the mailbox rule creates a rebuttable presumption o — receipt, which can be challenged with evidence demonstrating non-receipt, including technical issues or other irregularities; rejected a rigid rule against using sel — -serving a —
idavits to invoke the presumption and emphasized the need to weigh all available evidence in context). In addition, statutes like the Uni — orm Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce (E-Sign) Act provide — rame- works — or validating electronic communications but remain neutral on the applica- tion o — the mailbox rule. As courts grapple with the modern application o — the mailbox rule, they should consider risk allocation, technological — actors, and — uture trends. Traditional postal mail risk allocations are less relevant when electronic systems enable almost imme- diate transmission and acknowledgment. Factors like email delivery — ailures, server errors, and message delays complicate the application o — traditional rules. Emerg- ing technologies, such as blockchain and virtual reality communication, are likely to require — urther adaptation o — existing doctrines.
-
Traditional Applications o
the Mailbox Rule Why, then, is learning the traditional mailbox rule relevant? One reason is that bar examiners are still likely to test on quirky timing issues involving time-delayed corre- spondence. Another reason is that — uture developments in law will likely be based on reasoning established in traditional rules. For now, you should still learn the mailbox rule.
Mailbox Rule Hypo: Gallaway. Consider this tricky mailbox-rule problem. On January 1, Gallaway posts an advertisement in a local newspaper that he is selling his car. He includes a price o — $10,000 and provides a mailing address to interested parties to write — or more in — ormation. On January 5, Her- nandez sends a letter to Gallaway o —
ering to pay $8,000 — or the car. Gallaway receives Hernandez’s o —
er on January 7 and replies on January 8 by posting a letter to Hernandez stating, “I cannot sell it — or less than $9,000.” On Janu- ary 9, Gallaway has a change o — heart. At 9 a.m., he sends a second letter that states, “I accept your o —
er — or $8,000.” Hernandez receives Gallaway’s — irst letter 6 • Acceptanc 139
(proposing $9,000) at 10 a.m. At 1 p.m., Hernandez writes back and states, “I accept your $9,000 o —
er.” At 4 p.m., Hernandez receives Gallaway’s second letter (accepting his $8,000 o —
er). On January 10, Hernandez writes Gallaway again, stating “I accept your $8,000 o —
er.” On January 11, Gallaway receives both o — Hernandez’s letters (the $9,000 acceptance and the $8,000 acceptance) in his mailbox at the same time. On January 12, Gallaway drives the car to Hernandez and demands $9,000. Hernandez insists on paying $8,000. What is Hernandez required to pay, i —
anything?
Let us analyze this situation by applying the rules you have learned. Gallaway’s advertisement on January 1 is not an o ---
er but rather an invitation to make o —
ers. Advertisements generally lack the intent to be bound and are not treated as o —
ers under contract law. Hernandez’s letter on January 5 o —
ering $8,000, however, is a valid o —
er. It demonstrates a present willingness to enter a bargain and provides reason- ably certain terms that justi — y Gallaway in believing his acceptance will conclude the deal. Hernandez’s o —
er becomes e —
ective upon receipt, which occurs on January 7. See R2d § 63(c). Gallaway’s letter on January 8, stating, “I cannot sell it — or less than $9,000,” is a countero —
er. A countero —
er serves both to reject the original o —
er and to propose new terms. Under R2d § 39, this countero —
er terminates Hernandez’s original $8,000 o —
er. The countero —
er is e —
ective when Hernandez receives it, which occurs on Janu- ary 9 at 10 a.m. At 9 a.m. on January 9, Gallaway sends a second letter attempting to accept Her- nandez’s original $8,000 o —
er. Under the mailbox rule, R2d § 63(a), an acceptance is generally e —
ective upon dispatch i — properly addressed and sent. However, because Gallaway’s countero —
er terminated Hernandez’s original o —
er, the mailbox rule no longer applies. Instead, R2d § 40 governs: “Whichever communication is received
irst controls.” Hernandez receives Gallaway’s countero —
er at 10 a.m., be — ore receiving Gallaway’s attempted acceptance, so the $8,000 o —
er is no longer available to accept. At 1 p.m. on January 9, Hernandez sends a letter stating, “I accept your $9,000 o —
er.” This constitutes a valid acceptance o — Gallaway’s countero —
er. Under Restate- ment § 63(a), Hernandez’s acceptance is e —
ective upon dispatch, — orming a binding contract — or $9,000 at 1 p.m. The parties are now legally bound to a contract — or the sale o — the car at $9,000. At 4 p.m. on January 9, Hernandez receives Gallaway’s second letter attempting to accept the $8,000 o —
er. However, this letter has no legal e —
ect. The $8,000 o —
er had already been terminated by the countero —
er, and a binding contract — or $9,000 was
ormed earlier that day. Similarly, Hernandez’s January 10 letter to Gallaway stating, “I accept your $8,000 o —
er,” is irrelevant. Once a binding contract is — ormed, subsequent 140 6 • Acceptanc
communications cannot alter its terms unless both parties agree to a modi
ication. See R2d § 87(2) — or modi — ication rules. On January 12, when Gallaway drives the car to Hernandez and demands $9,000, Hernandez is legally obligated to pay that amount. The binding contract — or $9,000,
ormed on January 9 at 1 p.m., governs the transaction.
D. Re
lections on Acceptance This module on mutual assent initially may have seemed a little abstract. That is because the doctrine o — mutual assent is best understood by exploring its speci — ic ele ments, o —
er and acceptance, which we did a — ter reviewing the general concepts. As the doctrine gets more speci — ic, it also becomes clearer. See i — you can now reconstruct the abstraction o — mutual assent with a new — ound appreciation — or its purpose: mutual assent re — lects the goal o — contract law to e —
ectuate the intent o — the parties. Yet this goal o — en — orcing two parties’ original mutual intentions is in tension with the realities o — contract law. Intentions can be obscure. Ephemeral memories o — past
eelings give courts little guidance on how they should rule today. Contracts must be clear and predictable i — they are to govern the actions o — two parties. For this reason, objective evidence — such as written terms, eyewitness testimony, or an expert in the trade — is pre — erred over parties’ descriptions o — their subjective perspective. In other words, although mutual assent is a subjective state o — a meeting o — the minds, courts will look — or objective evidence that the parties expressed a common understanding, and that outward expression is what mutual assent entails.
Cases Reading State Department o --- Transportation v. Providence & Worcester Railroad Co. You’ve already encountered Providence & Worcester Railroad as an example o --- the modern, more --- lexible approach to the mirror image rule — and it’s o --- ten cited --- or that relaxed rule. But let’s look more closely — not just at what the court held, but why it might have reached that conclusion, and what this case reveals about how courts apply contract doctrine in the --- ace o ---
strategic behavior. At a sur — ace level, the case appears to relax the mirror image rule. The State o — Rhode Island accepted a statutory o —
er — rom a railroad company to buy land, but its letter included two modi — ications: (1) requesting to correct the buyer’s name, and (2) noting that the seller need not remove the railroad tracks as previously stated. The railroad company argued these changes invalidated the acceptance, making it a countero —
er. But the court — ound both changes 6 • Acceptanc 141
immaterial: one corrected a clerical oversight, and the other con
erred a bene — it on the railroad by saving it the cost o — track removal. But take a step back. Why was the railroad so eager to invalidate the state’s acceptance? The answer lies in context. A statute required the railroad to o —
er the land to the state be — ore selling it to a private buyer. The railroad had already entered into a deal with a private developer, contingent on the state declining to purchase. Its technical argument about the mirror image rule was, in e —
ect, a way to escape its legal obligation — a — ormal argument deployed to serve a strategic goal. The court saw this. It acknowledged the letter wasn’t a per — ect mirror image o — the o —
er, but it re — used to let contract doctrine be used as a tool o — eva- sion. Instead, the court applied “rules o — common sense” and treated the state’s response as a valid acceptance. The deeper lesson o — Providence & Worcester Railroad is that courts may apply seemingly rigid rules like the mirror image rule with — lexibility — espe- cially to prevent opportunism or bad- — aith tactics. The case doesn’t reject the mirror image rule outright. But it reminds us that context matters. The rule must yield when strict application would — rustrate statutory purpose, under- mine — airness, or allow one party to game the system. In short: contract law isn’t just about — ormal precision — it’s about how rules operate in practice, where — acts, — airness, and strategy o — ten shape the outcome.
State Department o --- Transportation v. Providence &
Worcester Railroad Co.
674 A.2d 1239 (R.I. 1996) LEDERBERG, Justice.
This case arose --- ollowing the sale o --- a parcel o --- land by the de --- endant, Providence and Worcester Railroad Co. (P & W or the railway company), to the code --- endant, Promet Corp. (Promet). The conveyance was declared “null and void” by an amended judgment o --- the Superior Court that ordered P & W to convey the parcel to the plain- ti ---
, the State o — Rhode Island Department o — Transportation (state), — or the purchase price o — $100,000. The state was ordered to pay prejudgment interest on the purchase price, and P & W was required to reimburse Promet — or interest on the purchase price and — or property taxes that Promet paid while it was in possession o — the parcel. The state appealed — rom the requirement that it pay interest on the purchase price; P & W appealed — rom the Superior Court’s — indings that the state was entitled to purchase the property and that P & W had to reimburse Promet — or property taxes and — or interest on the purchase price. Promet — iled a brie — in support o — the amended Superior Court 142 6 • Acceptanc
judgment. For the reasons recited below, we sustain in part and reverse in part the judgment o — the Superior Court. In 1985, P & W owned a 6.97-acre parcel o — water — ront property in East Provi- dence, Rhode Island. Railroad tracks were situated on the property, but the property was, and remains, otherwise unimproved. The railroad tracks at one time ran — rom the — ormer Union Station through a tunnel, and over a bridge. At that point the tracks reached the subject property where they split to — orm a Y, one o — whose arms directed rail tra —
ic north, and the other traveled south on what is known as the Bristol sec- ondary track. The railroad company had acquired this property in 1982 — rom the Consolidated Rail Corporation (Conrail) as part o — P & W’s purchase o — all Conrail’s Rhode Island — reight operations. The property, however, was acquired by P & W subject to an order o — the Spe- cial Court under the Regional Rail Reorganization Act o —
- That order required P & W to “guarantee rail service [on the property] — or — our years — rom the date” o —
conveyance on May 1, 1982, and stipulated that P & W could “not seek to abandon or discontinue rail service . . . — or such — our-year period.” It is undisputed that P & W never petitioned the Interstate Commerce Commission (ICC) to abandon or to dis- continue rail service pursuant to the provisions [o — a — ederal statute regarding the termination o — rail services]. On December 12, 1985, P & W entered into a purchase and sale agreement with Promet — or the sale o — the subject property at the price o — $100,000. Although the tracks were still suitable — or rail use, the property was not being used — or rail purposes, or any other uses at the time o — the transaction. The terms o — the purchase and sale agreement expressly made the agreement “subject to a 30 day option in the State o —
Rhode Island to purchase the premises,” as required by [Rhode Island’s statute govern- ing the sale o — rail properties], which provided:
“All rail properties within the state o ---
ered — or sale by any railway corporation a — ter April 9, 1976 shall be o —
ered — or sale to the state in the — irst instance at the lowest price at which the railway corporation is willing to sell. The railway corporation shall noti — y the state in writing i — it desires to o —
er — or sale any rail properties. The state shall have a period o — not more than thirty (30) days — rom receipt o — the noti — ication to accept the o —
er.”
On November 20, 1985, Joseph Arruda (Arruda), assistant director
or planning
or the State Department o — Transportation, wrote to P & W’s agent, Joseph DiSte — ano (DiSte — ano). In that letter, Arruda re — erred to an October 22, 1985 meeting he had attended with DiSte — ano and principals o — Promet at which “it was mentioned that Promet Property and P & W were discussing the sale o — abandoned railroad proper- ties.” Arruda claimed that “the state must be given — irst option to acquire” the property and stated that “[i] — , in — act, P & W is pursuing the sale o — any railroad property in this area, we would sincerely appreciate being noti — ied at the earliest possible date.” On December 12, 1985, DiSte — ano wrote to Arruda, stating: 6 • Acceptanc 143
Dear Mr. Arruda:
You are hereby noti --- ied, pursuant to Section 39-6.1-9 o --- the Rhode Island Gen-
eral Laws, that this company proposes to sell a certain parcel o --- land situated
at East Providence, Rhode Island . . . --- or $100,000 with a closing to be held
on January 17, 1986.
Pursuant to statute, the State o --- Rhode Island has a period o --- thirty (30)
days --- rom the date o --- this noti --- ication within which to accept this o ---
er to sell under the same terms and conditions as outlined in the enclosed Real Estate Sales Agreement. I — the State’s rights are not exercised within such period, we shall deem our- selves — ree to sell the property to Promet Corp. in accordance with the terms o —
the enclosed Real Estate Sales Agreement.
This notice is sent to you although this company is o --- the opinion that the
property in question is not covered by [Rhode Island’s statute governing the
sale o --- rail properties]. On January 7, 1986, Herbert DeSimone (DeSimone), director o --- transportation --- or the state, accepted the o ---
er in writing. In his letter to DiSte — ano, DeSimone wrote, “O —
course, you understand that certain wording in the Real Estate Sales Agreement relat- ing to ‘buyer’ and obligations concerning the removal o — track would be inappropriate to the purpose o — the State’s purchase.” The closing between P & W and Promet had been originally scheduled — or January 17, 1986, but the parties rescheduled several times, — inally agreeing to April 14, 1986, at 10 a.m. The reason — or rescheduling the closing date was to allow the state and Promet’s engineers to determine whether the property could accommodate Promet’s development plans while preserving the state’s rail options. Such a plan proved to be impossible. On April 11, 1986, the state — iled a complaint in Superior Court, claiming that P & W was re — using to convey title to the property to the state but was going to “convey title to said land to the Promet Corporation on Monday, April 14, 1986 at 8:30 A.M. in derogation o — the State’s statutory rights.” The state sought a temporary restraining order to enjoin the conveyance to Promet, but the Superior Court justice denied the state’s request, indicating that the state had protected its rights and that P & W would be proceeding at its own risk. Some minutes be — ore 10 a.m. on April 14, 1986, Arruda appeared on behal — o — the state at DiSte — ano’s o —
ice and tendered a check — or $100,000. Arruda was in — ormed that P & W had already delivered the deed to the property to Promet earlier that morning. The closing between P & W and Promet had taken place at a location and time (8:30 a.m. instead o — 10 a.m.) di — — erent — rom those originally scheduled, and P & W had taken no a —
irmative steps to in — orm the state o — these changes. The state — iled its amended complaint on December 9, 1986, naming both P & W and Promet as de — endants, praying that the deed to Promet be declared null and void. Promet — iled two counterclaims and a request — or jury trial. The counterclaims were 144 6 • Acceptanc
later severed, and the parties waived by stipulation the demand
or a jury trial. The trial was held be — ore a justice o — the Superior Court on November 15, 1991, and Janu- ary 30, 1992. At trial, P & W and Promet argued that the subject property was not “rail property” subject to the statute because it was not being used — or rail purposes at the time o — the conveyance. The railroad company and Promet — urther argued that the state had waived any rights it possessed under the statute by having — ailed to tender payment — or the property within the thirty days prescribed [by Rhode Island’s statute governing the sale o — rail properties]. In his decision issued — rom the bench, the trial justice — ound that the property in question is “rail property” within the meaning o — [Rhode Island’s statute governing the sale o — rail properties], that it was dedicated — or railroad use, and that it was avail- able — or rail purposes. The trial justice — ound “some o — the testimony given by de — en- dant’s witness disingenuous when he made the comment that there was no — unction in 1986 — or rail property uses, when that was exactly the same condition when the Special Court order was entered into in 1982, which speci — ically says that no abandon- ment or discontinue o — rail use service should take place — or a — our-year period a — ter the conveyance.” The trial justice — urther — ound that the state had validly accepted P & W’s o —
er within the thirty-day period and that the state was not required to tender payment at that time. Rather, the trial justice determined that the state had a “reasonable time” in which to pay — or the property, and he indicated that such reason- able time coincided with the various closing dates scheduled by P & W and Promet. The trial justice issued an amended judgment on March 17, 1994. In that judg- ment, the trial justice declared the deed — rom P & W null and void and ordered that the property be trans — erred to the state. In addition, the trial justice ordered P & W to repay to Promet the purchase price o — $100,000 plus interest and to reimburse Promet — or real estate taxes that Promet had paid on the property, plus interest on that amount. Finally, the amended judgment required the state to pay P & W the $100,000 purchase price plus interest. On April 14, 1994, the state appealed that portion o — the amended judgment that required the state to pay P & W the interest on the $100,000 purchase price. The rail- road company — iled its notice o — appeal on April 20, 1994. Did the State’s January 7, 1986 Letter Constitute a Valid Acceptance o — P & W’s O —
er? The trial justice — ound that on December 12, 1985, P & W extended an option to the state to purchase the subject property and that the January 7, 1986 letter — rom DeSimone to DiSte — ano was “a valid exercise o — [Rhode Island’s statute governing the sale o — rail properties] option.” The — inding o — a trial justice sitting without a jury in respect to the — ormation o — a contract is entitled to great weight, and this Court will not disturb such a — inding unless the trial justice “misconceived material evidence or was otherwise clearly wrong.” On appeal, P & W asserted that no contract — or the sale o — the subject parcel existed because the state’s January 7, 1986 letter did not constitute a valid acceptance o — P & W’s December 12, 1985 o —
er. In support o — its assertion, 6 • Acceptanc 145
P & W argued that the January 7 letter in
act proposed additional terms to the agree- ment. The letter — rom DeSimone to DiSte — ano provided in pertinent part: Pursuant to [Rhode Island’s statute governing the sale o — rail properties], I am writing to you on behal — o — the State o — Rhode Island to exercise its right to accept the o —
er to purchase 6.9 acres o — land. O — course, you understand that certain wording in the Real Estate Sales Agreement [re — erring to the agreement between P & W and Promet] relating to ‘buyer’ and obligations concerning the removal o — track would be inappro- priate to the purpose o — the State’s purchase. Please contact Mr. Joseph F. Arruda o — this department to arrange — or a meeting to revise the existing o —
er to con — orm the State’s acceptance. P & W argued that “[a]s a matter o — law, [the state’s] letter was nothing more than an invitation to meet and attempt to reach agreement on the terms o — the sale.” We disagree. This Court has held that a valid acceptance “must be de — inite and unequivocal,” and that an “acceptance which is equivocal or upon condition or with a limitation is a countero —
er and requires acceptance by the original o —
eror be — ore a contractual relationship can exist.” It is not equivocation, however, “i — the o —
eree merely puts into words that which was already reasonably implied in the terms o — the o —
er.” It is — urther the case that “an acceptance must receive a reasonable construction” and that “the mere addition o — a collateral or immaterial matters [sic] will not prevent the
ormation o — a contract.” The state’s letter o — acceptance points out that the name o — the buyer in the original agreement would have to be changed. In our opinion, this statement simply re — lected the obvious necessity to replace “the state” — or “Promet” as the named buyer in the deed. Moreover, the letter’s re — erence to P & W’s obligation to Promet to remove tracks
rom the property as “inappropriate to the purpose o — the State’s purchase” did not add any terms or conditions to the contract but, instead, constituted a clear bene — it to P & W. In pointing out that the “wording” that obligated P & W to remove tracks would be “inappropriate” in an agreement between P & W and the state, the state, in — act, relieved P & W — rom the obligation and expense it otherwise would have incurred in selling the property to Promet. When an o —
eree, in its acceptance o — an o —
er, absolves the o —
eror o — a material obligation, the “rules o — contract construction and the ‘rules o — common sense’ ” pre- clude construing that absolution as an additional term that invalidates the acceptance. Moreover, DeSimone explicitly and unequivocally stated, “I am writing to you on behal — o — the State o — Rhode Island to exercise its right to accept the o —
er to purchase 6.9 acres o — land,” and requested the meeting with Arruda in order “to revise the exist- ing o —
er to con — orm the State’s acceptance.” There — ore, we concur, with the trial justice who — ound that the state validly accepted the option extended to it by P & W. Because the contract was valid, we need not 146 6 • Acceptanc
address P & W’s contention that the parcel was not rail property within the meaning o — [Rhode Island’s statute governing the sale o — rail properties]. [Discussion o — whether the state had to pay interest on the purchase price o — the property omitted.] In conclusion, there — ore, we sustain the state’s appeal, and we deny and dismiss the appeal o — P & W. We a —
irm the amended judgment o — the Superior Court except that we vacate the requirement that the state pay interest to P & W on the purchase price o — the property. The papers in this case may be returned to the Superior Court with direction to enter judgment consistent with this opinion.
Re --- lection
The P & W Railroad court recognized that a contract existed despite minor di --- -
erences between the o —
er and acceptance. The rule — or valid acceptance is that it must be de — inite and unequivocal (not open to more than one interpretation). I — the acceptance includes additional terms, limitations, or conditions, then it is not a mir- ror image o — the o —
er and is instead a countero —
er. The court reasoned that the state did not add any new terms or conditions that invalidated the acceptance. The name o — the buyer was changed out o — an obvious necessity and the re — erence to removing the tracks was immaterial because it con-
erred a clear bene — it to P & W. Moreover, the state also made it clear that it was mak- ing a positive acceptance by stating in its letter that it accepted the o —
er to purchase the land. The court’s decision re — lects the modern view that the mirror image rule does not need to be strictly adhered to. Minor di —
erences are usually immaterial matters or terms that have no major bearing on the original o —
er. Imagine i — P & W were allowed to get out o — the contract because the state said that P & W did not have to pay the expense o — ripping up the railway tracks; it would be un — air i — the mirror image rule were strictly applied. There — ore, courts are willing to recognize valid acceptances when there are minor discrepancies about immaterial matters between the o —
er and acceptance.
Discussion 1. What is the mirror image rule? Cite the R2d provision that contains this rule and then explain that provision in your own words. 2. What is the purpose o --- the mirror image rule? Why should an acceptance mirror an o ---
er? Consider what advantages this provides to private parties, to society gen- erally, and to the courts. 6 • Acceptanc 147
-
What are some problems with the strict application o
the mirror image rule? Think o — some situations where the strict application would lead to unjust results and explain why those results are unjust.
-
Consider whether or to what extent the P & W Railroad court
ollowed the mirror image rule. When should courts — ollow this rule strictly, and when should they relax it?
Reading Flender Corp. v. Tippins International, Inc. Under the common law, i — the o —
eree does not accept every single term in the o —
er, there is no contract. This is called the “mirror image rule.” However, the UCC expressly rejects the mirror image rule and adopts what is known as the “battle o — the — orms,” con- tained in UCC § 2-207. Under UCC § 2-207(1), so long as there is a “de — inite and seasonable expression o — acceptance” which is not made “conditional” on assent to new terms, there is still a contract despite the presence o — mismatching terms. Flender Corporation v. Tippins International Incorporation, 830 A.2d 1279 (Pa. Super. 2003), represents a classic battle-o — -the- — orms scenario, but with a wrinkle. The parties’ mismatching terms directly con — licted with one another. They were “di — — erent” terms, rather than “additional” terms. Flender illustrates the majority approach to the battle o — the — orms in a scenario where the parties’ communications contain di — — erent terms. Tippins, the buyer, mailed a purchase order to Flender, the seller, — or the purchase o — custom-made gear-drive assemblies. Tippins’s purchase order included an arbitration clause which speci — ied that any dispute under the con- tract must be submitted to arbitration in Vienna, Austria, and be governed by Austrian law. Flender did not agree to Tippins’s purchase order; rather, Flender made and shipped the goods and included in the shipment its invoice. Flender’s invoice included a clause which speci — ied that any dispute must be heard in Chicago, Illinois. These — orum clauses directly con — licted with one another. Thus, the court applied the knock-out rule, instead o — the usual rule in UCC § 2-207(2). I — the court had applied UCC § 2-207(2), the buyer’s (Tippins’s) clause would have controlled, and the court would have had to send the case into arbitration in Vienna. But under the knock-out rule, the contract is limited to any terms on which the parties’ writings agree. Any remaining gaps are — illed by the UCC’s de — ault terms or other appropriate de — ault rules. Here, the court applied the de — ault rules — or — orum selection and permitted the seller (Flender) to sue in Pennsylvania. Because the buyer was a Pittsburgh-based company, this was an appropriate — orum — or the dispute. 148 6 • Acceptanc
Flender Corp. v. Tippins International, Inc.
830 A.2d 1279 (Pa. Super. 2003) JOHNSON, J. This matter arose out o --- a “battle o --- the --- orms” in which the two contracting par- ties attempted to impose di ---
ering terms o — the purchase o — goods. Tippins, a Pitts- burgh based company, engaged in the construction o — a steel rolling mill in the Czech Republic. Tippins sought to purchase gear drive assemblies — rom Flender Corporation
or installation at the new — acility. In January 1998, Tippins mailed a purchase order to Flender speci — ying terms o —
sale. The
orm required that the parties’ disputes under any resulting contract be sub- mitted to arbitration. The order stated Tippins’s terms as — ollows:
“Tippins[’s] purchase order is expressly limited to acceptance o --- ‘Standard
General Conditions Nova Hut Purchase Order’ and special conditions o --- pur-
chase, which take precedence over any terms and conditions written on the
back o --- the purchase order.”
The “Standard General Conditions Nova Hut Purchase Order” included the arbi- tration clause at issue here, requiring that all claims or disputes arising out o — the contract must be submitted to arbitration be — ore the International Chamber o — Com- merce in Vienna, Austria and be governed by Austrian law. Moreover, the order limited the — orm o — Flender’s acceptance as — ollows: “AS PART OF THIS OFFER TO PURCHASE GOODS OR SERVICES THE ATTACHED ACKNOWLEDGMENT FORM OF THE PURCHASE ORDER ‘MUST’ BE SIGNED AND RETURNED. . . . [NEITHER] TIPPINS NOR ANY OF ITS AFFILIATES REC- OGNIZES ANY OTHER DOCUMENT AS AN ACKNOWLEDGMENT.” Flender did not sign the attached acknowledgment — orm or issue any other written acceptance o — Tippin’s o —
er, but instead manu — actured and shipped the — inished drive assemblies. Flender’s invoice, which accompanied the drive assemblies, provided “Conditions o — Sale and Delivery” that attached conditions to Flender’s acceptance o —
Tippins’s order. Flender’s conditions provided as
ollows:
“[T]hese terms and conditions will govern all quotations covering purchase
orders --- or and sales o --- Seller’s products and are the sole terms and conditions
on which the order o --- buyer will be accepted. Seller’s acceptance o --- Buyer’s
order will not constitute an acceptance o --- printed provisions on Buyer’s order
orm which are inconsistent with or additional to these terms and conditions unless speci — ically accepted in writing by the Seller. Buyer’s agreement and Buyer’s — orm containing inconsistent, or material terms shall not be deemed a speci — ic objection to any terms hereo — .”
The invoice did not, however, require that Tippins accept these additional terms
or the parties to — orm a binding contract. The invoice did provide a mechanism — or 6 • Acceptanc 149
dispute resolution. The dispute resolution clause required that “exclusive jurisdiction and venue o — any dispute arising out o — or with respect to this Agreement or otherwise relating to the commercial relationships o — the parties shall be vested in the Federal and/or State Courts located in Chicago, Illinois.” Tippins accepted and installed the gear drives, but, subsequently, — ailed to pay the balance due on the shipment. Flender then commenced this action in the Court o —
Common Pleas o
Allegheny County seeking to recover an amount outstanding o —
$238,663.15, plus $76,372.16 in service charges. In the trial court, Tippins — iled preliminary objection to Flender’s complaint, argu- ing that the parties’ contract o — sale required that Flender submit its claim to arbitra- tion in Vienna, Austria. The Honorable Ronald W. Folino, denied Tippins’s objections, reasoning that the arbitration clause on which Tippins relied had been “knocked out” because it was materially di — — erent — rom the dispute resolution clause in Flender’s invoice. Tippins raised the — ollowing question — or review: Did the Trial Court err in ruling that neither Flender’s nor Tippins’s
orum selection provision became a part o — their contract thus — ind- ing that the appropriate — orum — or Flender to bring this action was in Pennsylvania? Section 2-207(a) provides that an expression o — acceptance may operate to accept an o —
er, even i — it contains terms additional to or di — — erent — rom those stated in the o —
er. Thus, mere noncon — ormance between competing — orms will not undermine the — ormation o — a contract, so long as the parties demonstrate their mutual assent to essential terms. Under such circumstances, a written contract is deemed to exist consisting o — the essential terms o — the o —
er, to which the o —
eree’s response has estab- lished its agreement. The — ormation o — a written contract is de — eated only where the o —
eree responds with di — — erent or additional terms and “explicitly communicates his or her unwillingness to proceed with the transaction” unless the o —
eror accepts those terms. In this case, Flender, through its course o — conduct and subsequent invoice, accepted the essential terms o — Tippins’s o —
er. Although the invoice provided terms that did not appear in Tippins’s o —
er, Flender did not communicate its unwilling- ness to proceed without them or condition the transaction on Tippins’s acceptance o — those terms. Consequently, we agree with Tippins that the parties did — orm a written con- tract under section 2-207(a). The dispute provision in Flender’s acceptance, requir- ing resolution o — the parties’ disagreements in state or — ederal courts in Chicago, is clearly at odds with and quite “di — — erent” — rom the clause in Tippins o —
er requiring arbitration o — disputes be — ore the International Chamber o — Commerce in Vienna. By operation o — the rule we adopt today, those provisions are both, quite clearly, “knocked out.” Neither became a part o — the parties’ contract. Accordingly, the trial 150 6 • Acceptanc
court did not err in re
using to compel arbitration in response to Tippins’s prelimi- nary objections. For the — oregoing reasons, we a —
irm the trial court’s order. Order AFFIRMED.
Re --- lection
Flender is a great example o --- the battle o --- the --- orms. Flender and Tippins exchanged pre-printed --- orms --- or the purchase o --- goods. Both --- orms included dispute resolu- tion clauses that expressly designated di --- --- erent locations. Even though the --- orms con- tained competing clauses, the court --- ound a “de --- inite and seasonable expression o ---
acceptance”
rom the parties’ course o — per — ormance and there — ore applied the battle o — the — orms. Since the dispute resolution clauses provided by both parties were clearly at odds with each other, the court applied the majority approach, the knock-out rule, and applied neither party’s dispute resolution clause. The court “knocked out” all compet- ing terms to simpli — y the contract to just the terms that were agreed upon. The court then utilized the de — ault rules — or deciding where litigation should take place.
Discussion 1. The R2d adopts the mirror image rule, but the UCC does not. Beyond generally observing that the R2d and UCC rules are di --- --- erent, can you speci --- ically articulate all the ways in which they are di --- --- erent? Create a table comparing the elements o ---
the two rules.
- Why does the UCC do away with the mirror image rule? Is there anything unique about contracts involving sales o — goods that would obviate the need — or this rule?
-
Why does the UCC provide special acceptance rules
or merchants? What makes contracts — or sales o — goods between merchants di — — erent — rom sales o — goods gener- ally? Note the merchant-speci — ic rules in your table.
Problems Problem 6.1. Primo Ladders Taylor, a housepainter, sent a text message to the Primo Ladder Company order- ing Model No. 35E, a 35- --- oot aluminum extension ladder with sa --- ety harness, --- or $325. Primo Ladder replied by text, stating, “We accept your o ---
er. Model 35E is no 6 • Acceptanc 151
longer available. We have shipped Model 40E to you at no extra cost, payment due on delivery.” Taylor texts back, “I do not want the 40E, it’s too long — or my truck.” Primo responds, “Product has already shipped, we demand payment on delivery.” Taylor re — used to accept delivery o — the ladder, and Primo sued Taylor — or breach o — contract. Under UCC § 2-207, was a binding contract — ormed by Primo’s “acceptance”? What i — Primo’s initial text message had stated, “We accept. Model 35E has been shipped to your address, payment due upon delivery. Any and all disputes must be resolved by arbitration.” Would this communication “operate as an acceptance” under UCC § 2-207(1)? Was a contract — ormed by the exchange o — these communications?
Problem 6.2. An Earnest Letter Erneste Ardente made a bid o — $250,000 — or William & Katherine Horan’s residen- tial property. A — ter the bid was deemed acceptable, Ardente received and executed the purchase and sale agreement. Ardente’s attorney returned the agreement to the Horans along with a check — or $20,000 and a letter which read: My Client is concerned that the — ollowing items remain with the real estate: a) dining room set and tapestry wall covering in dining room; b) — ireplace
ixtures throughout; c) the sun parlor — urniture. I would appreciate your con-
irming that these items are part o — the transaction, as they would be di —
icult to replace. A — ter receiving the letter, the Horans re — used to sell the enumerated items and did not sign the purchase and sale agreement. Ardente sued, seeking speci — ic per — ormance
or the property. Was Ardente’s letter a countero —
er or a valid acceptance? See Ardente v. Horan, 366 A.2d 162 (1976).
Problem 6.3. Conditional Acceptance o
a Court Order Mr. Jameel Ibrahim lost a lawsuit in the United States Court o — Federal Claims, which dismissed his complaint against the United States — or an alleged breach o — an implied-in-law contract. The contract Ibrahim re — ers to is a child support order — rom the state court system o — New Jersey. On January 23, 2019, Ibrahim sent a twelve-page letter to various o —
icials o — the State o — New Jersey, cabinet secretaries, and the Supreme Court o — the United States, titled “Conditional Acceptance — or the Value/Agreement/Counter O —
er to Acceptance o — O —
er.” In the letter, Ibrahim alleged that he had “received [these parties’] o —
er and accept[ed]” it, subject to conditions set — orth in the rest o — the letter — — or the most part, demanding that the recipients justi — y the existence o — various governmental 152 6 • Acceptanc
agencies and practices. The letter asserts that
ailure to do so would result in de — ault, and in turn, an obligation to pay Ibrahim $3.5 million in damages. Did Ibrahim’s “Conditional Acceptance” letter constitute a valid acceptance o —
the state’s child support order, and, i
so, on what terms? See Ibrahim v. United States, 799 Fed. App’x 865 (Fed. Cir. 2020). Module II
Consideration and
Its Alternatives
Contract law supports the
undamental principle that promises, once made, should generally be kept. By en — orcing voluntary bargains, contract law promotes several key goals: e —
iciency, reliance, autonomy, and — airness. The main rationale — or en — orcing bargains is that each party can assess whether a deal bene — its them and — reely choose to enter only those exchanges that improve their wel — are. By — acilitating these vol- untary exchanges, contract law not only protects individual choice but also bene — its society as a whole. However, contract law achieves these goals only when three pre- conditions are met. First, the exchange must involve mutual assent. A contract cannot be imposed on someone without their consent. For example, i — a painter arrives uninvited, paints your house in the dead o — night, and demands payment, there is no evidence that you valued the service or agreed to it. You never opted in. Without mutual agreement, contract law does not support en — orcing such transactions. As you learned in the prior module, valid o —
ers and acceptances are essential to establishing mutual assent. Second, the exchange must be truly voluntary. Promises made under conditions o —
mistake or
raud, or by parties lacking the capacity to understand them, may not be en — orceable, as these — actors undermine the voluntary nature o — the agreement. You will learn about these de — enses to — ormation and en — orceability in the next module.
153
154 Module II • Consideration and Its Alternatives
Third, even when there is mutual assent to an exchange, not all promises become en — orceable contracts. In this module, we — ocus on the precondition o — consideration, which requires a bargained- — or exchange. By insisting that each party provides some- thing o — legal value in return — or a promise, consideration o —
ers evidence that both sides deliberately and voluntarily entered the agreement. This is why contracts requir- ing consideration are o — ten called “bargain contracts.” Consideration serves contract law’s dual goals o — economic e —
iciency and auton- omy. It signals that the parties expected mutual bene — it — rom the exchange and chose to bind themselves — reely. While not a per — ect sa — eguard, this — ramework reduces dis- putes and ensures that obligations are intentional and consensual. Voluntary obliga- tions supported by consideration lie at the heart o — contract law. Still, not all promises arise — rom bargains. Exceptions to the consideration doc- trine, known as “alternatives to consideration,” re — lect contract law’s broader goals o —
reliance and
airness. These exceptions allow courts to en — orce certain promises even without a bargained- — or exchange. Promissory estoppel protects a party who reasonably relied on a promise to their detriment. Courts use this tool to avoid injustice. Promissory restitution is a — airness-
ocused doctrine that prevents unjust enrichment when one party con — ers a bene — it on another without compensation. These exceptions create what are known as “non- bargain contracts” and re — lect the law’s — lexibility in pursuing justice. By brie — ly introducing these doctrines and their goals here, we set the stage — or deeper discussions. In the chapters ahead, you will examine consideration as the primary pathway — or creating en — orceable obligations grounded in e —
iciency and autonomy. You will then explore the exceptions — promissory estoppel and promis- sory restitution — that allow courts to en — orce promises based on reliance or — airness. Together, these doctrines demonstrate how contract law balances competing objec- tives to achieve justice in private agreements. Chapter 7 Consideration
To be en
orceable, contracts must involve some — orm o — exchange. Typically, con- tracts involve an exchange o — promises; such contracts are known as a “bilateral contracts.” Consideration o — ten takes the — orm o — a promise exchanged — or the other party’s promise. Less commonly, contracts consist o — a single promise exchanged — or the comple- tion o — a requested per — ormance. In such a unilateral contract, the only way to bind the promisor is to complete the requested per — ormance. In a unilateral contract, the consideration supporting that singular en — orceable promise is, o — course, the comple- tion o — the per — ormance itsel — . This chapter — ocuses primarily on bilateral exchanges o — promises, as these are — ar more common. Most contracts involve an exchange o — promises. Each party’s promise provides consideration supporting the other party’s promise.
Promise
O ---
eror O —
eree
Consideration
Figure 7.1. Consideration is what the o ---
eree promises the o —
eror in exchange — or the o —
eror’s promise to the o —
eree.
Consideration is a
oundational concept in contract law. Why are some promises legally en — orceable, while others remain unen — orceable? Consideration is central to determining which promises are legally en — orceable. As you learned earlier, a contract
155
156 7 • Consideration
is de
ined as “a promise or a set o — promises — or the breach o — which the law gives a rem- edy, or the per — ormance o — which the law in some way recognizes as a duty.” R2d § 1. Consideration ensures that en — orceable promises involve a mutual commitment rooted in a bargained- — or exchange. Without it, most promises remain unen — orceable, as contract law emphasizes voluntary obligations that re — lect reciprocal bene — it. The doctrine o — consideration serves three main purposes. First, it advances e —
i- ciency by enabling voluntary exchanges that allocate resources to their most valued uses, which improves social wel — are. Second, consideration promotes autonomy by ensuring that en — orceable promises re — lect deliberate and voluntary commitments, which sa — eguards individual — reedom to contract. Third, consideration acts as a gatekeeping tool by helping to distinguish between promises that the law ought to en — orce — namely, promises supported by intentional mutual exchange — and those that do not really belong in court, such as casual or gratuitous promises. This balance ensures that contract law en — orces only those commitments that align with its broader goals o —
ostering e —
icient cooperation and predictability. Consideration is not just a legal — ormality — it is the glue that makes en — orceable promises meaning — ul and ensures mutual bene — it. How would commerce — unction i —
parties could not rely on each other’s promises? For example, consider Frances, an apple orchard owner, and Benjamin, who owns an orange grove. Their — ruits ripen at di — — erent times — apples in September and oranges in December — making direct barter impractical. Contract law allows them to bind themselves through en — orceable promises. Frances promises to deliver hal — o —
her apple harvest in September, and Benjamin promises to deliver hal
o — his orange crop in December. With this agreement, both parties can rely on the other’s promise, which in turn prevents waste and enables them to enjoy — resh — ruit at di — — erent times o — the year. Without the ability to en — orce such promises, Frances and Benjamin might hesitate to commit, which would lead to spoiled crops and lost opportunities — or mutual gain. This example illustrates the three main purposes o — the consideration doctrine. E —
iciency is achieved because consideration ensures that Frances and Benjamin exchange something o — value in alignment with their mutual expectations o — bene — it. Autonomy is respected because the presence o — consideration — rom each party signals that both parties voluntarily chose to enter into an agreement with reciprocal obli- gations. Finally, gatekeeping is achieved by limiting en — orceability to promises that involve a bargained- — or exchange. This chapter will explore the rules that govern the consideration doctrine in light o — these goals. The chapter begins by examining the evolution o — consideration in the courts. Over the centuries, courts have developed di — — erent approaches to de — ining the consideration necessary to support a contractual promise. There is signi — icant overlap in these approaches, but understanding the di —
erences between these theories will help you to appreciate how the concept o — consideration 7 • Consideration 157
has evolved and what the modern standard really entails. The chapter begins by explaining the traditional “bene — it/detriment” theory o — consideration, which — ocused (o — ten quite literally) on whether one party gained a bene — it and the other party su — -
ered a detriment. The chapter then moves to the modern “bargained- — or exchange” theory o — consid- eration, which has become the dominant standard. This does not require a literal ben- e — it or detriment; instead, it — ocuses on the presence o — a voluntary exchange. Along the way, we will clari — y the boundaries o — consideration and distinguish en — orceable promises — rom those that are gratuitous, illusory, or shams. This exploration will show how consideration — unctions both as a legal requirement and as a re — lection o — the economic, social, and moral goals underlying contract law.
Apples
Frances Benjamin
Oranges
Figure 7.2. Illustration o --- promise and consideration.
Rules A. The Historical Bene --- it/Detriment Theory Historically, there have been two alternative theories --- or de --- ining what consider- ation is and when it is, or is not, present. The older theory is what is sometimes called the “bene --- it/detriment” theory. This asks whether the promisor incurs a bene --- it in exchange --- or their promise and whether the promisee, in turn, incurs a detriment in exchange --- or that promise.
158 7 • Consideration
This historic test is now dis
avored and has largely been replaced by the bargained-
or exchange test o — consideration. However, courts still re — er to these concepts with some — requency. For this reason, law students should read and understand the historic case Hamer v. Sidway, 27 N.E. 256 (1891), which is perhaps the most — amous articula- tion o — the bene — it/detriment test. The court in Hamer re — ined the theory, clari — ying that what constitutes a detriment under the law is not as literal as some might believe. Despite the name o — the case, the — acts revolve around an uncle named William E. Story (who happened to be a liquor dealer) and his nephew named William E. Story the Second.
. . . ‘William E. Story agreed to and with William E. Story, 2d, that i --- he would
re --- rain --- rom drinking liquor, using tobacco, swearing, and playing cards or
billiards --- or money until he should become twenty-one years o --- age, then he,
the said William E. Story, would at that time pay him, the said William E.
Story, 2d, the sum o --- $5,000 --- or such re --- raining, to which the said William E.
Story, 2d, agreed,’ and that he ‘in all things --- ully per --- ormed his part o --- said
agreement.’
The uncle died be
ore the nephew turned 21, but the nephew — ul — illed the promise anyway. This was probably a unilateral contract. Do you see why? The nephew appar- ently accepted the uncle’s o —
er by — ully per — orming the requested abstention — rom vices rather than by promising to do so. The administrator o — the uncle’s estate re — used to pay the nephew, claiming that the nephew did not render any consideration — or the uncle’s promise. The administrator reasoned that the nephew actually bene — ited — rom abstaining — rom liquor, tobacco, swearing, cards, and billiards, and that the uncle received no personal bene — it — rom his nephew’s abstinence. The court applied the bene — it/detriment test to determine whether the nephew gave consideration in exchange — or his uncle’s promise:
The exchequer chamber in 1875 de --- ined ‘consideration’ as --- ollows: ‘A valuable
consideration, in the sense o --- the law, may consist either in some right, interest,
pro --- it, or bene --- it accruing to the one party, or some --- orbearance, detriment,
loss, or responsibility given, su ---
ered, or undertaken by the other.’
The court
ound that the nephew did indeed incur a detriment under the law because he gave up his legal rights:
It is su ---
icient that [the nephew] restricted his law — ul — reedom o — action within certain prescribed limits upon the — aith o — his uncle’s agreement.
The nephew did not have to su
er or end up worse o —
because o — this bargain in order to incur a detriment under this test; rather, merely giving up one’s legal right is enough to pass as a detriment. The nephew incurred a detriment, the court reasoned, so he gave consideration — or the promise. The court acknowledged that the bene — it/ 7 • Consideration 159
detriment test required either a detriment to the promisee or a bene
it to the promi- sor. Upon — inding this detriment to the promisee, the court did not have to opine on whether the promisor bene — ited, but, in dicta, it stated: We see nothing in this record that would permit a determination that the uncle was not bene — ited in a legal sense. Hamer shows how the bene — it/detriment theory is applied to determine whether there is consideration. But the case also shows why the rule is problematic. From the economic perspective o — increasing social wel — are, how does requiring a person to incur a detriment help to ensure that en — orceable contracts make society better o —
? The bene — it/detriment theory is also problematic because pain and pleasure are somewhat subjective. The court could not ask the uncle whether he bene — ited — rom his nephew’s abstinence because the uncle was dead at the time o — the trial. And whether the nephew su —
ered or enjoyed his abstinence — rom intoxicating liquors is also a subjective matter that is both hard to discover and di —
icult to en — orce generally. The theory is di —
icult to apply, and courts have generally replaced it with a new theory that is both easier to objectively measure and more likely to result in an increase in social wel — are.
B. The Modern Bargained-For Exchange Theory Most modern courts have moved away — rom the bene — it/detriment test and toward the bargained- — or exchange test. The R2d clearly adopts this modern test. To constitute consideration, a per — ormance or a return promise must be bar- gained — or. R2d § 71(1). In this more modern test, the question is whether the contract is the result o — both parties’ desire to receive something — rom the transaction. This does not require bar- gaining per se, meaning that the parties do not have to haggle or dicker over terms. Rather, the test simply looks at whether promises are given in exchange — or one another. A per — ormance or return promise is bargained — or i — it is sought by the promi- sor in exchange — or his promise and is given by the promisee in exchange — or that promise. R2d § 71(2). The bargained- — or exchange test is — lexible and inclusive. It includes a wide vari- ety o — actions that can count as consideration. The promise and the consideration in exchange — or that promise can be a —
irmative actions, — orbearance, promises, other acts, and anything that alters some legal relationship. The per — ormance may consist o — (a) an act other than a promise, or (b) a — or- bearance, or (c) the creation, modi — ication, or destruction o — a legal relation. R2d § 71(3). 160 7 • Consideration
The consideration does not even have to
low to the original promisor. I — a promi- sor bargains — or the promisee to give consideration to a third party, that still counts as consideration. The per — ormance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person. R2d § 71(4). This modern test — its better with the law-and-economics approach to contract law, which justi — ies en — orceable agreements on the basis that they generally make the world more valuable by allocating property to the person who values it more. The bargained- — or exchange test is — lexible enough to apply in cases where the bene — it/detriment test would — ail. In Pennsy Supply, Inc. v. American Ash Recycling Corp., 895 A.2d 595 (Pa. Sup. Ct. 2006), American Ash was a business that converted hazardous waste into use — ul material. Businesses would pay American Ash to remove their waste and by-products, and then American Ash would process the material and give away the resulting recycled product, which it called AggRite, — or — ree. American Ash thus avoided the cost o — disposing o — the hazardous waste and, hope — ully, made a pro — it by charging more to remove the hazardous materials than it spent recycling, storing, and advertising the resulting recycled AggRite. Pennsy Supply agreed to take about 11,000 tons o — AggRite — rom American Ash and use it in a paving project. Pennsy used the product correctly. Un — ortunately, the pave- ment developed extensive cracking within three months o — its use. Pennsy then asked American Ash to remediate the de — ective work under the theory that American Ash owed Pennsy an implied warranty that the product would not crack and — ail so quickly. In Chapter 18, you will learn that contracts — or sales o — goods usually include implied warranties such as this. For present purposes, simply note that sales o — goods include implied warranties o — merchantability, meaning — itness — or the ordinary pur- chase — or which such goods are used, see UCC § 2-314, and “ — itness — or a particular purpose,” meaning the buyer’s special purposes i — the seller has reason to know o —
them, see UCC § 2-315. In this case, the AggRite should be warrantied
or its ordi- nary use in making pavement that would not crack, but this warranty only applies i —
American Ash sold the AggRite to Pennsy in a bargained-
or contractual exchange and did not give it away as a gi — t. Returning to our — acts, the pavement made o — AggRite cracked, and American Ash re — used to — ix the pavement, claiming that there was no contract because it had merely given Pennsy a gi — t, since it did not charge any money — or the AggRite. Pennsy sued. The trial court applied the bene — it/detriment test and agreed with American Ash. It — ound that American Ash gave Pennsy a conditional gi — t. As explained below, a conditional gi — t is just a promise to give a gi — t, and the recipient must meet some con- dition in order to accept the gi — t. The trial court reasoned that, since the parties did not discuss disposal costs during any part o — the bargaining process, American Ash did not give away the AggRite with the intent to avoid disposal costs. Instead, hauling 7 • Consideration 161
away the AggRite was simply a condition Pennsy had to meet in order to receive the gi — t o — the product. The appellate court disagreed — or two reasons. First, it — ound that American Ash did seek people to haul away its AggRite. It advertised the material — or — ree and would have otherwise paid to dispose o — it. The trial court mistakenly thought that since the material was — ree, it was a gi — t. But the material had a negative value. It was a “bad,” not a “good.” It was made o — hazardous waste that was expensive to eliminate. By removing a negative thing — rom American Ash, Pennsy gave American Ash a bene — it. There — ore, under the bene — it/detriment test, there was a bene — it to the promisor, and there — ore, there was consideration — or the promise. Second, the appellate court applied the bargained- — or exchange theory o — consider- ation. It — ound that the trial court misunderstood and misapplied the theory by — ind- ing that there was no bargain because the parties did not have a bargaining process. This was an error. There is no requirement — or a bargaining process. What is required is that both parties seek something in exchange. The appellate court reasoned that, in this case, American Ash sought removal o — hazardous waste — rom its property, and Pennsy sought paving material. Both parties expected to get something — rom this exchange, and there — ore, there was consideration — or the promise. This case shows how the bene — it/detriment test and the bargained- — or exchange test overlap and can arrive at the same result. But it also shows that the bene — it/detriment test can be di —
icult to apply, and the bargained- — or exchange test is both easier to determine objectively and more analytically straight — orward. This is why courts have moved toward the bargained- — or exchange theory o — consideration.
C. Gratuitous Promises Are Not Supported by Consideration Gratuitous means given or done — or — ree. Gratuitous, as in the word gratuity, is synonymous with — ree, gratis, complimentary, voluntary, unpaid, without charge, and pro bono. Likewise, a gratuitous promise is a promise to give a gi — t, to volunteer, or to do something — or nothing. Contractual promises require consideration, which is something in exchange — or the promise. By de — inition, a gratuitous promise seeks nothing in return. There — ore, gratuitous promises are not supported by consideration.
D. Conditional Gi
ts Are Not Supported by Consideration Consideration is usually easy to spot where both parties to a contract are expecting and wanting to get some bene — it — rom that transaction. However, there are cases where consideration appears to be present but is truly absent; one such situation involves the “conditional gi — t.” 162 7 • Consideration
The terms “condition” and “conditional” are used in di
— erent contexts within con- tract law, and their meanings can vary, leading to some understandable con — usion. In particular, the concept o — a conditional gi — t di —
ers — rom that o — a conditional promise in a contract. Both involve the occurrence or non-occurrence o — an event, but the legal implications and underlying principles are distinct. A conditional promise, as you will learn in Chapter 19, re — ers to an en — orceable contract where a promise is not obligatory until some event occurs or — ails to occur. In this book, when we discuss “conditions,” we are usually re — erring to this type o — event. For example, Laurel and Hardy decide to purchase a new wardrobe — or their slap- stick comedy act. Western Costume makes the — ollowing o —
er: “We’ll make you two
ine suits — or $10 each. And i — one stains the — irst time you get custard pie on it, we’ll make you a new one — or $1.” I — Laurel and Hardy accept, there is a bargain contract supported by consideration. Western Costume promises to deliver two suits, and Laurel and Hardy promise to pay $10 — or each. However, whether Western Costume has to make a third suit — or $1 depends on whether one o — the — irst suits stains. Staining is a condition precedent — an event that must occur be — ore the obligation to provide the third suit arises. I — the condition does not happen (i.e., the suit does not stain), Western Costume is not obligated to make the third suit. Nevertheless, the contract remains valid, supported by the initial bargain. A conditional gi — t, on the other hand, is a promise unsupported by consideration. Without some alternative to consideration (like reliance or unjust enrichment), a con- ditional gi — t cannot — orm a bargain contract. A conditional gi — t is, literally, a promise to give something and not a promise to make an exchange. Consider a wrapped present you receive — or Christmas. What do you need to do to receive the gi — t? You need to unwrap it. Unwrapping the gi — t is a necessary step — a “condition” in lay terms — — or getting the gi — t, but it is not something the giver bar- gained — or in exchange. The unwrapping is merely incidental to the receipt o — the gi — t, not consideration. Courts sometimes struggle to distinguish between conditional promises and con- ditional gi — ts. The analysis depends on whether the condition was intended as part o —
a bargained-
or exchange or was simply incidental to the act o — gi — t-giving. Pro — essor Samuel Williston provided a — amous example o — a conditional gi — t. In his example, a bene — actor promises a tramp (an unhoused, transient person) that i — the tramp goes to the corner store, the tramp may purchase a new coat on the bene — actor’s account. The condition — or receiving the bene — actor’s gi — t is that the tramp walks to the store and charges the coat. But is this condition — or receiving the gi — t also consid- eration — or the bene — actor’s promise? At — irst glance, it might look like consideration. Under the bene — it/detriment the- ory, the promisee (the tramp) incurs a detriment by walking to a store they otherwise 7 • Consideration 163
would not have gone to. Under the bargained-
or exchange theory, one might reason that the tramp’s walk was the “price” paid in exchange — or the coat. However, this is not the kind o — detriment that counts as consideration. Pro — essor John Murray explains the distinction: I — the promisor made the promise — or the purpose o — inducing the detriment, the detriment induced the promise. I — , however, the promisor made the prom- ise with no particular interest in the detriment that the promisee had to su —
er to take advantage o — the promised gi — t or other bene — it, the detriment was incidental or conditional to the promisee’s receipt o — the bene — it. Even though the promisee su —
ered a detriment induced by the promise, the purpose o — the promisor was not to have the promisee su —
er the detriment because [the prom- isor] did not seek that detriment in exchange — or [the promisor’s] promise. John Edward Murray, Jr., Murray on Contracts § 60 (3d ed. 1990). Applying Murray’s test, we must ask: Was the purpose o — the bene — actor’s promise o — the coat to induce the tramp to walk to the store? The most reasonable interpreta- tion is that the bene — actor did not care about the tramp’s walk. Instead, walking to the store was simply the logistical step necessary — or the tramp to obtain the coat. The walk was a condition — or receiving the gi — t, not a detriment bargained — or in exchange. In sum, distinguishing true consideration — rom a mere conditional gi — t requires assessing the parties’ objectively mani — ested intentions. Did the promisor’s promise seek to induce the detriment as part o — a bargained- — or exchange, or was the detriment merely an incidental step in receiving a gi — t? As you evaluate consideration problems, think care — ully about this distinction. You will see this issue arise again in the Pennsy case, below, where the de — endant argued that its promise to supply the AggRite was merely a promise to give a gi — t with a condition attached.
E. Past Consideration Is Not Consideration Consideration must induce the promisor to give the promise to the promisee in exchange — or the consideration. I — the consideration has already been given to the promisor, then it cannot serve to — urther induce him. There — ore, there is no such thing as “past consideration.” Sometimes the term is used to re — er to a moral obligation to repay someone, but promises to repay someone — or a bene — it previously received are governed by the doctrine o — promissory restitution. For example, i — Ezekial gives Kent a book on Day 1 as a gi — t, and then on Day 2, Kent promises to repay Ezekial $10 — or the book, Kent’s promise obviously is not intended to induce Ezekial to give the book to Kent. Ezekial already gave Kent the book — or — ree, and Kent already possesses and owns the book. I — we diagram this situ- ation, it looks quite di — — erent — rom situations where we — ind consideration. 164 7 • Consideration
Coat
Bene --- actor Tramp
Walk
Figure 7.3. Illustrating a conditional gi --- t, lacking consideration.
Book Day 2
Ezekial Kent Ezekial Kent
$10
Day 1
Figure 7.4. Illustration o --- past consideration.
There are situations where a promise to pay
or a bene — it previously received can be binding. But such situations do not — orm contracts-at-law. Rather, they are poten- tially en — orceable promises pursuant to the equitable doctrine o — promissory restitu- tion. Moreover, such promises are only en — orced when and to the extent that justice requires. In general, promises to pay — or past bene — its are not en — orceable, and you will learn about the special and rare exceptions to that rule.
F. Illusory Promises Are Not Consideration Illusory promises are promises that do not actually have to be per — ormed by the promisor. For example, i — Nancy says to Drew, “I — you pay me $20, I promise to drive you to the airport tomorrow, provided that I — eel up to it,” that is an illusory promise because Nancy reserves total control o — whether she — ul — ills her promise or not. There is the illusion o — a promise, since Nancy spoke the words, “I promise,” but, in reality, 7 • Consideration 165
she did not commit hersel
to per — orm any task. In the terms o — the R2d, Nancy has reserved a choice o — alternative per — ormance:
A promise or apparent promise is not consideration i --- by its terms the promi-
sor or purported promisor reserves a choice o --- alternative per --- ormances unless
(a) each o --- the alternative per --- ormances would have been consideration i ---
it alone had been bargained --- or; or (b) one o --- the alternative per --- ormances
would have been consideration and there is or appears to the parties to be
a substantial possibility that be --- ore the promisor exercises his choice events
may eliminate the alternatives which would not have been consideration.
R2d § 77.
There is, however, a doctrine which can serve to bind a promisor to what would otherwise be an illusory promise. The duty o — good — aith and — air dealing requires that contractual parties act in good — aith to produce the — ruits o — their mutual agree- ment. A — amous case authored by Justice Cardozo, Wood v. Lucy, Lady Du —
-Gordon, 222 N.Y. 88 (1917), reproduced in Chapter 16, dealt with precisely this issue. Lady Du —
-Gordon (1863–1935) was a leading British — ashion designer who sur- vived the sinking o — the RMS Titanic in 1912. She was also booked to sail on the RMS Lusitania, a cruise ship that was sunk by a German submarine in 1915 as a precursor to the First World War, but she canceled her trip due to illness. Around the time when the Lusitania set sail, Du —
-Gordon o —
ered to hire a certain Otis T. Wood, an American advertising agent, to help her turn her vogue into money, on the — ollowing terms:
[Wood] was to have the exclusive right, subject always to [Du ---
-Gordon’s] approval, to place her indorsements on the designs o — others. He was also to have the exclusive right to place her own designs on sale, or to license others to market them. In return, she was to have one-hal — o — “all pro — its and revenues” derived — rom any contracts he might make. The exclusive right was to last at least one year — rom April 1, 1915, and therea — ter — rom year to year unless terminated by notice o — ninety days.
Today, we would call Du
-Gordon an “in — luencer,” and Wood was her public rela- tions man. Their deal clearly included his exclusive right to her endorsements, yet Du —
-Gordon violated this promise by placing her endorsements on other things without Wood’s knowledge, and she did not share pro — its with him. Wood sued Du —
- Gordon — or damages, and the issue upon which the case turned was whether Du —
- Gordon’s promise to give Wood an exclusive right had been supported by a promise
rom Wood in exchange. Du —
-Gordon argued that Wood’s promise was illusory. Wood did not promise her anything, she reasoned, because the contract did not speci — y that Wood had to make any e —
orts to locate and suggest items — or Du —
-Gordon to endorse. Since Wood did not really bind himsel — to do anything — or her, Du —
-Gordon was equally — ree — rom contractual obligations to him. 166 7 • Consideration
Figure 7.5. Lady Du ---
-Gordon on the deck o — the Titanic. Library o — Congress (1900). Public domain work.
Cardozo did not agree with this reasoning: A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imper — ectly expressed. I — that is so, there is a contract. I — the contract does not have a term in which Wood makes a binding promise to Du —
-Gordon, where can we — ind such an obligation? Cardozo — inds it in the circum- stances surrounding the deal. Wood created a business — or the purpose o — placing such endorsements as Du —
-Gordon approved, which tends to show he intended to commit to this work. The plainti —
[Wood] goes on to promise that he will account monthly — or all moneys received by him, and that he will take out all such patents and copy- rights and trademarks as may in his judgment be necessary to protect the rights and articles a —
ected by the agreement. Cardozo — inds that these promises are nonsensical without the implication that Wood shall make his best e —
orts to place Du —
-Gordon’s endorsements. One should not assume that business transactions, especially ones supported by — ormal written contracts prepared by lawyers and signed by the parties, are intended to be merely optional. Rather, one should presume that the parties intended to both make good
aith e —
orts to bring about the — ruits o — the agreement. 7 • Consideration 167
I
a party does indeed have total — reedom to per — orm or not per — orm a promise at its own discretion, then that is an illusory promise that cannot constitute consideration. But courts will look — or that obligation in law and — acts: A limitation on the promisor’s — reedom o — choice need not be stated in words. It may be an implicit term o — the promise, or it may be supplied by law. R2d § 77 cmt. d. The doctrine o — good — aith and — air dealing implies limits on parties’ — reedom not to per — orm their obligations. This makes some obligations that would otherwise be illusory into binding promises that can constitute valid consideration.
G. Nominal Consideration Is Not Consideration Courts do not generally inquire about the value o — consideration. There is no obli- gation that the consideration be worth the same or more than the promise. In — act, the point o — contract law is to allow parties to decide — or themselves what they value and how much they value it. It is antithetical to this purpose — or courts to police bargains based on how the judges value components o — the parties’ exchange. I — the requirement o — consideration is met, there is no additional requirement o — . . . equivalence in the values exchanged. R2d § 79(b). Parties are — ree to agree to exchanges o — unequal values. Moreover, many things have no — ixed or general sense o — market value or price. Beauty is in the eye o — beholder, and valuation is le — t to private parties because they are in the best position to evaluate their own transaction. Although courts generally do not inquire about the value o — consideration, they may question whether gross inadequacy o — consideration implies that the consideration is just a sham. Parties who are aware o — the consideration doctrine may attempt to make a gratuitous promise binding by claiming in writing that it was — or good and valuable consideration where that is in — act not the case. Or parties may o —
er some relatively tiny amount o — payment as consideration — or a promise in order to obtain the pretense o — consideration through mere — ormality. Such tiny amounts are called nominal con- sideration, and nominal consideration is not su —
icient to en — orce a contract-at-law. For example, in the historic case Schnell v. Nell, 17 Ind. 29 (1861), a widower (Schnell, de — endant) wanted to honor his deceased wi — e’s desire to bequeath $200 to each o —
three heirs. To accomplish this, the widower wrote contracts by which he agreed to pay them $200 each, and the writing recited three — orms o — consideration — or this payment: 1. A promise, on the part o — the plainti —
s, to pay him one cent. 2. The love and a —
ection he bore his deceased wi — e, and the — act that she had done her part, as his wi — e, in the acquisition o — property. 168 7 • Consideration
3. The --- act that she had expressed her desire, in the --- orm o --- an inoperative
will, that the persons named therein should have the sums o --- money speci --- ied. The court held, --- irst, that one cent is nominal consideration with regard to a prom- ise to pay $200. It is obvious that no one desires $0.01 more than $200. This was a sham, and courts are not mindless wooden sticks.
Second, the court held that love and a ---
ection are not consideration, — or two rea- sons. First, the wi — e had died, so her love and a —
ection was in the past. As discussed earlier, past consideration is not consideration. Second, even present or — uture love and a —
ection o — a wi — e is not consideration to pay a third party. Consideration must be a thing o — tangible value, not a moral obligation or a sense o — endearment. Third, his wi — e’s desire is also not consideration. His wi — e — ailed to make a valid will. An invalid will is meaningless and valueless, so it cannot constitute consideration. The
act that Schnell now venerates the memory o — his deceased wi — e is not valid consid- eration to pay any third person money.
H. Re
lections on Consideration The consideration doctrine notoriously troubles law students, but, in reality, it is rarely a problem in most commercial agreements. The debate on the doctrine is pri- marily an academic one. This chapter has shown you how to evaluate whether the element o — consideration is present in a contract. Perhaps the best way to do this eval- uation is by remembering the common situations in which consideration is likely to be absent. Gratuitous promises, conditional gi — ts, past consideration, illusory prom- ises, nominal consideration, and the like are common scenarios where consideration must be examined more closely. These situations are rare in real-li — e contracting but obnoxiously common on the bar exam, so a wise student will learn to watch out — or red — lags that are meant to signal the necessity o — a consideration analysis. I — consid- eration is — ound to be lacking, all hope is not lost. A contract may still be en — orceable based on some alternative to consideration, as the — ollowing chapters explore.
Cases Reading Hamer v. Sidway. Historically, there have been two alternative theo- ries that attempt to explain what consideration is and why the law should require it. The --- irst, and older, theory is best understood as the bene --- it/detri- ment test. It asks whether the promisor incurs a bene --- it or the promisee incurs a detriment, to evaluate whether consideration is present such that a bind- ing contract may be --- ormed. This historic test is now dis --- avored by modern courts and has largely been replaced by the bargained- --- or exchange test o ---
7 • Consideration 169
consideration. However, the doctrine is varied, and courts still cleave to the old language. For this reason, and because Hamer is a hallmark o — the clas- sic contract law canon, students should read and remember the — acts o — this historic case, which is perhaps the most — amous articulation o — the bene — it/ detriment test in practice. Although the case revolves around an uncle named William E. Story and his nephew, William E. Story II, the case is captioned Hamer v. Sidway. Lou- isa W. Hamer was the assignee o — the nephew’s — inancial interest in the uncle’s promise. Franklin Sidway was the executor o — the uncle’s estate. The case is captioned this way because the nephew trans — erred his right to the promised money to his wi — e, who later assigned it to her mother, Louisa W. Hamer. When the uncle died, his executor, Sidway, re — used to pay the money, so Hamer sued to collect. In short, Hamer was asserting the contractual right originally held by William E. Story II against the executor o — William E. Story’s estate, Sidway.
Hamer v. Sidway
124 N.Y. 538, 27 N.E. 256 (1891) PARKER, J., The question which provoked the most discussion by counsel on this appeal, and which lies at the --- oundation o --- plainti ---
’s asserted right o — recovery, is whether by virtue o — a contract de — endant’s testator, William E. Story, became indebted to his nephew, William E. Story, 2d, on his twenty- — irst birthday in the sum o — $5,000. The trial court — ound as a — act that ‘on the 20th day o — March, 1869, William E. Story agreed to and with William E. Story, 2d, that i — he would re — rain — rom drinking liquor using tobacco, swearing, and playing cards or billiards — or money until he should become twenty-one years o — age, then he, the said William E. Story, would at that time pay him, the said William E. Story, 2d, the sum o — $5,000 — or such re — raining, to which the said William E. Story, 2d, agreed,’ and that he ‘in all things — ully per — ormed his part o — said agreement.’ The de — endant contends that the contract was without consideration to support it and is there — ore invalid. He asserts that the promisee, by re — raining — rom the use o —
liquor and tobacco, was not harmed, but bene
ited; that that which he did was best
or him to do, independently o — his uncle’s promise, — and insists that it — ollows that, unless the promisor was bene — ited, the contract was without consideration, — a con- tention which, i — well — ounded, would seem to leave open — or controversy in many cases whether that which the promisee did or omitted to do was in — act o — such ben- e — it to him as to leave no consideration to support the en — orcement o — the promisor’s agreement. Such a rule could not be tolerated and is without — oundation in the law. Courts will not ask whether the thing which — orms the consideration does in — act bene — it the promisee or a third party, or is o — any substantial value to anyone. It is enough that something is promised, done, — orborne, or su —
ered by the party to whom 170 7 • Consideration
the promise is made as consideration
or the promise made to him. In general, a waiver o — any legal right at the request o — another party is a su —
icient consideration
or a promise. Any damage, or suspension, or — orbearance o — a right will be su —
icient to sustain a promise. Pollock in his work on Contracts, a — ter citing the de — inition given by the exchequer chamber, says: ‘The second branch o — this judicial description is really the most important one. “Consideration” means not so much that one party is pro — iting as that the other abandons some legal right in the present or limits his legal — reedom o —
action in the --- uture, as an inducement --- or the promise o --- the --- irst.’
Now, applying this rule to the --- acts be --- ore us, the promisee used tobacco, occa- sionally drank liquor, and he had a legal right to do so. That right he abandoned --- or a period o --- years upon the strength o --- the promise o --- the testator that --- or such --- orbear- ance he would give him $5,000. We need not speculate on the e ---
ort which may have been required to give up the use o — those stimulants. It is su —
icient that he restricted his law — ul — reedom o — action within certain prescribed limits upon the — aith o — his uncle’s agreement, and now, having — ully per — ormed the conditions imposed, it is o —
no moment whether such per
ormance actually proved a bene — it to the promisor, and the court will not inquire into it; but, were it a proper subject o — inquiry, we see noth- ing in this record that would permit a determination that the uncle was not bene — ited in a legal sense. Few cases have been — ound which may be said to be precisely in point, but such as have been, support the position we have taken. In Shadwell v. Shadwell, an uncle wrote to his nephew as — ollows: My dear Lancey: I am so glad to hear o — your intended marriage with Ellen Nicholl, and, as I promised to assist you at starting, I am happy to tell you that I will pay you 150 pounds yearly during my li — e and until your annual income derived — rom your pro — ession o — a chancery barrister shall amount to 600 guin- eas, o — which your own admission will be the only evidence that I shall receive or require. Your a —
ectionate uncle, CHARLES SHADWELL. It was held that the promise was binding and made upon good consideration. In Lakota v. Newton, the complaint averred de — endant’s promise that: I — you [meaning the plainti —
] will leave o —
drinking — or a year I will give you $100. Plainti —
’s assent thereto, per — ormance o — the condition by him, and demanded judgment there — or. De — endant demurred, on the ground, among others, that the plainti —
’s declaration did not allege a valid and su —
icient consideration — or the agree- ment o — the de — endant. The demurrer was overruled. 7 • Consideration 171
In Talbott v. Stemmons, the step-grandmother o
the plainti —
made with him the
ollowing agreement: I do promise and bind mysel — to give my grandson Albert R. Talbott $500 at my death i — he will never take another chew o — tobacco or smoke another cigar during my li — e, — rom this date up to my death; and i — he breaks this pledge he is to re — und double the amount to his mother. The executor o — Mrs. Stemmons demurred to the complaint on the ground that the agreement was not based on a su —
icient consideration. The demurrer was sustained, and an appeal taken there — rom to the court o — appeals, where the decision o — the court below was reversed. In the opinion o — the court it is said that: The right to use and enjoy the use o — tobacco was a right that belonged to the plainti —
, and not — orbidden by law. The abandonment o — its use may have saved him money, or contributed to his health; nevertheless, the surrender o —
that right caused the promise, and, having the right to contract with re --- erence
to the subject matter, the abandonment o --- the use was a su ---
icient consider- ation to uphold the promise. Abstinence — rom the use o — intoxicating liquors was held to — urnish a good con- sideration — or a promissory note in Lindell v. Rokes. The order appealed — rom should be reversed, and the judgment o — the special term a —
irmed, with costs payable out o —
the estate. All concur.
Re --- lection
Hamer v. Sidway explains the bene --- it/detriment test. The bene --- it/detriment test requires that --- or there to be adequate consideration, the contract must either bene --- it the promisor or detriment the promisee. I --- the contract does not bene --- it the promi- sor or detriment the promisee, the contract is without consideration and there --- ore invalid. Adequate consideration can consist o --- “some right, interest, pro --- it, or ben- e --- it accruing to the one party, or some --- orbearance, detriment, loss, or responsibility given, su ---
ered, or undertaken by the other.” In Hamer v. Sidway, the nephew promised to — orbear drinking, swearing, smoking, and some gambling until his twenty- — irst birthday. He did — orbear these activities, and it does not matter how much he had to su —
er because o — it because he restricted his legal — reedom to do so. The nephew restricted his legal — reedom o — action based on the inducement o — his uncle’s promise. However, the bene — it/detriment test is o — ten dis — avored by courts, since it leaves room — or controversy in many cases as to whether the promisee either did or did not do something that was to his bene — it, there — ore leaving no consideration to support the en — orcement o — the promisor’s agreement. For the most part, courts apply a more modern test, the bargained- — or exchange test, to evaluate whether a contract is supported by consideration. 172 7 • Consideration
Discussion 1. Why do courts require consideration? 2. What is the role o --- (i) inducement and (ii) exchange in (a) the bene --- it/detriment test as articulated in Hamer and (b) the modern consideration test (R2d § 71)? 3. Evaluate the --- acts o --- Hamer under the bargained- --- or exchange test o --- consider- ation. Is the result the same? 4. The Hamer court analogizes to several cases, including Lakota and Talbott. What is similar about these three cases? Can you identi --- y any distinctions that the court glossed over?
Reading Pennsy Supply, Inc. v. American Ash Recycling Corp. Most modern courts and the R2d have moved away --- rom the bene --- it/detriment test and toward the bargained- --- or exchange test. In this modern test (R2d § 71), the
question is whether the contract is the result o --- both parties’ desire to receive
something --- rom the transaction. This does not require bargaining per se,
meaning that the parties do not have to haggle or dicker over terms. Rather,
the test simply looks at whether promises are given in exchange --- or one
another. This modern test --- its better with the law-and-economics approach
to contract law, which justi --- ies en --- orceable agreements on the basis that they
generally make the world more valuable by allocating property to the person
who values it more.
But the bargained- --- or exchange test is not per --- ect. The Pennsy case, which involved a contract --- or the removal o --- a “bad” — hazardous waste — highlights one o --- the challenges in applying the bargained- --- or exchange test where the contract is not --- or a typical good. Fortunately, the test proves --- lexible enough to accommodate this circumstance, demonstrating one way in which it proves superior to the bene --- it/detriment test in terms o --- its ability to distinguish socially bene --- icial bargains --- rom ones that should not necessarily be en --- orced by courts.
7 • Consideration 173
Pennsy Supply, Inc. v. American Ash
Recycling Corp.
895 A.2d 595 (Pa. Super. Ct. 2006) ORIE MELVIN, J.: Appellant, Pennsy Supply, Inc. (“Pennsy”), appeals --- rom the grant o --- preliminary objections in the nature o --- a demurrer [Pennsylvania’s version o --- a motion to dis- miss] in --- avor o --- Appellee, American Ash Recycling Corp. o --- Pennsylvania (“Ameri- can Ash”). We reverse and remand --- or --- urther proceedings. The trial court summarized the allegations o --- the complaint as --- ollows:
The instant case arises out o --- a construction project --- or Northern York High
School (Project) owned by Northern York County School District (District)
in York County, Pennsylvania. The District entered into a construction con-
tract --- or the Project with a general contractor, Lobar, Inc. (Lobar). Lobar, in
turn, subcontracted the paving o --- driveways and a parking lot to [Pennsy].
The contract between Lobar and the District included Project Speci --- i-
cations --- or paving work which required Lobar, through its subcontractor
Pennsy, to use certain base aggregates. The Project Speci --- ications permitted
substitution o --- the aggregates with an alternate material known as Treated
Ash Aggregate (TAA) or AggRite.
The Project Speci --- ications included a “notice to bidders” o --- the avail-
ability o --- AggRite at no cost --- rom [American Ash], a supplier o --- AggRite.
The Project Speci --- ications also included a letter to the Project architect
rom American Ash con — irming the availability o — a certain amount o — — ree AggRite on a — irst come, — irst served basis. Pennsy contacted American Ash and in — ormed American Ash that it would require approximately 11,000 tons o — AggRite — or the Project. Pennsy subsequently picked up the AggRite — rom American Ash and used it — or the paving work, in accordance with the Project Speci — ications. Pennsy completed the paving work in December 2001. The pavement ultimately developed extensive cracking in February 2002. The District noti — ied . . . Lobar as to the de — ects and Lobar in turn directed Pennsy to remedy the de — ective work. Pennsy per — ormed the remedial work during summer 2003 at no cost to the District. The scope and cost o — the remedial work included the removal and appro- priate disposal o — the AggRite, which is classi — ied as a hazardous waste mate- rial by the Pennsylvania Department o — Environmental Protection. Pennsy requested American Ash to arrange — or the removal and disposal o — the AggRite; however, American Ash did not do so. Pennsy provided notice to American Ash o — its intention to recover costs. 174 7 • Consideration
Pennsy also alleged that the remedial work cost it $251,940.20 to per --- orm
and that it expended an additional $133,777.48 to dispose o --- the AggRite
it removed. On November 18, 2004, Pennsy --- iled a --- ive-count complaint against American Ash alleging breach o --- contract (Count I); breach o --- implied warranty o --- merchantabil- ity (Count II); breach o --- express warranty o --- merchantability (Count III); breach o ---
warranty o
itness — or a particular purpose (Count IV); and promissory estoppel (Count V). American Ash — iled demurrers to all — ive counts. Pennsy responded and also sought leave to amend should any demurrer be sustained. The trial court sus- tained the demurrers by order and opinion dated May 25, 2005 and dismissed the complaint. This appeal — ollowed. Pennsy raises three questions — or our review: (1) Whether the trial court erred in not accepting as true . . . [the] Complaint allegations that (a) [American Ash] promotes the use o — its AggRite material, which is classi — ied as hazardous waste, in order to avoid the high cost o — disposing [o — ] the material itsel — ; and (b) [American Ash] incurred a bene — it — rom Pennsy’s use o — the material in the — orm o — avoidance o — the costs o — said disposal su —
icient to ground contract and warranty claims. (2) Whether Pennsy’s relie — o — [American Ash’s] legal obligation to dispose o — a material classi — ied as hazardous waste, such that [American Ash] avoided the costs o — disposal thereo — at a hazardous waste site, is su —
icient consideration to ground contract and warranty claims. [(3) Promissory estoppel question omitted.] “Preliminary objections in the nature o — a demurrer test the legal su —
iciency o —
the complaint.” [A demurrer is an older term in civil procedure
or what is now more commonly known as a motion to dismiss.] When reviewing the dismissal o — a complaint based upon preliminary objections in the nature o — a demurrer, we treat as true all well-pleaded material, — actual averments and all in — erences — airly deducible there — rom. Where the preliminary objections will result in the dismissal o — the action, the objections may be sustained only in cases that are clear and — ree — rom doubt. To be clear and — ree — rom doubt that dismissal is appropriate, it must appear with certainty that the law would not permit recovery by the plainti —
upon the — acts averred. Any doubt should be resolved by a re — usal to sustain the objections. Moreover, we review the trial court’s decision — or an abuse o —
discretion or an error o
law. In applying this standard to the instant appeal, we deem it easiest to order our discussion by count. Count I raises a breach o — contract claim. “A cause o — action — or breach o — contract must be established by pleading (1) the existence o — a contract, including its essential terms, (2) a breach o — a duty imposed by the contract and (3) resultant damages.” 7 • Consideration 175
While not every term o
a contract must be stated in complete detail, every element must be speci — ically pleaded. Clarity is particularly important where an oral contract is alleged. Instantly, the trial court determined that “any alleged agreement between the par- ties is unen — orceable — or lack o — consideration.” The trial court also stated, “the — acts as pleaded do not support an in — erence that disposal costs were part o — any bargaining process or that American Ash o —
ered the AggRite with an intent to avoid disposal costs.” Thus, we understand the trial court to have dismissed Count I — or two reasons related to the necessary element o — consideration: one, the allegations o — the Com- plaint established that Pennsy had received a conditional gi — t — rom American Ash, and two, there were no allegations in the Complaint to show that American Ash’s avoidance o — disposal costs was part o — any bargaining process between the parties. It is axiomatic that: Consideration is an essential element o — an en — orceable contract. Consideration consists o — a bene — it to the promisor or a detriment to the promisee. Consideration must actually be bargained — or as the exchange — or the promise. It is not enough, however, that the promisee has su —
ered a legal detriment at the request o — the promisor. The detriment incurred must be the “quid pro quo”, or the “price” o — the promise, and the inducement — or which it was made. . . . I — the promisor merely intends to make a gi — t to the promisee upon the per — ormance o — a condition, the promise is gratuitous, and the sat- is — action o — the condition is not consideration — or a contract. The distinction between such a conditional gi — t and a contract is well illustrated in Williston on Contracts, where it is said: I — a benevolent man says to a tramp, — “I — you go around the corner to the clothing shop there, you may purchase an overcoat on my credit,” no reasonable person would understand that the short walk was requested as the consideration — or the promise, but that in the event o — the tramp going to the shop the promisor would make him a gi — t. Whether a contract is supported by consideration presents a question o — law. The classic — ormula — or the di —
icult concept o — consideration was stated by Justice Oliver Wendell Holmes, Jr.: The promise must induce the detriment and the detriment must induce the promise. As explained by Pro — essor Murray: I — the promisor made the promise — or the purpose o — inducing the detriment, the detriment induced the promise. I — , however, the promisor made the promise 176 7 • Consideration
with no particular interest in the detriment that the promisee had to su ---
er to take advantage o — the promised gi — t or other bene — it, the detriment was incidental or conditional to the promisee’s receipt o — the bene — it. Even though the promisee su —
ered a detriment induced by the promise, the purpose o — the promisor was not to have the promisee su —
er the detriment because she did not seek that detriment in exchange — or her promise.
This concept is also well summarized in American Jurisprudence:
As to the distinction between consideration and a condition, it is o --- ten di --- -
icult to determine whether words o — condition in a promise indicate a request
or consideration or state a mere condition in a gratuitous promise. An aid, though not a conclusive test, in determining which construction o — the promise is more reasonable is an inquiry into whether the occurrence o — the condition would bene — it the promisor. I — so, it is a — air in — erence that the occurrence was requested as consideration. On the other hand, i — the occurrence o — the condi- tion is no bene — it to the promisor but is merely to enable the promisee to receive a gi — t, the occurrence o — the event on which the promise is conditional, though brought about by the promisee in reliance on the promise, is not properly con- strued as consideration.
Upon review, we disagree with the trial court that the allegations o
the Complaint show only that American Ash made a conditional gi — t o — the AggRite to Pennsy. In paragraphs 8 and 9 o — the Complaint, Pennsy alleged:
American Ash actively promotes the use o --- AggRite as a building material to
be used in base course o --- paved structures, and provides the material --- ree o ---
charge, in an e ---
ort to have others dispose o — the material and thereby avoid incurring the disposal costs itsel — . . . . American Ash provided the AggRite to Pennsy — or use on the Project, which saved American Ash thousands o — dollars in disposal costs it otherwise would have incurred.
Accepting these allegations as true and using the Holmesian
ormula — or consid- eration, it is a — air interpretation o — the Complaint that American Ash’s promise to supply AggRite — ree o — charge induced Pennsy to assume the detriment o — collecting and taking title to the material, and critically, that it was this very detriment, whether assumed by Pennsy or some other success — ul bidder to the paving subcontract, which induced American Ash to make the promise to provide — ree AggRite — or the project. Paragraphs 8–9 o — the Complaint simply belie the notion that American Ash o —
ered AggRite as a conditional gi — t to the success — ul bidder on the paving subcontract — or which American Ash desired and expected nothing in return. We turn now to whether consideration is lacking because Pennsy did not allege that American Ash’s avoidance o — disposal costs was part o — any bargaining process between the parties. The Complaint does not allege that the parties discussed or even 7 • Consideration 177
that Pennsy understood at the time it requested or accepted the AggRite that Pennsy’s use o — the AggRite would allow American Ash to avoid disposal costs. However, we do not believe such is necessary. The bargain theory o — consideration does not actually require that the parties bar- gain over the terms o — the agreement. . . . According to Holmes, an in — luential advo- cate o — the bargain theory, what is required [ — or consideration to exist] is that the promise and the consideration be in “the relation o — reciprocal conventional induce- ment, each — or the other.” Here, as explained above, the Complaint alleges — acts which, i — proven, would show the promise induced the detriment and the detriment induced the promise. This would be consideration. Accordingly, we reverse the dismissal o — Count I. [Discus- sion o — Counts II, III, IV (Breach o — Warranty — Sales) and V (Promissory Estoppel) omitted.] For all o — the — oregoing reasons, we reverse the trial court’s order granting the demurrers and dismissing the Complaint and remand — or — urther proceedings. Juris- diction relinquished.
Re --- lection
The Pennsy case is an example o --- a court’s using both the bene --- it/detriment test and the bargained- --- or exchange test. The bene --- it/detriment test states that “[c]onsid- eration consists o --- a bene --- it to the promisor or a [legal] detriment to the promisee.” Here, there is both a bene --- it and detriment, though both do not need to be present. The promisor (American Ash) bene --- ited by saving thousands o --- dollars in disposal costs. A legal detriment is something that the promisee is not obligated to do. Thus, Pennsy collecting and taking title to the AggRite was the detriment.
The court also applied the bargained- --- or exchange test. That test states “[c]onsid- eration must actually be bargained --- or as the exchange --- or the promise.” The type o ---
bargain required
or consideration is not negotiating or bartering over terms but that “[t]he promise must induce the detriment and the detriment must induce the prom- ise.” In other words, a bargain induces (persuades/encourages) the other’s response, and the other person is induced by it and acts on that inducement. One way to tell the di —
erence between a conditional gi — t and consideration is whether the occurrence o — that condition would bene — it the promisor. Unlike Wil- liston’s “tramp” example, where the walk around the corner was merely incidental to obtaining the coat, taking the AggRite was not. The promisor did not bene — it — rom the promisee walking around the corner nor was the promisor’s promise motivated by the walk. In Pennsy, American Ash bene — ited and induced others to get rid o — the AggRite by o —
ering it — ree o — charge to avoid the disposal costs. Pennsy was induced by American Ash and acted on that inducement by taking and collecting the material, thereby su —
ering a legal detriment. 178 7 • Consideration
Discussion 1. How does the Pennsy court distinguish between a conditional gi --- t and a promise supported by consideration? Why did the court --- ind that AggRite o ---
ered its aggre- gate as part o — a bargained- — or exchange and not as a conditional gi — t?
-
Would this case have come out di
erently i — the court had applied the bene — it/detri- ment test and not the bargained- — or exchange test? Why or why not?
Problems Problem 7.1. An Aunt’s Promise Dougherty, a boy o --- eight years, received --- rom his aunt a promissory note --- or $3,000, payable at her death or be --- ore. While visiting her nephew, the aunt saw how well he was progressing in school and decided that she wanted to help take care o --- the child since she loved him very much. The aunt had the boy’s guardian dra --- t a promis- sory note --- or her. The aunt handed a note to her nephew, which read:
You have always done --- or me, and I have signed this note --- or you. Now, do not
lose it. Someday it will be valuable. Following the aunt’s death, Dougherty sought to recover --- or the note. Was there adequate consideration to --- orm an en --- orceable contract? See Dougherty v. Salt, 125 N.E. 94 (N.Y. 1919).
Problem 7.2. Betty and the Bene
it M.J.D., Inc. (MJD), applied to Bank — or a loan to pay o —
its debt. Bank approved the loan subject to a guaranty (a contract where one person agrees to pay the debt o — the other i — the other — ails to do so) by the Small Business Administration (SBA), a — ederal government agency. The SBA approved the loan but required the principals, Melton Meadors, Jay Judd, Harold Ducote, and Ducote’s wi — e, Marie, to sign a guaranty on the SBA — orm. On the application, the guarantors had been “Melton E. Meadors — a single person, Jay A. Judd & Wi — e, Harold A. Ducote, Jr., & Wi — e.” At the signing, the — our principals were all present, as well as Betty Meadors, Meadors’ new wi — e, and Helen Judd, Judd’s wi — e. The SBA was not present. All six signed the guaranty — orm. MJD de — aulted on the loan, and SBA was to take over the guaranteed portion o — the loan. The United States sued to collect the de — iciency — rom the guarantors, including Betty Meadors. 7 • Consideration 179
Applying both the bene
it-detriment test and bargained- — or exchange test, did Betty Meadors receive consideration — rom the SBA — or her signature on the guar- anty — orm? See United States v. Meadors, 753 F.2d 590 (7th Cir. 1985).
Problem 7.3. Shi
ting Sands Peter was on a guided tour through the Sahara Desert when a sandstorm sud- denly appeared. In the chaos o — the storm, Peter got separated — rom his tour group. A — ter the storm abated, Peter — ound himsel — lost in the desert. He wandered — or two
ull days in the baking sun, growing weak and very thirsty, when he — inally happened upon a village in the desert. Peter urgently ran up to the — irst person he saw, who was a man named Merzouga, and asked desperately — or water. Merzouga said to Peter, “I —
you walk through my village and over the last dune beyond it, you will
ind a stream o — clean water. I — you promise to send me and my — amily $1,000 upon your return to America, then you may go there and drink as much water as you like.” Peter agreed and shook Merzouga’s hand, then walked through the village and over the dune, where he — ound a cold, clear stream. Peter drank a great deal o — water and re — reshed himsel — . Later that day, a search party — ound Peter and took him back to his tour group, which later returned to America. When he arrived, Peter remembered his promise to Merzouga, but he — elt that $1,000 was much too high a price, and so he decided not to pay Merzouga anything. As a matter o — law, has Peter — ormed a contract with Merzouga? I — so, what is Peter’s obligation under that agreement? Chapter 8 Promissory Estoppel
Promissory estoppel is an equitable doctrine designed to prevent injustice. It pro- tects individuals who reasonably and detrimentally rely on a promise, even when that promise lacks the consideration typically required — or a contract. According to R2d § 90, a promise may be en — orced i — the promisor should reasonably expect their promise to induce action or — orbearance and i — injustice can only be avoided through en — orcement. By — ocusing on reliance rather than reciprocal exchange, promissory estoppel serves as an alternative to traditional bargain contracts. Consider Sarah, a small business owner, who relocates her ca — é to a newly devel- oped retail space a — ter the developer, Alan, promises her three months o — — ree rent as an incentive. She incurs signi — icant moving expenses, only — or Alan to renege and demand rent — rom the — irst month. Although no — ormal contract exists, Sarah relied on Alan’s promise to her detriment. This example demonstrates how promissory estoppel can be a vital tool — or achieving justice in such cases. Promissory estoppel requires three key elements: a clear promise, reasonable reli- ance, and detriment caused by that reliance. Yet promissory estoppel’s application also hinges on the ultimate principle o — justice, granting courts — lexibility to weigh — airness in each case. This balance between en — orcing promises and maintaining discretion makes promissory estoppel a power — ul complement to traditional contract law, espe- cially in cases where — airness demands recognition o — an obligation. Promissory estoppel — requently arises in speci — ic contexts that highlight its equi- table purpose. For instance, charitable subscriptions o — ten depend on promissory estoppel when donors pledge large sums to organizations that rely on those commit- ments to — und their operations. Courts may en — orce such promises to ensure — airness, particularly when charities act in reliance on those pledges by initiating projects or making — inancial commitments. Similarly, promissory estoppel plays a signi — icant role in employment contexts, where individuals rely on promises o — job security, promotions, or relocation assistance. For example, i — an employer promises a job candidate a position and the candidate resigns
rom their current role or relocates in reliance on that promise, courts may invoke promissory estoppel to prevent injustice i — the employer later withdraws the o —
er. Another key area involves — amily promises, such as assurances o —
inancial sup- port or inheritance. These situations o — ten involve signi — icant reliance by one party,
181
182 8 • Promissory Estoppel
such as moving to care
or a — amily member or investing resources in property with the expectation o — — uture ownership. Promissory estoppel provides a mechanism to en — orce such promises when — airness requires recognition o — the detriment su —
ered. This chapter examines the theory and purpose o — promissory estoppel, its essential elements, and the role o — justice in shaping its application. We explore speci — ic con- texts where the doctrine’s equitable roots are most evident, such as charitable sub- scriptions, employment promises, and — amily arrangements. Finally, we re — lect on promissory estoppel’s broader implications, including its interplay with other legal doctrines like consideration and restitution, and its role in ensuring justice when traditional principles — all short.
Promise Detriment
• By Promisor • To Promisee
Reliance
• On Promise
• By Promisee
• Foreseeable
by Promisor
Figure 8.1. Promissory estoppel elements illustrated.
Rules A. Theory o --- Promissory Estoppel Promissory estoppel --- inds its roots in equity, a body o --- law designed to ensure --- air- ness when strict legal rules --- all short. Unlike traditional contract law, which supports economic e ---
iciency by en — orcing agreements based on the exchange o — promises, promissory estoppel steps in to address the harm caused when someone reasonably relies on a promise that isn’t supported by consideration. In this way, promissory estoppel protects reliance rather than reciprocity. The doctrine re — lects a basic idea: when a promisor makes a commitment that reasonably induces the promisee to act or re — rain — rom acting, the law may en — orce that promise to prevent injustice. The — airness principles behind promissory estoppel come into — ocus in situa- tions where one party reasonably relies on another’s promise to their detriment. For 8 • Promissory Estoppel 183
example, suppose an employer assures a longtime employee that they will receive a retirement pension, and the employee relies on that promise by retiring earlier than planned. I — the employer later revokes the promise, the employee may su —
er serious harm — perhaps having passed up other job opportunities or — or — eited income based on the belie — that they would be — inancially secure. Promissory estoppel allows courts to address this kind o — reliance-based injustice, even when the promise was not part o — a — ormal bargain or supported by consideration. But not every retirement decision would justi — y equitable intervention. I — the employee had already planned to retire regardless o — the pension promise, or i — the only consequence o — their reliance was placing a re — undable deposit on a new boat, then there may be no substantial or irrevocable detriment. In such cases, promissory estoppel would likely not apply, because the reliance was not induced in a way that created serious harm or injustice. This — ocus on — airness has deep historical roots. The doctrine evolved — rom courts o —
chancery, where judges were tasked with acting as “keepers o
the king’s conscience.” These courts, less constrained by the equal application o — rigid rules, — ocused on ensuring equitable outcomes in disputes. Promissory estoppel re — lects that heritage. It prioritizes harm prevention. It recognizes the trust that people place in promises, which have moral dimensions as well as economic ones. Reliance on a promise o — ten creates obligations as binding as those — ormed through mutual agreement. Today, promissory estoppel serves as a sa — ety net within contract law, — illing the gaps le — t by doctrines like consideration. While traditional contracts are grounded in mutual exchange, many real-world promises do not involve — ormal bargains, yet they still create reasonable expectations. Promises o — gi — ts, pensions, or even chari- table donations o — ten lack consideration but may predictably lead the promisee to take actions in reliance on them. By providing an equitable remedy in these cases, promissory estoppel rein — orces trust and accountability, essential components o — both personal and pro — essional relationships.
B. Elements o
Promissory Estoppel R2d § 90 provides the — ramework courts use to determine whether a promise should be en — orced under the promissory estoppel doctrine. A promise which the promisor should reasonably expect to induce action or
orbearance on the part o — the promisee or a third person and which does induce such action or — orbearance is binding i — injustice can be avoided only by en — orcement o — the promise. The remedy granted — or breach may be limited as justice requires. R2d § 90(1). Promissory estoppel requires proving three core elements: (1) a promise, (2) reli- ance, and (3) a detriment. These three elements set the stage — or applying promissory estoppel, but they are not the whole story. Unlike bargain-based contracts, where 184 8 • Promissory Estoppel
meeting the elements typically ensures en
orcement, promissory estoppel includes an overarching requirement that en — orcement be necessary to prevent injustice. Even when all the elements are present, a court may limit or deny en — orcement i — the result would be inequitable. In the sections that — ollow, we will examine each o — these ele ments and explore how the doctrine balances the interests o —
airness and justice.
- The Promise A promise lies at the heart o — every claim — or promissory estoppel. Without a prom- ise, there is no assurance to induce reliance, and without reliance, the — oundation o — the doctrine collapses. However, not every casual assurance or vague statement constitutes a promise in the eyes o — the law. Recall the R2d’s de — inition o — a promise: A promise is a mani — estation o — intention to act or re — rain — rom acting in a speci — ied way, so made as to justi — y a promisee in understanding that a com- mitment has been made. R2d § 2(1).
To satis
y the — irst element o — promissory estoppel, the promise must be clear and de — inite. Only a clear, de — inite promise can create a reasonable expectation in the promisee that the promisor intends to be bound. The clarity and de — initeness o — a promise are evaluated — rom the perspective o — a reasonable person. This objective standard ensures that the promisor’s words and actions are interpreted in a way that aligns with societal norms rather than the subjec- tive belie — s o — the parties. For instance, a promisor’s saying, “I might help you out with rent next month i —
things go well,” likely lacks the speci
icity to quali — y as a promise. On the other hand, a statement like “I will cover your rent next month so that you can — ocus on your studies” demonstrates the kind o — clear and de — inite assurance that could give rise to reliance. Promises can be made orally or in writing, and even casual or in — ormal language can su —
ice i — it reasonably conveys a commitment. The key question is whether the promisee, upon hearing the statement and considering the context, could reasonably understand that a commitment has been made. Context matters greatly. The relation- ship between the parties, their past dealings, and the circumstances surrounding the statement all in — luence whether the words or actions rise to the level o — a promise. Consider Ricketts v. Scothorn, 77 N.W. 365 (Neb. 1898), where a grand — ather wrote a promissory note to his granddaughter stating that she would not need to work any longer and that he would support her. The court — ound this to be a su —
iciently clear and de — inite promise, especially in light o — the — amily relationship and the grand daughter’s subsequent reliance on it. This case underscores that courts do not evaluate promises in isolation but rather within the broader context o — the parties’ relationship and the promise’s likely e —
ect. 8 • Promissory Estoppel 185
In sum, the promise element serves as the
oundation o — promissory estoppel; it ensures that the doctrine addresses only those commitments that a reasonable per- son would understand to be binding. A promise should not be lightly in — erred. The doctrine o — promissory estoppel will not provide recourse — or misunderstandings or unmet expectations arising — rom casual conversations. This care — ul balancing ensures that promissory estoppel remains grounded in its equitable purpose. Once a promise is established, the next phase o — the inquiry assesses the promisee’s reliance and the detriment that reliance may have caused.
- Reliance Reliance is the second essential element o — promissory estoppel, building directly on the — oundation o — the promise. For a promise to give rise to legal en — orcement under this doctrine, the promisee must have relied on it in a way that is actual, rea- sonable, and — oreseeable. These requirements ensure a direct connection between the promise and the actions or inactions taken by the promisee, which potentially justi — ies judicial intervention. First, there must be actual reliance. It is not enough — or a promisee to claim they might have acted di —
erently, absent the promise. Instead, the promisee must dem- onstrate that they actually changed their behavior, took speci — ic steps, or — orewent certain opportunities because o — the promise. For example, a job applicant who turns down other o —
ers in reliance on a promised position has engaged in actual reliance. In contrast, i — the job applicant merely thought about declining o —
ers but did not do so, there is no actual reliance. Courts examine the — acts to ensure the reliance is more than speculative or hypothetical. Second, the reliance must be “reasonable,” based on an objective standard. Courts ask whether a reasonable person in the promisee’s position under these speci — ic cir- cumstances would have acted similarly. This ensures that reliance is not based on an exaggerated interpretation o — the promise or an irrational reaction to it. For instance, a tenant who declines an alternative lease based on a landlord’s clear promise to renew their current lease may be seen as acting reasonably. Conversely, i — the landlord said merely, “I think we’ll renew your lease,” reliance on that statement might not meet the reasonableness standard. Courts weigh — actors like the clarity o — the promise, the promisee’s knowledge and sophistication, and the surrounding context to assess whether reliance was reasonable. Finally, the promisee’s reliance must have been — oreseeable to the promisor. This, too, is based on an objective standard. Courts evaluate whether a reasonable per- son, in the same situation as the promisor, would have anticipated that their promise would induce the speci — ic reliance at issue. This protects promisors — rom being held accountable — or responses they could not have reasonably predicted. For example, i —
an employer promises an employee a pension in exchange
or immediate retirement, 186 8 • Promissory Estoppel
it should be extremely
oreseeable to the employer that the employee would leave their job. However, i — a casual acquaintance jokingly promises — inancial support to a — riend, it would likely not be — oreseeable — or the — riend to rely on that statement by quitting their job. The promisor’s knowledge o — the promisee’s circumstances and the nature o — their relationship o — ten play key roles in this analysis. Once reliance is established, the — ocus shi — ts to the — inal element: detriment. This element asks whether the promisee su —
ered some actual harm, which might warrant judicial intervention.
- Detriment The third element o — promissory estoppel is detriment. Detriment ensures that courts intervene only when the promisee’s reliance has meaning — ully worsened their position, creating a situation where non-en — orcement o — the promise would be unjust. While the harm does not need to be overwhelming, it must be signi — icant enough to justi — y judicial intervention. Detriment requires the court to assess the actual consequences o — the promisee’s reliance. The promisee must demonstrate that they are worse o —
because o — their reli- ance on the promise than they would have been had the promise never been made. This harm can take various — orms, including — inancial loss, missed opportunities, or other signi — icant setbacks. Courts o — ten seek evidence o — out-o — -pocket expenditures which can be clearly documented. For instance, i — a contractor who is promised a construction project hires additional workers and purchases materials in preparation — or the project, but the project is then cancelled, the contractor can demonstrate a clear detriment in the
orm o — the direct, out-o — -pocket expenses they incurred in hiring the workers and in purchasing the materials. R2d § 90 does not itsel — use the term “substantial” to describe the detriment required — or promissory estoppel. But it does require that the harm create a compel- ling case — or en — orcement to avoid injustice, and the comments suggest that a promise that leads to a substantial detriment is more likely to be en — orced to avoid injustice. See R2d § 90 cmt. b. This implicitly excludes trivial inconveniences or speculative harms. I — a promisee spends negligible time or resources in reliance on a promise, the court is unlikely to — ind detriment su —
icient to warrant en — orcement. Although courts — requently — ind detriment where the reliance involves measurable out-o — -pocket expenses, the detriment need not necessarily take the — orm o — a direct
inancial expenditure. It can be a — or — eiture o — opportunities, an “opportunity cost,” that results — rom relying on a promise. For example, in Katz v. Danny Dare, 610 S.W.2d 121 (Mo. Ct. App. 1980), the plainti —
retired early based on his employer’s promise o —
a pension,
oregoing other employment opportunities and income. The court — ound the employee’s — or — eiture o — other employment opportunities to be a substantial detri- ment that made the employer’s promise en — orceable. 8 • Promissory Estoppel 187
The detriment can also take unusual
orms. For example, in Cohen v. Cowles Media Co., 479 N.W.2d 387 (Minn. 1992), a newspaper promised anonymity to a source who supplied the newspaper with in — ormation. The bargained- — or nature o — the exchange was unclear, but the court en — orced the promise on a promissory estoppel theory. The promisee provided sensitive in — ormation to the newspaper in reliance on the news- paper’s promise o — anonymity. When the newspaper broke its promise and identi — ied the source, the source su —
ered harm to their career and reputation. As should by now be obvious, the detriment as well as the reliance must actually be caused by the promise. Causation is critical to establishing both reliance and detri- ment in a promissory estoppel case. The promisee’s reliance, and the harm it causes, must — low directly — rom the promise. I — the promisee would have taken the same action, and su —
ered the same harm, regardless o — the promise, there is no su —
icient causal link between the promise and the detrimental reliance. For example, imagine a landlord promises to renew a tenant’s lease, and the ten- ant relocates to a more expensive apartment but does so — or reasons unrelated to the promise. The tenant’s action in renting the more expensive apartment is not caus- ally tied to the promise. The causal connection ensures that the detrimental reliance addressed by a promissory estoppel claim was actually induced by the promise, rather than by independent or unrelated — actors. With the three core elements — promise, reliance, and detriment — established, promissory estoppel addresses the conditions under which promises become en — orce- able. Yet the inquiry does not end there. The ultimate element o — promissory estoppel is justice.
C. Justice: The Ultimate Requirement Justice is the ultimate element o — promissory estoppel. It underpins the entire doc- trine. Even when the promise, reliance, and detriment elements are satis — ied, courts will not automatically en — orce the promise unless en — orcement is necessary to avoid injustice. R2d § 90 explicitly incorporates this principle by requiring en — orcement o — a promise only “i — injustice can be avoided only by en — orcement o — the promise.” The inquiry into justice is inherently case-speci — ic. Courts assess the broader context to determine whether en — orcement would prevent un — airness or whether alternative remedies might su —
ice. When considering justice, courts o — ten weigh the promisor’s conduct against the promisee’s harm. On the one hand, courts ask, did the promisor make the promise negligently, recklessly, or in bad — aith? Did the promisor reasonably — oresee the reliance that occurred? On the other hand, courts ask, was the promisee’s reliance reasonable, proportionate, and consistent with the promise? Were the promisee’s actions excessive or disproportionate in comparison to the prom- ise that was made? The balance o — these considerations allows courts to determine whether en — orcement is warranted as a matter o — justice. 188 8 • Promissory Estoppel
There is signi
icant overlap with the other elements. For instance, i — the reliance was unreasonable, or the detriment relatively minor, a court is more likely to conclude that the harm does not rise to the level requiring judicial intervention. In contrast, i —
the reliance was highly
oreseeable, and the harm signi — icant, a court is more likely to
ind justice requires en — orcing the promise. Justice also limits the scope o — the remedy. In traditional contract cases, courts generally seek to en — orce the — ull scope o — the agreement the parties struck. The goal is to give the plainti —
the “bene — it o — their bargain,” either by awarding money (called damages) or by ordering per — ormance o — a promise (called speci — ic per — ormance.) But in promissory estoppel cases, courts award remedies that are tailored to the speci — ic harm su —
ered by the promisee. The goal is not to en — orce the — ull scope o — the promise, as i — it were a — ully bargained- — or contract, but to compensate — or the detri- ment caused by the promisee’s reliance. Thus, courts might award so-called “reliance damages,” which cover the costs or losses incurred because o — the promise, rather than expectation damages, which seek to put the promisee in the position they would have occupied had the promise been — ully per — ormed. You will learn about these issues in later chapters. The remedy in promissory estoppel cases o — ten takes the — orm o — compensation — or harms su —
ered in the past. For example, in Cowles Media Co., above, the court did not en — orce the promise o — con — identiality literally. Instead, it awarded damages to address the reputational and pro — essional harm caused by the promisor’s breach. Similarly, in Danny Dare, above, the court awarded reliance damages to compensate — or the plain- ti —
’s decision to retire early based on the promise o — a pension, rather than en — orcing the pension promise outright. In sum, en — orcement in promissory estoppel cases is limited to what justice requires. Justice is the doctrine’s ultimate sa — eguard, and it ensures that promissory estoppel remains true to its equitable roots. It ties together the three core elements o —
promise, reliance, and detriment and allows courts to address real harm without cre- ating new inequities. By limiting en — orcement and remedies to what justice requires, this element ensures that promissory estoppel remains a — lexible and — air doctrine capable o — adapting to the complexities o — real-world disputes.
D. Charitable Subscriptions Promissory estoppel is a versatile doctrine that is capable o — addressing unique relational dynamics and speci — ic policy concerns. The core elements o — promise, reli- ance, and detriment, as well as the overarching goal to prevent injustice, are usually required and guide the doctrine’s application. However, special contexts may require departures — rom these traditional elements. A major example is “charitable subscriptions.” A charitable subscription is a prom- ise made to donate money or other resources to a charitable organization or cause. 8 • Promissory Estoppel 189
You saw an example in Pappas v. Bever, 219 N.W.2d 720 (Iowa 1974), which you read earlier in the course. In that case, the court — ound that the donor (Mr. Bissonnette) never made a promise to donate to the Charles City College but rather made a mere statement o — intent. What happens i — a donor makes a clear promise to give to a college but then backs out a — ter the college has already taken action in reliance on the promise, such as tak- ing out massive loans or starting to build a — ootball stadium? This is an excellent con- tender — or a promissory estoppel claim. But what i — the college did not take any actions in reliance on the promise, and the donor backs out? Can the college use contract law to secure the money as promised? The answer would normally be “no,” given that there is neither consideration nor detrimental reliance. However, you may be surprised to learn that courts will some- times en — orce charitable promises in the absence o — either consideration or detrimen- tal reliance. The R2d and the courts that — ollow it take a particularly lenient approach. R2d § 90(2) provides that a charitable subscription is binding without requiring proo —
that the promise induced action or
orbearance, so long as en — orcement is necessary to avoid injustice. R2d § 90(2) states:
A charitable subscription or a marriage settlement is binding under Sub
section (1) without proo --- that the promise induced action or --- orbearance.
This approach re
lects a public policy interest in encouraging charitable giving. It also recognizes the practical realities o — how charities operate. Charities o — ten rely on the aggregate expectations created by hundreds or thousands o — pledges in order to plan their budgets and initiatives. Thus, reliance on any single promise may not be immediately evident. For courts that — ollow this lenient approach, the societal importance o — honor- ing charitable commitments can outweigh the traditional reliance requirement o —
promissory estoppel. For example, in Salsbury v. Northwestern Bell Telephone Co., 221 N.W.2d 609 (Iowa 1974), a court upheld a charitable pledge to Charles City Col- lege in the amount o — $5,000, to be made over three years, despite lack o — either con- sideration or a showing o — reliance by the school on this speci — ic promise. But not all courts agree that this is the right approach. Courts in other jurisdic- tions insist on proo — o — actual reliance by the charity be — ore en — orcing a subscription under promissory estoppel. For example, in St. Joseph’s Foundation v. Bashas’ Inc., 468 B.R. 381 (D. Ariz. 2012), the court rejected an attempt by St. Joseph’s Founda- tion to en — orce a $250,000 charitable pledge made by Bashas’ Inc., a grocery chain. Bashas’ argued that its pledge was never intended to be binding and was instead a noncommittal gesture o — support. The court agreed, also noting that St. Joseph’s had not taken speci — ic actions in reliance on the pledge, such as initiating a project or incurring expenses based on the promised — unds. Arizona, unlike jurisdictions that have adopted R2d § 90(2), requires proo — o — either consideration or reliance — or a 190 8 • Promissory Estoppel
charitable subscription to be en
orceable. Without evidence o — reliance, the — ounda- tion could not en — orce the promise. Similarly, in Local 107 O —
ice & Pro — essional Employees International Union v. O —
- shore Logistics, Inc., 380 F.3d 832 (5th Cir. 2004), a labor union sought to en — orce a promise by O —
shore Logistics to provide its members with certain bene — its during a dispute. O —
shore Logistics had made verbal assurances that the bene — its would be granted, leading the union to re — rain — rom escalating the con — lict or pursuing alterna- tive strategies. The court, however, — ound that the union — ailed to demonstrate clear and detrimental reliance on the promise. O —
shore Logistics’s assurances were vague and did not induce the union to take de — initive actions that it otherwise would not have taken. The Fi — th Circuit held that reliance is an essential element o — promissory estoppel, rejecting the union’s argument — or en — orcement based on the promise alone. These cases illustrate the more traditional approach taken by some courts, which treat charitable subscriptions and other promises under the doctrine o — promissory estoppel no di —
erently than any other claim. Proo — o — actual reliance remains central to en — orceability, emphasizing the need — or a tangible connection between the prom- ise and the promisee’s actions or decisions. However, even in jurisdictions requiring reliance, courts sometimes — ind ways to interpret reliance broadly in the context o — charitable subscriptions. For example, in Temple Beth AM v. Tanenbaum, 6 Misc. 3d 373 (N.Y. Sup. Ct. 2004), the court en — orced a congregation’s claim — or unpaid membership dues, emphasizing the con- gregation’s reliance on aggregate contributions to budget its operations. Although the de — endants, — ormer members o — the congregation, argued that their resignation relieved them o —
urther obligations, the court — ound that the congregation’s — inancial planning, which depended on total membership dues, constituted su —
icient reliance. This decision illustrates how courts balance the practical realities o — charitable giving with the traditional principles o — promissory estoppel by interpreting reliance broadly in contexts where reliance on aggregate pledges is essential to organizational stability. The en — orceability o — charitable subscriptions without proo — o — reliance thus depends heavily on the jurisdiction. While some courts, in line with the Restatement, prioritize public policy considerations, others adhere to a stricter application o — the reliance requirement. These di —
ering approaches illustrate the — lexibility o — promis- sory estoppel and its capacity to evolve as courts navigate the complexities o —
airness and public interest.
E. Re
lections on Promissory Estoppel Promissory estoppel occupies a unique and — lexible position in contract law, strad- dling the line between the — ormalistic requirements o — traditional contract doctrines and the equitable principles aimed at preventing injustice. At its core, promissory estoppel challenges the notion that every en — orceable promise must be supported by 8 • Promissory Estoppel 191
consideration. Instead, it recognizes that in many real-world scenarios, the trust and reliance placed on a promise can be just as consequential as the mutual obligations
ormed in a bargained- — or exchange. A recurring theme in promissory estoppel is the tension between justice and pre- dictability. The requirement that en — orcement be limited to the extent that justice demands ensures that promissory estoppel remains rooted in equity, but it also intro- duces a level o — uncertainty. Application o — promissory estoppel can vary based on judicial philosophy, local policy concerns, and evolving societal values. Another important dimension o — promissory estoppel is its relationship with con- sideration. The doctrine does not seek to replace the traditional exchange model o —
contract law but rather to supplement it in situations where consideration is absent or inadequate. In doing so, promissory estoppel serves as a sa — ety net ensuring that promises made in good — aith and relied upon to the promisee’s detriment do not result in inequitable outcomes. However, this raises the question o — how — ar courts should go in en — orcing promises absent a clear mutual agreement. Should promissory estop- pel remain a narrowly applied exception, or does its equitable nature justi — y broader application? Finally, promissory estoppel invites re — lection on the role o — context in contract en — orcement. Unlike traditional contracts, which prioritize the — ormal elements o —
o
er, acceptance, and consideration, promissory estoppel demands a deeper exami- nation o — the parties’ relationship and the surrounding circumstances. This contextual approach allows courts to account — or power imbalances, the — oreseeability o — reliance, and the magnitude o — harm su —
ered by the promisee. At the same time, it imposes a responsibility on courts to exercise discretion judiciously, to ensure that promissory estoppel does not become a tool — or en — orcing vague or ill-considered promises. In sum, promissory estoppel is both a doctrine o — great promise and inherent com- plexity. It expands the reach o — contract law to protect reliance and prevent injustice, while also raising important questions about its scope, application, and relationship with other doctrines. As courts continue to navigate these tensions, promissory estop- pel remains a vital reminder that contract law is not merely about rigid rules but about achieving — airness in the myriad — orms that human relationships can take. 192 8 • Promissory Estoppel
Cases Reading Ricketts v. Scothorn. The doctrine o --- promissory estoppel developed under common law during the nineteenth century, primarily to deal with con-
tracts that were unen --- orceable --- or want o --- consideration. Ricketts illustrates
the development o --- this doctrine, which is now also --- ound in R2d § 90. As you
read the case, consider how the elements o --- the modern doctrine would apply.
Ricketts v. Scothorn
57 Neb. 51, 77 N.W. 365 (1898) SULLIVAN, J. In the district court o --- Lancaster county the plainti ---
, Katie Scothorn, recovered judgment against the de — endant, Andrew D. Ricketts, as executor o — the last will and testament o — John C. Ricketts, deceased. The action was based upon a promissory note, o — which the — ollowing is a copy: “May the — irst, 1891. I promise to pay to Katie Scothorn on demand, $2,000, to be at 6 per cent. per annum. J.C. Ricketts.” In the petition the plainti —
alleges that the consideration — or the execution o — the note was that she should surrender her employment as bookkeeper — or Mayer Bros. and cease to work — or a living. She also alleges that the note was given to induce her to abandon her occupation, and that, relying on it, and on the annual interest, as a means o — sup- port, she gave up the employment in which she was then engaged. These allegations o — the petition are denied by the administrator. The material — acts are undisputed. They are as — ollows: John C. Ricketts, the maker o — the note, was the grand — ather o — the plainti —
. Early in May — presumably on the day the note bears date — he called on her at the store where she was working. What tran spired between them is thus described by Mr. Flodene, one o — the plainti —
’s witnesses: A. Well, the old gentleman came in there one morning about nine o’clock, probably a little be — ore or a little a — ter, but early in the morning, and he unbuttoned his vest, and took out a piece o — paper in the shape o — a note; that is the way it looked to me; and he says to Miss Scothorn, “I have — ixed out something that you have not got to work any more.” He says, none o —
my grandchildren work, and you don’t have to.
Q. Where was she?
A. She took the piece o --- paper and kissed him, and kissed the old gentleman,
and commenced to cry. It seems Miss Scothorn immediately noti --- ied her employer o --- her intention to quit work, and that she did soon a --- ter abandon her occupation. The mother o --- the plainti ---
was a witness and testi
ied that she had a conversation with her — ather, Mr. Ricketts, 8 • Promissory Estoppel 193
shortly a
ter the note was executed. In the note, he in — ormed her that he had given the note to the plainti —
to enable her to quit work; that none o — his grandchildren worked, and he did not think she ought to. For something more than a year the plainti —
was without an occupation, but in September, 1892, with the consent o — her grand — ather, and by his assistance, she secured a position as bookkeeper with Messrs. Funke & Ogden. On June 8, 1894, Mr. Ricketts died. He had paid one year’s interest on the note, and a short time be — ore his death expressed regret that he had not been able to pay the balance. In the summer or — all o — 1892 he stated to his daughter, Mrs. Scothorn, that i — he could sell his — arm in Ohio he would pay the note out o — the proceeds. He at no time repudiated the obligation. We quite agree with counsel — or the de — endant that upon this evidence there was nothing to submit to the jury, and that a verdict should have been directed peremptorily — or one o — the parties. The testimony o — Flodene and Mrs. Scothorn, taken together, conclusively estab- lishes the — act that the note was not given in consideration o — the plainti —
pursuing, or agreeing to pursue, any particular line o — conduct. There was no promise on the part o — the plainti —
to do, or re — rain — rom doing, anything. Her right to the money promised in the note was not made to depend upon an abandonment o — her employ- ment with Mayer Bros., and — uture abstention — rom like service. Mr. Ricketts made no condition, requirement, or request. He exacted no quid pro quo. He gave the note as a gratuity, and looked — or nothing in return. So — ar as the evidence discloses, it was his purpose to place the plainti —
in a posi- tion o — independence, where she could work or remain idle, as she might choose. The abandonment o — Miss Scothorn o — her position as bookkeeper was altogether voluntary. It was not an act done in — ul — illment o — any contract obligation assumed when she accepted the note. The instrument in suit, being given without any valuable consideration, was nothing more than a promise to make a gi — t in the — uture o — the sum o — money therein named. Ordinarily, such promises are not en — orceable, even when put in the — orm o — a promissory note. It has o — ten been held that an action on a note given to a church, college, or other like institution, upon the — aith o — which money has been expended or obligations incurred, could not be success — ully de — ended on the ground o — a want o — consider- ation. In this class o — cases the note in suit is nearly always spoken o — as a gi — t or dona- tion, but the decision is generally put on the ground that the expenditure o — money or assumption o — liability by the donee on the — aith o — the promise constitutes a valuable and su —
icient consideration. It seems to us that the true reason is the preclusion o — the de — endant, under the doctrine o — estoppel, to deny the consideration. Such seems to be the view o — the matter taken by the supreme court o — Iowa in the case o — Simpson Centenary College v. Tuttle: Where a note, however, is based on a promise to give — or the support o — the objects re — erred to, it may still be open to this de — ense [want o — consideration], unless it shall appear that the donee has, prior to any revocation, entered 194 8 • Promissory Estoppel
into engagements, or made expenditures based on such promise, so that he
must su ---
er loss or injury i — the note is not paid. This is based on the equitable principle that, a — ter allowing the donee to incur obligations on the — aith that the note would be paid, the donor would be estopped — rom pleading want o —
consideration.
And in the case o --- Reimensnyder v. Gans, which was an action on a note given as a donation to a charitable object, the court said: “The --- act is that, as we may see --- rom the case o --- Ryerss v. Trustees, a contract o --- the kind here involved is en --- orceable rather by way o --- estoppel than on the ground o --- consideration in the original undertaking.” It has been held that a note given in expectation o --- the payee per --- orming certain services, but without any contract binding him to serve, will not support an action. But when the payee changes his position to his disadvantage in reliance on the prom- ise, a right o --- action does arise. Under the circumstances o --- this case, is there an equitable estoppel which ought to preclude the de --- endant --- rom alleging that the note in controversy is lacking in one o --- the essential elements o --- a valid contract? We think there is. An estoppel in pais is de --- ined to be “a right arising --- rom acts, admissions, or conduct which have induced a change o --- position in accordance with the real or apparent intention o --- the party against whom they are alleged.” Mr. Pomeroy has --- ormulated the --- ollowing de --- inition:
Equitable estoppel is the e ---
ect o — the voluntary conduct o — a party whereby he is absolutely precluded, both at law and in equity, — rom asserting rights which might, perhaps, have otherwise existed, either o — property, o — contract, or o —
remedy, as against another person who in good --- aith relied upon such con-
duct, and has been led thereby to change his position --- or the worse, and who
on his part acquires some corresponding right, either o --- property, o --- contract,
or o --- remedy. According to the undisputed proo --- , as shown by the record be --- ore us, the plainti ---
was a working girl, holding a position in which she earned a salary o
$10 per week. Her grand — ather, desiring to put her in a position o — independence, gave her the note, accompanying it with the remark that his other grandchildren did not work, and that she would not be obliged to work any longer. In e —
ect, he suggested that she might abandon her employment, and rely in the — uture upon the bounty which he promised. He doubtless desired that she should give up her occupation, but, whether he did or not, it is entirely certain that he contemplated such action on her part as a reasonable and probable consequence o — his gi — t. Having intentionally in — luenced the plainti —
to alter her position — or the worse on the — aith o — the note being paid when due, it would be grossly inequitable to permit the maker, or his executor, to resist payment on the ground that the promise was given without consideration. The petition charges the elements o — an equitable estoppel, and the evidence conclusively establishes them. I — errors intervened at the trial, they could not have been prejudicial. A verdict — or the de — endant would be unwarranted. The judgment is right and is a —
irmed. 8 • Promissory Estoppel 195
Re --- lection In Ricketts, the promissory note was a clear and de --- inite promise. The grand --- ather would have reasonably expected to induce his granddaughter to give up her job by his words and actions. The granddaughter relied on his promise and quit the job she had. The court --- ound that allowing the executor to resist payment would be grossly inequi- table, and there --- ore, en --- orced the promise under the doctrine o --- promissory estoppel.
Discussion 1. Promissory estoppel is a very --- act-speci --- ic doctrine. What speci --- ic --- acts in the Rick- etts case convinced the court that promissory estoppel was appropriate here? 2. What is the purpose o --- the consideration doctrine? Were the purposes underlying the consideration doctrine served here? 3. Does it matter whether Ms. Scothorn was worse o ---
or better o —
or not having worked — or some time? How does Ricketts compare with Hamer?
Reading Conrad v. Fields. This case is a more recent illustration o --- how courts today still use this doctrine when a person relies on a promise to their detri-
ment. In Conrad, Walker R. Fields o ---
ered to pay — or Marjorie Conrad’s legal education. Legal questions involve whether that promise was supported by consideration and, i — not, whether it should be en — orceable as a matter o — justice under the doctrine o — promissory estoppel. As you read this case, pay attention to how it compares and contrasts with Ricketts. Do the courts use the same rules and tests? Which material — acts are di — — erent, and which circumstances are similar?
Conrad v. Fields
2007 WL 2106302 (Minn. Ct. App. July 24, 2007) PETERSON, Judge. This appeal is --- rom a judgment and an order denying posttrial motions. The judg- ment awarded respondent damages in the amount o --- the cost o --- her law-school tuition and books based on a determination that the elements o --- promissory estoppel were proved with respect to appellant’s promise to pay --- or the tuition and books. We a ---
irm the judgment and grant in part and deny in part respondent’s motion to strike appel- lant’s brie — and appendix. 196 8 • Promissory Estoppel
Facts Appellant Walter R. Fields and respondent Marjorie Conrad met and became
riends when they were neighbors in an apartment complex in the early 1990’s. Appel- lant started his own business and became a — inancially success — ul businessman. Appel- lant built a $1.2 million house in the Kenwood neighborhood in Minneapolis and leased a Bentley automobile — or more than $50,000 a year. Appellant is a philanthropic individual who has sometimes paid education costs — or others. In the — all o — 2000, appellant suggested that respondent attend law school, and he o —
ered to pay — or her education. Respondent, who had recently paid o —
an $11,000 medical bill and still owed about $5,000 — or undergraduate student loans, did not — eel capable o — paying — or law school on her own. Appellant promised that he would pay tuition and other expenses associated with law school as they became due. Appellant quit her job at Qwest, where she had been earning $45,000 per year, to attend law school. Appellant admitted at trial that be — ore respondent enrolled in law school, he agreed to pay her tuition. Respondent testi — ied that she enrolled in law school in the summer o — 2001 as a result o — appellant’s “inducement and assurance to pay — or [her] education.” Appel- lant made two tuition payments, each in the amount o — $1,949.75, in August and October 2001, but he stopped payment on the check — or the second payment. At some point, appellant told respondent that his assets had been — rozen due to an Inter- nal Revenue Service audit and that payment o — her education expenses would be delayed until he got the matter straightened out. In May 2004, appellant and respon- dent exchanged e-mail messages about respondent’s di —
iculties in managing the debts that she had incurred — or law school. In response to one o — respondent’s messages, appellant wrote, “to be clear and in writing, when you graduate law school and pas[s] your bar exam, I will pay your tuition.” Later, appellant told respondent that he would not pay her expenses, and he threatened to get a restraining order against her i — she continued attempting to communicate with him. Respondent brought suit against appellant, alleging that in reliance on appellant’s promise to pay her education expenses, she gave up the opportunity to earn income through — ull-time employment and enrolled in law school. The case was tried to the court, which awarded respondent damages in the amount o — $87,314.63 under the doctrine o — promissory estoppel. The district court denied appellant’s motion — or a new trial or amended — indings. This appeal — ollowed.
Decision The district court’s “[ --- ]indings o ---
act, whether based on oral or documentary evi- dence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity o — the trial court to judge the credibility o — the witnesses.” In applying this rule, “we view the record in the light most — avorable to the judgment o — the district court.” I — there is reasonable evidence to support the district court’s — indings o —
act, this court will not disturb those — indings. While the district court’s — indings o —
act 8 • Promissory Estoppel 197
are reviewed under the de
erential “clearly erroneous” standard, this court reviews questions o — law de novo. “Promissory estoppel implies a contract in law where no contract exists in — act.” “A promise which the promisor should reasonably expect to induce action or — or- bearance on the part o — the promisee or a third person and which does induce such action or — orbearance is binding i — injustice can be avoided only by en — orcement o — the promise.” Restatement (Second) o — Contracts § 90(1) (1981). The elements o — a promissory estoppel claim are (1) a clear and de — inite promise, (2) the promisor intended to induce reliance by the promisee, and the promisee relied to the promisee’s detriment, and (3) the promise must be en — orced to prevent injus- tice. Judicial determinations o — injustice involve a number o — considerations, “includ- ing the reasonableness o — a promisee’s reliance.” “Granting equitable relie — is within the sound discretion o — the trial court. Only a clear abuse o — that discretion will result in reversal.” But: The court considers the injustice — actor as a matter o — law, looking to the rea- sonableness o — the promisee’s reliance and weighing public policies (in — avor o —
both en --- orcing bargains and preventing unjust enrichment). When the --- acts
are taken as true, it is a question o --- law as to whether they rise to the level o ---
promissory estoppel.
I. Appellant argues that respondent did not plead or prove the elements o --- promis- sory estoppel. Minnesota is a notice-pleading state that does not require absolute speci --- icity in pleading and, instead, requires only in --- ormation su ---
icient to — airly noti — y the opposing party o — the claim against it. Paragraph 12 o — respondent’s complaint states, “That as a direct and approximate result o — the negligent conduct and breach o — contract conduct o — [appellant], [respon- dent] has been damaged. . . . ” But the complaint also states: 4. That in 2000, based on the assurance and inducement o — [appellant] to pay
or [respondent’s] legal education, [respondent] made the decision to enroll in law school at Hamline University School o — Law (Hamline) in St. Paul, Min- nesota which she did in 2001. 5. That but — or the inducement and assurance o — [appellant] to pay — or [respon- dent’s] legal education, [respondent] would not have enrolled in law school. [Appellant] was aware o — this — act. Paragraphs — our and — ive o — the complaint are su —
icient to put appellant on notice o — the promissory-estoppel claim. At a pretrial deposition, respondent testi — ied that negligence and breach o — contract were the only two causes o — action that she was pleading. Because promissory estop- pel is described as a contract implied at law, respondent’s deposition testimony can be interpreted to include a promissory-estoppel claim. 198 8 • Promissory Estoppel
In its legal analysis, the district court stated: The Court — inds credible [respondent’s] testimony that [appellant] encouraged her to go to law school, knowing that she would not be able to pay — or it on her own. He knew that she was short on money, having helped her pay — or — ood and other necessities. He knew that she was working at Qwest and would need to quit her job to go to law school. He o —
ered to pay — or the cost o — her going to law school, knowing that she had debts — rom her undergraduate tuition. He made a payment on her law school tuition a — ter she enrolled. [Respondent] knew that [appellant] was a wealthy philanthropist, and that he had o —
ered to pay — or the education o — strangers he had met in chance encounters. She knew that he had the wealth to pay — or her law school education. She knew that [ ] he was established in society, older than she, not married, without children, an owner o — a success — ul company, an owner o — an expensive home, and a lessor o — an expensive car. Moreover, [appellant] was a — riend who had per — ormed many kindnesses — or her already, and she trusted him. [Appellant’s] promise in — act induced [respondent] to quit her job at Qwest and enroll in law school, which she had not otherwise planned to do. The circumstances support a — inding that it would be unjust not to en — orce the promise. Upon reliance on [appellant’s] promise, [respondent] quit her job. She attended law school despite a serious health condition that might other wise have deterred her — rom going.
These
indings are su —
icient to show that respondent proved the elements o — prom- issory estoppel. Appellant argues that because he advised respondent shortly a — ter she enrolled in law school that he would not be paying her law-school expenses as they came due, respondent could not have reasonably relied on his promise to pay her expenses to her detriment a — ter he repudiated the promise. Appellant contends that the only injustice that resulted — rom his promise involved the original $5,000 in expenses that respon- dent incurred to enter law school. But appellant’s statement that he would not pay the expenses as they came due did not make respondent’s reliance unreasonable because appellant also told respondent that his — inancial problems were temporary and that he would pay her tuition when she graduated and passed the bar exam. This statement made it reasonable — or respondent to continue to rely on appellant’s promise that he would pay her expenses.
II.
[Court’s discussion o --- appellant’s misplaced reliance on
Olson v. Synergistic Techs. Bus. Sys., Inc. omitted.]
III.
[Discussion o --- statute o ---
rauds omitted.] IV. [Discussion o — damages omitted.] 8 • Promissory Estoppel 199
V. Appellant argues that because respondent received a valuable law degree, she did not su ---
er any real detriment by relying on his promise. But receiving a law degree was the expected and intended consequence o — appellant’s promise, and the essence o — appellant’s promise was that respondent would receive the law degree without the debt associated with attending law school. Although respondent bene — ited — rom attending law school, the debt that she incurred in reliance on appellant’s promise is a detriment to her.
VI.
[Discussion o --- civil procedure omitted.] A ---
irmed; motion granted in part.
Re --- lection Both Ricketts and Conrad exempli --- y success --- ul arguments --- or applying the doc- trine o --- promissory estoppel where there is a lack o --- consideration. The basic elements to prove a promissory estoppel claim are: (1) a clear and de --- inite promise, (2) the promisor should reasonably expect to induce reliance by the promisee, (3) the prom- isee relied on the promise to the promisee’s detriment, and (4) the promise must be en --- orced to prevent injustice. Elements three and --- our are o --- ten combined, but either
ormulation works. In Conrad, the de — endant promised to pay tuition and other expenses associated with law school as they became due. He encouraged the plainti —
to go to law school at his expense, knowing she did not have the money and would have to quit her job to attend. She relied on his promise by enrolling in law school and assuming the debt. The trial court — ound that it would be unjust not to en — orce the promise, and the Min- nesota Court o — Appeals a —
irmed.
Discussion 1. Reasonable reliance is a key element o --- any promissory estoppel claim. Did Conrad reasonably rely on Fields’s promise? List speci --- ic --- acts that tend to show her reliance was reasonable. Then list other --- acts tending to show it was unreasonable --- or her to rely on Fields’s promise. Can you weigh and balance the --- acts to determine which are more compelling? 2. Conrad applied the bargained- --- or exchange test. Would this case have come out di ---
erently under the bene — it/detriment test? Did Marjorie Conrad incur a detri- ment? Did Walter R. Fields incur a bene — it? 200 8 • Promissory Estoppel
Reading Otten v. Otten. This case
ocuses on Wi — e’s claim that Husband’s promise to pay her $4,500 is not su —
icient consideration — or her promise to relinquish her legal right to $7,800 in past due child support. Wi — e is correct, but Husband may still merit en — orcement o — Wi — e’s promise under the doctrine o — promissory estoppel. Otten illustrates the limits o — promissory estoppel and its element o —
oreseeable reliance. Although — oreseeable reliance is a — lexible principle, it is not merely a blank check — or the plainti —
to rubber stamp. The divorce settlement case Otten v. Otten, 632 S.W.2d 45 (Mo. App. 1982), circumscribes the limits o —
oreseeable reliance. In 1976, Husband and Wi — e divorced, and their divorce decree granted Wi — e $200 per month — or child support. In 1981, Husband — iled to modi — y the decree on the ground that one o — the children had become emancipated. Wi — e responded that Husband owed her $7,800 (three years’ worth) o — unpaid child support. The court — ound that Husband had been delinquent, and it ordered garnishment o — Husband’s bank account. The bank disbursed that sum (plus $30) to Wi — e. Husband appealed, alleging that Wi — e called Husband’s attorney prior to the court’s order and o —
ered to settle the dispute — or $4,500 cash and $100 monthly child support therea — ter. Husband also alleged that a — ter consulting Husband, Husband’s attorney advised Wi — e that Husband could deliver $1,000 cash immediately and $3,500 via a stipulated promissory note, in exchange — or Wi — e’s withdrawing her claims, and that Wi — e orally agreed to this settlement. The appeal turns on whether her oral promise to abide by the settlement is en — orceable. Courts will consider both legal and equitable en — orceability.
Otten v. Otten
632 S.W.2d 45 (Mo. App. 1982) WASSERSTROM, Judge. This is a suit to speci --- ically en --- orce an alleged settlement agreement. The trial court sustained de --- endant’s motion to dismiss, and plainti ---
appeals. We a —
irm. In 1976, as part o — a decree dissolving the marriage between the parties, the wi — e (de — endant here) was granted $200 per month as a single sum — or the support o — two minor children. On January 13, 1981, the husband (plainti —
here) — iled a motion to modi — y the decree on the ground that one o — the children had become emancipated. The next day, January 14, 1981, the wi — e — iled execution — or $7,800 which she alleged to be accrued in unpaid child support and ordered garnishment on Third National Bank. The garnishment papers were served upon the bank on January 16, 1981. The bank paid $7,830 into court, and disbursement o — that sum to the wi — e was ordered by the court on February 26, 1981. 8 • Promissory Estoppel 201
On March 2, 1981, the husband
iled his petition in the present case. He alleged that the wi — e had called his attorney on January 21, 1981, o —
ering to settle all questions with respect to back child support — or the sum o — $4,500 and — urther o —
ering that the decree o — divorce be amended to provide child support on and a — ter February 1, 1981, o — only $100. The petition — urther alleged that the attorney told the wi — e he would have to consult his client; and that a — ter consultation, the attorney advised the wi — e that the husband could raise $1,000 in cash immediately and would deliver to her his note — or $3,500 in — ull satis — action o — back child support payments. The petition goes on to allege that the wi — e then stated that she would accept the proposal and would stop in the attorney’s o —
ice the — ollowing Wednesday to pick up the check — or $1,000 and the $3,500 note and that she would at that time sign a stipulation — or modi — ication o — the decree. The husband alleges that he per — ormed his part o — the agreement by executing his check and note and by signing the agreed stipulation. Paragraph 8 o — the petition then proceeds to allege as — ollows: “Relying to his detri- ment upon the — act that a compromise agreement had been reached, and the respon- dent would upon the — ollowing Wednesday, her next day o —
, stop by petitioner’s attorney’s o —
ice and execute Exhibit B and pick up her promissory note and check in — ull settlement o — all back child support payments, borrowed a substantial sum o —
money in order to meet business obligations incurred by him and relying upon the
act that a compromise agreement had been made satis — ying the judgment — or all child support payments due respondent through January 31, 1981 caused said loan proceeds to be temporarily deposited in a business account in his name alone at Third National Bank, Sedalia, Missouri.” The petition goes on to allege that the wi — e, in vio- lation o — her agreement said to have been orally agreed on January 26, 1981, caused execution and garnishment to be issued on January 14, 1981. The petition concludes with a prayer that the wi — e be ordered to speci — ically per-
orm the January 26 agreement by executing the Stipulation and that the court order the clerk o — the court to return to the husband the sum o — $7,800 paid into court by Third National Bank. On the same day that the petition was — iled, the trial court entered a temporary order — or escrow o — the $7,830 paid in by Third National Bank. Therea — ter the wi — e
iled her motion to dismiss the petition on the ground that it — ailed to state a cause o —
action. The court sustained that motion on the grounds that (1) the
acts did not show an accord and satis — action; and (2) there was no valid consideration — or the alleged compromise agreement. The husband’s sole point on this appeal is that the court erred in dismissing his petition as an unsatis — ied accord “because the contractual obligation alleged in the appellant’s petition was a bilateral contract and not a — ull accord and satis — action.”
I. The law is unclear as to whether an accord can be en --- orced where it is not --- ol- lowed by a completed satis --- action. The general texts show a con --- lict o --- authority on this point.
202 8 • Promissory Estoppel
One eminent legal writer [Williston] states that there is strangely little authority upon the matter and the — ew cases on the point contain reasoning which is not very
ull or satis — actory. This writer goes on to say that:
As a court o --- law cannot give adequate relie --- , and as the promise o --- temporary
orbearance necessarily included in the accord gives equity jurisdiction o — the matter, there seems good reason — or equity to deal with the whole matter by granting speci — ic per — ormance.
Some Missouri cases contain dicta bearing on this question. However, no Mis- souri holding squarely in point has been — ound. For purposes o — this opinion we shall assume, without holding, that an agreement embodied in an accord is a proper subject
or speci — ic per — ormance, even though the accord be not — ollowed with a completed satis — action. II. The trial court stated as an alternative ground — or its ruling that: “It is clear upon the — ace o — the pleadings there is no valid consideration — or the alleged compromise agreement.” The wi — e devotes the bulk o — her brie — to an argument supporting that conclusion. The husband has omitted giving this court the bene — it o — his views as to wherein con- sideration may be — ound. Nevertheless we shall consider: (a) whether consideration need be shown by the petition; and (b) whether any consideration has been shown or can be reasonably in — erred — rom the allegations made in this petition. A. An accord and satis — action will not be given e —
ect unless — ounded upon a su —
icient consideration. Moreover the party relying upon the alleged contract o — settlement is obligated to plead the matter o — consideration. B. The — irst possible basis upon which to claim consideration would be the husband’s promise to pay $4,500. That must be considered, however, in the light o — the — act that the wi — e was claiming $7,800 in past due child support. Nowhere in his petition does the husband deny that he was delinquent in the amount o — $7,800. An agreement on his part to pay the partial sum o — $4,500 out o — a total undisputed amount due o —
$7,800 cannot be acceptable consideration. Nor can the husband’s promise to pay $100 child support on and a — ter February 1, 1981, be accepted as legal consideration. The husband was already under a continuing obligation to pay $200 per month. Even though one o — the children may have become emancipated, that did not automatically result in a reduction o — the $200 — igure. The law in this state is clear that when support is awarded — or more than one child in a single lump sum — or all o — them, the same total amount continues — or the remain- ing child or children even a — ter the emancipation o — any one o — the children, until 8 • Promissory Estoppel 203
reduction o
that amount by court order. Furthermore, the reduction o — child support is not a valid subject o — contract between the parents. The only remaining basis upon which the requirement o — consideration might pos- sibly be satis — ied would have to rest upon the allegations o — paragraph 8 o — the petition, in which the husband alleged that he had borrowed money — or his general business purposes and in reliance upon the wi — e’s promises had deposited the borrowed sum in Third National Bank. Those allegations seem to represent an e —
ort on the part o —
the husband to bring himsel
within the theory o — promissory estoppel, set — orth in Restatement (Second) o — Contracts Section 90 (1981). That doctrine, which permits a promise without consideration to be en — orced i — the elements o — estoppel are present, has been adopted in this state. However, such a promise will be en — orced only where the promisor should have expected or reasonably — oreseen the action which the promisee claims to have taken in reliance upon the promise. Thus, Comment b to Section 90 o — the Restatement (Second) o — Contracts states: The promisor is a —
ected only by reliance which he does or should — oresee. Henderson, Promissory Estoppel and Traditional Contract Doctrine, 78 Yale L.J. 343, 346 (1969), puts the matter this way: In short, Section 90 states the proposition that, in situations where traditional consideration is lacking, reliance which is — oreseeable, reasonable, and serious will require en — orcement i — injustice cannot otherwise be avoided. In all o — the Missouri cases involving the application o — promissory estoppel, the
acts clearly showed that the promisor should have and in — act clearly did — oresee the precise action which the promisee took in reliance. Thus in Co —
man Industries, Inc. v. Gorman-Tabor Co., supra, the opinion states: “Fidelity should reasonably have expected that its promise o — payment would induce the change o — position by Gorman-Tabor.” And in Katz v. Danny Dare, Inc., the opinion states: “It is conceded Dare intended that Katz rely on its promise o — a pension. . . . ” In the present case the nature o — the situation would not impel a reasonable expecta- tion by the wi — e that the oral agreement allegedly made by her would lead the husband to borrow money — or his business and deposit it in Third National Bank. Nor does the husband’s petition allege any special — acts which would support a conclusion that the wi — e expected or should have — oreseen such borrowing and deposit by the husband. Accordingly, the present case is not within the doctrine o — promissory estoppel. The husband has not carried the burden o — pleading consideration — or the alleged contract o — settlement. The trial court there — ore properly sustained the motion to dismiss. A —
irmed. All concur. 204 8 • Promissory Estoppel
Re --- lection Otten v. Otten illustrates several key principles in contract law. Courts aim to en --- orce and preserve agreements that parties intended to be binding, even i ---
urther documentation or negotiation is needed to determine the obligations o — the parties. Courts are o — ten willing to accept extrinsic evidence to determine what the parties intended by their writing (intrinsic) agreement, especially in personal cases such as this one. The interpretation o — contract terms can be in — luenced by the parties’ sub- sequent conduct. Contract law also seeks to prevent a party — rom bene — itting — rom its own breach. While contract law allows both parties to bene — it — rom e —
icient breach, it generally does not permit one party to extract the value o — the contract — rom another via its own breach. Finally, the distinction between tort law and contract law is important, as they serve di — — erent purposes. An important principle o — contract law is the implied cov- enant o — good — aith. But contract law will not impose punitive damages — or its breach. The goal o — contract law is to put parties in the position — or which they bargained — no more and no less.
Discussion 1. The court --- inds that Ms. Otten’s o ---
er to settle the lawsuit was not supported by consideration. Why? Cite and use the de — inition in the R2d when analyzing this issue.
-
Mr. Otten argues that Ms. Otten’s promise to settle the lawsuit is en
orceable on the basis o — promissory estoppel. List the elements o — promissory estoppel and explain whether Mr. Otten meets each o — them.
-
Unlike contracts-at-law, contracts-at-equity need only be en
orced to the extent that justice requires. Were there any — acts or circumstances in this case that may have led the court to decide that justice did not need to en — orce Ms. Otten’s promise to Mr. Otten?
Reading Maryland National Bank v. United Jewish Appeal Federation o
Greater Washington, Inc. In some jurisdictions, charitable subscriptions (promises to donate money to non-pro — it organizations and good causes) are en — orceable even without consideration. Other jurisdictions do not distin- guish charitable subscriptions in this way. The — ollowing case care — ully decides whether to accord an equitable exception to the consideration doctrine — or charitable subscriptions unsupported by consideration. 8 • Promissory Estoppel 205
As you read this case, decide
or yoursel — whether charitable subscriptions should be subject to or excepted — rom the consideration doctrine.
Maryland National Bank v. United Jewish Appeal Federation o --- Greater Washington, Inc. 286 Md. 274 (1979) ORTH, Judge. The issue in this case is whether a pledge to a charitable institution survives the death o --- the pledgor and is an en --- orceable obligation o --- his estate. I Milton Polinger pledged $200,000 to the United Jewish Appeal Federation o ---
Greater Washington, Inc. (UJA)
or the year 1975. He died on 20 December 1976. His last will and testament was admitted to probate in the Orphans’ Court — or Montgom- ery County and letters were issued to Melvin R. Oksner and Maryland National Bank as personal representatives. At the time o — Polinger’s death, $133,500 was unpaid on his pledge. The personal representatives disallowed the claim — or the balance o — the pledge. UJA — iled a petition praying that the claim be allowed and moved — or summary judg- ment. The personal representatives answered and — iled a cross-motion — or summary judgment. The court granted UJA’s motion — or summary judgment, denied the per- sonal representatives’ motion — or summary judgment, allowed UJA’s claim against the estate in the amount o — $133,500, and assessed the costs against the personal representatives. The personal representatives noted an appeal to the Court o — Special Appeals and petitioned this Court to issue a writ o — certiorari to that court be — ore decision by it. We did so. II The — acts be — ore the court were undisputed in material part. They showed the nature o — UJA and its relationship with its bene — iciaries. UJA, chartered in the Dis- trict o — Columbia, is a public non-pro — it corporation. In general, its objective is to solicit, collect and receive — unds and property — or the support o — certain religious, charitable, philanthropic, scienti — ic and educational organizations and institutions, and it enjoys tax exempt status — ederally and in Maryland, Virginia and the District o — Columbia. Based on monies received and pledged, it makes allocations to tax exempt organizations. No — ormal commitment agreement is executed with respect to the allocations, but UJA undertakes to pay pursuant to the allocation and the ben- e — iciary organizations “go ahead to act as though they are going to have the money and they spend it.” In other words, UJA makes allocations to various bene — iciary organizations based upon pledges made to it, and the bene — iciary organizations incur liabilities based on the allocations. Historically 95% o — the pledges are collected over 206 8 • Promissory Estoppel
a three-year period, and allowance
or the 5% which may be uncollected is made in determining the amount o — the allocations. So, according to Meyer Brissman, Execu- tive Vice-President Emeritus o — UJA: “We always pay (the allocated amount). I don’t know o — any case where we haven’t paid.” Pledges to “emergency — unds” are not paid on the basis o — an allocation by UJA. All monies actually collected on those pledges are paid to the emergency — unds. The — acts be — ore the court showed the circumstances surrounding the pledge o —
Polinger with which we are here concerned. It was evidenced by a card signed by Polinger under date o — 9 November 1974. It recited: In consideration o — the obligation incurred based upon this pledge, I hereby promise to pay to the United Jewish Appeal the amount indicated on this card. The amount indicated as his “1975 pledge” was $100,000 — or “UJA including local, national and overseas,” and $100,000 — or “Israel Emergency Fund.” UJA organized a “mission” to Israel in the — all o —
- The mission was in no sense a tour. It was at the time o — the missile crisis in Israel, and the members o — the mis- sion were to meet with Golda Meir, then Prime Minister, and with other government leaders to be brie — ed on the problems the country — aced. It was to be involved with “people in the troubled settlements.” Certain community leaders, including Polinger, went on the mission. Polinger had been active in the a —
airs o — UJA and had regularly made substantial contributions to it. “Pre-solicitation” is a process whereby it is determined who can be expected to make large pledges and speci — ically who will likely substantially increase their pledges o — previous years. Pre-solicitation is part o — a well-conceived plan to obtain large contributions. It leads to a “high-pressure meeting” at which, according to Brissman, [T]here is no question that the technique is the interchange and people know- ing everyone else in the room, and i — this one is thinking o — a need o — being so great as to be willing to do something unusual, the others thought it was similarly important — or them to demonstrate it. The idea is that “i — somebody thought it was important enough to give more than he gave be — ore, (others would think) that they ought to give more, and they (give) more money. . . . [W]e get together and discuss reactions to what they have seen, what the needs are, and people sometimes make a speech be — ore they decide what they are going to say about the money, and it is a — ree- — lowing thing, and nobody knows in advance what anybody is going to say, but some o — the people are talked to one by one privately to condition them to make some kind o — a special response to in — luence the group. The whole purpose o —
und raising is to get an example.” Polinger was selected to be an example on the Israel mission. He had pledged $65,000 — or 1973. He had “participated willingly” in such a meeting in connection with the 1974 — und raising campaign and had pledged $150,000. He was one o — those 8 • Promissory Estoppel 207
it was “
elt was ready to do something unusual. . . . ” He was pre-solicited by three or
our individuals and went up to two hundred thousand dollars — or 1975. It was agreed that his pledge would be made in a “caucus” at the King David Hotel in Jerusalem. The caucus was held and Polinger “came into the caucus,” as Brissman said, “so we could announce all the gi — ts and in — luence other people o — di — — erent levels.” Polinger was to be a “pacesetter.” There were about thirty men at the caucus. About — our o — them had pledged an amount as large as $200,000 be — ore Polinger made his announcement. Brissman thought that “there was an emotional impact that develops when a man has seen things that in — luence him to believe that there is something desperate and earth- shaking going on and he could do something about it bene — icially, and he responds.” When Polinger said he would give $200,000, he indicated that he wanted everybody to give as much as they could. He thought he was giving the greatest amount that he possibly could — ind himsel — able to so do. O — course, Polinger was only one o — many people who spoke and made a pledge. Whether anyone in — act increased his pledge because o — Polinger was never discussed at the meeting, and Brissman was unable to say whether anyone was in — luenced by Polinger’s pledge. It is just a dynamics o — an involvement where a — ter two weeks o — being together night and day in a setting o — that kind a — ter a major war, meeting with indi- viduals who lived through three or — our such wars, that everybody is strung out and you are like a — amily, and in the process o — interchange, speeches are made, and maybe somebody made a gi — t o — $5,000.00 in — luenced people just as much as the man who gave $200,000.00 because o — what the money meant in their view o — this person’s ability to give. It is just not the biggest number, but it is the concept o — response to a need that these people are reacting to. And I don’t know that you verbalize it in that way necessarily, but it does come out that one in — luences another in the interchange, because you are going around a room and everybody is talking about how they were moved by what they were into. So there is no question one in — luences another. Brissman was asked “whether aside — rom the speci — ic group o — people who were present in Israel with Mr. Polinger, are there any other people here in the Washington area or anywhere else that you are aware o — who made pledges, gi — ts, or increased gi — ts as a result o — Mr. Polinger’s gi — t?” He could not say. He could only give the procedure
ollowed: I solicited personally hundreds o — people, some — ace to — ace, some by telephone, some by appointment with two or three people talking to an individual. And
requently I, personally, and I know o — others who do likewise, start to tell people what kind o — response we are getting when we get to the question o —
what is a standard --- or giving, or what you ought to consider as your share, and
in the process I have used Milton Polinger as an example talking to individu-
als. They know who Milton is. And I would tell them what Milton had done
208 8 • Promissory Estoppel
in 1973 and in 1974 in trying to get them to respond in some way to move
urther ahead in their extension as — ar as they can, because we are talking o —
stretching. I --- you can give so much, can you give a little but more type o --- thing,
and I --- requently would use Milton as an illustration.
There is no question in my mind when I do it I know others do it, and
I have seen at the time that we are talking about people reporting on the
mission to others who were not there, soliciting gi --- ts at meetings or in indi-
vidual con --- rontations, telling what happened at the mission, and they would
go down line by line everybody who made gi --- ts, they had a list in --- ront o ---
them as a tool.
So it was used. There is no question about it. I cannot tell you this one
increased his gi --- t only because o --- that one’s response, but it is part o --- a package.
That is how you raise money.
III We --- ind that the law o --- Maryland with regard to the en --- orcement o --- pledges or subscriptions to charitable organizations is the rule thus expressed in the Restatement o --- Contracts § 90 (1932):
A promise which the promisor should reasonably expect to induce action or
orbearance o — a de — inite and substantial character on the part o — the promisee and which does induce such action or — orbearance is binding i — injustice can be avoided only by en — orcement o — the promise. We reach this conclusion through opinions o — this Court in — our cases, Gittings v. Mayhew; Erdman v. Trustees Eutaw M.P. Ch.; Sterling v. Cushwa & Sons; and American University v. Collings. Gittings concerned the building o — an Atheneum. The subscription contract autho- rized the calling o — payment o — installments by the subscribers when a certain amount had been pledged. The amount was reached, installments were called — or and paid, contracts to erect the building were made and the Atheneum was completed. It was in these circumstances that the Court said: In whatever uncertainty the law concerning voluntary subscriptions o — this character may be at this time, in consequence o — the numerous decisions pronounced upon the subject, it appears to be settled, that where advances have been made, or expenses or liabilities incurred by others, in conse- quence o — such subscriptions, be — ore notice o — withdrawal, this should, on general principles, be deemed su —
icient to make them obligatory, provided the advances were authorized by a — air and reasonable dependence on the subscriptions. . . . The doctrine is not only reasonable and just, but consistent with the analogies o — the law. This statement o — the law appeared to be Obiter dictum in Gittings, but i — it were, it became the law in Erdman. 8 • Promissory Estoppel 209
Erdman dealt with a suit on a promissory note whereby there was a promise to pay the Eutaw Methodist Protestant Church the sum o — $500 — our years a — ter date with interest. The consideration — or the note was a subscription contract made with the trustees o — the church — or the purpose o — paying o —
a building debt, which had been incurred — or the erection o — a new church building. It had been entered on the books o — the church, the trustees had subsequently borrowed $2,000 on that subscription and other subscriptions to pay o —
the indebtedness — or the erection o — the church building. The Court held that in such circumstances the subscription contract was a valid and binding one and constituted a su —
icient consideration to support the note, observing that “[t]he policy o — the law, to sustain subscription contracts o — the char- acter o — the one here in question, is clearly stated by this court, and by other appellate courts, in a number o — cases.” The only Maryland case cited was Gittings. The holding in Gittings was said to be “that as the party had authorized others by the subscription to enter into engagements — or the accomplishment o — the enterprise, the law requires that he should save them harmless to the extent o — his subscription.” Erdman. One case in another appellate court was discussed, Trustees v. Garvey, and two cited as to like e —
ect, McClure v. Wilson and United Presbyterian Church v. Baird. In Garvey the court noted that:
As a matter o --- public policy, courts have been desirous o --- sustaining the legal
obligation o --- subscriptions o --- this character, and in some cases . . . have --- ound
a su ---
icient consideration in the mutuality o — the promises, where no — raud or deception has been practiced. But while we might be unwilling to go to that extent and might hold that a subscription could be withdrawn be — ore money had been expended or liability incurred, or work per — ormed on the strength o — the subscriptions, and in — urtherance o — the enterprise, the church trustees had, on the — aith o — the subscriptions, borrowed money, relying on the sub- scription as a means o — payment and incurred a speci — ic liability.
Thus, it seems that Erdman made law o
the dictum in Gittings, but that law was that charitable subscriptions to be en — orceable require reliance on the subscriptions by the charity which would lead to direct loss to the organization or its o —
icers i — the subscriptions were not en — orced. This principle o — the law was applied in Sterling. In that case pledges were made to support a — ailing bank, to restore con — idence in it and protect its depositors and creditors, to comply with demands o — the bank commissioner so as to keep the bank open and to prevent impairment o — its capital. There were, there — ore, substantial con- siderations — or the subscriptions. “Not only was every subscription expressly made in consideration o — the agreement o — other subscribers, who have — ul — illed their pledges, but a prior subscription agreement was to be, and was, in — act, released to the speci — ied extent, when the new one became binding, and consent o — the bank commissioner to the continued — unctioning o — the bank was thereby induced.” In such circumstances, the Court declared: “The su —
iciency o — such considerations cannot be doubted.” 210 8 • Promissory Estoppel
Gittings and Erdman were re
erred to in American University v. Collings as cases “which hold that where one has made a subscription and thereby authorized the entering into engagements to accomplish the purpose — or which the subscription was made, the subscription was upon a valuable consideration.” The Court care — ully pointed out that “[in those] cases, however, the promisee had actually incurred obli- gations relying upon the promises,” but that in the case it was considering there was no claim “that any such obligations had been entered into.” The case turned on the
inding that the pledge was testamentary in nature. In summary, the rule announced in Gittings, re — erred to in Collings and applied in Erdman and Sterling, is in substance the rule set out in § 90 o — the Restatement o —
Contracts (1932). It is the settled law o
this State. IV UJA would have us “view traditional contract law requirements o — consideration liberally” in order to maintain what it believes to be a judicial policy o —
avoring chari- ties. We deeply appreciate the — act that private philanthropy serves a highly impor tant — unction in our society. This was well expressed by the Court some hundred and twenty- — ive years ago in observing that the maintenance o — charitable institutions was “certainly o — the highest merit”: Whether projected — or literary, scienti — ic or charitable purposes, they address themselves to the — avorable consideration o — those whose success in li — e may have enabled them, in this way, to minister to the wants o — others, and at the same time promote their own interests, by elevating the character o — the com- munity with whose prosperity their — ortunes may be identi — ied. But we are not persuaded that we should, by judicial — iat, adopt a policy o —
avoring charities at the expense o — the law o — contracts which has been long established in this state. We do not think that this law should be disregarded or modi — ied so as to bestow a pre — erred status upon charitable organizations and institutions. It may be that there are cases in which judgments according to the law do not appear to subserve the purposes o — justice, but this, ordinarily, the courts may not remedy. “It is sa — er that a private right should — ail, or a wrong go unredressed, than that settled principles should be disregarded in order to meet the equity o — a particular case.” Gittings. I — change is to be made it should be by legislative enactment, as in the matter o — the tax status o — charitable organizations. In advocating its position, UJA points to this statement in Gittings: In some cases, the courts, in — urtherance o — what they deemed a recognized public policy, have — elt themselves warranted in relaxing, to some extent, the rigor o — the common law, and have held the subscribers liable, when, perhaps, upon strict principles, there was not a legal consideration — or the contract. That this was no more than an observation and not an adoption o — the principle was made mani — est by the — urther comments o — the Court: 8 • Promissory Estoppel 211
Indeed, considering the number o --- these [charitable] institutions, erected and
maintained by private muni --- icence alone, the cases are very rare in which
subscribers have re --- used compliance with their engagements. Instances may
occur in which parties, --- eeling themselves released in consequence o --- a --- ailure
o --- expectations reasonably entertained at the time o --- making the subscrip-
tion, might avail themselves o --- legal de --- enses, without justly --- or --- eiting the good
opinion o --- those who embarked with them in the enterprise. The propriety,
however, o --- employing such means o --- resisting payment the parties must deter-
mine --- or themselves. Upon that portion o --- the present case, there --- ore, so much
contested at the bar, we decline expressing any opinion.
In Collings the Court noted that American University had cited cases
rom other jurisdictions which, the educational institution stated, “represents the general trend o — judicial authority, and it is in accordance with the better reasoned opinion, that contracts — or subscriptions or donations to churches or charitable or kindred institu- tions which have been duly accepted are based upon a valid consideration because o —
the mutual obligations o
other subscribers.” But the Court also observed Pro — essor Williston’s criticism o — this view. In any event, as we have indicated, the Court had no occasion to decide whether the pledge involved in Collings was given — or a valid consideration. Restatement (Second) o — Contracts (Tent. Dra — t No. 2, 1965) proposes changes in § 90. It would read: A promise which the promisor should reasonably expect to induce action or
orbearance on the part o — the promisee or a third person and which does induce such action or — orbearance is binding i — injustice can be avoided only by en — orcement o — the promise. The remedy granted — or breach may be limited as justice requires. This deletes — rom the existing section the quali — ication “o — a de — inite and substantial character” with regard to the inducement o — action or — orbearance and has the induce- ment o —
orbearance apply to “a third person” as well as the promisee. It also adds the discretionary limitation as to the remedy. Comment c to the proposed Section concerns “[c]haritable subscriptions, marriage settlements, and other gi — ts.” It begins: One o — the — unctions o — the doctrine o — consideration is to deny en — orcement to a promise to make a gi — t. Such a promise is ordinarily en — orced by virtue o —
the promisee’s reliance only i --- his conduct is --- oreseeable and reasonable and
involves a de --- inite and substantial change o --- position which would not have
occurred i --- the promise had not been made. This re --- lects the previous section and the Maryland rule. The comment then notes that “[i]n some cases, however, other policies rein --- orce the promisee’s claim.” It states: American courts have traditionally --- avored charitable subscriptions and marriage settlements and have --- ound consideration in many cases where the element o --- exchange
212 8 • Promissory Estoppel
was doubt
ul or nonexistent. Where recovery is rested on reliance in such cases, a prob- ability o — reliance is likely to be enough, and no e —
ort is made to sort out mixed motives or to consider whether partial en — orcement would be appropriate. Illustration 7 is o — a charitable subscription: A orally promises to pay B, a university, $100,000 in — ive annual installments
or the purposes o — its — und-raising campaign. The promise is con — irmed in writing by A’s agent, and two annual installments are paid be — ore A dies. The continuance o — the — und-raising campaign by B is su —
icient reliance to make the promise binding on A and his estate. Section 90 o — the tentative dra — t No. 2 o — the Restatement (Second) o — Contracts, 1965, has not been adopted by the American Law Institute, and we are not persuaded to — ollow it. “Cases throughout the country clearly re — lect a con — lict between the desired goal o — en — orcing charitable subscriptions and the realities o — contract law. The result has been strained reasoning which has been the subject o — considerable criticism.” Sals- bury v. Northwestern Bell Telephone Company. When charitable subscriptions, even though clearly gratuitous promises, have been held either contracts or o —
ers to con- tract, the “decisions are based on such a great variety o — reasoning as to show the lack o — any really su —
icient consideration.” Williston on Contracts. “Very likely, concep- tions o — public policy have shaped, more or less subconsciously, the rulings thus made. Judges have been a —
ected by the thought that ‘de — enses o — [the] character [o — lack o —
consideration are] breaches o
aith towards the public, and especially towards those engaged in the same enterprise, and an unwarrantable disappointment o — the rea- sonable expectations o — those interested.’ ” Allegheny College v. National Chautauqua County Bank. There — ore, “[c]ourts have . . . purported to — ind consideration on vari ous tenuous theories. . . . [The] wide variation in reasoning indicates the di —
iculty o —
en
orcing a charitable subscription on grounds o — consideration. Yet, the courts have generally striven to — ind grounds — or en — orcement, indicating the depth o —
eeling in this country that private philanthropy serves a highly important — unction in our society.” J. Calamari & J. Perillo, The Law o — Contracts, § 6–5 (1977). Some courts have
orthrightly discarded the — acade o — consideration and admittedly held a charitable subscription en — orceable only in respect o — what they conceive to be the public policy. See, — or example, Salsbury v. Northwestern Bell Telephone Company; More Game Birds in America, Inc. v. Boettger. We are not convinced that such departure — rom the settled law o — contracts is in the public interest. A charitable subscription must be a contract to be en — orceable, unless we characterize it as some other type o — agreement, unknown to established contract law, — or which a valid consideration is not essential. We said in Broaddus v. First Nat. Bank: It is unnecessary at this time to cite authorities in this state and elsewhere to the e —
ect that every contract must be supported by a consideration; and this must be regarded as one o — the elementary principles o — the law o — contract. 8 • Promissory Estoppel 213
And, we recently cited Broaddus in Peer v. First Fed. S. & L. Ass’n, in asserting, a
ter noting several other requirements o — a valid contract: “Finally, the agreement must be supported by su —
icient consideration.” We abide by that principle in determining the validity o — the charitable subscriptions. V When the — acts concerning the charitable subscription o — Polinger are viewed in light o — the Maryland law, it is mani — est that his promise was not legally en — orceable. There was no consideration as required by contract law. The incidents on which Gittings indicated a charitable pledge was en — orceable, and on which Erdman and Sterling held the subscriptions in those cases were en — orceable are not present here. The consideration recited by the pledge card was “the obligation incurred based upon this pledge.” But there was no legal obligation incurred in the circumstances. Polinger’s pledge was not made in consideration o — the pledges o — others, and there was no evidence that others in — act made pledges in consideration o — Polinger’s pledge. No release was given, nor binding agreement made by the UJA on the strength o — Polinger’s pledge. The pledge was not — or a speci — ic enterprise; it was to the UJA generally and to the Israel Emergency Fund. With respect to the — ormer, no allocation by UJA to its bene — iciary organization was threatened or thwarted by the
ailure to collect the Polinger pledge in its entirety, and, with respect to the latter, UJA practice was to pay over to the Fund only what it actually collected, not what was pledged. UJA borrowed no money on the — aith and credit o — the pledge. The pledge prompted no “action or — orbearance o — a de — inite and substantial character” on the part o — UJA. No action was taken by UJA on the strength o — the pledge that could reasonably be termed “de — inite and substantial” — rom which it should be held harmless. There was no change shown in the position o — UJA made in reliance on the subscription which resulted in an economic loss, and, in — act, there was no such loss demonstrated. UJA was able to — ul — ill all o — its allocations. Polinger’s pledge was utilized as a means to obtain substantial pledges — rom others. But this was a tech- nique employed to raise money. It did not supply a legal consideration to Polinger’s pledge. On the — acts o — this case, it does not appear that injustice can be avoided only by en — orcement o — the promise. To summarize, there was no speci — ic goal prompting the pledge such as existed in Gittings, Erdman and Sterling with a mutual awareness o — — uture reliance on the sub- scription. UJA did not enter into binding contracts, incur expenses or su —
er liabilities in reliance on the pledge. UJA’s — unction was to serve as a conduit or clearinghouse to collect gi — ts o — money — rom many sources and to — unnel them into various charitable organizations. It did, o — course, plan — or the — uture, in that it estimated the rate o —
cash
low based on the pledges it received and told its bene — iciaries to expect certain amounts. In so doing, however, it expressly did not incur liabilities in reliance on speci — ic pledges. It seems that none o — the organizations to which it allocated money would have legal rights against UJA in the event o —
ailure to pay the allocation, and, in any event, UJA, cognizant o — the past history o — collections, made due allowance — or the — act that a certain percentage o — the pledges would not be paid. 214 8 • Promissory Estoppel
We hold that Polinger’s pledge to UJA was a gratuitous promise. It had no legal consideration, and under the law o — this State was unen — orceable. The Orphans’ Court
or Montgomery County erred in allowing the claim — or the unpaid balance o — the subscription, and its order o — 5 January 1979 is vacated with direction to enter an order disallowing the claim — iled by UJA. ORDER OF 5 JANUARY 1979 OF THE ORPHANS’ COURT FOR MONT- GOMERY COUNTY VACATED; CASE REMANDED TO THAT COURT WITH DIRECTION TO ENTER AN ORDER DISALLOWING THE CLAIM FILED BY THE UNITED JEWISH APPEAL FEDERATION OF GREATER WASHINGTON, INC.; COSTS TO BE PAID BY APPELLEE.
Re --- lection The issue in UJA is whether a pledge to a charitable institution survives the death o --- the pledgor and is an en --- orceable obligation o --- his estate. When Polinger died, $133,500 o --- his pledge remained unpaid. In contract law, where advances have been made or expenses or liabilities have been incurred by others in consequence o --- such subscriptions, be --- ore notice o --- with- drawal, this should, on general principles, be deemed su ---
icient to make them obliga- tory, provided the advances were authorized by a — air and reasonable dependence on the subscriptions. Polinger’s pledge was not supported by consideration. The only “consideration” recited on the pledge card was “the obligation incurred based upon this pledge,” but that language re — ers circularly to a legal obligation that never materialized. Polinger did not make the pledge in consideration o — others’ pledges, nor is there evidence that any other donors made their pledges in reliance on his. Likewise, no allocation by UJA to any o — its bene — iciary organizations was shown to have been made in reliance on collecting the Polinger pledge. In — act, UJA’s own practice was to pay over to its ben- e — iciary — unds only the amounts actually collected — not the amounts merely pledged. So, even i — UJA had allocated — unds while anticipating — ull payment — rom Polinger, that would not have created a binding obligation or material risk o — loss. No change in UJA’s position was shown, no detrimental reliance occurred, and no economic harm was demonstrated. UJA was able to meet all its — unding commitments regardless. In short, there was no reliance — detrimental or otherwise — with respect to anyone that would support en — orcement o — the pledge under promissory estoppel. When looking at whether a charitable donation should be en — orced, it is important to consider whether injustice can be avoided only by en — orcement o — the promise. On the — acts o — this case, it does not appear that injustice can be avoided only by en — orce- ment o — the promise. UJA did not enter into binding contracts, incur expenses, or su —
er liabilities in reliance on the pledge. 8 • Promissory Estoppel 215
Discussion 1. The UJA court declines to --- ollow the R2d approach. Why? Which, in your opinion, is the right approach? 2. Would the case have come out di ---
erently i — the court applied the R2d approach? Analyze the claim based on R2d § 90.
-
The R2d gives special pre
erence to promises to give charity and promises to give alimony. Why are these two categories o — promises singled out?
Problems Problem 8.1. Escaped Bull Martin Fitzpatrick owned a small --- arm in Vermont on which lived a prized bull. Somehow, in September 1860, that bull escaped Fitzpatrick’s --- arm and wandered across Chittenden, Vermont, eventually arriving upon a pasture owned by Bishop Boothe in Pitts --- ord, Vermont, about eleven miles away. Boothe then cared --- or the bull by providing --- or its --- ood and shelter while Boothe attempted to determine who owned the bull, but he was not able to quickly ascertain the owner. In November, Boothe determined that Fitzpatrick owned the bull, and the two men met in Pitts --- ord. At the meeting, Fitzpatrick said that the bull was indeed his and that he would pay --- or its care but could not drive it away until the winter ended. Boothe kept the bull through the winter, and Fitzpatrick drove him home in spring. Boothe sent Fitzpatrick a bill --- or the cost o --- the care. The amount charged was reasonable, but Fitzpatrick re --- used to pay. What is Fitzpatrick’s best legal argument --- or why he does not have to pay Boothe? What is Boothe’s counterargument --- or why Fitzpatrick must pay him? Which party is more likely to prevail i --- this case was brought to court? See Boothe v. Fitzpatrick, 36 Vt. 681 (1864).
Problem 8.2. Plantations Steel Plantations Steel Co. (Plantations) manu — actured steel rein — orcing rods — or use in concrete construction. The company was the employer o — Edward J. Hayes. In Janu- ary 1972, Hayes planned to retire the next year. Approximately one week be — ore his actual retirement, Hayes spoke to Hugo R. Mainelli, Jr., an o —
icer and stakeholder o —
Plantations. Mainelli said that he would “take care” o
Hayes. There was no mention o —
a sum o
money or a percentage o — salary that Hayes would receive. Nor was there any 216 8 • Promissory Estoppel
ormal authorization — rom other shareholders or — ormal provision — or a pension — or employees other than unionized employees. Hayes was not a union member. Hayes received $5,000 per year as part o — his pension. Mainelli testi — ied that his — ather had authorized the — irst payment “as a token o —
appreciation
or the many years o — Hayes’s service.” It was implied that that check would continue on an annual basis and would continue as long as Mainelli was still around. A — ter retirement, Hayes would visit the company, thanking Mainelli — or and discussing with him the payments he was receiving. He also asked how long they would continue so that he could plan his retirement. Hayes testi — ied that he would not have retired had he not expected to receive a pension. A — ter he stopped working — or Plantations, he sought no other employment. The payments stopped in 1976, when the Mainellis, including Hugo Mainelli, Jr., and his — ather, lost the company in a takeover by the DiMartino — amily. Hayes sued Plantations — or three years’ worth o — pension payments. Under R2d § 90, does Hayes have an a —
irmative claim o — promissory estoppel — or the lack o — consideration? See Hayes v. Plantations Steel Co., 438 A.2d 1091 (R.I. 1982). Chapter 9 Promissory Restitution
Imagine this: A construction worker, Joe, sees his
oreman, Hank, in the path o —
a speeding
orkli — t. Joe pushes Hank aside, saving Hank’s li — e but crushing his own
oot in the process. Grate — ul, Hank promises li — elong — inancial support. A — ter Hank dies ten years later, his estate re — uses to continue payments. Should the estate be held to its word? Promissory restitution provides a — ramework — or answering this ques- tion that balances — airness and the prevention o — unjust enrichment with the tradi- tional boundaries o — contract law. To state the question more generally: should courts en — orce promises rooted in gratitude and moral obligation, or should they strictly adhere to traditional doctrines o — consideration? Promissory restitution bridges the gap between contract and restitution law. It rem- edies situations where — airness demands en — orcing a promise made a — ter a bene — it is con — erred. The doctrine ensures that those who receive a signi — icant bene — it and later promise compensation in recognition o — that previously received bene — it can be held accountable, even without traditional consideration. To understand how promissory restitution applies, consider the — ollowing question: When does — airness demand that a promise made a — ter receiving a bene — it should be en — orced? This chapter explores situations that justi — y deviation — rom traditional consideration doctrine, illustrated through key cases that show when such promises become binding. Promissory restitution involves three key elements:
(1) The promise must be made in recognition o --- a bene --- it previously con --- erred
on the promisor by the promisee.
(2) The bene --- it must be such that the promisor would have been unjustly
enriched i --- allowed to retain it without compensating the promisee.
(3) En --- orcement o --- the promise must be necessary to prevent injustice, with
courts’ tailoring remedies as justice requires.
When all three elements are present, a promise made a
ter a bene — it is con — erred may be en — orceable, even without traditional consideration. As summarized in R2d § 86: A promise made in recognition o — a bene — it previously received by the promisor
rom the promisee is binding to the extent necessary to prevent injustice. This chapter introduces a — oundational example that demonstrates the general rule o — unen — orceability, — ollowed by — ive contexts where — airness and justice justi — y
217
218 9 • Promissory Restitution
deviations
rom this rule to en — orce promises. Each scenario corresponds to an excep- tion to the traditional consideration doctrine and is supported by a key case. We begin with Mills v. Wyman, 20 Mass. 207 (1825), a case that highlights the general rule that promises based solely on past bene — its are unen — orceable. Why should moral obligation alone be insu —
icient to create a binding promise? This case serves as a baseline — or understanding the doctrine’s exceptions. In this case, a — ather’s promise to reimburse a stranger who cared — or his adult son lacked consideration because the bene — it had been con — erred be — ore the promise was made. This — oundational case establishes that moral obligation alone is insu —
icient to create a binding promise. Mistakenly con — erred bene — its provide an exception to the general rule. Promissory restitution en — orces subsequent promises to correct errors and compensate bene — ac- tors. In Drake v. Bell, 55 N.Y.S. 945 (App. Div. 1899), a contractor mistakenly repaired the wrong house but signi — icantly improved its value. The homeowner’s later promise to pay — or the improvements was en — orceable because the promise recti — ied an unin- tended but valuable enrichment. Emergency situations may preclude — ormal agreements, raising the question, should a li — e-saving act be rewarded even i — no contract existed be — orehand? Promissory res- titution applies when a subsequent promise acknowledges the value o — such actions or critical assistance. In Webb v. McGowin, 27 Ala. App. 82 (1936), an employee saved his employer’s li — e at great personal cost and received a promise o — li — elong — inancial support in recognition o — the bene — it. The court en — orced the promise, emphasizing the material bene — it received and the justice o — compensation. In commercial contexts, actions that appear to be gi — ts may implicitly carry expec- tations o — compensation. In Haynes Chemical v. Staples, 133 Va. 82 (1922), an advertis- ing agency created a marketing campaign without an explicit agreement — or payment but later received a promise o — reimbursement. The court en — orced the promise, — ind- ing that it acknowledged the signi — icant investment o — labor and resources that con-
erred a bene — it on the promisor. When a bene — it is con — erred pursuant to a valid but unpaid contract, a third party’s promise to compensate the bene — actor can be en — orceable. In Edson v. Poppe, 124 N.W. 441 (S.D. 1910), a tenant’s contractor built a well that improved the landlord’s prop- erty. The landlord’s subsequent promise to pay — or the well was en — orced because it recognized the material bene — it con — erred by the contractor’s per — ormance. Finally, promissory restitution addresses situations where a legal technicality ren- ders a contract unen — orceable but a subsequent promise revives the obligation. In Muir v. Kane, 55 Wash. 131 (1909), a real estate broker’s oral agreement to receive a commission was void under the statute o —
rauds. However, the seller’s later written promise to pay the commission was en — orced because it acknowledged the broker’s valuable services. Promissory restitution en — orces promises made in recognition o — past bene — its when — airness requires it. By bridging contract and restitution law, the doctrine o —
ers 9 • Promissory Restitution 219
remedies in exceptional cases where traditional rules
all short. The cases in this chap- ter demonstrate how courts navigate these exceptions and balance the equitable goal o — preventing unjust enrichment with the — oundational principles o — contract law.
Bene --- it Injustice
• To Promisor • To Promisee
Promise
• To correct a mistake
• To pay --- or emergency services
• To waive Statute o --- Frauds
• Etc.
Figure 9.1. Illustration o
the elements o — promissory restitution as they occur across time.
Promisor’s Promisee’s
Promise Consideration
Figure 9.2. Comparison o --- the timing o --- a promissory restitution
situation (where the promise occurs a --- ter the bene --- it) to a traditional
bargain contract (where the exchange o --- promises happens
simultaneously, at the moment o --- contract acceptance).
220 9 • Promissory Restitution
Rules A. Promise to Pay --- or Bene --- it Received Contract law requires consideration to ensure mutuality and prevent parties --- rom being bound by mere promises without reciprocal obligations. A simple promise to pay --- or a bene --- it previously received, without more, does not justi --- y any deviation --- rom this --- oundational rule. Promissory restitution, however, provides a narrowly tailored exception. To understand the need --- or this doctrine, we begin with a case that exempli-
ies the general rule: most promises unsupported by consideration are unen — orceable. The classic case Mills v. Wyman, below, took place in Hart — ord, Connecticut, in
-
Levi Wyman, a 25-year-old sailor,
ell ill a — ter a sea voyage. Daniel Mills cared
or him at his own expense until Levi died. Upon learning o — Mills’s e —
orts, Levi’s
ather, Seth Wyman, wrote a letter promising to reimburse Mills — or his expenses. However, Wyman — ailed to pay, and Mills sued. The court — ound this was a typical example o — an unen — orceable promise to pay — or a past bene — it. The promise was made to compensate Mills — or a bene — it already con-
erred. Without more, such promises are unen — orceable due to a lack o — consideration. The promisor (Seth Wyman) did not seek to induce any action by Mills, and the prom- isee (Mills) was not induced by Wyman’s promise. The lower court dismissed the case.
Figure 9.3. The Sick Man by Laurits Andersen Ring (1902).
Public domain work.
9 • Promissory Restitution 221
Mills v. Wyman underscores the principle that moral obligations alone do not cre- ate legally binding promises. While Seth Wyman may have had a moral duty to com- pensate Mills, the court emphasized that contract law does not en — orce these so-called moral obligations: I — moral obligation, in its — ullest sense, is a good substratum — or an express promise, it is not easy to perceive why it is not equally good to support an implied promise. What a man ought to do, generally he ought to be made to do, whether he promise or re — use. But the law o — society has le — t most o —
such obligations to the interior --- orum, as the tribunal o --- conscience has been
aptly called.
The court’s decision re
lects the broader goals o — contract law: maintaining predict- ability and avoiding the imposition o — obligations based solely on subjective notions o — morality. The re — usal to en — orce Wyman’s promise aligns with these principles. Legal liability arises only when mutual intent and consideration exist. While Mills v. Wyman rea —
irms the importance o — consideration, subsequent cases reveal circumstances where — airness and justice compel courts to en — orce promises despite the absence o — consideration. These cases illuminate the boundaries o — prom- issory restitution, which will be explored in the — ollowing sections.
B. Promise to Correct a Mistake In all cases o — promissory restitution, the promise to pay — or a bene — it occurs a — ter the bene — it has been con — erred. Because o — this, it is impossible — or the original bene — it to induce the promise. Time — lows in only one direction, and events in the — uture can- not in — luence past intentions. However, subsequent events can reveal what intentions a person would have had i — circumstances were di — — erent. Consider this streamlined hypothetical: In a household, one partner routinely cooks dinner while the other cleans up. I — the cooking partner mistakenly prepares a meal di — — erent — rom what was expected but the other partner still promises to clean up, this promise substitutes — or consideration. It retroactively signals that the cleaning partner would have agreed to the bargain had the correct meal been prepared. This post-bene — it promise re — lects a voluntary agreement that satis — ies the consideration requirement by substituting — or it. A similar situation arose in Drake v. Bell. Just as the cleaning partner’s promise in the hypothetical acknowledges the value o — the meal and corrects the mistake, Bell’s promise to pay — or the contractor’s repairs corrected an unintended enrichment caused by the contractor’s error. In Drake, a contractor hired by Drake mistakenly repaired Bell’s house instead o — Drake’s. The repairs signi — icantly enhanced Bell’s prop- erty value. A — ter realizing the mistake, Bell promised to pay the contractor — or the work. This promise — unctioned as a substitute — or an initial agreement, acknowledging the bene — it Bell received and ensuring — airness. 222 9 • Promissory Restitution
This demonstrates a key
eature o — promissory restitution: when a bene — it is con — erred by mistake, the promisor’s subsequent promise ensures that the recipi- ent does not unjustly retain the bene — it without compensation. By en — orcing such promises, courts balance the prevention o — unjust enrichment with the need — or vol- untary agreements, which ensures equitable outcomes in cases where initial mistakes occur.
C. Promise to Pay
or Emergency Services and Necessaries As a policy matter, society wants to encourage people to help each other in times o — need and struggle. In such situations, it may be impossible to — ormally contract. Imagine a man — inds an unconscious woman in the street and drives her one hundred miles to the nearest hospital. While she has no legal obligation to repay him under contract law, she might later promise compensation. This promise addresses a bene — it she received during an emergency when — ormal contracting was impossible. I — the story ends here, the man cannot sue the woman — or the services he rendered, at least not under contract law. Allowing such claims could lead to unintended conse- quences. For example, a person might look — or incapacitated individuals and provide unnecessary or extravagant services — such as hiring expensive personal care nurses or administering gold-plated IVs — and then attempt to recover exorbitant sums — rom them. This would discourage genuine altruism and create perverse incentives. To pre- vent such outcomes, there must be a “plus — actor” be — ore the law will en — orce a promise to pay — or emergency services. The plus — actor arises when the bene — iciary voluntarily promises to pay — or the services received. Such promises o — ten occur a — ter the emergency has passed, when the bene — iciary has the capacity to re — lect on and recognize the value o — the services provided. The promise acts as a substitute — or consideration by acknowledging the
airness o — compensation and preventing unjust enrichment. Courts en — orce such promises to ensure equity and encourage altruistic behavior during emergencies. A landmark case illustrating this principle is Webb v. McGowin. Joe Webb and J. Greeley McGowin worked at the W.T. Smith Lumber Company in Alabama. Webb’s job involved dropping 75-pound pine blocks — rom the upper — loor o — a mill to the ground — loor. During one such task, Webb noticed McGowin standing below, directly in harm’s way. To prevent the block — rom striking McGowin, Webb held onto it and
ell to the ground, severely injuring himsel — . Webb’s actions saved McGowin’s li — e but le — t Webb permanently disabled and unable to work. In gratitude, McGowin promised to care — or Webb — or the rest o — his li — e by paying him $15 every two weeks. McGowin honored this promise — or nearly nine years, but a — ter McGowin’s death, his estate re — used to continue the payments, arguing that the promise lacked consideration. Webb sued to en — orce the promise. 9 • Promissory Restitution 223
Figure 9.4. William Arthur Cooper, Lumber Industry (1934). Credit: Smithsonian
American Art Museum. Public domain work.
The court held that McGowin’s estate was bound by the promise. While the initial bene --- it — saving McGowin’s li --- e — occurred be --- ore the promise, the court reasoned that the emergency nature o --- the situation precluded bargaining. McGowin’s sub- sequent promise recognized the substantial bene --- it he received and served as a sub- stitute --- or consideration. By en --- orcing the promise, the court upheld the equitable principle that bene --- iciaries o --- emergency services should not unjustly retain those bene --- its without compensation. As a thought experiment, imagine what Webb and McGowin might have agreed upon i --- time --- roze just as Webb began to divert the --- alling block. Webb could ask, “Will you compensate me i --- I risk injury to save your li --- e?” McGowin’s subsequent promise re --- lects what they likely would have agreed to under normal circumstances. By en --- orcing such promises, courts prevent unjust enrichment and promote --- airness in cases where emergencies preclude --- ormal agreements.
D. Promise to Pay
or a Past Gi — t The Mills case establishes the basic rule that promises to pay — or past gi — ts are unen — orceable. For example, i — I give my mother an iPhone as a birthday present and, a week later, she calls me and says that I should not have spent so much on her and 224 9 • Promissory Restitution
that she will pay me back the purchase price, this promise is unen
orceable. In — act, this situation is a simple example o — past consideration, which is not consideration at all. Not all gi — ts are true gi — ts, however. Sometimes, especially in business situations, parties o —
er something — or — ree with the intention o — gaining more business later. For example, a contractor might o —
er a homeowner a “ — ree estimate” o — the cost to repair a roo — . This is not a true gi — t because the contractor is not looking to give charity to the homeowner. Rather, the contractor is hoping that the homeowner will hire the contractor to repair the roo — . The — ree estimate is not a true gi — t but rather a loss leader, a strategy in which a seller gives away something — or — ree or sells it — or less than it is worth in order to attract more business in the — uture. Promissory restitution provides a — ramework — or en — orcing promises that — ollow sel — -interested gi — ts, recognizing that these gi — ts o — ten create a moral or practical expectation o — compensation. While the Latin terms gratuitum (pure gi — t) and lar- gitio (sel — -interested gi — t) are not used in modern American law, the concepts remain relevant. A promise to pay — or a truly gratuitous gi — t that was given in the past is unen — orceable. But a promise to pay — or a gi — t given with sel — -interested motives may be en — orceable i — it re — lects the recipient’s acknowledgment o — value received and their intent to compensate. For example, a company o —
ering a — ree trial — or its so — tware expects that customers will later purchase a subscription. While the trial may appear as a gi — t, its purpose is to create — uture business. This makes it a largitio, not a gratuitum. I — a customer later
Figure 9.5. Peter Jungen (on the right) presents a gi --- t to ambassador Philip D.
Murphy (on the le --- t). Credit: Raimond Spekking (2013). CC BY-SA 4.0.
9 • Promissory Restitution 225
promises to pay
or the trial’s value, that promise is en — orceable under the principles o — promissory restitution. The law generally assumes that — amily members give gratuitum, true gi — ts, to each other. Family relationships presume true gi — ts motivated by love, such as a grand
ather’s o —
ering to pay — or his granddaughter’s law school without expecting anything in return. O — course, there are exceptions. A parent might say to their child, “I will pay you $5 to mow the lawn.” This clearly has the — orm o — a contract and overrides the presumption o — a gi — t. Family members may also enter into en — orceable contracts with each other when their agreements resemble commercial transactions. In the business world, where strangers engage in arm’s-length transactions, the presumption is — lipped. Courts assume that commercial activities involve contracts and bargaining, not gi — ts. A construction worker who agrees to “help out” their boss by working on Sunday probably expects to be paid — or their work, not to give a gi — t o — their time. However, exceptions exist here as well. For example, a corporation may give charity to causes that do not directly or indirectly bene — it the corporation, such as donating le — tover — ood to a local — ood bank. While uncommon, businesses can make promises to give gratuitous gi — ts. The key point to remember is that the law distinguishes between gi — ts given purely out o — generosity and those given with expectations o — — uture bene — it. Business strate- gies that give away services or products — or — ree, sometimes re — erred to as loss leaders, aim to entice the recipient into a — uture transaction. These so-called gi — ts are not true gi — ts because they come with strings attached. Ultimately, when a gi — t is given with expectations and the recipient later prom- ises to compensate, promissory restitution ensures that such promises are en — orce- able — re — lecting both the intent and the — airness inherent in the transaction. This
airness is not established by any single gesture or vague hope, but by the combina- tion o — a material bene — it con — erred and a voluntary promise to repay it. Promissory restitution does not impose liability — or kindness or generosity alone; it applies only when en — orcing the promise is necessary to prevent unjust enrichment. In this way, the law avoids imposing obligations unilaterally but honors voluntary commitments that acknowledge value received and meet the demands o — justice.
E. Promise to Pay
or an Unpaid Contract In some cases, a party who bene — its — rom another’s per — ormance under an unpaid contract may promise to pay — or the bene — it received. This promise can be en — orce- able under the doctrine o — promissory restitution when certain — actors demonstrate
airness and intent. The doctrine o — consideration ensures that en — orceable promises are grounded in a voluntary exchange. Courts generally do not en — orce promises unsupported by consideration, instead preserving their resources — or disputes involving mutual 226 9 • Promissory Restitution
Contract exists between
A and B
A per --- ormed but
B --- ailed to pay
C bene --- ited --- rom
A’s per --- ormance
C promises
to pay A
what B would
have paid
Figure 9.6. Stacked Venn diagram showing the circumstance where promise to
pay --- or another’s contract will be en --- orceable under promissory restitution.
agreements. However, exceptions exist when
airness and equity demand en — orce- ment. These exceptions o — ten hinge on a plus — actor — circumstances demonstrating the promisor’s intent to recognize and compensate the bene — it received. The plus — actor re — ers to additional circumstances, such as the existence o — a prior contract or direct bene — it to the promisor, that show the promise was not merely gratuitous but rooted in — airness and intent to compensate. This principle arises par- ticularly in cases where one party per — orms under a valid contract, but the bene — it con — erred is not compensated due to un — oreseen circumstances, and a third party promises to pay. A classic example is Edson v. Poppe. In this case, George Poppe rented and lived on land owned by his brother, William Poppe. George Poppe contracted with George Edson, a local well digger, to construct a well on William Poppe’s land. Edson com- pleted the work, but George Poppe — ailed to pay him. Recognizing the value that the well added to his property, William Poppe agreed to pay Edson $250, the reasonable value o — the work. However, like his brother, William Poppe ultimately did not pay, prompting Edson to sue him. The court held that William Poppe’s promise to pay was en — orceable. The ben- e — it — the well — arose — rom a valid contract with George Poppe, and William Poppe 9 • Promissory Restitution 227
directly bene
ited — rom its construction. The existence o — the contract demonstrated that the bene — it was not — oisted upon William. His promise to pay re — lected an acknowledgment o — the value received, thus providing the necessary plus — actor to make the promise en — orceable under promissory restitution. By en — orcing promises in such cases, courts ensure — airness in situations where one party bene — its — rom another’s labor while also encouraging third-party bene — i- ciaries to resolve disputes without unnecessary litigation. This principle exempli — ies the — lexibility o — promissory restitution, which seeks to balance contractual principles with equitable outcomes in cases where the promisor voluntarily acknowledges and compensates a bene — it received.
F. Promise to Pay
or an Unen — orceable Contract Promises may become unen — orceable — or various reasons, such as insu —
iciently de — ined terms, — ailure to comply with — ormalities like the statute o —
rauds, mutual mistakes, or changed circumstances a — ter contract — ormation. These barriers o — ten arise despite the parties’ clear intent to — orm a valid agreement. Although gratuitous promises are generally unen — orceable, the common law rec- ognizes an exception — or promises to pay — or otherwise unen — orceable contracts. The plus — actor in these cases lies in the original intent o — the parties to — orm a valid agreement and the — airness o — holding the promisor accountable — or obligations that were clear but legally unen — orceable due to technicalities. By en — orcing such prom- ises, courts encourage parties to honor their obligations while ensuring equitable outcomes. The 1909 case Muir v. Kane provides a clear example. In this case, M. Francis Kane and his wi — e Ida Kane orally agreed to pay B.L. Muir & Co. a commission — or helping to sell their property. Muir succeeded in — inding a buyer, and the parties later executed a — ormal written agreement stating that Muir would receive $200 — rom the sale pro- ceeds. However, the Kanes re — used to pay, arguing that the original oral agreement was unen — orceable under the statute o —
rauds, which required commission agree- ments — or real estate sales to be in writing, and that the later written agreement lacked consideration because Muir’s services had already been per — ormed, thus making the promise to pay unsupported by past consideration. The court disagreed. While the original oral agreement was unen — orceable under the statute o —
rauds, it was a valid contract — ormed by o —
er, acceptance, and consid- eration. The subsequent written agreement revived the earlier obligation and made it en — orceable. The court reasoned: Contracts — ormerly valid but unen — orceable due to statutory bars may — urnish su —
icient consideration — or a subsequent promise to per — orm, while agree- ments void — rom their inception due to legal de — ects cannot. 228 9 • Promissory Restitution
This distinction is critical. Promises reviving obligations under initially valid contracts re --- lect a continuation o --- the parties’ intent and are --- undamentally di --- --- erent
rom gratuitous promises. The court upheld the written agreement, emphasizing that the Kanes’ promise was rooted in — airness and recognition o — Muir’s — ul — illed contrac- tual role. By en — orcing such promises, courts promote — airness, prevent unjust enrichment, and uphold the principle that legal technicalities should not undermine validly
ormed agreements. This principle illustrates the adaptability o — promissory restitu- tion in ensuring equitable outcomes: it bridges gaps where rigid contract rules might otherwise — ail to honor legitimate obligations.
G. Re
lections on Promissory Restitution Over time, exceptions to the consideration doctrine have emerged, weakening its rigidity. While some argue that the doctrine is outdated, it remains central to contract law. Perhaps during your career, you will be the lawyer who success — ully argues — or its demise in your jurisdiction. For now, however, the best way to understand this requirement o — a bargained- — or exchange, and the exceptions to it, is by studying the equitable paths that precedent has carved through the doctrine. Studying these precedents provides tools — or lawyers to navigate exceptions to con- sideration, which equips them to argue — or en — orceability when justice and — airness demand it. For pedagogical reasons, this chapter — eatures more cases than the rest. Each case illustrates a speci — ic scenario where a judge — elt compelled to eschew the consideration requirement in the interest o — justice and — airness. This process is akin to navigating pathways carved by precedent through the once-solid — oundation o — the consideration doctrine. Identi — ying an analogous case and arguing — or a similar outcome is an important step. However, mastering equitable doctrines requires understanding and articulat- ing the deeper principles that justi — y exceptions to the consideration requirement. For example, recognizing the values behind promissory restitution can help a lawyer argue that a promise to pay — or emergency services or an unpaid bene — it should be en — orced. The goal is to demonstrate why a novel promise warrants relie —
rom tra- ditional rules — not just because o — precedent, but because justice requires it. These generalized equitable arguments demand higher-order thinking and creativity, allow- ing lawyers to cra — t principled and persuasive claims. The equitable exceptions to the consideration doctrine — all into two main catego- ries: promissory restitution (promises — or bene — its received), which you have just stud- ied, and promissory estoppel (promises reasonably inducing action or — orbearance), which are covered in the next chapter. Promissory restitution en — orces promises — or bene — its already con — erred, — ocusing on — airness — or past actions. In contrast, promis- sory estoppel addresses promises that induce — uture reliance. Together, these doc- trines provide equitable alternatives to consideration. 9 • Promissory Restitution 229
Despite their di
erences, both doctrines share a critical — eature: both require a promise. Without a promise, there is no contractual liability. Other legal doctrines, such as restitution and unjust enrichment, allow claims — or damages without alleging a promise, but these doctrines involve quasi-contracts — agreements that resemble contracts but are not legally recognized as such. These doctrines are beyond the scope o — this book and course, as they do not belong to contract law. Ultimately, prom- ises remain the cornerstone o — contractual liability, distinguishing contract law — rom related doctrines. Without a promise, there can be no contractual liability, even under equitable alternatives to the consideration doctrine.
Cases Reading Mills v. Wyman. Establishing whether there is promissory restitu- tion starts with determining whether there was a promise. In the case below, a --- ather promised to compensate a stranger who took care o --- his dying adult son. The promise was made to compensate the stranger --- or a bene --- it that had happened in the past. The promisor (the --- ather) did not seek to induce some kind o --- action, and the promisee (the stranger) was not induced, so there was no consideration, and the case was dismissed in the lower court. I --- there was no consideration, then there needed to be an alternative — one based on a sense o ---
airness and justice. I — the — ather — ailed to keep this promise, wouldn’t it — eel like a violation o —
some kind o
moral obligation or duty? Can moral obligation alone be an alter- native to consideration? As you read the Mills case below, determine whether moral obligation alone can be an alternative to consideration or i — there needs to be something more.
Mills v. Wyman
20 Mass. 207 (1825) PARKER C. J.
General rules o --- law established --- or the protection and security o --- honest and
air-minded men, who may inconsiderately make promises without any equivalent, will sometimes screen men o — a di — — erent character — rom engagements which they are bound in — oro conscientiæ [be — ore the tribunal o — conscience] to per — orm. This is a de — ect inherent in all human systems o — legislation. The rule that a mere verbal promise, without any consideration, cannot be en — orced by action, is universal in its application, and cannot be departed — rom to suit particular cases in which a re — usal to per — orm such a promise may be disgrace — ul. 230 9 • Promissory Restitution
The promise declared on in this case appears to have been made without any legal consideration. The kindness and services towards the sick son o --- the de --- endant were not bestowed at his request. The son was in no respect under the care o --- the de --- endant. He was twenty- --- ive years old, and had long le --- t his --- ather’s --- amily. On his return --- rom a --- oreign country, he --- ell sick among strangers, and the plainti ---
acted the part o — the good Samaritan, giving him shelter and com — ort until he died. The de — endant, his — ather, on being in — ormed o — this event, in — luenced by a transient — eeling o — gratitude, promises in writing to pay the plainti —
or the expenses he had incurred. But he has determined to break this promise, and is willing to have his case appear on record as a strong example o — particular injustice sometimes necessarily resulting — rom the operation o — general rules. It is said a moral obligation is a su —
icient consideration to support an express prom- ise; and some authorities lay down the rule thus broadly. However, upon examination o — the cases, we are satis — ied that the universality o — the rule cannot be supported, and there must have been some preexisting obligation, which has become inoperative by positive law, to — orm a basis — or an e —
ective promise. The cases o — debts barred by the statute o — limitations, o — debts incurred by in — ants, o — debts o — bankrupts, are generally put — or illustration o — the rule. Express promises — ounded on such preexisting equitable obligations may be en — orced. There is a good consideration — or them. They merely remove an impedi- ment created by law to the recovery o — debts honestly due, but which public policy protects the debtors — rom being compelled to pay. In all these cases there was origi- nally a quid pro quo; and according to the principles o — natural justice the party receiving ought to pay; but the legislature has said he shall not be coerced. Then comes the promise to pay the debt that is barred, the promise o — the man to pay the debt o — the in — ant, o — the discharged bankrupt to restore to his creditor what by the law he had lost. In all these cases there is a moral obligation — ounded upon an ante- cedent valuable consideration. These promises there — ore have a sound legal basis. They are not promises to pay something — or nothing. Not naked pacts; but the voluntary revival or creation o —
obligation which be
ore existed in natural law, but which had been dispensed with. It was not — or the bene — it o — the party obliged solely, but principally — or the public convenience. I — moral obligation, in its — ullest sense, is a good substratum — or an express promise, it is not easy to perceive why it is not equally good to support an implied promise. What a man ought to do, generally he ought to be made to do, whether he promise or re — use. But the law o — society has le — t most o — such obligations to the interior — orum, as the tribunal o — conscience has been aptly called. Is there not a moral obligation upon every son who has become a —
luent by means o — the education and advantages bestowed upon him by his — ather, to relieve that — ather — rom pecuniary embarrass- ment? To promote his com — ort and happiness, and even to share with him his riches, 9 • Promissory Restitution 231
i
thereby he will be made happy? And yet such a Son may, with impunity, leave such a — ather in any degree o — penury above that which will expose the community in which he dwells, to the danger o — being obliged to preserve him — rom absolute want. Is not a wealthy — ather under strong moral obligation to advance the interest o — an obedient, well disposed son? To — urnish him with the means o — acquiring and maintaining a becoming rank in li — e, to rescue him — rom the horrors o — debt incurred by mis — ortune? Yet the law will uphold him in any degree o — parsimony, short o — that which would reduce his son to the necessity o — seeking public charity. Without doubt there are great interests o — society which justi — y withholding the coercive arm o — the law — rom these duties o — imper — ect obligation. As they are called; imper — ect, not because they are less binding upon the conscience than those which are called per — ect, but because the wisdom o — the social law does not impose sanctions upon them. A deliberate promise, in writing, made — reely and without any mistake, one which may lead the party to whom it is made into contracts and expenses, cannot be broken without a violation o — moral duty. But i — there was nothing paid or promised — or it, the law, perhaps wisely, leaves the execution o — it to the conscience o — him who makes it. It is only when the party making the promise gains something, or he to whom it is made loses something, that the law gives the promise validity. And in the case o —
the promise o
the adult to pay the debt o — the in — ant, o — the debtor discharged by the statute o — limitations or bankruptcy, the principle is preserved by looking back to the origin o — the transaction, where an equivalent is to be — ound. An exact equivalent is not required by the law; — or there being a consideration, the parties are le — t to estimate its value: though here the courts o — equity will step in to relieve — rom gross inadequacy between the consideration and the promise. These principles are deduced — rom the general current o — decided cases upon the subject, as well as — rom the known maxims o — the common law. The general posi- tion, that moral obligation is a su —
icient consideration — or an express promise, is to be limited in its application, to cases where at some time or other a good or valuable consideration has existed. A legal obligation is always a su —
icient consideration to support either an express or an implied promise; such as an in — ant’s debt — or necessaries, or a — ather’s promise to pay — or the support and education o — his minor children. But when the child shall have attained to manhood, and shall have become his own agent in the world’s busi- ness, the debts he incurs, whatever may be their nature, create no obligation upon the — ather; and it seems to — ollow, that his promise — ounded upon such a debt has no legally binding — orce. The cases o — instruments under seal and certain mercantile contracts, in which con- siderations need not be proved, do not contradict the principles above suggested. The
irst import a consideration in themselves, and the second belong to a branch o — the mercantile law, which has — ound it necessary to disregard the point o — consideration 232 9 • Promissory Restitution
in respect to instruments negotiable in their nature and essential to the interests o
commerce. The opinions o — the judges had been variant — or a long course o — years upon this subject, but there seems to be no case in which it was nakedly decided, that a promise to pay the debt o — a son o —
ull age, not living with his — ather, though the debt were incurred by sickness which ended in the death o — the son, without a previous request by the — ather proved or presumed, could be en — orced by action. It has been attempted to show a legal obligation on the part o — the de — endant by vir- tue o — our statute, which compels lineal kindred in the ascending or descending line to support such o — their poor relations as are likely to become chargeable to the town where they have their settlement. But it is a su —
icient answer to this position, that such legal obligation does not exist except in the very cases provided — or in the statute, and never until the party charged has been adjudged to be o — su —
icient ability thereto. We do not know — rom the report any o — the — acts which are necessary to create such an obligation. Whether the deceased had a legal settlement in this commonwealth at the time o — his death, whether he was likely to become chargeable had he lived, whether the de — endant was o — su —
icient ability, are essential — acts to be adjudicated by the court to which is given jurisdiction on this subject. The legal liability does not arise until these — acts have all been ascertained by judgment, a — ter hearing the party intended to be charged. For the — oregoing reasons we are all o — opinion that the nonsuit directed by the Court o — Common Pleas was right, and that judgment be entered thereon — or costs
or the de — endant.
Re --- lection Mills demonstrates that, in general, a promise based on moral obligation to com- pensate --- or a bene --- it already received cannot be en --- orced without a preexisting obli- gation. In other words, moral obligation alone is insu ---
icient to be an alternative to consideration. It needs to be based on something that is already recognized as legal consideration, like a preexisting legal duty. One o — the court’s examples was that i —
someone
iled — or bankruptcy, the law could discharge certain debts, and they would not have to pay the debt back. However, i — that same person decided to pay it back out o — a sense o — moral obligation, then that promise could be en — orced by law because it was once supported by consideration. The debtor had a legal duty to pay back his creditor, but the law allowed the — orgiveness o — the debt due to public policy. Though the debtor revived the promise out a sense o — moral obligation, it is supported by the preexisting legal duty to pay back the creditor. Arguably, the — ather was morally obligated to pay the stranger what he had prom- ised. But since the stranger helped the son in the past without the inducement o — the — ather’s words and actions, it cannot be consideration. Moral obligation alone cannot be an alternative to consideration; there — ore, the court cannot en — orce the promise. 9 • Promissory Restitution 233
Discussion 1. The Mills court case --- ound that Seth Wyman (the --- ather o --- Levi Wyman) did not have to pay Daniel Mills (the caregiver o --- Levi Wyman). Do you think this is the right result? Justi --- y your opinion by making a policy argument. 2. The Mills court determined that Seth Wyman’s promise to Daniel Mills lacked consideration. What speci --- ic --- acts led the Mills court to this holding, and what have you learned generally about what is consideration --- rom this case? 3. Would the case have come out di ---
erently i — Levi Wyman was an unemancipated minor? Why?
Reading Drake v. Bell. Contracts are usually en
orceable as a matter o — law only where both parties were mutually induced to per — orm an exchange. But promises could alternatively be en — orceable on the basis o — equity, even where there is no inducement, pursuant to the doctrine o — promissory restitution. Restitution re — ers to the return o — ill-gotten gains or the disgorgement o — unjust enrichment. Promissory restitution is where one party makes a promise to return some money or property that it is not entitled to hold. By de — inition, promissory restitution cannot induce a material trans — er that already occurred; as mentioned above, time — lows in only one direction, and events in the — uture cannot in — luence intentions in the past. In Drake v. Bell, Bell received valuable home improvements — rom Drake that were not bargained — or. Bell later promised to pay Drake’s contractor. The Drake court — ound Bell’s promise en — orceable under the doctrine o — promis- sory estoppel. What makes the Drake case di — — erent — rom the Mills case, where a — ather’s promise to pay a stranger — or previously rendered care o — his son was deemed unen — orceable? Drake is distinguishable — rom Mills because Daniel Mills gave care out o — pure charity, expecting nothing in return, whereas the contractor in Drake per — ormed his work because he believed he was to be paid — or it. In other words, the prom- ise to pay the contractor related to a prior legal obligation. Chancellor Kent said: It is an unsettled point whether a moral obligation is o — itsel — a su —
icient consideration — or a promise, except in those cases in which a prior legal obligation or consideration had once existed. In Drake, there was consideration — or the promise to repair Drake’s house, so consideration had once existed with regard to the promise Bell made. This distinguishes Drake — rom Mills, where there was never any consideration. 234 9 • Promissory Restitution
,
Figure 9.7. Old House in Rector Street ( --- rom Scene o --- Old New York),
Henry Farrer (1870). Public domain work.
Note that this obligation still required a voluntary promise
rom Bell. He would not have had to pay — or the repairs i — he did not promise to do so. Bell was not obligated to pay the contractor — or the repairs, even though the repairs improved his house, because those repairs were thrust upon him, without his mani — estation o — assent to pay — or them. However, when Bell promised to pay the contractor — or the repairs, the contract became binding. Bell’s promise to pay the contractor was not solely based on a moral obligation; Bell reaped a bene — it — rom the contractor’s repairs to his house, and the contractor per — ormed those repairs pursuant to a contract supported by consideration; there — ore, Bell’s promise was supported by consideration and was binding. 9 • Promissory Restitution 235
Drake v. Bell
55 N.Y.S. 945 (App. Div. 1899) GAYNOR, J. The de --- endant was under no legal obligation to pay --- or the work. Nor is there any question o --- acceptance as o --- a chattel, --- or there was nothing capable o --- being rejected or taken away. Did, then, his promise bind him? Lord Mans --- ield with his keen percep- tion, broad mind, and aversion to alleged rules o --- law resting on misunderstood or inadvertent remarks o --- judges, instead o --- on --- oundations o --- reason and justice, said in Hawkes v. Saunders, that:
Where a man is under a moral obligation, which no court o --- law or equity can
en --- orce, and promises, the honesty and rectitude o --- the thing is a consideration. Buller, J., said in the same case:
I --- such a question were stripped o --- all authority it would be resolved by inquir-
ing whether law were a rule o --- justice, or whether it was something that acts
in direct contradiction to justice, conscience and equity. I --- the rule so plainly stated by Lord Mans --- ield, that a moral obligation was o --- itsel ---
su
icient consideration — or a subsequent promise, had been — ollowed, the sole ques- tion in each case would be whether there was a moral obligation to support the prom- ise. That would resolve the present case — or the plainti —
. But it has not been always
ollowed. I have examined the cases on the subject in England and here — rom the beginning. They are irreconcilable, and it would be no use to cite and review them. But notwithstanding much stray remark by judges may be cited to the contrary, it seems to me that a promise to pay — or antecedent value received by the promisor — rom the promisee binds, although there was never any obligation to pay which could be en — orced. Why not? Such a case is not one o — mere moral obligation resting on no con- sideration received, i — there can be any such abstract moral obligation. The case is one o — moral obligation created by a past valuable consideration derived — rom another. For instance, a promise a — ter coming o — age to pay a debt incurred during in — ancy, and which cannot be en — orced, or by a woman a — ter coming discovers to pay a like debt incurred while covert, is binding. On the other hand, a subsequent promise by a — ather to pay — or the care o — his adult son while sick among strangers, or o — a son to pay — or like care o — his — ather, is not binding. Mills v. Wyman. The distinction is that in the — ormer class o — cases there was past valuable consideration to the promisor, while in the latter not. The promise in the one class is not a naked pact, — or it is not to pay something — or nothing, while in the other class just that is the case. [Case law] is construed to mean that only a subsequent promise which revives an obligation — ormerly en — orceable either at law or in equity, but which has grown extinct, is binding. “But a mere moral or conscientious obligation, unconnected with any prior legal or equitable claim, is not enough,” is the rule reduced — rom the said 236 9 • Promissory Restitution
note in a number o
cases. And yet the same opinions say that the moral obligation “to pay a debt contracted during in — ancy or coverture, and the like,” is su —
icient to support a subsequent promise; as though in such cases the moral obligation rested on a prior legal or equitable claim, which it does not. Such is true though o — a promise to pay a debt barred by the statute o — limitations or by a discharge in bankruptcy, which all o — the cases hold to be binding. The actual decisions most worthy o — attention (not — eeling bound by mere general remarks o — judges and their citation) make two classes. In one o — them the promise is held binding because based on a — ormer obligation en — orceable at law or in equity, which obligation it revives; in the other because the promisor though never under any such obligation nevertheless received an antecedent valuable consideration, Hence the rule seems to be that a subsequent promise — ounded on a — ormer en — orceable obli- gation, or on value previously had — rom the promisee, is binding. It does not seem to me there is any actual decision in this state opposed to this. Some decisions may seem to be until something more than the head note and bare opinion are considered. The actual decision cannot be broader than the actual — acts. The promise in Frear v. Hardenbergh, was by the owner o — land to pay a trespasser in possession the value o — his improvements i — the owner prevailed in his action o —
ejectment then pending. The plainti
had entered knowing that he had no title, and it was held that no moral obligation — or the promise could arise out o — the will — ul trespass. The language o — the opinion in Eastwood v. Kenyon is very large, but the point decided does not seem controlling o — cases like the present one. A — ter coming o — age the woman promised to pay back moneys expended by her — ather’s executor — or her bene — it upon her real property during her in — ancy. Having a — terwards become covert, her husband promised to pay the same. An action against him on his promise was not sustained, the opinion saying: I — the rati — ication o — the wi — e while sole was relied on, then a debt — rom her would have been shown, and the de — endant could not have been charged in his own right without some — urther consideration, as o —
orbearance a — ter mar- riage, or something o — that sort. The debt was the wi — e’s, and while the husband was liable — or it by the common law in an action against both o — them, he was not liable in an action against him in his own right on his said assumpsit. The point is technical. Chancellor Kent does not con — ine the validity o — such promises to cases o — past legal obligation, but extends it to cases o — the existence o — a prior consideration. He says it is an unsettled point whether a moral obligation is o — itsel — “a su —
icient consideration
or a promise, except in those cases in which a prior legal obligation or consideration had once existed.” I do not pretend that this question is — ree — rom doubt, but to use the words o —
Chie
Justice Marshall, “I do not think that law ought to be separated — rom justice 9 • Promissory Restitution 237
where it is at most doubt
ul,” and that has no doubt in — luenced me some in reaching a conclusion. Judgment — or the plainti —
.
Re --- lection
Drake v. Bell illustrates that a promise made a --- ter receiving a bene --- it can be binding i --- it rests on a --- ormer legal obligation or material value — but not on moral obligation alone. The court ruled that Bell’s promise to pay --- or mistaken repairs was en --- orceable because he received a material bene --- it. Although he had no legal obligation at the time o --- the repairs, his subsequent promise was treated not as a gratuitous gesture but as a binding commitment grounded in --- airness and value received.
Discussion 1. How does the court distinguish Drake --- rom Mills? Do you agree with this distinction? 2. Why does the Drake court argue that the Frear case re --- erenced in its opinion is not on point? 3. What have you learned about when promissory restitution applies, based on the distinctions between Drake on the one hand and Mills and Frear on the other?
Reading Webb v. McGowin. The next case illustrates how the contract law doctrine o — consideration and its alternatives evolved as it entered the modern era. In 1905, James Greeley McGowin (along with his brothers and a brother- in-law) purchased the W.T. Smith Lumber Company in Chapman, Alabama. In 1925 McGowin became president o — the company, which employed Joe Webb. On August 3, 1925, while Webb was working on the upper — loor o —
the mill, and McGowin was on the ground below, Webb diverted a
alling 75- pound block o — lumber, which would otherwise have hit and probably killed McGowin. Webb su —
ered serious injuries in diverting this block. In recogni- tion o — Webb’s action, McGowin promised to pay Webb $15 every two weeks
or the rest o — Webb’s li — e. McGowin died on January 1, 1934. His estate re — used to continue to pay Webb, on the grounds that there was no consideration — or McGowin’s promise. Webb sued. The result is — ound in this landmark case, which discusses whether material bene — it plus moral obligation can — unction as a substitute — or consideration. 238 9 • Promissory Restitution
Webb v. McGowin
27 Ala. App. 82 (1936) BRICKEN, Presiding Judge. This action is in assumpsit. [Assumpsit is the per --- ect active indicative o --- the Latin verb assumere, meaning, “he has undertaken.” In this historical context, it means that the plainti ---
has — iled an action to recover money owed due to an implied promise. The modern signi — icance is that this is essentially an equitable pleading, meaning that the plainti —
seeks justice to remedy some unjust enrichment or — ailed quasi-contractual obligation.] The complaint as originally — iled was amended. The demurrers to the complaint as amended were sustained. [A demurrer is a historical civil procedure that is closely related to a modern motion to dismiss. I — the de — endant’s demurrer is granted, then the plainti —
’s case is dismissed.] Because o — this adverse ruling by the court the plainti —
took a nonsuit. [A voluntary nonsuit is where the plainti —
dismisses its own case without a court order to do so. Plainti —
s may have some opportunity to re — ile the claim. The speci — ic rules regard- ing nonsuit are governed by Fed. R. Civ. Pro. 41 and similar provisions in state civil procedure codes.] The assignment o — errors on this appeal are predicated upon said action or ruling o — the court. A — air statement o — the case presenting the questions — or decision is set out in appel- lant’s brie — , which we adopt. “On the 3d day o — August, 1925, appellant while in the employ o — the W.T. Smith Lumber Company, a corporation, and acting within the scope o — his employment, was engaged in clearing the upper — loor o — mill No. 2 o — the company. While so engaged he was in the act o — dropping a pine block — rom the upper — loor o — the mill to the ground below; this being the usual and ordinary way o — clearing the — loor, and it being the duty o — the plainti —
in the course o — his employment to so drop it. The block weighed about 75 pounds. As appellant was in the act o — dropping the block to the ground below, he was on the edge o — the upper — loor o — the mill. As he started to turn the block loose so that it would drop to the ground, he saw J. Greeley McGowin, testator o — the de — endants, on the ground below and directly under where the block would have — allen had appellant turned it loose. Had he turned it loose it would have struck McGowin with such — orce as to have caused him serious bodily harm or death. Appellant could have remained sa — ely on the upper — loor o — the mill by turning the block loose and allowing it to drop, but had he done this the block would have — allen on McGowin and caused him serious injuries or death. The only sa — e and reasonable way to prevent this was — or appellant to hold to the block and divert its direction in — alling — rom the place where McGowin was standing and the only sa — e way to divert it so as to prevent its coming into contact with McGowin was — or appellant to — all with it to the ground below. Appellant did this, 9 • Promissory Restitution 239
and by holding to the block and
alling with it to the ground below, he diverted the course o — its — all in such way that McGowin was not injured. In thus preventing the injuries to McGowin appellant himsel — received serious bodily injuries, resulting in his right leg being broken, the heel o — his right — oot torn o —
and his right arm broken. He was badly crippled — or li — e and rendered unable to do physical or mental labor. On September 1, 1925, in consideration o — appellant having prevented him — rom sustaining death or serious bodily harm and in consideration o — the injuries appellant had received, McGowin agreed with him to care — or and maintain him — or the remain- der o — appellant’s li — e at the rate o — $15 every two weeks — rom the time he sustained his injuries to and during the remainder o — appellant’s li — e; it being agreed that McGowin would pay this sum to appellant — or his maintenance. Under the agreement McGowin paid or caused to be paid to appellant the sum so agreed on up until McGowin’s death on January 1, 1934. A — ter his death the payments were continued to and including Jan- uary 27, 1934, at which time they were discontinued. Thereupon plainti —
brought suit to recover the unpaid installments accruing up to the time o — the bringing o — the suit. The material averments o — the di — — erent counts o — the original complaint and the amended complaint are predicated upon the — oregoing statement o —
acts.” In other words, the complaint as amended averred in substance: (1) That on August 3, 1925, appellant saved J. Greeley McGowin, appellee’s testator, — rom death or grievous bodily harm; (2) that in doing so appellant sustained bodily injury crip- pling him — or li — e; (3) that in consideration o — the services rendered and the injuries received by appellant, McGowin agreed to care — or him the remainder o — appellant’s li — e, the amount to be paid being $15 every two weeks; (4) that McGowin complied with this agreement until he died on January 1, 1934, and the payments were kept up to January 27, 1934, a — ter which they were discontinued. The action was — or the unpaid installments accruing a — ter January 27, 1934, to the time o — the suit. The principal grounds o — demurrer to the original and amended complaint are: (1) It states no cause o — action; (2) its averments show the contract was without consider- ation; (3) it — ails to allege that McGowin had, at or be — ore the services were rendered, agreed to pay appellant — or them; (4) the contract declared on is void under the statute o —
rauds.
-
The averments o
the complaint show that appellant saved McGowin — rom death or grievous bodily harm. This was a material bene — it to him o — in — initely more value than any — inancial aid he could have received. Receiving this bene — it, McGowin became morally bound to compensate appellant — or the services rendered. Recog- nizing his moral obligation, he expressly agreed to pay appellant as alleged in the complaint and complied with this agreement up to the time o — his death; a period o —
more than 8 years. Had McGowin been accidentally poisoned and a physician, without his knowledge or request, had administered an antidote, thus saving his li — e, a subsequent promise 240 9 • Promissory Restitution
by McGowin to pay the physician would have been valid. Likewise, McGowin’s agree- ment as disclosed by the complaint to compensate appellant — or saving him — rom death or grievous bodily injury is valid and en — orceable. Where the promisee cares — or, improves, and preserves the property o — the promi- sor, though done without his request, it is su —
icient consideration — or the promisor’s subsequent agreement to pay — or the service, because o — the material bene — it received. In Boothe v. Fitzpatrick, the court held that a promise by de — endant to pay — or the past keeping o — a bull which had escaped — rom de — endant’s premises and been cared
or by plainti —
was valid, although there was no previous request, because the sub- sequent promise obviated that objection; it being equivalent to a previous request. On the same principle, had the promisee saved the promisor’s li — e or his body — rom grievous harm, his subsequent promise to pay — or the services rendered would have been valid. Such service would have been — ar more material than caring — or his bull. Any holding that saving a man — rom death or grievous bodily harm is not a material bene — it su —
icient to uphold a subsequent promise to pay — or the service, necessarily rests on the assumption that saving li — e and preservation o — the body — rom harm have only a sentimental value. The converse o — this is true. Li — e and preservation o — the body have material, pecuniary values, measurable in dollars and cents. Because o —
this, physicians practice their pro
ession charging — or services rendered in saving li — e and curing the body o — its ills, and surgeons per — orm operations. The same is true as to the law o — negligence, authorizing the assessment o — damages in personal injury cases based upon the extent o — the injuries, earnings, and li — e expectancies o — those injured. In the business o — li — e insurance, the value o — a man’s li — e is measured in dollars and cents according to his expectancy, the soundness o — his body, and his ability to pay premiums. The same is true as to health and accident insurance. It — ollows that i — , as alleged in the complaint, appellant saved J. Greeley McGowin
rom death or grievous bodily harm, and McGowin subsequently agreed to pay him
or the service rendered, it became a valid and en — orceable contract.
-
It is well settled that a moral obligation is a su
icient consideration to support a subsequent promise to pay where the promisor has received a material bene — it, although there was no original duty or liability resting on the promisor. In the State ex rel. Bayer v. Funk, the court held that a moral obligation is a su —
icient consideration to support an executory promise where the promisor has received an actual pecuniary or material bene — it — or which he subsequently expressly promised to pay. The case at bar is clearly distinguishable — rom that class o — cases where the consid- eration is a mere moral obligation or conscientious duty unconnected with receipt by promisor o — bene — its o — a material or pecuniary nature. Here the promisor received a material bene — it constituting a valid consideration — or his promise.
-
Some authorities hold that,
or a moral obligation to support a subsequent prom- ise to pay, there must have existed a prior legal or equitable obligation, which — or 9 • Promissory Restitution 241
some reason had become unen
orceable, but — or which the promisor was still morally bound. This rule, however, is subject to quali — ication in those cases where the promi- sor, having received a material bene — it — rom the promisee, is morally bound to com- pensate him — or the services rendered and in consideration o — this obligation promises to pay. In such cases the subsequent promise to pay is an a —
irmance or rati — ication o —
the services rendered carrying with it the presumption that a previous request
or the service was made. Under the decisions above cited, McGowin’s express promise to pay appellant — or the services rendered was an a —
irmance or rati — ication o — what appellant had done raising the presumption that the services had been rendered at McGowin’s request.
-
The averments o
the complaint show that in saving McGowin — rom death or grievous bodily harm, appellant was crippled — or li — e. This was part o — the consider- ation o — the contract declared on. McGowin was bene — ited. Appellant was injured. Bene — it to the promisor or injury to the promisee is a su —
icient legal consideration — or the promisor’s agreement to pay.
-
Under the averments o
the complaint the services rendered by appellant were not gratuitous. The agreement o — McGowin to pay and the acceptance o — payment by appellant conclusively shows the contrary.
-
[Discussion regarding the statute o
rauds omitted.] The cases o — Shaw v. Boyd and Duncan v. Hall are not in con — lict with the princi ples here announced. In those cases the lands were owned by the United States at the time the alleged improvements were made, — or which subsequent purchasers — rom the government agreed to pay. These subsequent purchasers were not the owners o — the lands at the time the improvements were made. Consequently, they could not have been made — or their bene — it. From what has been said, we are o — the opinion that the court below erred in the ruling complained o — ; that is to say, in sustaining the demurrer, and — or this error the case is reversed and remanded. Reversed and remanded.
Re --- lection Webb illustrates that, sometimes, a material bene --- it received in the past can be con- sideration i --- there was a subsequent promise --- or it and it was --- or emergency services or necessaries. Moral obligation alone cannot be su ---
icient consideration unless there was a prior legal or equitable obligation. In this case, a moral obligation did not stand alone; McGowin received a material bene — it — rom the promisee. Webb had saved McGowin’s li — e without any inducement. McGowin subsequently promised to pay Webb — or saving his li — e. Thus, there is no consideration, and the court must look toward alternatives. Here, unlike Mills, the case did not rest upon only a moral obligation to carry out the promise. McGowin materially bene — ited because he 242 9 • Promissory Restitution
was saved
rom death or serious bodily injury. There — ore, because McGowin made a subsequent promise to compensate — or a material bene — it, the promise between McGowin’s estate and Webb is binding.
Discussion 1. The Webb court distinguishes this case --- rom ones where “the consideration is a mere moral obligation.” What consideration does the court here --- ind? Does it --- ind it under the bene --- it/detriment test or the bargained- --- or exchange test? 2. Would a modern court applying the R2d approach --- ind consideration in this case? Why or why not? 3. I --- it were possible to --- reeze time at the very moment when Webb had the choice to injure himsel --- to save McGowin’s li --- e, what do you think the parties would have bargained to do? Would McGowin have traded his li --- e in exchange --- or li --- etime payments to Webb? Does your answer to the question tend to support or re --- ute the holding in Webb? 4. McGowin was extremely wealthy and, in --- act, owned the mill in which Webb worked. Should this impact the court’s reasoning in any way?
Reading Haynes Chemical Corp. v. Staples & Staples. A gi
t is de — ined as the voluntary trans — er o — property to another without compensation. By de — inition, one does not expect something in return — or a gi — t. One does not give a gi — t in order to get some sort o — consideration in exchange. True gi — ts are, there — ore, gratuitous, that is, they are given without any expectation o — exchange. But this usage o — gi — t as donum gratuitum is not necessarily how the term is used in commercial circumstances. Consider a situation where you get a “ — ree $10 Amazon gi — t card” — or answering a “brie — , 73-question marketing survey.” Is the marketing — irm truly looking to give away Amazon gi — t cards, and the survey is simply the means by which one acquires that gi — t? Or is something else going on beyond what is nominally being said? The situation appears to be closer to a bargain than to a gi — t because the marketing company wants (and is willing to “pay”) — or your in — ormation, and you are only completing the sur- vey to get the gi — t card. This represents an exchange, distinguishable — rom gi — ts between — riends. In — act, the presumption that parties are giving each other gi — ts generally does not apply to such commercial relationships. In the Haynes Chemical case, two commercial parties entered into a relation- ship where an advertising — irm agreed to produce a trial advertising campaign 9 • Promissory Restitution 243
or another company. I — the company was not pleased with the campaign, it could have simply dismissed the advertising — irm without incurring liability. But, instead, the company expressed a great deal o — pleasure with the advertis- ing product. The company even insisted on paying the advertising — irm — or the work. But, — ollowing some changes in management, the company ended up re — using to pay. On the one hand, the trial advertising campaign was given without the sup- port o — consideration. There was no express agreement that the company would pay — or the campaign. In this sense, the campaign was a gi — t. On the other hand, businesses like this do not usually give purely gratuitous gi — ts to each other. The commercial context implies that there were some strings attached, or at least some hope that this work would generate — uture business. But even that hope is not enough to make the company pay — or the advertisement. A — ter all, how much would a court charge? It is too uncertain. But then, when the recipient o —
such a “gi
t” promises to pay a speci — ic amount — or it, that promise may — unction as a substitute — or consideration.
Haynes Chemical Corp. v. Staples & Staples
133 Va. 82 (1922) WEST, J., delivered the opinion o --- the court. The de --- endant in error, Staples & Staples, Incorporated, hereina --- ter called the plainti ---
, recovered a judgment against the plainti —
in error, Haynes Chemical Cor- poration, hereina — ter called the de — endant, in the law and equity court o — the city o —
Richmond
or the sum o — $707.09, with interest — rom February 28, 1921, till paid. The case is here upon a writ o — error to that judgment. The plainti —
and de — endant are both corporations duly chartered under the laws o — the state o — Virginia. The de — endant is engaged in the manu — acture and sale o — an insecticide product known as “Preventol.” The plainti —
s are engaged in the advertising business, styling themselves as, “Adver- tising Counsellors,” who advise the manu — acturers o — the country as to how to market their products; there being over 100 o — these advertising agencies in this country. A manu — acturer desiring to put a product upon the market, selects an agent, and directs him to map out plans — or marketing his product. The agent’s remuneration — or handling the advertising campaign usually consists o — a commission o — 15 percent on the space which the manu — acturer buys and is paid by the publishers. The cost o — drawings, dis- plays, and matters o — that kind is invariably paid — or by the manu — acturer o — the goods. In August, 1919, C.P. Hasbrook, treasurer and a director o — the de — endant corpora- tion, had an interview with H.L. Staples, president, and J.W. Fawcett, vice president, o —
244 9 • Promissory Restitution
the plainti
corporation, and commissioned them to prepare an advertising plan — or the de — endant, showing them how to put “Preventol” on the market, promising them their plans would receive the heartiest consideration on the part o — his people, and, i —
satis
actory, the advertising under such plan would go to them. The plainti —
does not submit plans in competition, and no notice o — competition was given it until its plans had been per — ected and submitted. Acting under instructions o — Director Hasbrook, the plainti —
proceeded to make the plans without expectation o — payment there — or, i — satis — actory, as in that event the plainti —
would be selected to handle the campaign and make his commission out o — the publishers; and i — unsatis — actory, it would be entitled to nothing, provided, in either event, a decision in good — aith was made on the merits o — the plan. Later, Has- brook requested the plainti —
to speed up the plan, and on October 12, 1919, Staples and Fawcett presented the plan to C.P. Hasbrook treasurer and director, L.G. Larus, director, and Roger Topp, vice president and general manager o — the de — endant cor- poration, all three o — whom expressed themselves as satis — ied with the campaign plan in all respects. Hasbrook and Larus le — t the room stating that Topp, as general manager, was the man to sell, and would have the last say; and at their suggestion the plans were le — t at de — endant’s o —
ice — or their study. Later Hasbrook attended a meeting o — the board o — directors o — his company in New York, taking with him the proxy o — Larus. Having no notice o — the meeting, no representative o — the plainti —
was present to explain the plan, nor was the plan itsel — , the sketches, statistics, merchandise data, or results o — trade investigations there. At the close o — the meeting, Hasbrook telegraphed Topp: Our president deems it necessary to have a New York agent. Advise Staples. The plainti —
, on condition o — a — air decision, on its merits, had spent a large sum o —
money to produce a satis
actory plan, and there is nothing in the telegram to indicate that the plan was not satis — actory. Later Topp said to Staples and Fawcett, in discussing what happened at the New York meeting: It looks like you got the rough end o — the poker; however, you did a good job; your work was — ine; and we — eel you ought to be recompensed, and we would like — or you to send us a bill — or your expenses. The bill was sent, but not paid, and this suit was brought to collect it. The de — endant’s assignments o — error are to the action o — the court: (1) In re — using certain instructions asked — or by the de — endant; (2) In granting certain instructions; (3) In overruling de — endant’s motion to set aside the verdict o — the jury; (4) In entering judgment upon the verdict. The instructions granted by the court were as — ollows: 9 • Promissory Restitution 245
Instruction No. 1: “The court instructs the jury that i — they believe — rom all the evidence that the de — endant requested the plainti —
to devise and submit a plan o — advertising to them, and it was known to the de — endant that the costs and expenses were connected with the work to be done by the plainti —
, and no express agreement was made between the parties with re — erence to payment — or the services o —
the plainti
, then the jury may in — er — rom the evidence an implied contract on the part o — the de — endant to reimburse the plainti —
or such expenses in connection with getting up the advertising plan as were reasonably within the contemplation o — the parties.” Instruction No. 2: “The court instructs the jury that i — they believe — rom the evidence that the plainti —
per — ormed certain work at the instance and request o — the de — endant, and therea — ter the de — endant acknowledged liability to the plainti —
or the expenses incident thereto and promised to pay the same, they shall — ind — or the plainti —
in whatever amount they deem reasonable under all the circum- stances o — the case — or such expenses.” Instruction No. 3: “The court instructs the jury that i — they believe — rom the evidence that the de — endant did no more than to agree that the plainti —
should devise and sub- mit to it — or its acceptance a plan — or an advertising campaign, then the de — en- dant is not liable to the plainti —
or any expenses incurred in and about getting up the plan to submit to the de — endant.” Instruction No. 4: “The court instructs the jury that i — they believe — rom the evidence that it was understood between the parties the plainti —
was merely to o —
er plans or speci-
ications or a plan — or advertising the product o — the de — endant — or sale, and whether such speci — ications or plan were o —
ered in competition with others or not, then the de — endant is not liable — or the expense o — getting up such a plan unless accepted by it.” Instruction No. 5: “The court instructs the jury that where one party requests o — another an opportunity o — submitting an o —
er, then unless it be in the minds o — both par- ties and understood and agreed at that time that the party making the o —
er is to be reimbursed — or his expenses in submitting the same, then the law does not raise an implied contract — or such reimbursement unless the jury shall — urther believe that there is a custom and usage equally within the knowledge o — both parties and with re — erence to which they can be necessarily presumed to have contracted, calling — or such reimbursement.” 246 9 • Promissory Restitution
Instructions numbered 1 and 2 were given by the court at the request o --- the plain- ti ---
; instruction numbered 3 was given by the court o — its own motion, a — ter re — using instructions o —
ered by the de — endant; instruction numbered 4 was given by the court in lieu o — instruction “B,” as requested by the de — endant; and instruction numbered 5 was given at the request o — the de — endant. Where one renders services — or another at the latter’s request, the law, in the absence o — an express agreement, implies a promise to pay what those services are reasonably worth, unless it can be in — erred — rom the circumstances that those services were to be rendered without compensation. It plainly appears — rom the evidence that the primary consideration which moved the plainti —
to prepare the advertising plan was the assurance o — the representative o —
the de
endant corporation that his people would give the plan heartiest consideration, which meant nothing less than a — ull and — air consideration o — the plans and speci — ica- tions upon their merits, by the proper authorities o — that corporation. The record shows that the board o — directors, which, according to the present con- tention o — the de — endant, was alone authorized to pass upon them, never gave the plainti —
an opportunity to present its plans, and, without seeing them, and without regard to their merits, gave the contract to another agency, because the president o —
the company
elt they should have a New York agent. In view o — such conduct on the part o — the de — endant, it cannot be “in — erred — rom the circumstances” that the services o — the plainti —
, so — ar as concerns the expenses incurred by it, were to be rendered without compensation, and we are o — opinion that the law implies a promise to pay any reasonable amounts expended by the plainti —
in complying with the request o —
the de
endant to prepare the plans. A person cannot request another to pay out money, or per — orm services — or him, upon his agreement to render certain services — or that person, and then, a — ter the money is paid, or the services per — ormed, re — use to keep his agreement and escape liability — or the amount o — money or labor so expended at his request. It is said by the Supreme Court o — Massachusetts in Williams v. Bemis: The de — endant having re — used to per — orm [the contract], the party paying the money or rendering the services in pursuance thereo — , may treat it as a nul- lity, and recover the money or value o — the services under the common counts There is evidence that the vice president and general manager o — the de — endant corporation, a — ter the contract was awarded the New York agent, said to the vice presi- dent o — the plainti —
company that they had considered the matter, and — elt that the plainti —
should be compensated, and asked him to send bill — or expenses. The de — endant contends that a subsequent express promise does not create any new cause o — action, and is without consideration, except in those cases where the circumstances are such that an implied promise to pay arises under the law, and relies with con — idence on a line o — cases o — which the — ollowing is representative: Stout v. Humphrey, where it is said: 9 • Promissory Restitution 247
An express promise, there --- ore, as it should seem, can only revive a prece
dent good consideration, which might have been en --- orced at law through the
medium o --- an implied promise, had it not been suspended by some positive
rule o --- law, but can give no original right o --- action i --- the obligation on which
it is --- ounded never could have been en --- orced at law, though not barred by any
legal maxim or statute provision.
In the case o
Beaumont v. Reeve, the rule is thus stated, and it is quoted by Mr. Chitty in the text o — his work on contracts (volume 1, p. 54):
An express promise cannot be supported by a consideration --- rom which the
law would not imply a promise, except where the express promise does away
with a legal suspension or bar o --- a right o --- action which, but --- or such suspen-
sion or bar, would be valid.
In our view, there is nothing in this line o --- cases which should deprive the plainti ---
o
its right to a recovery, as there was an implied promise to pay the amount expended at the de — endant’s request. The de — endant questions the authority o — Hasbrook to bind the corporation by a contract o — this nature. It appears — rom the evidence that Hasbrook was treasurer and director, Larus, director, and Roger Topp, vice president and general manager o — the de — endant cor- poration, all o — whom resided in Richmond, and that they constituted three o — the — ive stockholders o — the corporation, the remaining two, including the president, being residents o — New York. The general manager had — ull authority and was in active charge o — the business o —
the company and was made vice president to increase his authority. Hasbrook requested the work to be done, and promised that the plans would have the heartiest consideration o — his people, and that, i — approved, the de — endant would be given the contract. The plans were in preparation — or several months, during which time it is pre- sumed that he in — ormed the proper o —
icials o — his company as to the agreement he had made with the de — endant, as he sent de — endants a request to speed up the plans. When completed, the plans and speci — ications were submitted to these three gentle- men, all o — whom received and inspected them, without any suggestion — rom the vice president that Hasbrook had exceeded his authority in the premises. All three declared the plans satis — actory. Hasbrook and Larus, upon leaving, in — ormed Staples that Topp, vice president and general manager, was the man they would have to sell; that he would have the last say. There is nothing in the record to show that any mem- ber o — the board o — directors at the New York meeting question Hasbrook’s authority. On the contrary, his telegram intimates that the board had no objection to the plans, but the president — elt the contract ought to go to a New York agent. 248 9 • Promissory Restitution
In Winston v. Gordon, this court held: An act o — an agent — rom which he derives no personal bene — it, but which is done in good — aith — or the bene — it o — his principal, and which was apparently necessary and would redound to his bene — it, will be held to have been rati — ied and acquiesced in, and be thereby rendered valid upon slight evidence. And it is said: This doctrine . . . is as applicable to corporations as to other principals. The contract under consideration, entered by one director, was within the charter powers o — the corporation, and was made, the circumstances tend to show, with the knowledge and consent o — the vice president and general manager and another direc- tor o — the company. In Am. B.H.O.S. Mach. Co. v. Burlack, the court said: There are so-called corporations which — or all practical purposes, when they do business, cannot be reached at all, i — we are not permitted to treat the only known or accessible embodiment in any other way than according to the char- acter the manager may see — it — or the occasion to assume. He is possessed o —
ull authority to talk and act where there is anything to be gained, but he is not the proper man to talk or act when there is anything to be lost; and yet the princi- pal, — or all practical purposes, i — not o — ten in reality, is represented in no other way except by a name, so that a species o — legerdemain is carried on — “now you see it, and now you don’t.” The ordinary business world is becoming tired with, i — not vexed at, this sort o — jugglery, and thinks that the true principles o — evidence and o — agency are not so narrow or so rigid that they may not be made to reach such cases. Admitting that the making o — the contract was irregular in its inception, those who governed the corporation will be held, by their conduct, to have waived such irregularity, and the corporation is estopped to rely on it as a de — ense to this action. We — ind no error in the instructions granted o — which the de — endant can complain; and are o — the opinion that the jury were — ully and — airly instructed, and that there is no error in the court’s re — usal to grant instructions. Upon the record we are unable to say that the verdict o — the jury is plainly wrong, or without evidence to support it. For the — oregoing reasons the judgment complained o — will be a —
irmed. A —
irmed.
Re --- lection In Haynes Chemical, the plainti ---
made plans to advertise the de — endant’s product without expectation o — payment. I — the plainti —
were chosen to run the campaign, then it would receive payment. However, the plainti —
’s advertising plan was not selected. 9 • Promissory Restitution 249
The telegraph in
orming the plainti —
that the director wished to hire a New York agent made no mention o — the plan’s being unsatis — actory. A — ter the plainti —
was in — ormed that it was not selected to run the campaign, the chemical company reached out to the plainti —
, letting it know that they realized the amount o — money spent on the campaign and wished to reimburse it — or the cost. The plainti —
submitted its bills but was not reimbursed. In this case, the intention that moved the plainti —
to create the advertising plan was not to receive immediate payment but — or the company to honestly consider their plan. However, a — ter the plainti —
was not selected to run the campaign, the de — endant made the promise to reimburse the plainti —
. A person cannot request another to pay out money, or per — orm services — or him, upon his agreement to render certain services — or that person, and then, a — ter the money is paid, or the services per — ormed, re — use to keep his agreement and escape liability — or the amount o — money or labor so expended at his request. The chemical company requested that the advertising — irm create an advertising plan in exchange — or the chemical company’s consideration. However, the chemical company did not consider the plainti —
’s plan because the director decided that the company must use an advisor — rom New York instead. For this reason, the chemical company cannot escape liability — or the money and labor that had been expended, since the company did not — ull-heartedly consider the plainti —
’s campaign.
Discussion 1. What did Haynes Chemical promise to Staples & Staples? Did this promise con- template receiving anything in exchange in the --- uture, or was the promise given in recognition o --- something done in the past? 2. The court --- inds that Haynes Chemical made a contract with Staples & Staples. Would a modern court applying R2d reach the same result? I --- so, cite the R2d provision that mirrors the rule in Haynes Chemical. I --- not, cite the correlated R2d provision and analyze how it would come out di ---
erently under the R2d.
-
Do business corporations typically give gi
ts to each other? How does the answer to this question impact the court’s interpretation o — Haynes’s promise to Staples?
-
Would this case have been decided di
erently i — the companies were small,
amily-run businesses, where the owners were longtime — riends, or i — the promises were between — amily relations who have a long history o — giving — reely to each other?
-
What are jury instructions? How can jury instructions impact the disposition o
a case? Why might jury instructions be litigated upon appeal? 250 9 • Promissory Restitution
Reading Edson v. Poppe. The entire doctrine o
promissory restitution requires some o — the same elements that are required — or a contract-at-law. In both cases, there must be a promise to do something, and a promise to do something in return. But that is where the similarities begin to break down. When promises mutually induce each other, we call the return promise “consideration.” But what happens where the promise and the return promise are separated by time, such that it is logically and chronologically impossible — or the return promise to induce the per — ormance o — the original promise? For example, i — I serve you a hamburger and you eat it, any promise to pay me — or that hamburger is not motivated by your desire to incentivize me to cook a hamburger — or you. The hamburger has already been cooked, served, and eaten! In truth, all you have done in this scenario is to make a gratuitous promise to me. You may — eel morally obligated to — ollow through on this promise, but absent other circum- stances, you are probably not legally required to do so. One o — the other circumstances that can trans — orm a moral obligation into a legal liability is where the original promise was completed pursuant to some other contract. Where a contract — ormed the basis o — a party’s actions, we may
eel more con — ident that the per — orming party was not simply trying to impose some bene — it upon another person. Rather, the contract shows that the comple- tion o — that promise was done — or good reason, as part o — a voluntary exchange. Un — ortunately, contracts do not always work out. The promisee may prove unable to pay the consideration. The promisee may dispute whether the per — ormance meets the criteria required by the agreement. Or the promisee may claim that it no longer wants or needs to pay — or the per — ormance because o — changed circumstances. In some o — these instances, where one party to a contract already per — ormed but the other side was not ready to per — orm, a third party who was not part o — the original contract but who bene — ited — rom it may — eel a moral obligation to pay — or the per — ormance. A moral obligation is not enough to make — or an en — orceable agreement, but when the bene — iciary mani — ests a desire to pay — or that bene — it, that mani — estation may constitute a promise that can be binding upon the promisor. The Edson case is a — amous example o — this situation. A tenant ordered a valuable well to be built. The well was built, but the tenant re — used to pay. The landlord, brother o — the tenant, seeing how the well improved the value o — his land, then agreed to pay — or the well. Just like the person who has already eaten the hamburger, the landlord has already received the well, and in both those cases, any promise to pay is gratuitous. But the di —
erence between the sce- narios is that the well was constructed pursuant to a valid contract. That may give courts con — idence that the well-digger was not simply trying to impose unwanted bene — its on landowners. 9 • Promissory Restitution 251
Edson v. Poppe
124 N.W. 441 (S.D. 1910) McCOY, J. The plainti ---
recovered judgment upon the verdict o — a jury in the circuit court. The case was tried upon the — ollowing complaint: That the de — endant at all the times hereina — ter named was the owner o — the — ollowing described premises situated in Turner county, S.D., to wit (describing the land). That at all the times herein named George Poppe was in possession o — said premises as the tenant o — de — endant. During the year 1904 this plainti —
, at the instance and request o — said George Poppe, drilled and dug upon said premises a well 250 — eet deep, and obtained water in said well, and placed casing therein. The reasonable value o — the digging and casing o — said well was and is the sum o — $250 and said well was and is a valuable improvement upon the said premises, and greatly adds to the value thereo — . It has been used by the occupants o —
said premises since the said digging thereo
. Accordingly, with the knowledge and consent o — de — endant; that on or about the 5th day o — August, 1905, the de — endant, at the said premises, a — ter having examined the said well, and in consideration o — the said well to him, and o — the improvement it made upon said premises, expressly rati — ied the acts o — his said tenant in having said well drilled. He then and there promised and agreed to pay plainti —
the reasonable value o — the digging and casing o — the said well as a — oresaid.; De — endant has since re — used, and still re — uses, to pay plainti —
anything — or said well. Where — ore, etc. To the said complaint, de — endant made the — ollowing answer: Denies gener- ally and speci — ically each and every allegation in said complaint, except such as is hereina — ter speci — ically admitted. De — endant admits that he is the owner o — the said premises as stated in the complaint. At the opening o — the trial, and upon the o —
er o — testimony on the part o — plainti —
, de — endant objected to the introduction o — any evidence. For the reason that the complaint did not state a cause o — action, in that the consideration alleged in the contract is a past consideration, and no consideration
or any promise, i — any was made, and no consideration — or the promise alleged. The objection was overruled, and de — endant excepted. This ruling o — the trial court is assigned and now urged as error, but we are o — the opinion that the ruling o — the learned trial court was correct. It seems to be the general rule that past services are not a su —
icient consideration
or a promise to pay there — or, made at a subsequent time, and a — ter such services have been — ully rendered and completed; but in some courts a modi — ied doctrine o —
moral obligation is adopted, and it is held that a moral obligation,
ounded on previ- ous bene — its received by the promisor at the hands o — the promisee, will support a promise by him. The authorities are not so clear as to the su —
iciency o — past services, rendered without previous request, to support an express promise; but, when proper distinctions are made, the cases as a whole seem to warrant the statement that such a promise is supported by a su —
icient consideration i — the services were bene — icial, and were not intended to be gratuitous. 252 9 • Promissory Restitution
In Drake v. Bell, a mechanic, under contract to repair a vacant house, by mistake repaired the house next door, which belonged to the de — endant. The repairing was a bene — it to the latter, and he agreed to pay a certain amount there — or. It was held that the promise rested upon su —
icient consideration. Gaynor, J., says: “The rule seems to be that a subsequent promise, — ounded on a — ormer en — orceable obligation, or on value previously had — rom the promisee, is binding.” In Glenn v. Savage, it was held that an act done — or the bene — it o — another without his request is deemed a voluntary act o — courtesy, — or which no action can be sus- tained, unless a — ter knowing o — the service the person bene — ited thereby promises to pay — or it. In Boothe v. Fitzpatrick, it is held that i — the consideration, even without request, moves directly — rom the plainti —
to the de — endant, and inures directly to the de — en- dant’s bene — it, the promise is binding though made upon a past consideration. In this case the court held that a promise by de — endant to pay — or the past keeping o — a bull, which had escaped — rom de — endant’s premises and been cared — or by plainti —
, was valid, although there was no previous request, but that the subsequent promise obvi- ated that objection; it being equivalent to a previous request. The allegation o — the complaint here is that the digging and casing o — the well in question inured directly to the de — endant’s bene — it, and that, a — ter he had seen and examined the same, he expressly promised and agreed to pay plainti —
the reasonable value thereo — . It also appears that said well was made under such circumstances as could not be deemed gratuitous on the part o — plainti —
, or an act o — voluntary courtesy to de — endant. We are there — ore o — the opinion that, under the circumstances alleged, the subsequent promise o — de — endant to pay plainti —
the reasonable value — or digging and casing said well was binding, and supported by su —
icient consideration. We are also o — the opinion that the instructions based on this complaint, and in particular as to the validity o — the subsequent promise o — de — endant, properly submitted the issues to the jury. At the close o — plainti —
’s evidence, and again at the close o — all the evidence on both sides, de — endant moved — or a directed verdict. Both motions were overruled. De — endant excepted, and now assigns such rulings as error; but, as the evidence is not contained in the abstract on which these motions were based, the assignment cannot be considered. Neither can we consider assignments o — error based on evidence or objections to evidence not shown by the abstract. Finding no error in the record, the judgment o — the circuit court is a —
irmed.
Re --- lection Edson demonstrates that when a third person subsequently promises to pay --- or the bene --- it received under another’s contract, that promise can be binding. Here, William Poppe received a material bene --- it that was not intended to be gratuitous. He then sub- sequently promised to compensate Edson --- or the bene --- it. There --- ore, the subsequent promise is binding.
9 • Promissory Restitution 253
Discussion 1. The Edson court re --- erences the Drake (the accidental home repair) and Boothe (the errant bull) cases. Does it use these cases as authority --- or rules, as --- actual analogies, as distinctions, or something else? 2. The de --- ense is based on the claim “that the complaint did not state a cause o ---
action, in that the consideration alleged in the contract is a past consideration.” Explain what this means.
-
In Mills, the court
ound there was no en — orceable promise; in Edson, the court
ound there was. Can you distinguish the key — acts o — these cases such that the same rule applies to both, even though it produces di — — erent results?
Reading Muir v. Kane. There are many reasons why a promise turns out to be unen — orceable. Parties who intended to contract may have — ailed to include enough de — inition in the terms o — the agreement — or a court to en — orce it. The contract may be o — a sort which requires a signed writing to be en — orceable, but it lacks such a writing. The contract may have emerged — rom a mistake about the nature o — the subject matter. Even changed circumstances a — ter a valid — or- mation can excuse an obligation and make it unen — orceable. In the Muir case, a man owed a debt. But the collection o — this debt was unen — orceable because the debt agreement was not in writing and a state stat- ute required such contracts to be in writing. Perhaps in recognition o — the un — airness o — this situation, the debtor — an attorney — renewed his promise to pay the debt. Note that the renewed promise was not supported by consid- eration. When he made the renewed promise, the debtor already had received the services. He did not make this promise in order to get a loan but rather in recognition o — his moral obligation to repay it.
Muir v. Kane
55 Wash. 131 (1909) FULLERTON, J. The respondent brought this action to recover o --- the appellants the sum o --- $200, alleged to be due pursuant to a written agreement executed and delivered to him by the appellants, whereby they agreed to pay him the sum o --- $200 --- or his services in selling --- or appellants a certain tract o --- real property. Issue was taken on the complaint, and a trial had thereon which resulted in a judg- ment in his --- avor --- or the amount claimed to be due. The case was tried by the court
254 9 • Promissory Restitution
sitting without a jury. No question is raised as to the correctness o
the — acts — ound, but the case is here on the question whether these — acts justi — y the judgment o — the court. The court’s — indings o —
act are as — ollows: “(1) That now and at all times herein re — erred to the plainti —
is and was doing a general real estate business in Seattle, Wash., under the — irm name and style o — B.L. Muir & Co., being the sole owner thereo — . “(2) That now and at all times concerned herein the de — endants are and were hus- band and wi — e. “(3) That on or about the 21st day o — November, 1906, the de — endants made, exe- cuted, and delivered to the plainti —
their written agreement, agreeing to pay said plainti —
$200 — or his services in selling — or them a certain parcel o — real estate; said agreement being in words and — igures, to wit: M. Francis Kane and Ida Kane, his wi — e, agree to sell and Paul Bush agrees to buy the — ollowing described real estate situated in the county o — King, state o — Washington, to wit: South 40 — eet o — lot 1, block 17, J.H. Nagle’s addition to the city o — Seattle, — or the sum o — nine thousand six hundred dollars ($9,600) the purchaser having paid the sum o —
ive hundred dollars ($500) the receipt o — which is hereby acknowledged, as earnest money and part payment — or said land, the same to be held in trust by B.L. Muir & Co. until the sale is closed or canceled and the balance o — said purchase price shall be paid as — ollows, or as soon a — ter said dates respectively as the title to said real estate is shown to be marketable, to wit: Three thousand dollars ($3,000) on or be — ore the 22nd day o — Nov., 1906, at 1 p. m.; nineteen hundred dollars ($1,900) on or be — ore the 22nd day o — Nov., 1907, at 1 p. m.; — our thousand dollars ($4,000) according to certain mortgage to be executed due in three years — rom date. The purchaser agrees to pay interest at the rate o — six percent, payable semiannually on all de — erred payments. The vendor agrees to — urnish an abstract o — title made by a reliable abstract company — or said real estate, showing a marketable title o —
record in the vendor --- ree --- rom encumbrances to date o --- conveyance, except
the street assessments amount to about two hundred dollars ($200) and i ---
over $200 the surplus to be deducted --- rom the nineteen hundred payment
which the purchaser assumes and agrees to pay as a part o --- the above named
purchase price, and the vendor --- urther agrees to trans --- er said property to the
purchaser by a good and su ---
icient warranty deed to the said vendee or his assigns and pay two hundred dollars ($200) o — the purchase price to B.L. Muir & Co., — or services rendered. The purchaser shall have one day’s time a — ter the delivery o — said abstract — or examination o — same, and in case the abstract shall show a marketable title in the vendor, this sale shall be completed, and i — the said title is not marketable and cannot be made so, then B.L. Muir & Co. shall re — und to the said vendee the above named earnest money, and the sale shall be canceled, the deposit o — $500 to be paid to Mrs. Ida Kane in the event o — the purchaser — ailing to comply with this agreement. 9 • Promissory Restitution 255
Witness our hands this 21st day o --- November 1906. Signed and delivered
in the presence o --- B.L. Muir. M. Francis Kane. [Seal.] Ida Kane. [Seal.] Paul
Bush. [Seal.]’ “(4) That the plainti ---
did make the sale re — erred to in said written contract and which sale was accepted by the de — endants, but they have since — ailed, neglected, and re — used to pay the a — oresaid two hundred dollars ($200) commission allowed, although the same is long past due and still the property o — the plainti —
.” The statute governing contracts — or commissions — or buying or selling real estate provides that any agreement authorizing an employee, as an agent, or broker, to sell or purchase real estate — or compensation or a commission, shall be void unless the agreement, contract, or promise or some note or memorandum thereo — be in writing. The appellants contend that the writing relied upon by the respondent is insu — -
icient under the statute; that it is not an agreement authorizing the respondent to sell the real property described — or compensation or commission, nor does it authorize or employ the respondent to sell real estate at all. Mani — estly, i — the writ- ing sued upon was intended as an agreement authorizing the respondent to sell real estate o — the appellants, it is — aulty in the particulars mentioned, and so — ar, de — icient as not to warrant a recovery even i — a sale had been made thereunder. But we do not understand that this is the question presented by the record. This writing was not intended as an agreement authorizing the respondent to sell the real property mentioned. In — act, it was executed a — ter that service had been per — ormed, and is an agreement in writing to pay a — ixed sum — or a past service, not a service to be per — ormed in the — uture. The question — or determination is its validity as a promise to pay — or a past service. Looking to the instrument itsel — , there is nothing on its — ace that in any manner impugns its validity. It is a direct promise to pay a — ixed sum o — money — or services rendered. Prima — acie, there — ore, it is legal and valid; and, i — it is illegal at all, it is because the actual consideration — or the promise, which was alleged and proven, ren- dered the promise illegal. This consideration was the sale o — real property — or the appellants by the respondent acting as a broker without a written agreement authoriz- ing the service, and it is thought that, because the statute declares an agreement — or such a service void unless in writing, the service — urnishes no consideration — or the subsequent promise, since the service must either have been — ounded upon an invalid agreement or was voluntary. There are cases which maintain this doctrine. In Bagnole v. Madden, the precise question was presented. There the plainti —
had been orally authorized by the de — en- dant to sell a parcel o — real estate owned by the de — endant. A purchaser was — ound, and a contract o — sale entered. The de — endant thereupon executed a written agreement, and delivered the same to the plainti —
, wherein she promises to pay him $50 — or his services. In an action brought upon the writing, the court held that she could not recover because o — the invalidity o — the original oral contract authorizing the services; it being in violation o — the statute declaring such agreement void unless in writing. 256 9 • Promissory Restitution
The case was rested on a decision o
the Court o — Errors and Appeals, which announced the same doctrine, but upon a state o —
acts not quite the same; the sub- sequent promise to pay being oral instead o — in writing. During its opinion in the lat- ter case the court said: “It is clear that i — a contract between two parties be void, and not merely voidable, no subsequent express promise will operate to charge the party promising, even though he has derived the bene — it o — the contract. Yet, according to the commonly received motion respecting moral obligations, and the — orce attributed to a subsequent express promise, such a person ought to pay. An express promise, there — ore, as it should seem, can only revive a precedent good consideration which might have been en — orced at law through the medium o — an implied promise had it not been suspended by some positive rule o — law, but can give no original right o —
action i
the obligation on which it is — ounded never could have been en — orced at law, though not barred by any legal maxim or statute provision.” The court, it will be observed, makes a distinction between contracts — ormerly good, but on which the right o — recovery has been barred by the statute, and those contracts which are barred in the — irst instance because o — some legal de — ect in their execution, holding that the — ormer will — urnish a consideration — or a subsequent promise to per — orm, while the latter will not. It has seemed to us that this distinction is not sound. The moral obligation to pay — or services rendered as a broker in sell- ing real estate under an oral contract where the statute requires such contract to be in writing is just as binding as is the moral obligation to pay a debt that has become barred by the statute o — limitations; and there is no reason — or holding that the latter will support a new promise to pay while the — ormer will not. There is no moral delinquency that attaches to an oral contract to sell real property as a broker. This service cannot be recovered — or because the statute says the promise must be in writing, not because it is illegal in itsel — . It was not intended by the statute to impute moral turpitude to such contracts. The statute was intended to prevent — rauds and perjuries, and, to accomplish that purpose, it is required that the evidence o — the contract be in writing; but it is not conducive to either — raud or perjury to say that the services rendered under the void contract or voluntarily will support a subsequent written promise to pay — or such service. Nor is it a valid objection to say there was no antecedent legal consideration. The validity o — a promise to pay a debt barred by the statute o — limitations is not
ounded on its antecedent legal obligation. There is no legal obligation to pay such a debt, i — there were there would be no need — or the new promise. The obligation is moral solely, and, since there can be no di —
erence in character between one moral obligation and another, there can be no reason — or holding that one moral obligation will support a promise while another will not. Our attention has been called to no case, other than the New Jersey case above cited, where the — acts o — the case at bar are presented. A case in point on the princi ple involved, however, is Ferguson v. Harris. Certain persons without authority — rom 9 • Promissory Restitution 257
the de
endant had ordered lumber and used it in the erection o — a building on the de — endant’s separate property; she being a married woman. Subsequently she gave her promissory note there — or, and, when an action was brought upon the note, she sought to de — end on the ground o — want o — consideration. It was conceded that there was never any legal obligation on the part o — the de — endant to pay — or the lumber, but that her obligation was wholly moral. It was thereupon urged that such an obligation was insu —
icient to support the promise. Speaking upon this question, the court said: “All o — the authorities admit that where an action to recover a debt is barred by the statute o — limitations, or by a discharge in bankruptcy, a subsequent promise to pay the same can be supported by the moral obligation to pay the same, although the legal obligation is gone — orever; and I am unable to perceive any just distinction between such a case and one in which there never was a legal, but only a moral, obligation to pay. In the one case the legal obliga- tion is gone as e —
ectually as i — it had never existed, and I am at a loss to perceive any sound distinction in principle between the two cases. In both cases, at the time the promise sought to be en — orced is made there is nothing whatever to support it except the moral obligation, and why the — act that, because in the one case there was once a legal obligation, which, having utterly disappeared, is as i — it had never existed, should a —
ect the question, I am at a loss to conceive. I — in the one case the moral obligation, which alone remains is su —
icient to a —
ord a valid consideration — or the promise, I can- not see why the same obligation should not have the same e —
ect in the other.” The remark made by Lord Denman in Eastwood v. Kenyon, that the doctrine — or which I am contending “would annihilate the necessity — or any consideration at all, inasmuch as the mere — act o — giving a promise creates a moral obligation to per — orm it,” is more specious than sound, — or it entirely ignores the distinction between a promise to pay money which the promisor is under a moral obligation to pay, and a promise to pay money which the promisor, is under no obligation, either legal or moral, to pay. It seems to me that the cases relied upon to establish the modern doctrine, so — ar as my examination o — them has gone, ignore the distinction pointed out in the note to Comstock v. Smith, above cited, between an express and an implied promise resting merely on a moral obligation, — or, while such obligation does not seem to be su —
icient to support an implied promise, yet it is su —
icient to support an express promise. To the same e —
ect is Anderson v. Best, wherein it was said: “The distinction sought to be made between considerations — ormerly good but now barred by statute, and those barred by statute in the — irst instance, is not substantial, and is not sustained by the cases.” Believing, as we do, that the better rule is with the cases holding the moral obliga- tion alone su —
icient to sustain the promise, it — ollows that the judgment appealed — rom should be a —
irmed. It is so ordered. RUDKIN, C. J., and GOSE, CHADWICK, and MORRIS, JJ., concur. 258 9 • Promissory Restitution
Re --- lection The issue --- or determination in the Muir case regards the validity o --- a promise to pay --- or a past service. Muir states the rule that where an action to recover a debt is barred by the statute o ---
rauds, a subsequent promise to pay the same can be sup- ported by the moral obligations to pay the same. However, the legal obligation is gone
orever. In the Muir case, the consideration was the sale o — real property — or the appellants by the respondent acting as a broker. However, there was no written agreement autho- rizing such service, and the statute o —
rauds declares an agreement — or such a service void unless in writing. For this reason, the service — urnished no consideration — or the subsequent promise. The validity o — a promise to pay a debt barred by the statute o —
rauds is not — ounded on its antecedent legal obligation. There is no legal obligation to pay such a debt; i —
there were, there would be no need
or the new promise. The obligation is solely moral, and, since there can be no di —
erence in character between one moral obliga- tion and another, there can be no reason — or holding that one moral obligation will support a promise while another will not. The main takeaway — rom Muir is that where an action to recover a debt is barred by the statute o —
rauds, a subsequent promise to pay the same can be supported by moral obligation — and promissory restitution — to pay the same, but the legal obliga- tion is gone — orever.
Discussion 1. What does the Muir court mean when it states that moral obligation alone may be su ---
icient to sustain a promise?
- The statute at issue, which requires contracts promising real estate commission to be evidenced by a signed writing, is a type o — statute o —
rauds. What purpose does the statute serve here? In other words, why should courts require real estate com- missions to be evidenced by signed writings?
-
The Muir opinion cites long provisions
rom cases that distinguish consideration
ormerly good but now barred — rom “consideration” that was never good. Can you apply this distinction to Mills and to the other cases in this chapter?
-
Is there any doubt that the seller agreed to pay the real estate commission? Does the clear and substantial nature o — the promise seem to have any impact on the court’s willingness to en — orce it? Should that be a — actor? What about the seller’s pro — ession as attorney? Should attorneys be held to higher moral standards than laypersons? 9 • Promissory Restitution 259
Problems Problem 9.1. IRAC Edson Under R2d, promises without consideration are generally unen --- orceable; how- ever, the doctrine o --- promissory restitution makes promises to pay --- or a past bene --- it received en --- orceable where some plus --- actor applies. Edson is a classic case where the court --- ound that justice required promissory restitution — but why? And, noting that Edson was decided even be --- ore the --- irst Restatement o --- Contracts, would it still be so decided under the R2d? In other words, what was the plus --- actor in Edson, and does this --- actor “count” under the R2d? Answer this question using the IRAC writ- ing paradigm; that is, --- irst write the issue regarding this particular element o --- prom- issory estoppel: “Whether Edson merits en --- orcement o --- Poppe’s promise based on promissory restitution, where . . . ?” Include key material --- acts a --- ter the where clause. Second, write and cite the key rules --- rom the R2d needed to answer this question (including the rule --- or promissory restitution) be --- ore analyzing the --- acts o --- this case under those rules. Finally, conclude whether Edson merits promissory restitution.
Problem 9.2. Annihilation o
Consideration The opinion in Muir de — ends its holding against the claim by Lord Denman in Eastwood that the doctrine espoused in Muir “would annihilate the necessity — or any consideration at all, inasmuch as the mere — act o — giving a promise creates a moral obligation to per — orm it.” The Muir court retorts that Denman’s remark “is more spe- cious than sound, — or it entirely ignores the distinction between a promise to pay money which the promisor is under a moral obligation to pay, and a promise to pay money which the promisor, is under no obligation, either legal or moral, to pay.” What do you make o — these competing rationales — or two competing doctrines? First, discuss whether it is easy and readily possible to distinguish between promises made pursuant to a moral obligation and promises made pursuant to no obligation. Sec- ond, discuss whether the doctrine should be as Muir argues it should, that is, whether promises made pursuant to moral obligations should be en — orceable? Does the Muir doctrine “annihilate” the consideration doctrine? Module III
De --- enses
Contract law developed out o
the idea that promises deserve legal protection. But this protection is not without limits. Previously, you learned that the consideration requirement limits courts’ scope o — en — orcement to promises involving a bargained-
or exchange. You also saw how equitable doctrines such as promissory estoppel expand this scope. Now we will learn the de — enses to contract — ormation, which narrow the scope o —
protection again by giving the de
endant in a contract dispute a way to argue that a contract is unen — orceable or should be voided or rescinded by the court. These limitations on contract en — orceability are considered de — enses because they must generally be raised by the party seeking to get out o — the contract — the de — en- dant. They are, in this sense, a —
irmative de — enses, which can be waived i — they are not brought, and which the de — endant has the burden to plead and prove. A — ter the plainti —
proves there is a valid contract supported by mutual assent and consideration (or an alternative to consideration), the de — endant can avoid this otherwise-valid contract by raising a de — ense. As a matter o — civil procedure, de — en- dants usually have to raise de — enses in the answer or a motion to dismiss. I — de — enses are not timely raised, they may be waived. The — irst de — ense is the statute o —
rauds, which bars en — orcement o — certain oral contracts unless they are in writing. The second category is mistake. Courts may rescind (unwind) a contract i — one or both parties had a mistaken belie — about an important — act relating to the agreement.
261
262 Module III • De — enses
The third category consists o
improper bargaining de — enses: misrepresentation, duress, and undue in — luence. These doctrines — ocus on o — ten-intentional wrongdoing that undermines voluntary consent. The — ourth category is public policy de — enses, which address situations where en — orcing a contract would harm the public interest. This category includes uncon- scionability, which prohibits grossly one-sided deals or deals based on unequal bar- gaining power, and de — enses like illegality, which permit courts to — ind contracts void when they violate a law. The — i — th category is incapacity, which is e —
ectively a codi — ied extension o — the more general public policy de — enses. Certain categories o — persons are deemed incapable o —
contracting as a matter o
public policy. For example, minors can disa —
irm contracts made while underage, and persons under guardianship cannot make binding agree- ments. Similar de — enses exist — or mental incapacity and, to a lesser extent, intoxication. In the chapters that — ollow, you will see how each de — ense applies in concrete situ- ations. Keep in mind that these black-letter rules re — lect deeper questions about — air- ness, — reedom, and the role o — courts in shaping private agreements. These de — enses help balance the costs o — en — orcing the wrong promises with the costs o —
ailing to en — orce the right ones. By exploring these doctrines, you will better understand how courts determine which promises deserve protection and which do not. Chapter 10 The Statute o — Frauds
A “statute o
rauds” is, literally, a statute. It is a law governing the en — orceability o —
certain contracts, passed by a legislative body. A statute o
rauds creates an a —
irma- tive de — ense where a party can avoid certain types o — contracts where the contract is not evidenced by a signed writing. The British Parliament passed the original statute o —
rauds, titled the English Act
or Prevention o — Frauds and Perjuries, in 1677. It required courts to see some writ- ing signed by the party to be charged (which generally means the party against whom en — orcement o — the contract is sought) that evidenced a contract — although not nec- essarily the contract itsel — — prior to courts’ granting judgment — or breach o — agree- ment regarding certain matters. Statutes o —
rauds caught on in America, and most states have some version o — the original on the books. In — act, many states have not only one but many statutes o —
rauds. Any statute that requires an en — orceable contract to be in writing can be deemed a statute o —
rauds. Such statutes can appear in di — — erent places within one state’s legal code. For example, Pennsylvania’s statute o —
rauds requiring real estate leases to be in writing is codi — ied in the Pennsylvania Landlord-Tenant Act at 68 P.S. § 250.202; and Pennsylvania’s statute o —
rauds requiring sales o — goods — or more than $500 to be in writing is codi — ied in the Pennsylvania Uni — orm Commercial Code at 13 P.S. § 2201(a). Most states do not put all writing requirements into a single statute but rather simply add writing requirements to the statutes covering the transactions in question. Requiring a signed writing serves three — unctions. First, it creates evidence o — con- tracting, which makes lawsuits easier to adjudicate or dismiss. Second, it cautions contract parties, who should realize that signing or sealing a — ormal writing is likely to bind them as to the terms therein. Third, it promotes the use o —
orms o — agreement, which are standardized signed writings re — lecting common issues that arise in speci — ic types o — transactions. Typically, a statute o —
rauds issue comes up when one party does not want to be subject to a contract and that contract is either entirely oral or has some potential de — ect in its writing. When you spot an issue like this, ask three analytical questions to determine whether the statute o —
rauds prevents en — orcement o — that contract: (1) Does the statute o —
rauds in this jurisdiction require a signed writing — or this general class o — contract?
263
264 10 • The Statute o — Frauds
(2) Is there a signed writing that satis --- ies the statute?
(3) I --- there is no memorandum, do the speci --- ic --- acts suggest an equitable excep-
tion to the statute o ---
rauds? Importantly: Each state must enact its own version o — the statute o —
rauds. This means there is signi — icant variety across the various states. In practice, you should always look up the statute o —
rauds that applies in your jurisdiction and pay attention to the speci — ic language. Despite these variations in statutory language, the interpretation and en — orcement o — the statutes is quite similar across the states. In general, all statutes o —
rauds have the same e —
ect: a statute o —
rauds — orbids en — orcement o — a contract unless it is evi- denced by a memorandum signed by the party against whom the contract is being en — orced. Understanding this e —
ect makes analyzing statute o —
rauds problems easy. There is a straight — orward, three-step process — or analyzing every statute o —
rauds situation.
Rules A. Classes o --- Contracts Requiring Signed Writing (MYLEGS)
According to the R2d, most American states have adopted a statute o ---
rauds which covers six classes o — contracts. The acronym “MYLEGS” is o — ten used to represent these six classes: (1) Marriage (2) Year-long (or longer) (3) Land (4) Executorship (5) Goods — or $500 or more (6) Suretyship Many states require additional categories o — transactions to be evidenced by a writ- ing to be en — orceable. For example, Texas requires a signed writing — or an agreement to pay a commission on the sale o — mineral rights in the land. See Tex. Bus. & Com. Code § 26.01(b)(7)(D) (2001). On the other hand, many states do not require the traditional categories to be in writing. For example, Louisiana does not require a signed writing — or sales o — goods. See La. Rev. Stat. § 10:8-113 (2016). Check the state legal codes to determine whether a certain type o — contract requires evidence o — its existence in the — orm o — a signed writing. This book will not cover idiosyncratic state statutes. 10 • The Statute o — Frauds 265
E
ectively, the statute o —
rauds requires additional written proo —
or contracts that
all into one o — these six MYLEGS classes. These categories have remained remarkably stable over time. R2d § 110 lists the same classes o — contracts that were included in the English statute o —
rauds in 1677. Although the English statute was repealed in 1954, except — or the suretyship and land contract provisions, many American states still require a signed writing to evidence
ive classes o — contracts that were subject to the original statute o —
rauds: (a) a contract o — an executor or administrator to answer — or a duty o — his decedent (the Executor-administrator provision); (b) a contract to answer — or the duty o — another (the Suretyship provision); (c) a contract made upon consideration o — marriage (the Marriage provision); (d) a contract — or the sale o — an interest in land (the Land contract provision); (e) a contract that is not to be per — ormed within one year — rom the making thereo —
(the one-year provision). See R2d § 110(1). The sixth class — sale o --- goods contracts priced at $500 or more — was added when the R2d was revised in 1981 to include re --- erence to the Uni --- orm Commercial Code, Article 2. Accordingly, the R2d includes the UCC’s requirement --- or evidence o --- a signed writing where there is
(a) a contract --- or the sale o --- Goods --- or the price o --- $500 or more (UCC § 2-201).
R2d § 110(2). These classes may overlap. In other words, a contract may be subject to a statute o ---
rauds — or multiple reasons. For example, i — a landowner agrees to sell a tract o — land, with closing to occur in 366 days, then that contract is subject to two provisions o — the traditional statute o —
rauds: the land provision and the year-long provision. We will quickly go through each o — the six classes. But keep your — ocus on the most common types o — contracts that trigger the statute o —
rauds: over one year, land, and sale o — goods $500 or more.
- Executor/Administrator Executors and administrators manage the estate o — a decedent (someone who died). The primary di —
erence between them is that an executor is named in the decedent’s will, whereas an administrator is appointed by a court, typically when the decedent didn’t name a valid executor. Many jurisdictions now re — er to both as the decedent’s “personal representative.” A decedent’s personal representative may have the power to enter into contracts on behal — o — the decedent’s estate, such as by obligating the estate to make payment to creditors or provide awards to inheritors. These ordinary-course transactions, where 266 10 • The Statute o — Frauds
the executor is only obligating the estate and not the executor personally, are not sub- ject to the statute o —
rauds executor provision. The statute o —
rauds is only triggered when a personal representative agrees to “answer personally” — or the estate: A contract o — an executor or administrator to answer personally — or a duty o —
his decedent is within the Statute o --- Frauds i --- a similar contract to answer --- or
the duty o --- a living person would be within the Statute as a contract to answer
or the duty o — another. R2d § 111. In other words, the executor provision only comes up in unusual circumstances where the executor agrees to be personally liable. For example, Sam is appointed executor o — Dan’s estate, as Dan recently died. When Dan died, he owed Carl $10,000. Sam strikes a bargain with Carl by promising to personally guarantee that the estate will pay Carl $5,000 i — Carl agrees to write o —
the rest o — the debt. Sam’s promise is within the executor provision because Sam is personally liable — or the remainder o —
the debt. Sam would likely agree to take on the debt because Sam is the main bene
i- ciary o — the estate and would have assumed the estate’s debt anyway. This is also a way to speed up probate. On the other hand, i — Sam simply promises Carl that the estate will pay $5,000 now instead o — Carl waiting — or the estate to go through probate, then the agreement is not within the executor provision because Sam is not personally liable — or that obligation.
- Suretyship Suretyship involves a promise to guarantee that the obligation o — another will be per — ormed. This ancient concept has existed — or millennia. One o — the earliest recorded suretyship agreements, inscribed on a Mesopotamian clay tablet around 2750 BCE, remains illustrative o — the principles o — suretyship. In that agreement, a — armer was dra — ted into the king’s army and had to leave his
arm. A second — armer agreed to manage the — irst — armer’s land in exchange — or hal —
the pro
its. A local merchant promised to ensure that the second — armer — ul — illed this obligation. I — the second — armer — ailed, the merchant guaranteed to pay the — irst
armer his share o — the pro — its. This arrangement involved three roles central to sure- tyship: an obligor (the second — armer), an obligee (the — irst — armer), and a surety (the merchant). The basic structure o — suretyship has remained remarkably consistent over nearly 5,000 years. Today, a similar arrangement occurs when a parent co-signs a child’s lease. A landlord might be unwilling to rent to a young person without a credit his- tory. To address this concern, the parent promises to pay the landlord i — the child — ails to pay rent. This promise ensures that the landlord will receive the rent. Under the statute o —
rauds, a suretyship promise is unen — orceable unless evidenced by a writing signed by the surety. The Restatement (Second) o — Contracts — rames this requirement negatively: 10 • The Statute o — Frauds 267
A contract is not within the Statute o --- Frauds as a contract to answer --- or the
duty o --- another unless the promisee is an obligee o --- the other’s duty, the promi-
sor is a surety --- or the other, and the promisee knows or has reason to know o ---
the suretyship relation. R2d § 112. This writing requirement serves two purposes. First, it provides a cautionary --- unc- tion by ensuring that the surety care --- ully considers the obligations they are under- taking be --- ore --- ormalizing their promise. Second, it serves an evidentiary --- unction by requiring a higher burden o --- proo --- to establish that a promise o --- suretyship was genuinely made. These sa --- eguards are particularly important because suretyship is o --- ten a gratuitous promise, lacking the consideration present in most other contrac- tual obligations.
- Marriage Marriage is a commonly misunderstood topic under the statute o —
rauds. While many cultures, such as those — ollowing Jewish law, use — ormal contracts like a ketubah to document a marriage, such agreements — ormalize the marriage itsel — . These are distinct — rom contracts upon consideration o — marriage, which — all within the statute o —
rauds. The marriage provision does not concern marriage contracts or mutual promises to marry. Instead, it applies to contracts where marriage or a promise to marry is exchanged — or something else: A promise — or which all or part o — the consideration is either marriage or a promise to marry is within the Statute o — Frauds, except in the case o — an agreement which consists only o — mutual promises o — two persons to marry each other. R2d § 124. For example, suppose Joe proposes to Anita, but Anita hesitates because she is concerned about leaving her ailing — ather without care. Joe promises Anita that i — she marries him, he will hire a live-in nurse — or her — ather. In this case, Joe’s promise is within the statute o —
rauds because marriage is being exchanged as consideration — or his promise. Similarly, prenuptial agreements (prenups), in which spouses agree to trans — er property or structure their assets in a certain way in consideration o — marriage, are typically within the statute o —
rauds and require a writing. Dowries, in which a parent gives another parent assets in consideration o — their children’s marriage, are typically within the statute o —
rauds and require a writing. By contrast, i — Joe and Anita simply promise to marry each other, this agree- ment is not within the statute o —
rauds. Although mutual promises to marry were included in the original English statute, American courts excluded them early on as inconsistent with the statutory purpose. Many modern statutes explicitly exclude such promises. 268 10 • The Statute o — Frauds
Figure 10.1. A stylized Jewish marriage contract, or ketubah.
Note that such a marriage contract, which recognizes a union, is
distinct --- rom a contract made upon consideration o --- marriage,
which creates a duty upon consummation o --- marriage.
- Land Land has always held a special place in society, historically serving as a primary source o — wealth, power, and security. Its unique characteristics — immovability, irre- placeability, and o — ten subjective value — have made land transactions particularly important and prone to disputes. The English statute o —
rauds, enacted in 1677, rec- ognized this importance and sought to prevent — raud by requiring that contracts — or the trans — er o — land be evidenced by a signed writing. This principle continues to guide modern statutes o —
rauds, re — lecting the enduring signi — icance o — land and the need
or care — ul legal sa — eguards in its trans — er. The land provision o — the statute o —
rauds is a — oundational element in most mod- ern American jurisdictions as well. It requires that any contract involving the trans — er 10 • The Statute o — Frauds 269
o
an interest in land be evidenced by a writing signed by the party to be charged. R2d summarizes this requirement: A promise to trans — er to any person any interest in land is within the Statute o — Frauds. R2d § 125(1). This rule is straight — orward in the context o — real estate sales. However, it becomes more complex when applied to leases. Most states except short-term leases and con- tracts to lease — rom the statute o —
rauds’s land and one-year provisions. R2d provides the general principle: Statutes in most states except — rom the land contract and one-year provisions o — the Statute o — Frauds short-term leases and contracts to lease, usually — or a term not longer than one year. R2d § 125(4). While the Restatement suggests a general rule o — exempting leases — or one year or less, variations exist among jurisdictions. For example, Pennsylvania requires a writ- ing only — or leases exceeding three years. This means that oral leases — or three years or less are en — orceable in Pennsylvania, aligning with the original English statute o —
rauds, which also excluded leases “not exceeding the term o — three years — rom the making thereo — .” Other states, however, strictly adhere to the one-year threshold pro- posed in the Restatement and require leases longer than one year to be evidenced by a signed writing. Some jurisdictions also impose additional — ormalities beyond the basic statute o —
rauds requirements. For instance, states may mandate notarization or recording o —
leases above a certain duration to protect third parties or provide public notice. These requirements ensure that longer-term lease agreements are properly documented and reduce the likelihood o — disputes over their terms. Given these variations, it is important to check the speci — ic language o — the appli- cable jurisdiction’s statute o —
rauds to determine what constitutes a short-term lease that is excepted — rom the writing requirement. Even i — a lease does not — all within the land provision o — the statute, it may still — all under the one-year provision i —
per
ormance cannot be completed within a year. This interplay between provisions underscores the importance o — understanding both the statutory language and its practical implications.
- Year The one-year provision o — the statute o —
rauds applies only to contracts that cannot possibly be per — ormed within one year o — their — ormation: Where any promise in a contract cannot be — ully per — ormed within a year
rom the time the contract is made, all promises in the contract are within the Statute o — Frauds until one party to the contract completes his per — ormance. R2d § 130(1). 270 10 • The Statute o — Frauds
For example, i
Sally contracts with AT&T — or 18 months o — cellular service at $40 per month, this agreement is within the one-year provision. Per — ormance o — the contract — providing 18 months o — service — cannot possibly be completed within one year. There — ore, a signed writing is required to make the contract en — orceable. The one-year provision — ocuses on theoretical impossibility, not on what actu- ally happens or what the parties expect. For instance, i — Allstate promises to insure Brian’s house against — ire — or — ive years in exchange — or weekly premiums, the contract is not within the one-year provision. This is because the house could theoretically burn down at any time, even within the — irst year. I — it burns down a — ter a month and Allstate promptly pays the claim, the contract would be — ully per — ormed in less than a year. Since this outcome is possible, the contract is not subject to the statute o —
rauds. Similarly, traditional doctrine holds that contracts — or li — etime obligations — such as li — etime employment or — ree beer — or li — e — are not subject to the one-year provision because the person could die within a year. However, some jurisdictions now treat these agreements di —
erently, reasoning that they should be included within the one- year provision regardless o — the possibility o — death. The key to the one-year provision is that contracts o — uncertain duration are excluded unless their per — ormance cannot possibly be completed within one year. Another important exception to the one-year rule involves — ull per — ormance by one party: When one party to a contract has completed his per — ormance, the one-year provision o — the Statute does not prevent en — orcement o — the promises o — other parties. R2d § 130(2). For example, i — Farmer Fred promises to deliver three shipments o — peaches to Gro- cer Georgia in six months, one year, and eighteen months, the contract initially — alls within the Statute o — Frauds because Fred cannot per — orm all his obligations within a year. However, i — Georgia pays Fred in — ull at the time the contract is made, her com- plete per — ormance removes the contract — rom the one-year provision, thus making a signed writing unnecessary to en — orce Fred’s promises under the statute. This exception ensures that — ully per — ormed agreements are not invalidated by technicalities, thereby preserving — airness and reducing the potential — or unjust out- comes. Together, these principles illustrate how the one-year provision balances pre- dictability with — lexibility in contract en — orcement.
- Goods The UCC governs contracts — or the sale o — goods and introduces a specialized stat- ute o —
rauds. Unlike other statute o —
rauds provisions, UCC § 2-201 — ocuses on prac- tical and commercial realities that re — lect the unique nature o — goods transactions. It establishes a — ew basic principles. 10 • The Statute o — Frauds 271
First, any contract
or the sale o — goods priced at $500 or more must generally be evidenced by a signed writing. NH UCC § 2-201(1) mirrors the typical language: Except as otherwise provided in this section, a contract — or the sale o — goods
or the price o — $500 or more is not en — orceable . . . unless there is some writ- ing su —
icient to indicate that a contract — or sale has been made between the parties and signed by the party against whom en — orcement is sought or by his authorized agent or broker.
Second, merchants are subject to a unique exception to the signed writing require- ment. Under the “merchant’s con — irmatory memo exception,” i — both parties are mer- chants, and one merchant sends a con — irmation o — a contract to another merchant, the con — irmation satis — ies the statute o —
rauds unless the receiving party objects within ten days. This exception re — lects commercial practices where — ormal contracts are o — ten absent at the outset o — per — ormance. For example, diamond merchants — requently ship valuable stones to prospective buyers without a — ormal contract. I — the buyer retains the stone, the seller — ollows up with a con — irmation memorandum that outlines the terms o — the sale. This memoran- dum satis — ies the statute o —
rauds against the sender, as it demonstrates their intent to
orm a contract. As NH UCC § 2-201(2) explains:
Between merchants i --- . . . a writing in con --- irmation o --- the contract . . . is
received and the party receiving it has reason to know its contents, it satis --- ies
the requirements . . . unless written notice o --- objection . . . is given within
10 days.
Third, UCC § 2-201(3) identi
ies three additional exceptions that apply to both merchants and non-merchants:
1. Special Manu --- acture Exception: A contract is en --- orceable i --- the goods are
specially manu --- actured --- or the buyer, cannot be resold in the seller’s ordi-
nary course o --- business, and the seller has begun production or procurement
be --- ore receiving notice o --- repudiation. This exception recognizes that the act
o --- beginning to manu --- acture unique goods is strong evidence o --- a contractual
relationship.
2. Party Admission Exception: A contract is en --- orceable i --- the party against
whom en --- orcement is sought admits in court that a contract was --- ormed,
though en --- orcement is limited to the quantity admitted. This ensures that
ormalities do not override clear evidence o — a contract’s existence. 3. Goods Accepted Exception: A contract is en — orceable — or goods that have been delivered and accepted or — or which payment has been made and accepted. When parties have acted on their agreement, their conduct pro- vides compelling evidence o — the contract. 272 10 • The Statute o — Frauds
These exceptions re
lect the UCC’s pragmatic approach, prioritizing evidence o —
contract
ormation over strict adherence to — ormalities. They illustrate how the statute o —
rauds — or goods accommodates the realities o — modern commerce while maintain- ing sa — eguards against — raud. Here, when a party accepts and pays — or goods, that is evidence that the party wanted the bene — it o — that bargain.
B. Satis
action o — the Statute o — Frauds Once it is determined that a contract — alls within the statute o —
rauds, the next step is to assess whether there is a writing that satis — ies the statute. I — no such writing exists, the contract is generally unen — orceable unless an exception applies in law or equity. The analysis o — statute o —
rauds issues can be approached in various ways. One e —
ective method is to proceed in three steps: (1) determine whether the transaction
alls within the statute o —
rauds, (2) assess whether there is a writing that satis — ies the statute, and, i — not, (3) consider whether any exceptions apply. This order ensures that both legal and equitable arguments are properly addressed. This method o — analysis re — lects the statute’s dual — ocus on technical precision and justice. Focusing on whether there is a su —
icient writing be — ore exploring whether any exceptions apply is advantageous — or several reasons. The requirement — or a writ- ten memorandum and its su —
iciency is based on legal principles grounded in tech- nical, logical reasoning. This contrasts with equitable exceptions, which courts apply to avoid injustice in speci — ic circumstances. By analyzing su —
iciency — irst, the argument remains anchored in clear legal standards, potentially resolving the issue without the need to invoke exceptions. This approach aligns with the stat- ute’s purpose o — promoting certainty and reducing reliance on subjective equitable considerations. Additionally, many real-world contracts are evidenced by writings, even i — in — or- mal or incomplete. Determining su —
iciency early can simpli — y the analysis, particu- larly in cases where jurisdictional di —
erences complicate the threshold question o —
whether the statute o
rauds applies. I — a writing su —
icient to satis — y the statute exists, no — urther inquiry is necessary. The contract is en — orceable on its terms. However, the — acts o — a case or exam-prompt may dictate a di — — erent approach. For instance, i — the prompt explicitly states that no written agreement exists, it is likely a signal to — ocus on exceptions. Conversely, i — the — acts indicate that a writing exists but its signature is unclear, that issue should take precedence. This — lexibility ensures the analysis is tailored to the speci — ic scenario while preserving the rigor o —
legal reasoning. It is also important to remember that satis — ying the statute o —
rauds does not require a — ormal written contract. The statute requires only a memorandum that meets certain legal criteria. As the — ollowing sections will show, these criteria are less 10 • The Statute o — Frauds 273
demanding than one might expect. Understanding these requisites is key to analyzing whether a contract can be en — orced under the statute o —
rauds.
- Memorandum Our earlier discussion established when a signed writing is required to en — orce a contract. Generally, contracts in one o — six categories — represented by the acronym MYLEGS — require a signed writing under the statute o —
rauds. The Restatement (Second) identi — ies two common law exceptions, one that applies generally and one speci — ic to land sales. The UCC adds — our exceptions applicable to the sale o — goods. Once it is determined that a contract requires a signed writing, the next question is whether a su —
icient writing exists to satis — y the statute o —
rauds. The R2d explains the requirements o — a memorandum — which it clearly distinguishes — rom the contact itsel — : Unless additional requirements are prescribed by the particular statute, a con- tract within the Statute o — Frauds is en — orceable i — it is evidenced by any writ- ing, signed by or on behal — o — the party to be charged, which (a) reasonably identi — ies the subject matter o — the contract, (b) is su —
icient to indicate that a contract with respect thereto has been made between the parties or o —
ered by the signer to the other party, and (c) states with reasonable certainty the essential terms o — the unper — ormed promises in the contract. R2d § 131. In simpler terms, a su —
icient memorandum must: 1. Identi — y the subject matter, 2. Indicate that a contract exists, 3. Include the essential terms, and 4. Be signed by the party denying the contract. In addition to memorizing these elements, consider recalling them based on their purpose: ensuring reliable evidence o — a contract’s existence and terms. The primary goal o — the statute o —
rauds is to prevent en — orcement o — contracts through — raud or perjury. It achieves this by requiring evidence that makes — raudu- lent claims unlikely. A su —
icient memorandum need not include all the terms o — the agreement. Instead, it must provide enough in — ormation to establish that the parties intended to enter into a binding contract and what they agreed upon. Notably, the memorandum does not have to be a — ormal contract. Courts have
ound that a wide range o — writings can satis — y the statute o —
rauds, including in — or- mal letters, receipts, notations on checks, diary entries, and even pleadings — iled in court cases. Delivery o — the memorandum to the other party is not required, nor must it have been created with the intent o — serving as evidence o — the contract. For example, a private ledger entry by one party can su —
ice, as long as it meets the statu- tory requirements. 274 10 • The Statute o — Frauds
- Several Writings Contracts are o — ten evidenced by multiple writings, even — or simple transactions. For example, a buyer might make an o —
er to purchase an item in one document, and the seller might respond in a separate document, o —
ering to sell the same item at a higher price. The seller’s reply may not include all the details o — the buyer’s o —
er, but the writ- ings together can provide a complete picture o — the agreement. Complex agreements, such as corporate mergers, o — ten involve multiple documents as a matter o — course. R2d § 132 explicitly allows separate writings to be combined to satis — y the statute o —
rauds, provided they clearly relate to the same transaction:
The memorandum may consist o --- several writings i --- one o --- the writings is
signed and the writings in the circumstances clearly indicate that they relate
to the same transaction. R2d § 132.
I --- multiple documents are signed by the party to be charged, they can be read together even i --- they make no explicit re --- erence to one another. Courts determine whether these writings constitute a su ---
icient memorandum as though they were incorporated into a single document. A su —
icient connection between the writings is established i — they re — er to the same subject matter or transaction. Suppose Taylor, a prospective buyer, corresponds with Alex, a property owner, about purchasing Alex’s property at 123 Main Street. Imagine that Taylor physically mails Alex a letter that reads, “I’m o —
ering to buy your property at 123 Main Street — or $500,000. Closing to occur within 60 days.” In the same envelope, Taylor includes a signed check, made out to Alex, with a memo line stating, “Earnest money deposit — or purchase o — 123 Main Street.” Alex cashes the check and, one month later, asks Taylor to schedule the closing. Taylor re — uses to honor the deal and demands his money back. Is there a memorandum su —
icient — or en — orcement against Taylor? Taylor’s letter outlines key terms o — the proposed contract. However, the letter is unsigned. Under the statute o —
rauds, a writing must be signed by the party to be charged — in this case, Taylor — to be en — orceable. Without Taylor’s signature, the letter alone does not meet the statute’s requirements, even though it contains essential terms. Taylor’s check is signed and re — erences the property, but it lacks other essential terms o — the contract, such as the purchase price o — $500,000, the timing — or the clos- ing, and an explicit indication that a binding contract has been — ormed. While the check provides evidence o — Taylor’s intent to proceed with a transaction involving the property, it does not include enough detail to stand alone as a su —
icient memorandum under the statute o —
rauds. When read together, however, the letter and the check create a complete memo- randum satis — ying the statute o —
rauds. Collectively, they include the parties, subject matter, price, and other essential terms. Common law allows multiple writings to be combined to satis — y the statute o —
rauds i — they clearly relate to the same transaction. In this case, the letter and the check were sent in the same envelope, which indicates 10 • The Statute o — Frauds 275
a strong connection between the two documents. Together, they
orm a su —
icient memorandum, en — orceable against Taylor. The memorandum required by the statute o —
rauds may be assembled — rom sepa- rate writings — some signed and some unsigned — as long as they clearly re — er to the same transaction. This — lexibility re — lects the practical realities o — contract — ormation and ensures that technicalities do not invalidate agreements where su —
icient evidence exists.
- Signature The statute o —
rauds requires a signed writing — or certain classes o — contracts, but what constitutes a signature? Many assume this means a traditional pen-and-ink sig- nature — one’s “John Hancock.” However, according to R2d, the legal de — inition o — a signature is — ar broader: The signature to a memorandum may be any symbol made or adopted with an intention, actual or apparent, to authenticate the writing as that o — the signer. R2d § 134. For a writing to satis — y the statute o —
rauds, it must include a signature by the party to be charged. However, “signed” does not require a traditional handwritten name. Any mark or symbol intended to authenticate the document can su —
ice. This includes initials, thumbprints, or even arbitrary symbols. The signature may be made in ink, pencil, or even stamped or impressed into the paper. Copies made with carbon paper, photocopiers, or similar methods also quali — y as signed writings as long as they re — lect the intent o — the signer. The rise o — electronic commerce has — urther expanded the concept o — a signature. Most states have adopted the Uni — orm Electronic Transactions Act (UETA), which de — ines an electronic signature as “an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.” Similarly, the — ederal Electronic Signatures in Global and National Commerce Act (ESIGN), enacted in 2000, ensures the validity o — electronic signatures in interstate commerce. Under ESIGN, a contract or signature “may not be denied legal e —
ect, validity, or en — orceability solely because it is in electronic — orm.” In other words, electronic signatures are treated as equivalent to their paper counterparts. This means that clicking “I agree” on a digital contract, typing one’s name at the end o — an email, or using an electronic signing tool like DocuSign can constitute a legally binding signature. Both UETA and ESIGN act as overlay statutes, addressing gaps le — t by the common law and ensuring that modern methods o — communication and agreement are legally recognized. These statutes replace traditional paper-based requirements with elec- tronic records and signatures, allowing contracts to adapt to technological advance- ments while maintaining en — orceability under the Statute o — Frauds. 276 10 • The Statute o — Frauds
-
Loss or Destruction o
a Memorandum The statute o —
rauds requires the creation o — a signed writing to make certain classes o — contracts en — orceable. However, it does not require that the original signed writ- ing be preserved or presented to the court. This distinction arises — rom the statute’s purpose: it is not a rule o — evidence but a substantive rule o — contract law designed to ensure that su —
icient evidence o — the agreement exists at the time o —
ormation. Under common law: The loss or destruction o — a memorandum does not deprive it o — e —
ect under the Statute. R2d § 137. This means that even i — the original memorandum is lost or destroyed, the agree- ment may still be en — orceable. Courts permit proo — o — the memorandum’s existence and contents through alternative — orms o — evidence, such as: • An unsigned copy o — the memorandum. • Testimony — rom witnesses who saw or were — amiliar with the memorandum. • Other corroborative evidence indicating the agreement’s existence and terms. The rationale — or this rule is rooted in the statute’s primary purpose: to prevent
raud by requiring that certain agreements be documented. Once a memorandum has been created and satis — ies the statute’s requirements, its loss or destruction does not undermine the — act that evidence o — the contract once existed. Denying en — orcement in such cases would elevate — orm over substance, creating an unjust result — or the party seeking en — orcement. This rule also re — lects the balance courts strike between en — orcing contracts and preventing — raud. By allowing oral or secondary evidence to establish the existence and terms o — a lost or destroyed memorandum, courts ensure that the statute o —
rauds remains a sa — eguard against — raud rather than a tool to escape valid agreements. Consider this practical scenario: Brad and Ursula enter into a written agreement
or the sale o — a painting — or $50,000. Ursula signs the agreement, but the original document is accidentally destroyed in a — ire at Brad’s o —
ice. Later, Ursula disputes the agreement, arguing that without the original signed writing, the contract cannot be en — orced under the statute o —
rauds. Brad, however, produces an unsigned photocopy o — the agreement and o —
ers testi- mony — rom his assistant, who witnessed Ursula signing the original document. Under R2d § 137, the photocopy and oral testimony can together serve as su —
icient evi- dence o — the memorandum’s existence and terms, satis — ying the statute o —
rauds even though the original signed writing is no longer available. This example highlights the practical — lexibility in how courts interpret the statute o —
rauds. While the statute requires the creation o — evidence at the time o — contract
ormation, it does not demand that the original document be preserved or presented at trial. Allowing alternative — orms o — proo — — such as copies or oral testimony — ensures 10 • The Statute o — Frauds 277
that a legitimate contract is not invalidated simply because the evidence was destroyed by accident.
C. Exceptions to the Statute o
Frauds Scholars criticize the statute o —
rauds — or creating as many problems as it solves. While it aims to prevent — raudulent claims by requiring certain contracts to be evi- denced by a signed writing, it can also lead to unjust results by rendering genuine agreements unen — orceable simply because they — ail to meet — ormal requirements. To address this tension, courts and legislatures have developed exceptions to the statute o —
rauds. These exceptions ensure that the statute does not undermine its — un- damental purpose: achieving — airness and preventing — raud. While the statute creates
ormal barriers to en — orcement, these exceptions allow courts to consider alternative evidence or equitable principles in certain situations where en — orcement is necessary to avoid injustice. At common law, courts have applied the doctrine o — promissory estoppel as a gen- eral equitable exception to the statute o —
rauds. This doctrine allows courts to en — orce certain promises, even without a signed writing, where one party reasonably relied on the promise to their detriment. Promissory estoppel can apply to any class o — con- tracts subject to the statute o —
rauds under common law. In addition, the common law developed a more speci — ic exception — or contracts involving the sale o — land: the part per — ormance exception. This exception permits en — orcement o — oral agreements — or the trans — er o — land when one party has partially per — ormed their obligations under the contract in a way that unequivocally points to the existence o — the agreement. While part per — ormance applies only to land con- tracts, it re — lects a broader judicial e —
ort to balance the statute’s — ormal requirements with equitable considerations. The Uni — orm Commercial Code (UCC) introduces its own set o — exceptions to the statute o —
rauds, speci — ic to contracts — or the sale o — goods priced at $500 or more. These — our exceptions recognize the unique realities o — commercial transactions and aim to prevent technicalities — rom invalidating legitimate agreements. Below we examine these exceptions in detail and consider how they preserve the statute’s integrity while addressing its limitations.
- Promissory Estoppel The doctrine o — promissory estoppel should be — amiliar — rom earlier discussions o —
alternatives to consideration. While consideration is a core requirement
or contract
ormation, courts have recognized certain equitable exceptions where promises made without consideration are still en — orceable. Promissory estoppel, or detrimental reli- ance, is one such exception. It arises when one party takes or re — rains — rom action to their detriment in reasonable reliance on a promise. 278 10 • The Statute o — Frauds
Promissory estoppel also serves as an exception to the statute o
rauds. In these cases, the detrimental reliance o — the promisee becomes evidence o — the promise itsel — , allowing en — orcement even without a signed writing. As R2d explains: A promise which the promisor should reasonably expect to induce action or
orbearance on the part o — the promisee or a third person and which does induce the action or — orbearance is en — orceable notwithstanding the Statute o — Frauds i — injustice can be avoided only by en — orcement o — the promise. The remedy granted — or breach is to be limited as justice requires. R2d § 139(1). I — you compare this to R2d § 90, you will see R2d applies virtually the same stan- dard to justi — y en — orcement o — contracts that would otherwise be unen — orceable — or want o — consideration or want o — a signed writing. To determine whether en — orcement is necessary to avoid injustice, R2d would consider several — actors, including: 1. The availability and adequacy o — other remedies, such as cancellation or restitution. 2. The de — inite and substantial character o — the reliance in relation to the remedy sought. 3. The extent to which the reliance corroborates the evidence o — the promise. 4. The reasonableness o — the reliance. 5. The — oreseeability o — the reliance by the promisor. See R2d § 139(2). R2d was a bit ambitious in dra — ting this rule, as it takes a minority position. Most states do not yet recognize a broad promissory estoppel exception to the writing requirement. Rather, most states still — ollow the narrower exception — ound in the Restatement (First) o — Contracts. The — irst Restatement included a much more limited reliance-based exception to the statute o —
rauds, which applied only where the party detrimentally relied on a promise that a writing existed or would be created. While R2d § 139 takes an expansive view, many jurisdictions still — ollow the narrower posi- tion o — the — irst Restatement. This narrower approach demonstrates ongoing caution against eroding the statute’s — ormal requirements. Nonetheless, it is important to learn the R2d’s expansive approach. As you learned in Chapter 8 on promissory estoppel, application o — this doctrine is highly — act-speci — ic and re — lects the equitable nature o — the doctrine. Two cases illustrate how courts diverge in applying this doctrine. In McIntosh v. Murphy, 52 Haw. 29, 469 P.2d 177 (1970), below, an employer in Hawaii alleg- edly promised a man in Cali — ornia a year o — employment i — he moved to Hawaii. The court — ound that the employee’s signi — icant reliance — moving states and incurring substantial costs — justi — ied en — orcing the promise despite the lack o — a signed writ- ing. However, a dissenting opinion warned that overusing promissory estoppel could undermine the statute o —
rauds entirely by making equitable exceptions indistin- guishable — rom general contract en — orcement. 10 • The Statute o — Frauds 279
By contrast, in Stearns v. Emery-Waterhouse, 596 A.2d 72 (1991), an employee alleged he had been promised long-term employment i --- he relocated --- rom Boston to Portland, Maine. The court unanimously rejected the claim, --- inding that the employ- ee’s reliance — relatively minor costs associated with a short move — was insu ---
iciently substantial to warrant en — orcement. These contrasting cases show how courts weigh the — actors in § 139(2) di —
erently depending on the — acts, particularly the extent and reasonableness o — the reliance. Promissory estoppel highlights the tension between the statute o —
rauds’s — ormal requirements and the need to en — orce genuine agreements to avoid injustice. While it provides a vital sa — ety valve — or un — air cases, courts remain cautious in applying this doctrine, to avoid eroding the statute’s purpose. As you study these cases, — ocus on how courts balance these competing considerations and whether justice can truly be achieved without undermining the statute’s broader goals.
-
Part Per
ormance o — Land Transactions The promissory estoppel exception to the statute o —
rauds, discussed in the pre- vious section, potentially applies to all classes o — MYLEGS contracts. In contrast, the so-called “part-per — ormance” exception to the statute o —
rauds is narrower in scope. It applies only to contracts involving the trans — er o — interests in land. The part- per — ormance exception, despite its name, is another reliance-based exception through which courts may order speci — ic per — ormance o — a land transaction to prevent injus- tice caused by detrimental reliance on an oral promise. Land is a distinct type o — property — real property — that is subject to special rules and doctrines not applicable to personal property or intellectual property. The part- per — ormance exception acknowledges the importance and permanence o — land trans- actions and provides a limited exception to the statute o —
rauds — or cases where one party has acted in reliance on an oral agreement. According to R2d § 129: A contract — or the trans — er o — an interest in land may be speci — ically en — orced notwithstanding — ailure to comply with the Statute o — Frauds i — it is established that the party seeking en — orcement, in reasonable reliance on the contract and on the continuing assent o — the party against whom en — orcement is sought, has so changed his position that injustice can be avoided only by speci — ic en — orce- ment. R2d § 129. The usual — act pattern goes like this: a party who orally agreed to purchase an inter- est in land takes signi — icant actions in reliance on the oral agreement even though there was no writing evidencing the transaction. The seller raises the statute o —
rauds. The purchaser argues the part-per — ormance exception applies, due to their actions in reliance on the promise to sell them the land. Courts may en — orce such oral agreements — or the trans — er o — land, but only i — the party seeking en — orcement has taken actions in reliance that unequivocally point to the existence o — the agreement. Courts generally hold that — or the part-per — ormance 280 10 • The Statute o — Frauds
exception to apply, this oral promise must be evidenced by two or more o
the — ollow- ing: taking possession o — land, making a — ull or partial payment, and making improve- ments to the land. Thus, the doctrine o — part per — ormance is not a blanket exception. Courts exercise this equitable power cautiously to ensure that its application does not undermine the statute o —
rauds’ purpose: preventing — raudulent claims and ensuring reliable evi- dence o — agreements. For example, consider the — ollowing scenario: Sarah orally agrees to sell Blackacre, a parcel o — land, to Betty — or $200,000. With Sarah’s consent, Betty moves onto the prop- erty, pays $50,000 o — the purchase price, and builds a house on the land. Two years later, a dispute arises over the remaining balance, and Sarah repudiates the agreement, re — using to trans — er title. Betty seeks speci — ic per — ormance o — the oral contract. Here, Betty’s actions — taking possession, making a partial payment, and building a house — constitute part per — ormance. These actions unequivocally indicate reliance on the agreement and are inconsistent with any explanation other than the existence o — a contract. A court would likely — ind that en — orcing the contract through speci — ic per — ormance is necessary to avoid injustice. In contrast, i — all Betty did was make a down payment, without more, a court would not en — orce this contract absent a writ- ing signed by the seller. The court would simply order the seller to give the down payment back.
-
UCC Exceptions
or Goods Transactions Article 2 o — the Uni — orm Commercial Code contains a statute o —
rauds provision that applies to contracts — or the sale o — goods valued at $500 or more — regardless o —
whether those sales contracts involve merchants. UCC § 2-201 contains the UCC’s unique version o — the statute o —
rauds and provides several exceptions tailored to the realities o — commercial practice. These exceptions re — lect the UCC’s — ocus on — lexibility and e —
iciency in commer- cial transactions and are a signi — icant departure — rom the common law. Under the common law, the statute o —
rauds applies rigidly, o — ten without regard to the par- ties’ sophistication or the nature o — the transaction. In contrast, the UCC’s exceptions re — lect its goal o — accommodating the practical realities o — commerce.
a. “Merchant’s Con --- irmatory Memo” Exception The UCC provides a special exception to the statute o ---
rauds — or transactions between merchants. This exception recognizes that merchants operate in a world o —
ast-paced transactions where — ormalities like signed writings are o — ten impractical. Under the “merchant’s con — irmatory memo” exception, i — one merchant sends another merchant a signed con — irmation o — their agreement, this con — irmatory memo can satis — y the statute o —
rauds against the receiving merchant so long as the memo 10 • The Statute o — Frauds 281
satis
ies the Statute o — Frauds as against the sending merchant and so long as the receiving merchant does not object within ten days. Read this provision closely and apply the elements with precision. Between merchants i — within a reasonable time a writing in con — irmation o —
the contract and su ---
icient against the sender is received and the party receiv- ing it has reason to know its contents, it satis — ies the requirements o — subsection (1) against such party unless written notice o — objection to its contents is given within 10 days a — ter it is received. NH UCC § 2-201(2). This merchant-speci — ic exception to the statute o —
rauds is an example a so-called “big-boy” clause that applies only to merchants. As you saw when you learned about merchants’ — irm o —
ers, the UCC de — ines “merchants” as individuals or entities who deal pro — essionally in goods o — the kind in question or who hold out as having rel- evant skill or knowledge. See UCC § 2-104. The UCC identi — ies this merchant class, to whom special rules apply, in recognition o — the — act that there are varying levels o —
sophistication among contracting parties. The UCC assumes merchants can
end — or themselves to a greater extent than ordinary people can. What is a con — irmatory memo? A simple email or letter acknowledging the agree- ment and outlining its key terms — such as the nature and quantity o — goods and the agreed price — can su —
ice as a con — irmation. As long as the recipient has reason to know the contents o — the con — irmation and does not object within ten days, the writing satis — ies the statute o —
rauds even i — the recipient did not sign or even acknowledge it. In sum, i — you see a situation where both parties are merchants and they have entered an oral contract — or the sale o — goods valued at $500 or more, consider whether the merchant’s con — irmatory memo exception applies. I — both parties quali — y as mer- chants, a con — irmation sent by one merchant to the other can satis — y the statute o —
rauds even i — the recipient has not signed anything. Unlike the — irm-o —
er rule, both parties must be merchants.
b. “Special Manu --- acture” Exception The statute o ---
rauds, which aims to reduce disputes by requiring reliable evidence o — agreements, generally requires a signed writing — or the en — orcement o — certain con- tracts. However, the UCC recognizes that a signed writing is not the only possible evidence o — a contract. In some cases, actions speak louder than words. Speci — ically, when a seller begins or completes the production o — goods that are uniquely designed
or a particular buyer, the court may in — er that a contract exists based on the goods themselves. A contract which does not satis — y the requirements o — subsection (1) but which is valid in other respects is en — orceable i — the goods are to be specially manu — ac- tured — or the buyer and are not suitable — or sale to others in the ordinary course o — the seller’s business and the seller, be — ore notice o — repudiation is received and under circumstances which reasonably indicate that the goods are — or the 282 10 • The Statute o — Frauds
buyer, has made either a substantial beginning o --- their manu --- acture or com-
mitments --- or their procurement. NH UCC § 2-201(3)(a).
This “special manu --- acture” exception re --- lects the rationale o --- res ipsa loquitur — the thing speaks --- or itsel --- . When a seller produces goods with unusual or distinctive char- acteristics that make them unsuitable --- or sale to anyone but the intended buyer, those goods provide compelling evidence o --- the contract. The law recognizes that sellers are unlikely to invest in creating goods they cannot resell unless they have a --- irm order in place.
The key question in determining whether goods are specially manu --- actured is whether they can be sold in the ordinary course o --- the seller’s business to someone other than the original buyer. I --- minor alterations would make the goods marketable to others, they are not considered specially manu --- actured. I --- , however, substantial changes would be necessary to sell the goods, or i --- they are entirely unsuitable --- or resale, the exception applies.
For example, in Company Image Knitware, Ltd. v. Mothers Work, Inc., 2006 PA Super 272 (2006), the court examined whether maternity garments produced by CIK were specially manu --- actured --- or Mothers Work. The garments were made to exact- ing speci --- ications: the --- abric had to meet strict standards o --- content, texture, and processing, the --- indings (trim, buttons, etc.) had to match the --- abric colors precisely, and the sizes were tailored to --- it American women. These characteristics rendered the garments unsuitable --- or resale in the ordinary course o --- CIK’s business. The court concluded that the goods were specially manu --- actured and there --- ore --- ell within the UCC exception. The policy underlying this exception is straight --- orward: the cost o --- mistakenly producing specialty goods is higher than that o --- manu --- acturing standard goods. Spe- cialty goods are harder to sell on the open market because they are tailored to meet the unique needs o --- a speci --- ic buyer. For instance, a monogrammed leather notebook with someone else’s initials is likely less valuable than a plain leather notebook, as most buyers would pre --- er the latter. Similarly, a specialty item made --- or a particular customer will typically have limited value to other buyers, increasing the seller’s error cost i --- the agreement is repudiated. Importantly, the special manu --- acture exception does not depend on whether pro- ducing specialty goods is part o --- the seller’s usual business. Instead, the --- ocus is on the unique characteristics o --- the goods in question and whether they are unsuitable --- or sale to others. Even a seller who occasionally produces specialty goods may invoke this exception i --- the goods in question are truly tailored to the buyer’s speci --- ications.
Courts applying this exception emphasize the need --- or clear evidence that the goods were uniquely created --- or the buyer and that their production or procurement was substantially underway be --- ore repudiation. By recognizing the special manu --- ac- ture exception, the UCC balances its goal o --- reducing --- raud with the practical realities o --- commercial transactions and thus ensures that sellers who act in good --- aith are not le --- t uncompensated --- or their e ---
orts. 10 • The Statute o — Frauds 283
c. “Party-Admission” Exception Under the UCC, a party who admits in court that a contract --- or the sale o --- goods exists is estopped --- rom asserting that the contract is unen --- orceable due to the lack o ---
a signed writing. This exception re
lects the UCC’s emphasis on practicality and the goal o — preventing parties — rom using the statute o —
rauds as a shield to avoid legiti- mate obligations.
A contract which does not satis --- y the requirements o --- subsection (1) but which
is valid in other respects is en --- orceable i --- the party against whom en --- orce-
ment is sought admits in his pleading, testimony, or otherwise in court that
a contract --- or sale was made, but the contract is not en --- orceable under this
provision beyond the quantity o --- goods admitted. NH UCC § 2-201(3)(b).
This provision ensures that when a party acknowledges the existence o --- a con- tract under oath, the evidentiary purpose o --- the statute o ---
rauds is satis — ied. Such an admission eliminates the risk o —
raud or perjury regarding the existence o — the agreement, as the party against whom en — orcement is sought has e —
ectively con-
irmed the contract’s validity. However, the en — orceability o — the contract is limited to the quantity o — goods admitted, preserving some sa — eguards against potential overreach.
Contentious Issue:
Involuntary Admissions
While the party-admission exception to the statute o ---
rauds might seem straight — orward, it can be contentious when admissions are involuntary. For example, imagine a seller is being grilled by an opposing lawyer during a deposition about whether the seller entered a multi-million dol- lar oral contract with a buyer — or the sale o — goods. A — ter hours in the deposition room, the seller admits to agreeing on the price and terms o —
an oral sale.
Is this a party admission --- or purposes o --- UCC § 2-201? Can the buyer
use this involuntary admission to get around the statute o ---
rauds and en — orce the contract against the seller? Courts are divided. Under the majority view, involuntary admissions satis — y the statute o —
rauds. These courts prioritize evidentiary reliability and reason that party admissions, even when made under cross-examination, should prevent parties — rom backing out o — legitimate obligations. Under the minority view, involuntary admissions do not satis — y the statute o —
rauds. These courts place a greater value on the need — or — ormal compliance with the writing requirement, and they — ear that undue pressure during court 284 10 • The Statute o — Frauds
proceedings can lead to “ --- alse positives,” undermining the statute’s pur-
pose o --- validating contracts through --- ormal writings.
This split highlights the UCC’s pragmatic --- ocus on preventing --- raud
versus the traditional emphasis on --- ormal agreements. It also serves as
a reminder to always consider jurisdictional di ---
erences and look up the speci — ic approach in your jurisdiction.
d. “Goods-or-Payment-Accepted” Exception The statute o ---
rauds intends to prevent — raud by requiring a signed writing to evidence agreements. In theory, this writing provides clear proo — o — what the parties agreed to do, reducing disputes about the existence or terms o — a contract. However, the UCC recognizes that actions can sometimes serve as reliable evidence o — an agree- ment, particularly in the context o — goods transactions. The “goods-or-payment-accepted” exception under the UCC allows en — orcement o — an oral contract — or the sale o — goods when one party per — orms their side o — the agreement and the other side accepts the bene — its. This tends to show the parties’ mutual assent to the agreement, even i — they never put it into writing. Speci — ically:
A contract which does not satis --- y the requirements o --- subsection (1) but which
is valid in other respects is en --- orceable with respect to goods --- or which pay-
ment has been made and accepted or which have been received and accepted
(Sec. 2-606). NH UCC § 2-201(3)(c).
This exception is based on the principle that actions speak louder than words. I --- a seller accepts payment --- or goods, this acceptance evidences the seller’s intent to sell those goods --- or the agreed-upon price. Similarly, i --- a buyer accepts delivery o --- goods, this acceptance demonstrates the buyer’s intent to purchase those goods. In either case, the conduct o --- the party serves as evidence o --- the contract, thus making a signed writing unnecessary. The goods-or-payment-accepted exception is limited to the goods that have been paid --- or or delivered. It does not apply to goods that remain undelivered or unpaid. For example, i --- a seller delivers one thousand reams o --- paper, and the buyer accepts and pays --- or those one thousand reams, the seller cannot later deliver nine thousand additional reams and claim there was a contract --- or the sale o --- ten thousand reams. The exception applies only to the speci --- ic goods --- or which per --- ormance has occurred. Similarly, this exception is su ---
icient to en — orce a contract only to the extent o — the per — ormance. I — a buyer pays — or hal — the goods in an alleged contract, the seller may en — orce the contract — or that hal — but cannot demand payment or delivery — or the remaining goods based solely on the per — ormance exception. 10 • The Statute o — Frauds 285
D. Re
lections on the Statute o — Frauds The statute o —
rauds serves as a study in the balance between — ormalism and equity. By requiring certain contracts to be evidenced by a signed writing, it aims to prevent
raud and ensure reliable evidence o — agreements. Yet, as this chapter has shown, the statute also provides numerous exceptions and — lexible standards to address the reali- ties o — contractual relationships. At its heart, the statute o —
rauds highlights a core tension in contract law: the need
or — ormal sa — eguards versus the need to honor legitimate agreements. Common law and UCC exceptions re — lect this balance. While equitable doctrines like promissory estoppel address — airness broadly, targeted exceptions such as part-per — ormance — or land and the UCC’s tailored rules — or goods transactions demonstrate the law’s adapt- ability to speci — ic contexts. Understanding these doctrines enables practitioners to navigate disputes with both technical precision and a sense o — justice. The statute o —
rauds is not just a technical hurdle but a reminder o — contract law’s dual role: to provide clarity while accom- modating human and commercial realities. As commerce continues to evolve, the principles underlying this doctrine will remain a vital part o — contract law’s enduring relevance.
Cases Reading McIntosh v. Murphy. The statute o ---
rauds was established — or three purposes: (1) cautioning parties against entering into serious agreements, (2) evidencing those agreements so they can be properly en — orced by courts, and (3) channeling certain types o — agreements into certain — orms and modes that are easier to adjudicate. The statute o —
rauds is meant as a de — ensive shield or bulwark against people — raudulently claiming that there is a serious agree- ment where none actually exists. However, the statute o —
rauds itsel — can create the opportunity — or — raud. For example, where one party promises to put an agreement in writing, that party may — ail to do so to ensure the contract is later unen — orceable. The law has created an exception to this instance, such that where a party promises to memorialize a contract in writing, the other party can evidence reliance on that promise that justi — ies an exemption to the statute o —
rauds. A more general exception to the statute o —
rauds comes — rom reliance on the promise. Even where a party does not rely speci — ically on the other’s promise to memorialize a contract in writing, the aggrieved party can still attempt to en — orce that contract on the basis o — reasonable reliance. The McIntosh case illustrates a situation where one party relied on the oral promise o — another. The 286 10 • The Statute o — Frauds
court must
irst establish whether a contract — alls within the statute o —
rauds. I — it — inds that it does, the court must then go on to determine whether an equitable exception applies. Read on to learn how courts will apply R2d § 139 to determine whether equity requires en — orcement o — contracts that are not evidenced in writing. McIntosh v. Murphy provides a use — ul review o — the statute o —
rauds, includ- ing its purpose, be — ore discussing the promissory estoppel exception to the statute o —
rauds. The dissent is included because it shows how such a — act- speci — ic inquiry can come out di —
erently. Moreover, the dissent reminds us that applying equitable exceptions can eviscerate the purpose o — the statute o —
rauds, and so they must be applied care — ully and in — requently.
McIntosh v. Murphy
52 Haw. 29, 469 P.2d 177 (1970) LEVINSON, Justice. This case involves an oral employment contract which allegedly violates the provi- sion o --- the Statute o --- Frauds requiring “any agreement that is not to be per --- ormed within one year --- rom the making thereo --- ” to be in writing in order to be en --- orceable. In this action the plainti ---
-employee Dick McIntosh seeks to recover damages — rom his employer, George Murphy and Murphy Motors, Ltd., — or the breach o — an alleged one-year oral employment contract. While the — acts are in sharp con — lict, it appears that de — endant George Murphy was in southern Cali — ornia during March, 1964 interviewing prospective management personnel — or his Chevrolet-Oldsmobile dealerships in Hawaii. He interviewed the plainti —
twice during that time. The position o — sales manager — or one o — the dealer- ships was — ully discussed but no contract was entered into. In April, 1964 the plainti —
received a call
rom the general manager o — Murphy Motors in — orming him o — pos sible employment within thirty days i — he was still available. The plainti —
indicated his continued interest and in — ormed the manager that he would be available. Later in April, the plainti —
sent Murphy a telegram to the e —
ect that he would arrive in Honolulu on Sunday, April 26, 1964. Murphy then telephoned McIntosh on Saturday, April 25, 1964 to noti — y him that the job o — assistant sales manager was available and work would begin on the — ollowing Monday, April 27, 1964. At that time McIntosh expressed surprise at the change in job title — rom sales manager to assistant sales man ager but recon — irmed the — act that he was arriving in Honolulu the next day, Sunday. McIntosh arrived on Sunday, April 26 1964 and began work on the — ollowing day, Monday, April 27, 1964. As a consequence o — his decision to work — or Murphy, McIntosh moved some o —
his belongings
rom the mainland to Hawaii, sold possessions, leased an apartment in Honolulu and obviously — orwent any other employment opportunities. In short, the 10 • The Statute o — Frauds 287
plainti
did all those things which were incidental to changing one’s residence perma- nently — rom Los Angeles to Honolulu, which is approximately 2200 miles. McIntosh continued working — or Murphy until July 16, 1964, approximately two and one-hal —
months, at which time he was discharged on the grounds that he was unable to close deals with prospective customers and could not train the salesmen. At the conclusion o — the trial, the de — ense moved — or a directed verdict arguing that the oral employment agreement was in violation o — the Statute o — Frauds, there being no written memorandum or note thereo — . The trial court ruled that as a matter o — law the contract did not come within the Statute, reasoning that Murphy bargained — or acceptance by the actual commencement o — per — ormance by McIntosh, so that McIn- tosh was not bound by a contract until he came to work on Monday, April 27, 1964. There — ore, assuming that the contract was — or a year’s employment, it was per — ormable within a year exactly to the day and no writing was required — or it to be en — orceable. Alternatively, the court ruled that i — the agreement was made — inal by the telephone call between the parties on Saturday, April 25, 1964, then that part o — the weekend which remained would not be counted in calculating the year, thus taking the contract out o — the Statute o — Frauds. With commendable candor the trial judge gave as the motivating — orce — or the decision his desire to avoid a mechanical and unjust applica- tion o — the Statute. The case went to the jury on the — ollowing questions: (1) whether the contract was
or a year’s duration or was per — ormable on a trial basis, thus making it terminable at the will o — either party; (2) whether the plainti —
was discharged — or just cause; and (3) i — he was not discharged — or just cause, what damages were due the plainti —
. The jury returned a verdict — or the plainti —
in the sum o — $12,103.40. The de — endants appeal to this court on — our principal grounds, three o — which we — ind to be without merit. The remaining ground o — appeal is whether the plainti —
can maintain an action on the alleged oral employment contract in light o — the prohibition o — the Statute o — Frauds making unen — orceable an oral contract that is not to be per — ormed within one year.
I. Time o --- Acceptance o --- the Employment Agreement The de --- endants contend that the trial court erred in re --- using to give an instruction to the jury that i --- the employment agreement was made more than one day be --- ore the plainti ---
began per — ormance, there could be no recovery by the plainti —
. The reason given was that a contract not to be per — ormed within one year — rom its making is unen — orceable i — not in writing. The de — endants are correct in their argument that the time o — acceptance o — an o —
er is a question o —
act — or the jury to decide. But the trial court alternatively decided that even i — the o —
er was accepted on the Saturday prior to the commencement o —
per
ormance, the intervening Sunday and part o — Saturday would not be counted in computing the year — or the purposes o — the Statute o — Frauds. The judge stated that Sunday was a non-working day and only a — raction o — Saturday was le — t which he would not count. In any event, there is no need to discuss the relative merits o — either ruling since we base our decision in this case on the doctrine o — equitable estoppel 288 10 • The Statute o — Frauds
which was properly brie
ed and argued by both parties be — ore this court, although not presented to the trial court. II. En — orcement by Virtue o — Action in Reliance on the Oral Contract In determining whether a rule o — law can be — ashioned and applied to a situa- tion where an oral contract admittedly violates a strict interpretation o — the Statute o — Frauds, it is necessary to review the Statute itsel — together with its historical and modern — unctions. The Statute o — Frauds, which requires that certain contracts be in writing in order to be legally en — orceable, had its inception in the days o — Charles II o —
England. Hawaii’s version o
the Statute is — ound in HRS § 656-1 and is substantially the same as the original English Statute o — Frauds. The — irst English Statute was enacted almost 300 years ago to prevent “many — raud- ulent practices, which are commonly endeavored to be upheld by perjury and sub- ornation o — perjury”. Certainly, there were compelling reasons in those days — or such a law. At the time o — enactment in England, the jury system was quite unreliable, rules o — evidence were — ew, and the complaining party was disquali — ied as a witness so he could neither testi — y on direct-examination nor, more importantly, be cross- examined. The a — orementioned structural and evidentiary limitations on our system o — justice no longer exist. Retention o — the Statute today has nevertheless been justi — ied on at least three grounds: (1) the Statute still serves an evidentiary — unction thereby lessening the dan- ger o — perjured testimony (the original rationale); (2) the requirement o — a writing has a cautionary e —
ect which causes re — lection by the parties on the importance o —
the agreement; and (3) the writing is an easy way to distinguish en
orceable contracts
rom those which are not, thus channeling certain transactions into written — orm. In spite o — whatever utility the Statute o — Frauds may still have, its applicability has been drastically limited by judicial construction over the years in order to mitigate the harshness o — a mechanical application. Furthermore, learned writers continue to disparage the Statute regarding it as “a statute — or promoting — raud” and a “legal anachronism.” Another method o — judicial circumvention o — the Statute o — Frauds has grown out o — the exercise o — the equity powers o — the courts. Such judicially imposed limitations or exceptions involved the traditional dispensing power o — the equity courts to miti- gate the “harsh” rule o — law. When courts have en — orced an oral contract despite the Statute, they have utilized the legal labels o — “part per — ormance” or “equitable estop- pel” in granting relie — . Both doctrines are said to be based on the concept o — estoppel, which operates to avoid unconscionable injury. Part per — ormance has long been recognized in Hawaii as an equitable doctrine jus- ti — ying the en — orcement o — an oral agreement — or the conveyance o — an interest in land where there has been substantial reliance by the party seeking to en — orce the contract. Other courts have en — orced oral contracts (including employment contracts) which 10 • The Statute o — Frauds 289
ailed to satis — y the section o — the Statute making unen — orceable an agreement not to be per — ormed within a year o — its making. This has occurred where the conduct o — the parties gave rise to an estoppel to assert the Statute. It is appropriate — or modern courts to cast aside the raiments o — conceptualism which cloak the true policies underlying the reasoning behind the many decisions en — orcing contracts that violate the Statute o — Frauds. There is certainly no need to resort to legal rubrics or meticulous legal — ormulas when better explanations are avail- able. The policy behind en — orcing an oral agreement which violated the Statute o —
Frauds, as a policy o
avoiding unconscionable injury, was well set out by the Cali — or- nia Supreme Court. In Monarco v. Logreco, a case which involved an action to en — orce an oral contract — or the conveyance o — land on the grounds o — 20 years per — ormance by the promisee, the court said: The doctrine o — estoppel to assert the Statute o — Frauds has been consistently applied by the courts o — this state to prevent — raud that would result — rom re — usal to en — orce oral contracts in certain circumstances. Such — raud may inhere in the unconscionable injury that would result — rom denying en — orce- ment o — the contract a — ter one party has been induced by the other seriously to change his position in reliance on the contract. In seeking to — rame a workable test which is — lexible enough to cover diverse — actual situations and provide some reviewable standards, we — ind very persuasive section 139 o — the Second Restatement o — Contracts. That section speci — ically covers those situa- tions where there has been reliance on an oral contract which — alls within the Statute o — Frauds. Section 139 states: (1) A promise which the promisor should reasonably expect to induce action or — orbearance on the part o — the promisee or a third person and which does induce the action or — orbearance is en — orceable notwithstanding the Statute o — Frauds i — injustice can be avoided only by en — orcement o — the promise. The remedy granted — or breach is to be limited as justice requires. (2) In determining whether injustice can be avoided only by en — orcement o —
the promise, the --- ollowing circumstances are signi --- icant: (a) the availability
and adequacy o --- other remedies, particularly cancellation and restitution;
(b) the de --- inite and substantial character o --- the action or --- orbearance in rela-
tion to the remedy sought; (c) the extent to which the action or --- orbearance
corroborates evidence o --- the making and terms o --- the promise, or the making
and terms are otherwise established by clear and convincing evidence; (d) the
reasonableness o --- the action or --- orbearance; (e) the extent to which the action
or --- orbearance was --- oreseeable by the promisor. We think that the approach taken in the Restatement is the proper method o ---
giving the trial court the necessary latitude to relieve a party o
the hardships o — the Statute o — Frauds. Other courts have used similar approaches in dealing with oral employment contracts upon which an employee had seriously relied. This is to be 290 10 • The Statute o — Frauds
pre
erred over having the trial court bend over backwards to take the contract out o —
the Statute o
Frauds. In the present case the trial court admitted just this inclination and — orthrightly — ollowed it. There is no dispute that the action o — the plainti —
in moving 2200 miles — rom Los Angeles to Hawaii was — oreseeable by the de — endant. In — act, it was required to per-
orm his duties. Injustice can only be avoided by the en — orcement o — the contract and the granting o — money damages. No other remedy is adequate. The plainti —
ound himsel — residing in Hawaii without a job. It is also clear that a contract o — some kind did exist. The plainti —
per — ormed the contract — or two and one-hal — months receiving $3,484.60 — or his services. The exact length o — the contract, whether terminable at will as urged by the de — endant, or — or a year — rom the time when the plainti —
started working, was up to the jury to decide. In sum, the trial court might have — ound that en — orcement o — the contract was war- ranted by virtue o — the plainti —
’s reliance on the de — endant’s promise. Naturally, each case turns on its own — acts. Certainly, there is considerable discretion — or a court to implement the true policy behind the Statute o — Frauds, which is to prevent — raud or any other type o — unconscionable injury. We there — ore a —
irm the judgment o — the trial court on the ground that the plainti —
’s reliance was such that injustice could only be avoided by en — orcement o — the contract. A —
irmed.
Dissent ABE, J., dissenting The majority o --- the court has a ---
irmed the judgment o — the trial court; however, I respect — ully dissent.
I. Whether alleged contract o --- employment came within the Statute o --- Frauds: As acknowledged by this court, the trial judge erred when as a matter o --- law he ruled that the alleged employment contract did not come within the Statute o --- Frauds; however, I cannot agree that this error was not prejudicial as this court intimates. On this issue, the date that the alleged contract was entered into was all impor tant and the date o --- acceptance o --- an o ---
er by the plainti —
was a question o —
act — or the jury to decide. In other words, it was — or the jury to determine when the alleged one-year employment contract was entered into and i — the jury had — ound that the plainti —
had accepted the o —
er more than one day be — ore plainti —
was to report to work, the contract would have come within the Statute o — Frauds and would have been unen — orceable.
II. This court holds that though the alleged one-year employment contract came within the Statute o --- Frauds, nevertheless the judgment o --- the trial court is a ---
irmed 10 • The Statute o — Frauds 291
“on the ground that the plainti
’s reliance was such that injustice could only be avoided by en — orcement o — the contract.” I believe this court is begging the issue by its holding because to reach that conclu- sion, this court is ruling that the de — endant agreed to hire the plainti —
under a one- year employment contract. The de — endant has denied that the plainti —
was hired — or a period o — one year and has introduced into evidence testimony o — witnesses that all hiring by the de — endant in the past has been on a trial basis. The de — endant also testi-
ied that he had hired the plainti —
on a trial basis. Here on one hand the plainti —
claimed that he had a one-year employment con- tract; on the other hand, the de — endant claimed that the plainti —
had not been hired
or one year but on a trial basis — or so long as his services were satis — actory. I believe the Statute o — Frauds was enacted to avoid the consequences this court is — orcing upon the de — endant. In my opinion, the legislature enacted the Statute o — Frauds to negate claims such as has been made by the plainti —
in this case. But this court holds that because the plainti —
in reliance o — the one-year employment contract (alleged to have been entered into by the plainti —
but denied by the de — endant) has changed his position, “injustice could only be avoided by en — orcement o — the contract.” Where is the sense o — justice? Now assuming that the de — endant had agreed to hire the plainti —
under a one-year employment contract and the contract came within the Statute o — Frauds, I cannot agree, as intimated by this court, that we should circumvent the Statute o — Frauds by the exercise o — the equity powers o — courts. As to statutory law, the sole — unction o —
the judiciary is to interpret the statute and the judiciary should not usurp legislative power and enter into the legislative — ield. Thus, i — the Statute o — Frauds is too harsh as intimated by this court, and it brings about undue hardship, it is — or the legislature to amend or repeal the statute and not — or this court to legislate.
Re --- lection McIntosh involved a man who moved --- rom Cali --- ornia to Hawaii to take a job. He sold many o --- his possessions to make this long-distance transition. The court seems to make much about the 2,200-mile move. This implies that the case could have come out di ---
erently i — the move was only 200 or 20 miles. But this raises the question: how
ar a move is — ar enough to constitute substantial reliance? The court also seems to gloss over the — act that most terms o — employment are at will. Is it reasonable to expect that a sales job will last — or a year, regardless o — per — ormance on the job? There is not much discussion about McIntosh’s job per — ormance. Should his work quality matter? Perhaps the answers to these questions are — ound by evaluating the procedural pos- ture. The Supreme Court decision you read — ollows a jury verdict. Courts are reluctant to set aside jury verdicts, especially on matters o —
act. Whether or not McIntosh substantially and reasonably relied on the promise o — employment is very much a 292 10 • The Statute o — Frauds
act-speci — ic question. The court even says that “each case turns on its own — acts.” Perhaps the Hawaii Supreme Court’s de — erence to the jury — inding implies that the court presumed the jury — ound McIntosh’s reliance was substantial and that he was not — ired — or cause. Although the McIntosh court suggests that employment agreements will be treated
avorably toward the employee-plainti —
, there are cases where the employee does not merit the equitable exception to the statute o —
rauds. For example, in Stearns v. Emery-Waterhouse, which was also about an employment o —
er that resulted in a long-distance move, the court’s decision was precisely the opposite o — McIntosh. In Stearns, the court held that the employer was not bound to the oral agreement — or the term contract — even though the employee made a relatively long move to Portland, Maine, and su —
ered detrimental reliance costs. Echoing the reasoning o — the dissent in McIntosh, the Stearns court unanimously rejected the employee’s claim, conclud- ing that “to en — orce a multi-year employment contract an employee must produce a writing that satis — ies the Statute o — Frauds[,]” or else provide some other reason to get around the writing requirement, such as “ — raud on the part o — the employer.” Once again, these cases supply a reminder to look up the law in your jurisdiction when dealing with essentially any common law issue.
Discussion 1. What is the purpose o --- the statute o ---
rauds? Discuss how the underlying purpose o — the statute was implicated in McIntosh and whether its purpose would be served by allowing the de — endant to avoid the contract.
-
The promissory estoppel exception to the statute o
rauds works similarly to the promissory estoppel exception to the requirement o — consideration. Compare R2d §§ 90 and 139. How are they similar? How are they di — — erent?
-
Was there any evidence o
potential injustice in this case? Look particularly at the dissent. Why would the dissent re — use to grant the promissory estoppel exception in this case? What injustice is that dissent trying to avoid?
Reading Sterling v. Taylor. The case below gives an example o
an insu —
icient memorandum. As you read Sterling, think about why the memorandum was not su —
icient. The case also provides a thorough review and discussion o — the general requisites o — a memorandum that will help you better understand how the rule stated above is applied by courts. 10 • The Statute o — Frauds 293
Sterling v. Taylor
40 Cal. 4th 757 (2007) CORRIGAN, J. The Statute o --- Frauds provides that certain contracts “are invalid, unless they, or some note or memorandum thereo --- , are in writing and subscribed by the party to be charged. . . . ” In this case, the Court o --- Appeal held that a memorandum regarding the sale o --- several apartment buildings was su ---
icient to satis — y the Statute o — Frauds. De — endants contend the court improperly considered extrinsic evidence to resolve uncertainties in the terms identi — ying the seller, the property, and the price. We reverse, but not because the court consulted extrinsic evidence. Extrinsic evi- dence has long been held admissible to clari — y the terms o — a memorandum — or pur- poses o — the Statute o — Frauds. Statements to the contrary appear in some cases, but we disapprove them. A memorandum serves only an evidentiary — unction under the statute. I — the writing includes the essential terms o — the parties’ agreement, there is no bar to the admission o — relevant extrinsic evidence to explain or clari — y those terms. The memorandum, viewed in light o — the evidence, must be su —
icient to demonstrate with reasonable certainty the terms to which the parties agreed to be bound. Here, plainti —
s attempt to en — orce a price term that lacks the certainty required by the Stat- ute o — Frauds. I. Factual and Procedural Background In January 2000, de — endant Lawrence Taylor and plainti —
Donald Sterling discussed the sale o — three apartment buildings in Santa Monica owned by the Santa Monica Collection partnership (SMC). De — endant was a general partner in SMC. Plainti —
and de
endant, both experienced real estate investors, met on March 13, 2000, and discussed a series o — transactions including the purchase o — the SMC properties. At this meeting, plainti —
dra — ted a handwritten memorandum entitled “Contract — or Sale o — Real Property.” The memorandum encompasses the sale o —
ive properties; only the SMC prop- erties are involved here. They are identi — ied in the memorandum as “808 4th St.,” “843 4th St.,” and “1251 14th St.,” with an aggregate price term o — “approx. 10.468 × gross income[,] estimated income 1.600.000, Price $16,750.00.” Although de — endant had given plainti —
rent rolls showing the income — rom the properties, neither man brought these documents to the March 13 meeting. Plainti —
dated and initialed the memorandum as “Buyer,” but the line he provided — or “Seller” was le — t blank. Plainti —
contends the omission was inadvertent. De
endant, however, asserts he did not sign the document because he needed approval — rom a majority o — SMC’s limited partners. On March 15, 2000, plainti —
wrote to de — endant, re — erring to the properties by street address only, and stating “[t]his letter will con — irm our contract o — sale o — the above buildings.” The letter discussed deposits plainti —
had given to de — endant and noted “our agreement that the depreciation allocation and tax bene — its will be given to me no later than April 1, 2000, since I now have equitable tittle [sic].” Price terms 294 10 • The Statute o — Frauds
were not mentioned. Both parties signed the letter, de
endant beneath the handwrit- ten notation “Agreed, Accepted, & Approved.” Plainti —
claims the March 13 memorandum was attached to the March 15 letter, which de — endant annotated and signed in his presence. De — endant insists nothing was attached to the March 15 letter, which he did not sign until March 30. Accord- ing to de — endant, his signature re — lected only an accommodation to acknowledge the deposits he had received — rom plainti —
. On April 4, 2000, de — endant sent plainti —
three — ormal purchase agreements with escrow instructions, identi — ying the properties by their legal descriptions. SMC was named as the seller and the Sterling Family Trust as the buyer. The price terms totaled $16,750,000. De — endant signed the agreements as a general partner o — SMC. Plainti —
re
used to sign. De — endant claims plainti —
telephoned on April 28, saying the pur- chase price was unacceptable. Plainti —
asserts that a — ter reviewing the rent rolls, he determined the actual rental income — rom the SMC buildings was $1,375,404, not $1,600,000 as estimated on the March 13 memorandum. Plainti —
claims he tried to have de — endant correct the escrow instructions, but de — endant did not return his calls. Plainti —
wanted to lower the price to $14,404,841, based on the actual rental income — igure and the 10.468 multiplier noted in the memorandum. Plainti —
did not ask — or the $16,750.00 purchase price stated in the memoran- dum. He admits that he “accidentally le — t o —
one zero” when he wrote down that
igure. De — endant also acknowledges that the price recorded on the memorandum was meant to be $16,750,000. De — endant returned plainti —
’s uncashed deposit checks on May 23. The parties conducted — urther negotiations in December 2000 and January 2001. De — endant pro- vided additional rent rolls, but no agreement was reached. In March 2001, the trustees o — the Sterling Family Trust sued Taylor, SMC, and related entities, alleging breach o — a written contract to sell the properties — or a total price o — $14,404,841. The March 13 memorandum and the March 15 letter were attached to the complaint as the “Purchase Agreement.” The complaint included causes o — action — or breach o — the implied covenant o — good — aith and — air dealing, speci — ic per — ormance, declaratory relie — , an accounting, intentional misrepresenta tion, and imposition o — a constructive trust. De — endants sought summary judgment, claiming that no contract was — ormed, the alleged contract violated the Statute o — Frauds, and plainti —
s could not prove
raud. De — endants contended the memorandum and letter did not satis — y the statute because they established no agreement on price, — ailed to su —
iciently identi — y either the contracting parties or the properties, and were not signed by Taylor and Christina Development. The trial court granted summary judgment. It ruled that the price term was too uncertain to be en — orced and the writings did not comply with the Statute o — Frauds. The court also concluded that the undisputed — acts disclosed neither a 10 • The Statute o — Frauds 295
raudulent intent on de — endant’s part nor damages to plainti —
, thus — oreclosing the misrepresentation claim. The Court o — Appeal reversed as to the contract causes o — action but remanded — or entry o — summary adjudication in de — endants’ — avor on the — raud claim. The court held that Taylor’s name and signature on the writings submitted by plainti —
s satis-
ied the Statute o — Frauds. It also deemed the identi — ication o — the properties by street address su —
icient, in light o — extrinsic evidence speci — ying the city and state. Likewise, the court held that the price terms in the March 13 memorandum, while ambigu- ous, could be clari — ied by examining extrinsic evidence. It concluded that de — endants’ evidence raised a triable issue as to whether the parties had agreed on a — ormula — or determining the purchase price. The court — urther ruled that the — raud claim — ailed because plainti —
s could not prove damages. Only the contract claims are at issue in this appeal. II. Discussion De — endants contend the Court o — Appeal improperly considered extrinsic evidence to establish essential contract terms. They insist the Statute o — Frauds requires a mem- orandum that, standing alone, supplies all material elements o — the contract. Plainti —
s, on the other hand, argue that extrinsic evidence is routinely admitted — or the purpose o — determining whether memoranda comply with the Statute o — Frauds. Both sides o — this debate — ind support in Cali — ornia case law, sometimes in the same opinion. Part A o — our discussion explains that plainti —
s’ view is correct. The Statute o — Frauds does not preclude the admission o — evidence in any — orm; it imposes a writing requirement, but not a comprehensive one. In part B, however, we conclude that de — endants are nevertheless entitled to judgment. The Court o — Appeal properly considered the parties’ extrinsic evidence, but erroneously deemed it legally su —
icient under the Statute o — Frauds to establish the price sought by plainti —
s. A. The Memorandum Requirement o — the Statute o — Frauds The Statute o — Frauds does not require a written contract; a “note or memorandum . . . subscribed by the party to be charged” is adequate. We [in a prior case] observed that “[a] written memorandum is not identical with a written contract; it is merely evi- dence o — it and usually does not contain all o — the terms.” Indeed, in most instances it is not even necessary that the parties intended the memorandum to serve a contractual purpose. A memorandum satis — ies the Statute o — Frauds i — it identi — ies the subject o — the parties’ agreement, shows that they made a contract, and states the essential contract terms with reasonable certainty. “Only the essential terms must be stated, ‘details or particulars’ need not [be]. What is essential depends on the agreement and its context and also on the subsequent conduct o — the parties.” This court recently observed that the writing requirement o — the Statute o — Frauds “ ‘serves only to prevent the contract — rom being unen — orceable’; it does not neces- sarily establish the terms o — the parties’ contract.” Unlike the parol evidence rule, 296 10 • The Statute o — Frauds
which “determines the en
orceable and incontrovertible terms o — an integrated writ- ten agreement,” the Statute o — Frauds “merely serve[s] an evidentiary purpose.” As the dra — ters o — the Second Restatement o — Contracts explained: “The primary purpose o — the Statute is evidentiary, to require reliable evidence o — the existence and terms o — the contract and to prevent en — orcement through — raud or perjury o — con- tracts never in — act made. The contents o — the writing must be such as to make suc- cess — ul — raud unlikely, but the possibility need not be excluded that some other subject matter or person than those intended will also — all within the words o — the writing. Where only an evidentiary purpose is served, the requirement o — a memorandum is read in the light o — the dispute which arises and the admissions o — the party to be charged; there is no need — or evidence on points not in dispute.” Thus, when ambiguous terms in a memorandum are disputed, extrinsic evidence is admissible to resolve the uncertainty. Extrinsic evidence can also support re — ormation o — a memorandum to correct a mistake. Because the memorandum itsel — must include the essential contractual terms, it is clear that extrinsic evidence cannot supply those required terms. It can, however, be used to explain essential terms that were understood by the parties but would other wise be unintelligible to others. Two early cases — rom this court demonstrate that a memorandum can satis — y the Statute o — Frauds, even i — its terms are too uncertain to be en — orceable when considered by themselves. In Preble v. Abrahams, a written agreement — or the sale o — land described the prop- erty to be sold as “ — orty acres o — the eighty-acre tract at Biggs.” The court observed: “An agreement not in writing — or the sale and purchase o — real estate is void. And the description o — the property in the written agreement is so entirely uncertain as to render the instrument inoperative and void, unless we can go beyond the — ace o — it to ascertain its meaning.” To give e —
ect to the agreement, the Preble court relied on extrinsic evidence that another buyer had purchased one 40-acre tract and the de — endant had agreed to pur- chase the remainder. “We think the evidence makes the subject-matter su —
iciently certain, and that is all that is necessary.” Pro — essor Pomeroy says: “It is not strictly accurate to say that the subject-matter must be absolutely certain — rom the writing itsel — , or by re — erence to some other writing. The true rule is, that the situation o —
the parties and the surrounding circumstances, when the contract was made, can be shown by parol evidence, so that the court may be placed in the position o — the parties themselves; and i — then the subject-matter is identi — ied, and the terms appear reason- ably certain, it is enough.” In Brewer v. Horst and Lachmund Co., a contract was memorialized by two telegrams employing a — orm o — shorthand notation so arcane that “[i] — there were nothing to look to but the telegrams, the court might — ind it di —
icult, i — not impossible, to determine the nature o — the contract, or that any contract was entered into between the parties.” The de — endant contended the telegrams were an insu —
icient “note or memorandum” to satis — y the Statute o — Frauds. 10 • The Statute o — Frauds 297
The Brewer court disagreed, stating: “[T]he court is permitted to interpret the memorandum (consisting o --- the two telegrams) by the light o --- all the circumstances under which it was made; and i --- , when the court is put into possession o --- all the knowledge which the parties to the transaction had at the time, it can be plainly seen
rom the memorandum who the parties to the contract were, what the subject o — the contract was, and what were its terms, then the court should not hesitate to hold the memorandum su —
icient. Oral evidence may be received to show in what sense — igures or abbreviations were used; and their meaning may be explained as it was understood between the parties.” Reading the telegrams “by the light o — the circumstances surrounding the parties,” the Brewer court concluded it was clear that they re — erred to a contract — or the pur- chase o — 296 bales o — hops on terms understood by the parties. The — acts o — Brewer were adapted by the dra — t ers o — the Restatements as an illustration o — a su —
icient mem- orandum — or purposes o — the Statute o — Frauds. Despite this venerable authority, con — licting statements appear in other Cali — ornia cases: The su —
iciency o — a writing to satis — y the Statute o — Frauds cannot be established by evidence which is extrinsic to the writing itsel — . The preeminent quali — ication o — a memorandum under the Statute o — Frauds is ‘that it must contain the essential terms o — the contract, expressed with such a degree o — certainty that it may be understood without recourse to parol evidence to show the intention o — the parties. The whole object o — the statute would be — rustrated i — any substantive portion o — the agreement could be established by parol evidence. Unless the writing, considered alone, expresses the essential terms with su —
icient certainty to constitute an en — orceable contract, it
ails to meet the demands o — the statute. De — endants rely on these and similar cases to argue that the Court o — Appeal improperly considered extrinsic evidence to determine the meaning o — essential but imper — ectly stated terms in the memorandum dra — ted by plainti —
Sterling. To clari — y the law on this point, we disapprove the statements in Cali — ornia cases barring consideration o — extrinsic evidence to determine the su —
iciency o — a memo- randum under the Statute o — Frauds. The purposes o — the statute are not served by such a rigid rule, which has never been a consistent — eature o — the common law. Corbin observes: “Judicial dicta abound to the e —
ect that the writing must contain all o — the “essential terms and conditions” o — the contract, and it is o — ten said that these must be so clear as to be understood “without any aid — rom parol testimony.” But the long course o — judicial decision shows that “essential terms and conditions” is itsel — a term o — considerable — lexibility and that the courts do not in — act blind themselves by excluding parol testimony when it is a necessary aid to understanding.” Some con — usion is attributable to a — ailure to keep clearly in mind the purpose o —
the statute and the in
ormal character o — the evidence that the actual words o — the statute require; some is no doubt due to di —
erences in the attitude o — the judges as to the bene — icence o — the statute and the wisdom o — its existence. Further, there are di —
er- ences in the strictness o — judicial requirements as to the contents o — the memorandum. 298 10 • The Statute o — Frauds
It is believed that sometimes these apparent di
erences can be explained by the degree o — doubt existing in the court’s mind as to the actual making and per — ormance o — the alleged contract. The better and the more disinterested is the oral testimony o —
ered by the plainti —
, the more convincing the corroboration that is — ound in the surrounding circumstances, and the more limited the disputed issue because o — admissions made by the de — endant, the less that should be and is required o — the written memorandum. Williston o —
ers similar counsel: “In determining the requisites and meaning o — a ‘note or memorandum in writing,’ courts o — ten look to the origin and — undamental purpose o — the Statute o — Frauds. In — act, a — ailure to do so will o — ten result in a — utile preoccupation with the numerous and con — licting precepts and decisions involving the clauses providing — or a note or memorandum, and a corresponding — ailure to see the — orest — or the trees.” The Statute o — Frauds was not enacted to a —
ord persons a means o — evading just obli- gations; nor was it intended to supply a cloak o — immunity to hedging litigants lacking integrity; nor was it adopted to enable de — endants to interpose the Statute as a bar to a contract — airly, and admittedly, made. In brie — , the Statute “was intended to guard against the perils o — perjury and error in the spoken word.” There — ore, i — a — ter a consideration o — the surrounding circumstances, the pertinent — acts and all the evidence in a partic ular case, the court concludes that en — orcement o — the agreement will not subject the de — endant to — raudulent claims, the purpose o — the Statute will best be served by hold- ing the note or memorandum su —
icient even though it is ambiguous or incomplete. The governing principle is: “That is certain which can be made certain.” We hold that i — a memorandum includes the essential terms o — the parties’ agreement, but the meaning o — those terms is unclear, the memorandum is su —
icient under the Statute o —
Frauds i
extrinsic evidence clari — ies the terms with reasonable certainty and the evi- dence as a whole demonstrates that the parties intended to be bound. Con — licts in the extrinsic evidence are — or the trier o —
act to resolve, but whether the evidence meets the standard o — reasonable certainty is a question o — law — or the court. We emphasize that a memorandum o — the parties’ agreement is controlling evi- dence under the Statute o — Frauds. Thus, extrinsic evidence cannot be employed to prove an agreement at odds with the terms o — the memorandum. This point was made in Beazell v. Schrader. There, the plainti —
sought to recover a 5 percent real estate bro- ker’s commission under an oral agreement. The escrow instructions, which speci — ied a 1.25 percent commission, were the “memorandum” on which the plainti —
relied to comply with the statute. However, he contended the instructions incorrectly re — lected the parties’ actual agreement, as shown by extrinsic evidence. The Beazell court rejected this argument, holding that under the Statute o — Frauds, “the parol agreement o — which the writing is a memorandum must be one whose terms are consistent with the terms o — the mem- orandum.” Thus, in determining whether extrinsic evidence provides the certainty required by the statute, courts must bear in mind that the evidence cannot contradict the terms o — the writing. 10 • The Statute o — Frauds 299
B. The Su ---
iciency o — This Memorandum As noted above, it is a question o — law whether a memorandum, considered in light o — the circumstances surrounding its making, complies with the Statute o — Frauds. Accordingly, the issue is generally amenable to resolution by summary judgment. We independently review the record to determine whether a triable issue o —
act might de — eat the Statute o — Frauds de — ense in this case. A memorandum o — a contract — or the sale o — real property must identi — y the buyer, the seller, the price, and the property. De — endants contend the memorandum dra — ted by plainti —
Sterling — ails to adequately speci — y the seller, the property, or the price. The Court o — Appeal correctly held that the seller and the properties were su —
i- ciently identi — ied. The parties themselves displayed no uncertainty as to those terms be — ore their dispute over the price arose. It is a “cardinal rule o — construction that when a contract is ambiguous or uncertain the practical construction placed upon it by the parties be — ore any controversy arises as to its meaning a —
ords one o — the most reliable means o — determining the intent o — the parties.” The same rule governs the interpretation o — a memorandum under the Statute o — Frauds. The memorandum re — erred to “Seller Larry Taylor, & Christina Development.” De — endants argue that the omission o — the actual owner o — the properties, SMC, is
atal. However, they do not dispute Taylor’s authorization to act as SMC’s agent, or his actual per — ormance o — that role. A contract made in the name o — an agent may be en — orced against an undisclosed principal, and extrinsic evidence is admissible to identi — y the principal. I — a term is stated in a memorandum with su —
icient certainty to be en — orced, it satis — ies the Statute o — Frauds. There — ore, the re — erence to Taylor was adequate, regardless o — the apparently mistaken inclusion o — Christina Development. Similarly, while the properties were identi — ied in the memorandum only by street address, neither party displayed any con — usion over their actual location. The pur- chase agreements Taylor prepared included — ull legal descriptions, and when Ster- ling received those agreements he did not object that he wanted to buy buildings on 4th and 14th Streets in Manhattan rather than Santa Monica. In any event, the better view has long been that extrinsic evidence may be consulted to locate property described in imprecise terms, even though a memorandum with a more complete description would be pre — erable. As de — endants — orthrightly conceded in the trial court, “[t]he problem here is the price term.” The Court o — Appeal concluded that the lines in the memorandum stat- ing “approx. 10.468 × gross income[,] estimated income 1.600.000, Price $16,750.00” were ambiguous, given the use o — the modi — ier “approx.” be — ore the multiplier, the omitted zero in the price, and the uncertain meaning o — “gross income.” The court then considered Sterling’s testimony that “approx.” was meant to modi — y the total price, not the multiplier; that the missing zero was merely an error; and that “gross income” was used by the parties to re — er to actual gross annual income. It decided that this evidence, i — accepted by the trier o —
act, could establish an agreement to determine the price based on a — ormula, which would be binding under Carver v. 300 10 • The Statute o — Frauds
Teitsworth. In Carver, a bid
or either a speci — ied price or $1,000 over any higher bid was deemed su —
iciently certain. In this court, plainti —
s also cite Cal. Lettuce Growers v. Union Sugar Co. to show that a price term may be calculated — rom a — ormula. There, a price — ormula was derived
rom industry custom and the parties’ past practice. Plainti —
s contend the parties here negotiated a 10.468 multiplier to be applied to the actual gross rental income — rom the buildings in March 2000, as indicated by the — act that Taylor gave Sterling rent rolls be — ore their March 13 meeting. The Court o — Appeal erred by deeming Sterling’s testimony su —
icient to establish his interpretation o — the memorandum — or purposes o — the Statute o — Frauds. Had Taylor testi — ied that the parties meant to leave the price open to determination based on a rental income — igure that was yet to be determined, this would be a di — — erent case. Then, the “admissions o — the party to be charged” might have supported a reasonably certain price term derived — rom a negotiated — ormula. Here, however, Taylor insists the price was meant to be $16,750,000, and Sterling agrees that was the number he intended to write down, underlined, as the “Price.” $16,750,000 is clearly an approximate product o — the — ormula speci — ied in the memorandum, applied to the income — igure stated there. On the other hand, Ster- ling’s asserted price o — $14,404,841 cannot reasonably be considered an approxima- tion o — $16,750,000. It is instead an approximate product o — the — ormula applied to an actual income — igure not — ound in the memorandum. The writing does not include the term “actual gross income,” nor does it state that the price term will vary depend- ing on proo — or later agreement regarding the actual rental income — rom the build- ings. In e —
ect, Sterling would employ only the — irst part o — the price term (“approx. 10.468 × gross income”) and ignore the last parts (“estimated income 1.600.000, Price $16,750.00”). He would hold Taylor to a price that is 10.468 times the actual rental income — igure gleaned — rom the rent rolls, but only “approximately” so because o —
Sterling’s computational errors. Thus, two competing interpretations o — the memorandum were be — ore the court. Taylor’s is consistent with the — igures provided in the memorandum, requiring only the correction o — the price by re — erence to undisputed extrinsic evidence. Sterling’s price is not stated in the memorandum, and depends on extrinsic evidence in the
orm o — his own testimony, disputed by Taylor, that the parties intended to apply the
ormula to actual gross rental income instead o — the estimated income noted in the memorandum. Even i — the trier o —
act were to accept Sterling’s version o — the parties’ negotiations, the price he seeks is not re — lected in the memorandum; indeed, it is inconsistent with the price term that appears in the memorandum. Under these cir- cumstances, we conclude the evidence is insu —
icient to establish Sterling’s price term with the reasonable certainty required by the Statute o — Frauds. The Statute o — Frauds demands written evidence that re — lects the parties’ mutual understanding o — the essential terms o — their agreement, when viewed in light o —
the transaction at issue and the dispute be
ore the court. The writing requirement is 10 • The Statute o — Frauds 301
intended to permit the en
orcement o — agreements actually reached, but “to prevent en — orcement through — raud or perjury o — contracts never in — act made.” The su —
i- ciency o — a memorandum to — ul — ill this purpose may depend on the quality o — the extrinsic evidence o —
ered to explain its terms. In Preble, the memorandum — ailed to describe the property to be sold with any certainty, but extrinsic evidence established that the parties could only have been re — erring to the portion o — a tract that was not sold to another buyer. Similarly, in Brewer, telegrams that were otherwise inscrutable demonstrated an ascertainable agreement when the court considered the circum- stances o — the transaction and the parties’ understanding o — the terms employed. Here, unlike in the Preble and Brewer cases, the extrinsic evidence o —
ered by plain- ti —
s is at odds with the writing, which states a speci — ic price and does not indicate that the parties contemplated any change based on actual rental income. There — ore, the evidence is insu —
icient to show with reasonable certainty that the parties understood and agreed to the price alleged by plainti —
s. The price terms stated in the memoran- dum, considered together with the extrinsic evidence o — the contemplated price, leave a degree o — doubt that the Statute o — Frauds does not tolerate. The trial court properly granted de — endants summary judgment.
III. Disposition The judgment o --- the Court o --- Appeal is reversed with directions to a ---
irm the trial court judgment in its entirety. KENNARD, J., Concurring and Dissenting. I agree with the majority that extrinsic evidence is admissible to resolve the mean- ing o — an ambiguity in a written memorandum required by the Statute o — Frauds as evidence o — an agreement, and that con — licts in the evidence are — or the trier o —
act to resolve. The majority, however, goes astray when it takes it upon itsel — to resolve an existing con — lict in the evidence. In my view, the ambiguity in the language o — the memorandum at issue should be resolved by the trier o —
act.
I. In January 2000, plainti ---
Donald Sterling and de — endant Lawrence N. Taylor, both o — whom are experienced real estate investors, discussed the proposed sale o — three apartment buildings in Santa Monica owned by a partnership in which de — endant was the general partner. On March 13, 2000, they met again. At the meeting, plainti —
(the prospective buyer) prepared a brie — handwritten memorandum entitled “Contract
or the Sale o — Real Property.” As relevant here, the memorandum identi — ied proper- ties at “808 4th St.,” “843 4th St.,” and “1251 14th St.” This is immediately — ollowed by “approx 10.468 × gross income [¶] estimated income 1.600.000, Price $ 16,750,000.” The memorandum was initialed by plainti —
, but was not signed by de — endant. Two days later, on March 15, 2000, plainti —
sent de — endant a letter that con — irmed the contract o — sale but did not mention the price. De — endant signed the letter below the handwritten notation, “Agreed, Accepted, & Approved.” The parties dispute whether the March 13 memorandum was attached to the March 15 letter. 302 10 • The Statute o — Frauds
The issue is whether the document entitled “Contract
or the Sale o — Real Property” is a memorandum su —
icient to satis — y the Statute o — Frauds. That statute provides that contracts — or, among other things, the sale o — real estate are invalid unless evi- denced by a note or memorandum signed by the party to be charged. Plainti —
here claims that the memorandum meets the requirements o — the Statute o — Frauds because extrinsic evidence he o —
ered clari — ies that the agreed price was $14,404,841 — deter- mined by applying the — ormula in the memorandum o — multiplying the actual rent times 10.468. Plainti —
’s extrinsic evidence includes the “Contract — or Sale o — Real Property,” the letter dated March 15, 2000, con — irming the buildings’ sale signed by de — endant, and de — endant’s having given plainti —
in — ormation showing the actual rent received. De — endant maintains that the price is the — igure $16,750,000 expressed in the memorandum. The trial court granted de — endant’s motion — or summary judgment. The Court o —
Appeal, concluding there was a triable issue o
material — act as to whether the parties had agreed to a — ormula — or determining the purchase price, reversed. II. The parties’ dispute here centers on whether the price description in the memo- randum is ambiguous so that extrinsic evidence is admissible to clari — y its meaning and satis — y the Statute o — Frauds. Regarding price the memorandum states: “approx. 10.468 × gross income [¶] estimated income 1.600.000, Price $16,750,000.” Plainti —
claims that the word “approx.” modi
ied the entire statement, not just “10.468 × gross income,” and that the parties understood the term “gross income” to mean actual annual gross rental income. In other words, plainti —
’s position is that the memo- randum sets — orth a — ormula — or determining the actual price — 10.468 multiplied by actual annual gross rental income, which results in a price o — $14,404,841 — and that the re — erence to “Price $16,750,000” is an estimate o — the actual price, determined by application o — the — ormula just mentioned, albeit using a somewhat inaccurate esti- mate o — gross annual rental income. De — endant disagrees, contending that the memo- randum’s mention o — “Price $16,750,000” re — lects the actual purchase price agreed upon by the parties. Both have a point. As the Court o — Appeal observed, the language in the memorandum is ambigu- ous; that is, it can reasonably be read as each party proposes. To accept plainti —
’s argument would give meaning to the language in the disputed statement o — “10.468 × gross income [¶] estimated 1.600.000.” To accept de — endant’s argument would give meaning to the term “Price $16,750,000.” Which view should be accepted is a deter- mination to be made by the trier o —
act, based on its consideration o — the extrinsic evidence presented. Either way, the trier o —
act’s resolution would result in a spe- ci — ic purchase price: one arrived at through application o — a — ormula expressed in the memorandum, the other through acceptance o — the — igure $16,750,000 mentioned in the memorandum. The majority, however, simply adopts de — endant’s view instead o — leaving it to the trier o —
act to resolve the con — lict in the evidence. In accepting de — endant’s view, the 10 • The Statute o — Frauds 303
majority rejects plainti
’s view as attempting to alter rather than explain the terms o —
the memorandum. I disagree. Apparently based on its own evaluation o — the evidence, which as discussed above is con — licting, the majority takes it upon itsel — to decide that the agreed price was $16,750,000 and then concludes that any extrinsic evidence presented by plainti —
would be inconsistent with that
igure. The majority reasons that plainti —
is looking only to the — irst part o — the memorandum’s price description o — “approx. 10.468 × gross income,” while ignoring the last part stating “estimated income 1.600.000, Price $16,750,000.” This is both a misapprehension o — plainti —
’s view and a — ailure to appre- ciate that de — endant’s view too is not — ree — rom ambiguity. Plainti —
’s position that the memorandum sets — orth a — ormula — or determining the price does not ignore the memorandum’s re — erence to “estimated income 1.600.000, Price $16,750,000.” According to plainti —
, the memorandum’s stated price is itsel —
an estimate,
or it is the product o — the estimated income o — 1.600.000 times 10.468, while the actual price is to be determined by using the — ormula 10.468 multiplied by the actual gross income, resulting in a price o — $14,404,841. De — endant’s view that the actual price is $16,750,000 — inds support in the memorandum’s mention o — “Price $16,750,000” but it ignores the memorandum’s — ormula that plainti —
relies on. Unlike the majority, I see no reason to reject plainti —
’s position as a matter o — law when the purchase terms in the memorandum are ambiguous and are as reasonably susceptible to plainti —
’s position as to de — endant’s. I would leave it to the trier o —
act to resolve the ambiguity. Unlike the majority, I would a —
irm the judgment o — the Court o — Appeal. WERDEGAR, J., concurred. Appellants’ petition — or a rehearing is denied April 18, 2007. GEORGE, C.J., did not participate therein. KENNARD, J., and WERDEGAR, J., were o — the opinion that the petition should be granted.
Re --- lection In Sterling, the parties disputed the purchase price, and the court --- ound that price to be ambiguous. Later, in the chapters on contract interpretation, you will learn that courts have tools known as the “canons o --- construction” to resolve ambiguities in a document. Courts may also take evidence such as parties’ and experts’ testimonies to determine how a contract should be interpreted. You will also learn about the so-called “policy canon,” which instructs that an unresolvable ambiguity should be construed against the dra --- ter. All o --- these legal tools can be employed by courts to disambiguate a contract and to resolve a dispute by assessing damages --- or breach. But the Sterling court did not engage in this interpretive activity. Instead, the court
ocused on the preliminary question o — whether there was any en — orceable contract at all. This re — lects a certain jurisprudential stance. Some courts would be more apt to construe the legal meaning o — the writing and thus — ind the contract was en — orceable 304 10 • The Statute o — Frauds
in this case. Yet this court chose not to imply an agreement where the parties did not expressly write out what price they would pay — or a rental property. Although Sterling accords with principles in the R2d, a court with a di — — erent perspective could have resolved the case di —
erently. Given a complex enough set o — rules such as we — ind in contract law, courts have more — reedom than might be initially apparent to uphold contracts — or not. Careless dra — ting puts parties at risk o — judicial discretion.
Discussion 1. Although the statute o ---
rauds does not require an entire contract to be written, it does require written evidence o — material terms. What are “material” terms, in general?
- In Academy Chicago Publishers v. Cheever, 578 N.E.2d 981 (Ill. 1991), the trial court — ound that although the contract lacked essential terms, the court could dis- cover and imply those terms, thus making the contract en — orceable. Note that the Cheever decision was eventually reversed. Can you reason why the court in Sterling did not take it upon itsel — to determine what the price term should be?
- The Sterling concurrence and dissent argues that the majority overreached its judi- cial authority where it determined what the contract itsel — means. According to the dissent, who should resolve such matters o —
actual inquiry? Why should appellate courts not resolve such inquiries?
Problems Problem 10.1. Perpetuating Frauds The equitable exception to the statute o ---
rauds implicitly recognizes that the stat- ute can sometimes create injustice. Can you think o — some situations where requiring a signed writing might perpetuate — raud instead o — preventing — raud? In other words, could someone use the requirement o — a signed writing to de — raud another? Discuss a hypothetical situation to illustrate your reasoning.
Problem 10.2. Frauds Policy The Stearns court concludes simply: “to en — orce a multi-year employment contract an employee must produce a writing that satis — ies the Statute o — Frauds or must prove
raud on the part o — the employer.” This does not appear to be the same standard that McIntosh or the R2d employ, in that Stearns seems to add a new requirement — or the promissory estoppel exception to the statute o —
rauds, such that — raud by one party 10 • The Statute o — Frauds 305
is required to prevent the statute o
rauds — rom barring en — orcement o — the contract by the other. Do you agree with this addition? Explain your reasoning in terms o —
public policy.
Problem 10.3. UCC Frauds The UCC makes it easier — or merchants to satis — y the statute o —
rauds than the R2d does — or ordinary people. What policy reasons might justi — y a rule that e —
ectively makes it easier — or merchants to en — orce contracts among each other? Do you agree with this distinction — or merchants? Make sure to cite the rules and describe their di — -
erences in your discussion o — the policy reasons — or such di —
erences.
Problem 10.4. Misty Wedding Misty G. O’Connor established a limited liability company named Misty Shores Events, LLC. She created this entity to operate a wedding venue. On September 10, 2017, Shannon Markham and Cameron Folga entered into a contract with Misty Shores Events, LLC, — or the purchase o — a “ — ull wedding and reception package” that included a rental o — the reception — acility on June 16, 2018, at a total cost o — $17,500. Folga paid Misty Shores Events, LCC, a $1,000 deposit. Misty Shores Events, LLC, was ultimately unable to open — or business and — ailed to return any o — ten customer deposits. On March 4, 2018, O’Connor sent an email to Folga. In it, O’Connor wrote that she was “personally trying to pick up the pieces o — my business not opening,” and that she “agreed to pay each couple monthly pay- ments until their — ull deposited amount is paid in — ull.” A — ter what in a traditional letter would have been called the complimentary closing, O’Connor typed “Misty” in a space immediately above the automated signature block in her email. Despite this promise, Folga received no reimbursement. Folga sued O’Connor. She de — ended on the basis that the statute o —
rauds prevents en — orcement o — her alleged promise. Who should prevail, and why? See In re O’Connor, 630 B.R. 384 (2021). Chapter 11 Mistake
Contracts are the architecture o
voluntary exchange. They trans — orm uncertainty into mutual gain. When two parties shake hands — or sign on the dotted line — they create a — ramework o — rights and obligations that allows each to plan, invest, and rely on the other’s promises. But what happens when that — ramework rests on a — aulty assumption? When one or both parties misunderstand a crucial — act, should the law intervene, or should the mistake stand as part o — the bargain? The doctrine o — mistake allows courts to address pro — ound misunderstandings that undermine mutual assent. At its core, contract law prioritizes e —
iciency by allocating risks and rewards to maximize the bene — its o — exchange. Certainty plays a vital role in this process. Parties must trust that their agreements will be upheld as written, even when un — oreseen circumstances arise, or they would not plan, invest, and rely on them. Predictability enables commerce to thrive, but rigid en — orcement can clash with
airness and justice. When contracts are — ormed under signi — icant misunderstandings, strict adherence to their terms may lead to un — air outcomes and undermine con — i- dence in the legal system. The doctrine o — mistake navigates this tension, preserving stability while addressing cases where — airness demands intervention. On the one hand, letting parties rescind their contracts too easily would discour- age diligence and destabilize transactions. On the other hand, some mistakes are so
undamental that they disrupt mutual assent. In these rare cases, the law steps in to adjust or unwind the deal, striking a balance between stability and — airness. This chapter examines how courts address these competing priorities, using cases to illustrate when a mistake justi — ies intervention. From the tale o — a mysterious stone to disputes over a — ertile hei — er, these stories reveal how the law de — ines mistake, allo- cates risks, and determines the boundaries o — contractual — airness. As we explore the doctrine o — mistake, consider its broader implications: How should the law encourage parties to act care — ully without punishing honest errors? When does — airness require courts to intervene, and when should parties bear the risks o — their own assumptions? These questions guide our study o — the rules and poli- cies that shape this complex and — ascinating area o — contract law.
307
308 11 • Mistak
Rules A. Mutual Mistake A mutual mistake occurs when both parties share the same mistake about a mate- rial --- act relating to the transaction.
For example, the buyer and seller o --- a car both believe they are buying and selling a 2004 Dodge Ram Pickup 1500 vehicle, identi --- ied by vehicle identi --- ication number (VIN) 1D7HU18D54S747050. However, the seller’s agent inadvertently trans --- ers to the buyer a 2004 Chevrolet Tracker with VIN 2CNBJ134146900067. Unbeknownst to either party, the buyer goes home with the wrong car. These parties have made a mutual mistake. They entered a contract --- or the sale o --- the wrong vehicle. The party who is harmed by a mutual mistake may attempt to raise the mistake de --- ense in order to rescind (unwind) the contract. The result, i --- the de --- ense is suc- cess --- ul, would be to return the consideration paid by both parties as i --- the contract never occurred. In this hypothetical, assume the Dodge Ram has an estimated value o --- $6,000, while the Chevy Tracker has an estimated value o --- $5,000. This means the buyer is likely to be harmed by over-paying --- or the vehicle and can try to raise mutual mistake as a de --- ense. The rule governing the de --- ense o --- mutual mistake is --- ound in R2d § 152.
Where a mistake o --- both parties at the time a contract was made as to a
basic assumption on which the contract was made has a material e ---
ect on the agreed exchange o — per — ormances, the contract is voidable by the adversely a —
ected party unless he bears the risk o — the mistake under the rule stated in § 154. R2d § 152(1). Mutual mistake under R2d § 152 requires proving — our elements: 1. The parties have both made a mistake o —
act; 2. about a basic assumption on which the contract is made; 3. the mistake has a material e —
ect on the agreed exchange; and 4. neither party assumed the risk o — mistake. The — irst element clari — ies that the mistake must be a — actual error. A — act is an objectively veri — iable statement that can be proven or disproven through evidence. An example o — a — act is “the sky today is blue” or “the earth is round.” A — act is not an opinion, a prediction, or a judgment call. Thus, a mistake about the value o — a thing, or a mistake about the — uture value o — a thing, is not a mistake o —
act at all. The principle to keep in mind is that a party cannot escape their bad judgment simply by arguing, “Mistake!” The second element requires the mistake to relate to “a basic assumption on which the contract was made.” Traditionally, courts considered whether the mistake went to 11 • Mistak 309
the “nature o
the thing” — to its identity or its — undamental character — as opposed to merely its “quality” or “value.” This is the test used in the older cases you will read: Wood v. Boynton, 64 Wis. 265 (1885), and Sherwood v. Walker, 66 Mich. 568 (1887). Today, this element is more nuanced, asking whether the parties were operating on the assumption that the mistaken — act was true and — ormed their contract based on this assumption. Courts distinguish core issues (basic assumptions) — rom collateral side issues that did not really matter to the parties when making their contract. For example, in the Dodge Ram example, the parties were mistaken about the type o — car being sold, so this would almost certainly be deemed a basic assumption on which the contract was made. But what i — their mistake was that the name o — the — ounder o — the car company was “Jack,” when it was “Je —
”? This would only be a basic assumption on which the contract was made i — the parties explicitly addressed this issue and saw it as a core part o — their deal — which is highly unlikely. Third, the mistake must have had a “material e —
ect on the agreed exchange.” “Material” in contract law means something that would a —
ect a reasonable person’s decision to enter the contract or that would a —
ect the price or value ascribed to the consideration. The outcome o — this element will likely overlap with the outcome o —
the second element, but the
ocus is di — — erent. The “basic assumption” element asks whether the parties considered this issue when they entered the contract and saw it as a core part o — the transaction; “materiality” assesses the impact o — the mistake on the values exchanged. A mistake has a material e —
ect on the exchange i — the parties would not have entered the contract i — they knew the truth, or at least they would not have entered it on these terms. One use — ul rule o — thumb is to ask whether the mistake a —
ects the price paid by one o — the parties. Finally, the party trying to get out o — the contract cannot have borne the risk o —
the mistake. Even i
the — irst three elements are met, modern courts will not grant a mistake de — ense i — the aggrieved party bore the risk o — the mistake. This doctrine, sometimes called “assumption o — risk,” is explained in R2d § 154: A party bears the risk o — a mistake when (a) the risk is allocated to him by agreement o — the parties, or (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the — acts to which the mistake relates but treats his limited knowledge as su —
icient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the cir- cumstances to do so. The acronym — or remembering when a party bears the risk o — mistake is the “three Cs” — contract, conscious ignorance, and court. First, assumption o — risk occurs through contract when the parties expressly agree that one party shall bear the risk o — the mistake. This is a question o — contract inter- pretation, which is the subject o — the module on Interpretation. For example, imagine a contract that provides that Seller will sell Blueacre to Buyer via a quitclaim deed. Unlike a general or special warranty deed, a quitclaim deed is a legal instrument that 310 11 • Mistak
provides no protections
or the buyer as to whether the seller has a good title. The Buyer has assumed the risk that Seller’s title to Blueacre is de — ective. Second, assumption o — risk occurs through conscious ignorance when one party enters a transaction knowing she has limited knowledge o — material — acts and yet agrees to enter the contract anyway. For example, imagine a contract in which Buyer and Seller agree to the sale o — Greenacre, a parcel o — land which the parties believe encompasses one hundred acres. During negotiations, Buyer asks Seller to obtain a surveyor’s report veri — ying the acreage o — the property. However, Seller re — uses to pay — or the report, and Buyer chooses to buy the land without veri — ying the acreage. Buyer has assumed the risk that their belie — about the acreage is mistaken. Buyer cannot later raise the de — ense o — mutual mistake, even i — it turns out the property only contains seventy acres. Finally, courts can decide that a party assumed the risk o — a mistake based on concerns o — reasonableness, e —
iciency, or — airness. For example, courts may — ind that a pro — essional developer, who contracted to build an apartment complex on a parcel o — land owned by an onion — armer, bore the risk that the subsoil conditions were abnormal. A pro — essional developer has the resources and knowledge to e —
iciently determine the subsoil conditions, whereas the onion — armer does not. Courts may also pay attention to the comparative knowledge and sophistication o — the parties. For example, i — the buyer o — a car is an ordinary person, while the seller is a sophisticated corporation that sells hundreds o — cars a week, the court may determine, based on e —
i- ciency and — airness concerns, that the corporation bears the risk o — pricing mistakes and re — use to grant a mistake de — ense to such a power — ul counterparty.
Illustration o
Mutual Mistake: Sherwood v. Walker. Mutual mistake is
amously illustrated by the 1887 case o — Sherwood v. Walker, which is also known as the case o — the — ertile cow. Hiram Walker & Sons agreed to sell a cow named Rose 2d o — Aberlour (which the court mistranscribed as Aberlone) to Theodore C. Sherwood — or — ive and a hal — cents per pound. Rose weighed in at 1,420 pounds, and Sherwood tendered $80 — or her. But Walker re — used to deliver Rose to Sherwood, and Sherwood sued — or the cow. Walker de — ended on the ground that the parties assumed Rose was a barren cow and would not breed. But both parties were mistaken. Rose turned out to be with cal — . A — ertile cow is worth ten times more than a barren cow. There — ore, Walker argued, the parties made a mutual mistake. They thought they were buying and selling a barren cow but were transacting regarding a — ertile cow. Sherwood counter-argued that the parties made a contract — or Rose 2d, and Rose 2d is indeed what the parties agreed to buy and sell. Whether Rose was barren or — ertile was o — no moment, argued Sherwood. The Sherwood court thus had to answer the question o — whether the con- tract was — or a barren cow or — or Rose 2d. The court determined that the 11 • Mistak 311
contract was
or a barren cow and that the parties were in — act mistaken over whether the cow was barren. The court then applied the traditional rule, which asked whether the mistake went to the nature o — the thing or only to its quality or value. The court — ound the parties’ mistake indeed went to the very “character o — the animal,” and so a mistake de — ense was warranted. The court allowed Walker to rescind the con- tract. Sherwood gained the right to the return o — any price paid, and Walker gained the right to keep the cow. Sherwood included a strenuous dissent. The dissent took the position that courts should be very reluctant to allow parties to unwind a contract due to a mistake. It is not the duty o — courts to destroy contracts when called upon to en — orce them, a — ter they have been legally made. The dissent also agreed with Sherwood’s position that the cow was in — act the very same cow that Walker agreed to sell, so there was no mistake at all. More- over, the dissent disagreed with the majority’s conclusion that the cow’s barren state went to its inherent nature, as opposed to merely its quality or value. This debate, between two reasonable jurists, highlights the weakness o — the traditional rule. Rather than asking whether the aggrieved party assumed the risk o — the mistake, which is the — ocus o — the modern rule in R2d §§ 152 and 154, the court tried to resolve a metaphysical question over what makes a cow a cow.
B. Unilateral Mistake A unilateral mistake occurs when only one party to a transaction is mistaken as to a material — act relating to the deal. One party makes a mistake that causes them to hold an erroneous belie — , but the other party’s belie — remains accurate or simply un — ormed. For example, imagine that Seller believes she is the legal owner o — two acres o — land, when in — act she owns three acres o — land. Buyer approaches Seller to buy the land, either knowing there are three acres, or having no opinion on the matter at all. Seller then sells Buyer the land based on her erroneous belie — that it is only two acres. Seller regrets her decision once she learns the truth. This mistake results in harm to Seller. Presumably, Seller would have sold three acres — or more money than two acres. Seller may attempt to invoke the de — ense o — unilateral mistake to avoid the contract. The unilateral mistake de — ense is — ar more di —
icult to bring than the mutual mistake de — ense. The de — ense o — unilateral mistake requires proving all the same elements o —
mutual mistake, including that the mistaken party did not bear the risk o
the mistake, plus additional elements. 312 11 • Mistak
The elements o
a unilateral mistake de — ense are delineated in R2d § 153: Where a mistake o — one party at the time a contract was made as to a basic assumption on which he made the contract has a material e —
ect on the agreed exchange o — per — ormances that is adverse to him, the contract is voidable by him i — he does not bear the risk o — the mistake under the rule stated in § 154, and (a) the e —
ect o — the mistake is such that en — orcement o — the contract would be unconscionable, or (b) the other party had reason to know o — the mistake or his — ault caused the mistake. As you can see, the mistaken party must prove, along with the usual elements o —
mistake, either that the e
ect o — the mistake would make en — orcement o — the contract unconscionable (meaning so grossly one-sided it would shock the conscience o — the court) or that the other party had reason to know about the mistake or caused the mistake. In the land-sale hypothetical above, it is unlikely Seller could get out o — the contract based on her unilateral mistake about the acreage o — her own land. Not only would it be challenging to show she did not assume the risk o — mistake, but there are no — acts suggesting Buyer knew about or caused the mistake or that the sale would be uncon- scionable due to Seller’s error. In sum, courts are — ar less likely to grant the de — ense o — unilateral mistake. Contract law generally does not permit parties to escape un — avorable agreements simply due to their — ailure to investigate material — acts. That said, as you will see in DePrince v. Starboard Cruise Services, Inc., 271 So. 3d 11 (Fla. Dist. Ct. App. 2018), the de — ense can be success — ul in certain circumstances.
Illustration o
Unilateral Mistake: DePrince v. Starboard Cruise Services, Inc. The recent case o — DePrince v. Starboard Cruise Services, Inc., illustrates a unilateral mistake. Thomas DePrince was traveling aboard a Starboard cruise ship when he visited the ship’s jewelry boutique and indicated his interest in purchasing a large, loose diamond. The boutique manager called his corpo- rate o —
ice, which, in turn, contacted the corporation’s diamond broker in New York. The broker emailed the — ollowing prices to the corporate o —
ice, which
orwarded the communication to the boutique, whose manager then presented this in — ormation to Mr. DePrince: EC 20.64 D VVS2 GIA VG G NON selling price $235,000 EC 20.73 E VVS2 GIA EX EX FNT selling price $245,000 The manager, who was authorized to transact on behal — o — Starboard, then agreed to sell the — irst stone to DePrince — or $235,000. DePrince paid with his 11 • Mistak 313
credit card, and the manager promised that Starboard would ship the stone to him. But this manager, who had never dealt with such a large diamond be — ore, had made a critical mistake. Unbeknownst to the boutique manager, diamond traders quote prices in per-carat terms. In this case, the — irst stone was 20.64 carats, and the per-carat price was $235,000, so the total price should have been $4,850,400. In other words, the manager made a $4.5 million mistake. When Starboard Corporation discovered the error, it immediately noti — ied DePrince o — the error and reversed the charge to his card. But DePrince did not want his money back; rather, he wanted Starboard to keep its promise and complete the transaction. DePrince sued Starboard to en — orce the contract, and Starboard de — ended on the ground o — unilateral mistake. The court o — appeals upheld the jury verdict that Starboard should be excused. The jury, the trial judge, and the court o — appeals all agreed that the ele ments o — unilateral mistake were met, as described in R2d § 153, quoted above. The court did not need to — ocus on subparagraph (a) regarding uncon- scionability because Starboard presented su —
icient evidence indicating that DePrince was aware o — the mistake and chose to remain silent. Key — acts sup- porting the court’s decision to grant the de — ense o — mistake included the — act that DePrince’s partner, Mr. Craw — ord, who was with him at the time o — the sale, was a certi — ied gemologist. This tends to show that DePrince should have known that Starboard’s manager was making a mistake. Additionally, Craw — ord called DePrince’s sister, who was a graduate gem- ologist, to discuss the price. The sister advised Craw — ord that something was wrong because a diamond o — that size should cost millions o — dollars. This pro- vided — urther evidence that DePrince knew o — Starboard’s mistake. As — or the other elements, the mistake clearly had a material impact on the transaction since Starboard sold a diamond — or one-twentieth o — its value. There was nothing in the parties’ contract showing that Starboard had the risk o — this mistake, although a seller is typically responsible — or pricing its goods correctly. But, here, a jury — ound that DePrince knowingly took advantage o —
Starboard’s material mistake; there --- ore, granting the de --- ense o --- mistake was
appropriate.
C. Mistranscription Mistranscription, sometimes called a scrivener’s error, occurs when a written con- tract — ails to re — lect the actual agreement between the parties. Imagine Bartleby, a meticulous but occasionally distracted scrivener, mistakenly omits a zero or trans- poses a key term, leading to a contract that doesn’t match what the parties intended. 314 11 • Mistak
These errors can have serious consequences depending on the signi
icance o — the mistake and its impact on the agreement. Some mistranscriptions make a contract voidable. This happens when the mistake is so signi — icant that it undermines mutual assent. I — Bartleby dra — ts a sales agreement
or an art gallery and writes $75,000 instead o — $750,000, the written contract — ails to re — lect the true deal. The seller could argue there was no meeting o — the minds and re — use to complete the sale. The mistake would a —
ect a — undamental term and destroy the shared understanding necessary — or a valid contract. Re — ormation o —
ers another way to resolve a mistranscription. Courts o — ten correct the written terms to re — lect the parties’ actual agreement when there is clear and con- vincing evidence o — their mutual intent. In the example above, i — the buyer’s admin- istrative assistant testi — ies that the parties orally agreed to $750,000, or i — that was the price at which the art was publicly listed — or sale, a court might re — orm the contract to align with the true terms. Re — ormation ensures the contract matches what the parties intended without voiding the entire agreement. Sometimes, mistranscriptions are en — orced as written. This happens when the error is minor or when a third party relies on the contract in good — aith. For example, i —
Bartleby transcribes $3,000 instead o
$30,000 in a sales contract — or a car and the buyer assigns the agreement to an innocent third party, courts might en — orce the document as written to protect the third party’s reliance. Protecting innocent reliance o — ten takes priority over correcting the original mistake. Mistranscription cases highlight the balance between — airness and e —
iciency in contract law. Re — ormation preserves the integrity o — the parties’ true agreement, while en — orcement as written ensures predictability and stability in contractual relation- ships. Bartleby’s well-intentioned but — lawed work reminds us that even small errors in transcription can lead to signi — icant legal disputes. Courts must weigh these con- cerns care — ully, balancing the principles o —
airness, mutual assent, and reliance. Whether a contract is voidable, re — ormed, or en — orced as written depends on the nature o — the error and its e —
ect on the parties and others involved. Bartleby’s mistakes are not just the source o — headaches. They reveal the broader challenges o — ensuring
airness while maintaining the reliability o — written agreements. By addressing these disputes thought — ully, courts strive to achieve justice while respecting the — oundations o — contract law.
D. Re
lections on Mistake Mistake occurs when one or both parties hold a belie — that is not in accord with the — acts. When only one party is mistaken and the other party holds a correct belie —
or no belie
about the matter, this is known as a unilateral mistake. When both par- ties share the same mistaken belie — , it is called a mutual mistake. Finally, when a mistake arises in the — inal written memorialization o — an agreement, it is re — erred to as a mistranscription. 11 • Mistak 315
The mistake doctrine involves a care
ul balance between two key policies underlying contract law: — airness and e —
iciency. On the one hand, it seems — undamentally un — air to hold a party to a contractual obligation that was entered into under a mistaken belie —
about a material
act. On the other hand, permitting parties to escape their agreements too easily risks encouraging carelessness and undermines the stability o — contracts, thus making the entire system ine —
icient. Unilateral mistakes present a particular chal- lenge because our legal system generally expects capable individuals to bear the risks o — their own errors. For this reason, courts rarely grant relie —
or unilateral mistakes. Mutual mistakes, however, are treated somewhat di —
erently. When both parties are mistaken about a — undamental — act underlying their agreement, questions naturally arise about whether there was ever mutual assent. Mutual assent is the — oundation o — en — orceable contracts in a — ree society, and its absence strikes at the very core o —
contractual obligations. Where neither party is at
ault — or the mutual mistake, courts are o — ten inclined to void the agreement entirely. Mistranscriptions, when parties share a common understanding but do not write it down correctly, do not always justi — y voiding the contract. In cases o — minor errors, such as typos, courts may re — orm the written agreement to re — lect the true intent o —
the parties rather than invalidate the entire contract. It is also important to distinguish mistake — rom misunderstanding, a related but distinct concept. While a mistake involves a belie — not in accord with the — acts, a misunderstanding arises when the parties have di — — erent but accurate belie — s about a material aspect o — the transaction. For example, consider the — amous Peerless case, where two ships with the same name led to con — usion. I may intend — or cotton to be shipped on the October Peerless, while you believe we are re — erring to the Decem- ber Peerless. Neither o — us holds a mistaken belie — about the ships themselves; we are both correct about their existence and schedules. However, we do not share the same understanding. This situation re — lects a — ailure o — mutual assent, not a mistake, because there was no true agreement about the subject matter o — the contract. Similarly, misrepresentation is o — ten mistakenly grouped with mistake. However, these doctrines address di — — erent concerns. A misrepresentation involves an assertion that is not in accord with the — acts, typically made by one party to induce the other into a contract. While a misrepresentation may result in a party’s holding a mistaken belie — , the — ocus o — the analysis shi — ts to the wrong — ul conduct o — the party making the misrepresentation. This di —
erence is critical: the mistake doctrine applies to situa- tions where erroneous thinking arises without — ault, whereas misrepresentation intro- duces an element o — culpability. The next chapter, which — ocuses on how intentional or negligent misstatements can undermine the validity o — a contract, will explore this distinction — urther. By distinguishing mistake — rom related doctrines such as misunderstanding and misrepresentation, we see how contract law categorizes and addresses the challenges o — erroneous thinking. The doctrine o — mistake, though narrow in scope, underscores the importance o —
airness and mutual understanding in the — ormation and en — orce- ment o — agreements. 316 11 • Mistak
Cases Reading Wood v. Boynton. Imagine you have a Beanie Babies collection that you want to sell. You don’t know how much they’re worth, but you go to a shop anyway. The shop owner doesn’t know how much they’re worth either, but you decide to sell them --- or $20. Later you --- ind out they were actually worth $20,000. Can you use the de --- ense o --- mistake? What was your belie --- that was not in accord with the --- acts? The case below, Wood v. Boynton, discusses a similar situation. The seller, Ms. Wood, sold a stone to the buyer, Mr. Boynton,
or $1, believing the stone to be a rock o — unknow value, perhaps a topaz. But the stone was actually an extraordinarily expensive diamond. This case pro- vides an example o — how courts used to tackle the issue o — mistake. Rather than explicitly asking whether a party assumed the risk o — a mistake — which is the modern approach under R2d § 154 — courts used to — ocus on whether mistake regarded the very nature o — the thing, or merely its quality or value. In Wood, the court — ound the parties made no mistake as to “the identity o — the thing sold.” They thought they were transacting over a stone o — unknown value, and indeed they were. Consider how you might respond to this point. Was there perhaps indeed a mistake as to the nature o — the thing? Also consider how a modern court might have addressed this case under the — ramework provided in the R2d.
Wood v. Boynton
64 Wis. 265 (1885) TAYLOR, J. This action was brought in the circuit court --- or Milwaukee county to recover the possession o --- an uncut diamond o --- the alleged value o --- $1,000. The case was tried in the circuit court and, a --- ter hearing all the evidence in the case, the learned circuit judge directed the jury to --- ind a verdict --- or the de --- endants. The plainti ---
excepted to such instruction, and, a — ter a verdict was rendered — or the de — endants, moved — or a new trial upon the minutes o — the judge. The motion was denied, and the plainti —
duly excepted, and, a
ter judgment was entered in — avor o — the de — endants, appealed to this court. The de — endants are partners in the jewelry business. On the trial it appeared that on and be — ore the 28th o — December, 1883, the plainti —
was the owner o — and in the possession o — a small stone o — the nature and value o — which she was ignorant; that on that day she sold it to one o — the de — endants — or the sum o — one dollar. A — terwards it was ascertained that the stone was a rough diamond, and o — the value o — about $700. A — ter learning this — act, the plainti —
tendered the de — endants the one dollar, and ten 11 • Mistak 317
cents as interest, and demanded a return o
the stone to her. The de — endants re — used to deliver it, and there — ore she commenced this action. The plainti —
testi — ied to the circumstances attending the sale o — the stone to Mr. Samuel B. Boynton, as — ollows: “The — irst time Boynton saw that stone he was talking about buying the topaz, or whatever it is, in September or October. I went into his store to get a little pin mended, and I had it in a small box — the pin — a small ear- ring; . . . this stone, and a broken sleeve-button were in the box. Mr. Boynton turned to give me a check — or my pin. I thought I would ask him what the stone was, and I took it out o — the box and asked him to please tell me what that was. He took it in his hand and seemed some time looking at it. I told him I had been told it was a topaz, and he said it might be. He says, ‘I would buy this; would you sell it?’ I told him I did not know but what I would. What would it be worth? And he said he did not know; he would give me a dollar and keep it as a specimen, and I told him I would not sell it; and it was certainly pretty to look at. He asked me where I — ound it, and I told him in Eagle. He asked about how — ar out, and I said right in the village, and I went out. A — terwards, and about the 28th o — December, I needed money pretty badly, and thought every dol- lar would help, and I took it back to Mr. Boynton and told him I had brought back the topaz, and he says, ‘Well, yes; what did I o —
er you — or it?’ and I says, ‘One dollar;’ and he stepped to the change drawer and gave me the dollar, and I went out.” In another part o — her testimony, she says: “Be — ore I sold the stone, I had no knowl- edge whatever that it was a diamond. I told him that I had been advised that it was probably a topaz, and he said probably it was. The stone was about the size o — a canary bird’s egg, nearly the shape o — an egg — worn pointed at one end; it was nearly straw color — a little darker.” She also testi — ied that be — ore this action was commenced, she tendered the de — endants $1.10, and demanded the return o — the stone, which they re — used. This is substantially all the evidence o — what took place at and be — ore the sale to the de — endants, as testi — ied to by the plainti —
hersel — . She produced no other witness on that point. The evidence on the part o — the de — endant is not very di — — erent — rom the version given by the plainti —
, and certainly is not more — avorable to the plainti —
. Mr. Sam- uel B. Boynton, the de — endant to whom the stone was sold, testi — ied that at the time he bought this stone, he had never seen an uncut diamond; had seen cut diamonds, but they are quite di — — erent — rom the uncut ones; “he had no idea this was a diamond, and it never entered his brain at the time.” Considerable evidence was given as to what took place a — ter the sale and purchase, but that evidence has very little i — any bearing upon the main point in the case. This evidence clearly shows that the plainti —
sold the stone in question to the de — endants, and delivered it to them in December, 1883,
or a consideration o — one dollar. The title to the stone passed by the sale and delivery to the de — endants. How has that title been divested and again vested in the plainti —
? The contention o — the learned counsel — or the appellant is that the title became vested in the plainti —
by the tender to the Boyntons o
the purchase money, with interest, and a demand o —
318 11 • Mistak
a return o
the stone to her. Unless such tender and demand revested the title in the appellant, she cannot maintain her action. The only question in the case is whether there was anything in the sale which entitled the vendor (the appellant) to rescind the sale and so revest the title in her. The only reasons we know o —
or rescinding a sale and revesting the title in the vendor so that he may maintain an action at law — or the recovery o — the possession against his vendee are (1) that the vendee was guilty o —
some
raud in procuring a sale to be made to him; (2) that there was a mistake made by the vendor in delivering an article which was not the article sold, — a mistake in
act as to the identity o — the thing sold with the thing delivered upon the sale. This last is not in reality a rescission o — the sale made, as the thing delivered was not the thing sold, and no title ever passed to the vendee by such delivery. In this case, upon the plainti —
’s own evidence, there can be no just ground — or alleging that she was induced to make the sale she did by any — raud or un — air dealings on the part o — Mr. Boynton. Both were entirely ignorant at the time o — the character o — the stone and o — its intrinsic value. Mr. Boynton was not an expert in uncut diamonds, and had made no examination o — the stone, except to take it in his hand and look at it be — ore he made the o —
er o — one dollar, which was re — used at the time, and a — terwards accepted without any comment or — urther examination made by Mr. Boynton. The appellant had the stone in her possession — or a long time, and it appears — rom her own statement that she had made some inquiry as to its nature and qualities. I — she chose to sell it without — urther investigation as to its intrinsic value to a person who was guilty o — no
raud or un — airness which induced her to sell it — or a small sum, she cannot repudiate the sale because it is a — terwards ascertained that she made a bad bargain. There is no pretense o — any mistake as to the identity o — the thing sold. It was pro- duced by the plainti —
and exhibited to the vendee be — ore the sale was made, and the thing sold was delivered to the vendee when the purchase price was paid. Suppose the appellant had produced the stone, and said she had been told that it was a diamond, and she believed it was, but had no knowledge hersel — as to its character or value, and Mr. Boynton had given her $500 — or it, could he have rescinded the sale i — it had turned out to be a topaz or any other stone o — very small value? Could Mr. Boynton have rescinded the sale on the ground o — mistake? Clearly not, nor could he rescind it on the ground that there had been a breach o — warranty, because there was no warranty, nor could he rescind it on the ground o —
raud, unless he could show that she — alsely declared that she had been told it was a diamond, or, i — she had been so told, still she knew it was not a diamond. It is urged, with a good deal o — earnestness, on the part o — the counsel — or the appellant that, because it has turned out that the stone was immensely more valuable than the parties at the time o — the sale supposed it was, such — act alone is a ground
or the rescission o — the sale, and that — act was evidence o —
raud on the part o — the vendee. Whether inadequacy o — price is to be received as evidence o —
raud, even in a suit in equity to avoid a sale, depends upon the — acts known to the parties at the time the sale is made. When this sale was made the value o — the thing sold was open 11 • Mistak 319
to the investigation o
both parties, neither knew its intrinsic value, and, so — ar as the evidence in this case shows, both supposed that the price paid was adequate. How can — raud be predicated upon such a sale, even though a — ter-investigation showed that the intrinsic value o — the thing sold was hundreds o — times greater than the price paid? It certainly shows no such — raud as would authorize the vendor to rescind the contract and bring an action at law to recover the possession o — the thing sold. Whether that — act would have any in — luence in an action in equity to avoid the sale we need not consider. We can — ind nothing in the evidence — rom which it could be justly in — erred that Mr. Boynton, at the time he o —
ered the plainti —
one dollar — or the stone, had any knowledge o — the real value o — the stone, or that he entertained even a belie — that the stone was a diamond. It cannot, there — ore, be said that there was a suppression o — knowledge on the part o — the de — endant as to the value o — the stone which a court o — equity might seize upon to avoid the sale. The — ollowing cases show that, in the absence o —
raud or warranty, the value o — the property sold, as compared with the price paid, is no ground — or a rescission o — a sale. However un — ortunate the plainti —
may have been in selling this valuable stone
or a mere nominal sum, she has — ailed entirely to make out a case either o —
raud or mistake in the sale such as will entitle her to a rescission o — such sale so as to recover the property sold in an action at law. The judgment o — the circuit court is a —
irmed.
Re --- lection
The Wood case is an introduction to what a mistake is not. In this case, the court
ound there was no mistake as to the identity o — the thing being sold. It might be tempting to say that Wood and Boynton believed the stone to be a topaz when in — act it was an uncut diamond. In other words, their mutual mistake was that the stone was “not a diamond.” But the court reasoned that, in — act, there was no mistake o —
act at all. As the court stated, “[b]oth were entirely ignorant at the time o — the character o —
the stone and o
its intrinsic value.” Wood intended to sell a stone o — uncertain value
or $1, and that is what she indeed sold. Boynton intended to buy a stone o — uncertain value — or $1, and that was what he indeed bought. The law does provide limited grounds — or rescinding a contract on the basis o — a mutual mistake. But a seller cannot generally back out o — a bargain simply because it turns out the thing she sold was more valuable than she had presumed. In holding
or Boynton, the court — ocused primarily on the nature o — Wood’s mistake, zeroing in on the — act that there was “no pretense o — any mistake as to the identity o — the thing sold.” The court applied the traditional rule, which you will see again in Sherwood, that there must be a mistake as to the character o — the thing sold rather than merely its quality or value. A modern court would instead likely have — ocused on Wood’s assumption o — the risk. As the court noted, Wood had the stone in her possession — or a long time, and 320 11 • Mistak
while she made some inquiry as to its nature, she apparently did not hire an expert or reach any de — initive conclusion as to what the stone was. By choosing to sell the stone without a more complete investigation into the stone’s true nature, Wood assumed the risk o — her mistake. She acted in “conscious ignorance.” She could not therea — ter get out o — the deal she made — or hersel — .
Discussion 1. The court --- ound that there was no mistake in this case, so that de --- ense was unavail- able as a de --- initional matter. What is the de --- inition o --- mistake, and why do the circumstances in this case not re --- lect a mistake by either party? 2. De --- enses are granted to ensure that contract law does not create injustice. What injustice does the plainti ---
seek to remedy by avoiding the contract? Why does the court determine that it is not unjust to en — orce the contract?
-
Neither o
the parties in this case was an expert in gemology. Did this lack o — exper- tise seem to impact the court’s decision? Should courts consider whether a party is an expert or not in determining whether there has been a mistake?
Reading Sherwood v. Walker. Sherwood v. Walker, the case o
the barren cow, is perhaps the most — amous case in the history o — the mistake doctrine. The
acts o — Sherwood are actually similar to those o — Wood v. Boynton. A seller sells an object (or, here, an animal) that they believe to have a certain value, and then they learn that the object o — the sale is — ar more valuable than they thought. Mutual mistake provides a potential way out. In Wood, the seller lost. But in Sherwood, the seller wins. The seller (Walker) was in the business o — import- ing and breeding polled Angus cattle (as well as distilling whiskey). The buyer (Sherwood) was a banker who wanted to purchase some o — Walker’s stock but could — ind none that suited him at Walker’s Canadian — arm. Walker told Sher- wood that there were also cows at Walker’s Michigan — arm, but that those cows were probably barren. Sherwood visited Walker’s — arm in Michigan and chose one o — the cows to purchase. Walker wrote a letter to Sherwood authorizing the purchase o — that particular cow, the price, and explaining how Sherwood could obtain the cow. When the cow turned out to be — ertile rather than barren, the economics o — the deal turned out to be di — — erent than the parties believed. Walker re — used to deliver the cow to Sherwood. Sherwood sued to en — orce the contract, seeking replevin — return o — the cow — and Walker de — ended on the ground o — mutual mistake. The question became, can one party avoid the deal, given the (apparently) mutual mistake about the nature o — the cow? 11 • Mistak 321
Sherwood v. Walker
66 Mich. 568 (1887) MORSE, J.
Replevin [a procedure where seized goods can be returned to the owner dependent on the outcome o --- a lawsuit] --- or a cow. Suit commenced in justice’s court; judgment
or plainti —
; appealed to circuit court o — Wayne county, and verdict and judgment — or plainti —
in that court. The de — endants bring error, and set out 25 assignments o — the same. . . . It appears — rom the record that both parties supposed this cow was barren and would not breed, and she was sold by the pound — or an insigni — icant sum as com- pared with her real value i — a breeder. She was evidently sold and purchased on the relation o — her value — or bee — , unless the plainti —
had learned o — her true condition, and concealed such knowledge — rom the de — endants. Be — ore the plainti —
secured the possession o — the animal, the de — endants learned that she was with cal — , and there — ore o — great value, and undertook to rescind the sale by re — using to deliver her. The question arises whether they had a right to do so. The circuit judge ruled that this — act did not avoid the sale and it made no di —
erence whether she was bar- ren or not. I am o — the opinion that the court erred in this holding. I know that this is a close question, and the dividing line between the adjudicated cases is not easily discerned. But it must be considered as well settled that a party who has given an apparent consent to a contract o — sale may re — use to execute it, or he may avoid it a — ter it has been completed, i — the assent was — ounded, or the contract made, upon the mistake o — a material — act, — such as the subject-matter o — the sale, the price, or some collateral — act materially inducing the agreement; and this can be done when the mistake is mutual. I — there is a di —
erence or misapprehension as to the substance o — the thing bar- gained — or; i — the thing actually delivered or received is di — — erent in substance — rom the thing bargained — or, and intended to be sold, — then there is no contract; but i — it be only a di —
erence in some quality or accident, even though the mistake may have been the actuating motive to the purchaser or seller, or both o — them, yet the contract remains binding. “The di —
iculty in every case is to determine whether the mistake or misapprehension is as to the substance o — the whole contract, going, as it were, to the root o — the matter, or only to some point, even though a material point, an error as to which does not a —
ect the substance o — the whole consideration.” It has been held, in accordance with the principles above stated, that where a horse is bought under the belie — that he is sound, and both vendor and vendee honestly believe him to be sound, the purchaser must stand by his bargain, and pay the — ull price, unless there was a warranty. It seems to me, however, in the case made by this record, that the mistake or mis- apprehension o — the parties went to the whole substance o — the agreement. I — the cow was a breeder, she was worth at least $750; i — barren, she was worth not over $80. The parties would not have made the contract o — sale except upon the understanding and belie — that she was incapable o — breeding, and o — no use as a cow. 322 11 • Mistak
It is true she is now the identical animal that they thought her to be when the con- tract was made; there is no mistake as to the identity o --- the creature. Yet the mistake was not o --- the mere quality o --- the animal, but went to the very nature o --- the thing. A barren cow is substantially a di --- --- erent creature than a breeding one. There is as much di ---
erence between them — or all purposes o — use as there is between an ox and a cow that is capable o — breeding and giving milk. I — the mutual mistake had simply related to the — act whether she was with cal — or not — or one season, then it might have been a good sale, but the mistake a —
ected the character o — the animal — or all time, and — or its present and ultimate use. She was not in — act the animal, or the kind o — animal, the de — endants intended to sell or the plainti —
to buy. She was not a barren cow, and, i —
this
act had been known, there would have been no contract. The mistake a —
ected the substance o — the whole consideration, and it must be con- sidered that there was no contract to sell or sale o — the cow as she actually was. The thing sold and bought had in — act no existence. She was sold as a bee — creature would be sold; she is in — act a breeding cow, and a valuable one. The court should have instructed the jury that i — they — ound that the cow was sold, or contracted to be sold, upon the understanding o — both parties that she was barren, and useless — or the pur- pose o — breeding, and that in — act she was not barren, but capable o — breeding, then the de — endants had a right to rescind, and to re — use to deliver, and the verdict should be in their — avor. The judgment o — the court below must be reversed, and a new trial granted, with costs o — this court to de — endants.
Re --- lection Sherwood demonstrates a way to determine whether there is a mutual mistake between parties. This court expands on the rule --- or mistake that was established in Wood. Recall that in Wood, the parties were --- ound not to be mistaken as to the nature o --- the thing sold, namely, a stone o --- uncertain value. In Sherwood, there is no mistake as to the identity o --- the creature: it is the same cow. Yet the Sherwood court looks to the nature o --- the cow. I --- mutual assent to a bargain was made upon the mutual mistake o --- a material --- act (such as the subject matter o --- the sale or the price) that materially induced the agreement, then the contract is void. The mistake must go to the substance o --- the contract, and this is where the di ---
iculty arises under the rule in Sherwood. The court held that a barren cow was not just a quality o — the animal but went to the very nature o — the thing. “A barren cow is substantially a di — — erent creature than a breeding one.” The court also believed that the parties would not have contracted — or the sale except on the understanding and belie — that the cow was incapable o — breed- ing. “The mistake a —
ected the character o — the animal — or all time, and — or its present and ultimate use.” The cow would have been sold — or around $750 i — not barren, as opposed to the $80, and this went to the substance o — the whole agreement. The court’s distinction between whether the mistake went to the substance o — the contract or to its quality can be con — using since what a —
ects its value also a —
ects 11 • Mistak 323
its consideration. The R2d’s rule on mutual mistake makes less o
a distinction and instead states that the mistake must have been “as to a basic assumption on which the contract was made” and that it had a material e —
ect.
Discussion 1. In Wood, the court --- ound there was no mistake; in Sherwood, the court --- ound there was. Can you distinguish the cases on their --- acts such that you can apply the same rule and arrive at di --- --- erent results? 2. In a case regarding the purchase and sale o --- a --- arm animal, who should bear the risk o --- mistake that the animal is not as expected: the rancher or the purchaser? 3. Orthodox Jews only eat meat --- rom cows whose lungs do not have blemishes. Such blemishes are only observable a --- ter slaughtering the animal. I --- a rancher sells to a Jewish butcher a cow that both believe to be unblemished (glatt), but the cow turns out to have lesions in its lungs, is this a mistake? Is this a mistake that merits avoidance o --- the contract?
Reading DePrince v. Starboard Cruise Services, Inc. As previously stated, a mistake is a belie — that is not in accord with the — acts. In this next case, the seller clearly made a mistake regarding the price o — a valuable diamond. The mistake was adverse to the seller because the seller accidentally sold the diamond — or about one-twentieth o — its value. On the ground o — this unilateral mistake, how- ever, the seller can only avoid the contract i — the seller does not bear the risk o —
this mistake. This next case --- ocuses on who bears the risk o --- mistake.
DePrince v. Starboard Cruise Services, Inc.
271 So. 3d 11 (Fla. Dist. Ct. App. 2018) LUCK, J. On February 11, 2013, Thomas DePrince, a passenger aboard a cruise ship, visited the ship’s jewelry boutique, operated by Starboard, where he indicated his interest in purchasing a --- i --- teen to twenty carat loose diamond. DePrince speci --- ied he wanted an emerald cut, high quality, color D, E, or F diamond with a G.I.A. certi --- icate. The ship- board jewelry store did not have such a diamond, so the store’s manager, Mr. Rusan, e-mailed Starboard’s corporate o ---
ice. The corporate o —
ice reached out to Starboard’s diamond vendor in Cali — ornia. The vendor in Cali — ornia then called a diamond broker in New York — or its available 324 11 • Mistak
inventory. The diamond broker then sent a list o
diamonds available with the desired speci — ications. The list provided a per-carat price and net price — or each diamond. The vendor in Cali — ornia then selected two diamonds — rom the inventory listing and electronically mailed the corporate o —
ice the — ollowing in — ormation:
These prices are ship sailing prices based on the lowest tier diamond margin
we have. Let me know i --- you have any questions.
EC 20.64 D VVS2 GIA VG G NON selling price $235,000
EC 20.73 E VVS2 GIA EX EX FNT selling price $245,000
The corporate o
ice — orwarded this in — ormation back to the ship. Mr. Rusan pre- sented the in — ormation to DePrince and his partner, Mr. Craw — ord. Neither the contact nor the corporate o —
ice nor Mr. Rusan had ever sold a large loose diamond be — ore and did not realize that the quoted price was per carat. Mr. Craw — ord, who was a certi — ied gemologist, asked the opinion o — DePrince’s sister, a graduate gem- ologist. The sister warned that something was not right because the price — or a diamond o — that size should be in the millions and recommended not buying the diamond. Disregarding his sister’s advice, DePrince contracted with Starboard to purchase the 20.64 carat diamond — or the quoted $235,000 price, paying with his American Express credit card. Starboard discovered that the $235,000 price was per carat and immediately noti — ied DePrince o — the error and reversed the charges to his credit card. DePrince then — iled a complaint seeking to en — orce the parties’ contract. The trial court initially granted summary judgment in — avor o — Starboard on June 20, 2014, based on Starboard’s de — ense o — unilateral mistake. The trial court used a “ — our-prong test to establish unilateral mistake.” The court held that in order to rescind an otherwise-valid contract based on a unilateral mistake, the party seeking to avoid the contract must show:
(1) The mistake was induced by the party seeking to bene --- it --- rom the mistake,
(2) there is no negligence or want o --- due care on the part o --- the party seeking
to return to the status quo (3) denial o --- release --- rom the agreement would be
inequitable, and (4) the position o --- the opposing party has not so changed that
granting the relie --- would be unjust.
The court concluded that there was a genuine issue o
material — act on the induce- ment prong because “knowledge o — an error is markedly di — — erent than inducement o — that error.” As an example o — inducement, the court quoted the test — or — raudulent inducement, and explained: We do not hold that the burden to establish inducement — or purposes o — the — irst prong o — a unilateral mistake de — ense is the same as proving the elements — or a — raudu- lent inducement de — ense, but merely use — raudulent inducement by way o — example to demonstrate that inducement requires some type o — action, not mere knowledge. 11 • Mistak 325
In
act, the burden o — proo — cannot be the same because such a requirement would render the unilateral mistake o —
act de — ense completely obsolete by requiring a party seeking to avoid a contract on that basis to prove — raudulent inducement, which is itsel — su —
icient to render a contract voidable by the aggrieved party. The court also concluded that there was a genuine issue o — material — act on the neg- ligence prong. “[W]hether Starboard made a reasonable and understandable mistake or acted negligently in its handling o — the sale is a disputed issue o —
act.” Based on this, the court reversed the summary judgment — or Starboard and remanded — or — urther proceedings because there remained genuine issues o — material — act to be resolved. The case went to trial on April 4, 2016, on DePrince’s claim — or breach o — contract and Starboard’s de — ense o — unilateral mistake. The parties did not dispute that they entered into an agreement; the only issue was whether Starboard was excused — rom that agreement because it made a unilateral mistake. The trial court instructed the jury on the elements o — the unilateral mistake a —
ir- mative de — ense, including inducement: “To establish this de — ense Starboard must prove . . . the mistake was induced by the party, here Mr. DePrince, seeking to bene — it
rom the mistake. Inducement may occur through misrepresentations, statements or omissions which cause the contracting party to enter into a transaction.” The jury — ound that Starboard should be excused — rom per — orming under the con- tract because it committed a unilateral mistake. The trial court denied DePrince’s motion — or directed verdict on the unilateral mistake a —
irmative de — ense and entered judgment — or Starboard consistent with the jury’s verdict. The case was remanded — or a new trial because the trial court’s jury instruction on inducement prong o — the unilateral mistake test was inconsistent. The trial court de — ined inducement to include DePrince’s omission o — in — ormation about the price o —
the diamond, even though inducement had previously been de
ined as “some type o —
action, not mere knowledge.” The District Court o — Appeal held that inducement is not an element o — a unilateral mistake de — ense to en — orce a contract, that the jury was property instructed on the element o — unilateral mistake and that su —
icient evidence supported the jury’s — inding that all required elements — or rescission o — a contract on the basis o — unilateral mistake had been met.
Re --- lection A unilateral mistake occurs when a mistake o --- one party at the time a contract was made as to a basic assumption on which he made the contract has a material e ---
ect on the agreed exchange o — per — ormances that is adverse to him. In this case, Starboard made a mistake by not realizing that the quoted price o — the diamond was per carat, not — or the entire diamond. Starboard sold the diamond to DePrince — or less than a twentieth o — the actual cost o — the diamond. The price o — the diamond is — undamental to the contract and materially a —
ects the agreed exchange o —
326 11 • Mistak
per
ormances. Had Starboard not made this mistake, it never would have agreed to sell the uncut diamond — or that price. In this case, Starboard, the party who made the mistake, would have borne the brunt o — its mistake but — or the court’s determination that Starboard’s mistake had been induced by DePrince. Starboard illustrates a unilateral mistake. DePrince, the buyer, caused Starboard, the seller, to make a mistake as to a basic assumption on which the contract was
ormed that materially a —
ected the agreed exchange o — per — ormances and adversely a —
ected Starboard.
Discussion 1. Generally, the party seeking to avoid a contract on the grounds o --- mistake is the party making the mistake. In Starboard, Starboard Cruise Services is looking to avoid the contract. What is Starboard’s mistake? Evaluate this purported mistake based on the R2d’s de --- inition o --- mistake, and con --- irm whether this is a mistake --- or which the law can grant a remedy. 2. Mistakes are only actionable where they relate to a material aspect o --- the transac-
tion. Was the mistake in Starboard material? Explain. 3. A party only merits the de --- ense o --- mistake where it did not bear the risk o --- mistake. Did Starboard bear the risk o --- its mistake in this case? Why or why not?
Problems Problem 11.1. A Mistaken Dream A --- ter landing her dream job, Lauren decided to buy hersel --- a car to celebrate. Lau- ren did months o --- online research be --- ore she went to a used car lot to look at the cars in person. Lauren had decided that she wanted to purchase a used Volkswagen Beetle listed
or $4,700 at Trevor’s Used Car Dealership. Based on her research, Lauren knew that a used Volkswagen Beetle with approximately 50,000 miles should cost closer to $10,000 than $5,000. Kierstin had just started working at Trevor’s Used Car Dealership three days be — ore Lauren arrived at the dealership to look at used cars. Kierstin’s boss sent her an email that listed the prices o — all the new cars on the lot that Kierstin needed to tag. Kierstin had misread the email and mislabeled the cars. The $4,700 price tag was supposed to be placed on the Volkswagen Passat with almost 100,000 miles that was parked next to the Beetle. 11 • Mistak 327
Lauren moved
orward with purchasing the Beetle — rom Trevor’s Used Car Dealer- ship even though she knew that the car should be sold — or nearly $5,000 more than it was listed — or. Kierstin drew up all the paperwork, and she and Lauren entered a contract — or the sale o — the car. Kierstin’s boss, Shannon, arrived at the dealership later that a — ternoon and, while reviewing the paperwork, realized that Kierstin had listed the car at the wrong price and immediately called Lauren to recti — y the error. Is the contract — or the sale o — the Volkswagen Beetle voidable based on the theory o — unilateral mistake?
Problem 11.2. A Foundational Mistake In the summer o — 1995, Jesse and Barbara Darnell expressed an interest in buy- ing a home — rom Magdalene Myers, and all parties made preparations to sell and purchase the house. The Darnells received a copy o — the Seller’s Disclosure o — Real Property Condition Report (Seller’s Disclosure). In it, Myers answered that she was not aware o — “any water leakage, accumulation, or dampness within the basement or crawl space.” She also answered that there were not “any repairs or other attempts to control any water or dampness problem in the basement or crawl space.” The Darnells and Myers met to negotiate the price, and Myers brought, unsolic- ited, a handwritten list o — amenities. The list included a “[n]ew pump in crawl space to remove whatever water comes in when we have a hard rain.” The Darnells did not end negotiations because they believed that water only came in through the crawl space a — ter a hard rain and that it normally wasn’t a problem because the sump pump prevented accumulation. The parties agreed on a price. The Darnells had the home inspected, and the inspector noticed a “moisture prob lem” in the crawl space that should be — ixed. The Darnells put all o — their money into the house and decided to — orgo the repairs — or another year, which the inspector thought would be — ine. In the inspector’s report, the “Structural” section indicated the moisture as a “major de — iciency,” but it did not indicate the intensity o — the water problem or whether the moisture had caused any actual damage to the structure o —
the house. The crawl space was not readily accessible, and a pre-printed paragraph stated, “I — there is an inaccessible basement or crawl space, there is a possibility that past or present . . . rot exists in this area. Since no visual inspection can be made, it is not possible to make a determination o — this damage i — it exists.” The Darnells read the contradictory report and signed an agreement o — sale with no renegotiation because o — the crawl space or moisture. The day a — ter they moved in, the Darnells noticed water problems underneath a carpet on the — irst — loor. They called someone to do another inspection and discovered that the structural — ram- ing in the crawl space was so severely deteriorated — rom water that three-quarters o —
the structural members were no longer capable o
holding up the house. They were 328 11 • Mistak
advised to leave the house and have not been able to return since. The Darnells sued Myers — or rescission o — the agreement o — sale and argued, among others, the de — ense o — mistake. Under the R2d, what is the mistake, and what type o — mistake should the Dar- nells argue — or in court? Under the R2d, do the Darnells have a viable de — ense o —
mistake? See Darnell v. Myers, 1998 WL 294012 (Del. Ch. 1998).
Problem 11.3. A Policy Mistake OneBeacon America Insurance Company and Pennsylvania General Insurance Company (collectively, OneBeacon) issued a car insurance policy to Leasing Associ- ates, Inc., and LAI Trust (collectively, LAI), a vehicle leasing agency. LAI then leased a vehicle insured under this policy to Cap — orm, Inc., which had its own insurance coverage — rom Travelers. Cap — orm, Inc., drove the vehicle negligently and struck a pedestrian in an accident that resulted in a vehicle liability suit that Cap — orm settled
or $1,000,000, which is the limit under the OneBeacon insurance policy. Citing the OneBeacon/LAI policy, Cap — orm demanded that OneBeacon reimburse Travelers $1,000,000, the policy’s limit. The OneBeacon/LAI policy de — ines an “insured” to include: a. You — or any covered auto. b. Anyone else while using with your permission a covered auto you own. Although OneBeacon acknowledges that this language may be read to extend cov- erage to LAI’s lessees, it says that neither it nor LAI intended that coverage. Accord- ingly, OneBeacon asked the district court to re — orm the policy in light o — mutual mistake. OneBeacon asked the court to re — orm the insurance policy to match the parties’ intent that it would cover only those lessees who had speci — ically applied — or and been approved — or coverage under the OneBeacon policy. Is OneBeacon entitled to re — orm the insurance policy due to a scrivener’s error (mistranscription mistake)? See OneBeacon Am. Ins. Co. v. Travelers Indem. Co., 465 F.3d 38 (1st Cir. 2006). Chapter 12 Improper Bargaining
Contract law is
ounded on the principle that agreements should re — lect voluntary and in — ormed consent. Yet not all agreements are the product o —
air negotiation or equal — ooting. Improper bargaining re — ers to a set o — doctrines — misrepresentation, duress, undue in — luence, unconscionability, and public policy de — enses — that address situations where consent is tainted or — airness is undermined. These de — enses serve as a check on private ordering by ensuring that contracts are not en — orced when they are the result o — deception, coercion, or exploitation, or when they contravene societal norms. The uni — ying purpose o — these doctrines is to sa — eguard the integrity o — contrac- tual consent while balancing autonomy, — airness, and e —
iciency. The misrepresenta tion doctrine ensures that agreements are not based on — alsehoods. The duress and undue in — luence doctrines prevent the en — orcement o — contracts — ormed through improper pressure or the abuse o — trust. The unconscionability doctrine examines both the terms and the process o — contract — ormation to identi — y egregiously un — air agreements. Finally, public policy de — enses re — lect the law’s commitment to broader societal interests by invalidating contracts that harm the public or promote injustice. Together, these de — enses — orm the boundaries o — en — orceable contracts. They high- light the law’s dual role in respecting individual — reedom to contract while stepping in to correct or prevent the exploitation o — vulnerable parties. This chapter explores the principles, policies, and applications o — these de — enses to illustrate how courts navigate the complex interplay between autonomy and equity in the en — orcement o — contracts.
Rules A. Misrepresentation Misrepresentation can make a contract voidable when one party induces another to enter a contract by making an assertion that is not in accord with the --- acts. The analysis o --- this de --- ense begins with identi --- ying whether there is a misrepresentation, as de --- ined by R2d:
A misrepresentation is an assertion that is not in accord with the --- acts. R2d
§ 159.
329
330 12 • Improper Bargaining
A misrepresentation is any assertion that is not true. To understand this, we
irst need to clari — y what quali — ies as an assertion. According to Black’s Law Dictionary: Assertion. A person’s speaking, writing, acting, or — ailing to act with the intent o — expressing a — act or opinion; the act or an instance o — engaging in commu- nicative behavior. Assertions may take many — orms, including spoken or written statements, actions intended to convey meaning, or omissions where there is a duty to disclose. The doc- trine’s broad scope re — lects the law’s recognition that communication in various — orms in — luences contracting decisions. Once you have identi — ied that some assertion is a misrepresentation, then the next step in the analysis is determining the nature o — the misrepresentation. Fraudulent misrepresentation occurs when a party makes a — alse statement with the intent to deceive. Non- — raudulent misrepresentation, by contrast, does not require intent but instead hinges on whether the — alse assertion is material — meaning that it would likely in — luence a reasonable person’s decision to enter into the contract. R2d § 162. In either case, the misrepresentation must induce the other party’s agreement, and their reliance must be justi — ied. At its core, the doctrine o — misrepresentation protects the principle o — in — ormed consent. Contract law values autonomy and presumes that parties are best positioned to make decisions about their own interests. However, this autonomy is undermined when one party’s ability to make in — ormed choices is compromised by — alse or mis- leading in — ormation. Misrepresentation disrupts the — undamental premise that agree- ments arise — rom an honest and — air exchange o — in — ormation. By making contracts voidable in such cases, the law deters deceptive practices and promotes — airness in the bargaining process. The policy behind this doctrine re — lects a balance between private ordering and public norms. On the one hand, the law respects individuals’ ability to negotiate and assume risks in contracts. On the other, it recognizes that some risks — those arising
rom dishonesty or misin — ormation — undermine not only the individual contract but also the trust necessary — or the broader — unctioning o — markets. The misrepresenta tion doctrine ensures that contract law aligns with these broader societal interests by holding parties accountable — or the integrity o — their assertions. This section explores the steps in analyzing misrepresentation and how courts evaluate assertions, reliance, and inducement to protect the legitimacy o — contractual relationships.
- Fraudulent Misrepresentation Fraudulent misrepresentation arises when one party intentionally deceives another to induce them to enter into a contract. It is the most blameworthy — orm o — misrepre sentation and re — lects a deliberate breach o — the trust essential to contractual relation- ships. Under R2d § 162(1), a misrepresentation is — raudulent i — the maker intends 12 • Improper Bargaining 331
their assertion to induce assent and i
the maker either knows their assertion is — alse or acts with reckless disregard as to the assertion’s — alsity. We will explore the speci — ic degree o — knowledge that is required in detail below. Fraudulent misrepresentation requires the — ollowing elements:
a. False Assertion A --- raudulent misrepresentation begins with a --- alse assertion. The statement must be objectively untrue and may take the --- orm o --- spoken or written words, conduct, or silence where there is a duty to disclose. R2d § 159. For example, turning back an odometer on a car being sold constitutes a --- raudulent misrepresentation because it implies a --- alse --- act about the car’s mileage.
b. Scienter (Knowledge o --- Wrongdoing)
The asserting party must have acted with the appropriate state o --- mind, called “scienter.” The term derives --- rom the Latin verb sciō, meaning “to know.” In modern legal usage, scienter signi --- ies knowledge o --- wrongdoing. For a misrepresentation to be
raudulent, the asserting party must have knowingly made a — alse statement or at least acted with reckless disregard as to whether the assertion was — alse. A misrepresentation is — raudulent i — the maker intends his assertion to induce a party to mani — est his assent and the maker (a) knows or believes that the assertion is not in accord with the — acts, or (b) does not have the con — idence that he states or implies in the truth o — the assertion, or (c) knows that he does not have the basis that he states or implies — or the asser- tion. R2d § 162(1). This tells us that the knowledge requirement can be satis — ied in one o — three ways: • actual knowledge the assertion is — alse; or • lack o — con — idence that the assertion is true, despite an expression o — such con-
idence; or • lack o — a basis — or believing the assertion is true. The second two states o — knowledge can be re — erred to as reckless disregard — or the truth. Reckless disregard is more than mere carelessness (negligence) but less than actual knowledge. For purposes o — proving a misrepresentation is — raudulent, reckless disregard is typically su —
icient.
c. Intent to Induce Reliance The asserting party must have made the misrepresentation with the speci --- ic pur- pose o --- inducing the recipient to mani --- est assent. This requirement --- ocuses on the maker’s intent at the time the assertion was made.
332 12 • Improper Bargaining
d. Actual Inducement
The misrepresentation must have induced the recipient to assent to the contract. Under R2d § 167, inducement requires a causal connection: the --- alse assertion must have substantially contributed to the decision to contract. However, --- raudulent misrepre sentation does not require the misrepresentation to be material to the agreement; it is enough that the assertion in --- luenced the recipient’s decision in any meaning --- ul way.
e. Justi --- iable Reliance Finally, the recipient’s reliance on the misrepresentation must be justi --- ied. Courts generally consider whether a reasonable person in the recipient’s position would have relied on the assertion under the circumstances. However, the standard is laxer than a
ully objective standard would be. While the law expects a degree o — diligence, it does not excuse intentional deception simply because the recipient could have discovered the truth with extraordinary e —
ort or expertise. The R2d takes the position that — ailing to investigate whether an assertion is true does not make a person’s reliance unjusti — ied, even i — a reasonable person might have investigated — urther. A recipient’s — ault in not knowing or discovering the — acts be — ore making the contract does not make his reliance unjusti — ied unless it amounts to a — ailure to act in good — aith and in accordance with reasonable standards o —
air deal- ing. R2d § 172 This standard — or justi — ied reliance is much lower than in other areas o — contract law, such as in mistake doctrine, where the law considers whether the mistaken party assumed the risk o — their mistake by — ailing to take steps to learn the truth. The reason the standard is lower in this context is that — raudulent misrepresentation represents an egregious breach o — trust in contract law. By making such agreements more easily voidable, the law upholds the principles o —
airness and honesty while also deterring deceptive practices in the marketplace.
- Material Misrepresentation Material misrepresentation occurs when one party makes a — alse assertion that signi — icantly a —
ects the other party’s decision to enter a contract. Unlike — raudulent misrepresentation, material misrepresentation does not require intent to deceive. Instead, the — ocus is on the importance o — the misrepresentation and its actual impact on the recipient’s decision. Material misrepresentation requires essentially the same elements as a — raudulent misrepresentation except — or two key di —
erences. First, the state o — mind o — the maker o — the statement need not be — raudulent. The misrepresentation can be entirely innocent, and yet the law may still allow the aggrieved party to rescind the contract based on their — alse belie — . 12 • Improper Bargaining 333
Second, the misrepresentation must have been material. A misrepresentation is material i — it is signi — icant enough to in — luence the decision to contract. Under R2d § 162(2), [a] misrepresentation is material i — it would be likely to induce a reasonable person to mani — est his assent, or i — the maker knows that it would be likely to induce the recipient to do so. In other words, a misrepresentation can be material in one o — two ways — either under an objective standard, meaning a reasonable person in the same situation would likely be induced to assent by the assertion, or under a subjective standard, i —
the maker knows the assertion is uniquely important to the speci
ic recipient. For example, a seller’s claim about the structural soundness o — a building is objec- tively material because it impacts the property’s value. Conversely, a statement about a building’s historical signi — icance might be subjectively material i — the seller knows the buyer is particularly interested in historical preservation.
- Concealment as Misrepresentation Concealment occurs when one party actively prevents the other — rom discovering a material — act, e —
ectively making an assertion that the — act does not exist. Conceal- ment is de — ined as — ollows: Action intended or known to be likely to prevent another — rom learning a — act is equivalent to an assertion that the — act does not exist. R2d § 160. Concealment is a — orm o — misrepresentation because it involves behavior designed to mislead. The analysis o — concealment — ocuses on — our key elements: an act o — con- cealment, knowledge or intent, materiality, and inducement o — consent.
a. An Act o --- Concealment Concealment requires a ---
irmative conduct intended to hide a — act or mislead the other party. This may include physical actions, such as painting over water damage in a house to obscure the de — ect, or verbal inter — erence, such as instructing others to withhold material in — ormation. Unlike mere silence, which is addressed below, con- cealment involves deliberate action to obscure or distort the truth.
b. Knowledge or Intent
The party engaging in concealment must either know that their actions are likely to mislead the other party or act with the intent to prevent discovery o --- the --- act. Courts
ocus on whether the concealing party’s behavior demonstrates an awareness that the concealed in — ormation is material and would in — luence the other party’s decision to contract. For example, a seller o — a car rolls back the odometer to conceal the vehicle’s true mileage. This conduct clearly demonstrates knowledge that the — act being hidden is signi — icant. 334 12 • Improper Bargaining
c. Materiality For concealment to amount to actionable misrepresentation, the concealed --- act must be material. A --- act is material i --- it would likely in --- luence a reasonable person’s decision to enter into the contract or i --- the party concealing the --- act knows that it is particularly important to the other party. I --- a seller o --- a house paints over a cracked --- oundation to hide structural damage, this concealed de --- ect would be material because it signi --- icantly a ---
ects the value and sa — ety o — the property. Even i — the buyer does not explicitly ask about the — oundation, the seller’s deliberate action to obscure this — act tends to demonstrate its materiality in the transaction. However, i — a seller puts a welcome mat by the — ront door, this is probably not a material concealment even i — this covers up a small co —
ee stain on the carpet by the door. Not only could the buyer easily check under the mat to see whether the carpet is per — ect, but also a small cosmetic de — ect in this part o — the carpet does not signi — icantly impact the value o — the home and has zero impact on its property value. Even i — the seller deliberately put the mat down because he wanted to obscure the co —
ee stain, this is not a material concealment. Materiality is essential in the analysis because courts aim to ensure — airness and protect parties’ reliance on good- — aith dealings. I — the — act concealed is trivial or would not a —
ect the transaction, it may not rise to the level o — actionable misrepresentation.
d. Inducement o --- Assent
The concealed --- act must be material to the transaction, and the concealment must have induced the other party’s assent. As with other --- orms o --- misrepresentation, courts require a causal connection between the concealment and the decision to contract. The recipient must also show that they relied on the absence o --- the concealed in --- or- mation in making their decision. For example, i --- a buyer purchases a home believing it has no prior --- lood damage and the seller painted over water stains to hide evidence o ---
looding, the concealment likely induced the buyer’s assent. Concealment as misrepresentation protects parties — rom active deceit that under- mines the — airness o — the bargaining process. The doctrine emphasizes that contractual consent must be based on truth — ul and complete in — ormation, which is not possible when one party takes a —
irmative steps to hide material — acts. By treating concealment as equivalent to an assertion, the law ensures that parties engaging in deceptive con- duct cannot avoid liability simply because they did not speak — alsely.
- Silence as Misrepresentation Silence, or non-disclosure, may constitute misrepresentation when one party
ails to disclose a material — act under circumstances where disclosure is required. Unlike concealment, which involves a —
irmative acts to hide a — act, silence becomes 12 • Improper Bargaining 335
misrepresentation when it violates duties o
honesty, good — aith, or — air dealing. Non- disclosure is equivalent to an assertion that a — act does not exist in the — ollowing situations: (1) The party knows that disclosure is necessary to prevent a prior assertion
rom being a misrepresentation or — rom being — raudulent or material. (2) The party knows that disclosure would correct a mistake o — the other party as to a basic assumption on which that party is making the contract, and — ailure to disclose would violate standards o — good — aith and — air dealing. (3) The party knows that disclosure would correct a mistake o — the other party as to the contents or e —
ect o — a writing evidencing or embodying an agreement. (4) The other person is entitled to know the — act because o — a relationship o — trust and con — idence. The analysis o — silence as misrepresentation requires the — ollowing elements: duty to disclose, knowledge o — the — act and its materiality, and reliance and inducement.
a. Duty to Disclose Non-disclosure is generally not actionable unless the party withholding the in --- orma tion has a duty to disclose. Such duties arise in speci --- ic circumstances outlined in R2d § 161. For example, a duty to disclose exists when one party’s silence would cause a prior statement to become misleading, or when --- ailing to disclose would violate good --- aith and --- air dealing by leaving the other party mistaken about a basic --- act central to the agreement. For example, a seller o --- a home tells a buyer that the --- oundation has been inspected but --- ails to disclose that the inspection revealed serious cracks. The seller has a duty to disclose the de --- ect to prevent the prior statement --- rom becoming misleading.
b. Knowledge o --- the Fact and Its Materiality The party remaining silent must know both the --- act in question and its materiality. Courts assess whether the --- act relates to a basic assumption underlying the agreement or is likely to in --- luence the recipient’s decision to contract. For example, a car dealer knows that a vehicle has been in a serious accident and --- ails to disclose this in --- orma- tion to a buyer who reasonably assumes the car is in good condition. The accident history is a material --- act that the dealer has a duty to disclose.
c. Reliance and Inducement The non-disclosure must have induced the other party to enter the contract. The misled party must demonstrate that they relied on the absence o --- the withheld in --- or- mation when deciding to agree and that this reliance was justi --- ied. For example, a buyer relies on a seller’s silence about a property’s --- lood history when deciding to purchase. I --- the buyer would not have agreed had they known the truth, the non- disclosure has induced their assent.
336 12 • Improper Bargaining
Silence as misrepresentation re --- lects contract law’s commitment to --- airness and in --- ormed consent. While parties are generally not required to volunteer all in --- orma- tion, the law imposes disclosure duties in situations where silence would perpetuate mistakes or un --- airly exploit disparities in knowledge or trust. By treating silence as equivalent to an assertion in these limited contexts, the doctrine balances the princi ple o ---
reedom to contract with the need to ensure honesty and equity in bargaining.
- Solving Misrepresentation Problems The doctrine o — misrepresentation addresses the balance between protecting con- tractual consent and preserving good — aith in negotiations. By rendering contracts voidable in cases o —
raudulent or material misrepresentation, the law upholds — airness and deters deceptive practices, thus ensuring that agreements re — lect in — ormed and voluntary assent. There are — i — teen sections in R2d dedicated to explaining the de — ense o — misrepre sentation. This book has reproduced and explicated the key rules. But, given the broad scope and technical nature o — this doctrine, it is recommended that students read all these rules and comments — or themselves. To analyze a misrepresentation scenario, — ollow these steps: 1. State the ISSUE: For example, The ISSUE is whether [Buyer] can avoid the contract regarding [Term] because [Seller] misrepresented, where [Seller] asserted [Assertion] but [Fact] is true. 2. Cite the RULES: Start with R2d’s de — inition o — misrepresentation: A misrepresentation is an assertion that is not in accord with the — acts. R2d § 159. Additionally, re — erence key provisions such as: • R2d § 164, explaining that only — raudulent or material misrepresentations render contracts voidable. • R2d § 159 cmt. c, which clari — ies that — acts include past events or present circumstances but exclude — uture events. 3. Analyze the APPLICATION: • Determine whether the — act meets the legal de — inition o — a — act (not an opin- ion, prediction, or pu —
ery). • Distinguish the assertion — rom the — act; the discordance between the two is the misrepresentation. • Classi — y the misrepresentation as — raudulent (intentional) or material. A misrepresentation that is neither — raudulent nor material cannot void a contract. • Explain how the misrepresentation induced Buyer to contract with Seller. 12 • Improper Bargaining 337
4. Conclude: Decide whether Buyer merits the de --- ense o --- misrepresentation.
Consider whether Seller acted in good --- aith and whether Buyer can avoid the
contract as a result.
B. Duress The legal concept o — duress re — ers to the improper use o — strength or pressure to compel another to act against their will. The term itsel — traces back to Proto-Indo- European roots, where deru or dreu re — erred to — irmness, hardness, or unyielding strength, as seen in words like the Sanskrit dru (tree) and the Greek doru (spear sha — t). In Latin, this evolved into durus, meaning “hard,” and later into Old French duresse, signi — ying harshness or severity. This evolution captures the core o — duress in modern law: the wrong — ul application o — unrelenting — orce to overpower another’s autonomy. The concept o — duress in law can be traced to Roman legal traditions, where vis compulsiva re — erred to coercion through — ear, contrasting with vis absoluta, which involved overt physical compulsion. Over centuries, the doctrine expanded — rom addressing only physical threats to encompassing subtler — orms o — coercion, such as economic pressure. Today, the duress doctrine protects the integrity o — contractual relationships by ensuring that agreements are based on genuine consent rather than submission to improper pressure. In modern law, duress occurs when one party improperly pressures another to enter a contract by making threats that leave the victim with no reasonable alternative but to agree. The duress doctrine ensures that contractual consent is voluntary and — ree — rom coercion. Duress can take one o — two — orms: 1. Physical duress, which involves threats o — violence or the use o — physical
orce. I — a party’s mani — estation o — assent is physically compelled, the contract is void because the act is not voluntary. 2. Economic duress, which involves the improper use o —
inancial or economic pressure to coerce assent. A contract is voidable i — one party’s assent is induced by an improper threat that leaves them with no reasonable alternative. For example, threatening to breach an existing contract unless the other party agrees to new, un — air terms can constitute economic duress i — the victim has no viable alternatives to mitigate the harm. The evolution o — the word “duress” — rom concepts o —
irmness and unyielding — orce mirrors the doctrine’s — ocus on the misuse o — power to override — ree will. Just as the term suggests unrelenting pressure, the legal doctrine addresses situations where a party’s consent is coerced by the improper application o — strength — whether physical or economic. By addressing duress, contract law rein — orces the — oundational principle o — volun- tary agreement and ensures that contracts re — lect mutual assent rather than submis- sion to coercion. 338 12 • Improper Bargaining
- Physical Duress Physical duress addresses situations where coercion eliminates a party’s ability to provide genuine assent. It encompasses both physical compulsion and threats o —
harm, with the law distinguishing between these
orms based on the degree o — control exercised over the victim’s will. Physical compulsion involves direct physical — orce, reducing the victim to a “mere mechanical instrument.” In such cases, no intent to assent exists, and the resulting contract is void under R2d § 174. For example, i — one party physically grasps another’s hand and — orces them to sign a document, the signature re — lects nothing more than the act o — the coercer. No legal agreement is — ormed because the — undamental require- ment o — mutual assent is absent. Torture also — alls within the realm o — physical compulsion, albeit in a slightly less direct manner. Historically, devices like the thumbscrew were used to extract con — es- sions by in — licting excruciating physical pain. While the victim retained some control over their actions, the overwhelming coercion rendered their choices involuntary. Modern contract law rejects any agreement obtained through such means, treating it as equally invalid because the coercion destroys the possibility o — — ree will. The meta phorical “turning o — the screws” aptly captures the essence o — physical compulsion: unbearable — orce that eliminates volition entirely. Threats o — harm, by contrast, operate through psychological intimidation rather than direct physical control. Under R2d § 175, threats o — violence leave the victim in
Figure 12.1. Thumbscrew used in France to make prisoners
con --- ess to crimes or to otherwise reveal in --- ormation. Credit: Wellcome
Trust, Science Museum A67686, CC-A 4.0.
12 • Improper Bargaining 339
a state o
ear that compels assent. In such cases, the contract is voidable, allowing the victim to a —
irm or rescind the agreement once the coercive circumstances have passed. For example, i — one party threatens to break the other’s legs unless they sign a contract, the victim may agree out o —
ear. The law recognizes that the resulting assent is coerced but preserves the victim’s ability to void the agreement later. Courts evaluate threats based on their severity, credibility, and whether the victim had any reasonable alternatives to agreeing. Parmentier v. Pater, 13 Ore. 121 (1885), illustrates the devastating e —
ects o — psy- chological intimidation and the nuanced application o — the doctrine o — duress. Louis Parmentier entered into a — inancial agreement with Claude Pater that he later sought to cancel. On September 25, 1884, Parmentier surrendered a $6,000 promissory note secured by a mortgage on Pater’s property and recorded the note’s cancellation. Five days later, he died by suicide. His widow, Elizabeth Parmentier, contested the valid- ity o — the debt cancellation, alleging that his consent to this — inancial agreement was procured through duress. The — acts presented at trial revealed that Parmentier had been in a state o — extreme emotional distress leading up to the cancellation o — the note. Elizabeth testi — ied that her husband had not eaten or slept — or ten days be — ore his death, repeatedly express- ing — ear o — Pater and the potential consequences o — his threats. She tried to reassure him that Pater could not harm him, but Parmentier remained nervous and anxious. Speci — ic threats made by Pater included statements such as “Be — ore I get through with you, I will send you to Salem,” implying imprisonment or institutionalization. These statements, though vague, exacerbated Parmentier’s already — ragile mental state, leav- ing him unable to think or act rationally. The court emphasized that duress does not require the threats to be explicit or immediate, nor does it require that the threats be o — the type that would intimidate a person o — ordinary — irmness. Instead, the — ocus is on the subjective experience o —
the victim and takes into consideration
actors such as their state o — health, tempera- ment, and vulnerabilities. In this case, the evidence demonstrated that Pater know- ingly exploited Parmentier’s weakened condition by applying psychological pressure severe enough to compel him to act against his will. The court noted that Pater’s threats, though indirect, were “as e —
ective as a double-barreled shotgun leveled at the party’s head,” highlighting their potency in coercing Parmentier’s actions. Ultimately, the court ruled in — avor o — Elizabeth Parmentier, — inding that the can- cellation o — the debt was not a voluntary act but the result o — duress. It concluded that “any course calculated to excite alarm, which is resorted to by one party in order to coerce another to do an act detrimental to his rights, and advantageous to the — ormer, is unlaw — ul.” By leveraging Parmentier’s mental distress and creating a pervasive sense o —
ear, Pater invalidated the agreement. This case demonstrates how the doctrine o — duress accounts — or both the victim’s subjective experience and the coercer’s intent to exploit that vulnerability. It rein — orces the principle that threats need not involve physical harm to undermine voluntary 340 12 • Improper Bargaining
consent. By recognizing the impact o
psychological intimidation, the court expanded the application o — duress to protect parties who are particularly vulnerable to exploita- tion. The ruling re — lects the broader purpose o — the doctrine: to ensure that contracts arise — rom genuine and in — ormed assent, — ree — rom improper coercion. In summary, physical duress occurs when one party improperly compels another to mani — est assent through either direct physical compulsion or threats o — violence. Physical compulsion, which renders a contract void, involves the use o —
orce to physi- cally control the victim’s actions, leaving no room — or intent or volition. Threats o —
violence, by contrast, operate through
ear, leaving the victim with no reasonable alternative but to agree; such contracts are voidable at the victim’s option. Both — orms o — duress undermine the principle o — voluntary consent and demonstrate the law’s commitment to protecting parties — rom agreements — ormed through coercion. The nuanced distinctions between these — orms o — duress serve to ensure — airness and uphold the integrity o — contractual relationships.
- Economic Duress Economic coercion, also known as economic duress, arises when one party improp- erly compels another to enter into a contract through wrong — ul threats or actions that cause severe — inancial distress. The doctrine recognizes that consent obtained under such circumstances is not voluntary and undermines the — undamental principle o —
mutual assent. However, it is a limited de
ense, applicable only when the coercing party’s threats or actions are deemed improper. The cornerstone o — the doctrine is the concept o — an improper threat, as de — ined by R2d § 176. A threat is improper i — it involves criminal or tortious conduct, the bad- — aith use o — legal process, or a breach o — good — aith and — air dealing. For instance, threatening to breach an essential contract unless the victim agrees to unrelated and un — avorable terms is considered improper. In Acquaire v. Canada Dry Bottling, 906 F. Supp. 819 (E.D.N.Y. 1995), distributors o —
Canada Dry products success
ully alleged economic duress a — ter being — orced to sign contracts under extreme conditions. Canada Dry threatened to terminate their distrib utorships unless the distributors accepted new contracts on a “take-it-or-leave-it” basis. The distributors claimed they were coerced into signing while loading their trucks, without time to consult counsel, under the wrong — ul threat o — losing their livelihoods. The court recognized that such threats, i — proven, could constitute economic duress under R2d § 176. Although the parties agreed to private arbitration be — ore the case went to trial, this case illustrates how leveraging essential goods or services can be con- sidered an improper threat i — it coerces the victim into assenting to an un — air contract. But not all economic threats are improper. The doctrine recognizes that market dynamics o — ten create situations o —
inancial pressure, but such pressure does not automatically equate to coercion. R2d § 176(2) explains that a threat is only improper i — it results in un — air terms or is made — or illegitimate ends. 12 • Improper Bargaining 341
For example, a business raising prices in response to increased production costs may impose signi — icant — inancial stress on a buyer, but this re — lects law — ul market behavior rather than coercion. Courts care — ully distinguish between hard bargain- ing, which is legitimate, and conduct that crosses the line into coercion by exploiting vulnerabilities or undermining — airness. This distinction was illustrated in Martinez-Gonzalez v. Elkhorn Packing Co. LLC, 25 F.4th 613 (9th Cir. 2022). There, the court rejected a claim o — economic duress a — ter a — armworker signed an arbitration agreement during a late-night onboard- ing session conducted in a parking lot. Although the conditions were less than ideal and Martinez-Gonzalez claimed he — elt pressured, the court — ound no evidence o — a wrong — ul act or improper threat. The agreements were presented as part o — a routine business process, and no one explicitly told Martinez-Gonzalez that his job depended on signing. Moreover, the court noted that the onboarding session served a legitimate business purpose: — acilitating mass employment agreements — or a large work — orce. Without evidence o — bad — aith or coercive intent, the economic pressure inherent in the situation did not rise to the level o — duress. The Martinez-Gonzalez case demonstrates how courts care — ully evaluate whether the pressure applied stems — rom legitimate business practices or crosses into improper threats. Even in situations o —
inancial stress, economic duress requires a clear show- ing o — wrong — ul conduct that exploits vulnerabilities or leaves the victim without reasonable alternatives. This distinction ensures that the doctrine protects against genuine coercion without inter — ering with law — ul negotiations or practical business operations. For a claim o — economic coercion to succeed, three key elements must be established:
(1) There must be a wrong --- ul act or improper threat;
(2) The victim must show that the threat caused signi --- icant --- inancial distress,
leaving them unable to make a --- ree and voluntary decision; and
(3) The victim must demonstrate that they had no reasonable alternative but to
agree to the terms.
This
inal element ensures that the doctrine is not overextended. I — the victim could have sought legal remedies, alternative suppliers, or other solutions without undue harm, the de — ense may — ail. Economic coercion renders a contract voidable, allowing the victim to a —
irm or rescind the agreement. However, the victim must act promptly to repudiate the con- tract; — ailure to do so may result in rati — ication. In VKK Corp. v. NFL, 244 F.3d 114 (2d Cir. 2001), the court held that a two-year delay in challenging a release agreement, signed under alleged economic duress, constituted rati — ication. The victim’s — ailure to act swi — tly undermined their claim, as prompt repudiation is essential to preserving the de — ense o — duress. 342 12 • Improper Bargaining
The doctrine balances the need to protect parties
rom wrong — ul economic threats with the en — orceability o — contracts negotiated under legitimate commercial condi- tions. By addressing improper threats that undermine consent, it sa — eguards — airness while preserving the integrity o — contractual relationships. The economic coercion de — ense ensures that agreements re — lect genuine mutual assent, even in the — ace o —
inancial pressure, without inter — ering in law — ul business negotiations. Cases like Acquaire demonstrate the boundaries o — the doctrine, showing how courts assess the nature o — the threat, the victim’s — inancial distress, and the availability o — alternatives to determine whether economic coercion invalidates a contract.
C. Undue In
luence Undue in — luence occurs when a party’s will is overborne by excessive persuasion. Unlike duress, undue in — luence does not require a wrong — ul act or threat. Instead, it
ocuses on whether the victim was unduly susceptible to persuasion and whether the persuading party exploited a relationship o — trust or dominance. Under R2d § 177(1), undue in — luence arises when a party is un — airly persuaded by someone who dominates them or shares a special relationship o — trust. The doctrine requires two key elements: undue susceptibility in the victim and excessive persuasion by the dominant party. These elements work together. I — one element is strongly present, the other may be less critical. Undue susceptibility o — ten arises — rom age, illness, or emotional distress. Excessive persuasion involves conduct such as isolating the victim, excluding independent advisers, or creating urgency to act. Courts also consider the — airness o — the resulting agreement. A special relationship is central to undue in — luence. Fiduciary, — amilial, or caregiv- ing relationships o — ten involve the trust or reliance necessary to establish undue in — lu- ence. However, not all relationships involving power imbalances quali — y. In Martinez-Gonzalez, migrant — armworkers claimed undue in — luence a — ter sign- ing arbitration agreements during onboarding sessions held late at night in a parking lot. The workers argued that the circumstances, including logistical pressure, eco- nomic dependence, and limited English pro — iciency, created undue in — luence. Many workers relied on their jobs — or survival, and the agreements were presented without prior notice or independent advice. Martinez-Gonzalez speci — ically claimed that the employer’s authority and the workers’ vulnerable position le — t them with no meaning-
ul choice. The court rejected the claim. While the workers — aced signi — icant logistical and
inancial pressure, these — actors alone did not establish undue in — luence. The court emphasized that the employer-employee relationship, even in the context o — econom ically dependent migrant workers, does not automatically create the special relation- ship o — trust or dominance required — or undue in — luence. The employer was not in a
iduciary or advisory role, and there was no evidence that the employer exploited a relationship o — trust to compel the workers’ assent. The agreements were presented as 12 • Improper Bargaining 343
routine onboarding documents, and there was no indication o
excessive persuasion, such as threats or insistence on immediate compliance. This case illustrates that — actors like economic dependence, limited English pro-
iciency, and vulnerability due to employment are not enough to establish undue in — luence without a special relationship o — trust. To succeed on the de — ense o — undue in — luence, courts require evidence o — domination or reliance that allows one party to supplant the other’s independent judgment. The decision in Martinez-Gonzalez demonstrates that undue in — luence demands more than power imbalances or logisti- cal challenges, which ensures that the doctrine remains — ocused on genuine relational exploitation rather than routine workplace dynamics. By contrast, Goldman v. Bequai, 19 F.3d 666 (D.C. Ct. App. 1994), demonstrates a situation where undue in — luence was — ound. Florence Goldman, an elderly widow, trans — erred property interests to her attorney, August Bequai, shortly a — ter her hus- band’s death. Goldman was emotionally distressed and reliant on Bequai as a trusted advisor. The court — ound su —
icient evidence that Bequai exploited this trust to secure un — air property trans — ers without adequate consideration. Goldman’s vulnerability combined with Bequai’s position o — in — luence supplanted her independent judgment. (This case also raised issues o — incapacity, as her emotional state and reliance on medi cation heightened her susceptibility to undue in — luence.) As these illustrations show, undue in — luence overlaps with other de — enses like duress and incapacity. Duress — ocuses on threats or wrong — ul acts, while undue in — luence examines relationships and persuasion. Incapacity addresses cognitive ability, while undue in — luence — ocuses on relational dynamics. Together, these doctrines protect individuals — rom agreements that lack true consent. The cases o — Martinez-Gonzalez and Goldman show how courts analyze undue in — luence in di — — erent contexts and balance the need — or — airness with the importance o — upholding genuine agreements.
D. Unconscionability Unconscionability prevents the en — orcement o — contracts or terms that are grossly un — air or oppressive. The doctrine ensures — airness and protects parties — rom exploita- tion. Under R2d § 208 and UCC § 2-302, courts may re — use to en — orce a contract or its terms i — they — ind unconscionability. Unconscionability has two elements: procedural and substantive. Procedural unconscionability — ocuses on the — airness o — the bargaining process. It considers — actors like surprise, unequal bargaining power, or lack o — meaning — ul choice. Sub- stantive unconscionability examines the — airness o — the terms. Courts look — or terms that are overly harsh, one-sided, or oppressive. A sliding scale o — ten applies. A strong showing o — one element may o —
set a weaker showing o — the other. The contractual context matters. In Ronderos v. USF Reddaway, Inc., 114 F.4th 1080 (9th Cir. 2024), Ronderos applied — or a job. As part o — the hiring process, USF Red- daway required him to sign an arbitration agreement. The agreement was in the — orm 344 12 • Improper Bargaining
o
a contract o — adhesion: it was preprinted, non-negotiable, and required immediate signing on site. Ronderos had no chance to consult a lawyer or negotiate terms. This created procedural unconscionability. Substantive unconscionability was also present. The terms disproportionately bene — ited the employer by limiting Ronderos’s ability to seek redress. Together, these — laws rendered the agreement unen — orceable. In contrast, in Fagerstrom v. Amazon.com, Inc., 141 F. Supp. 3d 1051 (S.D. Cal. 2015), a court upheld an Amazon.com arbitration clause in a sales agreement that Amazon’s customers entered into over the internet. Customers agreed to Amazon’s “Conditions o — Use” during checkout in Amazon’s online store. The arbitration clause was included in those terms. Even though this was a contract o — adhesion, because it was non-negotiated and dra — ted only by one side, the court — ound minimal procedural unconscionability. Customers created the sales agreement by clicking a button on the checkout page that said “Place your order,” constituting an a —
irmative act o — consent. While the cus- tomer did not have to speci — ically click “I accept” on a pop-up window that included the — ull contract terms, those terms, including the arbitration clause, were reason- ably accessible via hyperlinks on the checkout page. Consumers — aced no immediate pressure to agree and could choose not to use Amazon’s services. Substantive uncon- scionability was also absent. The terms were reasonable. Amazon’s ability to modi — y the agreement was limited by the implied duty o — good — aith. The court upheld the agreement, — inding no signi — icant un — airness. These cases show the importance o — context but also highlight challenges in assess- ing procedural unconscionability. In Ronderos, the employer-employee dynamic created immediate pressure and emphasized the unequal bargaining power, with signi — icant consequences — or re — using to sign. In Fagerstrom, the consumer setting arguably reduced procedural concerns, as customers could review the terms and the- oretically decline the service without immediate repercussions. However, the heavy reliance on adhesion contracts in online transactions raises questions about whether consumers genuinely have meaning — ul choices, as re — usal o — ten means exclusion — rom widely used services. Courts must balance these contextual di —
erences while critically assessing whether apparent — reedom to decline masks a lack o — practical alternatives. Unconscionability balances — airness and — reedom o — contract. It protects against exploitation while allowing legitimate agreements to stand. Courts care — ully evaluate the process and terms to ensure that contracts re — lect mutual consent. The cases show that courts consider both the relationship between the parties and the context o — the agreement.
E. Contracts Violating Public Policy Contracts that violate public policy are unen — orceable, even i — both parties will- ingly agree to them. Public policy limits the — reedom o — contract to ensure that agree- ments do not con — lict with laws or harm societal interests. Contract law exists within 12 • Improper Bargaining 345
a system o
justice and cannot be used as a tool to promote illegality or undermine ethical norms. R2d § 178 provides the — ramework — or determining when a contract violates public policy. A promise is unen — orceable i — legislation explicitly prohibits it or i — the public interest in voiding the contract outweighs the interest in en — orcing it. Courts balance the harm caused by en — orcement against the bene — its o — upholding the agreement. Contracts that promote illegal activities are void. For example, a contract to smug- gle goods or evade taxes directly con — licts with public policy and is unen — orceable. Similarly, an agreement to commit perjury or — alsi — y evidence undermines the judicial system and cannot be en — orced. These contracts con — lict with the core principles o —
legality and justice. Certain contracts restrict legal rights in ways that violate public policy. For instance, a contract waiving liability — or intentional harm or gross negligence is void. Such agreements remove accountability — or serious wrongdoing, which harms the public good. An agreement that prevents someone — rom reporting illegal conduct to authori- ties would also be unen — orceable. These contracts inter — ere with societal interests in accountability and public sa — ety. Contracts that violate statutes are similarly unen — orceable. For example, an agree- ment to charge an interest rate exceeding a statutory usury cap is void. These contracts con — lict with legislative protections and harm the individuals the law seeks to protect. Courts re — use to uphold agreements that undermine legislative intent. Some contracts harm social relationships. For example, an agreement to pay some- one to divorce their spouse violates public policy because it disrupts — amily unity. Similarly, contracts promoting illegal discrimination are void because they con — lict with — undamental principles o —
airness and equality. These agreements are not only harm — ul to individuals but also detrimental to societal values. R2d § 178 also distinguishes between contracts that are inherently illegal and those that are only incidentally connected to illegality. For instance, a seller’s contract to provide goods is not void simply because the buyer intends to use them unlaw — ully, unless the seller knew o — and supported the illegal purpose. This distinction ensures that the doctrine targets only agreements that directly con — lict with public policy. By balancing private rights with societal interests, R2d § 178 ensures that contracts align with justice and public wel — are. The doctrine preserves the integrity o — the legal system while protecting individual — reedoms. It re — lects the broader principle that contracts, while power — ul tools — or private ordering, cannot be used to undermine public trust or harm the public good.
F. Re
lections on Improper Bargaining The improper bargaining doctrines reveal the limits o —
reedom in contract law. These doctrines ensure that agreements re — lect genuine consent and — undamental
airness. By applying the doctrines o — misrepresentation, duress, undue in — luence, 346 12 • Improper Bargaining
unconscionability, and public policy violations, courts can intervene when agree- ments are tainted by deception, coercion, or exploitation. These doctrines serve not only to protect individual parties but also to maintain trust in the contractual system. By deterring un — air practices and en — orcing societal norms, they support the integrity o — private agreements while upholding broader principles o — justice. However, such interventions are calibrated care — ully to avoid undue inter — erence with autonomy, preserving the core — reedom to shape agreements according to individual needs. The study o — improper bargaining underscores the dual role o — contract law: — acili- tating voluntary transactions while sa — eguarding against abuse. Understanding these boundaries equips practitioners to navigate the complex interplay among autonomy,
airness, and en — orceability in private agreements.
Cases Reading Barrer v. Women’s National Bank. Under R2d § 159, a misrepresen tation is an assertion not in accord with the --- acts. A deliberate lie will always be such an assertion, while concealment and non-disclosure may be in certain circumstances outlined in R2d §§ 160 and 161. Once a misrepresentation has been identi --- ied, it needs to be material or --- raudulent under R2d § 162.
Barrer is about an innocent material misrepresentation, which is when a person --- ails to disclose something unintentionally. As you read the case, pay attention to how the court organizes its rules and analysis --- or determining whether there is an innocent material misrepresentation.
Barrer v. Women’s National Bank
761 F.2d 752 (D.C. Cir. 1985) HARRY T. EDWARDS, Circuit Judge. The appellant, Lester A. Barrer, brought this action against Women’s National Bank (“the Bank” or “WNB”) --- or damages he allegedly sustained as the result o --- the Bank’s eleventh-hour decision to rescind a loan agreement. WNB de --- ended and moved --- or summary judgment on the ground that Barrer had made innocent material misrepre sentations in his loan application that justi --- ied the Bank’s avoidance o --- the contract. The magistrate --- ound that Barrer had made --- ive material representations to the Bank that were not in accord with the --- acts and, on that basis, granted WNB’s motion --- or summary judgment. We --- ind that the magistrate --- ailed to apply the correct legal test
or determining when an innocent material misrepresentation permits the rescission o — a contract, and that there are material issues o —
act that make summary judgment 12 • Improper Bargaining 347
inappropriate. Accordingly, we reverse and remand
or — urther proceedings consistent with this opinion. I. Background A. Factual Background On June 24, 1981, Lester Barrer’s personal home was sold at a tax sale by the Inter- nal Revenue Service (“IRS”) because o — his inability to pay certain employment taxes. The taxes were owed by Barrer’s closely-held corporation, Today News Service, Inc., and had been asserted against him personally as a 100 percent penalty pursuant to 26 U.S.C. § 6672 (1982). At the tax sale, Barrer’s home was purchased by Edward L. Curtis, Jr., — or $16,326, subject to the underlying mortgage. The Internal Revenue Code provides — or the redemption o — real property within 120 days o — a tax sale upon payment to the purchaser o — the purchase price plus interest. Barrer accordingly was advised by the IRS that he could redeem his home by delivering $17,400, in cash or its equivalent, to the IRS or to Curtis on or be — ore October 22, 1981. On October 20, 1981, Barrer went to WNB to discuss a personal loan — or the redemption amount. Apparently, on the previous day, Barrer had approached one other bank about the possibility o — a loan; however, he had been advised by the Presi- dent o — that bank that it would not be possible to process an application — or a loan in the amount sought by Barrer in such a short period o — time. Barrer indicated in his deposition statement that he waited until the last minute to seek a bank loan because he had been involved in serious negotiations over the sale o — his business and had expected to close on the sale be — ore October 20, 1981, and that he had intended to use the proceeds — rom that sale to redeem his house. At WNB, Barrer spoke with Emily Womack, the President o — the Bank, with whom he had a pro — essional acquaintance. Barrer’s corporation published the Women Today Newsletter, a periodical to which the Bank subscribed and which, according to Bar- rer’s deposition statement, had published an article on the Bank. Barrer’s corporation also maintained an account with the Bank. Womack gave Barrer a loan application
orm, which he completed and returned to her the next day, October 21, along with certain supporting documents, including those concerning the tax sale and his e —
orts to sell the business. Barrer evidently explained to Womack that he had experienced severe — inancial di —
iculties since his wi — e and long-time pro — essional collaborator died o — cancer in
-
At his deposition, Barrer testi
ied that he told Womack that, — or a period a — ter his wi — e died, he lost his motivation to work and that the business they had jointly owned and managed su —
ered serious economic reverses as a consequence. Those reverses led to Today News Service, Inc.’s inability to pay its employment taxes and ultimately to the tax sale o — Barrer’s home. Womack sympathized with Barrer’s plight and expressed to one o — her bank o —
icers the hope that they could help him. On October 21, Barrer and Womack reviewed his loan application line by line. With re — erence to his home mortgage, Barrer told her that his house was worth approximately 348 12 • Improper Bargaining
$130,000 and that Columbia First Federal Savings and Loan Association (“Columbia”) held a $65,000 mortgage on it. When asked whether his mortgage payments were up- to-date, Barrer recalls replying that he “thought” he was two months behind. By con- trast, Womack testi — ied that Barrer said he was current. In — act, Barrer was six months behind. Barrer explained that he thought his obligation to pay his mortgage ceased at the time o — the tax sale and that he did not realize that he was responsible — or more than the two months’ mortgage payments that had been due be — ore the sale. Because Barrer’s mortgage payments were in arrears, Columbia had begun — oreclo- sure proceedings — also a — act that Barrer did not disclose to Womack. In his deposi- tion statement, Barrer accounted — or this — ailure by stating that on October 21, 1981, he did not know that Columbia had initiated — oreclosure proceedings. On the liability side o — the loan application, Barrer revealed that he had borrowed $40,000 — rom — riends and relatives. Barrer testi — ied that he explained to Womack that he had borrowed this sum to ease the — inancial di —
iculties he had encountered since his wi — e’s death. Barrer also disclosed the $38,000 tax liability which was the cause o — the tax sale. He did not indicate, however, a contingent liability — or an additional $11,000 in employment taxes owed by his corporation which had not, at that time, been asserted against him personally under 26 U.S.C. § 6672. Barrer seems to argue both that this $11,000 was included in the $38,000 — igure, and that because the $11,000 tax liability had not been assessed against him personally it was not a contingent liability that he was obligated to reveal. Nor did Barrer list as a contingent liability a $5,300 debt owed by his wi — e’s estate to IBM. The Bank argues that this debt should have been revealed because Barrer had demonstrated, by requesting the probate court to charge the obligation to him, that he thought himsel — responsible — or the debt. Barrer contends that because the probate court ultimately ruled that the obligation belonged to the estate, his — ailure to list the amount on the loan application was not a misrepresentation. Finally, Barrer did not indicate on the loan application that he had approximately $1,500 in unsatis — ied judgments pending against him. However, he answered in the a —
irmative to a speci — ic question on the application — orm which inquired whether he was “a de — endant in any suits or legal actions.” Barrer also stated at his deposition that he told Womack that he owed small amounts arising out o — these lawsuits. He said that he explained to her that these debts involved disputes over medical bills and that he expected his major medical insurance to cover most o — them. A — ter Barrer and Womack — inished discussing the content o — the completed loan application — orm and Barrer’s — inancial situation, Womack indicated that, in order — or the Bank to grant the loan, the IRS would have to agree to subordinate its claim with respect to Barrer’s house to that o — WNB. On October 22, 1981, the last redemption day, Barrer obtained the subordination agreement — rom the IRS and delivered it to the Bank. Barrer then executed a collateral note — or $17,400, payable in 90 days at 15 percent interest, which gave the Bank the right to a security interest 12 • Improper Bargaining 349
in his house. The Bank’s Vice President, Emma Carrera, gave Barrer a cashier’s check, payable to him, — or the loan amount. Prior to granting the loan, neither Womack nor Carrera obtained a credit report on Barrer and neither o —
icer phoned Columbia about the status o — his mortgage. That a — ternoon, Barrer delivered the endorsed check to the IRS in accordance with the required redemption procedure and returned home, believing that his home had been saved. In the meantime, the tax sale purchaser, Curtis, phoned WNB and spoke with Car- rera. According to her deposition, their conversation was as — ollows: He stated that he had some in — ormation that he thought would be o — interest to me on the loan that the bank had made to Mr. Barrer. I told him at that time that I could not discuss any loan with him in regards to who it was or what it was — or. He said he didn’t want me to do any discussing, but he just wanted to tell me some — acts. He then told me he was the purchaser o — the property at the tax sale. He couldn’t believe that a bank would make a loan to a man who was in the credit position that he was in; that there were liens and judgments and so — orth against him and at that time, I signaled — or my secretary to bring me the — ile on Mr. Barrer. I quickly looked through the — ile and — ound there wasn’t a credit report in the — ile. At that time I told her to pull a credit report on him, which she did, and brought it to me within just a couple o — minutes. In the meantime, Mr. Curtis was continuing to talk. He had mentioned something about some kind o — code that says that a person who buys a property at a tax sale cannot inter — ere with the owner’s right to redeem, but that he didn’t
eel he was doing that just by in — orming the bank o — Mr. Barrer’s situation. He put me on a con — erence call with a gentleman who identi — ied himsel —
as an o ---
icial o — the mortgage company [Columbia] that held the mortgage on Mr. Barrer’s property. He [Mr. Ford] asked me at that time who, in his organization, had given us a credit report. . . . I . . . answer[ed] him . . . that it was my understanding that all o — the savings and loan associations required a written request — or credit rating [sic] on any o — the mortgages that they held and it had always been, to my knowl- edge, their policies not to give a re — erence by phone. [Mr. Ford] said at that point he thought it was important that we know that Mr. Barrer’s mortgage was six months in arrears and they were prepared to go to — oreclosure on the property. He excused himsel — and Mr. Curtis stayed on the line. [Mr. Curtis] said that he had knowledge that IRS had not made an agree- ment with Mr. Barrer to repay the balance o — the taxes; that they were ready to go back to another tax sale as soon as this $17,400 was paid. 350 12 • Improper Bargaining
Based on the in --- ormation --- urnished by Curtis, Ford, and the credit report, the Bank decided to stop payment on the cashier’s check. The Bank’s counsel called Barrer later that day to in --- orm him that the check would not be honored. When Curtis, to whom the IRS had turned over the check, presented it --- or payment the Bank re --- used to cash it. Barrer, there --- ore, did not e ---
ect the redemption o — his home within the statu- tory period and Curtis became the owner. B. Procedural History Barrer — iled suit against the Bank in District Court to recover damages to compen- sate him — or the loss o — $94,000 equity in his home — the di —
erence between the market value o — the house and the balance due on the mortgage — that he allegedly su —
ered as a result o — the Bank’s rescission o — the loan agreement. Barrer also claimed punitive damages — or the embarrassment he endured and the rent he has been required to pay Curtis in order to remain in his home. The case was re — erred to a magistrate — or pretrial proceedings. On the Bank’s motion
or summary judgment, the magistrate — ound that Barrer did not disclose the — ollow- ing — ive material — acts to the Bank: (1) that he was six months delinquent in mortgage payments, (2) that Columbia had begun — oreclosure procedures, (3) that Barrer had at least an $11,000 contingent liability to the IRS in addition to his $38,000 actual liabil- ity, (4) that he had a contingent liability to IBM o — approximately $5,000, and (5) that he had approximately $1,500 in unsatis — ied judgments pending against him. The mag- istrate purported to rely on the law o — innocent material misrepresentation to hold that these disclosure omissions justi — ied WNB’s rescission o — the loan contract. On that basis, he granted summary judgment in — avor o — the Bank. This appeal — ollowed. II. Analysis [A. Standards — or Summary Judgment omitted.] B. Elements o — Innocent Material Misrepresentation It is well established that misrepresentation o — material — acts may be the basis — or the rescission o — a contract, even where the misrepresentations are made innocently, without knowledge o — their — alsity and without — raudulent intent. The rationale sup- porting this rule, which has its origins in equity, is that, as between two innocent par- ties, the party making the representation should bear the loss. Stated another way, the rule is based on the view that “one who has made a — alse statement ought not to bene — it at the expense o — another who has been prejudiced by relying on the statement.” This rule may be employed “actively,” as in a suit at equity or law — or rescission and restitu- tion, or “passively,” as a de — ense to a suit — or breach o — contract. It is generally understood that — our conditions must be met be — ore a contract may be avoided — or innocent misrepresentation. The recipient o — the alleged misrepresen tation must demonstrate that the maker made an assertion: (1) that was not in accord with the — acts, (2) that was material, and (3) that was relied upon (4) justi — iably by the recipient in mani — esting his assent to the agreement. District o — Columbia law adds a
i — th condition, i.e., that the recipient relied to his detriment. 12 • Improper Bargaining 351
Un
ortunately, the applicable precedent does not elaborate on the meaning o — these conditions. In trying to give them content, we have — ound that the Restatement (Sec- ond) o — Contracts (“Restatement (Second)”) provides help — ul guidance concerning the — irst — our conditions.
1. Misrepresentation Section 159 o --- the Restatement (Second) de --- ines a misrepresentation as “an asser- tion that is not in accord with the --- acts.” Comment c explains that an “assertion must relate to something that is a --- act at the time the assertion is made in order to be a misrepresentation. Such --- acts include past events as well as present circumstances but do not include --- uture events.” Comment d observes that a person’s state o --- mind is a
act and that an assertion o — one’s opinion constitutes a misrepresentation i — the state o — mind is other than as asserted. According to section 161, the only non-disclosures that may be considered asser- tions o —
act — or purposes o — misrepresentation analysis are non-disclosures o —
acts known to the maker where the maker knows that disclosure: (a) is necessary to pre- vent a previous assertion — rom being a misrepresentation or — rom being — raudulent or material, (b) would correct a mistake o — the other party as to a basic assumption on which that party is making the contract, i — non-disclosure amounts to a — ailure to act in good — aith and in accordance with reasonable standards o —
air dealing, or (c) would correct a mistake o — the other party as to the contents or e —
ect o — a writing. The section also provides that where the other person is entitled to know the non-disclosed — acts because a relation o — trust and con — idence exists between the parties, non-disclosure is equivalent to an assertion o —
acts.
2. Materiality
In section 162, comment c, the Restatement (Second) explains that a misrepresen tation is material “i --- it would be likely to induce a reasonable person to mani --- est his assent.” The court in Cousineau v. Walker elaborated on the materiality requirement, noting that it is a mixed question o --- law and --- act that asks whether the assertion is one to which a reasonable person might be expected to attach importance in making a choice o --- action. A material --- act is one that could reasonably be expected to in --- luence a person’s judgment or conduct concerning a transaction. The justi --- ication --- or the materiality requirement is that it is believed to encourage stability in contract relations. It prevents parties who become disappointed at the outcome o --- their bargain --- rom seizing upon any insigni --- icant discrepancy to void the contract.
3. Reliance Section 167 requires that the misrepresentation be causally related to the recipi- ent’s decision to agree to the contract — that it have been an inducement to agree. Inducement, as comment a explains, is shown through actual reliance. Comment a goes on to state that this reliance need not, however, be the sole or predominant
352 12 • Improper Bargaining
actor in — luencing the recipient’s decision. Comment b indicates that circumstantial evidence is o — ten important in determining whether there was actual reliance. 4. Justi — iability o — Reliance Section 172 o — the Restatement (Second) provides that a recipient’s — ault in not knowing or discovering the — acts be — ore making the contract does not make his reli- ance unjusti — ied unless it amounts to a — ailure to act in good — aith and in accordance with reasonable standards o —
air dealing. While section 169 suggests that reliance on an assertion o — opinion o — ten is not justi — ied, section 168(2) and the accompanying comment d make clear that in some situations the recipient may reasonably understand a statement o — opinion to be more than an assertion as to the maker’s state o — mind. Where circumstances justi — y it, a statement o — opinion may also be reasonably understood as carrying with it an asser- tion that the maker knows — acts su —
icient to justi — y him in — orming it. 5. Detriment Because the Restatement (Second) does not require a showing o — detriment — or rescission, it does not de — ine it. We think that, in the innocent material misrepre sentation context, a recipient is appropriately considered to have relied to his detri- ment where he receives something that is less valuable or di — — erent in some signi — icant respect — rom that which he reasonably expected. C. Application o — Legal Standards Application o — the — oregoing principles to the — acts o — this case requires that the case be remanded — or trial. The magistrate tested Barrer’s alleged misrepresentations against only two o — the — ive elements necessary — or rescission — he asked only i — the representations were in accord with the — acts and i — they were material. In making this inquiry, the magistrate — ailed to consider the legal distinctions between asser- tions o —
act and nondisclosure and between assertions o —
act and statements o —
opinion. He neglected to investigate whether the Bank actually relied on the repre sentations in deciding to make the loan; whether that reliance, i — it existed, was jus- ti — iable; and whether the Bank relied to its detriment. Furthermore, the magistrate incorrectly concluded that there were no legally probative, material issues o —
act in dispute. 1. Elements the Magistrate Failed to Consider Initially, assuming — or a moment that Barrer actually “misrepresented” certain
acts, the materiality o — the representations is hardly obvious. A — ter deciding which representations meet the legal de — inition o — misrepresentation, the trial court must determine with regard to each individual misrepresentation whether it was “likely to induce a reasonable [bank] to mani — est [its] assent” to the loan agreement. I — no single misrepresentation is — ound to be material, the court may consider, a — ter ascertaining the assertions upon which WNB justi — iably relied, whether those assertions are mate- rial when taken together. 12 • Improper Bargaining 353
All --- ive alleged “misrepresentations” also raise serious --- actual questions as to whether the Bank actually and justi --- iably relied on them. Womack’s expressed sympathy --- or Barrer combined with the --- act that the loan was issued in a very short time, without either a credit check, which was obtainable in minutes, or an inquiry into the status o ---
Barrer’s mortgage, and the
act that the loan was withdrawn only when the Bank was placed in an embarrassing position by the tax sale purchaser— all these circumstances could suggest that the Bank was not very interested in the particulars o — Barrer’s — inan- cial condition. Indeed, it was clear — rom the loan application that Barrer did admit that he was experiencing — inancial di —
iculties, yet WNB chose to make no — urther inquiry into the details o — these problems. These — acts could be construed to show that Wom- ack’s sympathy — or Barrer’s predicament was the real inducement — or the loan. I — the trial court — inds that the Bank actually relied on Barrer’s alleged “misrepresentations,” it nonetheless must proceed to decide whether that reliance was justi — ied. The trial court must also determine whether the Bank’s reliance on Barrer’s alleged “misrepresentations” caused it any detriment. Did WNB receive as its bene — it o —
the bargain something less valuable or signi
icantly di — — erent — rom what it reason- ably expected? In addition, the trial court should consider whether the subordina- tion agreement, in combination with the right to a security interest in Barrer’s house granted by the collateral note, — ully satis — ied the Bank’s expectations. The magistrate also made individual errors with respect to the — ive representations. These errors are outlined below.
2. Delinquency in Mortgage Payments
Barrer and Womack disagree over whether he told her that he “thought” he was two months behind in his mortgage payments or whether he said that he was current. Because this case is be --- ore us on appeal --- rom the magistrate’s grant o --- summary judg- ment --- or the Bank, we must accept Barrer’s statement o --- the --- acts. The Bank argues that even i --- Barrer’s version is accepted, a misrepresentation still occurred because Barrer was actually six months behind. The Bank’s position is not necessarily correct. Barrer’s statement that he “thought” he was in arrears by two months initially raises the --- actual question whether he made any misrepresentation. On the sur --- ace, the --- act asserted by Barrer was his state o --- mind — what he thought. No --- inding was made below that Barrer’s state o --- mind was other than what he declared. On remand, be --- ore it may determine that this statement constituted a misrepresentation, the court must
ind either that Barrer misstated his thoughts, in accordance with the rule laid out in section 159, comment d o — the Restatement (Second), or that Barrer’s statement could reasonably have been understood as carrying with it an assertion that Barrer knew su —
icient — acts that justi — ied him in — orming his opinion, in accordance with section 168(2). When evaluating the materiality o — this particular representation, the court should keep in mind the concession made by WNB’s counsel at oral argument — that by itsel —
this representation might not be su
icient to justi — y summary judgment. 354 12 • Improper Bargaining
3. Failure to Disclose Mortgage Foreclosure Proceedings
Although the Bank evidently did not ask Barrer directly whether his mortgage was being --- oreclosed upon, it contends that he had an obligation to volunteer that in --- ormation and that his --- ailure to do so is tantamount to a misrepresentation. Bar- rer argues that he had no duty to reveal the existence o --- the --- oreclosure proceedings because he did not know about them. The Bank maintains that he must have known, because be --- ore Barrer applied --- or the loan his teen-age daughter signed --- or a certi --- ied letter --- rom Columbia noti --- ying him o --- the --- oreclosure. The magistrate erred in --- inding on summary judgment that this non-disclosure is equivalent to a misrepresentation. The Restatement (Second) provides that a non-disclosure may be considered an assertion o ---
act — or purposes o — misrepre sentation analysis only i — the non-disclosed — act is known to the maker and i — cer- tain other conditions are met. Because there exists a material issue o —
act as to whether Barrer knew that Columbia had begun to — oreclose, summary judgment was inappropriate.
4. $11,000 Contingent Liability The magistrate also erred in --- inding on summary judgment that Barrer’s alleged
ailure to list as a personal contingent liability an $11,000 tax debt owed to the IRS by his corporation constituted a misrepresentation. First, summary judgment is pre- cluded by the existence o — a — actual dispute over whether this $11,000 was included in the $38,000 tax liability that Barrer did list. Barrer seems to contend that at least some o — this amount was included in the $38,000 — igure; the Bank seems to dispute this contention. Second, there is a mixed question o — law and — act as to whether the IRS had, at the time o — the loan application, taken any action to assert the $11,000 tax debt owed by Today News Service, Inc., against Barrer personally and, i — not, whether the corporation’s liability may be considered Barrer’s contingent liability. I — the $11,000 tax debt could not at that time have been considered Barrer’s liability, his — ailure to list such a debt was not a misrepresentation.
5. $5,300 Debt Owed to IBM The magistrate --- ound that Barrer’s --- ailure to reveal as a personal liability a $5,300 debt owed to IBM --- or equipment purchased by his wi --- e was a misrepresentation. We disagree as a matter o --- law. Although Barrer asked the probate court handling his wi --- e’s estate to charge him with the debt, the court re --- used, ruling that the debt was hers alone. Contrary to the Bank’s protestations, it makes no di ---
erence to the deter- mination whether a misrepresentation occurred that Barrer asked the probate court to charge him with the debt be — ore, and the court re — used a — ter, Barrer submitted the loan application. A misrepresentation is “an assertion that is not in accord with the
acts.” The — act is that a court decided that this debt never legally belonged to Barrer. Barrer’s thoughts or wishes on the matter are irrelevant. He made no legal misrepre sentation to the Bank on this subject. 12 • Improper Bargaining 355
6. $1,500 in Judgments
Finally, the magistrate determined that Barrer’s --- ailure to list $1,500 in judgments that were outstanding against him constituted a misrepresentation. This issue should not have been resolved on summary judgment. Barrer disclosed on the loan appli- cation that he was a de --- endant in some lawsuits. Furthermore, in his deposition he stated that he had in --- ormed Womack that he owed some small judgments arising out o --- these suits and that he expected his health insurance to cover most o --- them. Accept- ing Barrer’s version o --- the --- acts, as we must in reviewing a grant o --- summary judg- ment, he revealed both his de --- endant status and the existence o --- judgments against him. It is true that he did not list them on the application --- orm. Because, however, Barrer contends that he adequately disclosed these debts in connection with the ques- tion concerning lawsuits and in his discussion with Womack, there exists a dispute over whether he actually revealed these debts; consequently the magistrate should not have resolved this issue on summary judgment. On remand, two --- actual questions must be decided. First, what in --- ormation concerning these judgments did Barrer give to Womack? Second, was that in --- ormation su ---
icient to give the Bank notice o — them? I — it was su —
icient, then Barrer made no misrepresentation. III. Conclusion The magistrate both — ailed to utilize the correct legal test — or determining when an innocent material misrepresentation permits the rescission o — a contract and to recognize that this case presents disputed material issues o —
act that render summary judgment inappropriate. We reverse and remand — or — urther proceedings consistent with this opinion.
Re --- lection Barrer is an example o --- how to analyze a case o --- innocent misrepresentation. In an innocent misrepresentation, the assertion must be material and justi --- iably relied on by the recipient in mani --- esting her assent to the agreement.
In its analysis o --- the rules, the court --- irst de --- ined misrepresentation and deter- mined that the assertion may be a non-disclosure. The assertion must be material enough to reasonably induce a person to mani --- est their assent. An assertion o --- an opinion is not normally something that can be justi --- iably relied upon but may be under certain circumstances. The additional requirement o --- detrimental reliance is determined by whether the recipient received something less in value than reason- ably expected.
The court believed that the magistrate did not distinguish between statements o ---
non-disclosure and statements o
opinion, and this was a — actual dispute that needed to be resolved in a trial court. Even assuming Barrer’s statements were misrepresen tations, there was also a — actual dispute over whether the bank justi — iably relied on the misrepresentations and whether there was a detriment su —
ered. Only when all 356 12 • Improper Bargaining
these elements are met can a contract be voided by the bank. There
ore, the case was remanded consistent with the court’s analysis.
Discussion 1. What are each o --- the purported misrepresentations in the Barrer case? For each, apply the R2d’s de --- inition o --- misrepresentation to con --- irm whether each is in --- act a misrepresentation under the legal de --- inition. 2. The trial court in Barrer --- ailed to consider whether the misrepresentations were material. For each misrepresentation, analyze whether it was material and/or
raudulent.
-
The de
ense o — misrepresentation is said to be “stronger” than the de — ense o —
mistake, in the sense that courts are more likely to permit avoidance o
a contract on the ground o — misrepresentation than mistake. Why might courts be more will- ing to grant the misrepresentation de — ense than the mistake de — ense? Present your opinion in terms o — a policy analysis.
Reading Hill v. Jones. The next case addresses the doctrine o
misrepresenta tion, speci — ically the doctrine o — misrepresentation due to non-disclosure. This case also raises the question o — whether a buyer o — residential real estate has a duty to inspect the property to learn all o — its de — ects or can instead rely on the seller to reveal signi — icant de — ects. Under the traditional approach, the de — ault rule was “caveat emptor.” This Latin phrase roughly translates to “let the buyer beware.” Under this doctrine, buyers — especially buyers o — real property — were generally responsible — or dis- covering de — ects, absent egregious — acts like deliberate — raud or concealment by the seller. Sellers were not responsible — or a —
irmatively disclosing de — ects to buyers. However, the traditional approach has given way, at least in some contexts. Today, in many real estate contracts and in contracts — or the sale o — goods, buy- ers can typically rely more heavily on sellers to disclose signi — icant de — ects in property and goods. That said, in determining whether caveat emptor applies, the — acts and context matter. Sometimes the law is more protective o — buyers. In contracts — or the sale o —
residential real estate, i
the seller o — a house knows that a house has a serious (material) de — ect but — ails to disclose this de — ect to a buyer, the seller’s sup- pression o — the — act can constitute voidable misrepresentation, assuming the 12 • Improper Bargaining 357
elements are met and the seller has a duty to disclose. The R2d § 161 lists sev- eral situations in which a seller has a duty to disclose material — acts under the common law o — contracts. In addition, state laws and regulations o — ten require residential sellers to make disclosures regarding their properties. The UCC, when dealing with the sale o — goods, also tends to be more protective o — buy- ers. As you will learn in Chapter 18 on warranties, in contracts — or the sales o —
goods, the UCC provides various implied warranties that automatically enter contracts in order to protect buyers. In contrast, in contracts — or the sale o — commercial real estate, the stan- dard is closer to “buyer beware.” Commercial buyers o — real estate are generally expected to conduct their own due diligence. State laws tend not to require spe- ci — ic disclosures, although some states may require disclosing certain property conditions in commercial real estate transactions as well. As you read Hill, consider whether the seller engaged in misrepresentation, and, i — so, what kind(s). Also consider why, as a matter o — policy, the law might be construed to require sellers to a —
irmatively disclose known de — ects in resi- dential property.
Hill v. Jones
725 P.2d 1115 (Ariz. Ct. App. 1986) BRUCE E. MEYERSON, Judge. Must the seller o --- a residence disclose to the buyer --- acts pertaining to past termite in --- estation? This is the primary question presented in this appeal. Plainti ---
s War- ren G. Hill and Gloria R. Hill (buyers) — iled suit to rescind an agreement to purchase a residence. Buyers alleged that Ora G. Jones and Barbara R. Jones (sellers) had made misrepresentations concerning termite damage in the residence and had — ailed to disclose to them the existence o — the damage and history o — termite in — estation in the residence. The trial court dismissed the claim — or misrepresentation based upon a so- called integration clause in the parties’ agreement. Sellers then sought summary judgment on the “concealment” claim arguing that they had no duty to disclose in — ormation pertaining to termite in — estation and that even i —
they did, the record
ailed to show all o — the elements necessary — or — raudulent conceal- ment. The trial court granted summary judgment, — inding that there was “no genuinely disputed issue o — material — act and that the law — avors the . . . de — endants.” The trial court awarded sellers $ 1,000.00 in attorney’s — ees. Buyers have appealed — rom the judg- ment and sellers have cross-appealed — rom the trial court’s ruling on attorney’s — ees. I. FACTS In 1982, buyers entered into an agreement to purchase sellers’ residence — or $72,000. The agreement was entered a — ter buyers made several visits to the home. The purchase 358 12 • Improper Bargaining
agreement provided that sellers were to pay
or and place in escrow a termite inspec- tion report stating that the property was — ree — rom evidence o — termite in — estation. Escrow was scheduled to close two months later. One o — the central — eatures o — the house is a parquet teak — loor covering the sunken living room, the dining room, the entryway and portions o — the halls. On a subsequent visit to the house, and when sellers were present, buyers noticed a small “ripple” in the wood — loor on the step leading up to the dining room — rom the sunken living room. Mr. Hill asked i — the ripple could be termite damage. Mrs. Jones answered that it was water damage. A — ew years previously, a broken water heater in the house had in — act caused water damage in the area o — the dining room and steps which necessitated that some repairs be made to the — loor. No — urther discussion on the subject, however, took place between the parties at that time or a — terwards. Mr. Hill, through his job as maintenance supervisor at a school district, had seen similar “ripples” in wood which had turned out to be termite damage. Mr. Hill was not totally satis — ied with Mrs. Jones’s explanation, but he — elt that the termite inspec- tion report would reveal whether the ripple was due to termites or some other cause. The termite inspection report stated that there was no visible evidence o — in — esta- tion. The report — ailed to note the existence o — physical damage or evidence o — previ- ous treatment. The realtor noti — ied the parties that the property had passed the termite inspection. Apparently, neither party actually saw the report prior to close o — escrow. A — ter moving into the house, buyers — ound a pamphlet le — t in one o — the drawers entitled “Termites, the Silent Saboteurs.” They learned — rom a neighbor that the house had some termite in — estation in the past. Shortly a — ter the close o — escrow, Mrs. Hill noticed that the wood on the steps leading down to the sunken living room was crum- bling. She called an exterminator who con — irmed the existence o — termite damage to the — loor and steps and to wood columns in the house. The estimated cost o — repairing the wood — loor alone was approximately $5,000. Through discovery a — ter their lawsuit was — iled, buyers learned the — ollowing. When sellers purchased the residence in 1974, they received two termite guarantees that had been given to the previous owner by Truly Nolen, as well as a diagram show- ing termite treatment at the residence that had taken place in 1963. The guarantees provided — or semi-annual inspections and annual termite booster treatments. The accompanying diagram stated that the existing damage had not been repaired. The second guarantee, dated 1965, reinstated the earlier contract — or inspection and treat- ment. Mr. Jones admitted that he read the guarantees when he received them. Sellers renewed the guarantees when they purchased the residence in 1974. They also paid the annual — ee each year until they sold the home. On two occasions during sellers’ ownership o — the house but while they were at their other residence in Minnesota, a neighbor noticed “streamers” evidencing live termites in the wood tile — loor near the entryway. On both occasions, Truly Nolen gave a booster treatment — or termites. On the second incident, Truly Nolen drilled through one o — the wood tiles to treat — or termites. The neighbor showed Mr. Jones the 12 • Improper Bargaining 359
area where the damage and treatment had occurred. Sellers had also seen termites on the back — ence and had replaced and treated portions o — the — ence. Sellers did not mention any o — this in — ormation to buyers prior to close o — escrow. They did not mention the past termite in — estation and treatment to the realtor or to the termite inspector. There was evidence o — holes on the patio that had been drilled years previously to treat — or termites. The inspector returned to the residence to deter- mine why he had not — ound evidence o — prior treatment and termite damage. He indicated that he had not seen the holes in the patio because o — boxes stacked there. It is unclear whether the boxes had been placed there by buyers or sellers. He had not
ound the damage inside the house because a large plant, which buyers had purchased
rom sellers, covered the area. A — ter investigating the second time, the inspector — ound the damage and evidence o — past treatment. He acknowledged that this in — ormation should have appeared in the report. He complained, however, that he should have been told o — any history o — termite in — estation and treatment be — ore he per — ormed his inspection and that it was customary — or the inspector to be given such in — ormation. Other evidence presented to the trial court was that during their numerous visits to the residence be — ore close o — escrow, buyers had unrestricted access to view and inspect the entire house. Both Mr. and Mrs. Hill had seen termite damage and were there — ore — amiliar with what it might look like. Mr. Hill had seen termite damage on the — ence at this property. Mrs. Hill had noticed the holes on the patio but claimed not to realize at the time what they were — or. Buyers asked no questions about termites except when they asked i — the “ripple” on the stairs was termite damage. Mrs. Hill admitted she was not “trying” to — ind problems with the house because she really wanted it.
II. Contract Integration Clause ....
III. Duty to Disclose The principal legal question presented in this appeal is whether a seller has a duty to disclose to the buyer the existence o --- termite damage in a residential dwelling known to the seller, but not to the buyer, which materially a ---
ects the value o — the property. For the reasons stated herein, we hold that such a duty exists. This is not the place to trace the history o — the doctrine o — caveat emptor. Su —
ice it to say that its vitality has waned during the latter hal — o — the 20th century [For exam- ple, courts — ound various implied warranties that protect buyers, such as the implied warranty o — habitability.] The modern view is that a vendor has an a —
irmative duty to disclose material — acts where: 1. Disclosure is necessary to prevent a previous assertion — rom being a misrepresentation or — rom being — raudulent or material; 2. Disclosure would correct a mistake o — the other party as to a basic assumption on which that party is making the contract and i — nondisclosure 360 12 • Improper Bargaining
amounts to a --- ailure to act in good --- aith and in accordance with reasonable
standards o ---
air dealing; 3. Disclosure would correct a mistake o — the other party as to the contents or e —
ect o — a writing, evidencing or embodying an agreement in whole or in part; 4. The other person is entitled to know the — act because o — a relationship o —
trust and con --- idence between them. R2d § 161 (1981) (Restatement); see Restatement (Second) o --- Torts § 551 (1977). Arizona courts have long recognized that under certain circumstances there may be a “duty to speak.” As the supreme court noted in the context o --- a con --- idential relationship, “suppression o --- a material --- act which a party is bound in good --- aith to disclose is equivalent to a --- alse representation.”
Thus, the important question we must answer is whether under the --- acts o --- this case, buyers should have been permitted to present to the jury their claim that sellers were under a duty to disclose their (sellers’) knowledge o --- termite in --- estation in the residence. This broader question involves two inquiries. First, must a seller o --- residential property advise the buyer o --- material --- acts within his knowledge pertaining to the value o --- the property? Second, may termite damage and the existence o --- past in --- estation constitute such material --- acts?
The doctrine imposing a duty to disclose is akin to the well-established contractual rules pertaining to relie ---
rom contracts based upon mistake. Although the law o — con- tracts supports the — inality o — transactions, over the years courts have recognized that under certain limited circumstances it is unjust to strictly en — orce the policy — avoring
inality. Thus, — or example, even a unilateral mistake o — one party to a transaction may justi — y rescission. R2d § 153. There is also a judicial policy promoting honesty and — air dealing in busi- ness relationships. This policy is expressed in the law o —
raudulent and negligent misrepresentations. Where a misrepresentation is — raudulent or where a negligent misrepresentation is one o — material — act, the policy o —
inality rightly gives way to the policy o — promoting honest dealings between the parties. See R2d § 164(1). Under certain circumstances nondisclosure o — a — act known to one party may be equivalent to the assertion that the — act does not exist. For example, “when one con- veys a — alse impression by the disclosure o — some — acts and the concealment o — others, such concealment is in e —
ect a — alse representation that what is disclosed is the whole truth.” Thus, nondisclosure may be equated with and given the same legal e —
ect as
raud and misrepresentation. One category o — cases where this has been done involves the area o — nondisclosure o — material — acts a —
ecting the value o — property, known to the seller but not reasonably capable o — being known to the buyer. Courts have — ormulated this “duty to disclose” in slightly di — — erent ways. For exam- ple, the Florida Supreme Court recently declared that “where the seller o — a home 12 • Improper Bargaining 361
knows o
acts materially a —
ecting the value o — the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.” In Cali — ornia, the rule has been stated this way: “Where the seller knows o —
acts materially a —
ecting the value or desirability o — the property which are known or accessible only to him and also knows that such — acts are not known to, or within the reach o — the diligent attention and observation o — the buyer, the seller is under a duty to disclose them to the buyer.” We — ind that the Florida — ormulation o — the disclosure rule properly balances the legitimate interests o — the parties in a transaction — or the sale o — a private residence and accordingly adopt it — or such cases. As can be seen, the rule requiring disclosure is invoked in the case o — material — acts. Thus, we are led to the second inquiry — whether the existence o — termite damage in a residential dwelling is the type o — material — act which gives rise to the duty to disclose. The existence o — termite damage and past termite in — estation has been considered by other courts to be su —
iciently material to warrant disclosure. In Lynn v. Taylor, the purchaser o — a termite-damaged residence brought suit against the seller and realtor — or — raud and against the termite inspector — or negli- gence. An initial termite report — ound evidence o — prior termite in — estation and rec- ommended treatment. A second report indicated that the house was termite — ree. The
irst report was not given to the buyer. The seller contended that because treatment would not have repaired the existing damage, the — irst report was not material. The buyer testi — ied that he would not have purchased the house had he known o — the — irst report. Under these circumstances, the court concluded that the — acts contained in the — irst report were material. Although sellers have attempted to draw a distinction between live termites and past in — estation, the concept o — materiality is an elastic one which is not limited by the termites’ health. “A matter is material i — it is one to which a reasonable person would attach importance in determining his choice o — action in the transaction in question.” For example, termite damage substantially a —
ecting the structural soundness o — the residence may be material even i — there is no evidence o — present in — estation. Unless reasonable minds could not di —
er, materiality is a — actual matter which must be deter- mined by the trier o —
act. The termite damage in this case may or may not be material. Accordingly, we conclude that buyers should be allowed to present their case to a jury. Sellers argue that even assuming the existence o — a duty to disclose, summary judg- ment was proper because the record shows that their “silence . . . did not induce or in — luence” the buyers. This is so, sellers contend, because Mr. Hill stated in his deposi- tion that he intended to rely on the termite inspection report. But this argument begs the question. I — sellers were — ully aware o — the extent o — termite damage and i — such in — ormation had been disclosed to buyers, a jury could accept Mr. Hill’s testimony that had he known o — the termite damage he would not have purchased the house. Sellers — urther contend that buyers were put on notice o — the possible existence o — termite in — estation and were there — ore “chargeable with the knowledge which an 362 12 • Improper Bargaining
inquiry, i
made, would have revealed.” It is also true that “a party may . . . reasonably expect the other to take normal steps to in — orm himsel — and to draw his own conclu- sions.” R2d § 161 comment d. Under the — acts o — this case, the question o — buyers’ knowledge o — the termite problem (or their diligence in attempting to in — orm them- selves about the termite problem) should be le — t to the jury. By virtue o — our holding, sellers’ cross-appeal is moot. Reversed and remanded.
Re --- lection Hill v. Jones is a case about termites — and trust. It raises a triable issue o ---
act, ask- ing when silence is a lie. In a world where buyers o — ten depend on sellers — or in — orma- tion about hidden de — ects, the court signals that silence can distort just as much as speech. Disclosure, when material, can become a legal duty. This isn’t just about real estate; it’s about how the law responds to in — ormation asymmetry. In — ormation asymmetry — when one party knows more than the other — is com- mon in contracting. Sellers usually know more about what they are selling than buy- ers know about what they are buying. This common situation does not necessarily trigger a duty to speak. I — it did, that would destroy incentives — or sellers to gather in — ormation. Rather, the contract itsel — is the mechanism that shi — ts the risks o — known and unknown risks and uncertainties. What matters is context. When silence conceals something the other side has no practical way to discover — and when the stakes are high enough to a —
ect the — airness o — the bargain — the law may treat that silence as misrepresentation. Contract law doesn’t punish mere advantage, but it does intervene when the structure o — a deal becomes distorted by withheld truths that matter. Hill reminds us that contract law is not just about — ormal assent. Contract law is also concerned with the boundary between sharp strategy and unethical deception.
Discussion 1. What is the duty to disclose with regard to the seller o --- a residential property? What, exactly, does this duty require a seller to do? 2. The implied warranty o --- habitability and other doctrines that so --- ten or restrict caveat emptor regarding sales o --- residential homes seem directed toward protecting home buyers. Should a judge consider whether a home buyer is a private person or a home --- lipping company? For example, Invitation Homes (INVH), a publicly traded corporation, is the largest owner o --- single- --- amily homes in America. INVH owns over 80,000 single- --- amily homes, which it rents or --- lips --- or resale. Should the law pertaining to sales o --- homes pertain equally to all buyers, or should the doctrine o --- caveat emptor apply more strictly where the buyer is a power --- ul corporation? I ---
12 • Improper Bargaining 363
you believe the law should apply di
erently to di — — erent parties, explain how you’d dra — t a contract that achieves your distinction.
-
Applying the rules in the R2d to the
acts in Hill: (a) Did the seller make a misrepre sentation? I — so, identi — y it. (b) Was the misrepresentation you identi — ied material? (c) Was the misrepresentation you identi — ied — raudulent? (d) Was it reasonable — or the buyer to rely on the misrepresentation you identi — ied?
Reading Quebodeaux v. Quebodeaux. The
ollowing case exhibits both duress and undue in — luence. This case was selected — or inclusion because the threats by one party are so egregious that they would likely constitute duress even i —
the parties did not have a special relationship. But you may also notice in the case caption that the parties have the same last name. The parties in this case were husband and wi — e. In such a relationship, a de — ense o — undue in — luence might also be raised. As you read this case, think about why the court voided this contract on the basis o — duress and not undue in — luence.
Quebodeaux v. Quebodeaux 102 Ohio App. 3d 502 (1995) SLABY, Judge. Anthony Quebodeaux appeals --- rom a trial court order granting Merry Quebo- deaux her motion --- or relie ---
rom judgment. We a —
irm. Anthony and Merry sought a dissolution o — their eleven-year marriage. The dis- solution petition included a separation agreement signed by both parties. This agree- ment gave custody o — the couple’s two sons to Anthony and the couple’s daughter to Merry. Although Merry’s annual income was less than hal — o — Anthony’s, the agree- ment stated that Merry would not receive spousal support. Similarly, the agreement did not require either party to pay child support. The trial judge extensively questioned Merry about the terms o — the separation agreement. Merry stated that she consented to the terms. Despite having “some dis- tinct reservations” about the agreement, the trial judge ordered the dissolution pursu- ant to the terms speci — ied in the agreement. About two months later, Merry moved — or relie —
rom judgment, alleging that she had entered into the separation agreement while under duress. She — urther claimed that Anthony had misrepresented his — inancial status. A — ter a lengthy hearing, the trial court granted Merry’s motion and — ound that Merry had not entered into the agreement — reely. The court also — ound that Anthony 364 12 • Improper Bargaining
had
ailed to report his — inancial interest in a house. The parties had leased the house
or approximately one and one-hal — years prior to the dissolution. Anthony bought the house a — ter the dissolution petition was — iled. The court — ound that he received credit
or the lease payments, which were made — rom the parties’ joint checking account, against the price o — the house. Anthony appeals, assigning three errors. Assignments o — Error I and II I. The trial court erred to the prejudice o — [Anthony] when it permitted Marily Zeidner to testi — y to general aspects o — the battered woman syndrome, where there was no testimony — rom an expert indicating that [Merry] su —
ered — rom the syndrome. II. The trial court erred and abused its discretion when it granted [Merry’s] motion
or relie —
rom the separation agreement pursuant to Civ.R. 60(B)(5) and — ound that [Merry] had been coerced into signing the separation agreement, where [Merry’s] testimony regarding abuse was not corroborated and where [Merry] — ailed to present su —
icient evidence as a matter o — law that she signed the separation agreement under duress. Anthony argues that the trial court abused its discretion in — inding that Merry signed the separation agreement while under duress and by invalidating the agree- ment on that basis. Anthony contests the admissibility o — the hearing testimony o —
Marilyn Zeidner, an assistant director o
a local battered woman shelter. He notes that Zeidner never observed Merry prior to the dissolution and that her testimony con- cerned only general aspects o — battered woman syndrome. He also argued that State v. Koss limits the admissibility o — evidence o — battered woman syndrome to criminal proceedings in which the woman seeks to use the syndrome as a de — ense. In her motion, Merry asserted that she signed the separation agreement while under duress. Three elements are necessary to establish duress; — irst, that one side involuntarily accepted the terms o — another; second, that circumstances permitted no other alternative; and third, that the opposite party’s coercive acts caused those circumstances. Blodgett v. Blodgett. We — ind that the trial court did not abuse its discretion in granting Merry’s motion
or relie —
rom judgment. The agreement was dra — ted by Anthony and his attorney. Merry testi — ied that Anthony threatened to take all three o — the children — rom her unless she assented to the agreement: “Q. Why did you give those answers [indicating consent to the separation agreement] to Judge Basinski?” “A. Because I had to tell him that. I mean. I didn’t have any choice but to tell him that.” “Q. Tell us why you are saying that.” “A. Because Tony told me, as long as I signed everything and did what he said, that he would let me keep [their daughter]. And, i — I gave him a hard 12 • Improper Bargaining 365
time, that he would leave and take the kids with him, and I wouldn’t have
any o --- them. And that he would have me declared as un --- it.”
Merry also testi
ied to repeated acts o — actual and threatened abuse by Anthony during the marriage. She repeatedly stated her belie — that she had no alternative to signing the agreement, believing that she stood to lose her children otherwise. Based on the — oregoing, the trial court did not abuse its discretion in — inding that Merry signed the agreement while under duress. We reject Anthony’s argument regarding testimony on the battered woman syn- drome. The court was not required to — ind that Merry was su —
ering — rom battered woman syndrome as a prerequisite to determining that she was under duress. Indeed, the trial court’s journal entry speci — ically declined to acknowledge Merry as a victim o — battered woman syndrome. Accordingly, any error in admitting Zeidner’s testi- mony was harmless. Anthony’s — irst and second assignments o — error are overruled. Assignment o — Error III [Discussion regarding trial court’s abuse o — discretion omitted.] Anthony’s third assignment o — error is overruled. . . .
Re --- lection Quebodeaux is a duress case. There are three elements necessary to establish a duress case: --- irst, one side involuntarily accepted the terms o --- another; second, that circumstances permitted no other alternative; and third, that the opposite party’s coercive acts caused those circumstances. The --- irst element is that one side involuntarily accepted the terms o --- another. In this case, Merry involuntarily agreed to Anthony’s terms. Merry did not want to agree to her ex-husband’s terms but --- elt that she had to.
The second element is that the circumstances permitted no other alternative. Merry had no choice but to agree to Anthony’s terms. Had Merry not agreed to the terms, Anthony was going to have Merry deemed an un --- it mother and take all three children away. Finally, the opposite party’s coercive acts must have caused those circumstances. Merry did not want to agree to Anthony’s terms, but she believed that she had no alternatives and had to agree to his terms because Anthony threated to take all three o --- her children --- rom her i --- she did not agree.
Why didn’t the court characterize Merry’s de --- ense as undue in --- luence? Perhaps the reason is that the parties, although married in a technical sense, were undergoing a bitter divorce at the time. While, in a typical situation, a wi --- e should be entitled to rely on her husband, under these circumstances, perhaps the court --- ound it unreasonable
or Merry to rely on Anthony to look out — or her best interests. 366 12 • Improper Bargaining
It is also important to note that in addition to physical duress, there is also what is called economic duress. However, economic duress is very rarely — ound to be a basis
or avoidance o — a contract, whereas physical duress commonly is.
Discussion 1. Duress can arise due to physical compulsion or an improper threat. List all the potential instances o --- compulsion and all the potential threats. For each threat, analyze where it was improper pursuant to R2d § 175. 2. In general, contract law considers objective mani --- estations. But in the case o ---
duress, there is a subjective test
or inducement. Explain that subjective test in general and then apply it to the speci — ic — acts o — Quebodeaux. In other words, how and what did Anthony’s threat to Merry make Merry — eel and think?
-
Why does contract law generally take an objective approach, and why does it take a subjective approach with regard to the duress doctrine?
Problems Problem 12.1. Motor Home Misrepresentation In early January 2004, John Powers, III, attended a motor home show in Tucson, Arizona, where he and Damon Rapozo, a salesman --- or Guaranty RV, Inc., discussed Powers’s purchasing a Country Coach, Inc. (Country Coach) motor home --- rom Guaranty. Powers had certain speci --- ications that he wanted in a motor home, including an engine su ---
iciently power — ul to tow a large trailer. On January 21, 2004, Rapozo sent Powers a proposal — or a Country Coach Intrigue motor home with a C-13 Caterpillar 525 hp engine. Because Powers had heard o — instances in which large engines in motor homes overheated, he speci — ically asked — or an assurance that the C-13 engine would not overheat in the Intrigue. In response, Rapozo emailed Je —
Howe, an employee with Country Coach, the — ollowing: Hi Je —
, I have a customer ready to — ly up and order a new Intrigue Serenade. He wants a letter — rom CC that states the C-13 will not overheat in the Intrigue, then he said he will — ly up. Is that possible? Damon Howe — orwarded Rapozo’s email to Bently Buchanan, Country Coach’s chassis engineering manager, who replied via email as — ollows: 12 • Improper Bargaining 367
The cooling system --- or each power train installation is required to be tested by
the engine manu --- acturer. The cooling system consists o --- a radiator, charge air
cooler, transmission cooler, hydraulic oil cooler, air conditioning condenser,
hydraulic pump, hydraulic motor and the cooling --- an. Recently we success --- ully
completed this testing --- or our C-13 installation on our Magna and A ---
inity chassis. This same cooling system will be used on your Intrigue with the C-13. The only di —
erence between our Magna/A —
inity installation and the Intrigue is the engine access door. On our Magnas and A —
inities the doors have “hid- den horizontal louvers” cut into them. On Intrigues we install a door which has a per — orated aluminum panel on it. These louvers and per — orations aid in engine compartment heat dissipation. Whereas I have — aith that our cooling package installation on the C-13 Intrigue will be success — ul, the e —
ect that the di — — erent door has on cooling is unknown at this time. Because our cooling system equipment is the same on all chassis with the C-13, we are not required to test our Intrigue installation. Rapozo then transmitted Buchanan’s response to Powers. On July 19, 2004, Powers and Guaranty executed the purchase documents — or the 2004 Intrigue — or a sales price o — $344,382.00. The Intrigue overheated during its initial drive — rom the lot in Oregon to Arizona, and repeatedly therea — ter. On July 18, 2005, Powers — iled a complaint against Country Coach and Guaranty alleging, among other things, — raudulent inducement to contract. Should the court void the agreement on the basis o —
raudulent misrepre- sentation? See Powers v. Guar. RV, Inc., 278 P.3d 333, 340 (Ariz. Ct. App. 2012).
Problem 12.2. The Blodgetts under Duress Nancy and William Blodgett were married in Connecticut on November 22, 1975. William signed an antenuptial agreement the day be — ore their marriage; Nancy did not sign the agreement until December 31, 1975. Shortly a — ter they married, the Blodgetts moved to Ohio. On November 10, 1975, William entered into an agreement to purchase the assets o — Roberts Cartage, Inc., later known as Roberts Express, Inc. William ran the com pany, and Nancy assisted in its operations by per — orming at various times duties such as clerical work, delivering — reight, dispatching drivers, and sales. The company pros- pered and was sold to Roadway Services, Inc., in 1984 — or $6 million in cash, $3 mil- lion in incentives i — certain pro — it goals were reached by 1989, and $3 million — or a non-competition provision between William Blodgett and Roadway Services. Nancy and William separated in February 1986, and in April 1986, Nancy — iled a complaint — or divorce. The trial court granted the divorce in January 1988. With regard to property division, the trial court — ound the $6 million in proceeds — rom the sale o — Roberts Express to be a marital asset. The non-competition and incentive 368 12 • Improper Bargaining
payments were
ound to be non-marital assets and solely the property o — William. Nancy’s share o — the marital assets, including the sale o — Roberts Express, was set at $3.1 million. Because o — tax consequences, the trial court ordered that Nancy be paid $2.765 million i — she signed a satis — action o — judgment within — orty- — ive days o — the trial court’s judgment entry, — iled on January 29, 1988. Both parties appealed the distribution o — assets. Nancy contended that the incen- tive and non-competition payments should have been treated as marital assets. Wil- liam appealed the trial court’s re — usal to en — orce the antenuptial agreement. While her appeal was pending, Nancy requested the court o — appeals to order that $2.765 million be released to her — rom escrow, and the same amount to William. On May 11, 1988, Nancy signed and executed the satis — action o — judgment. In return, $2.765 million was released — rom escrow, and William executed a deed to the — amily home. The next day, William — iled a motion to dismiss Nancy’s appeal based on her execu- tion o — the satis — action o — judgment, which he claimed had terminated her right to appeal. The court o — appeals took the motion under advisement, indicating it would rule on the motion prior to its decision on the merits. In order — or Nancy to use the excuse o — duress, what elements must she be able to prove? See Blodgett v. Blodgett, 551 N.E.2d 1249 (Ohio 1990).
Problem 12.3. Undue Bequest Florence Goldman, a widow in her eighties, sued August Bequai, an attorney and long-time — riend o — Goldman’s — amily. Goldman alleges that Bequai — raudulently induced her to convey to him substantially all o — her property shortly a — ter the death o — her husband. Goldman brought claims against Bequai — or — raud and deceit, breach o —
iduciary obligation, tortious conversion, and legal malpractice. She also brought a claim against Bequai’s wi — e, Mary Ryan Bequai, — or breach o —
iduciary obligation. A — ter permitting limited discovery, the District Court ruled that Goldman’s claims against appellee were barred by the three-year statute o — limitations in the District o — Columbia. The trial court rejected Goldman’s contentions that the running o — the limitations period should have been equitably tolled. In response to the ruling, Goldman brought a new claim — or rescission o — the agree- ment to convey her property to Bequai under the de — ense o — undue in — luence. Her com- plaint seeking rescission based on this de — ense included the — ollowing — acts: Florence Goldman’s husband died on October 31, 1985, a — ter a long bout with Alzheimer’s and Parkinson’s diseases. For several years prior to her husband’s death, Goldman cared — or him at home. During much o — her husband’s illness and — or some time therea — ter, Goldman was under the care o — a psychiatrist, who treated her — or depression stemming — rom the strain and grie — she experienced because o — her husband’s declining health. As part o — this therapy Goldman was treated 12 • Improper Bargaining 369
with antidepressant drugs, which she alleges had a negative e
ect on her cognitive processes. Goldman’s complaint described August Bequai as a long-time — riend whom she regarded as almost a member o — her — amily. Bequai in turn described Goldman’s hus- band as a “surrogate — ather,” and stated that both Mr. and Mrs. Goldman o — ten re — erred to him as their “good son.” Bequai is an attorney and has written several books about white-collar crime and served as an adjunct pro — essor or lecturer at several universities. Goldman alleged in her complaint that during her husband’s illness and a — ter his death, she looked to Bequai as her “adviser and attorney” in her — inancial a —
airs. In January 1986, three months a — ter her husband’s death, Goldman conveyed to Bequai joint tenancy with a right o — survivorship in a condominium in Bethesda, Maryland, and in a partnership interest in property at 423 Massachusetts Avenue, N.W., in Washington, DC. Ten dollars ($10) was given in consideration — or the trans-
er o — each property. Goldman had no legal counsel or independent advice o — any sort, and she alleges that Bequai did not — ully explain the nature o — the transactions to her. There were no witnesses to the transactions other than the notary, whose commission apparently had expired several months prior to the signing o — the deeds. The Massachusetts Avenue property was sold in January 1990, and the proceeds attributable to the Goldman/Bequai partnership share were distributed to them. Both Bequai and Goldman were represented at the closing by Robert Pollock, an attorney hired by Bequai. Goldman, however, described Pollock as “a — lunky who did [Bequai’s] bidding.” A — ter the sale o — the Massachusetts Avenue property, Bequai accompanied Gold- man to the bank, where both placed their proceeds in investment accounts that were opened that day. Bequai placed his money in an account he owned jointly with his wi — e. Goldman placed her share in a joint account with Bequai. In her deposition, appellant stated that, at least as early as 1986, she, her son (Den- nis Goldman), and Bequai had discussed starting a business that would employ both Goldman and her son. Dennis Goldman stated in an a —
idavit that Bequai had said that he needed to be listed as an owner o — the Massachusetts Avenue property in order adequately to represent the Goldmans’ interests during negotiations over the sale o — the property, and that Bequai told him that the trans — er “would be temporary, and solely — or the limited purpose o — in — lating his — inancial worth on paper” while he looked — or a business in which to invest. Florence Goldman stated that Bequai told her that he needed to be a part owner in order to “participate — ully” in negotiations
or the sale o — the property, and to locate a suitable business opportunity — or himsel —
and the Goldmans. Goldman
urther stated that: He said that it was necessary in order to represent me that he had to have his name on the property as a hal — owner. But all the proceeds — rom whatever I had, except to live on, would be going into the business and a — uture — or my son and a — uture — or me. That’s what we were building on. 370 12 • Improper Bargaining
According to Goldman, “This is why we let him do this, not ever realizing that I was relinquishing my — ull interest.” Goldman stated that it was her understanding that the purpose o — the documents she signed conveying a joint tenancy in her properties to Bequai was: “To give him stature in negotiating — or the business — or the three o — us.” At several points in her deposition, Goldman stated that she relied on Bequai’s repre sentations and so did not read the documents she signed. In August 1987, at Bequai’s dictation, Goldman hand wrote a power o — attorney authorizing her son to represent her “in all matters pertaining to the sale” o — the Mas sachusetts Avenue property. The purpose o — this power o — attorney was ostensibly to allow Dennis Goldman to attend partnership meetings concerning the sale o — the property. Florence Goldman indicated that Bequai suggested to her that it would be too much o — a strain — or her to attend these meetings hersel — . Goldman stated in her deposition that her “ — irst inklings” that Bequai had “deceived” her came in June o — 1990, a — ter she received the money — or the sale o — the Massachu setts Avenue property: “His name was on my hal — . His name was on everything I had: my checking account, my savings account. The other hal — he put in his name and his wi — e’s name and I couldn’t understand that.” It appears that there was also a disagreement between Dennis Goldman and Bequai at about this time. Both men stated that they — ormerly were very close — riends, and Bequai had employed Dennis Goldman — or some time as an administrative member o — his legal practice. However, in middle to late 1990, the two had an argument stem- ming at least in part — rom Bequai’s handling o — Florence Goldman’s — inances. As a result o — this quarrel, Bequai dismissed Dennis Goldman — rom his employ. Should the court rescind the agreement under which Goldman bequeathed her property to Bequai based on the de — ense o — undue in — luence? See Goldman v. Bequai, 19 F.3d 666 (D.C. Cir. 1994). Chapter 13 Incapacity
Contract law hinges on the principle o
voluntary agreement, requiring parties to understand and willingly enter binding commitments. However, not all individuals possess the capacity to contract. Incapacity as a de — ense re — lects the legal recognition that certain individuals, due to their status or condition, may lack the ability to pro- vide meaning — ul consent. This chapter examines how incapacity operates to protect vulnerable parties while maintaining the legitimacy o — the contractual system. R2d § 12(1) establishes the — oundational principle: No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. This general rule requiring capacity to contract is — ollowed by several speci — ic instances o — incapacity: A natural person who mani — ests assent to a transaction has — ull legal capacity to incur contractual duties thereby unless he is (a) under guardianship, (b) an in — ant, (c) mentally ill or de — ective, or (d) intoxicated. R2d § 12(2). Common law identi — ies speci — ic categories o — incapacity, such as guardianship, in — ancy, mental illness, and intoxication, that limit an individual’s ability to contract. Some o — these doctrines, like guardianship and in — ancy, — unction as bright-line rules that promote predictability. Others, like mental illness and intoxication, require a more nuanced assessment o — the individual’s ability to understand or engage in the transaction. Incapacity de — enses underscore the tension between autonomy and — airness. While clear rules can prevent exploitation and streamline dispute resolution, they may also limit individual — reedom by categorically excluding some — rom the ability to contract. Conversely, standards o —
er — lexibility but increase uncertainty and litigation costs. This chapter explores this balancing act, illustrating how incapacity doctrines range
rom rigid categorical rules to — lexible standards o — assessment. Ultimately, the incapacity doctrines share a common purpose o — ensuring that contracts are — ounded on voluntary, in — ormed consent while protecting individuals
rom exploitation or undue disadvantage. Through the study o — these rules and their application, we gain insight into how contract law reconciles its core principles o —
autonomy,
airness, and e —
iciency.
371
372 13 • Incapacity
Rules A. Guardianship A guardian is someone who has the legal authority to care --- or another’s person or property. A person who is under a guardian’s care or protection is called a “ward.” Also termed a conservator, a guardian may be appointed because o --- a ward’s in --- ancy, incapacity, or disability. A person under guardianship cannot contract.
A person has no capacity to incur contractual duties i --- his property is under
guardianship by reason o --- an adjudication o --- mental illness or de --- ect. R2d § 13. Guardianship is a legal state o --- a ---
airs, where the state, through a legal process, determines someone is incompetent to make decisions about their own person or property. This is a serious deprivation o —
reedom and civil liberties that is not taken lightly. A guardianship is usually an involuntary procedure imposed by the state onto a person who thus becomes the state’s ward. A ward who is placed under a guardian- ship lacks the legal power to make binding contracts during the term o — the guard- ianship. Instead, their appointed guardian has authority to enter contracts on their behal — , subject to court oversight and approval. The rules governing guardianships vary by jurisdiction.
B. In
ancy The second category o — incapacity, “in — ant,” counterintuitively, does not mean a little baby. Rather, an in — ant is a person who, in the eyes o — the law, has not yet reached the — ull age o — maturity. The more common term — or such a person is a “minor.” Under the common law o — contracts, the terms “in — ant” and “minor” are synonyms. Generally, an in — ant has the right to disa —
irm or avoid contracts made while he or she is a minor. The age o — majority is usually eighteen, though jurisdictions di —
er. Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning o — the day be — ore the per- son’s eighteenth birthday. R2d § 14. A minor can actively choose to disa —
irm the contract until the age o — majority and — or a “reasonable” time therea — ter. I — the minor is sued — or breach o — contract, the minor can raise in — ancy as a de — ense. A — ter reaching the age o — majority, in — ants must promptly elect to disa —
irm their obligation; otherwise, they may impliedly agree to be bound to it. A — ormer in — ant who continues to per — orm on a contract may be deemed to have rati — ied the contract through conduct. In contrast, an in — ant who disa —
irms the con- tract within a reasonable time is protected against a breach o — contract claim and 13 • Incapacity 373
can even recover contractual payments already made. I
any property remains in the in — ant’s possession, this must be returned. An in — ant need not take any action to disa —
irm his contracts until he comes o — age. I — sued upon the contract, he may de — end on the ground o — in — ancy without returning the consideration received. His disa —
irmance revests in the other party the title to any property received by the in — ant under the contract. R2d § 14 cmt. c. In Webster St. Partnership, Ltd. v. Sheridan, 220 Neb. 9 (1985), below, the court
ound that teenagers who rented an apartment did not wait too long to disa —
irm their lease, even though one o — them continued paying rent and living in the apartment — or seven days a — ter reaching the age o — majority in the jurisdiction (which in Nebraska is nineteen). A major exception to this right o — disa —
irmance is that the in — ant may be liable — or any necessaries they buy. Persons having no capacity . . . to contract are o — ten liable — or necessaries — ur- nished to them . . . [T]he liability is measured by the value o — the necessaries rather than by the terms o — the promise. R2d § 12 cmt. — . The di —
iculty in applying this exception is deciding what constitutes a “necessary.” For example, i — a minor rents an apartment when he could instead live at home, is that rental a necessary? I — an in — ant orders a crate o — ramen noodle soup when she could instead go to a soup kitchen, is that soup a necessary? I — a car dealership leases a basic Toyota Corolla to a sixteen-year-old who lives in a rural area and needs a car to drive to work in order to a —
ord basic living expenses, is this a necessary? Is a more expen- sive Ford Ranger truck with o —
-road capabilities still a necessary? What i — the same in — ant leases a much more expensive luxury car, like a — ully loaded Lexus GX SUV? I — the contract regards a necessary, then the in — ant’s power to void the contract becomes limited. The in — ant must pay — or the reasonable value o — the necessary, i — not the — ull contract price. Arthur Corbin’s treatise (3d ed.), citing to an older treatise, gives some guidance on what constitutes necessaries, such that in — ants who contract — or them have a binding obligation: Things may be o — a use — ul character, but the quality or quantity supplied may take them out o — the character o — necessaries. Elementary textbooks might be a necessary to a student o — law, but not a rare edition o — “Littleton’s Ten- ures,” or eight or ten copies o — “Stephen’s Commentaries.” Necessaries also vary according to the station in li — e o — the in — ant or his peculiar circumstances at the time. The quality o — clothing suitable to an Eton boy would be unnecessary
or a telegraph clerk; the medical attendance and diet required by an invalid would be unnecessary to one in ordinary health. It does not — ollow there — ore that because a thing is o — a use — ul class, a judge is bound to allow a jury to say 374 13 • Incapacity
whether or not it is a necessary. William R. Anson, Principles o --- the Law
o --- Contract 172 (1891).
Once you get past the archaic language, the point o
the above passage is clear: what is necessary depends on the circumstances but should always be distinguished
rom luxuries. While reading Webster, consider why the court — ound that the apart- ment that the teenagers rented was not a necessary under the circumstances o — the case.
C. Mental Illness Mental illness results in incapacity to contract in two situations. First, i — a mental illness speci — ically impacts a person’s ability to understand a particular transaction, this can result in incapacity.
A person incurs only voidable contractual duties by entering into a transaction
i --- by reason o --- mental illness or de --- ect he is unable to understand in a reason-
able manner the nature and consequences o --- the transaction. R2d § 15(1)(a).
Second, i
the mental illness impacts a person’s ability to act reasonably in relation to a transaction and the other party knows or should know o — the person’s condition, this, too, can result in incapacity.
A person incurs only voidable contractual duties by entering into a transac-
tion i --- by reason o --- mental illness or de --- ect . . . he is unable to act in a reason-
able manner in relation to the transaction and the other party has reason to
know o --- his condition. R2d § 15(1)(b).
Determining whether someone is so cognitively impaired that they lack the capac- ity to contract is a complex matter, and there is a — air amount o — debate about what the standard — or mental incapacity should be. The — ollowing example illustrates that assessing mental incapacity issues requires precise analysis, and it varies depending upon the nature o — the transaction and the nature o — the mental condition. Pat works as a car mechanic at a local tire shop. One day at work, a customer named Alex approaches Pat and says, “I am selling a Subaru WRX STI. It’s wicked — ast. Would you like to buy it — or $15,000?” Without hesitation, Pat responds, “Yes! I will buy your car. I’ll get the cash — rom my bank a — ter my shi — t today and pay you $15,000 tomor- row. Thanks — or the o —
er! I accept.” However, Pat goes home a — ter work and, — or many reasons, regrets having accepted Alex’s o —
er. Pat decides to avoid the contract by relying on mental incapacity. What — acts must Pat evidence to succeed? What i — Pat had been diagnosed with Attention-De — icit Hyperactivity Disorder (ADHD) as a child and continued to struggle with impulsivity as an adult? A court would still likely en — orce the contract against Pat. Despite su —
ering — rom ADHD, Pat 13 • Incapacity 375
still apparently had the capacity to understand the nature o
the transaction under R2d § 15(1)(a). And R2d § 15(1)(b) does not apply because Alex had no reason to know o — Pat’s ADHD or impulsivity issues and there — ore should not reasonably expect this condition to impact Pat’s behavior. In contrast, what i — , immediately prior to Alex’s o —
er, Pat had told Alex about Pat’s personal history o — impulsivity due to ADHD, and Pat had mentioned to Alex during contracting that a drug shortage had made it di —
icult — or Pat to obtain ADHD medi cation? Then Alex would have reasonably been aware o — Pat’s mental illness and Pat’s speci — ic symptom o — impulsivity. Under these conditions, in accordance with R2d § 15(1)(b), it is unlikely that a court would require Pat to comply with the contract or to pay damages to Alex. Pat was unable to act reasonably in relation to the transaction due to impulsivity symptoms o — ADHD, and Alex had reason to know o — Pat’s ADHD and impulsivity. Finally, what i — , unbeknownst to Alex, Pat had experienced an episode o — psychosis when accepting Alex’s o —
er? Then Pat may be able to avoid the contract. Psychosis makes it di —
icult — or a person to recognize what is real. I — , when Pat accepted Alex’s o —
er, Pat had held — alse belie — s about the need to purchase a vehicle immediately in order to save all humanity — rom imminent destruction, a court may determine that Pat lacked capacity to contract; Pat might not, in the moment, have been able under- stand the nature o — the transaction to purchase Alex’s car. However, — or a court to determine that Pat lacked the capacity to enter into a contract due to mental illness in this case, Pat would have to prove that psychosis was why Pat had accepted Alex’s o —
er. I — Pat can prove this, then Pat does not also have to prove that Alex knew or should have known about Pat’s psychosis. In sum, unlike guardianship or in — ancy, which are clearly de — ined legal states, whether a person lacks capacity — or reasons o — mental illness is a much more di —
icult assessment. It may require testimony — rom medical experts about the nature o — the illness.
D. Intoxication The term “intoxication” may also di —
er legally — rom common or lay conceptions o — the term. One may be too intoxicated to drive, — or example, but still well within his capacities to contract. The legal standard — or incapacity in contract law is that one must be so drunk or intoxicated — rom drugs that he does not know what he is doing. Moreover, the other party must know or have reason to know o — the intoxication.
A person incurs only voidable contractual duties by entering into a transac-
tion i --- the other party has reason to know that by reason o --- intoxication (a) he
is unable to understand in a reasonable manner the nature and consequences
o --- the transaction, or (b) he is unable to act in a reasonable manner in relation
to the transaction. R2d § 16.
376 13 • Incapacity
For example, Aaron and Betsy have been communicating
or weeks about the pur- chase and sale o — a boat. One day, the parties conclude their oral conversation with Aaron’s presenting a clear o —
er to sell his boat and Betsy’s saying, “I’ll think about it and get back to you as soon as possible.” That night, Betsy drinks to the point o — blacking out. While totally drunk, Betsy texts the seller with the simple message “I accept your o —
er.” Unless Aaron has some reason to know that Betsy was totally drunk — which would not be apparent — rom the text message — the contract is binding. I — , on the other hand, Betsy — irst texted, “Just took ten shots o — vodka!” and then texted that she wishes to accept Aaron’s o —
er, then Aaron might reasonably know that Betsy was not competent to accept his o —
er at that time.
E. Re
lections on Incapacity The study o — incapacity provides a — itting conclusion to the module on de — enses and the larger exploration o — contract — ormation. At its core, — ormation depends on the principle o — voluntary agreement — contracts are en — orceable because parties choose to bind themselves to their commitments. Yet incapacity reminds us that this vol- untariness is not absolute. The law recognizes that consent may be compromised, whether by an individual’s internal limitations or by external pressures, such as duress or undue in — luence. Incapacity also o —
ers a conceptual lens through which to consider the structure o —
contract law. Some jurisdictions and scholars (and a prior edition o
this casebook) treat capacity as a prerequisite to mutual assent, positioning it as part o — the — ounda- tional elements o —
ormation. This view re — lects its placement in the R2d, where capac- ity is addressed be — ore assent and separately — rom de — enses. The procedural reality, however, o — ten dictates its treatment as a de — ense, as it is typically raised a —
irmatively by parties seeking to avoid en — orcement. This dual characterization highlights the interplay between doctrine and procedural context, underscoring that capacity’s role in contract law is both — oundational and reactive. At a deeper level, incapacity doctrines illuminate the limits o —
ormation. Capac- ity is the gateway to en — orceability; without it, the — oundation o — mutual assent — the hallmark o — binding agreements — cannot exist. By excluding those who lack the abil- ity to consent meaning — ully, incapacity rules ensure that — ormation re — lects genuine, in — ormed participation. In doing so, they protect the vulnerable while rein — orcing the legitimacy o — the contractual system. This chapter also highlights how — ormation doctrine balances clarity with — lex- ibility. Some incapacity rules, such as those governing in — ancy and guardianship, rely on bright-line thresholds to promote e —
iciency and certainty in transactions. Others, like mental illness and intoxication, demand care — ul, — act-speci — ic analysis to ensure
airness in complex and marginal cases. This dual approach mirrors the broader chal- lenge o —
ormation law: reconciling the need — or predictable rules with the complex realities o — human behavior and — airness. 13 • Incapacity 377
As this module comes to a close, the discussion o
incapacity serves as a capstone
or the principles underlying contract — ormation. It demonstrates that the boundaries o — en — orceability are not mere technicalities; they re — lect pro — ound judgments about the nature o — human decision-making, the limits o — individual responsibility, and the role o — law in shaping private agreements. By en — orcing only those contracts — ormed with genuine capacity and consent, contract law not only protects vulnerable parties but also a —
irms the legitimacy o — the system itsel — .
Cases Reading Webster St. Partnership, Ltd. v. Sheridan. Contract law protects certain people --- rom contractual liability as a matter o --- public policy. One such protection
applies to minors and children, who are re --- erred to in contract law as “in --- ants.”
Contract law de --- ines “in --- ant” to mean someone who has not yet reached the age
o --- majority, which is eighteen years old in most states — though it varies based
on the jurisdiction. For example, in Nebraska, the age o --- majority is nineteen.
The question in the --- ollowing case is not whether one party is an in --- ant. This is usually a simple --- actual inquiry with a binary result (in --- ant or major). The question, instead, is whether said in --- ant — here, a couple o --- teenagers — con- tracted --- or a necessary. I --- so, they might be responsible --- or their contractual obligations, despite their minority status.
Be --- ore exploring what constitutes a necessary under the common law, think about why this rule exists. Put yoursel --- in the position o --- someone who has received an o ---
er to contract — rom an in — ant. You know this in — ant incurs only voidable obligations. Might that make you less likely to accept the in — ant’s o —
er to contract? It should, because you will not have certainty that the in — ant will per — orm his obligations, and you will have no recourse — or breach. While this rule protects in — ants — rom making bad deals, it also discourages people — rom making deals with in — ants at all, even ones that bene — it the in — ant. For example, it is very hard — or an in — ant to lease a car because car dealers know that the in — ant could void the contract at any time. This rule, although intended to bene — it in — ants, thus has the unintended con- sequence o — creating a hardship — or them. The way around that hardship is to make contracts — or necessaries binding. I — an emancipated minor (one who has been granted legal independence — rom parental control) is homeless, then renting an apartment would be a necessary, at least in this case. Because the apartment is necessary — or this particular minor, the contract will be binding on this minor, despite the capacity rule — or in — ants generally. Consider how the necessaries exception plays out in Webster. 378 13 • Incapacity
Webster St. Partnership, Ltd. v. Sheridan
220 Neb. 9 (1985) KRIVOSHA, Chie --- Justice. Webster Street Partnership, Ltd. (“Webster Street”), appeals --- rom an order o --- the district court --- or Douglas County, Nebraska, which modi --- ied an earlier judgment entered by the municipal court o --- the city o --- Omaha, Douglas County, Nebraska. The municipal court entered judgment in --- avor o --- Webster Street and against the appel- lees, Matthew Sheridan and Pat Wilwerding, in the amount o --- $630.94. On appeal, the district court --- ound that Webster Street was entitled to a judgment in the amount o --- $146.75, and that Sheridan and Wilwerding were entitled to a credit in the amount o --- $150. The district court there --- ore entered judgment in --- avor o --- Sheri- dan and Wilwerding and against Webster Street in the amount o --- $3.25. It is --- rom this $3.25 judgment that appeal is taken to this court. Webster Street is a partnership owning real estate in Omaha, Nebraska. On Sep- tember 18, 1982, Webster Street, through one o --- its agents, Norman Sargent, entered into a written lease with Sheridan and Wilwerding --- or a second- --- loor apartment at 3007 Webster Street. The lease provided that Sheridan and Wilwerding would pay to Webster Street, by way o --- monthly rental, the sum o --- $250 due on the --- irst day o --- each month until August 15, 1983. The lease also required a security deposit in the amount o --- $150 and a payment o --- $20 per month --- or utilities during the months o --- December, January, February, and March. Liquidated damages in the amount o --- $5 per day --- or each day the rent was late were also provided --- or by the lease. The evidence conclusively establishes that at the time the lease was executed both tenants were minors and, --- urther, that Webster Street knew. At the time the lease was entered, Sheridan was 18 and did not become 19 until November 5, 1982. Wilwerding was 17 at the time the lease was executed and never gained his majority during any time relevant to this case. [The age o --- majority in Nebraska is 19.]
The tenants paid the $150 security deposit, $100 rent --- or the remaining portion o --- September 1982, and $250 rent --- or October 1982. They did not pay the rent --- or the month o --- November 1982, and on November 5, Sargent advised Wilwerding that unless the rent was paid immediately, both boys would be required to vacate the premises. The tenants both testi --- ied that, being unable to pay the rent, they moved
rom the premises on November 12. In — act, a dispute exists as to when the two ten- ants relinquished possession o — the premises, but in view o — our decision, that dispute is not o — any relevance. In a letter dated January 7, 1983, Webster Street’s attorney made written demand upon the tenants — or damages in the amount o — $630.94. On January 12, 1983, the ten- ants’ attorney denied any liability, re — used to pay any portion o — the amount demanded, stated that neither tenant was o — legal age at the time the lease was executed, and demanded return o — the $150 security deposit. 13 • Incapacity 379
Webster Street therea
ter commenced suit against the tenants and sought judgment in the amount o — $630.94[.] . . . To this petition the tenants — iled an answer alleging that they were minors at the time they signed the lease, that the lease was there — ore void- able, and that the rental property did not constitute a necessary — or which they were otherwise liable. [The tenants won at the district court. Webster Street appealed.] It appears . . . to be Webster Street’s position that the district court erred in — ailing to — ind that Sheridan had rati — ied the lease within a reasonable time a — ter obtaining majority, and was there — ore responsible — or the lease, and that the minors had become emanci- pated and were there — ore liable, even though Wilwerding had not reached majority. Webster Street is simply wrong in both matters. As a general rule, an in — ant does not have the capacity to bind himsel — absolutely by contract. The right o — the in — ant to avoid his contract is one con — erred by law — or his protection against his own improvi- dence and the designs o — others. The policy o — the law is to discourage adults — rom contracting with an in — ant; they cannot complain i — , as a consequence o — violating that rule, they are unable to en — orce their contracts. “The result seems hardly just to the [adult], but persons dealing with in — ants do so at their peril. The law is plain as to their disability to contract, and sa — ety lies in re — using to transact business with them.” However, the privilege o — in — ancy will not enable an in — ant to escape liability in all cases and under all circumstances. For example, it is well established that an in — ant is liable — or the value o — necessaries — urnished him. An in — ant’s liability — or necessaries is based not upon his actual contract to pay — or them but upon a contract implied by law, or, in other words, a quasi-contract. Just what are necessaries, however, has no exact de — inition. The term is — lexible and varies according to the — acts o — each individual case. A number o — — actors must be considered be — ore a court can conclude whether a particular product or service is a necessary. As stated in Schoenung v. Gallet:
“The term ‘necessaries,’ as used in the law relating to the liability o --- in --- ants
there --- or, is a relative term, somewhat --- lexible, except when applied to such
things as are obviously requisite --- or the maintenance o --- existence, and depends
on the social position and situation in li --- e o --- the in --- ant, as well as upon his
own --- ortune and that o --- his parents. The particular in --- ant must have an actual
need --- or the articles --- urnished; not --- or mere ornament or pleasure. The articles
must be use --- ul and suitable, but they are not necessaries merely because use-
ul or bene — icial. Concerning the general character o — the things — urnished, to be necessaries the articles must supply the in — ant’s personal needs, either those o — his body or those o — his mind. However, the term ‘necessaries’ is not con — ined to merely such things as are required — or a bare subsistence. There is no positive rule by means o — which it may be determined what are or what are not necessaries, — or what may be considered necessary — or one in — ant may not be necessaries — or another in — ant whose state is di — — erent as to rank, social position, — ortune, health, or other circumstances, the question being one to be determined — rom the particular — acts and circumstances o — each case.” 380 13 • Incapacity
In Ballinger v. Craig, the de
endants were husband and wi — e and were 19 years o —
age at the time they purchased a trailer. [In this jurisdiction at this time, people the age o — 19 had not reached majority and were there — ore considered in — ants]. Both were employed. However, prior to the purchase o — the trailer, the de — endants were living with the parents o — the husband. The Court o — Appeals — or the State o — Ohio held that under the — acts presented, the trailer was not a necessary. The court stated: “To enable an in — ant to contract — or articles as necessaries, he must have been in actual need o — them, and obliged to procure them — or himsel — . They are not necessaries as to him, however necessary they may be in their nature, i — he was already supplied with su —
icient articles o — the kind, or i — he had a parent or guardian who was able and willing to supply them. The burden o — proo — is on the plainti —
to show that the in — ant was destitute o — the articles and had no way o — procuring them except by his own contract.” . . . [In this case,] [t]he undisputed testimony is that both tenants were living away
rom home, apparently with the understanding that they could return home at any time. Sheridan testi — ied: Q. During the time that you were living at 3007 Webster, did you at any time,
eel — ree to go home or anything like that? A. Well, I had a — eeling I could, but I just wanted to see i — I could make it on my own. Q. Had you been driven — rom your home? A. No. Q. You didn’t have to go? A. No. Q. You went — reely? A. Yes. Q. Then, a — ter you moved out and went to 3007 — or a week or so, you were again to return home, is that correct? A. Yes, sir. It would there — ore appear that in the present case neither Sheridan nor Wilwerd- ing was in need o — shelter but, rather, had chosen to voluntarily leave home, with the understanding that they could return whenever they desired. One may at — irst blush believe that such a rule is un — air. Yet, on — urther consideration, the wisdom o — the rule is apparent. I — , indeed, landlords may not contract with minors, except at their peril, they may re — use to do so. In that event, minors who voluntarily leave home but who are — ree to return will be compelled to return to their parents’ home — a result which is desirable. We there — ore — ind that both the municipal court and the district court erred in — inding that the apartment, under the — acts in this case, was a necessary. Having concluded that the apartment was not a necessary, the question o — whether Sheridan 13 • Incapacity 381
and Wilwerding were emancipated is o
no signi — icance. The e —
ect o — emancipation is only relevant with regard to necessaries. I — the minors were not emancipated, then their parents would be liable — or necessaries provided to the minors. As we recently noted in Accent Service Co., Inc. v. Ebsen: “In general, even in the absence o — statute, parents are under a legal as well as a moral obligation to support, maintain, and care — or their children, the basis o — such a duty resting not only upon the — act o — the parent-child relationship, but also upon the interest o — the state as parents patriae o — children and o —
the community at large in preventing them --- rom becoming a public burden.
However, various voluntary acts o --- a child, such as marriage or enlistment in
military service, have been held to terminate the parent’s obligation o --- sup-
port, the issue generally being considered by the courts in terms o --- whether an
emancipation o --- the child has been e ---
ectuated. In those cases, involving the issue o — whether a parent is obligated to support an unmarried minor child who has voluntarily le — t home without the consent o — the parent, the courts, in actions to compel support — rom the parent, have uni — ormly held that such conduct on the part o — the child terminated the support obligation.” I — , on the other hand, it was determined that the minors were emancipated and the apartment was a necessary, then the minors would be liable. But where, as here, we determine that the apartment was not a necessary, then neither the parents nor the in — ants are liable, and the question o — emancipation is o — no moment. Because the rental o — the apartment was not a necessary, the minors had the right to avoid the contract, either during their minority or within a reasonable time a — ter reaching their majority. Disa —
irmance by an in — ant completely puts an end to the contract’s exis- tence, both as to him and as to the adult with whom he contracted. Because the parties then stand as i — no contract had ever existed, the in — ant can recover payments made to the adult, and the adult is entitled to the return o — whatever was received by the in — ant. The record shows that Pat Wilwerding clearly disa —
irmed the contract during his minority. Moreover, the record supports the view that when the agent — or Webster Street ordered the minors out — or — ailure to pay rent and they vacated the prem- ises, Sheridan likewise disa —
irmed the contract. The record indicates that Sheridan reached majority on November 5. To suggest that a lapse o — 7 days was not disa — -
irmance within a reasonable time would be — oolish. Once disa —
irmed, the contract became void; there — ore, no contract existed between the parties, and the minors were entitled to recover all o — the moneys which they paid and to be relieved o — any — urther obligation under the contract. The judgment o — the district court — or Douglas County, Nebraska, is there — ore reversed and the cause remanded with directions to vacate the judgment in — avor o — Webster Street and to enter a judgment in — avor o — Matthew Sheridan and Pat Wilwerding in the amount o — $500, representing September rent in the amount o — $100, October rent in the amount o — $250, and the security deposit in the amount o — $150. REVERSED AND REMANDED WITH DIRECTIONS. 382 13 • Incapacity
Re --- lection Webster established that an in --- ant generally does not have the capacity to contract. In order to protect in --- ants, adults are discouraged --- rom contracting with them. I --- an adult enters a contract with an in --- ant, the contract may consequently be unen --- orce- able against the in --- ant.
However, the privilege o --- in --- ancy is not applicable under all circumstances. In --- ants are liable --- or the value o --- necessaries. There is no strict de --- inition --- or necessaries. What is de --- ined as a necessary varies --- rom case to case. In general, “necessaries” re --- ers to things that are use --- ul and required --- or existence. However, many --- actors can in --- lu- ence whether something is deemed a necessary. What may be deemed a necessary
or one party may not be deemed a necessary — or another party. Generally, items are not deemed necessaries — or an in — ant i — their parent/guardian is able to supply them. Speci — ically looking at Webster, the apartment they leased was not a necessary because they were able to return to housing provided to them by their parents. Another important rule — rom Webster is that an in — ant may disa —
irm a contract until the age o — majority and — or a “reasonable” time therea — ter. The court held that Sheridan was able to claim in — ancy, even though he vacated the property seven days a — ter he reached the age o — majority. The court held that seven days was not an unrea- sonable delay, and so Sheridan was still able to use in — ancy as a de — ense against con- tractual liability.
Discussion 1. Who is an “in --- ant” as de --- ined in contract law? Why should the law protect in --- ants? 2. Can you --- oresee any problems that might result --- rom a legal e ---
ort to protect in — ants?
-
What are “necessaries”? Why is there an exception to the protection
or in — ants
rom contractual liability with regard to necessaries?
-
The necessaries exception should ideally encourage landlords to rent apartments to minors who otherwise have nowhere else to live. But does it work? I — you were a landlord, would you rent an apartment to in — ants, or would you ask — or proo — that tenants are over the age o — majority?
Reading Estate o
- McGovern v. Commonwealth State Employees’ Retire-
- ment Bd. Along with in
- —
- ancy, another basis
- —
- or incapacity is mental illness.
- Under R2d § 15, a person lacks capacity to contract by reason o
- —
- mental ill-
- ness i
- —
-
(1) their condition prevents them
rom understanding the particular 13 • Incapacity 383
transaction at issue, or (2) their condition prevents them
rom acting reasonably in relation to the transaction, and the other party knows or should know o — their condition. Courts struggle with determining when mental illness is so severe that it results in incapacity. The — ollowing case, Estate o — McGovern, provides an excellent discussion o — the reasoning — or and against the R2d’s approach to this thorny problem. Not only does McGovern present relatively straight — orward and memorable — acts, but it also goes into signi — icant depth as to what legal standard should be applied to such — acts and why. As you will see, most o — the members o — the Supreme Court o — Pennsylvania re — use to accept the R2d’s approach. But a well-reasoned dissent in the case supports the R2d’s approach, arguing that it would produce more equitable results. A — ter reading this case, you should have a better understanding o — di — — erent legal standards that are applied to determine mental capacity to contract, and you should have some arguments that will help you decide — or yoursel — which legal standard is best.
Estate o --- McGovern v. Commonwealth State Employees’ Retirement Bd. 512 Pa. 377 (1986) FLAHERTY, Justice. On January 9, 1981, Francis J. McGovern retired a --- ter thirty years o --- service with the Delaware Joint Toll Bridge Commission. In December o --- 1980, just prior to his retirement, Mr. McGovern executed and --- iled a retirement application in which he selected two o --- several options --- or payout under the retirement plan o ---
ered by his employer. Under the options selected by Mr. McGovern, he would receive a lump sum payment o — $27,105, a joint survivor annuity paying him $750 monthly — or li — e, and i —
he predeceased his wi
e, she would receive a survivor’s annuity o — $375 monthly — or li — e. Mrs. McGovern, who had been ill with Hodgkins disease since 1979, died o — cancer on January 23, 1981. Five days later, on January 28, 1981, Mr. McGovern died. The Board determined that Mr. McGovern’s estate was due the lump sum o — $27,105.00 plus $499.92, a portion o — the — irst month’s annuity payment. Had Mr. McGovern chosen a living survivor annuitant, or no bene — iciary at all, the sum o — $151,311.45 would have been available to the living bene — iciary or his estate. Michael J. McGovern, Mr. McGovern’s son, requested that the Board review the amount payable to the estate, on the grounds that his — ather was not mentally compe- tent when he executed the retirement papers. According to testimony o — Michael McGovern, his sister, and — riends o — the elder Mr. McGovern, Mr. McGovern su —
ered during the last year o — his li — e — rom alcohol- ism and apparent distress at the state o — his wi — e’s health. Although Mrs. McGov- ern was told in March o — 1980 that she was terminally ill, Mr. McGovern, re — used to 384 13 • Incapacity
acknowledge that his wi
e was going to die. Occasionally, Mr. McGovern would admit that his wi — e was seriously ill, but Mr. McGovern’s — riends testi — ied that he was so sen- sitive to any conversation concerning his wi — e’s health that they would never mention it unless he introduced the subject. When Mrs. McGovern was hospitalized — or almost two months during the last year o — her li — e, Mr. McGovern visited her only once, — or
ive minutes, and would sometimes insist that his wi — e was malingering, or that she had a bleeding ulcer. Additionally, although Mr. McGovern had an alcohol problem
or many years, when his wi — e’s illness became apparent, he drank more heavily, even to the point o — missing work and being too drunk to keep appointments. Finally, there was some evidence that Mr. McGovern was not always attuned to reality in other ways: a — ter he retired, he would, on occasion, dress in his uni — orm and demand to be taken to work, and a — ter his wi — e died, Mr. McGovern re — used to eat and was heard having conversations with his dead — ather. The Board advised the junior Mr. McGovern that his — ather’s retirement documents were binding and could not be changed. On November 25, 1981, an administrative hearing was conducted at which Mr. McGovern contended that on December 17, 1980, the day his — ather completed his retirement application — orms, his — ather did not have the requisite mental capacity to execute a retirement application. A — ter hearing testimony — rom Mr. McGovern’s — riends and — amily, including a letter — rom the — amily doctor, and evidence — rom the retirement o —
icial who dealt with Mr. McGovern, a hearing examiner rejected this claim. The Board a —
irmed the hearing o —
icer, based on its conclusion that Mr. McGovern did, in — act, possess the requisite mental capacity on the day in question and that he understood the nature o — the transaction. Commonwealth Court reversed the Board, holding that it capriciously disre- garded the evidence o — Mr. McGovern’s incapacity. We granted allocatur [Latin — or “it is allowed,” allocatur is used to denote permission to appeal to the Supreme Court o — Pennsylvania] to examine whether Commonwealth Court applied the appropriate standard o — review o — the Board’s — indings o —
act and whether that court’s statement o — the law o — capacity to enter into a legally binding contract was correct. [Discussion o — the standard o — review omitted.] Since there is no allegation in this case that any party’s constitutional rights have been violated or that the proceedings were irregular, the question on review is whether the agency’s adjudication is supported by — indings o —
act which are, in turn, sup- ported by substantial evidence. The Board determined, in essence, that Mr. McGovern was mentally competent to execute his retirement papers and that he understood the nature o — the transaction. In support o — this adjudication, the Board — ound that although Mr. McGov- ern had an alcohol problem and was distressed about his wi — e’s illness with cancer, Mr. McGovern, some two months be — ore his retirement, executed a will which even his son believed to be competently executed; he conducted his job over the years in a 13 • Incapacity 385
controlled and responsible
ashion; he sometimes admitted and sometimes denied the seriousness o — his wi — e’s illness; he appeared coherent and responsive to the retirement o —
icial on December 17, 1980 during the meeting at which he selected his retirement options; and a — ter the meeting o — December 17, he sent a check to the retirement — und, as discussed at that meeting, to purchase his military buy-back retirement time. Whether these — acts support a conclusion that Mr. McGovern was legally compe- tent to execute his retirement papers on the day in question will depend on the legal de — inition o — competence. It is well established that the State Employee’s Retirement System creates a contract between the Commonwealth and its employees. When a member retires and elects a retirement option, he enters into a contract with the Board. I — the bene — it contract is
reely entered into with an understanding o — its terms, the contract cannot be set aside. Here the contract is challenged on the grounds that Mr. McGovern lacked the mental capacity to enter into an agreement. Under Pennsylvania law, it is presumed that an adult is competent to enter into an agreement, and a signed document gives rise to “the presumption that it accurately expresses the state o — mind o — the signing party.” To rebut this presumption, the challenger must present evidence o — mental incompetency which is “ ‘clear, precise and convincing’.” This Court has held that where mental capacity to execute an instrument is at issue, “the real question is the condition o — the person at the very time he executed the instrument or made the gi — t in question.” . . . “We — urther held that a person’s mental capacity is best determined by his spoken words and his conduct, and that the testimony o — persons who observed such conduct on the date in question out- ranks testimony as to observations made prior to and subsequent to that date.” “Mere mental weakness, i — it does not amount to inability to comprehend the contract, and is unaccompanied by evidence o — imposition or undue in — luence,” is insu —
icient to set aside a contract. Finally, a presumption o — mental incapacity does not arise merely because o — an unreasonable or unnatural disposition o — property. Contrary to these principles concerning the Pennsylvania law o — competence, Commonwealth Court in this case adopted a new standard o — competence based on the Restatement o — Contracts, 2d. Section 15 o — the Restatement, relied on by the court below, states: A person incurs only voidable contractual duties by entering into a transac- tion i — by reason o — mental illness or de — ect (a) he is unable to understand in a reasonable manner the nature and consequences o — the transaction, or (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know o — his condition. R2d § 15(1). Where the contract is made on — air terms and the other party is without knowledge o — the mental illness or de — ect, the power o — avoidance under Sub- section (1) terminates to the extent that the contract has been so per — ormed in 386 13 • Incapacity
whole or in part or the circumstances have so changed that avoidance would be
unjust. In such a case a court may grant relie --- as justice requires. R2d § 15(2). This Court has never adopted Section 15 o --- the Restatement, which requires a post- hoc determination o --- reasonableness, and we decline to do so now. In --- act, because the provisions o --- Section 15 establish new tests --- or incompetence which con --- lict with those previously established by this Court, Commonwealth Court exceeded its authority in purporting to adopt Section 15 o --- the Restatement.
Accepting, as we do, that the common law o --- incompetence as it has been articu- lated in our prior cases is the law that controls this case, even i --- it were conceded that Mr. McGovern may have been incompetent to execute any legal document at certain intervals o --- time within months o --- his wi --- e’s death, substantial evidence also supports the conclusion that on December 17, 1980, he was lucid and understood the terms o --- the retirement contract. This evidence, which consists o --- testimony o ---
the retirement o
icial who met with Mr. McGovern on December 17, is signi — icant because it concerns Mr. McGovern’s state o — mind on the date in question. Moreover, in support o — the o —
icial’s observations, immediately a — ter the December 17th meet- ing, Mr. McGovern mailed a check to the retirement — und to purchase his military buy-back time, which was discussed at that meeting. Such an act is consistent with the Board’s determination that Mr. McGovern acted with deliberation and understanding on December 17, 1980. It is our conclusion, there — ore, that Commonwealth Court was in error in revers- ing the Board’s determination, which properly applied the law o — incompetency and which was supported by substantial evidence. Ironically, the junior Mr. McGovern’s explanation o — what his — ather did in this case may be very close to the truth: Q. Let me ask you the critical question. Why did he [the elder Mr. McGov- ern] designate a joint survivor o — bene — its on that application a — ter all the counseling and the dialogue that you had with him regarding the pension? Can you attribute anything — or that choice? A. [The junior Mr. McGovern]. I think my — ather had . . . arrived at a — rame o — re — erence in his mind that was — permitted him to — unction, and I think that this — rame o — re — erence was totally out o — touch with the reality o — his real-li — e situation. I think he had convinced himsel — that my mother was going to outlive all o — us and that he was just — he just re — used to accept, I think he just re — used to accept the truth that my mother was dying and that he decided that this illusion that he created — or himsel — that he was going to live and that my mother was going to live and was not sick at all was the truth and that she was going to live — or twenty years or whatever. They were going to have a golden retirement together and that he decided to name her at the last minute to ensure that he was right; that we were all wrong and that he was right, that she was going to live — orever. . . . 13 • Incapacity 387
The real thrust o --- Mr. McGovern’s claim in this case is that his --- ather’s designa- tion o --- his mother as a secondary bene --- iciary was unreasonable and unwise. From some points o --- view, that may be true, but no one can say that belie --- that another will overcome a terrible disease and live is lunatic; no one can success --- ully assert that such a belie --- , even against the medical evidence, renders one incompetent. Such a belie --- may be, --- rom some points o --- view, thoughtless, against scienti --- ic probabilities, irrational, and when combined with what amounts to a testamentary disposition o ---
property in
avor o — the ill person as opposed to another who seems to be healthy, it may even be said to be sel — ish and heedless o — the needs o — others. But whatever may be said about it, it cannot, without more, be said to prove incompetence. Thus, the claim that is made here in the name o — incompetence is in reality a challenge to the wisdom, the desirability, the thought — ulness and the rationality o — the disposition. But such a challenge may not succeed, — or neither courts nor disappointed heirs may alter the disposition o — the property o — a deceased person merely on the grounds that that person acted in a way that the challenger believes to be irrational. Order o — Commonwealth Court is reversed, and the determination o — the Pennsyl- vania State Employee’s Retirement Board is reinstated. LARSEN, Justice, dissenting. I dissent. In view o — the obvious diminished mental capacity o — the decedent Fran- cis J. McGovern, I would hold that the contract created by decedent’s election o —
option 3 and the designation o
his then terminally ill wi — e as his sole bene — iciary is voidable. The evidence introduced at the hearing be — ore the State Employees’ Retire- ment Board (Board) is clear and persuasive. It shows that the decedent was laboring in a de — ective mental state when he signed his job termination and retirement papers on December 17, 1980. The decedent’s — lawed mental condition rendered him unable to act reasonably and deal with his retirement options in a reasonable — ashion. Contrary to the evidence, the Board — ound that the decedent “did not lack the requisites or mental capacity to execute his retirement application on December 17, 1980, and did understand the nature o — the transaction.” The Commonwealth Court reversed the Board, relying upon Section 15 o — the Restatement o — Contracts Second. The comment to Section 15 o — the Restatement is particularly apropos. Comment: a. Rationale. A contract made by a person who is mentally incompetent requires the reconciliation o — two con — licting policies: the protection o — jus- ti — iable expectations and o — the security o — transactions, and the protection o — persons unable to protect themselves against imposition. Each policy has sometimes prevailed to a greater extent than is stated in this Section. At one extreme, it has been said that a lunatic has no capacity to contract because he has no mind; this view has given way to a better understanding o — mental phenomena and to the doctrine that contractual obligation depends on mani — estation o — assent rather than on mental assent. See [R2d] §§ 2, 19. 388 13 • Incapacity
At the other extreme, it has been asserted that mental incompetency has
no e ---
ect on a contract unless other grounds o — avoidance are present, such as — raud, undue in — luence, or gross inadequacy o — consideration; it is now widely believed that such a rule gives inadequate protection to the incom- petent and his — amily, particularly where the contract is entirely executory. b. The standard o — competency. It is now recognized that there is a wide variety o — types and degrees o — mental incompetency. Among them are con- genital de — iciencies in intelligence, the mental deterioration o — old age, the e —
ects o — brain damage caused by accident or organic disease, and mental illnesses evidenced by such symptoms as delusions, hallucinations, delir- ium, con — usion, and depression. Where no guardian has been appointed, there is — ull contractual capacity in any case unless the mental illness or de — ect has a —
ected the particular transaction: a person may be able to understand almost nothing, or only simple or routine transactions, or he may be incompetent only with respect to a particular type o — transaction. Even though understanding is complete, he may lack the ability to control his acts in the way that the normal individual can and does control them; in such cases the inability makes the contract voidable only i — the other party has reason to know o — his condition. Where a person has some understand- ing o — a particular transaction which is a —
ected by mental illness or de — ect, the controlling consideration is whether the transaction in its result is one which a reasonably competent person might have made. Illustration: 1. A school teacher, is a member o — a retirement plan and has elected a lower monthly bene — it in order to provide a bene — it to her husband i — she dies — irst. At age 60 she su —
ers a “nervous breakdown,” takes a leave o — absence, and is treated — or cerebral arteriosclerosis. When the leave expires, she applies
or retirement, revokes her previous election, and elects a larger annuity with no death bene — it. In view o — her reduced li — e expectancy, the change is — oolhardy, and there are no other circumstances to explain the change. She — ully understands the plan, but by reason o — mental illness is unable to make a decision based on the prospect o — her dying be — ore her husband. The o —
icers o — the plan have reason to know o — her condition. Two months a — ter the changed election she dies. The change o — election is voidable. c. Proo — o — incompetency. Where there has been no previous adjudication o —
incompetency, the burden o --- proo --- is on the party asserting incompetency.
Proo --- o --- irrational or unintelligent behavior is essential; almost any conduct
o --- the person may be relevant, as may lay and expert opinions and prior and
subsequent adjudications o --- incompetency. Age, bodily in --- irmity or disease,
use o --- alcohol or drugs, and illiteracy may bolster other evidence o --- incom-
petency. Other --- acts have signi --- icance when there is mental illness or de --- ect
but some understanding: absence o --- independent advice, con --- idential or
13 • Incapacity 389
iduciary relationship, undue in — luence, — raud, or secrecy; in such cases the critical — act o — ten is departure — rom the normal pattern o — similar transac- tions, and particularly inadequacy o — consideration.
The above comment and illustration are speci
ically germane to the instant case. The — inal months o — the decedent’s li — e were pathetic. They depict an existence domi- nated by “delusion, hallucination, delirium, con — usion and depression.” During that time o — progressive deterioration, the decedent’s acts and decisions were in — luenced by his corrupted view o — reality. His conduct o — ten was based upon — alse perceptions. Such perceptions apparently prompted his selection o — pension option 3.1. The decedent may have understood the pension plan as presented to him by the pension o —
icer but the evidence establishes that he was unable to make a rational decision based upon the very real prospect o — his wi — e dying be — ore him. The dece- dent’s wi — e and sole bene — iciary, Loretta M. McGovern, was — irst diagnosed in Octo- ber o — 1979 as su —
ering — rom Hodgkin’s disease. In March o — 1980 she was in — ormed that the disease was in its late stages. Upon being apprised o — these medical — indings, the decedent became despondent, his “drinking” habits worsened and he, at times, re — used to accept the — act that his wi — e was terminally ill with cancer. The majority expresses the view that a person who believes, contrary to scienti — ic probability, that another will overcome a usually terminal disease and live is not rendered incompetent by holding such a belie — . The majority goes on to say that this is true even i — we consider that such a belie — is irrational. These, however, are not the circumstances presented in the instant case. Here the decedent did not express a belie — that his wi — e would overcome a terrible disease. Rather, the decedent, at times,
latly denied that Mrs. McGovern was ill, accusing her o — malingering. At other times he seemed to acknowledge her illness. This kind o — irrational conduct when con- sidered in conjunction with the decedent’s other aberrant behavior demonstrates a lack o — mental capacity su —
icient to render the decedent’s pension option election voidable. Additionally, the pension o —
icer, James Kendig, who accepted decedent’s appli- cation had reason to know o — decedent’s condition. Starting in early 1978, pension o —
icer Kendig had many discussions with the decedent. Those discussions included
ace to — ace meetings and numerous telephone conversations. It was established that Mr. Kendig had reason to know o — decedent’s alcohol problem. Further, at the time o — his application, the decedent — ailed to give Mr. Kendig comprehensible answers to questions concerning the health o — Mrs. McGovern. Considering all o — the evi- dence there was su —
icient and clear proo — o — irrational behavior and debilitating alcohol abuse on the part o — the decedent to render voidable his choice o — pension option 3. I would adopt the principles set — orth in the Restatement o — the Law o — Contracts Second, § 15, apply those principles to this case, and a —
irm the Commonwealth Court. I dissent. 390 13 • Incapacity
Re --- lection Estate o --- McGovern re --- lects the view that mental incapacity to comprehend a con- tract is based on the words and conduct o --- the person at the time the contract was entered. In other words, observations made on the date o --- entering the contract are more important than those made prior to or a --- ter entering the contract. R2d § 15 cmt. b re --- lects an alternative view, which Estate o --- McGovern declines to --- ollow. As you might have noticed, there is no per --- ect way to measure a person’s mental incapacity. Estate o --- McGovern and R2d § 15 cmt. b con --- lict in two distinct ways on how to determine a person’s capacity to contract. First, they disagree on what observa- tions can be used. Estate o --- McGovern --- ound that McGovern Sr. was able to compre- hend the contract at the moment o --- application despite a history o --- believing his wi --- e could overcome a terminal illness. The dissent, relying on R2d § 15 cmt. b, believed that his history o --- delusions, hallucinations, delirium, con --- usion, and depression cor- rupted his view o --- reality. Thus, these observations, made be --- ore, during, and a --- ter entering the contract, could be used as proo --- that he was incompetent. The second distinction concerns whether the legal standard --- or contractual capac- ity includes an objective component — such as whether the person acted as a reason- ably competent person would — and whether the other party had reason to know o ---
the incapacity. The majority in Estate o
McGovern held that even i — the decedent’s decision was unreasonable or unwise, that alone did not render him legally incompe- tent. Mere irrationality, they said, is not enough; legal incompetence requires more. By contrast, the dissent emphasized that McGovern Sr. did not merely hope his wi — e would recover — at times, he denied she was ill at all. That delusional belie — , the dis- sent argued, re — lected a break — rom reality, not just poor judgment. Moreover, the pension o —
icer had reason to question McGovern Sr.’s capacity when he — ailed to give coherent answers about his wi — e’s health. On this view, the decedent’s impaired perception and the other party’s notice made the contract voidable under the Restate- ment’s standard.
Discussion 1. How does the rule applied in the Estate o --- McGovern majority opinion di ---
er — rom the rule articulated by the R2d? Which rule do you think is better, and why?
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What are the advantages to a rule granting the de
ense o — incapacity — or the reason o — mental incompetency in a wider range o — cases? How problematic would such a broad rule be — or individuals or society?
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Do you agree with the majority opinion or the dissent in this case? Explain your reasoning. 13 • Incapacity 391
Problems Problem 13.1. The In --- ant and the Lemon Dobson entered an oral contract with Rosini Motor Company (Rosini) --- or the purchase o --- a used automobile. At the time o --- contracting, Dobson was an in --- ant. The two agreed that Dobson would pay $2,500 --- or the vehicle, and Rosini would bear liability --- or any expenses incurred by reason o --- repairs needed to put the vehicle in “proper working condition.” Dobson paid the purchase price. Two months later, Dobson was required to pay Apichell Motors, an automobile repair company, $350 --- or repairs. Another two months passed, and Dobson was --- orced to pay $450 to Apichell --- or even more repairs. The car continued to be mechanically de --- ective. Four months a --- ter the contract was entered, Dobson noti --- ied Rosini that he was disa ---
irming the contract and provided Rosini with the precise location o — the vehicle. “Disa —
irmance” is “the act by which a person who has entered into a voidable con- tract, as, — or example, an in — ant, disagrees to such contract and declares he will not abide by it.” Dobson brings a claim against Rosini to recover the purchase price o — the car and the amount he was required to spend on repairs. Will Dobson be able to recover the purchase price o — the car, the amount he was required to spend on repairs, or both? See Dobson v. Rosini, 20 Pa. D. & C.2d 537 (1959).
Problem 13.2. Bipolar Disorder and Contractual Capacity Stanley Fingerhut was the sole general partner in a private and success — ul invest- ment company. He wanted to buy a gol — club and obtained an appraisal o — Bel Aire Gol — & Country Club that valued the club to be worth $21 million. Several months later, Fingerhut and his attorney drove to Bel Aire to meet the sellers (de — endants) o —
the gol
club and purchase it. Negotiations took place, and parties agreed on the price o — $23.6 million. Fingerhut signed a binder (an in — ormal agreement that states the buyer is interested) that was written by his own lawyer and gave the sellers a check
or $200,000 as a down payment. The parties met again three days later, and, a — ter six hours o — negotiations, a contract was made. The next day, the contract was executed by all the parties, and Fingerhut paid a — urther down payment o — $1.5 million. The rest o — the price — or the property was to be paid at closing (or potentially sooner). In less than a month, Fingerhut, through his attorney, sent a letter to the seller. The letter stated, “We were apprised — or the — irst time that Mr. Fingerhut su —
ers — rom a manic-depressive psychosis, also known as bipolar disorder, a condition — or which he has received medical treatment — or the past years. We were advised, and competent medical authority will substantiate, that Mr. Fingerhut prior to the — irst meeting, and 392 13 • Incapacity
until recently, was in the manic stage o
his illness and wholly incompetent and totally incapable o — managing his own a —
airs during that time.” The lawyer also requested that the binder and contract be rescinded and the $1.7 million be returned to Finger- hut. The seller denied his request. Fingerhut — iled a complaint asking — or the contract to be rescinded and declared null and void and a return o — the $1.7 million — rom seller. Applying the standard set out in R2d § 15 cmt. b, should the court allow Finger- hut to rescind the contract? See Fingerhut v. Kralyn Enterprises, Inc., 337 N.Y.S.2d 394 (N.Y. Sup. Ct. 1971), a —
’d, 335 N.Y.S.2d 926 (N.Y. App. Div. 1972).
Problem 13.3. The Italian Gambler Mario LaBarbera is an Italian citizen and business owner who serves as a consultant
or the pharmaceutical industry. He claims to su —
er — rom gambling addiction, a con- dition he has been treated — or in Italy. LaBarbera does not speak any English. LaBarbera decided to visit Las Vegas and stay at the Wynn Hotel in late March through early April o — 2008 a — ter being recruited by Alex Pariente, an Italian-speaking employee and VIP host o — the Wynn. While staying at the Wynn, LaBarbera gambled and lost $1 million o — his own money. The Wynn then extended $1 million worth o —
gaming credit in the
orm o — casino markers to LaBarbera. When LaBarbera checked out o — the Wynn, Pariente brought LaBarbera the signed casino marker and asked LaBarbera to wire $1 million to cover the debt. LaBarbera re — used, claiming that he had no recollection o — taking that debt and that the signature on the agreement was not his. The $1 million marker was le — t unpaid. The Wynn then — iled a breach o — con- tract action to collect $1 million in unpaid casino markers — rom LaBarbera. At trial, LaBarbera claims he has no recollection o — the debt, and that even i — he did take that debt, he was intoxicated at the time and there — ore should be allowed to void the agreement. LaBarbera claimed that Wynn employees continually brought him drinks he did not order, that he was especially intoxicated while gambling, and that on one occasion, he became intoxicated to the point where he became physically ill and vomited. The Wynn claims that LaBarbera never complained or brought attention to his intoxication while he executed multiple gaming markers over several days. The Wynn cites cases showing the extremely high burden required to prove a voluntary intoxi- cation de — ense and claims that LaBarbera’s argument — ails because he cannot identi — y any speci — ic — acts about how much or how long he drank. Should the court allow LaBarbera to void the alleged agreement to borrow $1 million — rom the Wynn? See LaBarbera v. Wynn Las Vegas, LLC, 134 Nev. 393 (2018). Module IV
Interpretation
Interpretation is the process through which courts clari
y the rights and obligations o — the parties under a contract to ensure that the agreement re — lects their intended bargain. Interpretation o — a promise or agreement or a term thereo — is the ascertain- ment o — its meaning. R2d § 200.
Contracts are essential tools
or managing relationships and allocating risk. However, ambiguity — when language is open to more than one reasonable inter- pretation — can undermine these — unctions. For example, unclear terms in a supply agreement might lead to disputes over delivery schedules or product speci — ications. In some cases, unresolved ambiguity can even render contracts unen — orceable, de — eating their purpose as reliable mechanisms — or cooperation. This module presents a comprehensive — ramework — or interpreting contracts. Each chapter explores a speci — ic step in the process, o —
ering students a systematic approach to understanding and resolving ambiguity. Chapter 14 introduces the threshold question o — identi — ying ambiguity. Courts dis- tinguish between patent ambiguities, which are evident on the — ace o — the contract, and latent ambiguities, which arise only when external circumstances are considered. Chapter 15 — ocuses on intrinsic evidence, such as the plain language and structure o — the contract, as a primary tool — or resolving ambiguity. This step emphasizes the importance o — the written agreement as the clearest re — lection o — the parties’ intentions.
393
394 Module IV • Interpretation
Chapter 16 explains when and how courts turn to extrinsic evidence — including course o — per — ormance, course o — dealing, and trade usage — to clari — y intent. These contextual tools provide additional insight into how the parties understood and intended their obligations. Chapter 17 examines the parol evidence rule, which limits the admissibility o —
extrinsic evidence. This rule ensures that external evidence is used appropriately to clari — y — not contradict — the contract. Its application demonstrates the balance courts must strike between the integrity o — written agreements and concepts o —
airness. Finally, Chapter 18 applies these interpretive principles to speci — ic obligations,
ocusing on warranties. By examining how courts balance express and implied war- ranties, students gain practical insight into how the — ramework operates in real-world contexts. By studying this — ramework, students will develop a systematic approach to inter- preting contracts. Litigators rely on these steps to resolve disputes and reconstruct intent, while transactional lawyers use them proactively to dra — t clear and en — orceable agreements. Mastering this process equips students with the skills to ensure clarity,
airness, and predictability in contractual relationships. Chapter 14 Ambiguity
Contractual ambiguity arises when a term or provision is reasonably susceptible to more than one interpretation. This chapter explores how courts identi — y and address ambiguity. It examines why ambiguity arises and how it impacts en — orceability. It introduces the key distinctions between patent ambiguities, which are evident on the
ace o — a contract, and latent ambiguities, which become apparent only when external circumstances are considered. Understanding these distinctions provides the — ounda- tion — or interpreting ambiguous terms. Ambiguity is central to determining the en — orceability o — agreements. Litigators approach ambiguity in hindsight — they resolve disputes by reconstructing intent
rom evidence. In contrast, transactional lawyers use — oresight — they dra — t agree- ments to minimize ambiguity and prevent disputes. Both roles rely on recognizing and addressing ambiguity as a core skill in contract practice. This chapter previews a structured approach to ambiguity analysis. It guides stu- dents through identi — ying ambiguity, classi — ying it as patent or latent, and systemati- cally evaluating evidence to uncover intent. By mastering this process, students will develop practical tools — or interpreting contracts in litigation and dra — ting agreements that reduce potential con — licts.
Rules A. Ambiguity
Ambiguity arises when a contractual term or provision is reasonably susceptible to more than one interpretation. This is a signi --- icant issue in contract disputes because ambiguity can create uncertainty about legal obligations, and that uncertainty can lead to misunderstandings and disagreements over per --- ormance. Resolving ambi- guity ensures that the parties’ intentions are clari --- ied and en --- orceable. Determining ambiguity is a threshold issue. Courts begin by examining the language o --- the con- tract itsel --- . I --- the dispute can be resolved through a close reading o --- the text, the court will rely on the contract’s plain meaning. In many cases, however, courts may turn to circumstantial evidence to clari --- y intent, particularly when the written terms alone cannot --- ully resolve the issue.
395
396 14 • Ambiguity
- Patent Ambiguity Patent ambiguities are evident on the — ace o — the contract. They di —
er — rom latent ambiguities, which only become apparent when the contract is applied to external
acts or circumstances. This distinction guides how courts approach the evidence needed to resolve each type o — ambiguity. Patent ambiguities arise — rom contradic- tions, unclear language, or gaps within the written text. Courts typically resolve patent ambiguities using intrinsic evidence, such as the plain language o — the contract, its structure, and any de — ined terms. For example, a contract might state that a consultant will submit invoices quarterly but will be paid monthly. This inconsistency between quarterly and monthly obliga- tions is a patent ambiguity. Courts might resolve this by prioritizing the provision that re — lects the more speci — ic obligation. I — the contract includes a clause emphasizing “quarterly compliance with reporting requirements,” the court might conclude that invoicing aligns with this timeline while interpreting payment as a secondary mecha- nism to balance administrative needs. Another example is a contract speci — ying delivery on the — i — teenth o — each month while also stating that delivery schedules are — lexible with notice. Courts might resolve this by examining related clauses. I — the contract prioritizes timely delivery
or customer satis — action, the — lexibility clause might apply only under extraordinary circumstances.
- Latent Ambiguity Latent ambiguities are not apparent — rom the contract itsel — but arise when the con- tract is applied to external circumstances. These ambiguities highlight the importance o — care — ul dra — ting. For example, speci — ying a single address in a property maintenance agreement can prevent con — usion when multiple properties are involved, reducing the risk o —
disputes over which property is covered. Similarly, a contract
or the sale o — cotton might state that shipment will occur on the vessel Peerless, but there are two ships with the same name sailing at di — — erent times. This creates a latent ambiguity. In the — amous Ra —
les v. Wichelhaus case, EWHC Exch J19 (1864), courts could resolve the dispute by examining extrinsic evidence such as purchase orders or communication records to determine which Peerless the parties intended. In Peerless, the court determined the ambiguity was material and unresolvable, rendering the contract invalid because the parties had a — undamental misunderstand- ing. This case serves as a reminder that ambiguity, i — unresolved, can undermine en — orceability. 14 • Ambiguity 397
B. Evidence o
Ambiguity Courts rely on evidence to determine whether ambiguity exists in a contract term. This evidence is used to show that a term is reasonably susceptible to more than one interpretation.
- Intrinsic Evidence Intrinsic evidence comes — rom within the “ — our corners” o — the contract. This evi- dence — alls into three main categories: the text o — the contract, its de — ined terms, and its structure. Text o — the contract includes the actual words and phrases chosen by the parties. Courts o — ten begin interpretation by considering the plain meaning o — these words in their ordinary sense, unless the contract explicitly de — ines them otherwise. De — ined terms are words or phrases explicitly clari — ied within the contract. These de — initions take precedence over ordinary meanings and provide a clear — ramework
or interpreting speci — ic terms. For example, i — a contract de — ines “delivery” as “trans — er o — title,” courts will prioritize this de — inition over general understandings o — the term. Structure o — the contract re — ers to the organization and hierarchy o — its provisions. Courts look at how sections and clauses interact to determine whether an ambiguity can be resolved by aligning the terms with the document’s overall logic.
- Extrinsic Evidence Extrinsic evidence comes — rom outside the contract and is o — ten required to reveal latent ambiguities. This type o — evidence includes in — ormation such as course o —
per
ormance, course o — dealing, trade usage, and evidence o — preliminary negotiations. Each plays a distinct role in helping courts understand the context o — the contract. Course o — per — ormance re — ers to how the parties have behaved under the speci — ic contract at issue. For instance, i — one party consistently accepts deliveries on the 16th despite a contract speci — ying the 15th, this per — ormance may clari — y how both parties interpreted the delivery term. Course o — dealing looks at prior transactions between the same parties. Repeated conduct in earlier agreements can shed light on the intended meaning o —
ambiguous terms. For example, i
prior contracts involved similar terms and were understood in a particular way, that understanding can in — orm the interpretation o —
the current agreement. Trade usage re — lects industry norms or practices that provide meaning to terms used within a speci — ic trade or pro — ession. For instance, in the grain industry, the term “bushel” might have a speci — ic weight attached to it, such as 60 pounds, based on trade usage. This type o — evidence becomes especially important when intrinsic evidence and more speci — ic extrinsic evidence, such as course o — per — ormance or course o — dealing, 398 14 • Ambiguity
ail to clari — y the term. Courts rely on trade usage to ensure that contracts align with standard practices, o —
ering consistency and predictability within an industry. Preliminary negotiations include pre-contractual communications or dra — ts that reveal the parties’ intentions. While o — ten inadmissible to contradict the — inal written agreement, such evidence can sometimes clari — y ambiguities by showing how the par- ties discussed speci — ic terms be — ore — inalizing the contract.
C. Evidence Resolving Ambiguity Once ambiguity is established, courts use evidence to determine the most reason- able interpretation. Intrinsic evidence remains the primary resource — or resolving pat- ent ambiguities. For example, courts may reconcile con — licting terms by prioritizing the provision that aligns with the contract’s overall structure and purpose. Intrinsic evidence, which comes — rom within the contract, carries the most weight. Courts start with: (1) Plain meaning (ordinary meaning o — the words in the contract) (2) Speci — ic terms (de — ined or precise terms in the contract, which take precedence over general language) (3) Structure (headings, placement, and arrangement o — terms within the agreement) I — intrinsic evidence does not resolve the ambiguity, courts may turn to extrinsic evidence. Contract law prescribes a hierarchy, where some extrinsic evidence is pri- oritized over others, in this order: (4) Course o — per — ormance (how the parties acted under the contract a — ter it was
ormed) (5) Course o — dealing (patterns o — behavior in prior transactions between the same parties) (6) Trade usage (common practices or standards in the relevant industry) (7) Parol evidence (statements or agreements made during preliminary negotia- tions but not included in the — inal written contract) Although both the common law and the UCC prescribe the same hierarchy o —
priorities
or contract evidence, their underlying rationales — or the hierarchy illustrate di — — erent approaches to resolving ambiguity. Intrinsic evidence — plain meaning, spe- ci — ic terms, and structure — is given the highest priority because it re — lects the written agreement as the clearest record o — the parties’ intent. Among extrinsic evidence, courts prioritize course o — per — ormance and course o —
dealing because they provide direct insights into the behavior and history o
the con- tracting parties. Usage o — trade is weighed next, as it o —
ers valuable context taken — rom industry norms even though it lacks the speci — icity o — party conduct. Parol evidence ranks lowest due to its susceptibility to sel — -serving interpretations. These di —
erences 14 • Ambiguity 399
in weighting re
lect the balancing act courts per — orm to respect the integrity o — writ- ten agreements while ensuring — airness in interpretation. The UCC’s broader admis- sibility o — evidence underscores its pragmatic — ocus on resolving commercial disputes within their real-world context. Although both the common law and the UCC have the same hierarchy o — priori- ties o — contract evidence, the admissibility o — evidence di —
ers under their respective
rameworks. The UCC allows broader consideration o — context to resolve commercial disputes e —
iciently.
D. Admissibility o
Evidence The common law and the UCC re — lect — undamentally di — — erent priorities in their treatment o — extrinsic evidence. The common law emphasizes predictability and — or- malism: it treats the written agreement as the — inal expression o — the parties’ intent and generally excludes outside evidence unless the contract is ambiguous on its
ace. This restrictive approach seeks to promote stability, reduce litigation risk, and preserve the integrity o — written agreements by insulating them — rom a — ter-the- — act reinterpretation. The UCC, by contrast, embraces commercial realism. It permits a broader range o — extrinsic evidence — including course o — per — ormance, course o — dealing, and trade usage — even where the written agreement appears complete. This — lexible — rame- work recognizes that business relationships o — ten depend on evolving context, shared understandings, and industry norms that may not be — ully captured in writing. This section examines how these di —
ering — rameworks shape contract interpreta- tion and en — orcement — and how they re — lect deeper values in contract law: — ormality and certainty on one side, context and — airness on the other.
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Common Law Admissibility Under the common law, courts generally require the contract to be ambiguous on its — ace (intrinsically ambiguous) be — ore admitting extrinsic evidence. This approach emphasizes the primacy o — the written agreement and restricts additional evidence to situations where the text alone cannot yield a single reasonable interpretation. For example, in a contract — or IT services, extrinsic evidence might only be admit- ted i — the contract re — ers to a “schedule” that is unde — ined or missing. By — ocusing on the written contract, courts aim to provide predictability and limit disputes over extrinsic — actors.
-
UCC Admissibility The UCC takes a more expansive view. In contracts — or the sale o — goods, extrinsic evidence such as trade usage, course o — dealing, and course o — per — ormance may be considered even i — the written terms appear unambiguous. 400 14 • Ambiguity
For instance, i
a contract speci — ies delivery o — widgets “on or be — ore the 15th,” but prior transactions consistently allowed delivery on the 16th without objection, courts might conclude that the 16th is within the scope o — acceptable per — ormance based on course o — dealing. This approach recognizes the importance o — context and commer- cial practices in determining contractual meaning. By accommodating broader evidence, the UCC seeks to balance the need — or cer- tainty with the realities o — commerce. This broader approach incorporates trade usage within its evidentiary — ramework, respecting its role as a re — lection o — widely accepted industry practices. However, the UCC also maintains a hierarchy, which ensures that trade usage does not override more direct — orms o — evidence, such as course o —
per
ormance and course o — dealing, which provide clearer insights into the parties’ speci — ic intentions. This balance aligns with the UCC’s broader approach o —
acilitating commercial transactions while upholding — airness and predictability. By considering a wider range o — evidence, courts can interpret agreements in ways that re — lect the parties’ true intentions and the practical realities o — their industries, which helps to ensure equitable outcomes without undermining the reliability o — written contracts. For example, in rapidly evolving industries like technology or renewable energy, standard practices may shi — t — requently. Courts might rely on evidence o — recent trade usage or evolving industry norms to ensure that contract terms are interpreted in line with current realities, thus enabling agreements to remain — unctional and e —
ective. While this approach allows — or greater — lexibility, it still seeks to preserve the integrity o — the written agreement by ensuring that extrinsic evidence is used to clari — y, not contradict, the terms o — the contract.
E. Steps
or Addressing Ambiguity Courts and practitioners — ollow a structured — ramework to resolve contractual ambiguity systematically and in a way that ensures that interpretations align with the parties’ intentions and broader legal principles. The — irst step is to identi — y whether an ambiguity exists. Courts determine whether a term or provision is reasonably susceptible to more than one interpretation by dis- tinguishing between patent ambiguities, which are evident on the — ace o — the contract, and latent ambiguities, which become apparent only when the contract is applied to external circumstances. This initial classi — ication provides the — oundation — or — urther analysis. Once they identi — y ambiguity, courts examine intrinsic evidence to resolve the issue wherever possible. This includes the plain meaning o — the contract’s language, the structure and organization o — its provisions, and any de — initions explicitly included in the agreement. Intrinsic evidence carries the greatest weight because it re — lects the written record o — the parties’ intent and promotes predictability and stability in contract en — orcement. 14 • Ambiguity 401
I
ambiguity cannot be resolved using intrinsic evidence, courts turn to extrinsic evidence — or additional context. Sources such as course o — per — ormance, course o —
dealing, and trade usage illuminate how the parties understood their obligations and how similar terms are interpreted in the relevant industry. This step ensures that inter- pretation aligns with practical realities and the parties’ conduct. Throughout the process, courts adhere to a hierarchy o — evidence to prioritize the most reliable and relevant in — ormation. Speci — ic and direct evidence, such as course o —
per
ormance, typically carries more weight than generalized evidence like trade usage. This hierarchy balances the need — or clarity with the realities o — commercial practice and ensures that courts rely on evidence most closely tied to the parties’ agreement. This — ramework not only helps litigators reconstruct intent and resolve disputes but also serves as a guide — or transactional lawyers dra — ting contracts to minimize ambiguity. By understanding why ambiguity arises and how courts address it, trans- actional lawyers can cra — t agreements that reduce uncertainty and anticipate potential con — licts, thereby ensuring greater en — orceability and clarity.
F. Why Does Ambiguity Exist in Contracts? Ambiguity in contracts is a persistent and o — ten inevitable challenge. It arises — rom the interplay between language’s inherent limitations, the complexity o — real-world applications, and the unpredictability o — — uture events. Understanding these causes helps practitioners identi — y and address ambiguity e —
ectively during dra — ting and litigation. Language is inherently imprecise. Even care — ully chosen words can have multiple meanings, and slight di —
erences in phrasing may lead to signi — icant interpretive dis- putes. While dra — ters aim — or precision, the — lexibility o — language o — ten leaves room
or di —
ering interpretations. In McGinnis v. Union Paci — ic Railroad Co., 612 F. Supp. 2d 776 (D. Neb. 2009), the court addressed ambiguity in an insurance policy using the term “work.” The term was unclear as to whether it re — erred to the physical act o — lay- ing tracks or the geographic area o — construction. This latent ambiguity demonstrates how even simple terms can create disputes when applied to speci — ic contexts. Contracts o — ten address multi — aceted transactions, and applying their language to real-world scenarios can reveal latent ambiguities. These ambiguities become apparent only when the contract interacts with un — oreseen — acts or complexities. In Ezrasons, Inc. v. Travelers Indemnity Co., 89 F.4th 388 (2d Cir. 2023), an insurance policy listed an “Approved Location” — or coverage. Although the address seemed clear, the property included multiple warehouses, which raised questions about whether the policy applied to all buildings. The court resolved the ambiguity in — avor o — the insured. This case demonstrates how real-world complexities can expose gaps in contractual language. Future events are inherently uncertain, and dra — ters cannot predict every contin- gency. Even well-dra — ted agreements may become ambiguous when signi — icant changes in context, technology, or industry practices arise. For instance, in Brotherhood o —
402 14 • Ambiguity
Maintenance o
Way Employes Division o — International Brotherhood o — Teamsters v. Union Paci — ic Railroad, 475 F. Supp. 2d 819 (N.D. Iowa 2007), the introduction o —
iris-recognition technology
or tracking employee attendance raised questions about whether it constituted a “technological change” permitted under a collective bargain- ing agreement. The ambiguity arose because the dra — t ers could not have — oreseen such a speci — ic technological advancement. In some cases, ambiguity is intentional. Dra — ters may deliberately leave terms open-ended to expedite negotiations or allow — lexibility — or — uture developments. While this approach can make agreements more adaptable, it also increases the risk o — disputes. In Bohler-Uddeholm America, Inc. v. Ellwood Group, Inc., 247 F.3d 79 (3d Cir. 2001), a joint venture agreement was ambiguous about whether rebates applied to sales made to third parties. This deliberate dra — ting choice de — erred contentious negotiations but ultimately required the court to interpret the parties’ intent using extrinsic evidence. And dra — ting comprehensive agreements is time-consuming and expensive. Par- ties o — ten balance the need — or detail with the desire to — inalize agreements e —
iciently. This trade-o —
can leave gaps or ambiguities in contract terms. In MW Builders, Inc. v. United States, 134 Fed. Cl. 469 (2017), a construction contract was ambiguous about which party was responsible — or signing a line extension agreement. The lack o — clarity likely stemmed — rom prioritizing simplicity over exhaustive detail. The court resolved the ambiguity using the doctrine o — contra pro — erentem, interpreting the ambiguity against the dra — ter. Ambiguity in contracts arises — rom the inherent limitations o — language, the com- plexity o — real-world — acts, the uncertainty o — — uture events, deliberate choices, and practical dra — ting constraints. Recognizing these sources is essential — or both litiga- tors and transactional lawyers. Litigators must adeptly resolve ambiguities through extrinsic evidence and interpretive rules, while transactional lawyers can mitigate ambiguity by de — ining key terms, dra — ting clearly, and anticipating disputes. While ambiguity cannot always be avoided, its impact can be managed through thought — ul legal practice.
G. Re
lections on Ambiguity Ambiguity is not just a challenge — or courts and lawyers; it is a de — ining — eature o —
how contracts
unction in the real world. This chapter has demonstrated how ambigu- ity arises — rom the inherent limitations o — language, the complexity o — applying con- tractual terms to real-world — acts, and the unpredictability o — — uture circumstances. While ambiguity complicates the certainty that contracts aim to provide, it also high- lights contract law’s adaptability to varied and un — oreseen situations. For transactional lawyers, the challenge lies in minimizing ambiguity through pre- cise dra — ting while leaving room — or — lexibility in cases where rigidity could under- mine an agreement’s purpose. For litigators, ambiguity provides an opportunity to 14 • Ambiguity 403
reconstruct the parties’ intent and ensure
airness in the application o — unclear terms. These complementary roles underscore why ambiguity, though o — ten — rustrating, is an inevitable aspect o — contracting. Looking ahead, students should consider how ambiguity intersects with other — oun- dational issues in contract law. Disputes about per — ormance and breach — requently hinge on resolving ambiguous obligations and require courts to clari — y what consti- tutes compliance. Remedies are also shaped by ambiguity, as courts must determine how to en — orce or adjust agreements when terms lack clarity. Furthermore, ambiguity challenges the principle o — autonomy by — orcing courts to interpret terms in ways that may not — ully re — lect the parties’ intentions. This interpretive process o — ten requires balancing respect — or private agreements with broader public policy considerations, such as — airness, protecting weaker parties, and ensuring commercial consistency. This interplay reveals how ambiguity, while rooted in private agreements, intersects with judicial concerns about equity and broader legal norms.
Cases
Reading Frigaliment Importing Co., Ltd., v. B.N.S. International Sales Corp. The Frigaliment case involves an agreement — or the purchase and sale o — chicken
rom a U.S. company to a German company. The dispute arose when the seller delivered stewing chickens. The buyer claimed that the seller should have deliv- ered — rying chickens. The legal question presented is, what is the meaning o —
chicken?
,e ---
Figure 14.1. Gallina Poulle, Albert Flamen (1659). CC0 1.0.
404 14 • Ambiguity
In studying this case, make sure to identi --- y all the di --- --- erent strategies that the court uses to determine the meaning o --- chicken. In particular, try to list all the various sources o --- evidence that a court could consider when determining the meaning o --- contractual terms. Then explain which sources o --- evidence take priority over which others, and be prepared to discuss why this prioritization o --- evidence o --- contractual meaning makes sense.
Frigaliment Importing Co., Ltd., v. B.N.S.
International Sales Corp.
190 F. Supp. 116 (S.D.N.Y. 1960) FRIENDLY, J. The issue is, what is chicken? Plainti ---
says “chicken” means a young chicken, suit- able — or broiling and — rying. De — endant says “chicken” means any bird o — that genus that meets contract speci — ications on weight and quality, including what it calls “stew- ing chicken” and plainti —
pejoratively terms “ — owl.” Dictionaries give both meanings, as well as some others not relevant here. To support its [argument], plainti —
sends a number o — volleys over the net; de — endant essays to return them and adds a — ew serves o — its own. Assuming that both parties were acting in good — aith, the case nicely illus- trates Holmes’ remark “that the making o — a contract depends not on the agreement o — two minds in one intention, but on the agreement o — two sets o — external signs — not on the parties’ having meant the same thing but on their having said the same thing.” The Path o — the Law, in Collected Legal Papers, p. 178. I have concluded that plainti —
has not sustained its burden o
persuasion that the contract used “chicken” in the narrower sense. The action is — or breach o — the warranty that goods sold shall correspond to the description, New York Personal Property Law, McKinney’s Consol. Laws, c. 41, § 95. Two contracts are in suit. In the — irst, dated May 2, 1957, de — endant, a New York sales corporation, con — irmed the sale to plainti —
, a Swiss corporation, o —
US Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated 2½–3
lbs. and 1½–2 lbs. each all chicken individually wrapped in cryovac, packed in
secured --- iber cartons or wooden boxes, suitable --- or export
75,000 lbs. 2½–3 lbs. . . . . . . . @$33.00
25,000 lbs. 1½–2 lbs. . . . . . . . @$36.50
per 100 lbs. FAS New York, scheduled May 10, 1957 pursuant to instructions
rom Penson & Co., New York. The second contract, also dated May 2, 1957, was identical save that only 50,000 lbs. o — the heavier “chicken” were called — or, the price o — the smaller birds was $37 per 100 lbs., and shipment was scheduled — or May 30. The initial shipment under the — irst 14 • Ambiguity 405
contract was short but the balance was shipped on May 17. When the initial shipment arrived in Switzerland, plainti —
ound, on May 28, that the 2½–3 lbs. birds were not young chicken suitable — or broiling and — rying but stewing chicken or “ — owl”; indeed, many o — the cartons and bags plainly so indicated. Protests ensued. Nevertheless, shipment under the second contract was made on May 29, the 2½–3 lbs. birds again being stewing chicken. De — endant stopped the transportation o — these at Rotterdam. This action — ollowed. Plainti —
says that, notwithstanding that its acceptance was in Switzerland, New York law controls; de — endant does not dispute this, and relies on New York decisions. I shall — ollow the apparent agreement o — the parties as to the applicable law. Since the word “chicken” standing alone is ambiguous, I turn — irst to see whether the contract itsel — o —
ers any aid to its interpretation. Plainti —
says the 1½–2 lbs. birds necessarily had to be young chicken since the older birds do not come in that size, hence the 2½–3 lbs. birds must likewise be young. This is unpersuasive — a contract — or “apples” o — two di — — erent sizes could be — illed with di — — erent kinds o — apples even though only one species came in both sizes. De — en- dant notes that the contract called not simply — or chicken but — or “US Fresh Frozen Chicken, Grade A, Government Inspected.” It says the contract thereby incorporated by re — erence the Department o — Agriculture’s regulations, which — avor its interpreta- tion; I shall return to this a — ter reviewing plainti —
’s other contentions. The — irst hinges on an exchange o — cablegrams which preceded execution o — the
ormal contracts. The negotiations leading up to the contracts were conducted in New York between de — endant’s secretary, Ernest R. Bauer, and a Mr. Stovicek, who was in New York — or the Czechoslovak government at the World Trade Fair. A — ew days a — ter meeting Bauer at the — air, Stovicek telephoned and inquired whether de — endant would be interested in exporting poultry to Switzerland. Bauer then met with Stovi- cek, who showed him a cable — rom plainti —
dated April 26, 1957, announcing that they “are buyer” o — 25,000 lbs. o — chicken 2½–3 lbs. weight, Cryovac packed, grade A Government inspected, at a price up to 33¢ per pound, — or shipment on May 10, to be con — irmed by the — ollowing morning, and were interested in — urther o —
erings. A — ter testing the market — or price, Bauer accepted, and Stovicek sent a con — irmation that evening. Plainti —
stresses that, although these and subsequent cables between plainti —
and de — endant, which laid the basis — or the additional quantities under the
irst and — or all o — the second contract, were predominantly in German, they used the English word “chicken”; it claims this was done because it understood “chicken” meant young chicken whereas the German word, “Huhn,” included both “Brathuhn” (broil- ers) and “Suppenhuhn” (stewing chicken), and that de — endant, whose o —
icers were thoroughly conversant with German, should have realized this. Whatever — orce this argument might otherwise have is largely drained away by Bauer’s testimony that he asked Stovicek what kind o — chickens were wanted, received the answer “any kind o —
chickens,” and then, in German, asked whether the cable meant “Huhn” and received an a —
irmative response. Plainti —
attacks this as contrary to what Bauer testi — ied on 406 14 • Ambiguity
his deposition in March, 1959, and also on the ground that Stovicek had no authority to interpret the meaning o — the cable. The — irst contention would be persuasive i — sus- tained by the record, since Bauer was — ree at the trial — rom the threat o — contradiction by Stovicek as he was not at the time o — the deposition; however, review o — the deposi- tion does not convince me o — the claimed inconsistency. As to the second contention, it may well be that Stovicek lacked authority to commit plainti —
or prices or delivery dates other than those speci — ied in the cable; but plainti —
cannot at the same time rely on its cable to Stovicek as its dictionary to the meaning o — the contract and repudiate the interpretation given the dictionary by the man in whose hands it was put. Plain- ti —
’s reliance on the — act that the contract — orms contain the words “through the inter- mediary o — :”, with the blank not — illed, as negating agency, is wholly unpersuasive; the purpose o — this clause was to permit — illing in the name o — an intermediary to whom a commission would be payable, not to blot out what had been the — act. Plainti —
’s next contention is that there was a de — inite trade usage that “chicken” meant “young chicken.” De — endant showed that it was only beginning in the poultry trade in 1957, thereby bringing itsel — within the principle that “when one o — the parties is not a member o — the trade or other circle, his acceptance o — the standard must be made to appear” by proving either that he had actual knowledge o — the usage or that the usage is “so generally known in the community that his actual individual knowl- edge o — it may be in — erred.” Here there was no proo — o — actual knowledge o — the alleged usage; indeed, it is quite plain that de — endant’s belie — was to the contrary. In order to meet the alternative requirement, the law o — New York demands a showing that “the usage is o — so long continuance, so well established, so notorious, so universal and so reasonable in itsel — , as that the presumption is violent that the parties contracted with re — erence to it, and made it a part o — their agreement.” Plainti —
endeavored to establish such a usage by the testimony o — three witnesses and certain other evidence. Strasser, resident buyer in New York — or a large chain o —
Swiss cooperatives, testi
ied that “on chicken I would de — initely understand a broiler.” However, the — orce o — this testimony was considerably weakened by the — act that in his own transactions the witness, a care — ul businessman, protected himsel — by using “broiler” when that was what he wanted and “ — owl” when he wished older birds. Indeed, there are some indications, dating back to a remark o — Lord Mans — ield, Edie v. East India Co., 2 Burr. 1216, 1222 (1761), that no credit should be given “witnesses to usage, who could not adduce instances in veri — ication.” While Wigmore thinks this goes too — ar, a witness’[s] consistent — ailure to rely on the alleged usage deprives his opinion testimony o — much o — its e —
ect. Niesielowski, an o —
icer o — one o — the com- panies that had — urnished the stewing chicken to de — endant, testi — ied that “chicken” meant “the male species o — the poultry industry. That could be a broiler, a — ryer or a roaster,” but not a stewing chicken; however, he also testi — ied that upon receiving de — endant’s inquiry — or “chickens,” he asked whether the desire was — or “ — owl or — ry- ing chickens” and, in — act, supplied — owl, although taking the precaution o — asking de — endant, a day or two a — ter plainti —
’s acceptance o — the contracts in suit, to change its con — irmation o — its order — rom “chickens,” as de — endant had originally prepared it, 14 • Ambiguity 407
to “stewing chickens.” Dates, an employee o
Urner-Barry Company, which publishes a daily market report on the poultry trade, gave it as his view that the trade meaning o — “chicken” was “broilers and — ryers.” In addition to this opinion testimony, plainti —
relied on the
act that the Urner-Barry service, the Journal o — Commerce, and Wein- berg Bros. & Co. o — Chicago, a large supplier o — poultry, published quotations in a manner which, in one way or another, distinguish between “chicken,” comprising broilers, — ryers and certain other categories, and “ — owl,” which, Bauer acknowledged, included stewing chickens. This material would be impressive i — there were nothing to the contrary. However, there was, as will now be seen. De — endant’s witness Weininger, who operates a chicken eviscerating plant in New Jersey, testi — ied “Chicken is everything except a goose, a duck, and a turkey. Every thing is a chicken, but then you have to say, you have to speci — y which category you want or that you are talking about.” Its witness Fox said that in the trade “chicken” would encompass all the various classi — ications. Sadina, who conducts a — ood inspec- tion service, testi — ied that he would consider any bird coming within the classes o —
“chicken” in the Department o
Agriculture’s regulations to be a chicken. The speci-
ications approved by the General Services Administration include — owl as well as broilers and — ryers under the classi — ication “chickens.” Statistics o — the Institute o —
American Poultry Industries use the phrases “Young chickens” and “Mature chick- ens,” under the general heading “Total chickens.” And the Department o — Agriculture’s daily and weekly price reports avoid use o — the word “chicken” without speci — ication. De — endant advances several other points which it claims a —
irmatively support its construction. Primary among these is the regulation o — the Department o — Agri- culture, 7 C.F.R. § 70.300–70.370, entitled, “Grading and Inspection o — Poultry and Edible Products Thereo — .” and in particular 70.301 which recited: Chickens. The — ollowing are the various classes o — chickens: (a) Broiler or — ryer . . . (b) Roaster . . . (c) Capon . . . (d) Stag . . . (e) Hen or stewing chicken or — owl . . . ( — ) Cock or old rooster . . . De — endant argues, as previously noted, that the contract incorporated these regu- lations by re — erence. Plainti —
answers that the contract provision related simply to grade and Government inspection and did not incorporate the Government de — ini- tion o — “chicken,” and also that the de — inition in the Regulations is ignored in the trade. However, the latter contention was contradicted by Weininger and Sadina; and there is — orce in de — endant’s argument that the contract made the regulations a dictionary, particularly since the re — erence to Government grading was already in plainti —
’s ini- tial cable to Stovicek. 408 14 • Ambiguity
De
endant makes a — urther argument based on the impossibility o — its obtaining broilers and — ryers at the 33¢ price o —
ered by plainti —
or the 2½–3 lbs. birds. There is no substantial dispute that, in late April, 1957, the price — or 2½–3 lbs. broilers was between 35 and 37¢ per pound, and that when de — endant entered into the contracts, it was well aware o — this and intended to — ill them by supplying — owl in these weights. It claims that plainti —
must likewise have known the market since plainti —
had reserved shipping space on April 23, three days be — ore plainti —
’s cable to Stovicek, or, at least, that Stovicek was chargeable with such knowledge. It is scarcely an answer to say, as plainti —
does in its brie — , that the 33¢ price o —
ered by the 2½–3 lbs. “chickens” was closer to the prevailing 35¢ price — or broilers than to the 30¢ at which de — endant pro- cured — owl. Plainti —
must have expected de — endant to make some pro — it — certainly it could not have expected de — endant deliberately to incur a loss. Finally, de — endant relies on conduct by the plainti —
a — ter the — irst shipment had been received. On May 28 plainti —
sent two cables complaining that the larger birds in the — irst shipment constituted “ — owl.” De — endant answered with a cable re — using to recognize plainti —
’s objection and announcing “We have today ready — or shipment 50,000 lbs. chicken 2½–3 lbs. 25,000 lbs. broilers 1½–2 lbs.,” these being the goods procured — or shipment under the second contract, and asked immediate answer “whether we are to ship this merchandise to you and whether you will accept the merchandise.” A — ter several other cable exchanges, plainti —
replied on May 29 “Con-
irm again that merchandise is to be shipped since resold by us i — not enough pursuant to contract chickens are shipped the missing quantity is to be shipped within ten days stop we resold to our customers pursuant to your contract chickens grade A you have to deliver us said merchandise we again state that we shall make you — ully responsible
or all resulting costs.” De — endant argues that i — plainti —
was sincere in thinking it was entitled to young chickens, plainti —
would not have allowed the shipment under the second contract to go — orward, since the distinction between broilers and chickens drawn in de — endant’s cablegram must have made it clear that the larger birds would not be broilers. However, plainti —
answers that the cables show plainti —
was insisting on delivery o — young chickens and that de — endant shipped old ones at its peril. De — en- dant’s point would be highly relevant on another disputed issue — whether i — liability were established, the measure o — damages should be the di —
erence in market value o — broilers and stewing chicken in New York or the larger di —
erence in Europe, but I cannot give it weight on the issue o — interpretation. De — endant points out also that plainti —
proceeded to deliver some o — the larger birds in Europe, describing them as “poulets”; de — endant argues that it was only when plainti —
’s customers complained about this that plainti —
developed the idea that “chicken” meant “young chicken.” There is little — orce in this in view o — plainti —
’s immediate and consistent protests. When all the evidence is reviewed, it is clear that de — endant believed it could com- ply with the contracts by delivering stewing chicken in the 2½–3 lbs. size. De — endant’s subjective intent would not be signi — icant i — this did not coincide with an objective meaning o — “chicken.” Here it did coincide with one o — the dictionary meanings, with the de — inition in the Department o — Agriculture Regulations to which the contract 14 • Ambiguity 409
made at least oblique re
erence, with at least some usage in the trade, with the realities o — the market, and with what plainti —
’s spokesman had said. Plainti —
asserts it to be equally plain that plainti —
’s own subjective intent was to obtain broilers and — ryers; the only evidence against this is the material as to market prices and this may not have been su —
iciently brought home. In any event it is unnecessary to determine that issue. For plainti —
has the burden o — showing that “chicken” was used in the narrower rather than in the broader sense, and this it has not sustained. This opinion constitutes the Court’s — indings o —
act and conclusions o — law. Judg- ment shall be entered dismissing the complaint with costs.
Re --- lection
According to the R2d, “[i]nterpretation o --- a promise or agreement or a term thereo ---
is the ascertainment o
its meaning.” R2d § 200. But, by studying Frigaliment, you have — ound that there is an inherent tension in contract interpretation in cases where a party challenges the meaning o — a term written in an agreement. Should a court consider evidence that tends to show that a contract does not mean what it seems to say? The question o — whether to admit such evidence turns out to have a great deal o —
bearing on the result o
the contract interpretation process. The — amous Frigaliment case was decided be — ore the UCC was enacted or the R2d was established, but it takes a similar approach to both. Judge Friendly asks, “[W]hat is chicken?” He recognizes that one party intended “ — rying chickens,” whereas the other meant “broiling chickens,” but he does not begin the analysis by inquiring why they held these di — — erent meanings. Rather, Judge Friendly begins with the dictionar- ies, which “give both meanings.” Upon thus — inding that the term “chicken” is patently ambiguous with regard to what kind o — chicken, Judge Friendly then proceeds to entertain extrinsic evidence. It is not clear what the judge would have done had some universal dictionary o —
ered a singular de — inition, but one suspects that he would have agreed with the R2d § 201 cmt. b that “ordinarily a party has reason to know o — mean- ings in a general usage” and there — ore thrown the book, so to speak, at whichever party was attesting to be ignorant o — such a clearly established term.
Discussion 1. Generally, courts apply the plain meaning to a contractual term. Why did the court not apply the plain meaning o --- “chicken” in this case? What does its reasoning indicate about the plain meaning rule in general? 2. What constitutes an ambiguity? Should courts hear evidence that tends to show a term is latently ambiguous, or should courts only admit extrinsic evidence where a term is patently ambiguous?
410 14 • Ambiguity
Problems Problem 14.1. IRAC Frigaliment A party who wishes to show that a written contract should be interpreted accord- ing to the meaning it supplies usually must --- irst show that the written term is sus- ceptible to multiple meanings; in other words, that party must --- irst prove the term is ambiguous. Was the term “chicken” in the Frigaliment case ambiguous? Would this --- amous historic case come out the same way under modern rules? Answer this question using the IRAC paradigm. First, --- rame the issue in terms o --- whether the word chicken is ambiguous. Second, write, cite, and explain the key rules (including a de --- inition o --- what is a patent or latent ambiguity). Third, analyze the term “chicken” as it appears in the Frigaliment case under those rules. Finally, conclude whether the term “chicken” is ambiguous.
Problem 14.2. Approved Location A marine cargo insurance policy issued by Travelers Indemnity Company lists an “Approved Location” as “Chamad Warehouse, Inc., 56 Branch Street, Brooklyn, NY.” The property at this address includes three separate warehouse buildings: a primary ware house visible — rom the street, a second building at the rear o — the parcel, and a smaller storage unit located near the loading docks. A — ire destroys goods stored in the second building. Travelers denies coverage, arguing that the “Approved Location” re — ers only to the primary warehouse — ronting 56 Branch Street. Ezrasons, Inc., the insured, claims that the entire property, including all three buildings, is covered under the policy. What is the best argument that the term “Approved Location” is unambiguous? Does one, both, or neither party strategically bene — it — rom claiming the term is ambiguous? Why? I — the term is ambiguous, what kind o — ambiguity is it — patent or latent? See Ezrasons, Inc. v. Travelers Indem. Co., 89 F.4th 388 (2d Cir. 2023).
Problem 14.3. Work Insurance A liability insurance policy issued by Zurich American Insurance covers claims “arising out o — the insured’s work” during a railway construction project. An accident occurs on site during the Union Paci — ic Railroad Company’s railway expansion, and the contractor, Herzog Contracting Corporation, — iles a claim. The dispute centers on the term “work” in the policy. Zurich denies the claim, arguing that “work” re — ers only to the speci — ic tasks Herzog was contractually obligated to per — orm, such as lay- ing track. Herzog contends that “work” includes all activities at the construction site, including general site preparation and equipment use, where the accident occurred. What is the best argument that the term “work” is unambiguous? 14 • Ambiguity 411
Does one, both, or neither party strategically bene
it — rom claiming the term is ambiguous? Why? I — the term is ambiguous, what kind o — ambiguity is it — patent or latent? See McGinnis v. Union Pac. R.R. Co., 612 F. Supp. 2d 776 (D. Neb. 2009).
Problem 14.4. Licensing Ambiguity XYZ Productions licenses so — tware to Acme Corp. under an agreement that states: “Licensee may use the Licensed So — tware in connection with its business operations.” Years later, Acme begins using the so — tware to power an e-commerce plat — orm, which generates substantial revenue. XYZ claims this usage exceeds the scope o — the license, arguing that “in connection with its business operations” was intended to mean inter- nal use only. Acme counters that the phrase unambiguously permits all business- related applications, including revenue-generating uses. What is the best argument that the phrase “in connection with its business oper- ations” is unambiguous? Does one, both, or neither party strategically bene — it — rom claiming the term is ambiguous? Why? I — the term is ambiguous, what kind o — ambiguity is it — patent or latent? See generally Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79 (3d Cir. 2001). Chapter 15 Intrinsic Evidence
Contracts aim to provide clarity and en
orceability. Yet, disputes o — ten arise over the meaning o — speci — ic terms or provisions. When parties disagree about written terms, courts begin with intrinsic evidence — the words o — the contract itsel — . Courts prioritize intrinsic evidence because it re — lects the parties’ shared intent at the time o — dra — ting, o —
ering a — oundation — or resolving disputes without resorting to external evidence. But how do courts interpret contracts when ambiguities or con — licts arise? This chapter examines the “canons o — construction,” the interpretive tools courts use to clari — y terms, harmonize provisions, and ensure agreements — unction as intended. The canons o — construction — all into two categories: semantic and policy. Semantic canons — ocus on the language and structure o — the contract. These rules operate like tools in a toolbox, each suited — or a speci — ic purpose. Some, like the plain meaning rule, are versatile and — oundational, much like a screwdriver used in many situations. Others, such as the last antecedent rule, are specialized tools designed — or resolving precise issues — more akin to a torque wrench that tightens bolts to exact speci — i- cations. While this chapter does not exhaustively catalog every semantic canon, it introduces several key rules that help courts and practitioners interpret contracts with precision. Policy canons address — airness and equity by ensuring that contract interpreta- tion aligns with broader legal norms. For example, consider the doctrine o — contra pro — erentem, which resolves ambiguities against the dra — ter — this rule o — contractual interpretation aligns with the legal norms o — protecting reasonable expectations and preventing one party — rom exploiting unclear language. Policy canons re — lect contract law’s dual purpose: promoting predictability and autonomy while sa — eguarding — air- ness and equity. Learning the canons o — construction will help students to resolve disputes over intrinsic evidence. These principles — orm a critical — oundation — or understanding how courts apply contract terms in practice — by balancing textual precision with the prac- ticalities o — real-world agreements.
413
414 15 • Intrinsic Evidence
Rules A. Semantic Canons Semantic canons o --- construction are the primary tools courts use to interpret the written language o --- contracts. These rules prioritize clarity, coherence, and consis- tency by --- ocusing exclusively on the contract’s text and structure to resolve disputes. They help courts determine the intent o --- the parties based on the language they chose and ensure that every provision is given e ---
ect. Semantic canons operate within the “ — our corners” o — the document, applying logic and structure to interpret terms with- out relying on external evidence. These canons range — rom broad principles to precise tools. For example, the plain meaning rule gives words their ordinary sense unless the context indicates other wise. Other canons, such as the last antecedent rule, resolve speci — ic questions about how modi — iers apply to preceding terms. Together, these rules ensure that contracts are interpreted logically and predictably, enabling courts to resolve ambiguity while preserving the integrity o — the agreement. This chapter introduces twelve semantic canons that illustrate the range o — inter- pretive tools courts commonly use. While these canons are not an exhaustive list, they represent — oundational principles that recur in judicial decisions. They provide students with a reliable — ramework — or analyzing contract language and addressing ambiguities. Other lists o — canons, such as those outlined in key legal treatises, include additional rules that may apply in speci — ic contexts. For example, R2d § 203 highlights canons such as avoiding redundancy and — avoring interpretations that preserve valid- ity. Similarly, Scalia and Garner’s work on textual interpretation includes a wide array o — linguistic, syntactic, and contextual canons used across legal disciplines. By — ocusing on these twelve canons, this chapter provides a practical and accessible introduction to semantic canons. These tools are — oundational — or interpreting intrin- sic evidence in a way that ensures logical, consistent, and — air outcomes in contract disputes.
- Dictionary Meaning Courts o — ten begin interpreting contract terms by considering their dictionary meaning — the isolated, standalone de — inition o — a word. This ensures that interpreta- tion starts with a precise understanding o — language be — ore introducing additional layers o — complexity. By e —
ectively “consulting the dictionary,” courts select the most appropriate source — or the term in question, whether ordinary, technical, or legal. The plain meaning rule directs courts to interpret words in their ordinary sense unless the contract speci — ies otherwise. For example, in a service agreement requir- ing the contractor to “repair damage,” courts would interpret “repair” in its everyday sense: restoring the property to its prior condition. This meaning excludes upgrades 15 • Intrinsic Evidence 415
or improvements unless explicitly required, thus ensuring predictable and uni
orm application o — common language. The technical meaning rule applies when contracts use terms speci — ic to a partic ular trade, pro — ession, or industry. For instance, in an IT service agreement, “server maintenance” has a technical meaning that includes tasks like so — tware updates and hardware checks but excludes broader activities like equipment upgrades. Courts rely on trade-speci — ic de — initions to align the interpretation with industry practices and the parties’ shared understanding. These rules re — lect the importance o — grounding interpretation in precise, isolated de — initions be — ore considering broader context. However, dictionary meaning alone rarely resolves all ambiguities, as words o — ten gain their true signi — icance — rom the structure and context o — the contract. Courts, there — ore, treat dictionary meaning as a starting point rather than a de — initive resolution. From there, courts consider how terms interact with surrounding language and the agreement as a whole.
- Contextual Meaning Courts determine the contextual meaning o — contract terms by examining how those terms interact with surrounding language and the broader — ramework o — the agreement. This ensures that terms are not interpreted in isolation but as part o — a cohesive and logical document. Contextual tools help clari — y ambiguous language by aligning general provisions with their immediate and overall context. The general terms rule provides that broad language be interpreted reasonably within the contract’s context, which ensures that the contract does not impose obliga- tions or grant rights that are overly expansive or unintended. For example, in a com- mercial lease, a clause stating that “Tenant shall maintain all areas o — the property” might reasonably be interpreted to exclude structural repairs, as such responsibili- ties typically — all to the landlord. This rule ensures that general terms align with the broader agreement by preventing them — rom being stretched beyond their logical scope. The recognition by association rule (noscitur a sociis) holds that the meaning o —
a word is in
ormed by its association with surrounding terms. For instance, in an insurance policy covering “ — ire, — lood, or other disasters,” the phrase “other disasters” would be interpreted to include natural catastrophes o — similar magnitude, such as hurricanes or earthquakes, but not minor issues like a leaky pipe. This rule ensures that general terms are limited by the speci — ic terms that accompany them. The same kind, class, or nature rule (ejusdem generis) limits general terms that
ollow a list o — speci — ic items to those o — the same kind. For example, in the same insurance policy, i — the clause states, “losses caused by — ire, — lood, lightning, or other perils,” the term “other perils” would be limited to comparable natural or physical phenomena, excluding the — t or vandalism. This canon ensures that general terms remain consistent with the more speci — ic terms that precede them. 416 15 • Intrinsic Evidence
The grammar rules (such as the last antecedent rule) provide that modi
iers typi- cally apply to the nearest antecedent unless the context suggests otherwise. For exam- ple, in the same policy, a clause stating, “damages resulting — rom — ire, — lood, or other disasters occurring during the policy period,” would likely apply “occurring during the policy period” only to “other disasters” and not to “ — ire” or “ — lood,” unless other language in the contract clearly indicates a broader application. These contextual tools operate simultaneously rather than sequentially, as courts o — ten apply them in tandem when ambiguity persists. This interplay underscores the inherent challenges o — contract interpretation, where terms must be harmonized across multiple provisions to re — lect the intent o — the parties.
- Structural Meaning Courts interpret contracts as uni — ied documents, applying structural principles to ensure that every provision contributes to a coherent and harmonious agree- ment. These rules emphasize how terms — it together within the overall structure o —
the contract, which prevents interpretations that isolate clauses or render parts o
the agreement meaningless. Structural canons work alongside dictionary and con- textual principles to clari — y how terms interact within the broader — ramework o — the contract. The whole agreement rule requires courts to read the contract as a cohesive whole to reconcile potentially con — licting provisions. For example, in a commercial lease, a clause requiring the tenant to “maintain the property in good repair” must be inter- preted alongside another clause assigning the landlord responsibility — or “repairing structural damage.” Courts would harmonize these terms by assigning routine upkeep to the tenant while reserving major structural repairs — or the landlord, thus ensuring that both provisions are e —
ective and not contradictory. The avoid surplusage rule directs courts to give meaning to every word and clause and to avoid interpretations that render language redundant or super — luous. In the same lease, i — one clause states that the tenant must “promptly repair damage to the premises” and another requires the tenant to “address all issues o — damage in a timely manner,” courts would interpret “promptly” and “timely” as addressing di — — erent levels o — urgency. For example, “promptly” might apply to emergency repairs, while “timely” might address routine maintenance tasks. The consistent usage rule (and the related meaning — ul variation rule) assumes that identical terms are used consistently throughout the contract, while variations in terms indicate intentional di —
erences. For instance, i — the lease re — ers to “shared spaces” in one section and “common areas” in another, courts would presume that these terms have distinct meanings unless the contract explicitly de — ines them as interchangeable. By considering structural meaning, courts ensure that contracts — unction as inte- grated and logically consistent documents. These canons work in tandem with other 15 • Intrinsic Evidence 417
interpretive principles to clari
y responsibilities, harmonize the parties’ obligations, and re — lect the parties’ intent in a cohesive manner.
-
Tailored Meaning Courts o — ten rely on principles o — speci — icity and negotiation to prioritize lan- guage that is most tailored to the agreement. These canons emphasize the deliberate choices made by the parties and ensure that precise and customized terms prevail over broader or pre-dra — ted provisions. In the context o — service agreements, these princi ples guide courts in resolving ambiguities and con — licts. The speci — ic terms rule gives greater weight to precise and tailored provisions over more general language. For example, i — a service agreement requires the provider to “upgrade all network so — tware to the latest version,” this speci — ic term would override a general provision requiring the provider to “maintain an up-to-date system.” The speci — ic term re — lects the parties’ deliberate — ocus on addressing a particular issue in detail. The negotiated terms rule prioritizes individually negotiated or added terms over standardized or boilerplate provisions. For instance, in the same IT service agree- ment, a preprinted clause stating, “Support is provided during regular business hours,” might be overridden by a handwritten term speci — ying, “Support is available 24/7.” The handwritten term re — lects the parties’ speci — ic negotiation, capturing their unique agreement more accurately than the de — ault boilerplate language. These rules o — ten work alongside other interpretive principles to ensure that con- tracts re — lect the unique considerations o — the parties’ agreement. By prioritizing tailored language, courts honor the parties’ deliberate intent and incentivize care — ul dra — ting and negotiation to reduce the risk o — — uture disputes.
-
Legal Meaning When interpreting contracts, courts o — ten turn to the legal meaning rule to ensure that terms align with established legal de — initions. This canon prioritizes interpreta- tions that re — lect the broader legal and regulatory — rameworks governing the agree- ment. Legal meaning is particularly signi — icant in contracts involving regulated industries, complex transactions, or statutory terminology. It serves as the ultimate semantic canon, grounding interpretation in external legal authority. Courts apply the legal meaning rule when a contract term has a speci — ic legal de — i- nition that takes precedence over its ordinary or technical meaning. For example, in a construction contract requiring “installation o — sa — ety measures,” courts would inter- pret “sa — ety measures” to include — ire exits and other requirements mandated by local building codes, even i — the term could colloquially re — er to broader precautions. By anchoring interpretation in legal standards, this rule ensures consistency with exter- nal norms and en — orceability under the law. 418 15 • Intrinsic Evidence
This canon also applies to established legal terms o
art. For instance, in a loan agreement, the term “security interest” would be interpreted based on its — ormal de — inition under the UCC Article 9. Courts would not rely on a lay interpretation o — “security” as general protection but would instead treat the term as re — erring to a legally recognized right in collateral. This precision rein — orces consistency and pre- dictability by ensuring that contracts con — orm to legal — rameworks and shared pro — es- sional expectations. The legal meaning rule is o — ten invoked alongside other canons, such as the plain meaning rule and technical meaning rule, to clari — y ambiguous language. While courts prioritize the parties’ intent, they also recognize that contracts must operate within the bounds o — the law. By integrating legal meaning, courts bridge the gap between the parties’ agreement and the broader regulatory and statutory context in which it exists, thus ensuring that the contract is not only en — orceable but also compli- ant with applicable laws.
-
Con
licting Meanings Semantic canons are power — ul tools — or interpreting contracts, but they do not always lead to a single, de — initive meaning. Di — — erent canons can sometimes point to con — licting interpretations, leaving ambiguity unresolved even a — ter applying the principles o — dictionary, contextual, structural, and tailored meaning. This underscores the inherent limitations o — language and the complexity o — contractual relationships. Consider a commercial lease requiring the tenant to “repair damage to the prem- ises.” The plain meaning rule might suggest that “repair” re — ers to restoring any damage to its previous condition, including structural repairs; however, the whole agreement rule could prioritize a separate clause assigning the landlord responsibility
or “structural repairs.” Applying these canons creates a con — lict between the general duty to repair and the speci — ic allocation o — structural repairs. This tension leaves ambiguity unresolved, as both interpretations are plausible. Another example arises in a service agreement that requires the contractor to “use materials suitable — or the task.” The general terms rule might interpret “suitable — or the task” broadly, thus allowing — or — lexibility in choosing materials. At the same time, the avoid surplusage rule might emphasize a clause that speci — ies “ABC-brand materials,” which would suggest that the broad language be narrowed to align with the explicit mention o — ABC-brand products. This con — lict between broad and narrow interpre- tations may leave the term ambiguous, as both readings align with di — — erent canons. In cases like these, courts attempt to reconcile the con — licting meanings by con- sidering the contract as a whole and seeking the interpretation that best re — lects the parties’ intent. However, when semantic tools — ail to resolve ambiguity, courts may turn to other interpretive methods. Policy canons, such as contra pro — erentem, guide courts to construe ambiguities against the dra — ting party, particularly in contracts o —
adhesion or those with signi
icant power imbalances. These policy-driven principles, 15 • Intrinsic Evidence 419
discussed in the next section, o
er — airness-based resolutions when textual interpreta- tion alone is insu —
icient. When even policy canons cannot — ully resolve ambiguity, courts may evaluate extrinsic evidence, such as course o — per — ormance, course o — dealing, or trade usage, to uncover the intent o — the parties. The evaluation o — extrinsic evidence is explored in Chapter 16. The simultaneous application o — semantic canons re — lects the complexity o — con- tract interpretation. While these tools aim to clari — y meaning and reduce uncertainty, they are not in — allible. The potential — or con — licting meanings underscores the limita- tions o — purely textual approaches and highlights the need — or — lexibility in applying policy principles and considering external evidence. By addressing these con — licts, courts balance precision and — airness, and, in doing so, ensure that agreements remain en — orceable and adaptable to real-world complexities.
B. Policy Canons When ambiguity persists despite applying semantic canons, courts turn to pol- icy canons to resolve disputes in ways that promote — airness, equity, and the public interest. These rules re — lect broader principles o — contract law and ensure that inter- pretation aligns with societal values, reasonable expectations, and the duty o — good
aith.
- Good Faith A — undamental principle o — contract law is good — aith, which requires parties to act honestly and — airly in the per — ormance and en — orcement o — their agreements. This principle is codi — ied in both the common law and statutory — rameworks. R2d states: Every contract imposes upon each party a duty o — good — aith and — air dealing in its per — ormance and its en — orcement. R2d § 205. Similarly, UCC provides: Every contract or duty within the Uni — orm Commercial Code imposes an obli- gation o — good — aith in its per — ormance and en — orcement. NC UCC § 1-304. The UCC de — ines good — aith in general: “Good — aith” . . . means honesty in — act and the observance o — reasonable com- mercial standards o —
air dealing. NH UCC § 2-201(b). The UCC also de — ines good — aith — or merchants: “Good — aith” in the case o — a merchant means honesty in — act and the obser- vance o — reasonable commercial standards o —
air dealing in the trade. NH UCC § 2-103. 420 15 • Intrinsic Evidence
These provisions establish good
aith as a universal obligation, thus ensuring that parties do not undermine the purpose o — their agreements through opportunistic or un — air behavior. In Nānākuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981), repro- duced in Chapter 16, the court addressed the concept o — good — aith under the UCC in the context o — price increases — or asphalt. Nānākuli, a paving contractor in Hawai‘i, had a long-term supply agreement with Shell Oil to purchase asphalt. The contract speci-
ied that prices would be determined by Shell’s “posted price at the time o — delivery.” However, Nānākuli argued that Shell had repeatedly provided price protection, mean- ing Shell would honor the price posted at the time o — an order rather than at delivery. In January 1974, during a dramatic increase in oil prices, Shell raised the price o —
asphalt
rom $44 to $76 per ton, e —
ective immediately. Shell — ailed to provide advance notice o — the price increase and did not honor the previously agreed-upon pricing — or pending orders. Nānākuli sued, claiming that Shell’s actions violated the obligation o —
good
aith in the contract’s per — ormance. The court — ound that Shell’s abrupt price increase and lack o — advance notice violated the standard o — good — aith because it — ailed to meet commercially reason- able standards in the asphalt paving trade. Other suppliers, like Chevron, provided six weeks’ advance notice, which the court considered a reasonable standard in the industry. The jury likewise concluded that Shell’s — ailure to provide price protection and its lack o — notice breached the duty o — good — aith, as Nānākuli had relied on the previous pricing structure in its bids — or projects. Good — aith ensures that contracts — ul — ill their intended purpose without creating undue harm or un — air advantage. This example also highlights the interplay between the UCC’s good- — aith provisions and evidence o — trade usage, demonstrating how courts use context to evaluate — airness in commercial relationships. Courts invoke the principle o — good — aith to resolve ambiguities in — avor o —
airness, especially when semantic tools — ail to provide clarity. For instance, a term requiring “reasonable e —
orts” to deliver goods on time may be interpreted through the lens o —
good
aith to ensure that both parties — ul — ill their obligations — airly and consistently with industry norms. The duty o — good — aith serves as a sa — ety net to ensure that con- tracts are not only en — orceable but also equitable in their execution.
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Interpretation against the Dra
ter When ambiguity persists in a contract, courts o — ten invoke the principle o — contra pro — erentem — the rule that ambiguous terms should be construed against the party who dra — ted the agreement. This principle re — lects a broader policy aim o —
airness by ensuring that the dra — ting party, who had the power to clari — y terms, bears the conse- quences o — any lack o — clarity. In choosing among the reasonable meanings o — a promise or agreement or a term thereo — , that meaning is generally pre — erred which operates against the 15 • Intrinsic Evidence 421
party who supplies the words or --- rom whom a writing otherwise proceeds.
R2d § 206. The rationale is straight --- orward. The party dra --- ting the contract has greater con- trol over its language and is in the best position to prevent ambiguity. By interpreting unclear terms against the dra --- ter, courts incentivize clear and precise dra --- ting while protecting the reasonable expectations o --- the non-dra --- ting party. This principle is particularly important in contracts o --- adhesion, where one party, typically the dra --- ter, wields signi --- icantly more bargaining power. For example, in an insurance policy dra --- ted by the insurer, a clause ambiguously requiring coverage --- or “water damage” could be interpreted against the insurer to include --- lood damage i ---
the insured reasonably expected such coverage. The ambiguity is resolved in
avor o —
the weaker party, re
lecting the policy aim o —
airness. UCC § 2-316 provides a statutory example o — this principle, particularly in the con- text o — disclaimers or limitations o — warranties (warranties are covered in Chapter 18). I — a disclaimer is ambiguous or unclear, courts will construe it narrowly against the seller, which ensures that buyers are not un — airly deprived o — reasonable protections. For instance, a clause stating, “Seller is not responsible — or de — ects,” might be inter- preted to exclude only minor or cosmetic de — ects rather than serious sa — ety issues unless the clause is explicitly clear. Courts apply contra pro — erentem cautiously, recognizing that not all ambiguities result — rom bad dra — ting or un — air power dynamics. In negotiated agreements between sophisticated parties, courts may weigh additional — actors such as the parties’ relative expertise and the evidence o — bargaining. However, even in these contexts, the rule serves as a baseline policy canon to guide interpretation. By resolving ambiguities against the dra — ter, courts achieve multiple aims o — con- tract law. This rule protects reliance by ensuring that reasonable expectations are not undermined by unclear language. It promotes — airness by discouraging opportunism in dra — ting and incentivizes autonomy by ensuring that agreements re — lect mutual understanding rather than unilateral control.
- Public Policy Contracts are designed to govern private relationships, but their terms must align with public policy. Courts interpret ambiguous provisions in ways that uphold soci- etal values and ensure compliance with legal norms. A meaning that serves the public interest is generally pre — erred. R2d § 207. When courts encounter ambiguity, they adopt interpretations that preserve — unda- mental principles o —
airness, equity, and justice. For example, a non-compete clause ambiguously restricting a — ormer employee — rom engaging in similar work might be interpreted narrowly to apply only within a reasonable geographic area or — or a limited duration. This approach re — lects public policy — avoring — ree competition and 422 15 • Intrinsic Evidence
economic mobility by ensuring that restrictive covenants do not unduly harm the public interest. Similarly, public policy o — ten in — orms interpretations o — waiver clauses. In an employment agreement, a provision waiving the employee’s right to pursue legal claims might be construed narrowly to avoid in — ringing on statutory protections such as anti-discrimination laws. Courts — avor interpretations that preserve these rights, consistent with public policy goals o — preventing workplace exploitation. While R2d § 178 and UCC § 2-302 address public policy concerns more directly in the context o — unconscionability, as discussed in Chapter 12, R2d § 207 emphasizes public policy as a guiding principle — or interpretation. It ensures that courts pre — er meanings consistent with societal interests even when en — orcing the contract itsel — is not at issue. The public policy rule re — lects the broader purpose o — contract law: balancing pri- vate autonomy with public wel — are. By — avoring interpretations that align with the public interest, courts ensure that contracts are not only en — orceable but also equitable and consistent with societal norms.
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Unconscionability The unconscionability doctrine protects parties — rom un — air or oppressive contract terms by allowing courts to re — use en — orcement o — such provisions. While it is most o — ten used as a de — ense to en — orcement, the concept also in — orms contract interpre- tation. Courts will interpret ambiguous terms in a way that avoids unconscionable outcomes, aligning with the broader public policy goal o — promoting — airness and equity in contracting. I — a contract or term thereo — is unconscionable at the time the contract is made, a court may re — use to en — orce the contract, or may en — orce the remainder o —
the contract without the unconscionable term, or may so limit the application o — any unconscionable term as to avoid any unconscionable result. R2d § 208. Comment a to § 208 elaborates on the doctrine, noting that unconscionability may arise — rom “weaknesses in the bargaining process” or “un — air surprise.” These proce- dural de — ects include hidden terms, lack o — negotiation, or signi — icant disparities in bargaining power. Courts use these concerns to interpret ambiguous terms narrowly and prevent one-sided outcomes. As discussed in Chapter 12, unconscionability is o — ten divided into two categories. Procedural unconscionability — ocuses on the — airness o — the contract — ormation process, including whether one party lacked a meaning — ul choice or was misled about the agreement’s terms. Courts rely on R2d § 208 to address such concerns, interpret- ing ambiguous provisions in ways that mitigate the e —
ects o — procedural de — ects. For example, a credit agreement presented as a non-negotiable — orm contract includes a clause stating, “Borrower agrees to pay all — ees related to en — orcement.” I — the lender 15 • Intrinsic Evidence 423
dra
ted the agreement with no opportunity — or the borrower to review or negotiate the terms, courts might interpret “all — ees” narrowly to exclude unreasonable charges, such as excessive attorney’s — ees. This prevents procedural de — ects, like lack o — negotia- tion or notice, — rom resulting in an unconscionable outcome. Substantive unconscionability addresses whether the terms themselves are overly harsh or one-sided. While R2d § 208 allows courts to re — use en — orcement o — clearly unconscionable terms, it also guides interpretation to avoid un — air results. For exam- ple, a lease includes a clause stating, “Tenant must pay six months’ rent as a penalty — or early termination.” I — the clause’s scope or intent is ambiguous, courts may interpret the term narrowly to apply only in cases o — will — ul abandonment, limiting its applica- tion to avoid an excessively punitive result. While courts o — ten require both procedural and substantive unconscionability to re — use en — orcement, R2d § 208 cmt. a allows either concern to guide interpretation. This ensures that ambiguous terms are construed narrowly in — avor o — the weaker party, even when substantive un — airness is not extreme enough to invalidate the pro- vision outright. Unconscionability serves as a sa — eguard in contract interpretation; it ensures that agreements operate within boundaries o —
airness and equity. Courts address proce- dural de — ects and substantive un — airness to resolve ambiguities and prevent one party
rom exploiting another. This interpretive use o — unconscionability rein — orces public policy while preserving the en — orceability o — equitable agreements.
C. Re
lections on Evaluation o —
Intrinsic Evidence The principles o — contract interpretation explored in this chapter highlight the cen- tral role o — intrinsic evidence, the language o — the contract itsel — , in resolving disputes. Semantic canons provide a systematic — ramework — or interpreting contracts, prioritiz- ing textual clarity, internal consistency, and the deliberate choices o — the parties. These tools underscore the importance o — well-dra — ted agreements, where precise language and care — ul organization can reduce ambiguity and preempt disputes. However, as we have seen, even the most care — ully dra — ted contracts can give rise to con — licting meanings. The canons o — construction serve as the — irst line o — de — ense, guiding courts to interpret terms in ways that honor the parties’ intent and harmo- nize the provisions within the — our corners o — the document. When these tools yield con — licting outcomes, doctrines like contra pro — erentem and public policy ensure that ambiguity is resolved in ways that preserve — airness and protect reasonable expectations. Interpretation o — intrinsic evidence re — lects the broader themes o — contract law. The emphasis on the written terms promotes e —
iciency by reducing reliance on exter- nal evidence and streamlining dispute resolution. Courts’ pre — erence — or coherent 424 15 • Intrinsic Evidence
and harmonious interpretations supports reliance, which allows parties to plan their a —
airs with con — idence that their contracts will be en — orced as written. Meanwhile, the application o —
airness principles, such as good — aith and unconscionability, ensures that even intrinsic evidence is interpreted in a way that avoids injustice and re — lects the practical realities o — contractual relationships. Ultimately, the interpretation o — intrinsic evidence demonstrates the dual purpose o — contract law: en — orcing private agreements while sa — eguarding equitable outcomes. The tools and principles outlined in this chapter provide courts with the means to uncover meaning within the — our corners o — a contract while balancing the competing goals o — predictability and — airness. As contracts grow in complexity, these interpretive principles remain essential to ensuring that agreements are both e —
ective and just.
Cases Reading In re Motors Liquidation Co. On June 11, 2009, General Motors, which thus became known as “Old GM,” obtained chapter 11 bankruptcy pro- tection in --- ederal court. Chapter 11 o --- the United States Bankruptcy Code per- mits business entities (usually large corporations) to seek relie ---
rom creditors. When a corporation cannot pay all its debt and is there — ore at risk o —
ailing completely, the law provides this avenue — or the debtor to work out with credi- tors some mutually agreeable way to pay back a signi — icant portion o — the debt. One source o — corporate debt may arise — rom corporate torts. When a cor- poration harms a person and that person success — ully sues in — ederal court, the corporation may be required to pay damages. I — the corporate harm impacts a large number o — people at once, that alone could drive the corporation into a bankruptcy. In GM’s case, however, many — actors came together in the auto- motive industry crisis o — 2008–2010 — including, as you will read, GM’s tort liability to a certain Beverly Deutsch — or an accident that occurred in June 2007 and led to her death in August 2009. The Bankruptcy Court — unctions in some ways like a moderator who takes all the creditors’ interests into account and approves any settlement among all the parties. In this case, the parties agreed that GM would cut expenses and raise cash, among other things, by discontinuing the Hummer and Saturn brands and by selling the Saab brand to Spyker Cars. Substantially all o — the core GM assets were auctioned o —
in a peculiar sale at which there was only one bidder: New GM. New GM was a corporation
ormed by the United States government (60.8%), the Canadian government (11.7%), the United and Canadian Auto Workers Union (17.5%), and unse- cured bondholders o — Old GM (10%) to “bail out” its General Motors. New GM 15 • Intrinsic Evidence 425
purchased Old GM according to the bankruptcy court-approved Amended and Restated Master Sale and Purchase Agreement (MSPA). This next case was driven by the interpretation o — a key provision in that MSPA.
In re Motors Liquidation Co.
447 B.R. 142 (Bankr. S.D.N.Y. 2011) ROBERT E. GERBER, United States Bankruptcy Judge In this contested matter in the chapter 11 case o --- Motors Liquidation Company ( --- ormerly, General Motors Corp., and re --- erred to here as “Old GM”) and its a ---
iliates, General Motors LLC (“New GM”) seeks a determination — rom this Court that New GM did not assume the liabilities associated with a tort action in which a car accident took place be — ore the date (“Closing Date”) upon which New GM acquired the busi- ness o — Old GM, but the accident victim died therea — ter. The issue turns on the construction o — the documents under which New GM agreed to assume liabilities — rom Old GM — which provided that New GM would assume liabilities relating to “accidents or incidents” “ — irst occurring on or a — ter the Closing Date” — and in that connection, whether a liability o — this character is or is not one o — the types o — liabilities that New GM thereby agreed to assume. Upon consideration o — those documents, the Court concludes that the liability in question was not assumed by New GM. However, i — a proo — o — claim was not previ- ously — iled against Old GM with respect to the accident in question, the Court will permit one to be — iled within 30 days o — the entry o — the order implementing this Decision, without prejudice to rights to appeal this determination. The Court’s Findings o — Fact and Conclusions o — Law in connection with this deter- mination — ollow. Findings o — Fact In June 2007, Beverly Deutsch was severely injured in an accident while she was driving a 2006 Cadillac sedan. She survived the car accident, but in August 2009, she died — rom the injuries that she previously had sustained. In January 2010, the Estate o — Beverly Deutsch, the Heirs o — Beverly Deutsch, and San — ord Deutsch (collectively “Deutsch Estate”) — iled a Third Amended Complaint against New GM (and others) in a state court lawsuit in Cali — ornia (the “Deutsch Estate Action”), claiming damages arising — rom the accident, the injuries which Bev- erly sustained, and her wrong — ul death. The current complaint superseded the origi- nal complaint in the Deutsch Estate Action, which was — iled in April 2008, be — ore the
iling o — Old GM’s chapter 11 case. In July 2009, this Court entered its order (the “363 Sale Order”) approving the sale o —
Old GM’s assets, under section 363 o
the Bankruptcy Code, to the entity now known 426 15 • Intrinsic Evidence
as New GM. The 363 Sale Order, among other things, approved an agreement that was called an Amended and Restated Master Sale and Purchase Agreement (the “MSPA”). The MSPA detailed which liabilities would be assumed by New GM, and provided that all other liabilities would be retained by Old GM. The MSPA provided, in its § 2.3(a)(ix), that New GM would not assume any claims with respect to product lia- bilities (as such term was de — ined in the MSPA, “Product Liability Claims”) o — the Debtors except those that “arise directly out o — death, personal injury or other injury to Persons or damage to property caused by accidents or incidents — irst occurring on or a — ter the Closing Date [July 10, 2009] . . . . ” Thus, those Product Liability Claims that arose — rom “accidents or incidents” occurring be — ore July 10, 2009 would not be assumed by New GM, but claims arising — rom “accidents or incidents” occurring on or a — ter July 10, 2009 would be. Language in an earlier version o — the MSPA di —
ered somewhat — rom its — inal lan- guage, as approved by the Court. Be — ore its amendment, the MSPA provided — or New GM to assume liabilities except those caused by “accidents, incidents, or other distinct and discrete occurrences.” The 363 Sale Order provides that “[t]his Court retains exclusive jurisdiction to en — orce and implement the terms and provisions o — this Order” and the MSPA, including “to protect the Purchaser [New GM] against any o — the Retained Liabilities or the assertion o — any . . . claim . . . o — any kind or nature whatsoever, against the Purchased Assets.”
Discussion
The issue here is one o --- contractual construction. As used in the MSPA, when de --- ining the liabilities that New GM would assume, what do the words “accidents or incidents,” that appear be --- ore “ --- irst occurring on or a --- ter the Closing Date,” mean? It is undisputed that the accident that caused Beverly Deutsch’s death took place in June 2007, more than two years prior to the closing. But her death took place a --- ter the closing. New GM argues that Beverly Deutsch’s injuries arose --- rom an “accident” and an “incident” that took place in 2007, and that her death did likewise. But the Deutsch Estate argues that while the “accident” took place in 2007, her death was a separate “incident” — and that the latter took place only in August 2009, a --- ter the closing o --- the sale to New GM had taken place. Ultimately, while the Court respects the skill and --- ervor with which the point was argued, it cannot agree with the Deutsch Estate. Beverly Deutsch’s death in 2009 was the consequence o --- an event that took place in 2007, which undisputedly, was an accident and which also was an incident, which is a broader word, but --- undamentally o --- a similar type. The resulting death in 2009 was not, however, an “incident[] --- irst occurring on or a --- ter the Closing Date,” as that term was used in the MSPA. As usual, the Court starts with textual analysis. The key provision o --- the MSPA, § 2.3(a)(ix), set --- orth the extent to which Product Liability Claims were assumed by New GM. Under that provision, New GM assumed:
15 • Intrinsic Evidence 427
(ix) all Liabilities to third parties --- or death, personal injury, or other injury to
Persons or damage to property caused by motor vehicles designed --- or opera-
tion on public roadways or by the component parts o --- such motor vehicles and,
in each case, manu --- actured, sold or delivered by Sellers (collectively, “Product
Liabilities”), which arise directly out o --- death, personal injury or other injury
to Persons or damage to property caused by accidents or incidents --- irst occur-
ring on or a --- ter the Closing Date and arising --- rom such motor vehicles’ opera-
tion or per --- ormance ( --- or avoidance o --- doubt, Purchaser shall not assume or
become liable to pay, per --- orm or discharge, any Liability arising or contended
to arise by reason o --- exposure to materials utilized in the assembly or --- abri-
cation o --- motor vehicles manu --- actured by Sellers and delivered prior to the
Closing Date, including asbestos, silicates or --- luids, regardless o --- when such
alleged exposure occurs). The key words, o --- course, are “accidents” and “incidents,” neither o --- which are de --- ined anywhere else in the MSPA, and whose interpretation, accordingly, must turn on their common meaning and any understandings expressed by one side to the other in the course o --- contractual negotiations. Also important are the words “ --- irst occur- ring on or a --- ter the Closing Date,” which modi --- y the words “accidents” and “inci- dents,” and shed light on the --- ormer words’ meaning. The word “accidents,” o --- course, is not ambiguous. “Accidents” has su ---
iciently clear meaning on its own, and in any event its interpretation is not subject to debate, as both sides agree that Beverly Deutsch’s death resulted — rom an accident that took place in 2007, at a time when, i — “accidents” were the only controlling word, liability
or the resulting death would not be assumed by New GM. The ambiguity, i — any, is instead in the word “incidents,” which is a word that by its nature is more inclusive and less precise. But while “incidents” may be deemed to be somewhat ambiguous, neither side asked — or an evidentiary hearing to put — orward parol evidence as to its meaning. Though it is undisputed that “incidents” remained in the MSPA a — ter additional words “or other distinct and discrete occurrences,” were deleted, neither side was able, or chose, to explain, by evidence, why the latter words were dropped, and what, i — any relevance the dropping o — the additional words might have as to the meaning o — the word “incidents” that remained. The words “or other distinct and discrete occur- rences” could have been deleted as redundant, to narrow the universe o — claims that were assumed, or — or some other reason. Ultimately, the Court is unable to derive su —
icient indication o — the parties’ intent as to the signi — icance, i — any, o — deleting the extra words. So the Court is le — t with the task o — deriving the meaning o — the remaining words “accidents or incidents” — rom their ordinary meaning, the words that surround them, canons o — construction, and the Court’s understanding when it approved the 363 Sale as to how the MSPA would deal with prepetition claims against Old GM. Ultimately these considerations, particularly in the aggregate, point in a single direction — that a 428 15 • Intrinsic Evidence
death resulting
rom an earlier “accident[] or incident[]” was not an “incident[] — irst occurring” a — ter the closing. Starting — irst with ordinary meaning, de — initions o — “incident” — rom multiple sources are quite similar. They include, as relevant here, “an occurrence o — an action or situation — elt as a separate unit o — experience”; “an occurrence o — an action or situ- ation that is a separate unit o — experience”; “[a] discrete occurrence or happening”; “something that happens, especially a single event”; “a de — inite and separate occur- rence; an event”; or, as pro —
ered by the Deutsch Estate, “[a] separate and de — inite occurrence: EVENT.” In ways that vary only in immaterial respects, all o — the de — initions articulate the concept o — a separate and identi — iable event. And, and o — course, — rom words that — ol- low, “arising — rom such motor vehicles’ operation or per — ormance,” the event must be understood to relate to be one that that involves a motor vehicle. Accidents, explo- sions or — ires all — it com — ortably within that description. Deaths or other consequences that result — rom earlier accidents, explosions or — ires technically might — it as well, but such a reading is much less natural and much more strained. Turning next to words that surround the words “accidents or incidents,” these words provide an interpretive aid to the words they modi — y. The word “incident[]” is
ollowed by the words “ — irst occurring.” In addition to de — ining the relevant time at which the incident must take place (i.e., a — ter the closing), that clause inserts the word “ — irst” be — ore “occurring.” That suggests, rather strongly, that it was envisioned that some types o — incidents could take place over time or have separate sub-occurrences, or that one incident might relate to an earlier incident, with the earliest incident being the one that matters. Otherwise it would be su —
icient to simply say “occurring,” with- out adding the word “ — irst.” This too suggests that the consequences o — an incident should not be regarded as a separate incident, or that even i — they are, the incident that
irst occurs is the one that controls. Canons o — construction tend to cut in opposite directions, though on balance they — avor New GM. The Deutsch Estate appropriately points to the canon o — construction against “mere surplusage,” which requires di — — erent words o — a contract or statute to be construed in a — ashion that gives them separate meanings, so that no word is super — lu- ous. The Court would not go as — ar as to say that the words “accident” and “incident” cannot ever cover the same thing — or, putting it another way, that they always must be di — — erent. But the Court agrees with the Deutsch Estate that they cannot always mean the same thing. “Incidents” must have been put there — or a reason and should be construed to add something in at least some circumstances. But how di — — erent the two words “accidents” and “incidents” can properly be under- stood to be — and in particular, whether “incidents” can be deemed to separately exist when they are a — oreseeable consequence, or are the resulting injury, — rom the accidents or incidents that cause them — is quite a di — — erent matter. A second canon o — construction, “noscitur a sociis,” provides that “words grouped in a list should be given related meaning.” Colloquially, “a word is known by the company it keeps.” For 15 • Intrinsic Evidence 429
instance, in Dole [v. United Steelworkers o
America, 494 U.S. 26 (1990)], in interpret- ing a phrase o — the Paper Work Reduction Act, the Supreme Court invoked noscitur a sociis to hold that words in a list, while meaning di — — erent things, should nevertheless be read to place limits on how broadly some o — those words might be construed. The Dole court stated: That a more limited reading o — the phrase “reporting and recordkeeping requirements” was intended derives some — urther support — rom the words sur- rounding it. The traditional canon o — construction, noscitur a sociis, dictates that words grouped in a list should be given related meaning.
Here application o
the canon against surplusage makes clear, as the Deutsch Estate argues, that “incidents” must at least sometimes mean something di — — erent than “accidents” — but application o — that canon does not tell us when and how. The second canon, noscitur a sociis, does that, and e —
ectively trumps the doctrine o — sur- plusage because it tells us that “accidents” and “incidents” should be given related meaning. The Deutsch Estate argues that the Court should construe a death resulting — rom an earlier “accident” or “incident” to be a separate and new “incident” that took place at a later time. But ultimately, the Court concludes that it cannot do so. While it is easy to conclude that “accidents” and “incidents,” as used in the MSPA, will not necessarily be the same in all cases, they must still be somewhat similar. “Incidents” cannot be construed so broadly as to cover what are simply the consequences o — earlier “acci- dents” or other “incidents.” Applying noscitur a sociis in conjunction with the canon against “mere surplusage” tells us that the two words “accidents” and “incidents” must be understood as having separate meanings in at least some cases, but that these meanings should be concep- tually related. At oral argument, the Court asked counsel — or New GM an important question: i — an “incident” would not necessarily be an “accident,” what would it be? What would it cover? Counsel — or New GM came back with a crisp and very logical answer; he said that “incident” would cover a situation where a car caught — ire or had blown up, or some problem had arisen by means other than a collision. Conversely, the interpretation — or which the Deutsch Estate argues — that “inci- dents” re — ers to consequences o — earlier accidents or incidents — is itsel — violative or potentially violative, o — the two interpretive canons discussed above. It is violative o — noscitur a sociis, since a death or other particular injury is by its nature distinct
rom the circumstance — collision, explosion, — ire, or other accident or incident — that causes the resulting injury in the — irst place. The Deutsch Estate interpretation also tends to run counter to the doctrine against mere surplusage upon which the Deutsch Estate otherwise relies, making meaningless the words “ — irst occurring” which — ollow the words “accidents or incidents,” in any cases where death or other particular injury is the consequence o — an explosion, — ire, or other non-collision incident that causes the resulting injury. 430 15 • Intrinsic Evidence
The simple interpretation, and the one this Court ultimately provides, is that “incidents,” while covering more than just “accidents,” are similar; they relate to — ires, explosions, or other de — inite events that cause injuries and result in the right to sue, as contrasted to describing the consequences o — those earlier events, or that relate to the resulting damages. Finally, this Court’s earlier understanding o — the purposes o — New GM’s willing- ness to assume certain liabilities o — Old GM is consistent with the Court’s conclusion at this time as well. When the Court approved GM’s 363 Sale, this Court noted, in its opinion, that New GM had chosen to broaden its assumption o — product liabili- ties. The MSPA was amended to provide — or the assumption o — liabilities not just — or product liability claims — or motor vehicles and parts delivered a — ter the Closing Date (as in the original — ormulation), but also, — or “all product liability claims arising — rom accidents or other discrete incidents arising — rom operation o — GM vehicles occurring subsequent to the closing o — the 363 Transaction, regardless o — when the product was purchased.” As re — lected in the Court’s decision at the time, the Court understood that New GM was undertaking to assume the liabilities — or “accidents or other discrete incidents” that hadn’t yet taken place. Finally, the Deutsch Estate notes another interpretative canon, that ambiguities in a contract must be read against the dra — ter. I — the matter were closer, the Court might consider doing so. But the language in question is not that ambiguous, and the relevant considerations, — airly decisively, all tip in the same direction. While it cannot be said that the Deutsch Estate’s position is a — rivolous one, the issues are not close enough to require reading the language against the dra — ter. Conclusion The Deutsch Estate’s interpretation o — “accident or incident” is not supportable. Thus, the Debtor’s motion is granted, and the Deutsch Estate may not pursue this claim against New GM. New GM is to settle an order consistent with this opinion. The time to appeal — rom this determination will run — rom the time o — the resulting order, and not — rom the date o —
iling o — this Decision.
Re --- lection
This bankruptcy case might have introduced some new procedural concepts or legal terms, but the core learning relates directly to the canons o --- construction cov- ered in this chapter. The case involved two parties’ disagreement about the meaning o --- a contract. One party said “accident or incident” meant an event like a car crash or a spontaneous explosion. The other party said that an incident included long-term consequences o --- an accident such as resulting death years a --- ter a car crash.
To resolve such disputes, courts must --- irst determine whether the term in question is ambiguous such that it is susceptible to both meanings. I --- so, then courts must ana- lyze which meaning prevails using the canons o --- construction. Where both interpre- tations remain plausible, courts may construe the meaning to --- avor the non-dra --- ting
15 • Intrinsic Evidence 431
party as a last resort. The Motors Liquidation court
ollowed these steps, illustrating how to e —
ectively analyze and resolve a dispute regarding contractual interpretation.
Discussion Without the bene --- it o --- the parties’ arguments, how would you go about de --- ining what is meant by “accidents and incidents”? Does it seem more intuitive that accidents and incidents are two types o --- unrelated things, or that incidents are the proximate result o --- accidents? What evidence --- rom common speech can you give in de --- ense o --- your position?
Problems Problem 15.1. Matching the Canons o --- Construction to Case Applications Below are examples --- rom cases that applied the canons o --- construction. Identi --- y which canon or canons were applied in each example.
a. What canon(s) should be applied to determine whether a pharmaceutical
drug is a “compound combination” in a patent license agreement?
b. What canon(s) should be applied to determine whether a sales commission
was owed where an agreement --- or sale o --- real estate provided that the broker
would be paid a commission “upon the signing o --- this agreement” by both
buyer and seller, but which agreement also included in the last paragraph “the
commission being due and payable upon the trans --- er o --- the property”?
c. What canon(s) should be used to interpret a contract including both a printed
term saying “vessel to have turn in loading” and a handwritten term below
that saying “vessel to be loaded promptly”?
d. What canons(s) should be used to determine who bears the costs o --- regula-
tions where a contract between a general contractor and a subcontractor has
both a speci --- ic clause shi --- ting the cost o --- complying with regulations enacted
a --- ter the bid to the general contractor, and a more general clause requiring
that the subcontractor’s work comply with all relevant regulations?
e. What canon(s) should be used to determine whether the term “insured” in
an insurance policy includes company equipment operated by a company
employee, where the term “insured” is de --- ined as “any executive o ---
icer, direc- tor or stockholder thereo — while acting within the scope o — his duties”?
. What canon(s) should be used to determine the meaning o — “ — lood” in an insurance contract where “ — lood” is de — ined to mean inundation — rom natural 432 15 • Intrinsic Evidence
water sources, not damage --- rom a broken water main? Speci --- ically, the con-
tract re --- ers to loss --- rom “ --- lood, sur --- ace water, waves, tidal water or tidal wave,
over --- low o --- streams or other bodies o --- water or spray --- rom any o --- the --- orego-
ing, all whether driven by wind or not.”
g. What canon(s) should be used to determine whether a lease prohibition is
e ---
ective where the lease prohibits the lessee — rom subletting the property “ — or use as a pool parlor, beer parlor, or other business which would be undesir- able and objectionable to the tenants in other parts o — the building”? In par ticular, does this prohibition prevent the lessee — rom subletting — or use as a restaurant? h. What canon(s) should be used to interpret an invoice — rom a contractor which contained a smaller typewritten amount and a larger handwritten number? i. What canon(s) should be used to determine whether a — ranchise contract contemplated a third site when it only speci — ically discussed and approved two locations? j. What canon(s) should be used to disambiguate an installment contract clause where one o — two sensible constructions would violate usury laws? k. Is it appropriate to apply the canon o — construction against the dra — ter to deter- mine who has insurance coverage where the policy says it covers employees o — companies “controlled by” the holding company that bought the insurance, where the insurance company primarily dra — ted the contract, and where the contract was negotiated between the parties — or several months and involved teams o — lawyers on both sides? l. What canon(s) should be used to disambiguate a guaranty agreement that contains the — ollowing phrase: “All amounts due, debts, liabilities and pay- ment obligations described in clauses (i) and (ii), above, are re — erred to herein as ‘Indebtedness.’ ”? In particular, which canon(s) helps to determine whether “described in clauses (i) and (ii)” applies only to the “payment obligations,” and not to “amounts due, debts, liabilities”? m. What canon(s) o — construction should be used to resolve a case where Rog- ers Communications o — Toronto, Canada’s largest cable television provider, entered into a contract with the telephone company Aliant, — or the use o —
Aliant’s telephone poles? The contract stated, “Subject to the termination pro-
visions o --- this Agreement, this Agreement shall be e ---
ective — rom the date it is made and shall continue in — orce — or a period o —
ive (5) years — rom the date it is made, and therea — ter — or successive — ive (5) year terms, unless and until ter- minated by one year prior notice in writing by either party.” During the — irst
ive-year term o — the contract, Aliant in — ormed Rogers that it was terminating the contract one year early. Rogers argued that the termination provision did not apply to the initial — ive-year term o — the contract. 15 • Intrinsic Evidence 433
Problem 15.2. Homeowner’s Insurance? The Hanover Commercial Umbrella Insurance Policy agreement (the Policy) pro- vides the — ollowing coverage and exclusions: The words we, us, and our re — er to the Company providing the insurance. We will pay on behal — o — the Named Insured — or damages because o — bodily injury, property damage, personal injury, and advertising injury. This insurance does not apply to any bodily injury, property damages, personal injury, or advertis- ing injury arising out o — the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape o — “pollutants.” “Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, — umes, acids, alkalis, chemicals and waste. Waste includes materi- als to be recycled, reconditioned or reclaimed. Based on your analysis o — the Policy and your application o — the Canons o — Con- struction, determine: 1. Whether personal injury claims arising out o — ingestion o — lead — rom — laked paint or paint dust shall be covered under the Policy, where the Named Insured owned and operated an apartment building that it rented to Plainti —
; where an o —
icial city inspector inspected the premises and established the presence o — loose, peeling, — laking, or chipped paint which contained a haz- ardous concentration o — lead; and where Plainti —
sustained lead poisoning by ingesting lead derived — rom paint chips, paint — lakes and dust that was con- taminated with lead derived — rom lead based paint. See Peace v. Northwestern Nat’l Ins. Co., 596 N.W.2d 429 (Wis. 1999). 2. Whether property damages claims arising out o — the accumulation o — bat guano between a vacation home’s siding and walls shall be covered under the Policy, where the Named Insured owned a vacation home rental business, discovered during an annual vacation the presence o — bats and bat guano in a home, and noticed a “penetrating and o —
ensive odor emanating — rom the home,” and where a contractor determined that the cause o — the odor was the accumulation o — bat guano between the home’s siding and walls and — urther determined that it was more practical — inancially to demolish and rebuild the home rather than attempt to spend the money to make it habitable again. See Hirschhorn v. Auto-Owners Ins. Co., 809 N.W.2d 529 (Wis. 2011). 3. Whether personal injury claims arising out o — the inadequate ventilation o —
exhaled carbon dioxide shall be covered under the Policy, where an inadequate
air exchange ventilation system in an o ---
ice building owned and operated by the Named Insured caused an excessive accumulation o — carbon dioxide in their work area, and where the resultant poor air quality allegedly caused the plain- ti —
s to sustain the — ollowing injuries: headaches, sinus problems, eye irritation, extreme — atigue, upset stomach, asthma, sore throat, nausea, and pounding ears. See Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728 (Wis. 1997). 434 15 • Intrinsic Evidence
Problem 15.3. What Is a “Cartoon”? On November 28, 1998, the attorneys general o — multiple states entered into a Tobacco Master Settlement Agreement (TMSA) with major manu — acturers o — ciga- rettes, including R.J. Reynolds Tobacco Co., as part o — litigation over medical expenses
rom tobacco-related diseases. The TMSA prohibited such cigarette manu — acturers
rom using cartoons in advertising. Section II(l) o — the TMSA states as — ollows: (l) “Cartoon” means any drawing or other depiction o — an object, person, animal, creature or any similar caricature that satis — ies any o — the — ollowing criteria: (1) [T]he use o — comically exaggerated — eatures; (2) [T]he attribution o — human characteristics to animals, plants or other objects, or the similar use o — anthropomorphic technique; or (3) [T]he attribution o — unnatural or extrahuman abilities, such as impervi- ousness to pain or injury, X-ray vision, tunneling at very high speeds or trans — ormation. While operating under the settlement agreement, Reynolds placed the advertise- ment shown here in the 40th Anniversary Edition o — Rolling Stone magazine, which was published on November 15, 2007, promoting independent rock music and record labels in connection with its Camel cigarette brand and its Camel Farm campaign:
COHP-111 IED TO
SUPPORTING & PAOMOllNCI
INDEPENDENT RECORD LABELS
Figure 15.1. Camel cigarette ad. Is it a “cartoon”?
15 • Intrinsic Evidence 435
The Attorney General o
Ohio sued Reynolds — or violating the settlement agree- ment by promoting its cigarettes using cartoons. Reynolds claimed that the advertise- ment did not contain cartoons as that term is used in the settlement agreement. Articulate the arguments that you think would support each side’s interpretation o — the contract. How would you rule i — you were the judge? See State ex rel. Richard Cordray v. R.J. Reynolds Tobacco Co., 2010 WL 154720, 2010 Ohio App. LEXIS 73 (2010).
Problem 15.4. Meaning o
a Comma On January 1, 2000, Rappaport (Lessor) entered into a lease giving Interbroad, LLC (Lessee) the right to use the roo — top o — a building to display a billboard. The lease ran until April 11, 2094. The lease gave Rappaport the — ollowing termination rights: In the event that Lessor’s building is damaged by — ire or other casualty and Les- sor elects not to restore such building, or Lessor elects to demolish the building, Lessor may terminate the Lease upon not less than 60 days’ notice to Lessee upon paying Lessee ten (10) times the net operating income earned by Lessee
rom the Advertising Structures on the Premises — or the immediately preceding twelve (12) month period. In 2015, the building subject to the lease was purchased by BL Partners, Inc., which assumed the rights and obligations o — Rappaport and so became the Lessor under the original lease. BL Partners sent Interbroad a letter stating that it had taken over the lease, had elected to demolish the building, and was terminating the lease e —
ective 60 days — rom that date. The building had not been damaged by — ire or any other casu- alty. BL Partners asked Interbroad to provide its net operating income earned by the billboard — or the preceding twelve months, in order to calculate the amount owed in connection with the termination. Interbroad re — used, arguing that BL Partners had no right to terminate the lease. BL Partners sought a declaratory judgment that it had the right to terminate the lease. Articulate the arguments that you think would support each side’s interpretation o — the contract. How would you rule i — you were the judge? See BL Partners Grp., L.P. v. Interbroad, LLC, 2016 Phila. Ct. Com. Pl. LEXIS 156 (2016).
Problem 15.5. Vesting in Retirement This problem addresses the issue o — whose interpretation prevails where written agreements have internal contradictions. Be — ore you read this problem, you may want to look up the words “vest” or “vesting” in a dictionary, as these terms may not be — amiliar to you. You could also consult a specialized dictionary, such as investo- pedia.com. 436 15 • Intrinsic Evidence
First, some background: Craig Klapp worked as an insurance agent
or United Insurance Group Agency, Inc. (UIG) — or seven years — rom 1990 to 1997, then he retired be — ore turning the age o —
-
Klapp sued UIG
or breach o — contract, claiming that UIG promised to pay him a pension equal to 100% o — commissions on renewals o — policies that he originally sold. UIG claimed that Klapp is not entitled to any post- retirement commission payments on renewals or otherwise. When Klapp joined UIG, he signed two documents: an “Employment Agreement,” which set — orth his salary, bene — its, and conditions o — employment speci — ic to him; and an “Agent’s Manual,” which stated the rules and policies that apply to all UIG agents and employees. UIG’s — irst argument is that Klapp is not entitled to any commission based on the express language o — the Agent’s Manual, which states: Retirement is understood to be disengagement — rom the insurance industry. Vestment — or retirement is age 65 or 10 years o — service, whichever is later. In addition, UIG wanted to admit evidence that (a) an international study o — retire- ment bene — its policies o — insurance companies shows that only 20% allow partial vest- ing, and that over 75% o — insurance company retirement plans did not — ully (100%) vest until at least 10 years o — continuous — ull-time employment. UIG’s second argument was that Klapp was not entitled to any commission because he had not relinquished his license to sell insurance; there — ore, Klapp had not “retired” as that term was de — ined in the Agent’s Manual. Klapp responded to UIG’s second argument by seeking to introduce evidence that the ordinary meaning o — “retired” meant not currently working or immediately plan- ning to return to work and that he was in — act not currently working nor planning to work in the insurance industry. Klapp argued that the judge should deprioritize the de — inition o — vesting in the Agent’s Manual and instead use the de — inition provided in the Employment Agree- ment, Section 5 o — which states:
-
Vested Commissions. Commissions shall be vested in the
ollowing manner: (A) Death, disability, or retirement during term hereo — . Upon the death, disability, or retirement (as those terms shall be then de — ined in the Agent’s Manual) o — Agent at any time prior to the termination o — this Agreement, Agent (or Agent’s designated death bene — iciary who shall be designated by Agent in writing; or in the absence o — such written designation, Agent’s estate) shall therea — ter be entitled to receive one hundred percent (100%) o —
such renewal commissions then payable
rom premiums on Agent’s policies in place, in such amounts as would otherwise have been payable to Agent, until the aggregate renewals payable to Agent thereon shall equal less than Forty-One Dollars and Sixty-Seven Cents ($41.67) per month. I — upon the date o — death, disability, or retirement, Agent shall have aggregated eight 15 • Intrinsic Evidence 437
(8) or more years o
service under this Agreement, his then vesting shall be determined in accordance with the normal vesting schedule. (B) Vesting Schedule. In the event o — a termination o — this Agreement
-
or reasons o — death, disability or retirement (as de — ined in the Agent’s Manual), Agent as set — orth below on the date o — execution hereo — shall be entitled to receive a percentage o — renewal commissions then payable — rom premiums on Agent’s policies in place, applicable to such amounts as would otherwise have been payable to Agent in accordance with the — ollowing vesting schedule:
AGENT’S YEARS OF SERVICE % OF RENEWALS VESTED
LESS THAN 2 YEARS 0%
2 YEARS 10%
3 YEARS 30%
4 YEARS 50%
5 YEARS 70%
6 YEARS 90%
7 YEARS 100%
8 YEARS 110%
9 YEARS 120%
10 YEARS 130%
11 YEARS 140%
12 YEARS 150%
In addition, Klapp wanted to admit evidence that he had a conversation with the hiring manager at UIG who told Klapp that UIG has a “policy o — helping out the most valuable agents” and that UIG would “take good care” o — him, as evidence that he was guaranteed — ull retirement bene — its.
a. Characterize each piece o --- evidence that Klapp and UIG sought to admit as
intrinsic or extrinsic, and discuss what that evidence would be admitted to
show or prove.
b. Does the parol evidence rule apply to any o --- the evidence in this case?
Should any evidence have been excluded --- rom the jury pursuant to the
parol evidence rule?
438 15 • Intrinsic Evidence
c. How should the court have ruled? Should UIG have been required to pay
100% commission on renewals to Klapp?
d. How did looking up de --- initions --- or “vesting” and other --- inancial terms a ---
ect your analysis o — this case? How can you improve your ability to make legal decisions when contracts involve — inancial or other technical concepts?
Adapted
rom Klapp v. United Ins. Grp. Agency, Inc., 468 Mich. 459 (2003). Chapter 16 Extrinsic Evidence
Contracts do not exist in isolation. Contracts operate within the context o
the parties’ actions, relationships, and the industries they inhabit. While the language o —
a contract — its intrinsic evidence — serves as the primary guide to its meaning, courts
requently turn to extrinsic evidence when ambiguity persists or when the contract’s terms require additional context to be — ully understood. Extrinsic evidence includes any in — ormation outside the written document that sheds light on the parties’ intent, such as their prior dealings, conduct under the agreement, or the customs and prac- tices o — their trade. This chapter examines the role o — extrinsic evidence in contract interpretation,
ocusing on the principles that govern its admissibility and use. UCC § 1-303 provides a structured — ramework — or incorporating extrinsic evidence, prioritizing course o —
per
ormance, course o — dealing, and usage o — trade to resolve ambiguities and give meaning to contractual terms. The common law similarly acknowledges the value o —
external context, particularly when the contract language leaves room
or reasonable di —
erences in interpretation. Extrinsic evidence serves two primary purposes. First, it can help courts to resolve disputes by clari — ying contract terms that are unclear on their — ace or which become ambiguous in application. Second, it can supplement or quali — y the written agreement by — illing gaps or providing interpretive nuance that the text alone does not o —
er. However, courts approach extrinsic evidence with more caution than intrinsic evi- dence because in — ormation external to the written contract can complicate en — orce- ment by reducing predictability and increasing the risk o — subjective interpretation. Building on the discussion o — intrinsic evidence in Chapter 15, this chapter situ- ates extrinsic evidence within the broader — ramework o — contract interpretation. It also introduces the boundaries between extrinsic and parol evidence, which will be explored in greater depth in Chapter 17. By examining the tools and principles that govern extrinsic evidence, this chapter provides a roadmap — or understanding how courts navigate the tension between the written contract and the external world in which it operates.
439
440 16 • Extrinsic Evidence
Rules A. Course o --- Per --- ormance
Course o --- per --- ormance re --- ers to the way the parties have behaved during the exe- cution o --- the contract at issue. This type o --- extrinsic evidence provides a power --- ul indicator o --- the parties’ intent, particularly when their ongoing conduct re --- lects how they understood and applied the terms o --- the agreement. Courts prioritize course o ---
per
ormance as the most persuasive — orm o — extrinsic evidence because it demon- strates the parties’ actual behavior under the contract, o — ten providing more reliable insights than pre-contractual negotiations or general industry practices.
A “course o --- per --- ormance” is a sequence o --- conduct between the parties to
a particular transaction that exists i --- : (1) the agreement o --- the parties with
respect to the transaction involves repeated occasions --- or per --- ormance by a
party; and (2) the other party, with knowledge o --- the nature o --- the per --- ormance
and opportunity --- or objection to it, accepts the per --- ormance or acquiesces in it
without objection. NH UCC § 1-303(a).
This de --- inition establishes two conjunctive requirements --- or an evidentiary sequence o --- conduct: (1) the transaction must involve repeated occasions --- or per --- ormance, and (2) the conduct must be accepted or acquiesced to without objec- tion. Contracts involving only a single instance o --- per --- ormance cannot give rise to course o --- per --- ormance evidence. Imagine a customer orders a single box o --- groceries --- rom Blue Apron. The con- tract speci --- ies that “ingredients will be delivered --- resh to the customer’s home.” Blue Apron delivers the box to a neighbor’s address due to a delivery error, and the cus- tomer retrieves it without raising objections. While this action demonstrates that the customer accepted this speci --- ic delivery, it cannot establish course o --- per --- ormance because there is only one occasion --- or per --- ormance under this one-time order. Contrast this with a Blue Apron subscription service where groceries are delivered weekly --- or six months. I --- the subscription agreement ambiguously speci --- ies “deliv- ery to customer’s location,” and Blue Apron consistently delivers to the neighbor’s address without objection --- rom the customer, this pattern o --- behavior could estab- lish course o --- per --- ormance. The repeated nature o --- the deliveries (weekly) and the customer’s ongoing acceptance without objection satis --- y the de --- inition o --- course o ---
per
ormance. Once established, course o — per — ormance serves as a power — ul — orm o — evidence in interpreting contracts. Courts use this evidence to clari — y ambiguities, supplement missing terms, and resolve disputes about the meaning o — contractual language. The weight given to course o — per — ormance re — lects its unique ability to reveal how the parties themselves understood and carried out their agreement in practice. 16 • Extrinsic Evidence 441
Course o
per — ormance is particularly persuasive when resolving ambiguities in the written terms o — a contract. For example, i — a contract ambiguously states that “deliv- ery must occur at the customer’s — acility,” and the supplier consistently delivers to a nearby warehouse with the customer’s acceptance, this behavior clari — ies the intended meaning o — “ — acility.” The repeated conduct demonstrates a shared understanding o —
the term, which courts treat as the parties’ implicit agreement. Consider a service contract that requires “timely maintenance o — equipment” but does not de — ine “timely.” I — the service provider regularly per — orms maintenance within 30 days o — the customer’s request, and the customer accepts this practice with- out objection, the court may interpret “timely maintenance” to mean a 30-day period based on the established course o — per — ormance. Course o — per — ormance can also — ill gaps in a contract where essential terms are absent. For instance, a lease agreement might speci — y that rent is due but omit the pay- ment method. I — the tenant consistently pays by check, and the landlord accepts these payments without objection, this course o — per — ormance supplements the agreement to speci — y payment by check. Consider a long-term supply contract where the parties — ail to speci — y whether goods will be delivered on pallets or in bulk. I — the supplier consistently delivers on pallets, and the buyer accepts without objection, the court may treat pallet delivery as an implied term o — the contract. When two provisions within a contract appear to con — lict, course o — per — ormance may guide courts in determining which provision re — lects the parties’ true intent. For example, i — a contract contains both a general delivery term and a more speci — ic schedule, the parties’ conduct in adhering to the speci — ic schedule without objection may resolve the con — lict in — avor o — the detailed provision. Courts give course o — per — ormance signi — icant weight because it demonstrates how the parties interpreted and applied the contract in practice. Unlike course o — dealing or usage o — trade, course o — per — ormance re — lects the parties’ actual behavior under the cur- rent agreement. This immediacy and speci — icity make it one o — the most reliable — orms o —
extrinsic evidence. However, its evidentiary value is limited by consistency, contradic- tion, and reasonableness. The course o — per — ormance must be consistent and repeated to establish a clear pattern o — behavior. Course o — per — ormance cannot override express terms in the contract; it can only clari — y or supplement them. And courts assess whether the course o — per — ormance is reasonable in light o — the contract as a whole.
B. Course o
Dealing Course o — dealing provides insight into the parties’ intent by examining how they interacted in prior transactions. It is distinct — rom course o — per — ormance, which
ocuses on behavior under the current contract. Instead, course o — dealing re — lects 442 16 • Extrinsic Evidence
the shared understanding that has developed over a history o
agreements, o —
er- ing evidence o — how the parties have consistently interpreted terms in their business relationship. A course o — dealing is a sequence o — previous conduct between the parties to an agreement which is — airly to be regarded as establishing a common basis o — understanding — or interpreting their expressions and other conduct. R2d § 223(1); NH UCC § 1-303(b). This de — inition establishes two key elements: (1) a sequence conduct in prior trans- actions that (2) provided a common basis o — understanding. Course o — dealing applies only to prior agreements or transactions between the same parties. It does not include interactions with third parties or hypothetical industry norms. And the prior conduct must demonstrate a shared interpretation or mutual expectation that can reasonably in — orm the terms o — the current contract. For example, a — ood supplier and a restaurant have engaged in monthly supply contracts — or — resh produce. In every prior transaction, the supplier delivered goods on Monday mornings, and the restaurant paid by the end o — the week. I — their latest contract — ails to speci — y a delivery schedule or payment terms, the court can look to their course o — dealing to in — er these terms, as the prior transactions establish a com- mon basis o — understanding. Once established, course o — dealing serves as a use — ul — orm o — extrinsic evidence to clari — y ambiguities, — ill gaps, and resolve con — licts in the current contract. Courts rely on the parties’ prior interactions to in — er their intent and provide meaning to terms that might otherwise remain unclear. However, as with all extrinsic evidence, course o — dealing is used to supplement or clari — y the agreement, not to contradict express terms. Intrinsic evidence is weighted more heavily than extrinsic evidence. Compared to other — orms o — extrinsic evidence, such as course o — per — ormance or usage o — trade, course o — dealing is particularly valuable — or understanding how the parties themselves historically viewed their relationship. However, course o — dealing is generally given less weight than course o — per — ormance because it does not re — lect behavior under the current contract.
C. Usage and Trade Usage Usage re — ers to habitual or customary practices that provide context — or interpret- ing agreements. Usage is habitual or customary practice. R2d § 219. Usage, generally, need not be tied to any speci — ic trade or industry. Usage provides insight into how terms are generally understood in practice, and it can clari — y ambi- guity or — ill gaps in a contract. For example, it is common business practice to treat 16 • Extrinsic Evidence 443
contracts signed on a holiday as e
ective on the next business day. I — a dispute arises over a contract signed on New Year’s Day, a court may apply this usage to determine the agreement’s e —
ective date. This usage applies regardless o — whether both parties are in the same trade or industry. Usage o — trade, in contrast, re — ers to practices speci — ic to a particular trade, voca- tion, or industry.
A “usage o --- trade” is any practice or method o --- dealing having such regularity
o --- observance in a place, vocation, or trade as to justi --- y an expectation that it
will be observed with respect to the transaction in question. The existence and
scope o --- such a usage must be proved as --- acts. I --- it is established that such a
usage is embodied in a trade code or similar record, the interpretation o --- the
record is a question o --- law. NH UCC § 1-303(c).
R2d uses the term similarly:
A usage o --- trade is a usage having such regularity o --- observance in a place,
vocation, or trade as to justi --- y an expectation that it will be observed with
respect to a particular agreement. It may include a system o --- rules regularly
observed even though particular rules are changed --- rom time to time. R2d
§ 222(1).
For instance, in the lumber industry, a “two-by-
our” is universally understood to mean a board measuring 1.5 by 3.5 inches, and this trade usage would govern a contract re — erring to that term. This is true regardless o — whether the contract is — or goods (e.g., sale o — a dozen two-by- — ours) or — or services (e.g., construction o — a shed using two-by- — ours). Usage o — trade, once established, provides valuable extrinsic evidence — or inter- preting ambiguous terms or — illing gaps in a contract. Unlike dictionary usage, which relies on plain or technical de — initions intrinsic to the agreement, trade usage re — lects external norms speci — ic to an industry. However, both usage and trade usage must be proven as a matter o —
act unless they are so widely recognized that courts can take judicial notice o — them. Judicial notice allows courts to accept well-known or codi — ied practices without requiring — ormal proo — . For example, the universally recognized meaning o — “case” as twelve bottles in the wine industry may be judicially noticed. By contrast, a regional agricultural market practice o — treating “a dozen” as thirteen items would require evidence, such as testimony — rom trade participants or re — erence to historical agreements. Usage o — trade is most — requently used to clari — y ambiguous terms. For instance, in the construction industry, the term “ — inal completion” is widely understood to include site cleanup, even i — the contract does not explicitly state this requirement. Courts would interpret the term consistent with this trade usage, provided it aligns with the contract’s overall purpose and does not con — lict with its express terms. Similarly, i — a 444 16 • Extrinsic Evidence
contract
or the sale o — commodities re — ers to “market price” without speci — ying how the price will be determined, trade usage in the relevant industry may establish the appropriate pricing source, such as a particular index or publication. Trade usage can also supplement contracts by implying terms that are so com- monly observed in the trade that the parties are presumed to have included them implicitly. For example, in a contract — or custom — urniture manu — acturing, it is stan- dard trade practice — or delivery to include assembly at the customer’s site. I — the agree- ment is silent on this point, courts may in — er the obligation based on trade usage in order to ensure that the contract re — lects the reasonable expectations o — the parties. Contract law limits the application o — trade usage to ensure it does not undermine the written terms o — the contract. Trade usage cannot contradict express terms, and courts must ensure that its application aligns with the intent o — the agreement. Addi- tionally, the party asserting trade usage bears the burden o — proving its existence and scope. This requires evidence o — regularity and consistency, such as testimony — rom industry experts, trade publications, or established customs documented in prior agreements. By incorporating usage and trade usage into contract interpretation, courts bridge the gap between written agreements and the practical realities o — the industries in which they operate. These tools allow contracts to re — lect shared norms and expecta- tions, thus promoting e —
iciency, — airness, and reliance in commercial relationships. At the same time, judicial sa — eguards ensure that trade usage is applied responsibly, preserving the integrity o — the contract’s written terms.
D. Implied Terms Contracts o — ten omit essential provisions, leaving gaps that courts must — ill to ensure they — unction as intended. Parties can introduce evidence that implied terms address these gaps, either by drawing on the parties’ conduct and industry practices (implied- in- — act terms) or by applying universal legal principles (implied-in-law terms). The distinction lies in the sources that courts use: implied-in- — act terms depend on extrin- sic evidence, while implied-in-law terms re — lect judicially imposed norms. Implied-in- — act terms arise — rom the circumstances surrounding the contract, including the conduct o — the parties, their prior dealings, or the practices o — the rel- evant industry. In Paci — ic Grape Products Co. v. Commissioner,1 the dispute involved a sale o — bulk grape concentrate under an industry-standard contract that was silent about when title to the goods trans — erred. The buyer had agreed to the sale, the seller billed the goods, and the buyer paid — or them, but the goods remained undelivered at the time o — the seller’s bankruptcy. The Ninth Circuit examined industry practices
1. 219 F.2d 862 (9th Cir. 1955). 16 • Extrinsic Evidence 445
and testimony showing that in the grape concentrate trade, title typically passed to the buyer at the time o — billing. This evidence established an implied term that title trans — erred at billing, consistent with the intent o — the parties and the expectations o —
the industry. In Fisher v. Congregation B’Nai Yitzhok, a synagogue hired a part-time rabbi to lead religious services during the Jewish holiday season. Their written agreement was silent on seating arrangements, but the synagogue had historically — ollowed Orthodox tradition, including separate seating — or men and women. A — ter the con- tract was signed, the rabbi (who was Orthodox) learned the synagogue planned to introduce mixed seating and re — used to o —
iciate. The synagogue re — used to pay him. The court examined extrinsic evidence — such as the synagogue’s religious charac- ter, past practice, and prior statements — and — ound that both parties had implic- itly understood the agreement to preserve traditional seating. Because this shared understanding existed at the time o — contracting, the court en — orced an implied-in-
act term requiring separate seating. The case illustrates that implied terms may arise not — rom what is written, but — rom what both parties assumed to be true when they made the deal. Implied-in-law terms, by contrast, do not depend on the parties’ intent but are imposed by courts to ensure — airness and en — orceability. In Southern Bell Telephone & Telegraph Co. v. Florida East Coast Railway Co.,2 the dispute concerned a contract allowing telephone lines to cross over railroad tracks. The agreement did not speci — y a duration, and the railroad later sought to terminate it. The court held that contracts without a stated duration are terminable at will upon reasonable notice, unless evi- dence suggests otherwise. This implied-in-law term ensured that the contract would not result in perpetual obligations while preserving — airness by requiring reasonable notice. The evidentiary requirements — or these implied terms di —
er. Implied-in- — act terms require proo — , such as testimony, trade norms, or prior dealings. In Paci — ic Grape, tes- timony about trade practices provided the — actual basis — or in — erring the title trans — er term. In Fisher, the synagogue’s historical seating arrangements served as evidence o —
the parties’ intent. By contrast, implied-in-law terms like the reasonable termination rule in Southern Bell apply universally and do not require extrinsic evidence, as they are rooted in legal principles rather than party-speci — ic behavior. Implied terms allow courts to address omissions in contracts while balancing the autonomy o — the parties with principles o —
airness and practicality. Implied-in- — act terms ensure that agreements re — lect the intent o — the parties as demonstrated by extrinsic evidence, while implied-in-law terms uphold broader legal norms to make contracts complete and en — orceable. These tools collectively preserve the — unctionality o — agreements in diverse contexts.
2. 399 F.2d 854 (5th Cir. 1968). 446 16 • Extrinsic Evidence
E. Re
lections on Evaluating Extrinsic Evidence The evaluation o — extrinsic evidence underscores the dynamic relationship between the written terms o — a contract and the broader context in which it operates. While intrinsic evidence serves as the primary guide, extrinsic evidence allows courts to bridge gaps, clari — y ambiguities, and bring agreements into alignment with the par- ties’ lived realities. This interplay re — lects the law’s adaptability and its commitment to balancing textual integrity with practical — unctionality. Extrinsic evidence can both promote and complicate e —
iciency in contract en — orce- ment. On the one hand, it helps to clari — y ambiguous terms and resolve disputes in a way that re — lects established practices, such as course o — per — ormance and trade usage. These tools allow courts to align the agreement with the practical expectations o — the parties, particularly in complex or long-standing relationships. On the other hand, reliance on extrinsic evidence can introduce procedural ine —
iciencies, as courts may need to weigh competing narratives, interpret extensive external data, or navi- gate disagreements about which evidence should control. This duality highlights the importance o — care — ul dra — ting to reduce unnecessary reliance on external context and previews the challenges courts — ace when determining whether extrinsic evidence is admissible under the parol evidence rule. Beyond e —
iciency, extrinsic evidence supports the principle o — reliance. Contracts do not arise in a vacuum; they are built on expectations shaped by prior dealings, shared practices, and the customs o — the trade. By incorporating these elements into interpretation, courts rein — orce the stability o — agreements and protect the reasonable expectations o — the parties. The extent to which these external contexts are permit- ted to supplement or vary written terms, however, is a central question that the parol evidence rule seeks to address. Fairness also lies at the heart o — extrinsic evidence. Courts use it to address omis- sions, prevent opportunistic behavior, and incorporate implied terms that re — lect equi- table outcomes. Doing so ensures that contracts are not static documents, but instead
unctioning as dynamic instruments that can adapt to the realities o — per — ormance. Yet the use o — extrinsic evidence must also be balanced against the need — or certainty in written agreements, a tension that the parol evidence rule is designed to resolve by delineating the boundaries o — admissibility. Extrinsic evidence highlights both the complexity and — lexibility o — contract law. It reveals the limits o — relying exclusively on written terms while also demonstrating how interpretive tools ensure that agreements are en — orceable and equitable. By inte- grating external context into interpretation, courts ensure that contracts — ul — ill their intended purposes, harmonizing the letter o — the agreement with the practicalities o —
real-world application. The next chapter explores how the parol evidence rule serves as a gatekeeper — or extrinsic evidence by distinguishing between permissible supple- mentation and impermissible contradiction o — the written contract. 16 • Extrinsic Evidence 447
Hierarchy o --- Contractual Meaning
intrinsic evidence
• De --- ined Terms
• Canons o --- Construction
• Reasonable Meaning
Certainty,
Clarity extrinsic evidence
• Course o --- Per --- ormance
• Course o --- Dealing
• Usage o --- Trade
parol evidence
• Preliminary Negotiations
Uncertainty, implied terms
Vagueness • Implied in Fact
• Implied in Law
• Implied in Good Faith
Figure 16.1. Illustration o --- the hierarchy o --- evidence used to determine
contractual meaning. Credit: Seth C. Oranburg.
Cases Reading Wood v. Lucy, Lady Du ---
-Gordon. Be — ore you begin to read this case, note that it can be hard to read i — you do not understand the procedural posture, which is admittedly a bit con — using. In this case, the plainti —
, Otis F. Wood, has sued the de — endant, Lady Du —
-Gordon, on the grounds o — breach o — contract. Du —
-Gordon de — ends by arguing that there was no contract at all. Her argument is that the promises were illusory, and there — ore, there was no consideration. As you learned in the module on contract — ormation, without consideration, there can be no contract-at-law; there — ore, Du —
-Gordon argues, since there was no contract, there can be no breach o — contract. Cardozo — inds Du —
-Gordon liable — or breach o — contract; there — ore, he must have — ound that some contract existed. Although he could have — ound there was an en — orceable agreement without consideration due to promissory estop- pel or some other equitable approach to contract — ormation, he does not make that argument. Instead, he — inds that there is a contract as a matter o — law, and there — ore, he must have — ound there was some consideration. Recall that consideration is a bargained- — or exchange, or, as Cardozo puts it, some mutuality o — agreement. To — ind consideration, Cardozo must — ind that 448 16 • Extrinsic Evidence
Du
-Gordon and Wood made mutual promises to each other. This requires Cardozo to imply a key term that created this mutual obligation. As you read this case, pay care — ul attention to how Cardozo — inds that the parties created a mutual obligation by virtue o — the implied term o — good — aith.
Wood v. Lucy, Lady Du ---
-Gordon 222 N.Y. 88 (1917) CARDOZO, J. The de — endant styles hersel — “a creator o —
ashions.” Her — avor helps a sale. Manu-
acturers o — dresses, millinery and like articles are glad to pay — or a certi — icate o — her approval. The things which she designs, — abrics, parasols and what not, have a new value in the public mind when issued in her name. She employed the plainti —
to help her to turn this vogue into money. He was to have the exclusive right, subject always to her approval, to place her indorsements on the designs o — others. He was also to have the exclusive right to place her own designs on sale, or to license others to market them. In return, she was to have one-hal — o — “all pro — its and revenues” derived — rom any contracts he might make. The exclusive right was to last at least one year — rom April 1, 1915, and therea — ter — rom year to year unless terminated by notice o — ninety days. The plainti —
says that he kept the contract on his part, and that the de — endant broke it. She placed her indorsement on — abrics, dresses and millinery without his knowledge, and withheld the pro — its. He sues her — or the damages, and the case comes here on demurrer. The agreement o — employment is signed by both parties. It has a wealth o — recitals. The de — endant insists, however, that it lacks the elements o — a contract. She says that the plainti —
does not bind himsel — to anything. It is true that he does not promise in so many words that he will use reasonable e —
orts to place the de — endant’s indorsements and market her designs. We think, however, that such a promise is — airly to be implied. The law has out- grown its primitive stage o —
ormalism when the precise word was the sovereign tal- isman, and every slip was — atal. It takes a broader view to-day. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imper — ectly expressed. I — that is so, there is a contract. The implication o — a promise here — inds support in many circumstances. The de — en- dant gave an exclusive privilege. She was to have no right — or at least a year to place her own indorsements or market her own designs except through the agency o — the plainti —
. The acceptance o — the exclusive agency was an assumption o — its duties. We are not to suppose that one party was to be placed at the mercy o — the other. Many other terms o — the agreement point the same way. We are told at the out- set by way o — recital that “the said Otis F. Wood possesses a business organization 16 • Extrinsic Evidence 449
adapted to the placing o
such indorsements as the said Lucy, Lady Du —
-Gordon has approved.” The implication is that the plainti —
’s business organization will be used — or the purpose — or which it is adapted. But the terms o — the de — endant’s compensation are even more signi — icant. Her sole compensation — or the grant o — an exclusive agency is to be one-hal — o — all the pro — its resulting — rom the plainti —
’s e —
orts. Unless he gave his e —
orts, she could never get anything. Without an implied promise, the transaction cannot have such business “e —
icacy as both parties must have intended that at all events it should have.” But the contract does not stop there. The plainti —
goes on to promise that he will account monthly — or all moneys received by him, and that he will take out all such patents and copyrights and trademarks as may in his judgment be necessary to protect the rights and articles a —
ected by the agreement. It is true, o — course, as the Appellate Division has said, that i — he was under no duty to try to market designs or to place certi — icates o — indorsement, his promise to account
or pro — its or take out copyrights would be valueless. But in determining the inten- tion o — the parties, the promise has a value. It helps to en — orce the conclusion that the plainti —
had some duties. His promise to pay the de — endant one-hal — o — the pro — its and revenues resulting — rom the exclusive agency and to render accounts monthly, was a promise to use reasonable e —
orts to bring pro — its and revenues into existence. For this conclusion, the authorities are ample. The judgment o — the Appellate Division should be reversed, and the order o — the Special Term a —
irmed, with costs in the Appellate Division and in this court.
Re --- lection Cardozo’s --- amous opinion e ---
ectively establishes the doctrine o — good — aith. Car- dozo used this doctrine to create an en — orceable obligation on the part o — Lady Du —
-Gordon when her promise to grant exclusivity to Wood would otherwise be unen — orceable — or his lack o — consideration. But not every jurist would so willingly imply terms o — good — aith and thereby create a contract — rom them. For example, in Goldstick v. ICM Realty, 788 F.2d 456 (7th Cir. 1986), Judge Posner ignored any obliga- tion o — good — aith (the term never even appears in his opinion) and instead declares a promise en — orceable due to estoppel but not due to contract. The dispute in Goldstick regarded a pair o — out-o — -luck attorneys who could not collect on a bill — or a year’s worth o — legal services; as a cautionary tale in pro — es- sional responsibility, it is worth reading in — ull. As to the contract points, the — acts can be summarized. ICM owned some property on which back taxes were owed. ICM leased the property to John Kusmiersky, who agreed to pay the back taxes in exchange — or the rights to operate the property. Kusmiersky hired the law — irm o —
Goldstick & Smith to reduce the back taxes. The lawyers succeeded in reducing the taxes by $870,000 and billed Kusmiersky $290,000, which he re — used to pay. The 450 16 • Extrinsic Evidence
lawyers then entered into a settlement agreement with Kusmiersky and ICM under which ICM agreed to pay the lawyers $250,000 out o — any pro — its ICM made i — the property were sold. ICM sold the property at a loss and re — used to pay the lawyers, who sued in the Northern District o — Illinois. De — endants moved — or summary judgment, and the trial court granted judgment as a matter o — law to ICM, on the grounds that ICM did not promise to pay Goldstick & Smith unless it sold the property — or a pro — it, and it did not sell the property — or a pro — it, so ICM had no legal liability to Goldstick & Smith. The Seventh Circuit reversed and remanded the case because Goldstick & Smith may have detrimentally relied on ICM. Although the appellate court could have read some duty o — good — aith and — air dealing into ICM’s promise to Goldstick & Smith, such as an implied promise to make reasonable e —
orts to sell the property at a pro — it, the court did not even seem to entertain this idea. Rather, it employed the well- established doctrine o — detrimental reliance. The Goldstick case shows that Cardozo’s imposition o — good — aith is not strictly necessary to do justice. Instead o —
inding a contract where the parties may not have actually promised to per — orm some bargained- — or exchange, a judge could have — ound that Lady Du —
-Gordon’s promise to grant exclusive rights to Wood was en — orceable because Wood reasonably and detrimentally relied on that promise. See R2d § 90. The — act that Posner and Cardozo take such di — — erent approaches to this central issue in contract law indicates there is a deep tension between implying terms in good — aith and respecting the express intent o — the parties. In Wood, Cardozo seems quite willing to imply terms in this contract. He seems to be — ocused on achieving a
air result — or the parties in the case be — ore him; a — ter all, that is the hallmark o — his equity- — ocused approach to judicial decision-making.
Discussion 1. Equitable remedies are supposed to prevent courts and legal arrangements, like contracts, --- rom becoming tools o --- injustice. However, allowing judicial discretion
or equity creates a great deal o — uncertainty. Thus, equity creates an un — airness o —
its own, as parties to a contract cannot easily predict how a court will re-interpret a written agreement in hindsight. In other words, judicial power to correct things in hindsight obscures parties’ ability to negotiate contracts with — oresight. What is the appropriate balance? How much discretion should courts have to award equitable remedies “as justice requires”?
-
I
courts are — ree to add, change, and modi — y terms, what use is the parol evidence rule? Whence comes the objective theory o — contract interpretation? How can lawyers help businesses plan — or an uncertain legal — uture? 16 • Extrinsic Evidence 451
-
Is there another way to resolve Wood in
avor o — the plainti —
without implying a duty o — good — aith as a contractual term? For example, could the doctrine o —
promissory estoppel (detrimental reliance) be employed to reach the same result o — liability upon Lady-Du —
Gordon without implying legal terms that the parties did not actually use?
Reading Fisher v. Congregation B’Nai Yitzhok. Congregation B’Nai Yitzhok is such a classic illustration o — the concept o — terms implied in — act that it is actu- ally — eatured as an illustration in the R2d itsel — : Illustration 221.2. A, an ordained rabbi, is employed by B, an Orthodox Jewish congregation, to o —
iciate as cantor at speci — ied religious services. At the time the contract is made, it is the practice o — such congregations to seat men and women separately at services, and a contrary practice would violate A’s religious belie — s. At a time when it is too late — or A to obtain substitute employment, B adopts a contrary practice. A re — uses to o —
iciate. The practice is part o — the contract, and A is entitled to the agreed compensation. The illustration, however, oversimpli — ies the complex — actual analysis the court took on in this case. As you read this case, highlight the — acts that are relevant to the court’s decision and annotate each highlight you make with a comment on why that — act is relevant. This exercise will elevate your under- standing o — when courts will imply terms in — act. You should also pay attention to the court’s explanation — or why the parol evidence rule does not apply.
Fisher v. Congregation B’Nai Yitzhok
177 Pa. Super. 359 (1955) HIRT, J. Plainti ---
is an ordained rabbi o — the orthodox Hebrew — aith. He however does not o —
iciate except on occasion as a pro — essional rabbi-cantor in the liturgical service o — a synagogue. The de — endant is an incorporated Hebrew congregation with a synagogue in Philadelphia. Plainti —
, in response to de — endant’s advertisement in a Yiddish newspaper, appeared in Philadelphia — or an audition be — ore a committee representing the con- gregation. As a result, a written contract was entered into on June 26, 1950, under the terms o — which plainti —
agreed to o —
iciate as cantor at the synagogue o — the de — endant 452 16 • Extrinsic Evidence
congregation “
or the High Holiday Season o — 1950”, at six speci — ied services during the month o — September 1950. As — ull compensation — or the above services the de — en- dant agreed to pay plainti —
the sum o — $1,200. The purpose upon which the de — endant congregation was incorporated is thus stated in its charter: “The worship o — Almighty God according to the — aith, discipline,
orms and rites o — the orthodox Jewish religion.” And up to the time o — the execution o — the contract the de — endant congregation conducted its religious services in accor- dance with the practices o — the orthodox Hebrew — aith. On behal — o — the plainti —
there is evidence that under the law o — the Torah and other binding authority o — the Jewish law, men and women may not sit together at services in the synagogue. In the orthodox synagogue, where the practice is observed, the women sit apart — rom the men in a gallery, or they are separated — rom the men by means o — a partition [a “mechitza”] between the two groups. The contract in this case is entirely silent as to the character o — the de — endant as an orthodox Hebrew congregation and the practices observed by it as to the seating at the services in the synagogue. At a general meeting o — the congregation on July 12, 1950, on the eve o — mov- ing into a new synagogue, the practice o — separate seating by the de — endant — ormerly observed was modi — ied and — or the — uture the — irst — our rows o — seats during religious services were set aside exclusively — or the men, and the next — our rows — or the women, and the remainder — or mixed seating o — both men and women. When plainti —
was in — ormed o — the action o — the de — endant congregation in deviat- ing — rom the traditional practice as to separate seating, he through his attorney noti-
ied the de — endant that he, a rabbi o — the orthodox — aith, would be unable to o —
iciate as cantor because “this would be a violation o — his belie — s.” Plainti —
persisted in the stand taken that he would not under any circumstances serve as cantor — or de — endant as long as men and women were not seated separately. And when de — endant — ailed to rescind its action permitting men and women to sit together during services, plainti —
re
used to o —
iciate. It then was too late — or him to secure other employment as cantor during the 1950 Holiday season except — or one service which paid him $100, and he brought suit — or the balance o — the contract price. The action was tried be — ore the late Judge Fenerty, without a jury, who died be — ore deciding the issue. By agreement the case was disposed o — by the late President Judge Frank Smith “on the notes o — testimony taken be — ore Judge Fenerty.” At the conclusion o — the trial, counsel had stipulated that the judge need not make speci — ic — indings o —
act in his decision. This waiver applied to the disposition o — the case by Judge Smith. Nevertheless Judge Smith did speci — ically — ind that de — endant, at the time the contract was entered into, “Was conducting its services according to the Orthodox Hebrew Faith.” Judge Smith accepted the testimony o — three rabbis learned in Hebrew law, who appeared — or plainti —
, to the e —
ect: “That Orthodox Judaism required a de — i- nite and physical separation o — the sexes in the synagogue.” And he also considered it 16 • Extrinsic Evidence 453
established by the testimony that an orthodox rabbi-cantor “could not conscientiously o —
iciate in a ‘tre — ah’ synagogue, that is, one that violates Jewish law”; and it was spe- ci — ically — ound that the old building which the congregation le — t, “had separation in accordance with Jewish orthodoxy.” The ultimate — inding was — or the plainti —
in the sum o — $1,100 plus interest. And the court entered judgment — or the plainti —
on the — inding. In this appeal it is contended that the de — endant is entitled to judgment as a matter o — law. The — inding — or the plainti —
in this trial without a jury has the — orce and e —
ect o — a verdict o — a jury and in support o — the judgment entered by the lower court, the plain- ti —
is entitled to the bene — it o — the most — avorable in — erences — rom the evidence. Find- ings o —
act by a trial judge, sitting without a jury, which are supported by competent substantial evidence are conclusive on appeal. Although the contract is silent as to the nature o — the de — endant congregation, there is no ambiguity in the writing on that score and certainly nothing was omitted — rom its terms by — raud, accident or mistake. The terms o — the contract there — ore could not be varied under the parol evidence rule. Another principle controls the interpretation o — this contract. There is su —
icient competent evidence in support o — the — inding that this de — endant was an orthodox congregation, which observed the rule o — the ancient Hebrew law as to separate seating during the services o — the High Holiday Season; and also to the e —
ect that the rule had been observed immemorially and invariably by the de — endant in these services, without exception. As bearing on plainti —
’s bona — ide belie — that such was the — act, at the time he contracted with the de — endant, plainti —
was permitted to introduce in evidence the declarations o — Rabbi Ebert, the rabbi o — the de — endant congregation, made to him prior to signing o — the contract, in which the rabbi said: “There always was a separa- tion between men and women” and “there is going to be strict separation between men and women,” re — erring to the seating in the new synagogue. Rabbi Lipschitz, who was present, testi — ied that Rabbi Ebert, in response to plain- ti —
’s question “Will services be conducted as in the old Congregation?” replied “Sure. There is no question about that,” re — erring to the prior practice o — separate seating. The relationship o — rabbi to the congregation which he serves does not create the legal relationship o — principal and agent. And Rabbi Ebert in the absence o — special authority to speak — or the congregation could not legally bind the de — endant by his declarations to the plainti —
prior to the execution o — the contract. But while the dec- larations o — Rabbi Ebert, above re — erred to would have been inadmissible hearsay as proo — o — the truth o — what was said, yet his declarations were properly admissible as bearing upon plainti —
’s state o — mind and his intent in entering into the contract. In determining the right o — recovery in this case the question is to be determined under the rules o — our civil law, and the ancient provision o — the Hebrew law relating 454 16 • Extrinsic Evidence
to separate seating is read into the contract only because implicit in the writing as to the basis — according to the evidence — upon which the parties dealt. In our law the provision became a part o — the written contract under a principle analogous to the rule applicable to the construction o — contracts in the light o — custom or immemorial and invariable usage. It has been said that: “When a custom or usage is once established, in absence o — express provision to the contrary it is considered a part o — a contract and binding on the parties though not mentioned therein, the presump- tion being that they knew o — and contracted with re — erence to it.” In this case there was more than a presumption. From the — indings o — the trial judge supported by the evidence it is clear that the parties contracted on the common understanding that the de — endant was an orthodox synagogue which observed the mandate o — the Jewish law as to separate seating. That intention was implicit in this contract though not re — erred to in the writing, and there — ore must be read into it. It was on this ground that the court entered judgment — or plainti —
in this case. Judgment a —
irmed.
Re --- lection The Congregation B’Nai Yitzhok appeal was decided in 1955, and the trial court below it had rendered its opinion in 1950. To really understand what was happening in this case, consider some parol evidence (i.e., context) about what was happening in the Jewish-American world at the time. Congregation B’Nai Yitzhok appears to be a snapshot o --- great change in social his- tory. In this case, we see an Orthodox rabbi cleaving to tradition while congregations in the Philadelphia suburbs modernized their practices. Perhaps the congregation’s members were more inclined toward egalitarianism than its clergy were. In any event, when the Congregation B’Nai Yitzhok adopted the practice o --- mixed seating --- or its High Holiday services in September 1950, that was a major event that is best under- stood through the lens o --- its historical context.
Throughout the nineteenth century, American Judaism --- eatured two prominent movements. The Orthodox movement, discussed in Congregation B’Nai Yitzhok, above, generally held that the Torah (also known as the --- ive books o --- Moses, the Pentateuch, or the --- irst --- ive books o --- the Bible) contains the true and original words o --- God, and that the “revealed laws” therein and described by accepted oral tradition were binding and immutable. In this tradition, each year takes mankind --- urther away
rom the revelation o — the Torah at Mount Sinai, which the movement places at 1313 B.C.E. Under this theology, change is antithetical to core belie — s. There — ore, ancient practices, including dietary laws, separation o — the sexes, Hebrew language prayer, and resting on the Jewish Sabbath, must be maintained. The Re — orm movement, with — oundations related to the German Enlightenment, generally held that theology is a continuous revelation. Many Re — orm Jews believe 16 • Extrinsic Evidence 455
that man, not God, wrote the Bible, so critical research can lead to new insights such that each generation can build upon the past to get closer and closer to a true under- standing o — God. Under this movement, change is necessary — or the religion to remain relevant in a modern world. There — ore, changes to ancient practices are necessary so that Jews can eat in restaurants, achieve equality o — the sexes, pray in English, and work and drive on Saturdays. The di —
erences between these schools o — thought are quite vast, and the ri — t between the members o — these movements was vastly widened by an event called the Tre — a Banquet. (Recall — rom the Congregation B’Nai Yitzhok case above that “tre — a” (or “tre — ah,” as it appears in the case) means ritually unclean or impure under Orthodox Jewish law.) On July 11, 1883, at the Highland House Restaurant in Cincinnati, Ohio, a Re — orm seminary held a dinner to commemorate the graduation o — its — irst class o — rabbis. Whether by the organizers’ intentions or negligence, the banquet — eatured many — oods that are considered tre — a under Orthodox Jewish law. This caused great o —
ense among the Orthodox community and may have sparked the creation o — a third, middle way in Jewish theology. Members o — the Re — orm movement who were o —
ended by the brash disregard — or the revealed laws broke away to — orm a new movement that would become Conserva- tive Judaism. The Jewish Theological Seminary (JTS) was — ounded in 1886 to advance this middle way. Conservative Jewish theology, as expressed by JTS, seeks to combine commitment to traditional belie — s and practices with — ull engagement with modern society. The pressure to modernize Judaism while cleaving to its traditions may have been ampli — ied by the events o — World War II (1939–1945) and the Holocaust, in which six million European Jews were murdered by Nazis. This event had a pro — ound impact on the American Jewish conscience. For some, it drove them toward assimilation into American society. For others, it demanded a return to traditional practices. For all, it was a time o — great upheaval and change.
Discussion 1. Given this history, do you think the court was correct in determining that sepa- rate seating was an implied term in Rabbi Fisher’s contract? Was the court correct in only seeking the opinion o --- Orthodox rabbis? Should the court have also taken tes- timony --- rom Conservative or Re --- orm rabbis on what Jewish law requires? 2. I --- this case were to occur today — when 35% o --- American Jews identi --- y as Re --- orm, 18% identi --- y as Conservative, and 10% identi --- y as Orthodox — should the court arrive at a di --- --- erent result? Should a court generally be willing to hear evidence about the historical and social context o --- contract --- ormation?
456 16 • Extrinsic Evidence
Reading Nānākuli Paving & Rock Co. v. Shell Oil Co. Nānākuli is a di
icult case to read — or the same reason that so many contracts cases are di —
icult: because the subject matter o — these cases are commercial transactions that are
oreign to most law students. The parties — and the opinions resolving their disputes — tend to use speci — ic and technical terms that have special meaning
or those in the — ield. While this may be — rustrating, it is also necessary. To many judges, con- tract interpretation is the art and science o — determining what the parties actu- ally intended when they entered into an agreement. Courts use the language o — the parties and their trade to understand what intentions they had when they — ormed their agreement. To do this requires judges, attorneys, and law students to understand language and terminology that is sometimes un — amiliar to them. The key term in this case is “price protection.” This means that the seller will not raise the price — or some period o — time. Generally, price protection bene — its a buyer. This concept is not as strange as it might seem. Some credit cards o —
er price protection, which means that i — the price o — an item drops within some period o — time (usually 90 days) a — ter a purchase, the buyer can get the lower price.
Figure 16.2. Roads are o --- ten paved with re --- ined bitumen, which is derived
rom crude oil. Thus, the cost o — paving roads varies with the price o — oil, and the short-term volatility o — oil prices presents challenges — or pricing contracts — or long-term construction projects such as paving roads. Photo credit Seth C. Oranburg. 16 • Extrinsic Evidence 457
Does the nature o --- the parties matter when interpreting a contract? Should it? Consider the commercial context in Nānākuli. Nānākuli is one o --- two local road-paving companies on the island o --- Honolulu. It buys asphalt --- rom Shell Oil, one o --- the largest corporations on earth. Nānākuli argues that it is entitled to price protection --- or its asphalt purchases — not because o --- any power imbal- ance, but because Shell had honored such protections in past dealings. Speci --- i- cally, Nānākuli claims that the price should be based on Shell’s posted rate at the time the buyer committed to a paving project, not the higher rate Shell charged at delivery. It contends that this understanding re --- lects the parties’ course o ---
per
ormance and local industry practice. The contract, however, says otherwise. The seller, Shell — a corporation that is now worth over $200 billion — argues that the court should interpret its agreement with Nānākuli according to the plain meaning o — their agreement. The parties’ written contract clearly states in the writing that the contract price shall be “Shell’s Posted Price at time o — delivery.” This is not ambiguous. Posted price means the price that Shell is charging on that day. The posted price can change, either up or down. Nānākuli attempts to enter two types o — evidence in support o — its claim: trade usage and course o — per — ormance. As you read this case, pay attention to the arguments each party uses to argue — or or against the admission o — this evidence. Those are the same kinds o — arguments that law students and lawyers might make. Also, consider why the court accepted Nānākuli’s argument in the end. Why did this court ignore the plain meaning o — the contract? How might this reasoning impact whether courts are likely to accept extrinsic evidence that changes the meaning o — written terms?
Nānākuli Paving & Rock Co. v. Shell Oil Co.
664 F.2d 772 (9th Cir. 1981) HOFFAN, J. Appellant [Plainti ---
] Nānākuli Paving and Rock Company (Nānākuli) initially — iled this breach o — contract action against appellee [De — endant] Shell Oil Company (Shell) in Hawaiian State Court in February, 1976. Nānākuli, the second largest asphaltic paving contractor in Hawaii, had bought all its asphalt requirements — rom 1963 to 1974 — rom Shell under two long-term supply contracts; its suit charged Shell with breach o — the later 1969 contract. The jury returned a verdict o — $220,800 — or Nānākuli on its — irst claim, which is that Shell breached the 1969 contract in January, 1974, by — ailing to price protect Nānākuli on 7200 tons o — asphalt at the time Shell raised the price — or asphalt — rom $44 to $76. 458 16 • Extrinsic Evidence
Nānākuli’s theory is that price-protection, as a usage o
the asphaltic paving trade in Hawaii, was incorporated into the 1969 agreement between the parties, as demon- strated by the routine use o — price protection by suppliers to that trade, and rein — orced by the way in which Shell actually per — ormed the 1969 contract up until 1974. Price protection, appellant claims, required that Shell hold the price on the tonnage [o — asphalt] Nānākuli had already committed [to use in per — ormance o — government paving contracts] because Nānākuli had incorporated that price into bids put out to or contracts awarded by general contractors and government agencies. The District Judge set aside the verdict and granted Shell’s motion — or judgment notwithstanding the verdict o — the jury, which decision we vacate. We reinstate the jury verdict because we — ind that, viewing the evidence as a whole, there was substan- tial evidence to support a — inding by reasonable jurors that Shell breached its contract by — ailing to provide protection — or Nānākuli in 1974. We do not believe the evidence in this case was such that, giving Nānākuli the bene — it o — all in — erences — airly supported by the evidence and without weighing the credibility o — the witnesses, only one rea- sonable conclusion could have been reached by the jury. Nānākuli o —
ers two theories — or why Shell’s — ailure to o —
er price protection in 1974 was a breach o — the 1969 contract. First, it argues, all material suppliers to the asphal- tic paving trade in Hawaii — ollowed the trade usage o — price protection and thus it should be assumed, under the U.C.C., that the parties intended to incorporate price protection into their 1969 agreement. This is so, Nānākuli continues, even though the written contract provided — or price to be “Shell’s Posted Price at time o — delivery,” — ree on board (F.O.B.) Honolulu [meaning that buyer accepts and takes legal responsibility
or the asphalt when it arrives at port in Honolulu]. Its proo — o — a usage that was incorporated into the contract is rein — orced by evidence o — the commercial context, which under the U.C.C. should — orm the background — or viewing a particular contract. The — ull agreement must be examined in light o — the close, almost symbiotic relations between Shell and Nānākuli on the island o — Oahu, whereby the expansion o — Shell on the island was intimately connected to the business growth o — Nānākuli. The U.C.C. looks to the actual per — ormance o — a contract as the best indication o — what the parties intended those terms to mean. Nānākuli points out that Shell had price protected it on the two occasions o — price increases under the 1969 contract other than the 1974 increase. In 1970 and 1971 Shell extended the old price — or — our and three months, respectively, a — ter an announced increase. This was done, in the words o — Shell’s agent in Hawaii, in order to permit Nānākuli’s to “chew up” tonnage already committed at Shell’s old price. Nānākuli’s second theory — or price protection is that Shell was obliged to price protect Nānākuli, even i — price protection was not incorporated into their contract, because price protection was the commercially reasonable standard — or — air dealing in the asphaltic paving trade in Hawaii in 1974. Observance o — those standards is part o — the good- — aith requirement that the Code imposes on merchants in per — orming a 16 • Extrinsic Evidence 459
sales contract. Shell was obliged to price protect Nānākuli in order to act in good
aith, Nānākuli argues, because such a practice was universal in that trade in that locality. Shell presents three arguments — or upholding the judgment n.o.v. or, on cross appeal, urging that the District Judge erred in admitting certain evidence. First, it says, the District Court should not have denied Shell’s motion in limine to de — ine trade, — or purposes o — trade usage evidence, as the sale and purchase o — asphalt in Hawaii, rather than expanding the de — inition o — trade to include other suppliers o —
materials to the asphaltic paving trade. Asphalt, its argument runs, was the subject matter o — the disputed contract and the only product Shell supplied to the asphaltic paving trade. Shell protests that the judge, by expanding the de — inition o — trade to include the other major suppliers to the asphaltic paving trade, allowed the admis- sion o — highly prejudicial evidence o — routine price protection by all suppliers o —
aggregate. Shell’s second complaint is that the two prior occasions on which it price protected Nānākuli, although representing the only other instances o — price increases under the 1969 contract, constituted mere waivers o — the contract’s price term, not a course o — per — ormance o — the contract. A course o — per — ormance o — the contract, in contrast to a waiver, demonstrates how the parties understand the terms o — their agreement. Shell cites two U.C.C. Comments in support o — that argument: (1) that, when the meaning o — acts is ambiguous, the pre — erence is — or the waiver interpretation, and (2) that one act alone does not constitute a relevant course o — per — ormance. Shell’s — inal argument is that, even assuming its prior price protection constituted a course o — per — ormance and that the broad trade de — inition was correct and evidence o — trade usages by aggregate suppliers was admissible, price protection could not be construed as reasonably consistent with the express price term in the contract, in which case the Code provides that the express term controls. We hold that the judge did not abuse his discretion in de — ining the applicable trade, — or purposes o — trade usages, as the asphaltic paving trade in Hawaii, rather than the purchase and sale o — asphalt alone, given the unusual, not to say unique, circumstances: • the smallness o — the marketplace on Oahu; • the existence o — only two suppliers on the island; • the long and intimate connection between the two companies on Oahu, including the background o — how the development o — Shell’s asphalt sales on Oahu was inextricably linked to Nānākuli’s own expansion on the island; • the knowledge o — the aggregate business on the part o — Shell’s Hawaiian repre- sentative, Bohner; • his awareness o — the economics o — Nānākuli’s bid estimates, which included only two major materials, asphalt and aggregate; 460 16 • Extrinsic Evidence
• his --- amiliarity with realities o --- the Hawaiian marketplace in which all govern-
ment agencies re --- used to include escalation clauses in contract awards and
thus pavers would --- ace tremendous losses on price increases i --- all their mate-
rial suppliers did not routinely o ---
er them price protection; and • Shell’s determination to build Nānākuli up to compete — or those lucrative gov- ernment contracts with the largest paver on the island, Hawaiian Bitumuls (H.B.), which was supplied by the only other asphalt company on the islands, Chevron, and which was routinely price protected on materials. We base our holding on the reading o — the Code Comments as de — ining trade more broadly than transaction and as binding parties not only to usages o — their particular trade but also to usages o — trade in general in a given locality. This latter seems an equi- table application o — usage evidence where the usage is almost universally practiced in a small market such as was Oahu in the 1960’s be — ore Shell signed its 1969 contract with Nānākuli. Additionally, we hold that, under the — acts o — this case, a jury could reasonably have
ound that Shell’s acts on two occasions to price protect Nānākuli were not ambigu- ous and there — ore indicated Shell’s understanding o — the terms o — the agreement with Nānākuli rather than being a waiver by Shell o — those terms. Lastly we hold that, although the express price terms o — Shell’s posted price o — deliv- ery may seem, at — irst glance, inconsistent with a trade usage o — price protection at time o — increases in price, a closer reading shows that the jury could have reasonably construed price protection as consistent with the express term. We reach this holding — or several reasons. First, we are persuaded by a care — ul reading o — the U.C.C., one o — whose underlying purposes is to promote — lexibility in the expansion o — commercial practices and which rather drastically overhauls this particular area o — the law. The Code would have us look beyond the printed pages o —
the contract to usages and the entire commercial context o
the agreement in order to reach the “true understanding” o — the parties. Second, decisions o — other courts in similar situations have managed to reconcile such trade usages with seemingly contradictory express terms where the prior course o — dealings between the parties, trade usages, and the actual per — ormance o — the con- tract by the parties showed a clear intent by the parties to incorporate those usages into the agreement or to give to the express term the particular meaning provided by those usages, even at times varying the apparent meaning o — the express terms. Third, the delineation by thought — ul commentators o — the degree o — consistency demanded between express terms and usage is that a usage should be allowed to modi — y the apparent agreement, as seen in the written terms, as long as it does not totally negate it. We believe the usage here — alls within the limits set — orth by com- mentators and generally — ollowed in the better reasoned decisions. The manner in which price protection was actually practiced in Hawaii was that it only came into play at times o — price increases and only — or work committed prior to 16 • Extrinsic Evidence 461
those increases on non-escalating contracts. Thus, it
ormed an exception to, rather than a total negation o — , the express price term o — “Shell’s Posted Price at time o —
delivery.” Our decision is rein — orced by the overwhelming nature o — the evidence that • price protection was routinely practiced by all suppliers in the small Oahu market o — the asphaltic paving trade and there — ore was known to Shell; • that it was a realistic necessity to operate in that market and thus vital to Nānākuli’s ability to get large government contracts and to Shell’s continued business growth on Oahu; and • that it there — ore constituted an intended part o — the agreement, as that term is broadly de — ined by the Code, between Shell and Nānākuli.
I. History o --- Nānākuli-Shell Relations Be --- ore 1973 [This section may be summarized as --- ollows: Nānākuli and Shell had been working together closely since the early 1960s. In --- act, Nānākuli painted its trucks “Shell white” and placed the Shell logo on its trucks and its stationery to symbolize the closeness o ---
their relationship. In 1969, the parties signed a long-term (seven-year) supply agree- ment. That agreement is the subject o — this case.]
II. Trade Usage Be --- ore and A --- ter 1969 [This section may be summarized as --- ollows: In 1969 in Oahu, Hawaii, the majority o --- paving contracts were between a --- ew paving companies like Nānākuli on the one hand and government agencies on the other. None o --- the agencies allowed escalation clauses — which would increase the amount paid to paving companies i --- the price o --- input materials like asphalt goes up. Without price protection, paving companies could --- ind themselves paying more --- or asphalt than they would receive under the gov- ernment contracts --- or paving. There --- ore, price protection was an economic necessity and a nearly universal practice.]
III. Shell’s Course o --- Per --- ormance o --- the 1969 Contract [This section may be summarized as --- ollows: Nānākuli made several orders o --- asphalt
rom Shell under their 1969 contract. The original price was $35 per ton o — asphalt. From the inception o — that agreement until the events that gave rise to this lawsuit, Shell raised its price o — asphalt only two times: in 1970 and 1971, Shell raised its price to $40 and $44. Both times, Nānākuli complained about the price increase, and a — ter negotia- tions with Shell’s Hawaiian Representative, Bohner, Shell price protected Nānākuli by holding its price constant — or several months a — ter announcing a price increase. Shell argued that this evidenced its good — aith under the contract, but Nānākuli argued this evidenced that Nānākuli reasonably relied on Shell’s price protection.] [Shell sent its customers, including Nānākuli, a] November 25, 1970, letter set- ting out “Shell’s New Pricing Policy” at its Honolulu and Hilo terminals. The let- ter explained the elimination o — price protection: “In other words, we will no longer 462 16 • Extrinsic Evidence
guarantee asphalt prices
or the duration o — any particular construction projects or
or the speci — ic lengths o — time. We will, o — course, honor any existing prices which have been committed — or speci — ic projects — or which we have — irm contractual com- mitments.” The letter requested a supply contract be signed with Shell within — i — teen days o — the receipt o — an award by a customer. [Nānākuli’s Vice President] Smith’s reading o — this was that Nānākuli’s supply con- tract with Shell was a — irm contractual commitment by Shell and that no — urther con- tract was needed. “We — elt that this letter was unapplicable (sic) to our supply contract, that we already had a contractual commitment with Shell Oil Company which was not to end be — ore 1975.” [Nānākuli did not comply with the letter.]
IV. Shell-Nānākuli Relations, 1973-74 Two important --- actors --- orm the backdrop --- or the 1974 --- ailure by Shell to price pro- tect Nānākuli: the Arab oil embargo and a complete change o --- command and policy in Shell’s asphalt management. . . .
[Shell’s Hawaiian Representative] Bohner testi --- ied to a big organizational change at Shell in 1973 when asphalt sales were moved --- rom the construction sales to the com- mercial sales department. In addition, by 1973 the top echelon o --- Shell’s asphalt sales had retired. Lewis and Blee, who had negotiated the 1969 contract with Nānākuli, were both gone. Their duties were taken over by three men: Fuller in San Mateo, Cali-
ornia, District Manager — or Shell Sales, Lawson, and Chippendale, who was Shell’s regional asphalt manager in Houston. When the philosophy toward asphalt pricing changed, apparently no one was le — t who was knowledgeable about the peculiarities o — the Hawaiian market or about Shell’s long-time relations with Nānākuli or its 1969 agreement, beyond the printed contract. [On December 31, 1973, Shell in — ormed Nānākuli o — a price increase to $76 per ton o — asphalt.] On January 4, 1974, [Nānākuli’s Vice President] Smith called [Shell’s Hawaiian representative] Bohner, as he had done be — ore at times o — price increases, to ask — or price protection, this time on 7200 tons. Bohner told Smith that he would have to get in touch with the mainland, but he expected that the response would be negative. . . . Smith wrote several letters in January and February asking — or price pro- tection. A — ter getting no satis — action, he — inally — lew to Cali — ornia to meet with Lawson, Fuller, and Chippendale. Chippendale, — rom the Houston o —
ice, was acknowledged by the other two to be the only person with authority to grant price protection. All three Shell o —
icials lacked any understanding o — Nānākuli and Shell’s long, unique relation- ship or o — the asphaltic trade in Oahu. They had never even seen Shell’s contracts with Nānākuli be — ore the meeting. When apprised o — the three and their seven-year duration, Fuller remarked on the unusual nature o — Nānākuli’s relations with Shell, at least within his district. Chippendale — elt it was probably unique — or Shell anywhere. Smith testi — ied that Fuller admitted to knowing nothing, beyond the printed page o —
Nānākuli’s agreement with Shell, o
the background negotiation or Shell’s past pricing policies toward Nānākuli. . . . Fuller testi — ied that Shell would not act without written proo — o — Shell’s past price protection o — Nānākuli. 16 • Extrinsic Evidence 463
We conclude that the decision to deny Nānākuli price protection was made by new Houston management without a --- ull understanding o --- Shell’s 1969 agreement with Nānākuli or any knowledge o --- its past pricing practices toward Nānākuli. I --- Shell did commit itsel --- in 1969 to price protect Nānākuli, the Shell o ---
icials who made the decisions a —
ecting Nānākuli in 1974 knew nothing about that commitment. Nor did they make any e —
ective e —
ort to — ind out. They acted instead solely in reliance on the 1969 contract’s express price term, devoid o — the commercial context that the Code says is necessary to an understanding o — the meaning o — the written word. Whatever the legal en — orceability o — Nānākuli’s right, Nānākuli o —
icials seem to have acted in good — aith reliance on its right, as they understood it, to price protection and right-
ully — elt betrayed by Shell’s — ailure to act with any understanding o — its past practices toward Nānākuli. V. Scope o — Trade Usage The validity o — the jury verdict in this case depends on — our legal questions. First, how broad was the trade to whose usages Shell was bound under its 1969 agreement with Nānākuli: did it extend to the Hawaiian asphaltic paving trade or was it limited merely to the purchase and sale o — asphalt, which would only include evidence o —
practices by Shell and Chevron? Second, were the two instances o
price protection o —
Nānākuli by Shell in 1970 and 1971 waivers o
the 1969 contract as a matter o — law or was the jury entitled to — ind that they constituted a course o — per — ormance o — the con- tract? Third, could the jury have construed an express contract term o — Shell’s posted price at delivery as reasonably consistent with a trade usage and Shell’s course o —
per
ormance o — the 1969 contract o — price protection, which consisted o — charging the old price at times o — price increases, either — or a period o — time or — or speci — ic tonnage committed at a — ixed price in non-escalating contracts? Fourth, could the jury have
ound that good — aith obliged Shell to at least give advance notice o — a $32 increase in 1974, that is, could they have — ound that the commercially reasonable standards o —
air dealing in the trade in Hawaii in 1974 were to give some — orm o — price protection? We approach the — irst issue in this case mind — ul that an underlying purpose o — the U.C.C. as enacted in Hawaii is to allow — or liberal interpretation o — commercial usages. The Code provides, “This chapter shall be liberally construed and applied to promote its underlying purposes and policies.” No U.C.C. cases have been — ound on this point, but the court’s reading o — the Code language is similar to that o — two o — the best-known commentators on the U.C.C.: Under pre-Code law, a trade usage was not operative against a party who was not a member o — the trade unless he actually knew o — it or the other party could reasonably believe he knew o — it. White and Summers add: This view has been carried — orward by 1-205(3) . . . . [U]sage o — the trade is only binding on members o — the trade involved or persons who know or 464 16 • Extrinsic Evidence
should know about it. Persons who should be aware o --- the trade usage doubt-
less include those who regularly deal with members o --- the relevant trade, and
also members o --- a second trade that commonly deals with members o --- a rel-
evant trade ( --- or example, --- armers should know something o --- seed selling).
Using that analogy, even i
Shell did not “regularly deal” with aggregate supplies, it did deal constantly and almost exclusively on Oahu with one asphalt paver. It there-
ore should have been aware o — the usage o — Nānākuli and other asphaltic pavers to bid at — ixed prices and there — ore receive price protection — rom their materials suppliers due to the re — usal by government agencies to accept escalation clauses. . . . The Comment explains:
The ancient English tests --- or “custom” are abandoned in this connection.
There --- ore, it is not required that a usage o --- trade be “ancient or immemorial,”
“universal” or the like. . . . [F]ull recognition is thus available --- or new usages
and --- or usages currently observed by the great majority o --- decent dealers, even
though dissidents ready to cut corners do not agree. The Comment’s demand that “not universality but only the described ‘regularity o ---
observance’ ” is required rein
orces the provision only giving “e —
ect to usages o — which the parties ‘are or should be aware.’ ” A “regularly observed” practice o — protection, o —
which Shell “should have been aware,” was enough to constitute a usage that Nānākuli had reason to believe was incorporated into the agreement. Nānākuli went beyond proo — o — a regular observance. It proved and o —
ered to prove that price protection was probably a universal practice by suppliers to the asphaltic paving trade in 1969. It had been practiced by H.C. & D. since at least 1962, by P.C. & A. since well be — ore 1960, and by Chevron routinely — or years, with the last speci — ic instance be — ore the contract being March, 1969, as shown by documentary evidence. . . . VI. Waiver o — Course o — Per — ormance . . . Shell protested that the jury could not have — ound that those two instances o —
price protection [in 1970 and 1971] amounted to a course o
per — ormance o — its 1969 contract, relying on two Code comments. First, one instance does not constitute a course o — per — ormance. “A single occasion o — conduct does not — all within the lan- guage o — this section. . . .” Although the Comment rules out one instance, it does not — urther delineate how many acts are needed to — orm a course o — per — ormance. The prior occasions here were only two, but they constituted the only occasions be — ore 1974 that would call — or such conduct. In addition, the language used by a top asphalt o —
icial o — Shell in connection with the — irst price protection o — Nānākuli indicated that Shell — elt that Nānākuli was entitled to some — orm o — price protection. . . . Shell’s second de — ense is that the Comment expresses a pre — erence — or an interpre- tation o — waiver. . . . The pre — erence — or waiver only applies, however, where acts are 16 • Extrinsic Evidence 465
ambiguous. . . . The jury’s interpretation o
those acts as a course o — per — ormance was bolstered by evidence o —
ered by Shell that it again price protected Nānākuli on the only two occasions o — post-1974 price increases, in 1977 and 1978. VII. Express Terms as Reasonably Consistent with Usage in Course o — Per — ormance Perhaps one o — the most — undamental departures o — the Code — rom prior contract law is — ound in the parol evidence rule and the de — inition o — an agreement between two parties. Under the U.C.C., an agreement goes beyond the written words on a piece o — paper. “ ‘Agreement’ means the bargain o — the parties in — act as — ound in their language or by implication — rom other circumstances including course o — dealing or usage o — trade or course o — per — ormance as provided in [UCC §§ 1-205 and 2-208].” Express terms, then, do not constitute the entire agreement, which must be sought also in evidence o — usages, dealings, and per — ormance o — the contract itsel — . The pur- pose o — evidence o — usages, which are de — ined in the previous section, is to help to understand the entire agreement. [Usages are] a — actor in reaching the commercial meaning o — the agreement which the parties have made. The language used is to be interpreted as meaning what it may
airly be expected to mean to parties involved in the particular commercial transac- tion in a given locality or in a given vocation or trade. . . . Part o — the agreement o — the parties . . . is to be sought — or in the usages o — trade which — urnish the background and give particular meaning to the language used, and are the — ramework o — common understanding controlling any general rules o — law which hold only when there is no such understanding. Course o — dealings is more important than usages o — the trade, being speci — ic usages between the two parties to the contract. “[C]ourse o — dealing controls usage o — trade.” It “is a sequence o — previous conduct between the parties to a particular transaction which is — airly to be regarded as establishing a common basis o — understanding — or interpreting their expressions and other conduct.” Much o — the evidence o — prior deal- ings between Shell and Nānākuli in negotiating the 1963 contract and in carrying out similar earlier contracts was excluded by the court. A commercial agreement, then, is broader than the written paper and its meaning is to be determined not just by the language used by them in the written contract but “by their action, read and interpreted in the light o — commercial practices and other surrounding circumstances. The measure and background — or interpretation are set by the commercial context, which may explain and supplement even the language o — a — ormal or — inal writing.” Per — ormance, usages, and prior dealings are important enough to be admitted always, even — or a — inal and complete agreement; only i — they cannot be reasonably reconciled with the express terms o — the contract are they not binding on the parties. “The express terms o — an agreement and an applicable course o — dealing or usage o — trade shall be construed wherever reasonable as consistent with each other; but when such construction is unreasonable express terms control both course o — dealing and usage o — trade and course o — dealing controls usage o — trade.” 466 16 • Extrinsic Evidence
O --- these three, then, the most important evidence o --- the agreement o --- the par- ties is their actual per --- ormance o --- the contract. The operative de --- inition o --- course o ---
per
ormance is as — ollows: “Where the contract — or sale involves repeated occasions
or per — ormance by either party with knowledge o — the nature o — the per — ormance and opportunity — or objection to it by the other, any course o — per — ormance accepted or acquiesced in without objection shall be relevant to determine the meaning o — the agreement.” “Course o — dealing . . . is restricted, literally, to a sequence o — conduct between the parties previous to the agreement. However, the provisions o — the Act on course o — per — ormance [Section 2-208] make it clear that a sequence o — con- duct a — ter or under the agreement may have equivalent meaning.” The importance o — evidence o — course o — per — ormance is explained: “The parties themselves know best what they have meant by their words o — agreement and their action under that agreement is the best indication o — what that meaning was. This section thus rounds out the set o — — actors which determines the meaning o — the ‘agreement.’ ” “Under this section a course o — per — ormance is always relevant to determine the meaning o — the agreement.” Our study o — the Code provisions and Comments, then, — orm the — irst basis o — our holding that a trade usage to price protect pavers at times o — price increases — or work committed on nonescalating contracts could reasonably be construed as consistent with an express term o — seller’s posted price at delivery. Since the agreement o — the parties is broader than the express terms and includes usages, which may even add terms to the agreement, and since the commercial background provided by those usages is vital to an understanding o — the agreement, we — ollow the Code’s mandate to proceed on the assumption that the parties have included those usages unless they cannot reasonably be construed as consistent with the express terms. [Extensive analysis o — case law omitted.] “Astonishing as it will seem to most practicing attorneys, under the Code it will be possible in some cases to use custom to contradict the written agreement. . . . There-
ore usage may be used to ‘quali — y’ the agreement, which presumably means to ‘cut down’ express terms although not to negate them entirely.” Here, the express price term was “Shell’s Posted Price at time o — delivery.” A total negation o — that term would be that the buyer was to set the price. It is a less than com- plete negation o — the term that an unstated exception exists at times o — price increases, at which times the old price is to be charged, — or a certain period or — or a speci — ied tonnage, on work already committed at the lower price on nonescalating contracts. Such a usage — orms a broad and important exception to the express term, but does not swallow it entirely. There — ore, we hold that, under these particular — acts, a reasonable jury could have — ound that price protection was incorporated into the 1969 agreement between Nānākuli and Shell and that price protection was reasonably consistent with the express term o — seller’s posted price at delivery. 16 • Extrinsic Evidence 467
VIII. Good Faith in Setting Price . . . The Code provides, “A price to be --- ixed by the seller or by the buyer means a price --- or him to --- ix in good --- aith.” . . . Nānākuli presented evidence that Chevron, in raising its price to $76, gave at least six weeks’ advance notice, in accord with the long-time usage o --- the asphaltic paving trade. Shell, on the other hand, gave absolutely no notice, --- rom which the jury could have concluded that Shell’s manner o --- carrying out the price increase o --- 1974 did not con --- orm to commercially reasonable standards. In both the timing o --- the announcement and its re --- usal to protect work already bid at the old price, Shell could be --- ound to have breached the obligation o --- good --- aith imposed by the Code on all merchants. “Every contract or duty within this chapter imposes an obligation o --- good --- aith in its per --- ormance or en --- orcement,” id. § 490:1- 203, which --- or merchants entails the observance o --- commercially reasonable stan- dards o ---
air dealing in the trade. The Comment to 1-203 reads: This section sets — orth a basic principle running throughout this Act. The princi ple involved is that in commercial transactions good — aith is required in the per — ormance and en — orcement o — all agreements or duties. Particular applica- tions o — this general principle appear in speci — ic provisions o — the Act. . . . It is
urther implemented by Section 1-205 on course o — dealing and usage o — trade. Chevron’s conduct in 1974 o —
ered enough relevant evidence o — commercially rea- sonable standards o —
air dealing in the asphalt trade in Hawaii in 1974 — or the jury to — ind that Shell’s — ailure to give su —
icient advance notice and price protect Nānākuli a — ter the imposition o — the new price did not con — orm to good — aith dealings in Hawaii at that time. Because the jury could have — ound — or Nānākuli on its price protection claim under either theory, we reverse the judgment o — the District Court and reinstate the jury verdict — or Nānākuli in the amount o — $220,800, plus interest according to law. REVERSED AND REMANDED WITH DIRECTIONS TO ENTER FINAL JUDGMENT.
Re --- lection University o --- Virginia School o --- Law pro --- essors Charles J. Goetz and Robert E. Scott re --- lect extensively on Nānākuli in their seminal law review article on the interac- tion between express and implied contract terms. The article notes:
At --- irst glance, Nānākuli seems to be a per --- ectly correct application o --- the rules
o --- interpretation. . . . The court applied a presumption o --- consistency to the
extrinsic evidence submitted by the buyer, holding that the express price term
supplemented, rather than trumped, the price protection usage. The presump-
tion was not overcome by the inclusion o --- a standard merger clause, which
468 16 • Extrinsic Evidence
the court characterized as boilerplate rather than as an invoked term o --- art.
The Limits o --- Expanded Choice: An Analysis o --- the Interactions between
Express and Implied Contract Terms, 73 Cali --- . L. Rev. 261, 318 n.154 (1985). But the court’s strict prioritization o --- extrinsic evidence over express terms is actu- ally an oversimpli --- ication o --- how contracts should be interpreted:
Further re --- lection, however, reveals an underlying conceptual problem. The
court in Nānākuli --- ramed the interpretive issue as a choice between supple-
mentary expressions and trumps. This requires a binary resolution: either the
express price term trumps the context or the price protection usage --- ully applies. Pro --- essors Goetz and Scott argue that this binary does not re --- lect how parties actu- ally think and behave, especially with regard to long-term contracts. Remember that Nānākuli and Shell had a longstanding close relationship.
In such relationships, it is equally plausible to assume that the apparent con-
lict between the express price term and the custom o — price-protection could not have been “solved” by the parties when they cra — ted their agreement. In other words, shouldn’t the Nānākuli court have recognized that parties don’t really have an understanding at the time o — contracting about all circumstances that will occur in the — uture? Aren’t these long-term relational contracts more about a
ramework under which to work things out, and less about a set o — rules courts will apply to every — uture circumstance? This hypothesis [that the parties had no mutual assent regarding price pro- tection] is supported by evidence that the price-protection issue — irst arose in 1970, seven years a — ter the supply contract was negotiated and — ollowing major changes in Shell’s management. I — the — ormulations in Nānākuli were indeterminate rather than apparently inconsistent, then neither the outcome endorsed by the court nor the result urged by Shell would represent the optimal interpretive solution. Instead, an equitable adjustment o — price would have been more consistent with the contractual instructions o — the parties. In addition to this theoretical contribution, Goetz and Scott succinctly summa- rize the material — acts and holdings o — the case. It might be use — ul — or law students to compare the pro — essors’ approach to this case with their own notes o — key — acts and holdings: Nānākuli, a paving contractor, negotiated a long-term contract with Shell in which Shell agreed to supply and Nānākuli agreed to purchase all its asphalt requirements. A — ter extensive negotiations and dra — ting, a written contract was signed providing that the contract price — or asphalt ordered and supplied was to be determined by Shell’s “posted price at the time o — delivery.” The writ- ten contract contained a standard merger clause. Some ten years a — ter the original agreement was concluded, Shell increased the price on a delivery o —
16 • Extrinsic Evidence 469
7,200 tons o --- asphalt --- rom the $44 per ton price prevailing at the time o --- the
order to [$76] per ton, its posted price at the time o --- delivery. Subsequently,
Nānākuli sought $220,800 in damages --- or breach o --- the contract, alleging that
the paving trade in Hawaii --- ollowed a practice o --- “price protection” by extend-
ing the old price --- or a period o --- time a --- ter a new one became e ---
ective. . . . Nānākuli claimed that Shell had protected it — rom price increases in two previous instances. In response, Shell argued that i — the relevant market were narrowed to the supply o — asphalt alone, the usage was not clearly established. Shell — urther claimed that the two instances o — price protection were isolated waivers, not a course o — per — ormance. Finally, it said that in any event the extrinsic evidence was clearly inconsistent with the express price term in the contract and thus the price term was controlling under U.C.C. § 1-205(4). In reinstating the jury’s verdict — or Nānākuli, the Ninth Circuit held that the jury could properly have — ound a relevant usage and course o — per — ormance, and that this extrinsic evidence was not inconsistent with the express price term in the written contract. The above summary o — the — acts and holding o — Nānākuli may there — ore be a use-
ul guide to law students on how to accurately and brie — ly summarize such a complex case.
Discussion 1. Is there tension between the goals o --- e ---
ectuating the parties’ intentions and en — orc- ing the plain meaning o — written terms, or are these both means to the same ends?
- Do you think the Nānākuli court correctly interpreted the contract to include price protection? Why or why not?
-
In Nānākuli, Shell may have gone above and beyond its contractual obligations by giving price protection to Nānākuli two times in the past. I — going above and beyond in the past obligates a party to continue acting in that manner going — or- ward, how might that impact contractual parties’ willingness to do — avors — or each other?
Reading First National Bank o
Lawrence v. Methodist Home — or the Aged. The Congregation B’Nai Yitzhok case above illustrates how courts can use — ac- tual evidence, such as parties’ testimonies, to determine whether terms should be implied in — act. But what i — the parties are not available? 470 16 • Extrinsic Evidence
In First National Bank o
Lawrence v. Methodist Home — or the Aged, 181 Kan. 100 (1957), the plainti —
is the administrator o — a decedent’s estate. In other words, one o — the parties to the contract is dead. Since dead people cannot give testimony — and at least one court, Baiul v. William Morris Agency, LLC, 2014 U.S. Dist. LEXIS 14977, ruled that “evidence o — deceased’s wishes via Ouija board is not admissible in — ederal court” — courts will have to look to other sources o — evidence to determine whether implied terms existed. Methodist Home concerns an agreement — or li — etime tenancy in a retire- ment home. This li — etime membership was subject to a probationary period, during which either side could cancel the agreement. The written contract did not discuss what would happen i — the tenant died during the probationary period. When such a death occurred, the estate sought to cancel the agree- ment and receive a re — und o — the li — etime tenancy — ee. The court then had to determine whether such a term should be implied in this contract — but it could not call upon the decedent to determine her actual intentions at the time o — contracting. Be — ore reading the case, consider why the parties may have omitted this term. Do you think the omission was deliberate or negligent on the part o —
the retirement home, which dra
ted the written contract? Why didn’t Ms. Ells- worth insist that the contract stipulate what would happen i — she died during the probationary period? Would the court really be able to determine i — the parties actually discussed this term? Even i — they discussed it, would the parol evidence rule bar admission o — that discussion? The court states that the written contract in question is ambiguous, but it does not explain its reasoning. Do you think the contract is ambiguous? How does this — inding o — ambiguity impact the application o — the parol evidence rule? You may also note that this court help — ully outlines the rules o — interpret- ing an ambiguous contract. It phrases these rules a bit di —
erently — rom the R2d — which is not surprising, given that the R2d was not yet published — but e —
ectively goes through a similar process to the one you already learned. In
act, this court does a rather thorough job o — reviewing the rules o — contract interpretation in general. Highlight where the court discusses these rules. Annotate your highlights with a re — erence to the corresponding section in the R2d and note any discrepancies you notice between how the R2d and this court
rame the rules. Noting that the retirement home dra — ted the contract, do you think that the policy canon o — construction against the dra — ter, R2d § 206, plays a role in the court’s analysis? Should it? 16 • Extrinsic Evidence 471
First National Bank o --- Lawrence v. Methodist
Home --- or the Aged
181 Kan. 100 (1957) PARKER, Chie --- Justice.
Plainti ---
is a banking corporation with its place o — business at Lawrence, Kansas, and the duly appointed administrator, with the will annexed, o — the will o — Bertha C. Ells- worth, deceased. De — endant is the Methodist Home For the Aged, a corporation, with its principal place o — business at Topeka, Kansas, where it operates a home — or the aged. The events leading up to the institution o — this litigation are not in controversy and should be stated at the outset in order to insure a proper understanding o — the appel- late issues involved. On September 13, 1953, Bertha C. Ellsworth, who desired to be admitted to the de — endant’s home and was then single and more than seventy-one years o — age, made a written application — or admission to such home. Therea — ter, having been advised her application had been approved, she was admitted to the home on May 10, 1954, and on the same date entered into the written agreement with de — endant which is actually the subject o — this litigation. Pertinent portions o — such agreement, which we pause to note had been prepared by de — endant on one o — its standard — orms, used — or admission o — members, read: This Agreement, made and entered into this 10th day o — May, 1954, by and between The Methodist Home — or the Aged, a Corporation, o — Topeka, Kansas, Party o — the First Part and Bertha C. Ellsworth, o — Lawrence, Kansas, Party o —
the Second Part, Witnesseth:
Party o --- the Second Part having this day given Party o --- the First Part,
without reservation, the sum o --- $10,779.60 to be used and disposed o --- in the
urtherance o — its benevolence and charitable work as it may deem best, Party o — the First Part admits Party o — the Second Part into its Home as a member thereo — during the period o — her natural li — e, and agrees to — urnish: . . . Fi — th: It is clearly understood that Party o — the Second Part has been received in accordance with the new regulations on a probation period o — two months in which time she has the opportunity o —
inding out whether she desires to remain in the Home; and also — ind out whether the Home is able to satis — y the requirements. I — it should be — ound advisable to discontinue her stay in the Home, then her gi — t, with the exception o — $80.00 per month shall be re — unded. The rules and regulations and bylaws o — the Home as they now are and as they — rom time to time may be adopted and promulgated by the Board o —
Directors o --- said Party o --- the First Part are hereby re --- erred to and made a part
hereo --- and the Party o --- the Second Part hereby agrees to be bound by same.
It is especially understood and agreed that in case o --- serious mental illness
472 16 • Extrinsic Evidence
requiring hospital care and attention, that the First Party shall have the right
to make proper arrangements --- or the treatment and care o --- the Second Party
in a law --- ul manner in a proper State Institution, provided that i --- Second Party
is discharged as completely cured to admit Second Party into the Home with-
out --- urther --- inancial requirements. (Emphasis supplied.)
The parties concede that de
endant’s bylaw, article 12, was in — ull — orce and e —
ect on the date o — the execution o — the agreement and there — ore, according to the terms o —
that agreement, is a part o
the contract. It reads:
Probationary membership means a short trial period while the member
becomes adjusted to the li --- e o --- the Home. The probationary membership shall
not continue --- or a longer period than two consecutive months. I ---
or any reason the trial member does not desire to remain in the Home he or she shall have the privilege o — leaving. On the other hand, i — the Home — or any reason does not desire to continue the membership then the member shall be noti — ied in writing and leave the Home within a week a — ter such notice is given. Only members who do not have the money or securities to pay — or their li — e Membership shall be granted the privilege o — paying by the month. (Emphasis supplied.)
A
ter execution o — the May 10, 1954, agreement Bertha C. Ellsworth remained in the home until she died on June 10, 1954. At that time neither she nor the home had made an election as to whether she was to leave the home or remain therein a — ter the expiration o — the probationary period speci — ied by its terms. However, it is conceded that during the interim, and on June 4, 1954, the plainti —
bank in its capacity as trustee had paid the de — endant the sum o — $10,799.60 by a check, which de — endant had cashed, speci — ying that such check was “In Payment o — Li — e Membership — or Ber- tha C. Ellsworth in the Methodist Home — or the Aged, as speci — ied in Agreement dated May 10, 1954”, and that de — endant had acknowledged payment o — that sum by a receipt o — like import. Upon the death o — Bertha Ellsworth plainti —
was appointed by the probate court o — Douglas County, Kansas, as Administrator CTA o — such decedent. Therea — ter it made written demand on de — endant — or per — ormance under the agreement, includ- ing pertinent by-laws, and demanded that de — endant re — und the estate o — its decedent the amount paid pursuant thereto, less any amounts due the Home under its terms, particularly the — i — th clause thereo — . When this demand was re — used plainti —
procured authority — rom the probate court to institute the instant action to recover such amount as an asset o — the estate o — Bertha C. Ellsworth, deceased. Following action as above indicated plainti —
commenced this lawsuit by — iling a petition which, it may be stated, recites in a general way that under the more impor tant — acts, conditions and circumstances, hereto — ore outlined, the de — endant had never attained a li — e membership in the home by reason o — her death prior to the expiration o — the probationary membership period prescribed by the contract, hence 16 • Extrinsic Evidence 473
the contract should be construed as contemplating her estate was entitled to a return o — the money paid by her to de — endant — or such a membership. When a demurrer to this pleading, based on the ground it — ailed to state a cause o — action, was overruled by the trial court de — endant — iled an answer alleging in sub- stance that under the same — acts, conditions and circumstances the contract between it and the decedent is to be construed as warranting its retention o — the sum paid by such decedent — or the li — e membership even though, prior to her death, such decedent neither indicated that she did not desire to remain in the Home nor that she desired the privilege o — leaving it. It should perhaps be added that such answer contains an allegation that on May 10, 1954, decedent was permitted to enter the home without having paid her li — e mem- bership; admits subsequent payment o — such membership in the manner hereto — ore indicated; and makes decedent’s application — or admission to the home a part o — such pleading. With issues joined, as hereto — ore related, the cause came on — or trial by the court. During the trial — acts, as hereto — ore related, were established by evidence and at the conclusion thereo — the trial court, a — ter holding that the salient question in the case was purely a question o — law involving the interpretation o — the contract, rendered judgment decreeing that plainti —
was entitled to recover the amount paid by Ber- tha C. Ellsworth to the Home, less $235 paid by the Home — or her — uneral expenses and less the sum o — $80 provided — or in the contract in the event she had elected not to remain in the Home. Thereupon de — endant per — ected this appeal wherein under proper speci — ication o —
errors it charges the trial court erred in overruling the demurrer to the petition; in rendering judgment — or plainti —
and against de — endant, wholly contrary to the law and the terms o — the agreement; and in overruling its motion — or a new trial. In a preliminary way it can be said a care — ul examination o — the record leads to the inescapable conclusion the trial court was eminently correct in holding that the all decisive question involved in this case is purely a question o — law involving the inter- pretation o — the contract entered into between the appellant and Bertha C. Ellsworth, deceased. Indeed the parties make no serious contention to the contrary. For that reason, and others to be presently disclosed, we turn directly to appellant’s claim the trial court’s judgment was contrary to the terms o — the agreement and to the law, mind — ul as we do so that where — as here — the terms o — a contract are ambiguous, obscure or susceptible o — more than one meaning there are certain well de — ined rules to which courts must adhere in construing its provisions. Four o — such rules, which we believe have special application here, can be stated as — ollows: 1. That doubt — ul language in a contract is construed most strongly against the party preparing the instrument or employing the words concerning which doubt arises. 474 16 • Extrinsic Evidence
2. That where a contract is susceptible o --- more than one construction its
terms and provisions must, i --- possible, be construed in such manner as to give
e ---
ect to the intention o — the parties at the time o — its execution. 3. That in determining intention o — the parties where ambiguity exists in a contract the test is not what the party preparing the instrument intended its doubt — ul or ambiguous words to mean but what a reasonable person, in the position o — the other party to the agreement, would have understood them to mean under the existing conditions and circumstances. 4. That the intent and purpose o — a contract is not to be determined by considering one isolated sentence or provision thereo — but by considering and construing the instrument in its entirety.
Stated, substantially in its own language, the principal contention advanced by appellant as grounds — or reversal o — the judgment is that the membership agreement between it and the involved decedent was — ully executed inasmuch as decedent had been admitted to the Home as a li — e member on May 10, 1954, and therea — ter caused her li — e membership to be paid; hence, since nothing — urther needed to be done by the parties to make the portion o — the agreement relating to li — e membership binding, provisions o — the contract with respect thereto had become — ully executed and title to the — ee paid — or such membership had vested in appellant. I — we could limit our construction o — the contract to its — irst two paragraphs, as here- to — ore quoted, we might well conclude that appellant’s views respecting the status o —
the agreement and the gi
t therein mentioned could be upheld. However, as has been previously demonstrated, our obligation is not to consider isolated provisions o — the contract but to consider and construe such instrument in its entirety. When succeed- ing paragraphs o — the agreement, and the incorporated by-laws, particularly portions thereo — which we have hereto — ore italicized — or purposes o — emphasis, are reviewed in the light o — the rule to which we have just re — erred, as well as others hereto — ore men- tioned, we have little di —
iculty in concurring in the views expressed by the trial court in rendering its judgment that the contract had never become executed and that title to the gi — t paid by the decedent — or a li — e membership had not vested in the Home. In — act, and without repeating the emphasized portions o — the agreement on which we base our conclusion, we go — urther and hold that, under the clear import and meaning o — such emphasized provisions, Bertha C. Ellsworth, because o — her untimely death during the probationary and/or trial period expressly required by their terms, never attained a li — e membership status in the Home. Indeed to hold otherwise would not only do violence to the language o — the contract but read into it something that is not there. One question remains in this lawsuit. Who, the Home or the decedent’s estate, is entitled to the li — e membership — ee paid by decedent to appellant? In this connec- tion it is interesting to note that the money was paid by decedent by a check and receipted — or by appellant in writing, each o — which instruments contain a recital “In 16 • Extrinsic Evidence 475
Payment o
Li — e Membership — or Bertha C. Ellsworth in the Methodist Home — or the Aged, as speci — ied in Agreement dated May 10, 1954.” So, since it cannot be denied the contract contains no express provisions relating to where the money was to go i —
Bertha Ellsworth died during the probationary and/or trial period prescribed by its terms, it appears we are — aced with the obligation o — determining what was intended by the parties at the time o — the execution o — the agreement in the event o — such a contingency. Strange as it may seem, the question thus presented has been be — ore the Courts on but — ew occasions. However, it has been decided under similar circumstances. An interesting discussion on the subject appears in 10 A.L.R.2d., Annotation, pp. 874, 875, § 12. It reads: Many entrance contracts provide — or a probationary period during which the applicant — or admission to the charitable home as well as the home itsel —
can dissolve the agreement without cause. In case the applicant is re --- used
permanent admission at the end o --- the trial period or withdraws during the
period o --- his own volition, all payments made, less a --- ixed weekly charge --- or
the time he stayed at the home, are re --- unded to him and his property rights
are restored.
An interesting situation arises i --- the applicant dies during the probation-
ary period without having been either accepted or rejected as a permanent
inmate. The legal question then is whether or not the charitable home may
retain the applicant’s property on the ground that the agreement had not been
dissolved by either party.
In a majority o --- cases this question has been answered in the negative and
it has been held that the home may not claim or retain the applicant’s prop-
erty, on the ground that the death o --- the applicant has made it impossible to
determine whether he would have become a permanent inmate at the end o ---
the probationary period. In connection with the --- oregoing quotation the author cites [sources] as support- ing the conclusion reached by him in the concluding paragraph o --- his discussion and one case only as holding to the contrary. We may add our somewhat extended research o --- the books, including our own reports, discloses no other cases which can be regarded as decisive o --- the question presented under similar --- acts, conditions and circumstances. Again reviewing the contract in the light o --- the hereto --- ore stated rules, and mind --- ul that appellant, not the decedent, prepared the involved contract, we are impelled to the view that a reasonable person, in the position o --- the decedent at the time o --- the execution o --- the contract, would have understood the provisions o --- that instrument to mean that unless and until she attained the status o --- a li --- e member in the appellant’s home she, or her estate would be entitled to a return o --- the money paid by her --- or that right, less amounts speci --- ied in the agreement.
476 16 • Extrinsic Evidence
Moreover we are convinced, that having prepared the contract, appellant’s
ail- ure to make express provision therein — or retaining the money paid by Bertha C. Ellsworth as a li — e membership — ee, in the event o — her death during the period o —
her probationary and/or trial membership status, precludes any construction o
that agreement which would warrant its retention o — such money upon the happening o —
that contingency. A — ter care — ul consideration o — the decisions last above cited we have concluded those having the e —
ect o — holding, under similar circumstances, that the appellant cannot claim or retain Bertha Ellsworth’s li — etime payment — or the reason her death made it impossible — or her to determine whether she was to become a permanent inmate o — the Home at the end o — the probation period, are more sound in principle and better reasoned that the one case holding to the contrary. There — ore, based on the conclusions hereto — ore announced and on what is said and held in such decisions, we hold that the trial court did not err in rendering the judg- ment — rom which the Home has appealed. Lest we be charged with overlooking it, we pause here to note, we regard Old Peoples Home, etc. v. Miltner, relied on by each o — the parties in support o — respective claims regarding the propriety o — the judgment, as clearly distinguishable and hence o — no value as a precedent controlling issues involved in the case at bar. Contentions advanced by appellant in connection with the overruling o — its demur- rer to appellee’s evidence and the overruling o — its motion — or a new trial are the same as those hereto — ore considered, discussed and determined. For that reason — urther discussion o — the propriety o — such rulings is neither necessary nor required. The judgment is a —
irmed.
Re --- lection In Methodist Home, the court is unable to call upon the decedent to ascertain her intentions --- or the obvious reason that she is dead. So, the court takes the next best approach and tries to determine what a reasonable person in the place o --- the decedent would have intended. To determine the intention o --- a reasonable person, the court looks to case law. Fortunately --- or the disposition o --- this case, the exact matter had been litigated several times be --- ore. The court then, e ---
ectively, tallies up the number o — analogous cases that
ound — or the estate o — the decedent versus the number o — analogous cases that — ound
or the old-age home, and it rules in — avor o — the decedent seemingly based on the sheer number o — cases. Fairness considerations will come to the — ore — ront in the next section, where we consider terms implied — rom the duty o — good — aith and — air dealing. 16 • Extrinsic Evidence 477
Discussion 1. Are you com --- ortable with the court’s approach in Methodist Home? Does its empirical approach approximate what a “reasonable” old-age home and its resident would intend? I --- the actual intention o --- the parties is the polestar o --- contract inter- pretation, has the court reasonably approximated that with its reasonable person approach?
-
Consider your answer to the previous question in light o
the re — lections on Con- gregation B’Nai Yitzhok. I — Rabbi Fisher were unavailable — or testimony, could the court have determined his reasonable intentions by looking at other contracts — or rabbinical services?
-
One issue with looking at precedent is that, by its very nature, it looks backward, at what has been done in the past. At times o — great social, technological, industrial, or political change, does looking at precedent to determine the intentions o — a rea- sonable person still come close enough to the actual intentions o — the parties to be a valid means o — determining whether to add terms to an agreement?
-
Another issue to consider is
airness. Do you think the court arrived at the correct result by re — unding the decedent’s money to the estate?
Problems Problem 16.1. Output o --- Toasted Bread Plainti ---
Henry S. Levy & Sons, Inc., popularly known as Levy’s, is a bakery, located
irst at Moore Street and Graham Avenue in Brooklyn, New York, and later on Park Avenue and 115 Thames Street, New York, NY. Levy’s was — amous — or its cheesy bread and its rye bread, which was the subject o — an o —
beat advertisement campaign. De — endant Crushed Toast Co. manu — actures breadcrumbs. Interestingly, the term “breadcrumbs” does not re — er to crumbs that may — lake o —
bread. Rather, bread- crumbs are a manu — actured item that starts with stale or imper — ectly appearing loaves,
ollowed by removal o — labels, processing through two grinders, the second o — which e —
ects a — iner granulation, insertion into a drum in an oven — or toasting and, — inally, bagging o — the — inished product. Levy’s agreed to purchase “all breadcrumbs produced by Crushed Toast Co.” Over the next several years, Crushed Toast Co. sold over 250 tons o — breadcrumbs to Levy’s. But on May 15, 1969, the main oven at Crushed Toast Co. suddenly imploded, and the company therea — ter stopped production o — breadcrumbs. 478 16 • Extrinsic Evidence
Toa doa.'t have Toa cloa't bne
tobeJewS.h to be.Jewlah
--~
to love Levy',
Figure 16.3. Levy’s “You don’t have to be Jewish” campaign
was considered zany yet e ---
ective.
Levy’s brought suit, alleging that Crushed Toast Co. had a duty in good
aith to repair its oven and to continue producing breadcrumbs — or Levy’s. Crushed Toast Co. de — ended, alleging that the contract did not require it to manu-
acture breadcrumbs but merely to sell those it did. Since none were produced a — ter the demise o — the oven, there was no duty to deliver, and, consequently, — rom then on, no liability on its part. Analyze both claims and discuss whether either party should prevail upon a court and, i — so, what remedies that court should award the prevailing party. See Feld v. Levy and Sons, 37 N.Y.2d 466 (1975).
Problem 16.2. Requirements
or Corrugated Paper Boxes Plainti —
Fort Wayne Corrugated Paper Co. (Fort Wayne Paper) is a paper manu-
acturer that sells corrugated paper boxes. De — endant Anchor Hocking Glass Corp. (Anchor Glass) is a glass manu — acturer that purchases and uses corrugated paper boxes to package and ship its glassware. De — endant Anchor Glass, as buyer, entered into a written contract with Plainti —
Fort Wayne Paper, as seller, in which it was agreed that the buyer would buy not less than 90% o — its entire needs o — corrugated paper and solid — iber products — rom Fort Wayne Paper as seller. The buyer’s needs were estimated to be 500 carloads o — boxes per year. The seller agreed to reserve production space — or the manu — acture o — the buyer’s requirements and not to make contracts — or more than 50% o — its production capac- ity. The contract was to continue — or — ive years and therea — ter until written notice o —
16 • Extrinsic Evidence 479
annulment was given by either party. During the
irst two years — ollowing the making o — this contract, the amount purchased by the buyer increased — rom year to year. In the third year, the contract was amended to change the proportion o — require- ments which Anchor Glass agreed to buy — rom Fort Wayne Paper to not less than 75% o — its needs. These needs were re-estimated to be approximately 800 carloads a year. The parties did business under this arrangement satis — actorily up to the latter part o — the — ourth year. During the last — ew months o — that year, there was a sudden reces- sion o — business so that the demand — or glass containers — ell o —
sharply, and — rom the combination o — this and labor trouble at the Anchor Glass plant, there was a marked reduction in the business done there at the close o — that year. It is — ound as a — act that the president and general manager concluded that Anchor Glass could not hope — or any substantial increase o — business within a reasonably brie — period o — time. In the — ourth year, it was directed by resolution that operations at the plant should be suspended inde — initely. This direction was put into e —
ect immediately. Anchor Glass promptly noti — ied Fort Wayne Paper o — its intention not to purchase any cor- rugated paper boxes in the — i — th year o — the contract. The plainti —
, Fort Wayne Paper, brings the case upon its argument to the e —
ect that Anchor Glass, as buyer o — the plainti —
’s product, was required as a matter o — good
aith under the contract to continue purchasing a similar amount o — corrugated paper boxes in the — i — th year as it had in the — irst — our years. De — endant Anchor Glass con- tends that it is under no liability; that the contract was a requirements contract; and, having ceased having any requirements — or plainti —
’s paper boxes, they were under no obligation to take and pay — or any o — them. Analyze both claims and discuss whether either party should prevail upon a court, and i — so, what remedies that court should award the prevailing party. See Fort Wayne Corrugated Paper Co. v. Anchor Hocking Glass Corp., 130 F.2d 471 (3d Cir. 1942). Chapter 17 The Parol Evidence Rule
The parol evidence rule (PER) governs whether evidence o
prior discussions, agreements, or promises can be used to interpret or add to a written contract. At its core, the PER is straight — orward: once parties enter into a — inal written agreement intended to re — lect their contract’s terms, called an integration, the rule excludes evi- dence o — prior or contemporaneous agreements that — all outside the written docu- ment. This excluded evidence, known as parol evidence, is considered extrinsic to the
inalized terms. By en — orcing this rule, courts ensure that the written contract serves as the de — initive expression o — the parties’ intentions. The PER serves important policy goals in contract law. Written contracts reduce misunderstandings by providing a shared, objective record o — the parties’ agreement. By prioritizing the written terms and excluding extrinsic evidence, the PER creates clarity and certainty in contractual relationships that protects the parties — rom later disputes over unrecorded or ambiguous terms. Furthermore, because it takes parol evidence away — rom the jury or — act- — inder, the rule sa — eguards the integrity o — writ- ten agreements against speculative or unreliable claims that could undermine the written contract. Despite its simplicity, the PER is not absolute. Courts must — irst determine whether the parties created an integration, which is a written document representing the — inal expression o — one or more terms o — their agreement. This step is critical because the PER applies only when there is such a — inal writing. Second, courts assess the degree o — integration. A complete integration captures all the terms o — the agreement and excludes any additional evidence. By contrast, a partial integration may leave room — or consistent additional terms — rom outside the written contract. The degree o — integration directly impacts whether parol evidence is admissible. Finally, even i — the court — inds that the writing is a complete integration, cer- tain exceptions may still allow — or the admission o — parol evidence. For example, parol evidence can be admitted to resolve ambiguities, prove — raud or mistake, or address other speci — ic procedural issues. These exceptions ensure that the rule bal- ances the value o — written agreements with — airness in addressing the realities o —
contractual relationships.
481
482 17 • The Parol Evidence Rule
Understanding the PER requires more than knowing the rule itsel
. It demands a grasp o — how courts apply these principles in practice, particularly when resolving dis- putes over integration, consistency, and exceptions. This chapter examines the PER’s general rule, its exceptions, and the practical ways courts use it to resolve disputes. By analyzing cases and real-world scenarios, we will explore how the rule balances two — undamental goals o — contract law: preserving the integrity o — written agreements while addressing — airness and practical realities in en — orcement.
Rules A. Introducing the Parol Evidence Rule The PER controls whether evidence o --- prior discussions, agreements, or promises can be used to interpret or add to a written contract. The rule assumes that once the parties memorialize their contract in a --- inal writing, this written version o --- the contract represents the --- inal version o --- their agreement. All prior discussions, agree- ments, or promises are excluded --- rom the evidence and indeed discharged by the --- inal writing, meaning that they lose their legal e ---
ect. The — amous case Mitchill v. Lath, 247 N.Y. 377, 160 N.E. 646 (1928), provides a basic illustration o — how the PER works in practice. The buyer, Mrs. Mitchill, bought a property — rom the sellers, the Laths. During negotiations, Mr. Lath allegedly made Mrs. Mitchill an oral promise to remove an unsightly “icehouse” — rom a neighboring property which was not a part o — the sale to Mrs. Mitchell. However, the written con- tract memorializing the property sale made no mention o — this oral promise. A — ter the sale, Mr. Lath re — used to remove the icehouse, prompting Mrs. Mitchill to take legal action and sue the Laths — or breach o — contract, based on Mr. Lath’s oral promise to remove the icehouse. Mrs. Mitchill argued that Mr. Lath’s oral promise to remove the icehouse was part o — their agreement and should be en — orced. She claimed that, although the promise was not included in the — inal written contract, the promise was very important in her decision to buy the property, and that en — orcing the promise would not change or contradict the terms o — the — inal written contract because it dealt with an issue outside the land sale itsel — . In legal terms, she argued that the oral promise was a collateral agreement, which should not be excluded by the PER. (As you will learn, a collateral agreement is an exception to the PER). Mr. Lath, on the other hand, contended that the written contract was the complete and — inal record o — their agreement. He argued that i — the oral promise to remove the icehouse was truly part o — their deal, it would have been included in the written document. Allowing Mrs. Mitchill to introduce evidence o — the oral promise, he 17 • The Parol Evidence Rule 483
asserted, would undermine the reliability o
the written contract as the de — initive statement o — their agreement. The court had to decide whether the written contract was intended to be the — inal and exclusive agreement between the parties, or whether it le — t room — or promises made outside the written document. The court ultimately concluded that the PER barred admission o — Mr. Lath’s oral promise to remove the icehouse. To make this determination, the court asked three questions: 1. Was the promise to remove the icehouse a collateral agreement, meaning a totally separate “side deal” between the parties, which was not a part o — the written contract and not covered by its terms? 2. Was the promise consistent with the terms o — the written contract, or did it contradict the terms o — the written contract? 3. Was the promise the type o — term that the parties “would not ordinarily be expected to embody in the writing,” or was it instead “part and parcel” o — their land sale transaction? “An inspection o — this contract,” the court wrote, “shows a — ull and complete agree- ment, setting — orth in detail the obligations o — each party.” I — it were true that the oral promise was made, the court wrote, “it would seem most natural that the inquirer should — ind it in the contract.” Yet the promise was not contained in the contract at all, and there was nothing to suggest any exceptions applied that might permit the court to admit evidence o — the promise into the record. To answer the three questions it posed, the court — irst determined that the alleged promise was not truly collateral; it was closely connected to the subject matter o — the written contract and could not reasonably be considered a separate “side deal.” Sec- ond, the promise contradicted the completeness o — the written agreement, which the court — ound was intended to capture the entirety o — the parties’ obligations. Third, the court — ound that the type o — term at issue — a promise to remove a structure — rom the land — was signi — icant enough that the parties would ordinarily include it in their — inal written agreement i — it were part o — their understanding. These — indings collectively led the court to conclude that admitting evidence o — the oral promise would under- mine the integrity o — the written agreement. At a high level, the Mitchill court’s analysis was similar to the way most courts would assess a PER issue today. The R2d and the UCC both provide versions o — the PER that are, at their core, similar to the rule applied in Mitchill. Both — rameworks emphasize evaluating the completeness and intent o — the written agreement, the rela- tionship o — the oral term to the written agreement, and whether the term is o — the type typically included in a — ormal writing. There are, however, many nuances that you need to understand in order to correctly apply the rule. The rest o — the chapter explains how to thoroughly conduct a PER analysis. We start with a statement o — the general rule be — ore moving to speci — ic details o — the analysis and exceptions to the rule. 484 17 • The Parol Evidence Rule
B. The General Rule The PER establishes a de — ault rule — or how courts should treat prior or contempo- raneous agreements in relation to a written contract. I — a written contract is deemed to be the — inal expression o — the parties’ agreement, called an “integration,” then the PER generally excludes evidence o — any prior written or oral agreements, or contem- poraneous oral agreements discussed during the time the writing was entered, which are not contained in the — inal writing. The PER does not typically apply to contemporaneous written agreements. Written agreements — rom the time o — the writing are likely to be deemed integrated into the
inal writing, assuming they are clearly re — erenced in the writing. The PER also does not apply to — uture modi — ications or later agreements. Rather, the PER only applies to prior agreements, made be — ore the writing was — inalized, or contemporaneous oral agreements, made during the time o — the writing. The common law, as represented by the R2d, provides the general rule as — ollows: A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them. R2d § 213(1). “Discharge” comes — rom the Old French deschargier, meaning “to unload,” as in unloading a wagon or cart. In — act, in Latin, carrus means “wagon,” and dis means “do the opposite,” such that dis-carrus means to unload or disburden. In the legal sense, “discharge” re — ers to releasing, or unloading, one — rom a legal obligation or duty. In this context, the e —
ect o — the PER is that any prior obligations are discharged — they are released — once the PER is triggered by a — inal integration. The UCC announces a very similar version o — the PER, indicating that once the parties have entered a — inal written agreement, this writing cannot be contradicted by evidence o — prior agreements or contemporaneous oral agreements. [t]erms . . . set — orth in a writing intended by the parties as a complete and exclusive statement o — the terms o — the agreement may not be contradicted by evidence o — any prior agreement or o — a contemporaneous oral agreement. NH UCC § 2-202(b). The purpose o — the PER is to protect the integrity o — the written document and reduce uncertainty by preventing disputes over what was said or agreed upon during negotiations. The PER can be quite dramatic in its e —
ect. For example, in Mitchill, the court — ound the parties entered a — inal and complete integration, which the parties intended to encompass all the terms o — their land sale. Absent any exception(s) to the PER, the alleged oral promise by Mr. Lath to remove the icehouse simply could not be admitted into evidence. It did not matter whether Mr. Lath made the promise or not. The evidence could not be considered at all. The Mitchill court’s reasoning aligns with the PER’s general rule: written contracts supersede and discharge all prior agreements, discussions, or promises the parties might have made to each other, in order to ensure the reliability and en — orceability o —
17 • The Parol Evidence Rule 485
the document as the de
initive expression o — the parties’ agreement. This general rule applies broadly but is subject to nuances and exceptions which allow courts to admit extrinsic evidence in limited circumstances. We explore these in the next sections.
C. Determining Whether There Is an Integration The — irst step in addressing any PER scenario requires asking whether there is an integrated agreement, or integration. “Integrated” just means “ — inal.” You can use the terms “integrated” and “ — inal” synonymously. Thus, an integrated agreement is just a
inal writing.
An integrated agreement is a writing or writings constituting a --- inal expres-
sion o --- one or more terms o --- an agreement. R2d § 209(1).
In deciding whether there is an integration, the
ocal point o — the analysis is the intent o — the parties, as seen through an objective lens. Courts ask whether it reason- ably appears that the parties intended a writing to be the — inal expression o — one or more terms o — their agreement. Sometimes this question is easily answered. For example, in Mitchill, the court
ound that the parties had an integration because they entered a written contract — or Mrs. Mitchill to purchase Mr. Lath’s property. The writing delineated the key terms, like the price, the subject matter, and various other terms relating to the sale, such as how the purchase would be — inanced. The writing looked — inal, and so it was. That said, while courts o — ten — ind that a writing is an integration, this is not always the case. For example, in Sierra Diesel Injection Service, Inc. v. Burroughs Corp., 874 F.2d 653 (9th Cir. 1989), below, the court assessed whether a contract — or the sale o — a computer resulted in a — inal integration. The court — ound that it did not. The parties’ negotiations resulted in “at least — our di — — erent kinds o — writings. . . . No one writing stands alone, each must be read with re — erence to another document.” This case illustrates that just because a writing memorializing some terms o — the agree- ment exists, this does not necessarily mean that the parties intended this writing to represent the — inal terms o — their contract. I — the parties never — inalized their contract in any writing, then the PER does not apply. But assuming there is an integration, as is o — ten the case, the next question is: what is the degree o — integration?
D. Determining the Degree o
Integration The next question to consider is the degree o — integration. Is the integration partial, meaning that it captures only some o — the agreed terms, or is it complete, meaning that it includes all the terms the parties intended to agree upon? 486 17 • The Parol Evidence Rule
This distinction is critical. I
an agreement is partially integrated, then the court may admit consistent additional terms. In contrast, i — the agreement is completely integrated, the court will generally exclude any and all prior discussions, promises, or agreements that are not re — lected in the writing. The R2d states the distinction as — ollows: (1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement o — the terms o — the agreement. (2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement. (3) Whether an agreement is completely or partially integrated is to be deter- mined by the court as a question preliminary to determination o — a question o — interpretation or to application o — the parol evidence rule. R2d § 210. To draw the distinction between a complete and a partial integration, courts must evaluate the content o — the written document, the circumstances surrounding its cre- ation, and the nature o — the parol evidence and additional term(s) that a party seeks to admit.
- Partially Integrated Agreements A partially integrated agreement is a written contract that represents the — inal expression o — some, but not all, o — the terms o — the parties’ agreement. In these cases, the PER allows evidence o — consistent additional terms to supplement the written agreement. As long as the extrinsic evidence does not contradict the written terms, it can be admitted. This approach recognizes that the parties may intend a writing to memorialize certain aspects o — their agreement while leaving other consistent terms unwritten. R2d § 216(1) states that evidence o — a “consistent additional term” is admissible, unless the writing was intended as a complete and exclusive statement o — the agree- ment. In other words, so long as the integration is only partial, consistent additional terms are admissible. Evidence o — a consistent additional term is admissible to supplement an inte- grated agreement unless the court — inds that the agreement was completely integrated. R2d § 216(1). UCC § 2-202(b), while it uses di — — erent terminology, similarly indicates that so long as a writing was not “intended . . . as a complete and exclusive statement o — the terms,” then it may be supplemented by “evidence o — consistent additional terms[.]” This analysis will become clearer with the help o — an example. Imagine a written contract — or the sale o — goods that speci — ies the price and the basic delivery terms but does not address the timing o — payment. Imagine that the buyer and seller orally agreed that payment would be due thirty days a — ter delivery, but this oral agreement 17 • The Parol Evidence Rule 487
did not appear in the
inal writing. This — act pattern would trigger the parol evidence rule. The court would ask whether the sales contract was an integration — which it likely was — and then ask the degree o — integration. I — the court — inds the writing was only partially integrated, then the additional term regarding the due date — or payment will be admissible, so long as it is consistent with the — inal writing. What, then, does it mean — or a term to be “consistent”? Consistent terms are gen- erally regarded as are those that are “in reasonable harmony” with the — inal writing or at least do not “negate” any term in the — inal writing. (Ironically, courts are not consistent in de — ining what “consistent” means.) For example, i — one party in a land sale contract alleges that, during negotiations, the parties agreed to a di — — erent price than is re — lected in the — inal written contract, this would not be admissible (absent egregious — acts like — raud) because the oral price term clearly negates the price term in the — inal writing. In contrast, in Mitchill, Mr. Lath’s alleged promise to remove the icehouse did not negate any term in the — inal writing and was in reasonable harmony with the terms o — the land sale.
-
Completely Integrated Agreements A completely integrated agreement is a written document that represents the com- plete and exclusive statement o — the terms o — the parties’ contract. When a court deter- mines that a contract is completely integrated, the PER excludes all prior written and oral agreements, terms, or promises, regardless o — whether they contradict the — inal writing or not. I — an integration is complete, then the presumption is that all terms related to the agreement are contained within the document. No other evidence can be included, so long as the evidence relates to the same general agreement as the — inal written integra- tion. R2d § 213(2) states this rule as — ollows. A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope. R2d § 213(2). UCC § 2-202(b), similarly indicates that i — a writing is deemed the “complete and exclusive statement o — the terms o — the agreement,” then even “evidence o — consistent additional terms” is excluded. Completely integrated agreements re — lect the PER’s core purpose o — ensuring that written contracts provide a reliable and en — orceable record o — the parties’ intentions. By excluding essentially all extrinsic evidence, courts uphold the integrity o — the writ- ing and promote certainty in contractual relationships.
-
Distinguishing Complete
rom Partial Integrations How, then, do courts decide whether a writing is a partial integration or a complete integration? There are numerous approaches, and jurisdictions adopt di — — erent rules, with some being more — avorable to admitting parol evidence than others. Here we 488 17 • The Parol Evidence Rule
provide a generalizable approach that aligns with the R2d’s. But in practice, be sure to look up case law in the relevant jurisdiction. Under the R2d, a written contract is partially integrated i — it reasonably appears that the parties intended it to be the — inal expression o — some, but not all, o — the terms agreed upon. These agreements o — ten leave certain terms unstated or incomplete, re — lecting the parties’ intent to address speci — ic aspects o — their agreement in writ- ing while reserving other matters — or additional evidence. In contrast, a contract is completely integrated i — it reasonably appears that the parties intended the written contract to be the exclusive statement o — all the terms. In applying this rule, courts look at the language o — the contract itsel — . They look at the length o — the contract, and they look — or phrases indicating — inality and com- pleteness. Courts also ask whether the contract addresses key terms o — the agree- ment in detail, such as price, payment, delivery, or other terms like warranties. I — so, this is more likely to be viewed as completely integrated. In contrast, i — a document appears incomplete, contains “blanks” to be — illed in, or omits terms that are com- monly included in similar agreements, this suggests only a partial integration. Most courts look — or the presence, or absence, o — a merger clause. A merger clause, also called an “integration clause,” explicitly states that it is intention o — the parties — or the contract to be completely integrated. Here is an example o — a typical integration clause: This Agreement constitutes the complete, exclusive, and entire agreement between A and B regarding the Subject; all prior communications verbal or written between A and B shall be o — no — urther e —
ect or evidentiary value. Such language is o — ten dispositive. Courts usually — ind this language shows that the parties intended the agreement to be completely integrated. That said, courts do not always treat a merger clause as dispositive. Courts have — ound that agreements lack- ing such language were completely integrated and that agreements possessing such language were not. You will see an example o — this in Gianni v. R. Russell & Co., 281 Pa. 320 (1924), below, where the court — inds that an agreement was completed integrated even though it lacked a merger clause. The R2d indicates two very speci — ic reasons that a court might — ind a writing to be only partially integrated, such that consistent additional terms can be admitted into evidence. An agreement is not completely integrated i — the writing omits a consistent additional agreed term which is (a) agreed to — or separate consideration, or (b) such a term as in the circumstances might naturally be omitted — rom the writing. R2d § 216(2). Under this approach, which is adopted by some courts, deciding whether a writ- ing is only partially integrated requires examining the parol evidence term itsel — and asking whether this term was either (1) “agreed to — or separate consideration,” or (2) a term that “might naturally be omitted — rom the writing.” 17 • The Parol Evidence Rule 489
A parol evidence term is agreed to --- or separate consideration i --- the parties agreed that one o --- them would take on an additional obligation in exchange --- or separate con- sideration, above and beyond any consideration encompassed in the --- inal writing. I ---
so, evidence o
this term can be admitted, despite the PER. For example, in Mitchill, imagine that Mrs. Mitchill and Mr. Lath agreed that Mr. Lath would demolish the icehouse in exchange — or a separate agreed sum o — $3000, above and beyond the pur- chase price — or the property? I — so, the — inal written sales contract would not have been integrated with respect to this term. The agreement to remove the icehouse — or $3000 would have been admissible; a jury could at least consider this evidence. Identi — ying “naturally omitted terms” is trickier. This generally requires compar- ing the asserted parol evidence term to the terms contained in the — inal writing and considering the overall context and circumstances o — the parties’ dealings, in order decide whether there was some reason the term might “naturally have been omitted”
rom the — inal writing. A classic example o — this type o — analysis can be — ound in Gianni v. R. Russell & Co., below. Frank Gianni rented a room in R. Russell & Co.’s o —
ice building, — rom where he operated a store selling tobacco, — ruit, candy, and so — t drinks. A — ter some time, the parties entered into a written lease agreement, — or a three-year term, which contained the — ollowing provision:
Lessee should use the premises only --- or the sale o ---
ruit, candy, soda water, etc. It is expressly understood that the tenant is not allowed to sell tobacco in any
orm, under penalty o — instant — or — eiture o — this lease.
Under this lease agreement, Gianni agreed to pay rent, and he also gave up his right to sell tobacco in the building, in exchange — or Russell’s continued permission to let him lease the o —
ice space. Shortly a — ter signing, the lessor, Russell, rented another space in his building to a drug store. The drug store also sold soda. Gianni protested that his contract gave him the exclusive right to sell soda in the o —
ice building. He claimed Russell had promised exclusivity to him orally be — ore signing and that his agreement not to sell tobacco was part o — the consideration — or this exclusive right. But the — inal lease agreement was silent regarding this provision. The court had to decide whether the parties intended the written lease contract to be the exclusive statement o — their agreement — in which case, Gianni’s evidence o — a prior oral promise o — exclusivity would be excluded and discharged — or whether the writ- ing was susceptible to additional consistent terms. In other words, the court was e —
ec- tively asking whether the agreement was a complete or a partial integration. The court — ound that Gianni and Russell intended their writing to be the complete and exclusive list o — terms. The reason was two- — old. First, even though the writ- ten agreement lacked an integration clause, the agreement otherwise appeared quite comprehensive on its — ace. Second, a comparison o — the written terms to the oral term that Gianni alleged the parties agreed to suggested that the parties “would naturally 490 17 • The Parol Evidence Rule
and normally” have included the oral term in the
inal writing. Indeed, “the written contract stipulated — or the very sort o — thing which plainti —
claims has no place in it. It covers the use to which the storeroom was to be put by plainti —
and what he was and what he was not to sell therein.” I — the parties had orally agreed Gianni would have the exclusive right to sell soda in the building, this would have been in the — inal writing. “Nothing can be imagined more pertinent to these provisions[.]”
E. Identi
ying Exceptions The — inal step is to ask whether there are exceptions to the PER which might per- mit admitting parol evidence. While the PER generally excludes evidence o — prior or contemporaneous agreements that contradict or vary the terms o — a written contract, exceptions allow extrinsic evidence to be admitted under speci — ic circumstances. These exceptions ensure that courts can address — airness and practical realities, thus prevent- ing the rule — rom being applied rigidly in ways that would produce unjust outcomes.
- Fraud, Duress, or Mistake The PER does not bar evidence that challenges the validity o — the written contract itsel — . When a party alleges — raud, duress, or mistake, the — ocus shi — ts — rom en — orc- ing the written terms to determining whether the contract should be en — orced at all. These exceptions ensure that the rule is not applied rigidly in ways that allow un — air or deceptive practices to prevail. Evidence o —
raud is admissible to show that one party was induced into the con- tract through intentional misrepresentation or deceit. The PER cannot be used as a shield — or dishonest conduct. Fraud can take various — orms, including — raudulent inducement (when a party is tricked into entering the agreement based on — alse state- ments or promises) and — raudulent concealment (when a party deliberately withholds material in — ormation that a —
ects the agreement). For instance, in a contract — or the sale o — a home, the seller verbally assures the buyer that the basement is — ree o — water damage, but the buyer later discovers signi — icant — looding issues. Even i — the written contract includes an “as is” clause, the buyer may introduce evidence o — the seller’s statements to show — raud. Courts will consider whether the misrepresentation was material and whether it induced the buyer to enter the agreement. Evidence o — duress is admissible to demonstrate that a party was coerced into sign- ing the contract under unlaw — ul or un — air pressure. Duress undermines the volun- tariness o — consent, a — undamental principle o — contract — ormation. For example, a supplier threatens to stop all shipments to a retailer unless the retailer immediately signs a long-term exclusivity agreement. I — the retailer claims they signed under eco- nomic duress, they may introduce evidence o — the threat to challenge the validity o —
the contract. Courts will evaluate whether the supplier’s conduct le
t the retailer with no reasonable alternative. 17 • The Parol Evidence Rule 491
Evidence o
mistake is admissible to correct errors in the contract that do not re — lect the parties’ true intent. Mistakes can be unilateral (made by one party) or mutual (shared by both parties). Mutual mistakes are more likely to justi — y admitting extrinsic evidence, as they reveal a shared misunderstanding. Consider a situation where two parties agree on the sale o — one hundred shares o — stock — or $10 per share, but the written contract mistakenly states a total price o —
$10,000 instead o
$1,000. Evidence o — the mistake is admissible to correct the error and ensure that the written contract aligns with the parties’ intended terms. These exceptions re — lect the principle that contracts must be both — air and en — orce- able. The — raud exception prevents parties — rom bene — iting — rom deceptive practices. The duress exception ensures that contracts are entered into voluntarily, preserving the autonomy o — the parties. The mistake exception allows courts to correct unin- tended errors that would otherwise lead to unjust outcomes. Unlike other exceptions to the PER, these — ocus on the — ormation o — the contract itsel — rather than its interpretation. Evidence admitted under these exceptions does not supplement or contradict the written terms but instead calls into question the validity o — the contract as a whole. The — raud, duress, and mistake exceptions highlight the PER’s balance between textual certainty and — airness. While the rule prioritizes the written contract, these exceptions recognize that en — orcing a — lawed agreement undermines the principles o — justice and equitable outcomes. Courts use these exceptions to ensure that written contracts re — lect genuine assent and honest dealings.
- Ambiguity The ambiguity exception to the PER allows extrinsic evidence to clari — y the mean- ing o — ambiguous language in a written contract. Ambiguity arises when a term or provision is susceptible to more than one reasonable interpretation. In these cases, courts admit evidence — rom preliminary negotiations or oral agreements to uncover the parties’ intent. Some courts conduct a preliminary review o — parol evidence to determine whether it reveals a latent ambiguity, which is not obvious — rom the — ace o — the contract. This approach — ocuses on whether the extrinsic evidence shows that the written terms can reasonably bear more than one interpretation. I — so, the evidence is admitted to clari — y the ambiguity. For example, in Paci — ic Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33 (1968), the court examined parol evidence to determine whether the term “indemni — y” re — erred to indemni — ication against damages caused by a third party or by the contracting party. The court admitted the evidence a — ter — inding the term was susceptible to both interpretations, illustrating how extrinsic evidence can reveal ambiguities not apparent on the — ace o — the contract. Unlike course o — per — ormance, course o — dealing, and usage o — trade — tools — ocused on the behavior o — the parties or industry norms — parol evidence introduces prior 492 17 • The Parol Evidence Rule
statements or agreements as a lens
or interpreting written terms. This distinction highlights the unique role parol evidence plays in uncovering latent ambiguity. While parol evidence can reveal a latent ambiguity, courts are cautious not to use it to — abricate ambiguity in an otherwise clear contract. Evidence is admissible only i —
it genuinely demonstrates that the written terms are reasonably susceptible to alter- native meanings. I — a contract states payment is due “within thirty days o — delivery,” parol evidence cannot be introduced to argue that “thirty days” means “thirty busi- ness days,” as the term is clear on its — ace and not susceptible to a reasonable alterna- tive interpretation. The ambiguity exception balances textual certainty and interpretive — lexibility. By allowing parol evidence to be used to uncover latent ambiguities, courts respect the parties’ intent while ensuring contracts are not en — orced based on rigid, incomplete interpretations. This exception acknowledges the limits o — language and the need — or context in understanding contractual terms.
- Collateral Agreements Many courts recognize a separate exception to the PER — or so-called “collateral agreements.” A collateral agreement is a separate agreement that is related to but dis- tinct — rom the written contract. A collateral agreement is admissible only i — it satis — ies all three o — the — ollowing requirements: (1) The agreement is independent and separate — rom the written contract; (2) The agreement is consistent with the written terms and does not con — lict with them; and (3) The agreement is o — a type that would not naturally be included in the writ- ten contract. This conjunctive requirement ensures that the PER does not un — airly exclude terms that the parties intended to remain outside the primary written agreement, while maintaining the integrity o —
ully integrated contracts. Suppose a written contract — or the sale o — a house includes detailed terms about price, payment schedules, and property disclosures but makes no mention o — the seller’s agreement to leave a particular piece o —
urniture. The buyer claims that dur- ing negotiations, the seller promised to leave a — amily heirloom piano as part o — the deal. I — this promise does not con — lict with the terms o — the written contract and is independent o — the house sale terms, it may quali — y as a collateral agreement. A court would evaluate whether such a promise meets all three requirements: independence, consistency, and whether it would naturally have been included in the written contract. We have already seen this rule at play to some extent. Courts adopting the R2d’s approach per — orm a very similar analysis when determining whether an agreement is only partially integrated. Recall that R2d § 216(2)(b) provides that parol evidence is admissible i — it is either (1) supported by “separate consideration,” or (2) “such a term 17 • The Parol Evidence Rule 493
as in the circumstances might naturally be omitted
rom the writing.” This analysis is quite similar to the collateral agreement exception. However, because a collateral agreement is an exception to the PER, this means courts may consider evidence o — a collateral agreement even with respect to completely integrated written agreements. For example, in Mitchill, the court conceded that, even i — the parties’ purchase agreement was a complete and — inal integration, Mr. Lath’s promise to remove the icehouse would not have been excluded by the PER i — it quali — ied as a collateral agree- ment. Mrs. Mitchill argued that Mr. Lath’s oral promise to remove the icehouse — rom neighboring land was a separate agreement, collateral to the written contract — or the sale o — the property. The court, however, rejected this argument, reasoning that the alleged promise was so closely related to the property sale that it would naturally have been included in the written agreement i — it had been intended as part o — the deal. The court’s decision underscores the importance o — the third criterion: collateral agreements must concern terms that the written contract would not be expected to address. The application o — this exception is — urther illustrated in Lee v. Joseph E. Seagram & Sons, Inc., 413 F. Supp. 693 (S.D.N.Y. 1976). In this case, the plainti —
s wanted to evidence an oral agreement under which Seagram promised to relocate them to a new liquor distributorship a — ter the sale o — their current business. Although the written contract detailed the sale’s terms, the relocation promise was — ound to be independent and separate — rom the written agreement. The court determined that the oral promise did not contradict the sale’s written terms and concerned a matter — relocation — that would not naturally have been included in the contract — or the sale o — assets. This case demonstrates how the exception can preserve oral agreements that complement but do not alter or contradict a written contract. In contrast, Miller v. Hekimian Laboratories, Inc., 257 F. Supp. 2d 506 (N.D.N.Y. 2003), provides an example o — a court rejecting a claim that an agreement was col- lateral. The plainti —
argued that a pre-employment document outlining commis- sions was a collateral agreement separate — rom his employment contract. However, the court — ound that the alleged agreement con — licted with the written employment contract, which speci — ically gave discretion over incentive payments to the employer. Additionally, commission terms were considered central to the employment relation- ship and thus naturally included in the written contract. The court’s re — usal to admit the alleged collateral agreement highlights how closely related terms and integration clauses can block such claims. The collateral agreements exception balances the integrity o — written contracts with the parties’ — reedom to structure their agreements as they see — it. By allowing evidence o — separate agreements that meet all three criteria, courts preserve the — lex- ibility needed to address the realities o — complex transactions. At the same time, the requirement that collateral agreements satis — y all three elements prevents misuse o — the exception to undermine — ully integrated contracts. These cases illustrate the nuanced approach courts take to ensure — airness while upholding the written word. 494 17 • The Parol Evidence Rule
- Conditions Precedent The PER allows extrinsic evidence to prove the existence o — a condition prece- dent — a — act or event that must occur be — ore a contract, or a particular contractual promise, takes e —
ect. You will learn more about conditions precedent in Chapter 19. For now, it is su —
icient to understand that conditions are not promises; rather, condi- tions are events whose occurrence (or non-occurrence) turns a contractual duty on or o —
. I — a contractual duty is limited by a condition precedent, then the duty is not activated unless the condition is met. Conditions are everywhere in contract law. For example, a job o —
er may be contin- gent upon the candidate’s passing a drug test. A real estate purchase agreement may depend on the buyer’s obtaining — inancing. Evidence o — such conditions are admis- sible under the PER, so long as the condition does not alter the written terms but merely clari — ies the prerequisites — or the contract’s en — orceability. For example, consider a signed contract — or the sale o — a commercial building. Dur- ing negotiations, the buyer and seller agreed orally that the contract would not take e —
ect unless the buyer — irst obtained zoning approval — or their intended use o — the property. The written contract is silent on this condition. I — the buyer — ails to obtain zoning approval and re — uses to complete the sale, the buyer will likely seek to intro- duce evidence o — the oral agreement to show that the contract never became binding upon the buyer, since a condition was not met. This condition does not contradict the written terms; instead, it clari — ies that the agreement was contingent on the buyer’s obtaining zoning approval. I — the seller tries to exclude evidence o — the condition under the PER, a court would likely admit this evidence under the exception — or conditions precedent. This excep- tion is important. Without it, parties might be bound to promises or entire contracts that they never intended to be binding, merely because they — ailed to insert the condi- tion term in their — inal written agreement. R2d § 217 addresses this exception, providing that evidence o — a condition prece dent to the e —
ectiveness o — a written agreement is generally admissible despite the PER. Where the parties to a written agreement agree orally that per — ormance o — the agree- ment is subject to the occurrence o — a stated condition, the agreement is not integrated with respect to the oral condition. R2d § 217. The condition precedent exception may seem esoteric, but it can be broadly appli- cable. A party wishing to admit parol evidence can employ this exception strategically. Returning once again to the Mitchill case, what i — Mrs. Mitchill had argued that the removal o — the icehouse was a condition precedent to her per — ormance under the property sale agreement? I — so, the court might have admitted evidence o — the oral agreement, assuming it did not directly con — lict with the written terms. But in the actual case, Mrs. Mitchill used a di — — erent strategy. She tried to — rame the alleged ice house promise as a collateral agreement, which was totally separate — rom the land sale, 17 • The Parol Evidence Rule 495
rather than a prerequisite
or the sale. Her strategy was unsuccess — ul, and the court excluded the evidence under the PER. In sum, the condition precedent exception ensures that contracts are not en — orced when the parties intended them to depend on un — ul — illed conditions. This exception respects the intent o — the parties while preserving the integrity o — written agreements by — ocusing only on prerequisites to en — orceability, not on altering the substance o —
the written terms.
F. Re
lections on the Parol Evidence Rule The PER embodies a — undamental tension in contract law: preserving the integrity o — written agreements while accommodating the realities o — negotiation, per — ormance, and en — orcement. By prioritizing written contracts as the de — initive expression o — the parties’ intent, the PER promotes certainty, predictability, and e —
iciency. These qualities reduce transaction costs and rein — orce reliance, enabling parties to negotiate and — inal- ize agreements with the assurance that their written terms will govern — uture disputes. At the same time, the PER recognizes that written agreements are not in — allible. Contracting parties may omit key terms, — ail to address ambiguities, or succumb to
raud or coercion during negotiations. The rule’s care — ully delineated exceptions — such as — raud, ambiguity, collateral agreements, and conditions precedent — ensure that courts can address these imper — ections without undermining the general primacy o — written agreements. By admitting extrinsic evidence in narrowly de — ined circum- stances, the PER balances textual certainty with contextual — airness. This balance re — lects broader themes o — contract law. By ensuring that a contract’s terms are en — orced as intended, the PER respects the parties’ choice to memorialize their agreement in writing, and, in doing so, supports autonomy. Simultaneously, the rule protects reliance by allowing courts to intervene when written contracts — ail to re — lect the parties’ true commitments due to — raud, mistake, or ambiguity. The result- ing — ramework not only strengthens the en — orceability o — contracts but also mitigates the risk o — injustice in speci — ic cases. The — lexibility o — the PER does not weaken its principles but enhances its e —
ective- ness. For example, the — raud exception prevents dishonest parties — rom exploiting the PER to en — orce agreements procured through deception, thereby maintaining — air- ness. Similarly, the ambiguity exception ensures that courts can resolve disputes by interpreting terms in ways consistent with the parties’ shared intent. These exceptions highlight how the PER operates not as an absolute barrier but as a tool — or achieving both reliability and equity in contract en — orcement. The Mitchill case illustrates this dynamic. By excluding evidence o — the alleged promise to remove the icehouse, the court rein — orced the primacy o — the written agreement and ensured that the contract’s terms were de — initive and en — orceable. However, the court’s reasoning also acknowledged the need — or care — ul criteria, such as whether the oral promise was collateral or naturally included in the writing, to 496 17 • The Parol Evidence Rule
ensure
airness in its application. This dual — ocus underscores how the PER provides a structured — ramework — or evaluating extrinsic evidence that preserves the integrity o — written contracts while accounting — or the complexities o — real-world agreements. In the end, the PER is more than a rule o — exclusion; it is a re — lection o — contract law’s broader commitment to balancing e —
iciency, reliance, and — airness. By har- monizing the written word with contextual realities, it enables courts to uphold the parties’ intentions while sa — eguarding the principles o — justice and predictability that underlie all contractual relationships.
Cases Reading Gianni v. R. Russell & Co. Gianni demonstrates the objective approach to contract interpretation. Under the strict --- orm o --- the objective approach, the express terms in the written agreement (i.e., intrinsic evidence) take absolute priority over extrinsic evidence. When the written agreement appears to be “a contract complete within itsel --- ,” the presumption is even stronger: the court will not admit extrinsic evidence that is within the scope o --- the written agreement.
Gianni v. R. Russell & Co.
281 Pa. 320 (1924) SCHAFFER, J.
The Plainti ---
had been a tenant o — a room in an o —
ice building in Pittsburgh wherein he conducted a store, selling tobacco, — ruit, candy and so — t drinks. De — endant acquired the entire property in which the storeroom was located, and its agent negotiated with plainti —
or a — urther leasing o — the room A lease — or three years was signed. It con- tained a provision that the lessee should “use the premises only — or the sale o —
ruit, candy, soda water,” etc., with the — urther stipulation that “it is expressly understood that the tenant is not allowed to sell tobacco in any — orm, under penalty o — instant — or-
eiture o — this lease.” The document was prepared — ollowing a discussion about renting the room between the parties and a — ter an agreement to lease had been reached. It was signed a — ter it had been le — t in plainti —
’s hands and admittedly had been read over to him by two persons, one o — whom was his daughter. Plainti —
sets up that in the course o — his dealings with de — endant’s agent it was agreed that, in consideration o — his promises not to sell tobacco and to pay an increased rent, and — or entering into the agreement as a whole, he should have the exclusive right to sell so — t drinks in the building. No such stipulation is contained in the written lease. Shortly a — ter it was signed de — endant demised the adjoining room in the building to a drug company without restricting the latter’s right to sell soda water and so — t drinks. 17 • The Parol Evidence Rule 497
Alleging that this was in violation o
the contract which de — endant had made with him, and that the sale o — these beverages by the drug company had greatly reduced his receipts and pro — its, plainti —
brought this action — or damages — or breach o — the alleged oral contract, and was permitted to recover. De — endant has appealed. Plainti —
’s evidence was to the e —
ect that the oral agreement had been made at least two days, possibly longer, be — ore the signing o — the instrument, and that it was repeated at the time he signed; that, relying upon it, he executed the lease. Plainti —
called one witness who said he heard de
endant’s agent say to plainti —
at a time admit- tedly several days be — ore the execution o — the lease that he would have the exclusive right to sell soda water and so — t drinks, to which the latter replied i — that was the case he accepted the tenancy. Plainti —
produced no witness who was present when the con- tract was executed to corroborate his statement as to what then occurred. De — endant’s agent denied that any such agreement was made, either preliminary to or at the time o — the execution o — the lease. Appellee’s counsel argues this is not a case in which an endeavor is being made to re — orm a written instrument because o — something omitted as a result o —
raud, acci- dent, or mistake, but is one involving the breach o — an independent oral agreement which does not belong in the writing at all and is not germane to its provisions. We are unable to reach this conclusion. Where parties, without any — raud or mistake, have deliberately put their engage- ments in writing, the law declares the writing to be not only the best, but the only evidence o — their agreement. “All preliminary negotiations, conversations and verbal agreements are merged in and superseded by the subsequent written contract . . . and unless — raud, accident, or mistake be averred, the writing constitutes the agreement between the parties, and its terms cannot be added to nor subtracted — rom by parol evidence.” The writing must be the entire contract between the parties i — parol evidence is to be excluded, and to determine whether it is or not the writing will be looked at, and i — it appears to be a contract complete within itsel — , “couched in such terms as import a complete legal obligation without any uncertainty as to the object or extent o — the engagement, it is conclusively presumed that the whole engagement o — the parties, and the extent and manner o — their undertaking, were reduced to writing.” When does the oral agreement come within the — ield embraced by the written one? This can be answered by comparing the two, and determining whether parties, situated as were the ones to the contract, would naturally and normally include the one in the other i — it were made. I — they relate to the same subject-matter, and are so interrelated that both would be executed at the same time and in the same contract, the scope o — the subsidiary agreement must be taken to be covered by the writing. This question must be determined by the court. In the case at bar the written contract stipulated — or the very sort o — thing which plainti —
claims has no place in it. It covers the use to which the storeroom was to be 498 17 • The Parol Evidence Rule
put by plainti
and what he was and what he was not to sell therein. He was “to use the premises only — or the sale o —
ruit, candy, soda water,” etc., and was not “allowed to sell tobacco in any — orm.” Plainti —
claims his agreement not to sell tobacco was part o — the consideration — or the exclusive right to sell so — t drinks. Since his promise to re — rain was included in the writing, it would be the natural thing to have included the promise o — exclusive rights. Nothing can be imagined more pertinent to these provisions which were included than the one appellee avers. In cases o — this kind, where the cause o — action rests entirely on an alleged oral understanding concerning a subject which is dealt with in a written contract it is presumed that the writing was intended to set — orth the entire agreement as to that particular subject. “In deciding upon this intent [as to whether a certain subject was intended to be embodied by the writing], the chie — and most satis — actory index . . . is — ound in the circumstance whether or not the particular element o — the alleged extrinsic negotiation is dealt with at all in the writing. I — it is mentioned, covered, or dealt with in the writing, then presumably the writing was meant to represent all o —
the transaction on that element, i
it is not, then probably the writing was not intended to embody that element o — the negotiation.” As the written lease is the complete contract o — the parties, and since it embraces the
ield o — the alleged oral contract, evidence o — the latter is inadmissible under the parol evidence rule. “The [parol evidence] rule also denies validity to a subsidiary agreement within [the] scope [o — the written contract] i — sued on as a separate contract, although except — or [that rule], the agreement — ul — ills all the requisites o — valid contract.” There are, o — course, certain exceptions to the parol evidence rule, but this case does not — all within any o — them. Plainti —
expressly rejects any idea o —
raud, accident, or mistake, and they are the — oundation upon which any basis — or admitting parol evi- dence to set up an entirely separate agreement within the scope o — a written contract must be built. The evidence must be such as would cause a chancellor to re — orm the instrument, and that would be done only — or these reasons and this holds true where this essentially equitable relie — is being given, in our Pennsylvania — ashion, through common law — orms. We have stated on several occasions recently that we propose to stand — or the integ- rity o — written contracts. We reiterate our position in this regard. The judgment o — the court below is reversed, and is here entered — or de — endant.
Re --- lection Gianni makes the parol evidence rule seem quite black and white. But as you have probably already realized, the law is usually some shade o --- gray. A --- ter all, it is hard to cra --- t a clear, strict rule that produces the correct result in all circumstances. Broad, vague standards give judges the discretion to provide a --- air result in the instant case. But broad, vague standards create problems, too, especially in commercial law --- ields, where people are planning business decisions. It is hard to know in advance how a
17 • The Parol Evidence Rule 499
random judge will rule under a broad standard. This uncertainty creates risk. Risk creates cost. Cost kills deals, since no good businessperson would engage in a deal that has a negative expected value. When dealing with a commercial law subject such as contract law, there — ore, courts must maintain the delicate balance between certainty in advance (so people can plan accordingly) and — airness a — ter the — act (so the law does not become a tool to perpetuate injustice). You will next read how the R2d and the UCC complicate the rule. Be — ore moving on, pause and think about whether you understood the Gianni opinion. Was the rule stated clearly? Would you be able to counsel a client based on the parol evidence rule presented in Gianni? I — you disagreed with the Gianni opinion — or — ound it too vague to apply with con — idence — make a note o — that. It may suggest a pre — erence — or objec- tive standards, bright-line tests, and clearer doctrinal rules. Next, speculate on the reason the bright-line rule in Gianni could result in un — air decisions. What kind o — circumstances might make the rule in Gianni un — air? Does the bright-line, objective approach articulated in Gianni con — lict with deeper princi ples o — contract law? One way to explore these questions is to imagine how the Gianni court itsel — might have come to a di — — erent conclusion i — the — acts were di — — erent. Why did the court mention that the written agreement in Gianni was read over to him by two people? I — the agreement had not been read to him by anyone, would that change your opinion o — whether Gianni should be bound by it? Do you think he could have read it himsel — ? Does that change your opinion o — whether he should be bound by it? I — the agreement did not prohibit Gianni — rom selling tobacco, would that make his argument that he was entitled to exclusive rights to sell so — t drinks stronger or weaker? A — ter you read the next set o — rules and cases, you will see that the parol evidence rule is trying to balance objectivity and certainty on the one hand and subjective intent and — airness on the other. Which approach, objective or subjective, is the right one?
Discussion 1. What kind o --- intrinsic evidence would make a written agreement appear to be “a contract complete within itsel --- ”?
-
Can extrinsic evidence be used to show that a written agreement is complete within itsel — ?
-
Can extrinsic evidence be used to show that a written agreement is not complete within itsel — , where the written agreement itsel — taken alone appears to be complete?
-
How does a court determine the scope o
a written agreement in general? How does the Gianni court speci — ically determine that Gianni’s purported consideration (the exclusive right to sell so — t drinks) is within the scope o — this agreement allow- ing him to sell so — t drinks and — orbidding him — rom selling tobacco? 500 17 • The Parol Evidence Rule
-
What is the purpose o
, or reasoning — or, re — using to consider extrinsic evidence about preliminary negotiations where the intrinsic evidence appears to be the complete and exclusive statement o — the parties’ agreement?
Reading UAW-GM Human Resource Center v. KSL Recreation Corp. The next case involves a lawsuit about whether a hotel promised to sta —
an event using only union employees. The hotel’s client, United Auto Workers-General Motors (UAW), is a labor union, so it may make sense why it wanted to vote with its dollars by hiring union sta —
or its event. But the legal question is whether UAW is entitled to present evidence that the parties agreed to sta —
the event with union workers, even though the written agreement does not men- tion this provision. You should read this case — or three reasons. First, this case illustrates a criti- cal concept under the parol evidence rule: a merger clause. Also known as an integration clause, the merger clause is a written term in the agreement that e —
ectively says (to put this in the Gianni court’s terms) that the written agree- ment is a contract complete within itsel — . A — ter reading this case, you should be able to identi — y the merger clause in an agreement — and you might be able to begin analyzing whether a potential merger clause is e —
ective at declaring that the written agreement is a complete and exclusive statement o — the parties’ agreement. Second, the majority takes an approach similar to the Gianni court’s by re — us- ing to admit extrinsic evidence o — preliminary negotiations where the written agreement itsel — seemed to be complete within itsel — . The UAW court provides some additional reasoning and support — or this objective approach to contract interpretation. Think about why Gianni, which did not have a merger clause, arrived at the same result (the exclusion o — extrinsic evidence o — preliminary negations) as UAW. Third, the dissent in UAW provides your — irst introduction to the reasons why the objective standard can lead to un — air results. The dissent provides reasoning in support o — a subjective approach that would more readily admit extrinsic evidence. Take special note o — the dissent’s reasoning and see whether the case that — ollows UAW, Sierra Diesel, applies the same logic — or its selection o — the subjective approach. Although the — ollowing cases are edited, they are nevertheless lengthy. That is because your humble author — elt that Pro — essors Williston and Corbin explain competing rationales — or objective and subjective approaches to the parol evidence rule better than he could, so he included many — ull paragraph quotations o — their law treatises. 17 • The Parol Evidence Rule 501
UAW-GM Human Resource Center v. KSL
Recreation Corp.
228 Mich. App. 498 (1998) MARKMAN, J. De --- endants appeal as o --- right a trial court order granting summary disposition to plainti ---
on its claims o — breach o — contract, conversion, and — raud. De — endants also appeal as o — right the trial court’s denial o — their motion — or summary disposition. We reverse and remand — or determination o — damages pursuant to the liquidated damages
ormula set — orth in the contract. Facts In December 1993, plainti —
entered into a contract with Carol Management Cor- poration (CMC) — or the use o — its property, Doral Resort and Country Club, — or a convention scheduled in October 1994. The “letter o — agreement” included a merger clause that stated that such agreement constituted “a merger o — all proposals, negotia- tions and representations with re — erence to the subject matter and provisions.” The let- ter o — agreement did not contain any provision requiring that Doral Resort employees be union-represented. However, plainti —
contends in its appellate brie — that it signed the letter o — agreement in reliance on an “independent, collateral promise to provide [plainti —
] with a union-represented hotel.” Plainti —
provided the a —
idavits o — Herschel Nix, plainti —
’s agent, and Barbara Roush, CMC’s agent, who negotiated the contract. In his a —
idavit, Nix states that during the contract negotiation he and Roush discussed plainti —
’s requirement that the hotel employees be union-represented and that Roush agreed to this requirement. In her a —
idavit, Roush states that “prior to and at the time” the contract at issue was negotiated she “was well aware” o — plainti —
’s requirement that the hotel employees be union-represented and that “that there is no doubt that I agreed on behal — o — the Doral Resort to provide a union hotel.” The letter o — agreement also included a liquidated damages clause in the event plainti —
canceled the reservation “ — or any reason other than the — ollowing: Acts o — God, Government Regulation, Disaster, Civil Disorders or other emergencies making it illegal to hold the meeting/convention.” Later in December 1993, the hotel was sold to de — endants, who subsequently replaced the resort’s union employees with a nonunionized work — orce. In June 1994, when plainti —
learned that the hotel no longer had union employees, it canceled the contract and demanded a re — und o — its down payment. De — endants re — used to re — und the down payment, retaining it as a portion o — the liquidated damages allegedly owed to them pursuant to the contract. [Facts regarding the procedural history and standard o — review — or summary judg- ment are omitted.] Merger Clause De — endants claim that the trial court erred in granting plainti —
’s motion — or summary disposition and in denying de — endant’s motion — or summary disposition. 502 17 • The Parol Evidence Rule
Regarding the breach o
contract count, they speci — ically contend that parol evidence o — a separate agreement providing that the hotel would have union employees at the time o — the convention was inadmissible because the letter o — agreement included an express merger clause. We begin by reiterating the basic rules regarding contract interpretation. “The pri- mary goal in the construction or interpretation o — any contract is to honor the intent o — the parties.” “We must look — or the intent o — the parties in the words used in the instrument. This court does not have the right to make a di — — erent contract — or the parties or to look to extrinsic testimony to determine their intent when the words used by them are clear and unambiguous and have a de — inite meaning.” In Port Huron Ed Ass’n v Port Huron Area School Dist., 452 Mich. 309 (1996), the Court stated: The initial question whether contract language is ambiguous is a question o —
law. I --- the contract language is clear and unambiguous, its meaning is a ques-
tion o --- law. Where the contract language is unclear or susceptible to multiple
meanings, interpretation becomes a question o ---
act. A contract is ambiguous i — “its words may reasonably be understood in di — — erent ways.” Courts are not to create ambiguity where none exists. “Contractual language is construed according to its plain and ordinary meaning, and technical or constrained constructions are to be avoided.” I — the meaning o — an agreement is ambiguous or unclear, the trier o —
act is to determine the intent o — the parties. The parol evidence rule may be summarized as — ollows: “[p]arol evidence o — con- tract negotiations, or o — prior or contemporaneous agreements that contradict or vary the written contract, is not admissible to vary the terms o — a contract which is clear and unambiguous.” This rule recognizes that in “[b]ack o — nearly every written instru- ment lies a parol agreement, merged therein.” “The practical justi — ication — or the rule lies in the stability that it gives to written contracts; — or otherwise either party might avoid his obligation by testi — ying that a contemporaneous oral agreement released him — rom the duties that he had simulta neously assumed in writing.” 4 Williston, Contracts, § 631. In other words, the parol evidence rule addresses the — act that “disappointed parties will have a great incentive to describe circumstances in ways that escape the explicit terms o — their contracts.” Fried, Contract as Promise (Cambridge: Harvard University Press, 1981) at 60. However, parol evidence o — prior or contemporaneous agreements or negotiations is admissible on the threshold question whether a written contract is an integrated instrument that is a complete expression o — the parties’ agreement. In re Skotzke Estate, 216 Mich. App. 247 (1996); NAG Enterprises, Inc v All State Industries, Inc, 407 Mich. 407 (1979). The NAG Court noted — our exceptions to the parol evidence rule, stating that extrinsic evidence is admissible to show (1) that the writing was a sham, not intended to create legal relations, (2) that the contract has no e —
icacy or 17 • The Parol Evidence Rule 503
e
ect because o —
raud, illegality, or mistake, (3) that the parties did not integrate their agreement or assent to it as the — inal embodiment o — their understanding, or (4) that the agreement was only partially integrated because essential elements were not reduced to writing. Importantly, neither NAG nor Skotzke involved a contract with an explicit integration clause. The — irst issue be — ore us is whether parol evidence is admissible with regard to the threshold question o — integration even when the written agreement includes an explicit merger or integration clause. In other words, the issue is whether NAG applies to allow parol evidence regarding this threshold issue when a contract includes an explicit merger clause. While this issue is one o —
irst impression, its answer turns on well-established principles o — contract law. Williston on Contracts and Corbin on Contracts o —
er speci — ic guidance regarding this issue. 4 Williston, Contracts, § 633, p. 1014 states in pertinent part: Since it is only the intention o — the parties to adopt a writing as a memorial which makes that writing an integration o — the contract, and makes the parol evidence rule applicable, any expression o — their intention in the writing in regard to the matter will be given e —
ect. I — they provide in terms that the writing shall be a complete integration o — their agreement . . . the expressed intention will be e —
ectuated. 3 Corbin, Contracts, § 578, pp. 402-411 states in pertinent part: I — a written document, mutually assented to, declares in express terms that it contains the entire agreement o — the parties . . . this declaration is con- clusive as long as it has itsel — not been set aside by a court on grounds o —
raud or mistake, or on some ground that is su —
icient — or setting aside other contracts. . . . It is just like a general release o — all antecedent claims. . . . An agreement that we do now discharge and nulli — y all previous agreements and warranties is e —
ective, so long as it is not itsel — avoided. . . . By limiting the contract to the provisions that are in writing, the parties are de — initely express- ing an intention to nulli — y antecedent understandings or agreements. They are making the document a complete integration. There — ore, even i — there had in
act been an antecedent warranty or other provision, it is discharged by the written agreement. Thus, both Corbin and Williston indicate that an explicit integration clause is con- clusive and that parol evidence is not admissible to determine whether a contract is integrated when a written contract contains such a clause. In the context o — an explicit integration clause, Corbin recognizes exceptions to the barring o — parol evidence only
or — raud (or other grounds su —
icient to set aside a contract) and — or the rare situation when the written document is obviously incomplete “on its — ace” and, there — ore, parol evidence is necessary “ — or the — illing o — gaps.” The conclusion that parol evidence is not admissible to show that a written agreement is not integrated when the agreement itsel — includes an integration clause is consistent with the general contract principles 504 17 • The Parol Evidence Rule
o
honoring parties’ agreements as expressed in their written contracts and not creat- ing ambiguities where none exist. This conclusion accords respect to the rules that the parties themselves have set — orth to resolve controversies arising under the contract. The parties are bound by the contract because they have chosen to be so bound. Further, and most — undamentally, i — parol evidence were admissible with regard to the threshold issue whether the written agreement was integrated despite the exis- tence o — an integration clause, there would be little distinction between contracts that include an integration clause and those that do not. When the parties choose to include an integration clause, they clearly indicate that the written agreement is integrated; accordingly, there is no longer any “threshold issue” whether the agree- ment is integrated and, correspondingly, no need to resort to parol evidence to resolve this issue. Thus NAG, which allows resort to parol evidence to resolve this “threshold issue,” does not control when a contract includes a valid merger clause. 3 Corbin, Contracts, § 577, p. 401 states in pertinent part: A — inding that the parties had assented to a writing as the complete integration o — their then existing agreement is necessarily a — inding that there is no simul- taneous oral addition. On such a — inding o —
act, we are no longer required to decide whether proo — o — simultaneous oral agreement is admissible, — or we have just — ound that there was no such oral agreement.
The conclusion that parol evidence is not admissible regarding this “threshold issue” when there is an explicit integration clause honors the parties’ decision to include such a clause in their written agreement. It gives e —
ect to their decision to establish a written agreement as the exclusive basis — or determining their intentions concerning the subject matter o — the contract. This rule is especially compelling in cases such as the present one, where de — en- dants, successor corporations, assumed per — ormance o — another corporation’s obli- gations under a letter o — agreement. Because de — endants were not parties to the negotiations resulting in the letter o — agreement, they would obviously be unaware o — any oral representations made by CMC’s agent to plainti —
’s agent in the course o —
those negotiations. De
endants assumed CMC’s obligations under the letter o — agree- ment, which included an explicit merger clause. De — endants could not reasonably have been expected to discuss with every party to every contract with CMC whether any parol agreements existed that would place — urther burdens upon de — endants in the context o — a contract with an explicit merger clause. Under these circumstances, it would be — undamentally un — air to hold de — endants to oral representations allegedly made by CMC’s agent. O — the participants involved in this controversy, de — endants are clearly the least blameworthy and the least able to protect themselves. Unlike plainti —
, which could have addressed its concerns by including appropriate language in the contract, and unlike CMC, which allegedly agreed to carry out obligations not included within the contract, de — endants did nothing more than rely upon the express language o — the instant contract, to wit, that the letter o — agreement represented the 17 • The Parol Evidence Rule 505
ull understanding between plainti —
and CMC. We believe that de — endants acted rea- sonably in their reliance and that the contract should be interpreted in accordance with its express provisions. [Citations to and discussion o — Michigan law omitted.] For these reasons, we hold that when the parties include an integration clause in their written contract, it is conclusive and parol evidence is not admissible to show that the agreement is not integrated except in cases o —
raud that invalidate the integra- tion clause or where an agreement is obviously incomplete “on its — ace” and, there — ore, parol evidence is necessary — or the “ — illing o — gaps.” 3 Corbin, Contracts, § 578, p. 411. Fraud [Discussion on invalidity o — the contract — or — raud or misrepresentation omitted. Misrepresentation is discussed in Module IV.] Liquidated Damages [Discussion on en — orceability o — liquidated damages provision omitted. Liquidated damages (which are en — orceable) and penalties (which are unen — orceable) will be dis- cussed in Module VI.] Finally, we will brie — ly respond to the dissenting opinion. The dissenting opinion indicates that no contract existed between plainti —
and de — endants. Initially, we note that the parties themselves, unlike the dissent, have not suggested that no contract existed between plainti —
and de — endants. In — act, the parties clearly assume that the letter o — agreement is binding on them; they only disagree regarding its meaning and the e —
ect o — the alleged oral representations regarding union representation o — the sta —
. While this Court may, o — course, address essential issues not raised by the par- ties, we are perplexed by the dissent’s reliance upon an argument that is inconsistent with the parties’ positions to dispose o — this matter. [Discussion on delegation o — duties omitted. Assignment and delegation will be discussed in Module VI.] Reversed and remanded — or proceedings consistent with this opinion. We do not retain jurisdiction. HOLBROOK, J., dissenting I respect — ully dissent. The event that precipitated this legal dispute was Carol Management’s sale o — the resort to de — endants, without in — orming plainti —
during contract negotiations that the resort was — or sale or that a sale was pending, and de — endants’ subsequent — iring o —
the resort’s union sta
, less than one month a — ter the contract with plainti —
was negoti- ated and signed. The contract — dra — ted by Carol Management — included a standard- ized integration or merger clause, but was silent regarding plainti —
’s acknowledged requirement that the resort employ a union-represented sta —
. Attempts to pigeonhole these unusual — acts into established black-letter rules o — contract law led to harsh and unintended results. Hard cases do, indeed, make bad law. 506 17 • The Parol Evidence Rule
The contract’s merger clause — “a merger o
all proposals, negotiations and repre sentations with re — erence to the subject matter and provisions” — appears plain and unambiguous. While it is o — ten stated that courts may not create an ambiguity in a contract where none exists, and that parol evidence is generally not admissible to vary or contradict the terms o — a written contract, Pro — essor Corbin acknowledges that strict adherence to these rules can be problematic: The — act that the [parol evidence] rule has been stated in such a de — inite and dog- matic — orm as a rule o — admissibility is un — ortunate. It has an air o — author- ity and certainty that has grown with much repetition. Without doubt, it has deterred counsel — rom making an adequate analysis and research and
rom o —
ering parol testimony that was admissible — or many purposes. With- out doubt, also it has caused a court to re — use to hear testimony that ought to have been heard. The mystery o — the written word is still such that a paper document may close the door to a showing that it was never assented to as a complete integration. No injustice is done by exclusion o — the testimony i — the written integration is in — act what the court assumes or decides that it is. The trouble is that the court’s assumption or decision as to the completeness and accuracy o — the integration may be quite erroneous. The writing cannot prove its own completeness and accuracy. Even though it contains an express statement to that e —
ect, the assent o — the parties thereto must still be proved. Proo — o — its completeness and accuracy, discharging all antecedent agreements, must be made in large part by the oral testimony o — parties and other wit- nesses. The very testimony that the “parol evidence rule” is supposed to exclude is — requently, i — not always, necessary be — ore the court can determine that the parties have agreed upon the writing as a complete and accurate statement o —
terms. The evidence that the rule seems to exclude must sometimes be heard
and weighed be --- ore it can be excluded by the rule. This is one reason why the
working o --- this rule has been so inconsistent and unsatis --- actory. This is why
so many exceptions and limitations to the supposed rule o --- evidence have been
recognized by various courts.
There is ample judicial authority showing that, in determining the issue o ---
completeness o --- the integration in writing, evidence extrinsic to the writing
itsel --- is admissible. The oral admissions o --- the plainti ---
that the agreement included matters not contained in the writing may be proved to show that it was not assented to as a complete integration, however complete it may look on its — ace. On this issue, parol testimony is certainly admissible to show the circumstances under which the agreement was made and the purposes — or which the instrument was executed. And, in § 583 o — his treatise, Pro — essor Corbin continues: No written document can prove its own execution or that it was ever assented to as a complete integration, supplanting and discharging what preceded 17 • The Parol Evidence Rule 507
it. . . . There are plenty o --- decisions that additional terms and provisions can
be proved by parol evidence, thereby showing that the written document in
court is not a complete integration. This is true, even though it is clear that
the additional terms --- orm a part o --- one contractual transaction along with the
writing. [3 Corbin on Contracts, § 583, pp. 465–467.]
Accord Stimac v Wissman, 342 Mich. 20 (1955); Restatement Contracts, 2d, § 216, comment e, p. 140 (observing that a merger “clause does not control the question o —
whether the writing was assented to as an integrated agreement”). The — act that plainti —
’s representative read and signed the contract does not obvi- ate the applicability o — the principles outlined in Corbin, §§ 582 and 583. Indeed, Pro — essor Corbin illustrates the principles o — the section by analyzing the case o —
Int’l Milling Co v Hachmeister, Inc, 380 Pa. 407 (1955), in which the parties entered into a contract — or the sale and purchase o —
lour. During negotiations, buyer insisted that each shipment o —
lour meet certain established speci — ications and that such a provision be included in the contract. Seller re — used to put the provision in the contract, but agreed to write a con — irmation letter to buyer tying in the required speci — ications. Buyer placed a written order, indicating that the — lour must meet the required speci — ications. Seller sent to buyer a printed contract — orm, which contained none o — the speci — ications, but did contain an express integration clause. Seller also sent a separate letter assuring delivery in accordance with the required speci — ica- tions. Buyer signed the written contract — orm. When a subsequent shipment o —
lour
ailed to meet the speci — ications, buyer rejected it and canceled all other orders. The Pennsylvania Supreme Court held that extrinsic evidence o — the parties’ negotiations and antecedent agreements was admissible with regard to the issue whether buyer had assented to the printed contract — orm as a complete and accurate integration o —
the contract, notwithstanding its express provision to the contrary. Corbin, supra at
-
Pro
essor Corbin notes that the court’s decision was — ully supported by § 582, and explained at p. 459: It appears that in the instant case the buyer’s evidence was very strong, so strong that it would be a travesty on justice to keep it — rom the jury. This is not because the express provision o — integration was concealed — rom the buyer; he was — amiliar with the printed contract — orm and knew that the provision was in it and the speci — ications were not. The court rightly re — uses to deprive him o — the opportunity to prove that its statement was untrue. . . . Bear in mind, however, that throughout the chapter the author has warned against the acceptance o —
limsy and implausible assertions by parties to what has turned out to be a losing contract.
Section 582 o
Corbin, allowing admission o — extrinsic evidence with regard to the threshold question whether in — act the parties mutually assented to the written document as a completely integrated contract, does not contradict, but rather dove- tails with, § 578, on which the lead opinion relies. Indeed, in § 578, p. 402, Pro — essor Corbin hinges a — inding o — conclusiveness o — an express integration clause on whether 508 17 • The Parol Evidence Rule
the written document was “mutually assented to.” Further, in language excerpted out o — the lead opinion’s quotation o — § 578, Pro — essor Corbin observes: The — act that a written document contains one o — these express provisions does not prove that the document itsel — was ever assented to or ever became operative as a contract. Neither does it exclude evidence that the document was not in — act assented to and there — ore never became operative . . . [P]aper and ink possess no magic power to cause statements o —
act to be true when they are actually untrue. Written admissions are evidential; but they are not conclusive. [Id. at 405, 407 (emphasis added).] Thus, examination o — the written document alone is insu —
icient to determine its completeness; extrinsic evidence that is neither — limsy nor implausible is admissible to establish whether the writing was in — act intended by the parties as a completely integrated contract. The cardinal rule in the interpretation o — contracts is to ascertain the intention o — the parties. To this rule all others are subordinate. It is undisputed in this case that plainti —
’s decision to hold its convention at the resort was predicated on the understanding o — the representatives — or both de — en- dants’ predecessor and plainti —
that the resort employed a unionized sta —
. Had plain- ti —
been made aware that the resort was — or sale or that a sale was pending, I believe it is reasonable to assume that plainti —
’s representative would have insisted that such a clause be incorporated into the agreement. Courts should not require that con- tracting parties include provisions in their agreement contemplating every conceiv- able, but highly improbable, manner o — breach. In my opinion, the circumstances surrounding execution o — the contract, as well as the material change in circum- stance that occurred when the resort was sold and the union sta —
ired, establishes as a matter o — law that plainti —
did not assent to a completely integrated agreement. Corbin’s warning against the admission o — “ — limsy and implausible” evidence is not implicated here. Accordingly, I would a —
irm the trial court’s order granting summary disposition in — avor o — plainti —
pursuant to MCR 2.116(C)(10).
Re --- lection The UAW case had particular --- acts that may have led the court to its result. The
act the parties to this lawsuit were not the original parties to the contract may have encouraged the use o — Williston’s objectivist approach. UAW-GW had originally con- tracted with CMC. KSL only learned about this contractual obligation a — ter purchas- ing CMC’s hotel properties. The court may have held KSL to a lower standard than CMC with regard to extrinsic evidence, since KSL had no way to know what CMC and UAW discussed in preliminary negotiations. 17 • The Parol Evidence Rule 509
Discussion 1. Note that the UAW majority cites mainly to Pro --- essor Williston, while the UAW dissent cites to Pro --- essor Corbin. What is the di ---
erence between these two perspectives?
-
Do you agree with the majority (who gave e
ect to the plain meaning merger clause) or to the dissent (who would have disregarded the merger clause based on extrinsic evidence)?
-
Does the majority or the dissent more closely
ollow the R2d?
-
Based on your reading o
this case and the R2d rules, can you articulate a gen- eral rule on when merger clauses should be en — orced and when they should be disregarded?
Reading Sierra Diesel Injection Service, Inc. v. Burroughs Corp. Sierra Diesel juxtaposes UAW: whereas the UAW court took a strict constructionist approach to the merger clause in its agreement, Sierra Diesel disregards a similarly clear and plain integration clause. Why would two courts arrive at such di — — erent conclusions when reviewing similar intrinsic evidence? As you read Sierra Diesel, think about whether the court uses the objective approach (the plain meaning and — our corners rules) or a subjective approach (meeting o — the minds) to determine whether the sales contract in this case was integrated. Consider which approach is the right one — or this case and in general.
Sierra Diesel Injection Service, Inc. v. Burroughs Corp. 874 F.2d 653 (9th Cir. 1989) STEPHENS, J. Sierra Diesel Injection Service, Inc. (Sierra Diesel) is a --- amily owned and operated business that services the --- uel injection portions o --- diesel engines and sells related diesel engine parts. In September 1977, 19-year-old Caroline Cathey, the daughter-in- law o --- the Sierra Diesel’s owner and operator James Cathey, worked as the company bookkeeper. She went to the Reno, Nevada branch o ---
ice o — the Burroughs Corpora- tion (Burroughs) to purchase a posting machine to speed up Sierra Diesel’s invoicing and accounting. The salespeople at Burroughs told Caroline Cathey that Sierra Diesel 510 17 • The Parol Evidence Rule
should buy a B-80 computer (B-80) instead o
a posting machine. Caroline and James Cathey attended a demonstration o — the B-80 at the Burroughs o —
ice. A — ter the demon- stration, Burroughs’ sales sta —
sent a letter to Mr. Cathey which said that the B-80 “can put your inventory, receivables, and invoicing under complete control.” The letter also in — ormed Mr. Cathey that the in — ormation in the letter was “preliminary” and that “the order when issued shall constitute the only legally binding commitment o — the parties.” In October 1977, Mr. Cathey decided to purchase the B-80. Sierra Diesel and Bur- roughs signed various contracts — or the sale o — hardware and so — tware and — or main- tenance service. Mr. Cathey’s highest level o —
ormal education was a high school degree. At the time he bought the B-80 he was not knowledgeable about computers. He had a general knowledge o — warranties and their limitations — rom the warranty service work Sierra Diesel did — or diesel component parts manu — acturers, but he did not understand the meaning o — “merchantability.” He read the contracts — rom Bur- roughs to see that they contained the correct price in — ormation and product descrip- tion and he glanced at the back o — the contract to see, as he put it, that “I’m not actually signing away the deed to my home or something o — this nature.” The B-80 computer did not per — orm the invoicing and accounting — unctions — or which it had been purchased. It experienced basic equipment breakdowns and was unable to “multi-program.” Sierra Diesel personnel complained to the Burroughs service personnel. Burroughs responded to these complaints and its sta —
attempted to solve the problems and also attempted to repair the system during their regu- larly scheduled visits under the Maintenance Agreement. Eventually, the Burroughs sta —
recommended to Sierra Diesel that it purchase a di — — erent Burroughs computer (B-91) to remedy the problems. Sierra Diesel purchased the B-91 and took delivery in February 1981. The B-91 computer was no better able to per — orm the invoicing and accounting — unctions than the B-80. A — ter additional unsuccess — ul attempts by Bur- roughs employees to correct the problems, Sierra Diesel employed an independent computer consultant who concluded that the Burroughs computers would never per — orm the — unctions — or which they had been purchased. Sierra Diesel bought another computer — rom a di — — erent company. In 1984, Sierra Diesel initiated the pre sent litigation. [Procedural history omitted. The key point is the trial court determined that the contract was not completely integrated, despite its integration clause.] A — ter the trial court’s ruling, Sierra Diesel and Burroughs entered into a settlement in which the court dismissed with prejudice all o — Sierra Diesel’s claims as to the B-91 and to most o — the claims as to the B-80. The parties stipulated that Burroughs had breached its contracts with Sierra Diesel by — ailing to put Sierra Diesel’s inventory, receivables, and invoicing under complete control and that the B-80 was not mer- chantable. The trial court awarded Sierra Diesel $44,000 in damages. The judgment reserved to Burroughs a right to appeal the court’s integration and conspicuousness rulings. Burroughs timely appealed. [Jurisdictional discussion omitted.] 17 • The Parol Evidence Rule 511
I. Integration The trial court --- ound that the printed --- orm contracts supplied by Burroughs did not represent a --- inal integrated contract. The court considered the September 27 letter and --- ound that the representations in the letter were part o --- the agreement between the parties. Nevada has adopted the Uni --- orm Commercial Code’s parol evidence rule in NRS § 104.2202. Under the code, a trial court must make an initial determination that a writing was “intended by the parties as a --- inal expression o --- their agreement.” This is a question o ---
act and the trial court’s — indings are reviewed — or substantial error. In deciding whether a writing is — inal the most important issue is the intent o —
the parties. One
actor is the sophistication o — the parties. The trial court — ound that Mr. Cathey was not a sophisticated businessman, that he had little knowledge o — com- puters or o — contract terms, and that he — ully expected that the representations made to him by Burroughs’ representatives were part o — the contract. The trial court also
ound that Burroughs knew o — Mr. Cathey’s computer needs and knew that his sole purpose — or buying the computer was to get Sierra Diesel’s inventory, receiving, and invoicing under control and that Mr. Cathey would not have purchased the B-80 i — it were not capable o — putting his inventory, receiving, and invoicing under control. The trial court’s — indings are supported by the record. Burroughs argues that the presence o — a merger clause should, as a matter o — law, determine that the contract was integrated, and some courts have so held. However other courts and commentators have rejected this view, especially when the contract is a pre-printed — orm drawn by a sophisticated seller and presented to the buyer with- out any real negotiation. Whether several documents are integrated to — orm one con- tract is a — actual question and the presence o — a merger clause while o — ten taken as a strong sign o — the parties’ intent is not conclusive in all cases. The agreement between Burroughs and Sierra Diesel involved at least — our di — — er ent kinds o — writings: the contract — or the sale o — the hardware, the contracts — or the sale o — the so — tware, the contract to — inance the transaction through what was on its
ace a lease, and the contract — or service and maintenance. No one writing stands alone, each must be read with re — erence to another document. The description o —
the computer components does not lead to recognition o
how they relate to one another without additional explanation. The hardware could not — unction without the so — tware. The lease appears on its — ace to be inconsistent with a sale. It is not possible to understand what the basic transaction was intended to be without some coordinating explanation. It is understandable that Mr. Cathey believed that he was justi — ied in looking beyond the — our corners o — anyone writing — or the meaning o — his agreement with Burroughs. Additionally, the trial court — ound that Burroughs’ e —
orts to repair the B-80 showed that Burroughs intended to live up to the representations made in the September 27 letter. Burroughs did not advise Sierra Diesel that the repairs were undertaken with- out prejudice to Burroughs’ contention that there were no warranties. Burroughs’ 512 17 • The Parol Evidence Rule
e
orts are also evidence o — Burroughs’ knowledge o — Mr. Cathey’s expectations as to the scope and terms o — their agreement. [Discussion on implied warranties omitted. Implied warranties o — merchantability and — itness — or a particular purpose are discussed in courses — ocusing on the law o —
Sales.] [Discussion on e —
ect o — lend-lease agreement omitted.] Conclusion The trial court’s judgment is AFFIRMED.
Re --- lection Sierra Diesel re --- lects Corbin’s subjectivist philosophy. In this case, a clear and unequivocal --- ormal agreement is nevertheless interpreted based on testimony o --- what the parties thought but did not express in writing. This is anathema to the objectivist philosophy pre --- erred by Williston. And it re --- lects a general trend in the law at the time away --- rom objectivism and toward subjectivism. The successors o --- Corbin --- urthered the R2d’s push toward subjective standards over objective, --- ormalistic rules. One o --- those successors was John E. Murray Jr., chancellor and a pro --- essor o --- law at Duquesne University, who authored the treatise Murray on Contracts. His treatise summarizes what is common about the approaches you have seen so --- ar and --- unctions as a brie --- but complete statement o --- the essential
eatures o — the parol evidence rule: (1) [I] — the parties intend their written expression o — agreement to be merely
inal, the terms o — that — inal agreement may not be contradicted by any prior or contemporaneous oral agreement. (2) Such terms in a — inal writing may, however, be explained or supplemented by evidence o — consistent addi- tional terms or by evidence o — course o — dealing, usage o — trade or course o —
per --- ormance. (3) I --- the parties intended their writing to be not merely --- inal but
also a complete and exclusive statement o --- the terms o --- their agreement, evi-
dence o --- consistent additional terms is excluded, but even with respect to such
a complete and exclusive expression o --- agreement, evidence o --- trade usage,
course o --- dealing, and course o --- per --- ormance is admissible. There is, there --- ore,
no presumption that the writing is the complete and exclusive expression o ---
the parties’ agreement. Rather, the opposite is assumed, i.e., the writing will
not be viewed as complete and exclusive unless the court --- inds that the parties
intended it to be complete and exclusive. As mentioned above, it is ironic that Murray was --- ollowing in Corbin’s subjectivist
ootsteps in his role in Pittsburgh while the Pennsylvania courts continued to advance the objectivist approach. The cle — t between the bench and the bar show that Mur- ray’s and Corbin’s e —
orts to re — orm the law have not always been well met. It is not clear whether the Restatements will continue to have so much in — luence over judicial 17 • The Parol Evidence Rule 513
decision-making i
they continue to be activist in trying to change the law instead o —
reacting to what the law currently is. Instead o — dwelling on the Sierra Diesel case at this point, let’s move on to criti- cally evaluate how the R2d instructs judges to interpret contracts. As you review the Restatement’s approach, consider how it accords with the reasoning articulated in Sierra Diesel.
Discussion 1. Compare and contrast the UAW and Sierra Diesel cases. Are they based on the same rule and reasoning, or have the courts applied di --- --- erent rules? 2. I --- the rules in UAW and Sierra Diesel are di --- --- erent, which rule is better and why? I --- the rules are the same, what are the dispositive --- acts that produce a di --- --- erent outcome in each case?
Problems Problem 17.1. Comparing the Common Law and the UCC The parol evidence rule that has been enacted in each state as UCC § 2-202 is nearly identical to the parol evidence rule as it previously developed in the courts as part o --- the common law and as it is described in R2d §§ 213–216. There is, however, one subtle di ---
erence in the wording o — the common law rule and the statutory rule. a. The provisions are reproduced side by side below. In your opinion, is the di — -
erence substantive or merely semantic? In other words, is it real di —
erence, or merely a distinction without a di —
erence? b. Describe how NH UCC § 2-202 and R2d § 216 are di — — erent and whether those di —
erences matter.
Problem 17.2. Capitol City Liquor Company Harold S., Lester, and Eric Lee (the Lees, or Plainti —
s) owned 50% o — Capitol City Liquor Company Inc. (Capitol City). Seagram (or De — endant) is a distiller o — alcoholic beverages. Capitol City is a wholesale liquor distributor located in Washington, D.C. Capitol City carries a wide variety o — Seagram products, and a large portion o — its sales were generated by Seagram lines, — or many years. In May 1970, then EVP, now President, o — Seagram, Jack Yogman and Harold S. Lee discussed the sale o — Capitol City to Seagram, conditioned on Seagram’s o —
er to relocate the Lees to a new distributorship o — their own (100% ownership) in a di — — erent 514 17 • The Parol Evidence Rule
R2d. § 216. Consistent Additional NH UCC § 2-202. Final Written Terms. Expression: Parol or Extrinsic (1) Evidence o — a consistent additional Evidence. term is admissible to supplement Terms with respect to which the an integrated agreement unless the con — irmatory memoranda o — the court — inds that the agreement was parties agree or which are otherwise completely integrated. set — orth in a writing intended by the (2) An agreement is not completely parties as a — inal expression o — their integrated i — the writing omits a agreement with respect to such terms consistent additional agreed term as are included therein may not be which is contradicted by evidence o — any prior agreement or o — a contemporaneous (a) agreed to — or separate consid- oral agreement but may be explained eration, or or supplemented (b) such a term as in the circum- (a) by course o — dealing or usage o —
stances might naturally be
trade (Section 1-205) or by course
omitted --- rom the writing.
o --- per --- ormance (Section 2-208);
and
(b) by evidence o --- consistent addi-
tional terms unless the court --- inds
the writing to have been intended
also as a complete and exclusive
statement o --- the terms o --- the
agreement.
Figure 17.1. R2d and UCC were dra --- ted based on similar philosophies, but
the speci --- ic language di ---
ers in material ways.
city. Yogman agreed, and the Lees trusted him based on their years o
personal — riend- ship and con — idence. About a month later, Seagram sent an o —
icer to D.C., where the Lees negotiated and agreed to sell Capitol City. The Seagram o —
icers prepared the paperwork (the Merger Agreement), which Harold signed on behal — o — the Lees. The other 50% owners o —
Capitol City signed
or themselves as well. The promise to relocate the Lees was never reduced to writing. The Merger Agreement does not have an integration clause. Based on these — acts, answer the — ollowing questions: a. Is the Merger Agreement — inal? What evidence o —
inality is in these — acts? For each piece o — evidence, classi — y it as intrinsic or extrinsic. b. What is the e —
ect o — the Merger Agreement’s lack o — an integration clause? c. Is the promise to relocate the Lees within the scope o — the Merger Agreement? 17 • The Parol Evidence Rule 515
d. What do you think the parties to the oral agreement — Harold S. Lee and
Jack Yogman — actually agreed to?
e. I --- the Lees attempt to introduce evidence showing that Jack and Harold met
and what they discussed, should a court take an objective or a subjective
approach? Under that approach, how should a court rule?
. What do you think is a — air remedy (i — any) — or the Lees? See Lee v. Joseph E. Seagram & Sons, Inc., 552 F.2d 447 (2d Cir. 1977).
Problem 17.3. Middletown Concrete Products Middletown Concrete Products, Inc. (MCP) manu — actures precast concrete prod- ucts. Hydrotile is a corporate division o — Black Clawson Co. Hydrotile makes pipe- making systems. In 1988, David Mack, Hydrotile’s regional sales manager, visited MCP and gave one o — its managers a promotional brochure — or one o — its products, the Neptune Multipak Pipe Machine (the Neptune). The Neptune only works in conjunction with the other hal — o — its pipe-making system, the Rekers O —
-Bearing Unit (Rekers). The Neptune brochure contained a list o —
igures which included that the Neptune could produce round pipe at a rate o — 54 pipes per hour. A — ter considering purchasing concrete pipe-making equipment — rom multiple sup- pliers, MCP — ocused on negotiations with Hydrotile. Representatives — rom both com- panies met and discussed terms including production rates. Although negotiations got heated, with MCP managers screaming, shouting, and demanding a warranty on production rates, Hydrotile never agreed orally or in writing to any particular production rate. A — ter about a week o — negotiations, Hydrotile presented to MCP an “Acceptable Per — ormance Letter,” which contained a guaranteed round pipe production rate — or the Neptune o — 44 pipes per hour. The parties disagree on whether MCP orally made its payment to Hydrotile contingent on the system achieving Acceptable Per — ormance. A — ter inspecting several locations where the Neptune was installed and operating, MCP agreed to purchase the machine. MCP signed two di — — erent contracts: a Neptune Sales Agreement and a Rekers Sales Agreement. Both agreements contained the — ol- lowing clauses: There are no rights, warranties or conditions, express or implied, statutory or otherwise, other than those herein contained. This agreement between Buyer and Seller can be modi — ied or rescinded only by a writing signed by both parties. No waiver o — any provision o — this agreement shall be binding unless in writing signed by an authorized representative o — the party against whom the waiver is asserted and unless expressly made generally applicable shall only apply to the speci — ic case — or which the waiver is given. 516 17 • The Parol Evidence Rule
MCP’s Neptune was delivered piecemeal and installed on location starting in Octo- ber 1989 and began production on March 21, 1990. MCP’s Neptune produces round pipe at the rate o — 34 pipes per hour. MCP sued Hydrotile, claiming that Hydrotile breached its promises that the Neptune would produce 54 pipes per hour. Based on the above — acts, what evidence should the court allow MCP to admit in support o — this claim? See Middletown Concrete Products, Inc. v. Black Clawson Co., 802 F. Supp. 1135 (D. Del. 1992). To see how concrete pipe is manu — actured, visit https://www.youtube.com/watch ?v=E6jlTxhL8bg.
Problem 17.4. Corn Delivery Charles Campbell is a — armer in Adams County, Pennsylvania, who entered into a written contract with Hostetter Farms, Inc., to sell twenty thousand bushels o — corn
or $1.70 per bushel. The written agreement is signed and dated, but it lacks a merger clause. During preliminary negotiations, the parties calculated the quantity o — corn to be sold based on probable yield o — Campbell’s — arm. Campbell claims that the par- ties agreed to buy and sell only what Campbell could produce. Hostetter claims that Campbell agreed to sell the speci — ied quantity at the speci — ied price — rom whatever source. However, this term was not included in their — inal written agreement. The prior year, the parties had previously done business — or the purchase and sale o — three thousand bushels o — No. 2 wheat at $2.15 a bushel. Pursuant to an oral agree- ment, Campbell delivered 1,534.88 bushels o — wheat, but Campbell did not deliver the remaining 1,465.12 bushels. A — ter a little grumbling about the wheat not delivered, Hostetter paid — or the wheat delivered, and the matter was concluded. The weather was especially wet this year, and Campbell’s — arm did not yield as much corn as he expected. Campbell delivered 10,417.77 bushels o — corn to Hostet- ter, who re — used to pay anything given the shortage. Hostetter then purchased twenty thousand bushels o — corn on the open market — or $2.65 a bushel. Hostetter sued Campbell — or the extra he paid to purchase the corn on the open market instead o —
rom Campbell. In his de — ense, Campbell seeks to introduce evi- dence that (a) he only produced 12,417.77 bushels o — corn, (b) he retained 2,000 bushels o — corn to — eed his livestock, (c) the parties discussed that Campbell was only responsible — or delivering the quantity he produced, and (d) it is very common
or — armers in Adams County to retain about 10% o — their crop yields to — eed their livestock. Hostetter seeks to introduce evidence that the parties discussed that Campbell was responsible — or obtaining the corn — rom another source i — his — arming did not yield a su —
icient quantity. 17 • The Parol Evidence Rule 517
a. Characterize each piece o --- evidence that Campbell and Hostetter seek to
admit as intrinsic or extrinsic, and discuss what that evidence would be
admitted to show or prove.
b. Does the parol evidence rule apply to any o --- the evidence in this case?
Should any evidence be excluded --- rom the jury pursuant to the parol evi-
dence rule?
c. How should the court rule? Was Campbell responsible --- or delivering
20,000 bushels (the --- ull amount under the contract), 12,417.77 bushels (the
amount he actually produced), 10,417.77 bushels (the amount he actually
delivered), or some other amount? See Campbell v. Hostetter Farms, Inc., 251 Pa. Super. 232 (1977).
Problem 17.5. Injury and Indemnity DEFINITIONS: “Drayage” means shipping goods over a short distance, as com- pared with long-distance shipping. “Rigging” means attaching loads to cranes or structures. G.W.’s name implies it is in the trade o — moving and transporting heavy equipment. Please look up any other industrial or technical terms that are not — amiliar to you. Paci — ic Gas & Electric Company (PG&E), a producer o — electrical power, hired G.W. Thomas Drayage & Rigging Company (G.W.) to remove and replace the metal cover o — a steam turbine. Their written agreement, which was governed by Cali — ornia law, contained the — ollowing indemnity clause:
Contractor shall indemni --- y Company, its o ---
icers, agents, and employees, against all loss, damage, expense and liability resulting — rom injury to or death o — person or injury to property, arising out o — or in any way connected with the per — ormance o — this contract. Contractor shall, on Company’s request, de — end any suit asserting a claim covered by this indemnity. Contractor shall pay any costs that may be incurred by Company in en — orcing this indemnity.
During the work, the cover
ell and damaged PG&E’s turbine. PG&E sued G.W. to recover the cost to repair the turbine. PG&E presented evidence that the term “indemnity” has a plain meaning in the law o — contracts. It is de — ined in Cali — ornia Civil Code § 2772 as — ollows: “Indemnity is a contract by which one engages to save another — rom a legal consequence o — the conduct o — one o — the parties, or o — some other person.” G.W. responded by o —
ering to admit evidence o — (a) admissions o — plainti —
’s agents that they actually knew G.W. did not intend to indemni — y PG&E, (b) evidence o —
de
endant’s conduct under similar contracts entered into with plainti —
, and (c) evi- dence that the trade usage o — such indemnity clauses is meant to cover injury to prop- erty o — third parties only and not to plainti —
’s own property. 518 17 • The Parol Evidence Rule
a. Characterize each piece o --- evidence that PG&E and G.W. seek to admit as
intrinsic or extrinsic, and discuss what that evidence would be admitted to
show or prove (i.e., Would that evidence add, modi --- y, or explain a term? Is
the evidence collateral or directly related to the writing? Etc.).
b. Does the parol evidence rule apply to any o --- the evidence in this case?
Should any evidence be excluded --- rom the jury pursuant to the parol evi-
dence rule?
c. How should the court rule? Should G.W. be required to indemni --- y PG&E
and pay --- or the damage to its turbine? See Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33 (1968).
Chapter 18 Warranties
Warranties are promises that goods or services will meet certain standards. War- ranties clari — y the obligations o — sellers and the expectations o — buyers, which builds trust and ensures accountability. Disputes about warranties o — ten require courts to interpret the promises made, the terms o — the contract, and the context o — the transac- tion. This chapter examines warranties through the lens o — interpretation, — ocusing on how courts determine the obligations the parties intended to create. Interpretation is essential to the en — orcement o — warranties. Courts must decide whether a seller’s statement is an en — orceable express warranty or a mere opinion. Similarly, courts interpret whether implied warranties, such as merchantability or
itness — or a particular purpose, apply based on the circumstances o — the sale. These decisions hinge on the seller’s language, the transaction’s context, and whether the buyer reasonably relied on the promise. Consider this scenario. A seller advertises a speedboat as “unsinkable” and “capable o — withstanding any storm.” A buyer purchases the boat based on these claims. When the boat takes on water during a moderate thunderstorm, the buyer sues — or breach o — warranty. The court must decide whether the seller’s statements were — actual prom- ises creating en — orceable warranties or mere pu —
ery. Resolving this dispute requires interpreting the seller’s language, the context o — the sale, and the buyer’s reasonable expectations. Ambiguity — requently arises in warranty disputes. Sellers may make statements that buyers interpret as promises, even i — the seller believes otherwise. For example, a description like “durable design” might seem like a guarantee to a buyer but a mar- keting phrase to the seller. Courts resolve such ambiguities using interpretive tools, including intrinsic evidence, like contract language, and extrinsic evidence, such as trade practices or prior dealings. Disclaimers o — warranties add complexity. Sellers may limit or exclude warranties with terms like “as is” or “no warranties, express or implied.” Courts must interpret whether these disclaimers are clear, conspicuous, and consistent with the parties’ agreement. This process balances — reedom o — contract with protecting buyers — rom un — air or hidden terms. This chapter illustrates how interpretive tools are used to resolve speci — ic contrac- tual obligations. Warranties provide a practical context — or understanding broader
519
520 18 • Warranties
concepts in contract law, including ambiguity, en
orceability, and — airness. By studying warranties, students will learn how courts clari — y rights and obligations and balance competing interests in commercial transactions. This chapter serves as a practical capstone to our module on interpretation.
Rules A. Express Warranties
We begin with express warranties. “Express warranties” under the UCC are explicit promises made by a seller o --- goods to a buyer o --- goods about the quality, nature, lon- gevity, or speci --- ic --- acts relating to the goods. Express warranties can arise in several di --- --- erent ways. UCC § 2-313 provides:
Express warranties by the seller are created as --- ollows:
(a) Any a ---
irmation o —
act or promise made by the seller to the buyer which relates to the goods and becomes part o — the basis o — the bargain creates an express warranty that the goods shall con — orm to the a —
irmation or promise. (b) Any description o — the goods which is made part o — the basis o — the bargain creates an express warranty that the goods shall con — orm to the description. (c) Any sample or model which is made part o — the basis o — the bargain creates an express warranty that the whole o — the goods shall con — orm to the sample or model. NH UCC § 2-313(1). Thus, a seller o — goods can create an express warranty in three ways: (1) by making speci — ic a —
irmations o —
act about goods, which indicate that the goods will con — orm to the stated standard; (2) by providing a description o — goods, which suggests the goods will con — orm to the description; or (3) by providing samples or models, which suggest the goods will be similar to the sample or model provided. Any o — these meth- ods can potentially create a legally en — orceable promise that the goods will live up to the seller’s representations. The main way a seller creates an express warranty is by directly promising the buyer that goods will per — orm a certain way in the — uture. Magic words like “I warrant” or “I guarantee” are not necessary, so long as the statement is de — inite and speci — ic enough to become “part o — the basis o — the bargain.” The buyer must be aware o — the statement and rely on it, to some extent, in their decision to purchase the goods. For example, a seller might say, “This car gets — orty miles per gallon.” Even though the seller did not use magic words like “I promise,” i — the buyer hears and relies on this — actual assertion, 18 • Warranties 521
it becomes part o
the basis o — the bargain and creates an express warranty that the car will, in — act, get — orty miles per gallon. (Note that this is very similar to the de — inition o — a “promise” in R2d § 2 — a statement o — intention to do or not do something, so made as to justi — y the promisee in thinking a commitment has been made). Express warranties can also arise — rom descriptions o — the goods, such as on pack- aging. For example, a product label might say, “100% organic cotton.” This creates an express warranty that the goods meet that description. Sellers can also make express warranties by providing buyers with samples o — goods, which suggest to the buyer that the goods will be similar to the sample. For example, i — a seller gives a buyer a sample o — their newest snack bar, this sample e —
ectively generates a promise that the same brand o — snack bar sold in stores will match the sample. These are all — orms o —
express warranties. Express warranties are very important to how commerce works today. They ensure that buyers can rely on sellers’ statements about goods in making their purchasing decisions, and they hold sellers accountable — or their promises. En — orcing these prom- ises promotes — airness and trust in transactions. That said, not every statement a seller makes about goods creates an express war- ranty. Statements o — opinion or mere “pu —
ery” do not quali — y as a —
irmations o —
act which can — orm the basis o — a warranty. An exaggerated claim like “this is the best TV on the market” or a salesperson’s statement that “this computer is my — avorite” are not warranties. These are examples o — exaggerated bluster or subjective opinion, which no buyer would be justi — ied in relying upon. These types o — statements cannot be en — orced as warranties. Express warranties rely on the seller’s explicit statements or actions to create en — orceable promises. However, contracts also include implied warranties, which arise automatically under the UCC to protect buyers even when no explicit assur- ances are given. The next section examines these implied warranties, starting with the implied warranty o — merchantability.
B. Implied Warranty o
Merchantability The implied warranty o — merchantability ensures that goods meet basic quality standards. The implied warranty o — merchantability arises automatically when a seller is a merchant who deals in goods o — the kind involved in the transaction. In other words, the warranty o — merchantability is implied only when the seller is a merchant in the narrow sense o — being a dealer in this type o — goods. A merchant in the broad sense — a person who “by his occupation holds himsel — out as having knowledge or skill peculiar to the practices or goods involved in the transaction” — will not meet this standard. See UCC § 2-104(1). The implied warranty o — merchantability does not guarantee per — ection. Goods are merchantable i — they meet the minimal standards outlined in NH UCC § 2-314(2): 522 18 • Warranties
Goods to be merchantable must be at least such as
(a) pass without objection in the trade under the contract description; and
(b) in the case o ---
ungible goods, are o —
air average quality within the description; and (c) are — it — or the ordinary purposes — or which such goods are used; and (d) run, within the variations permitted by the agreement, o — even kind, quality and quantity within each unit and among all units involved; and (e) are adequately contained, packaged, and labeled as the agreement may require; and ( — ) con — orm to the promise or a —
irmations o —
act made on the container or label i — any. For example, Lawrence, a law student, decides to sell his old bike to Medina, a medical student, — or $100, to raise money — or his torts casebook. The bike looks — ine, but when Medina takes it home and tries to ride it, she realizes the bike doesn’t work. It won’t pedal, the gears are jammed, and it’s completely unusable. Medina, upset that she can’t use the bike as intended, decides to sue Lawrence. She brings a claim based on breach o — the implied warranty o — merchantability, arguing that the bike is not — it — or its ordinary purpose (riding). What result? When Lawrence, a law student, sells his old bike to Medina, a medical student, — or $100, the implied warranty o — merchantability does not apply because Lawrence is not a merchant. Under UCC § 2-314, the implied warranty o — merchantability arises only when the seller is a merchant dealing in goods o — the kind sold. Lawrence is a private individual selling his personal bike, not someone engaged in the business o — selling bicycles or holding himsel — out as an expert in this — ield. There — ore, Medina cannot bring a success — ul claim based on a breach o — the implied warranty o — merchantability. Similarly, the implied warranty o —
itness — or a particular purpose, which is governed by UCC § 2-315, does not apply here. This warranty arises when the seller knows the buyer has a speci — ic purpose — or the goods, and the buyer relies on the seller’s expertise to select goods suitable — or that purpose. In this case, Medina did not communicate any particular purpose — or the bike, nor did she rely on Lawrence’s skill or judgment in selecting it. Thus, no implied warranty o —
itness — or a particular purpose was created. I — Lawrence had explicitly stated to Medina, “This bike works — ine, I promise,” the situation would be di — — erent. This statement would likely create an express warranty under UCC § 2-313. Express warranties arise when the seller makes a speci — ic a —
irma- tion o —
act or promise about the goods that becomes part o — the basis o — the bargain. By stating that the bike works — ine, Lawrence promised a certain level o —
unctionality. I — Medina relied on this statement when purchasing the bike, and the bike turned out to be non- — unctional, Lawrence could be liable — or breaching the express warranty. I — Lawrence were in the business o — selling used bicycles, he would be considered a merchant under UCC § 2-104(1). As a merchant, Lawrence would be subject to 18 • Warranties 523
the implied warranty o
merchantability, which requires that goods sold be — it — or their ordinary purpose. I — the bike — ailed to meet this standard — — or example, i — it was completely unusable — or riding — Medina would have a valid claim — or breach o — the implied warranty o — merchantability. In the absence o — any warranties, the principle o — caveat emptor (“let the buyer beware”) applies. As a private sale between non-merchants, Medina bears the respon- sibility — or inspecting the bike and assuming the risk o — de — ects. Without an express or implied warranty, Medina likely has no legal recourse under the warranties doctrine. However, i — Lawrence made explicit promises or were a merchant, Medina’s claim would stand on much stronger — ooting.
C. Implied Warranty o
Fitness — or a Particular Purpose The implied warranty o —
itness — or a particular purpose ensures that goods meet the buyer’s speci — ic needs when those needs are communicated to the seller. This war- ranty, governed by UCC § 2-315, arises when three conditions are met. These condi- tions establish a relationship o — trust and accountability between the buyer and seller which ensures that the goods provided align with the buyer’s intended use. Where the seller at the time o — contracting has reason to know any particu lar purpose — or which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or — urnish suitable goods, there is unless excluded or modi — ied under the next section an implied warranty that the goods shall be — it — or such purpose. NH UCC § 2-315 First, the seller must have reason to know the buyer’s particular purpose — or the goods. A particular purpose re — ers to a use that goes beyond the goods’ ordinary or expected — unctions. For example, a buyer may need paint designed — or use in a high- humidity environment or tires suitable — or competitive racing rather than standard road use. To trigger this warranty, the buyer must clearly communicate this speci — ic purpose to the seller during the transaction. Second, the seller must have reason to know that the buyer is relying on the seller’s skill or judgment to select or provide suitable goods. This reliance occurs when the seller understands that the buyer is seeking advice or recommendations rather than acting based on their own expertise. For instance, i — a buyer explains the need — or pes- ticide to address a speci — ic type o — insect in — estation, and the seller recommends a prod- uct that does not work — or that purpose, the seller may be liable. Similarly, i — a buyer requests paint suitable — or outdoor use, and the seller provides paint intended only — or interiors, the seller could be held accountable i — the paint — ails under weather exposure. Third, the buyer must actually rely on the seller’s expertise or recommendations in selecting the goods. I — the buyer independently chooses the goods or disregards the seller’s advice, the warranty does not apply. For example, i — a buyer purchases 524 18 • Warranties
pesticide based solely on their own research and does not seek input
rom the seller, the warranty is not triggered even i — the pesticide is ine —
ective. Courts assess reliance by examining the context o — the transaction and whether the buyer reasonably trusted the seller’s expertise to meet their speci — ic needs. These three conditions ensure that the implied warranty o —
itness — or a particular purpose applies only in situations where the seller’s expertise is central to the transac- tion and the buyer reasonably depends on that expertise.
Illustrations o --- the Fitness
Warranty in Action
The implied warranty o ---
itness — or a particular purpose arises in trans- actions where the buyer communicates a speci — ic need and the seller’s expertise is central to meeting that need. Courts analyze whether the buy- er’s reliance on the seller’s recommendation was reasonable and whether the seller’s goods were suitable — or the communicated purpose. The — ol- lowing examples illustrate common applications o — this warranty: A — armer explains to a seller that they need a pesticide to address a speci — ic insect in — estation. The seller recommends a product that ultimately proves ine —
ective against the pest. Because the — armer relied on the seller’s recommendation, the seller has breached the implied warranty o —
itness — or a particular purpose. A buyer in — orms a seller that they need paint — or exterior use on a house and purchases paint based on the seller’s recommen- dation. When the paint begins to peel and degrade a — ter expo- sure to outdoor weather, the seller is liable under the warranty because their recommendation — ailed to meet the buyer’s clearly stated need. A hiker tells a seller that they need boots — or trekking in extreme cold. The seller recommends boots that are not designed
or such conditions, and the hiker su —
ers harm during their trip. Because the buyer relied on the seller’s expertise, the seller has breached the warranty by providing unsuitable goods. These examples demonstrate the warranty’s application across a variety o — contexts. In each case, the seller’s recommendation was central to the transaction, and the buyer relied on the seller’s expertise to meet a speci — ic, non-ordinary need. The implied warranty o —
itness ensures accountabil- ity and gives buyers con — idence when seeking specialized goods or advice.
The implied warranty o
itness — or a particular purpose complements the implied warranty o — merchantability. While merchantability ensures that goods meet basic 18 • Warranties 525
quality standards
or ordinary use, — itness — or a particular purpose protects buyers in situations where their needs go beyond those ordinary purposes. For example, while a pair o — boots might meet merchantable quality standards — or casual walking, they might — ail to satis — y the implied warranty o —
itness i — sold — or extreme cold without adequate insulation. Disputes over the implied warranty o —
itness — or a particular purpose o — ten arise when the communication between buyer and seller is ambiguous or when the seller disputes the buyer’s reliance. Courts must interpret the evidence to determine whether the buyer clearly expressed their needs and whether the seller’s knowledge and recom- mendations justi — ied reliance. By applying these principles, courts balance — airness and accountability in commercial transactions. The implied warranty o —
itness — or a particular purpose ensures that buyers can trust sellers’ expertise in specialized contexts while protecting sellers — rom liability where no reliance exists. It plays a vital role in — ostering trust and con — idence in trans- actions involving goods — or unique or technical purposes.
D. En
orcement and Remedies Warranties provide buyers with en — orceable rights and expose sellers to liability when those rights are breached. Breach o — a warranty occurs when goods — ail to meet the seller’s express or implied promises. In such cases, the UCC provides buy- ers with remedies that re — lect the di —
erence between the goods promised and those delivered. Under NH UCC § 2-714, the de — ault remedy — or breach o — warranty is money dam- ages. The statute provides:
The measure o --- damages --- or breach o --- warranty is the di ---
erence at the time and place o — acceptance between the value o — the goods accepted and the value they would have had i — they had been as warranted, unless special circum- stances show proximate damages o — a di — — erent amount.
For example, i --- a seller promises that a car has a new engine but delivers a car with a used and unreliable engine, the buyer can recover the diminished value o --- the car. I --- the car as promised would have been worth $8,000, but the car delivered is worth only $5,000, the buyer is entitled to $3,000 in damages. The UCC also allows parties to modi --- y or limit remedies through their agreement. NH UCC § 2-719(1) states:
The agreement may provide --- or remedies in addition to or in substitution --- or
those provided in this Article and may limit or alter the measure o --- damages
recoverable under this Article, as by limiting the buyer’s remedies to return
o --- the goods and repayment o --- the price or to repair and replacement o --- non-
con --- orming goods or parts.
526 18 • Warranties
For instance, a seller might include a provision stating that their liability is limited to repairing de — ective goods or replacing non-con — orming items. This — lexibility allows parties to cra — t remedies tailored to their speci — ic needs. However, limitations must comply with the UCC’s requirements and cannot — ail their essential purpose. I —
a repair or replacement clause cannot adequately resolve the de
ect, the buyer may revert to the de — ault remedies under § 2-714. It is also important to distinguish breach o — warranty remedies — rom rescission. Rescission, which unwinds the contract and returns the parties to their pre-contract positions, is generally available in cases o —
raud, mistake, or misrepresentation. In contrast, warranty remedies assume that the contract remains valid but breached. As a result, warranty remedies — ocus on compensating the buyer — or de — ective per — ormance rather than invalidating the agreement. En — orcing warranties ensures that sellers are held accountable — or their promises, and it provides buyers with reliable remedies when those promises are breached. By allowing parties to modi — y remedies under § 2-719, the UCC balances contractual
lexibility with the protection o — buyers’ reasonable expectations.
E. Disclaimers o
Warranties The UCC permits sellers to disclaim warranties, either by limiting, altering, or excluding them entirely. These disclaimers are governed by UCC § 2-316, which establishes speci — ic requirements — or validity. While sellers can use disclaimers to pro- tect themselves — rom liability, courts care — ully scrutinize these provisions to ensure they are clear, conspicuous, and — air to buyers.
- Disclaiming Implied Warranties It is generally easier — or sellers to disclaim implied warranties than express warran- ties. NH UCC § 2-316(2) provides: Subject to subsection (3), to exclude or modi — y the implied warranty o — mer- chantability or any part o — it the language must mention merchantability and in case o — a writing must be conspicuous, and to exclude or modi — y any implied warranty o —
itness the exclusion must be by a writing and conspicuous. Lan- guage to exclude all implied warranties o —
itness is su —
icient i — it states, — or example, that ‘There are no warranties which extend beyond the description on the — ace hereo — . To exclude the implied warranty o — merchantability, the disclaimer must speci — i- cally mention merchantability and, i — written, must be conspicuous. For example, a contract stating, “The seller makes no warranties, including any warranty o — mer- chantability,” satis — ies this requirement i — presented in a way that attracts the buyer’s 18 • Warranties 527
attention. Sellers o
ten write disclaimers in all caps or bold — ont to make them more conspicuous and meet the UCC’s standard. For instance, a used car dealership might include the — ollowing language in its sales contract: “THIS VEHICLE IS SOLD AS IS, WITH ALL FAULTS. THE SELLER MAKES NO WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY.”
This disclaimer, written in capital letters and prominently placed in the contract, would likely meet the UCC’s requirements --- or clarity and conspicuousness. However, i --- the disclaimer were buried in --- ine print or located on the back o --- a receipt, a court might --- ind it invalid because it does not reasonably attract the buyer’s attention. Similarly, to disclaim the implied warranty o ---
itness — or a particular purpose, the disclaimer must use clear, conspicuous language, such as “There are no warranties that extend beyond the description o — the goods.” In either case, courts evaluate whether the disclaimer meets the UCC’s standards — or conspicuousness by considering — actors like — ont size, placement, and visibility in the contract. Alternatively, sellers may use “catch-all” language to disclaim all implied warran- ties. UCC § 2-316(3) allows exclusions through phrases such as “as is” or “with all
aults,” provided these terms are clear and readily understandable to buyers. However, even with valid disclaimers, courts may invalidate provisions that are deemed uncon- scionable under UCC § 2-302.
- Disclaiming Express Warranties Disclaiming express warranties is inherently di —
icult. An express warranty arises when a seller makes a speci — ic promise or a —
irmation o —
act about the goods that becomes part o — the basis o — the bargain. I — a contract contains both an express war- ranty and a disclaimer o — warranties, UCC § 2-316(1) directs courts to interpret these terms as consistent wherever reasonable. However, when the warranty and disclaimer are inherently contradictory, courts generally — avor the warranty. Words or conduct relevant to the creation o — an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the [parol evidence rule] negation or limitation is inoperative to the extent that such construction is unreasonable. NH UCC § 2-316(1). For example, imagine a seller provides a written express warranty stating, “This engine is guaranteed to run — or 100,000 miles,” but the same contract includes a dis- claimer stating, “The seller makes no warranties, express or implied.” These terms cannot reasonably be reconciled. Courts will generally prioritize the warranty because 528 18 • Warranties
it re
lects the buyer’s reasonable reliance on the seller’s speci — ic promise, especially when the warranty induced the buyer to enter the contract.
- Parol Evidence Rule Implications The interaction between oral warranties and written disclaimers introduces addi- tional complexity because it implicates the parol evidence rule. When a seller makes an oral promise during negotiations (e.g., “This car will get 40 miles per gallon”), and the — inal written agreement contains a broad disclaimer o — warranties, courts must determine whether the oral warranty can be admitted as evidence. Under the parol evidence rule, prior or contemporaneous oral agreements that contradict the terms o — a — ully integrated written contract are generally excluded. For example, i — a written contract contains a clause stating that “the seller makes no warranties, express or implied,” evidence o — an oral promise that contradicts this disclaimer would typically be barred. However, courts o — ten scrutinize such disclaim- ers, particularly when the circumstances suggest un — airness, misrepresentation, or an imbalance in the bargaining process. In Sierra Diesel Injection Service v. Burroughs Corp., 890 F.2d 108 (9th Cir. 1989), the seller orally promised that its “B-80” computer would per — orm speci — ic accounting
unctions. The written contract, however, included a broad disclaimer stating that the seller made “no warranties, express or implied.” The court — ound that the disclaimer was not su —
iciently conspicuous, and it also concluded that the written contract was not — ully integrated. These — indings allowed the court to admit evidence o — the oral warranty. Importantly, the court emphasized that barring the oral warranty under the parol evidence rule would have un — airly shielded the seller — rom accountability — or its misleading representations. Courts are particularly likely to — ind ways around an integration clause when en — orcing it would lead to an inequitable result. I — a seller’s oral promises induced a buyer to enter a contract, and the written agreement later contains an unexpected disclaimer, courts may admit the oral promise as evidence o —
raud, misrepresenta tion, or a lack o — genuine assent. This judicial — lexibility helps to ensure — airness and protect buyers — rom deceptive practices.
Misrepresentation, Parol Evidence,
and Warranties
In addition to con --- licts between warranties and disclaimers, sellers’
statements during negotiations may give rise to claims o --- misrepresenta
tion. A seller’s --- alse assertion about the quality or --- unctionality o --- goods
can lead to liability, even i --- the contract contains a valid disclaimer o --- war-
ranties. This interaction highlights a key exception to the Parol Evidence
Rule: --- raud or misrepresentation.
18 • Warranties 529
For example, i --- a seller assures a buyer during negotiations that a prod-
uct is “state-o --- -the-art,” and the buyer later discovers that the product is
de --- ective or outdated, the buyer may bring a claim --- or misrepresentation.
Courts o --- ten allow evidence o --- the seller’s statement to establish --- raud or
misrepresentation, even when the Parol Evidence Rule would otherwise
exclude it. This principle ensures that sellers cannot use integration clauses
or disclaimers to shield themselves --- rom liability --- or deceptive practices.
As seen in Sierra Diesel, courts balance the need to en --- orce integration
clauses and protect the --- inality o --- written agreements with the need to
prevent un --- airness and misrepresentation. This --- lexibility underscores the
importance o ---
airness in contract en — orcement and provides a sa — eguard against opportunistic behavior in commercial transactions.
F. Re
lections on Warranties Warranties are essential to managing the expectations and obligations o — buyers and sellers in commercial transactions. They establish a — ramework ensuring that goods meet reasonable standards while allowing — lexibility in de — ining liability. This balance re — lects — oundational themes in contract law, including reliance, e —
iciency,
airness, and autonomy. Reliance is central to the concept o — warranties. Buyers trust sellers’ representa tions and expertise when making purchasing decisions. Express warranties, such as a seller’s claim that a lawnmower can handle wet grass, protect buyers who rely on speci — ic promises. Implied warranties, like merchantability and — itness — or a particular purpose, ensure that goods meet baseline expectations, which allows buyers to trust in their quality without negotiating every detail. For example, a buyer who commu- nicates the need — or a waterproo — tent — or camping in heavy rain relies on the seller’s expertise to recommend a suitable product. I — the tent — ails, the implied warranty o —
itness ensures accountability. E —
iciency is promoted by the UCC’s warranty provisions, which streamline trans- actions by providing clear de — ault rules. The implied warranty o — merchantability o —
ers a baseline standard — or goods, which eliminates the need — or parties to negotiate the quality o — routine items. For instance, when a buyer purchases a toaster, they rea- sonably assume it will toast bread without requiring explicit assurances. These de — ault rules reduce transaction costs by making commerce more predictable and reliable. At the same time, autonomy is preserved by allowing parties to disclaim warranties under speci — ic conditions. Disclaimers enable sellers to limit their liability, particu- larly in high-risk industries. A used car dealer, — or example, might sell vehicles “as is” to re — lect the uncertainty in the condition o — older cars. Such disclaimers reduce costs and allow parties to allocate risks according to their priorities. Buyers retain 530 18 • Warranties
the
reedom to accept or reject such terms, such as deciding whether to purchase an extended warranty — or appliances. This — lexibility ensures that contracts re — lect the unique needs o — both parties while requiring disclosure to maintain — airness. Fairness is sa — eguarded by rules that protect buyers — rom exploitative practices. The UCC’s requirement that disclaimers be conspicuous ensures that buyers are aware o — warranty limitations. For example, a disclaimer buried in — ine print, such as “NO IMPLIED WARRANTIES APPLY,” would likely be invalidated under UCC § 2-316. Additionally, the doctrine o — unconscionability prevents sellers — rom using disclaim- ers to deny buyers any remedy — or de — ective goods. A clause that denies liability — or delivering de — ective products might be struck down i — the buyer had no meaning — ul opportunity to negotiate. These protections balance the — reedom o — contract with sa — e- guards against abuse to ensure that buyers are not un — airly disadvantaged. Warranties also bridge the gap between contract — ormation and per — ormance. They ensure that sellers uphold their promises, whether explicit or implied, and that buy- ers receive goods consistent with their expectations. A seller o — “Grade A” apples, — or instance, guarantees that the apples will meet industry standards, creating account- ability i — the buyer discovers bruised or rotting — ruit. This accountability — osters trust in commercial relationships and rein — orces the importance o — delivering on contrac- tual promises. Finally, warranties clari — y remedies when goods — ail to per — orm as promised. The UCC provides remedies such as repair, replacement, or re — und, thus ensuring that buyers have recourse i — goods do not meet the agreed standards. These remedies uphold the principle o — reliance while deterring sellers — rom making — alse or mislead- ing representations. By en — orcing warranties, the law promotes trust, — airness, and reliability in the marketplace.
Cases Reading Daughtrey v. Ashe. In this case, the court examines whether a jeweler’s appraisal describing diamonds as “H color and v.v.s. quality” created an express warranty under UCC § 2-313. The case --- ocuses on two key issues: whether the description quali --- ied as an express warranty and whether it became part o --- the basis o --- the bargain.
As you read the case, pay attention to the court’s reasoning about what con- stitutes an express warranty. Note how the court distinguishes between --- actual descriptions that create warranties, and statements o --- opinion or pu ---
ery that do not. Also, consider the importance o — the “basis o — the bargain” standard, which presumes that a seller’s description becomes part o — the agreement unless rebutted. Re — lect on how this approach shi — ts the burden o — proo — to the seller 18 • Warranties 531
and ensures that buyers can rely on clear representations without needing to prove explicit reliance. Daughtry highlights the tension between protecting buyers’ expectations and preventing sellers — rom being un — airly bound by casual statements. Think about how the court’s decision balances these competing interests and what it implies
or — uture transactions where sellers provide detailed descriptions o — goods.
Daughtrey v. Ashe
243 Va. 73 (1992) Opinion By WHITING, J. Daughtrey v. Ashe, 243 Va. 73 (1992) In this dispute between the buyers and the sellers o --- a diamond bracelet, the prin- cipal issues arise under the Uni --- orm Commercial Code — Sales. Code §§ 8.2-101 through 725. Speci --- ically, they are:
1. whether the sellers’ appraisal statement o --- the grade o --- diamonds on the
bracelet is a description o --- the goods under Code § 8.2-313(1)(b), and there-
ore an express warranty; and 2. whether such a statement made the description “a part o — the bargain” under Code § 8.2-313(1)(b), and there — ore an express warranty, when the buyers did not know o — the warranty until some time a — ter the purchase price was paid and the bracelet was delivered. In con — ormity with — amiliar appellate principles, we state the evidence in the light most — avorable to the sellers, who prevailed in the trial court. In October 1985, W. Hayes Daughtrey consulted Sidney Ashe (Ashe), a jeweler, about the purchase o — a diamond bracelet as a Christmas gi — t — or his wi — e, Fenton C. Daughtrey. Ashe exhibited, and o —
ered to sell, a diamond bracelet to Daughtrey — or $15,000. Although Ashe “knew” and “classi — ied” the bracelet diamonds as v.v.s. grade (v.v.s. is one o — the highest ratings in a quality classi — ication system employed by gem- ologists and jewelers), he merely described the diamonds as “nice” in his conversation with Daughtrey. Ashe told Daughtrey that i — he was later dissatis — ied with the bracelet, he would re — und the purchase price upon its return. When Daughtrey later telephoned Ashe and told him he would buy the bracelet, Ashe had Adele Ashe, his business associate, complete an appraisal — orm which he signed. The — orm contained the — ollowing pertinent language: The — ollowing represents our estimate — or insurance purposes only, o — the present retail replacement cost o — identical items, and not necessarily the amounts that might be obtained i — the articles were o —
ered — or sale . . . 532 18 • Warranties
DESCRIPTION APPRAISED VALUE
platinum diamond bracelet, set with 28 brilliant
ull ct diamonds weighing a total o — 10 carats. H color and v.v.s. quality. $25,000.00 When Daughtrey came with his daughter to close the sale, he showed the bracelet to his daughter and then paid Ashe — or it. As Ashe was counting the money, Daughtrey handed the bracelet to Adele Ashe, who put it in a box together with the appraisal and delivered the box to Daughtrey. Daughtrey later gave the bracelet to his wi — e as a Christmas present. In February 1989, Daughtrey discovered that the diamonds were not o — v.v.s. qual- ity when another jeweler looked at the bracelet. Shortly therea — ter, Daughtrey com- plained to Ashe, who re — used to replace the bracelet with one mounted with diamonds o — v.v.s. quality but o —
ered to re — und the purchase price upon return o — the bracelet. Because the value o — diamonds generally had increased in the meantime, Daughtrey declined Ashe’s o —
er. On May 8, 1989, Daughtrey and his wi — e — iled this speci — ic per — ormance suit against Sidney Ashe and Adele Ashe t/a Ashe Jewelers (the Ashes) to compel them to replace the bracelet with one mounted with v.v.s. diamonds or pay appropriate damages. A — ter hearing the evidence, the trial court — ound that the diamonds “were o — substantially lesser grade” than v.v.s. Nevertheless, because it concluded that the Daughtreys had not proven that “the appraisal was a term or condition o — the sale nor a warranty upon which [they] relied in the purchase o — the bracelet,” the court denied relie —
or breach o — warranty. The Daughtreys appeal. First, we consider whether Ashe’s statement o — the grade o — the diamonds was an express warranty. Code § 8.2-313 provides in pertinent part: (1) Express warranties by the seller are created as — ollows: . . . (b) any description o — the goods which is made part o — the basis o — the bargain cre- ates an express warranty that the goods shall con — orm to the description. The Ashes argue that the statement in the appraisal — orm is not an express warranty
or two reasons. First, they say the “appraisal on its — ace stated that it was ‘ — or insurance purposes only.’ ” However, we think that the balance o — the emphasized language in the appraisal
orm demonstrates that the limiting language relates only to the statement o — the appraised value. There — ore, Ashe’s description o — the grade o — the diamonds should be treated as any other statement he may have made about them. Second, the Ashes contend that Ashe’s statement o — the grade o — the diamonds is a mere opinion and, thus, cannot quali — y as an express warranty under Code § 8.2-313(2). It is not necessary to the creation o — an express warranty that the seller use
ormal words such as “warrant” or “guarantee” or that he have a speci — ic 18 • Warranties 533
intention to make a warranty, but an a ---
irmation merely o — the value o — the goods or a statement purporting to be merely the seller’s opinion or com- mendation o — the goods does not create a warranty. Code § 8.2-313(2). The Ashes rely principally upon a North Carolina case construing the identical code section — rom the North Carolina Uni — orm Commercial Code. However, here, Ashe did more than give a mere opinion o — the value o — the goods; he speci — ically described them as diamonds o — “H color and v.v.s. quality.” Ashe did not quali — y his statement as a mere opinion. And, i — one who has superior knowledge makes a state- ment about the goods sold and does not quali — y the statement as his opinion, the statement will be treated as a statement o —
act. Nor does it matter that the opinions o — other jewelers varied in minor respects. All o — them said, and the trial judge — ound, that the diamonds were o — a grade substan- tially less than v.v.s. Clearly, Ashe intended to sell Daughtrey v.v.s. diamonds. He testi — ied that he used only the term “nice” diamonds but “never mentioned vvs because Daughtrey didn’t know anything about vvs.” Later, Ashe testi — ied that “I know when I sold the bracelet and I classi — ied it as vvs, I knew it was vvs.” Given these considerations, we conclude that Ashe’s description o — the goods was more than his opinion; rather, he intended it to be a statement o — a — act. There — ore, the court erred in holding that the description was not an express warranty under Code § 8.2-313(2). Next, the Ashes maintain that because the description o — the diamonds as v.v.s. quality was not discussed, Daughtrey could not have relied upon Ashe’s warranty and, thus, it cannot be treated as “a part o — the basis o — the bargain.” In our opinion, the “part o — the basis o — the bargain” language o — Code § 8.2-313(1) (b) does not establish a buyer’s reliance requirement. Instead, this language makes a seller’s description o — the goods that is not his mere opinion a representation that de — ines his obligation. Z Our construction o — Code § 8.2-313, containing language identical to § 2-313 o —
the Uni
orm Commercial Code, is supported by a consideration o — the — ollowing per- tinent portions o — the O —
icial Comment to the Uni — orm Commercial Code section: The present section deals with a —
irmations o —
act by the seller, descriptions o — the goods . . . exactly as any other part o — a negotiation which ends in a contract is dealt with. No speci — ic intention to make a warranty is necessary i — any o — these — actors is made part o — the basis o — the bargain. In actual prac- tice a —
irmations o —
act made by the seller about the goods during a bargain are regarded as a part o — the description o — those goods; hence no particular reliance on such statements need be shown in order to weave them into the
abric o — the agreement. Rather, any — act which is to take such a —
irmations, once made, out o — the agreement requires clear a —
irmative proo — . The issue normally is one o —
act. O —
icial Comment 3 (emphasis added). 534 18 • Warranties
In view o --- the principle that the whole purpose o --- the law o --- warranty is to
determine what it is that the seller has in essence agreed to sell, the policy is
adopted o --- those cases which re --- use except in unusual circumstances to
recognize a material deletion o --- the seller’s obligation. Thus, a contract is
normally a contract --- or a sale o --- something describable and described. O ---
i- cial Comment 4 (emphasis added). Paragraph (1)(b) makes speci — ic some o — the principles set — orth above when a description o — the goods is given by the seller. O —
icial Comment 5. The precise time when words o — description or a —
irmation are made . . . is not material. The sole question is whether the language [is] — airly to be regarded as part o — the contract. I — language is used a — ter the closing o — the deal (as when the buyer when taking delivery asks and receives an addi- tional assurance), the warranty becomes a modi — ication, and need not be supported by consideration, i — it is otherwise reasonable and in order (Sec- tion 2-209). O —
icial Comment 7 (emphasis added). Concerning a —
irmations o — value or a seller’s opinion or commendation under subsection (2), the basic question remains the same: What statements o — the seller have in the circumstances and in objective judgment become part o — the basis o — the bargain? As indicated above, all o — the statements o — the seller do so unless good reason is shown to the contrary. The provisions o —
subsection (2) are included, however, since common experience discloses
that some statements or predictions cannot --- airly be viewed as entering into
the bargain. O ---
icial Comment 8 (emphasis added).
We conclude
rom the language used in Code § 8.2-313 and the O —
icial Comment thereto that the dra — ters o — the Uni — orm Commercial Code intended to modi — y the traditional requirement o — buyer reliance on express warranties. Such a requirement was contained in the — ollowing pertinent language o — the earlier Uni — orm Sales Act § 12: “any a —
irmation o —
act or any promise by the seller relating to the goods is an express warranty i — the natural tendency o — such a —
irmation or promise is to induce the buyer to purchase the goods, and i — the buyer purchases the goods relying thereon.” (Emphasis added.) We note that “induce” and “reliance” appear nowhere in Code § 8.2-313, as contrasted with the re — erence to buyer reliance in the subsequent section, Code § 8.2-315, dealing with an implied warranty o —
itness — or a particular purpose. Hence, the seller’s representation need only be “a part o — the basis o — the bargain,” as set — orth in Code § 8.2-313(1)(b). The term “bargain” is not de — ined in the Code, but it is used in the — ollowing de — inition o — “agreement” as
the bargain o --- the parties in --- act as --- ound in their language or by implica-
tion --- rom other circumstances . . . Whether an agreement has legal conse-
quences is determined by the provisions o --- this act, i --- applicable; otherwise
by the law o --- contracts as provided in Code § 8.1-103. (Compare ‘Contract’).
Code § 8.1-201(3).
18 • Warranties 535
The word “ ‘Contract’ means the total legal obligation which results --- rom
the parties’ agreement as a ---
ected by this act and any other applicable rules o — law. (Compare ‘Agreement’).” Code § 8.1-201(11).
Ashe introduced no evidence o
any — actor that would take his a —
irmation o — the quality o — the diamonds out o — the agreement. There — ore, his a —
irmation was “a part o — the basis o — the bargain.” Accordingly, we hold that the Daughtreys are entitled to recover — or their loss o — bargain, and that the court erred in ruling to the contrary. There — ore, we will reverse the judgment o — the trial court and remand the case — or
urther proceedings to ascertain the Daughtreys’ damages. Reversed and remanded.
Re --- lection In Daughtrey, the court demonstrated how the UCC --- acilitates buyer protec- tion by presuming that a seller’s descriptions become part o --- the bargain. The jew- eler’s written appraisal describing the diamonds as “H color and v.v.s. quality” was a --- actual statement that created an express warranty under UCC § 2-313(1)(b). This warranty obligated the seller to deliver goods that con --- ormed to the description, even though the seller argued that the appraisal was intended --- or “insurance pur- poses only.”
One key takeaway --- rom the case is the reduced emphasis on reliance. Unlike com- mon law, the UCC does not require buyers to prove that they explicitly relied on the seller’s statements to create an express warranty. Instead, the seller must rebut the presumption that their descriptions or a ---
irmations were part o — the bargain. This shi — t underscores the UCC’s — ocus on — airness and e —
iciency by holding sellers accountable
or their representations, especially when the buyer lacks expertise to veri — y the goods independently. The case also highlights the distinction between — actual descriptions and pu —
ery. The jeweler’s description o — the diamonds as “H color and v.v.s. quality” was a — actual statement about the goods’ characteristics, not a subjective opinion. This distinction rein — orces the importance o — clarity in seller representations. Sellers must be cau- tious about making speci — ic claims that buyers could reasonably interpret as — actual guarantees. Finally, the court’s rejection o — the “insurance purposes only” argument under- scores how express warranties operate independently o — the context in which state- ments are made. Even i — the appraisal served multiple purposes, its — actual description o — the diamonds’ quality created an en — orceable obligation under the UCC. This ensures that sellers cannot escape liability by attempting to limit the scope o — their warranties retroactively. This case illustrates the balance that the UCC strikes between protecting buyers’ reliance on sellers’ descriptions and ensuring that commercial transactions remain 536 18 • Warranties
air and predictable. It demonstrates how express warranties are tools — or en — orcing accountability in transactions involving asymmetries o — knowledge and expertise.
Discussion 1. How does the court distinguish between --- actual descriptions that create express warranties, and opinions or pu ---
ery that do not? Was the jeweler’s appraisal clearly a — actual description, or could it have been interpreted as opinion?
- The court rejected the trial court’s emphasis on the “insurance purposes only” language in the appraisal. Do you agree with this reasoning? Why might such lan- guage still matter in other contexts?
-
Daughtrey highlights the UCC’s shi
t — rom reliance to the “basis o — the bargain” test. Does this approach adequately balance buyer protection with seller account- ability? What are its potential limitations?
- The court placed the burden on the seller to rebut the presumption that their description was part o — the bargain. What evidence might a seller present to suc- cess — ully rebut this presumption?
-
How might this case in
luence how sellers describe their goods? Would you expect sellers to become more cautious in their representations, and how could this a —
ect buyers?
-
I
the jeweler had explicitly stated that the appraisal was — or insurance purposes and not part o — the transaction, would this have changed the outcome? Why or why not?
Reading Carlson v. General Motors Corp. Have you ever owned a car that ran — ine — until it broke down catastrophically just a — ter the warranty expired? That’s not irony — it might be evidence o — a deceptive practice. In Carlson v. General Motors, the plainti —
s allege that GM sold diesel engines it knew were de — ective, then limited how long buyers could bring warranty claims — both through written warranties and — ine-print terms restricting any implied warranties. Some plainti —
s had major engine problems, but only a — ter the express warranty ended. Others didn’t experience — ailure themselves but claimed their cars lost resale value due to GM’s reputation — or de — ective diesel models. The legal issues are layered. On the sur — ace is the implied warranty o —
merchantability (UCC § 2-314) — the basic promise that goods will be
it — or 18 • Warranties 537
ordinary use. Beneath that is the doctrine o
unconscionability (UCC § 2-302), which allows courts to reject contract terms that are un — air or imposed without real choice. And layered over both is a — ederal statute: the Magnuson-Moss Warranty Act, passed in 1975 to address deceptive warranty practices in mass- market consumer goods. The Act doesn’t create new warranties, but it limits how sellers can disclaim or restrict the ones they o —
er — especially when they issue written warranties but try to undercut implied protections. As you read, notice the contrast between the trial and appellate courts. The trial judge dismissed the claims outright, treating GM’s warranty limits as rea- sonable on their — ace. The appellate court disagreed — at least in part — and sent the case back — or — urther — actual development. Why the di —
erence? What role does GM’s alleged knowledge o — de — ects play in determining whether the limits were unconscionable? You might also ask: what is the point o — a warranty? Is it just about short- term per — ormance, or should it protect longer-term expectations — especially when the seller has more in — ormation than the buyer? And how should courts decide whether a warranty term is — air, or whether the buyer had any real chance to object? This case invites you to consider the relationship between state and — ederal law, contract doctrine and consumer protection, sur — ace terms and deeper — air- ness. It also raises a broader question: in markets built on standard — orms and asymmetric in — ormation, what does it mean — or a contract to be — air?
Carlson v. General Motors Corp.
883 F.2d 287 (4th Cir. 1989) Opinion by PHILLIPS, J. This case involves alleged de --- ects in 5.7-liter diesel automobile engines manu --- ac- tured by the de --- endant-appellee, the General Motors Corporation (GM), in model years 1981 through 1985. In a seventy- --- our page amended complaint --- iled on behal --- o ---
183 named claimants and a prospective class o
“similarly situated” car owners — all o —
whom at one time purchased GM products equipped with diesel engines — plainti
s charged that the engines were inherently de — ective and subject to — requent break- downs, necessitating extensive and expensive repairs. Plainti —
s claimed, moreover, that GM’s — ailure to correct these de — ects constituted a breach o — the implied warranty o — merchantability on the engines, hence a remediable violation o — the Magnuson- Moss Warranty Act (the Act). In response to Rule 12(b)(6) motions — iled by the de — endant, the district court dis- missed the claims o — 130 o — the named plainti —
s. At the same time, it denied plainti —
s’ 538 18 • Warranties
motion to amend the complaint and name additional claimants. This appeal
ollowed and required us to decide: 1. whether GM diesel car owners who did not themselves encounter engine di — -
iculties are nevertheless entitled to maintain actions — or the recovery o — “lost resale value”; and 2. whether the district court erred by dismissing the separate claims o — some plainti —
s that GM’s durational limitations on any and all implied warranties o — merchantability were “unreasonable” and “unconscionable.” Because we agree with the district court that the implied warranty o — merchantabil- ity does not encompass claims — or “lost resale value,” we a —
irm its dismissal o — those plainti —
s who alleged damages attributable only to the “poor reputation” o — GM’s diesel products. We also hold, however, that the district court erred by dismissing the “unconscionability” claims o — other plainti —
s solely on the basis o — the pleadings. We there — ore reverse as to those claims and remand them — or — urther proceedings.
I For present purposes, we treat the named plainti ---
s in this case as — alling into three separate categories: (1) those who alleged that they encountered signi — icant mechani- cal di —
iculties with the diesel engines in their GM cars be — ore the applicable written warranties had expired; (2) those who alleged that they encountered engine problems only a — ter all express warranties had expired; and (3) those who did not speci — ically allege that their diesel vehicles were de — ective, but instead only that the “poor reputa- tion” o — GM’s diesel products resulted in compensable losses o — “resale value.” In a single order, the district court dismissed all named plainti —
s in the latter two catego- ries. Because it did so — or conceptually distinct reasons, however, we set out separately the salient — acts underlying the claims o — each group.
A. Plainti ---
s Claiming that GM’s “Durational Limitations” on the Operation o — Implied Warranties Were Unreasonable and Unconscionable. Included in the — irst group are those plainti —
s who challenge GM’s attempt to impose “durational limitations” on any and all implied warranties covering the diesel- equipped vehicles that are the subject o — this dispute. GM’s express warranties on the diesel engines it manu — actured in the 1981 and 1982 model years expired by their terms a — ter 24 months or 24,000 miles. For model years 1983 through 1985, all express warranties on the engines expired a — ter 36 months or 50,000 miles. Critical — or present purposes, however, is that the warranty documents provided to purchasers o — diesel-equipped GM vehicles included provisions purport- ing also to limit the operation o — any implied warranties to the periods covered by the express guarantees. O — the 183 plainti —
s named in the amended complaint, 107 alleged that they had
irst encountered substantial di —
iculties with their diesel cars only a — ter all applicable 18 • Warranties 539
express warranties had expired — hence a
ter the purportedly “simultaneous” expira- tion o — any implied warranties. Plainti —
s sought to avoid the obvious di —
iculties asso- ciated with GM’s written disclaimers, however, by alleging — urther that the underlying “durational limitations” on the operation o — any implied warranties were, as a matter o — law, both “unreasonable” and “unconscionable” — hence “ine —
ective” under § 2308 o — the Act:
§ 2308. Implied warranties. (a) No supplier may disclaim or modi --- y (except
as provided in subsection (b) o --- this section) any implied warranty to a con-
sumer with respect to [a] consumer product i --- (1) such supplier makes any
written warranty to the consumer with respect to such consumer product, or
(2) at the time o --- sale, or within 90 days therea --- ter, such supplier enters into a
service contract with the consumer which applies to such consumer product.
(b) For purposes o --- this chapter . . . , implied warranties may be limited in
duration to the duration o --- a written warranty o --- reasonable duration, i --- such
limitation is conscionable and is set --- orth in clear and unmistakable language
and prominently displayed on the --- ace o --- the warranty. (c) A disclaimer, mod-
i --- ication, or limitation made in violation o --- this section shall be ine ---
ective — or purposes o — this chapter and State law. 15 U.S.C. § 2308 (emphasis supplied).
In response to GM’s Rule 12(b)(6) motion to dismiss, however, the district court held that the implied warranty disclaimers were indeed both “reasonable” and “con- scionable.” Rejecting plainti —
s’ claim that “the warranty limitations were unconscio- nable and o — unreasonabl[y limited] duration because GM knew when it sold the cars that the diesel engines were de — ective,” the court reasoned as — ollows:
A durational limitation on an implied warranty can mean only that the
manu --- acturer warrants that the car is --- it --- or ordinary purposes only --- or the
duration o --- that warranty. In other words, the limitation can mean only
that the unmerchantability must mani --- est itsel --- in some manner during the
period o --- the warranty in order --- or the purchaser to have a cause o --- action.
I --- the court accepted plainti ---
s’ argument, a plainti —
would need only to show that a manu — acturer knew that a product would — ail some time a — ter the expiration o — the implied warranty in order to recover — or unmerchant- ability . . . This showing would rarely be di —
icult, and, thus, the time/mile- age limitation on the warranty which Congress expressly permits would be rendered meaningless. Turning to the speci — ic limitations periods in this case, the court has no problem concluding that the time and mileage limits are reasonable and not unconscionable. In a class action di —
ering — rom this case only in the model years o — the cars involved, a United States Magistrate — ound a one-year/12,000 mile warranty limitation reasonable. The warranties in the instant case last longer than those — ound reasonable in the Kaplan case, and this court — inds that the limitations are both reasonable and conscionable. 540 18 • Warranties
Carlson v. General Motors Corp., No. 2:86-2674-1, slip op. at 13-14 (D.S.C. April 4, 1988). Plainti —
s now argue that the district court erred by ruling on the unconscionability question solely on the basis o — the pleadings. O — course, their ultimate claim is that the amended complaint was su —
icient on its — ace to survive GM’s dismissal motion — at least inso — ar as it alleged — acts which, i — proven, would have established that the com pany’s durational limitations on implied warranties were indeed “unreasonable” and “unconscionable.”
B. Plainti ---
s Seeking Compensation Under the Implied Warranty o —
Merchantability --- or “Lost Resale Value.” The second group o --- dismissed claimants includes the 17 named plainti ---
s who did not allege that they encountered engine di —
iculties with their own cars, but instead claimed that widespread problems with GM’s diesel products had substantially undermined public con — idence in all diesel-equipped automobiles — and had in turn diminished markedly the “resale value” o — the plainti —
s’ cars. The district court held, however, that in no case may automobile owners maintain actions — or breach o — the implied warranty o — merchantability i — their cars have “operated without incident.” The warranty o — merchantability guarantees that the warranted goods are
it — or the ordinary purposes — or which they are used. Thus, in this case, GM warranted that the cars it manu — actured would be — it — or driving and transportation. GM did not warrant to each purchaser that every other pur- chaser’s car would be — it. As plainti —
s themselves point out, the alleged loss in resale value results — rom the poor reputation o — the cars, and not — rom a mani — est de — ect in any o — the cars which have experienced no mechanical problems. Only i — a plainti —
irst establishes that his or her car was o — unmer- chantable quality might he or she recover damages. Because these plainti —
s cannot establish that their cars were not — it — or the ordinary purposes — or which cars are used, their claims must be dismissed. Slip op. at 10-11. On appeal, these plainti —
s o — course renew their argument that lost resale value demonstrably attributable to widespread product — ailures constitutes “compensable injury” and gives rise to cognizable claims — or breach o — the implied warranty o —
merchantability.
II At the outset, we pause to note that both o --- the questions presented in this case turn largely on principles o --- state law — notwithstanding the amended complaint’s thresh- old invocation o --- a --- ederal statute. O --- course, resolution o --- the claims o --- both groups o --- dismissed plainti ---
s ultimately requires that we determine the scope o — the “implied warranty o — merchantability,” as that phrase is used in the Magnuson-Moss Warranty Act. As the district court recognized, however, the Act “operates in conjunction with state law to regulate the warranting o — consumer products.” 18 • Warranties 541
The statute itsel
de — ines an “implied warranty” as one “arising under State law (as modi — ied by this title) in connection with the sale by a supplier o — a consumer product,” 15 U.S.C. § 2301(7), and courts have in turn — ound it “beyond genuine dispute that, as to both implied and written warranties, Congress intended the application o — state law, except as expressly modi — ied by Magnuson-Moss, in breach o — warranty actions.” Each o — the named plainti —
s in this case is a resident o — South Carolina, and nearly all o — them purchased their GM cars in that state. Like 48 o — her sister states, South Carolina has adopted Article 2 o — the Uni — orm Commercial Code (UCC or the Code), and we there — ore must apply relevant provisions thereo — to the — ull extent required — or resolution o — the substantive questions on which this case turns. III We consider — irst whether the district court erred by dismissing the claims o — those plainti —
s who challenged GM’s “durational limitations” on the operation o — implied warranties. A The parties do not dispute that the question o — whether the limitation o — a war- ranty to a designated period is unreasonable or unconscionable may be decided as a matter o — law. Indeed, the rule is mandatory, rather than permissive. By its terms, UCC § 2-302 treats “unconscionability” as question o — law; and it is there — ore “the court — not the jury — [that] should make the determination o — whether designated warranty periods are ‘reasonable’ or ‘unconscionable.’ ” This does not suggest, however, that a trial court can always determine “on the pleadings” whether given contractual language is unconscionable. To the con- trary, unconscionability claims should but rarely be determined on the bare-bones pleadings — that is, with no opportunity — or the parties to present relevant evidence o — the circumstances surrounding the original consummation o — their contractual relationship. The gravamen o — nearly every such claim is that the parties’ initial trans- action was in some way tainted by “overreaching”; and it is — or this reason that courts have developed “tests” o — unconscionability which look, as a matter o — necessity, to the presence or absence in a given setting o — certain o — t-encountered “indicia” o — un — air bargaining. One — requently cited case holds, — or example, that unconscionability “gen- erally includes an absence o — meaning — ul choice on the part o — one o — the parties together with contract terms which are unreasonably — avorable to the other party.” In this circuit, we apply a similar test. The — actors determining “unconscionability” are various: the nature o — the injuries su —
ered by the plainti —
; whether the plainti —
is a substantial business concern; the relative disparity in the parties’ bargaining power; the parties’ relative sophistication; whether there is an element o — surprise in the inclusion o — the challenged clause; and the conspicuousness o — the clause. Trial courts obviously cannot apply these standards without care — ully examining all relevant evidence o — the setting in which the parties struck their bargain — and thus 542 18 • Warranties
cannot resolve bona
ide questions o — unconscionability be — ore the litigants have had an opportunity to present such evidence. Courts there — ore have strictly adhered to the UCC’s express requirement that, “when it is claimed or appears that a contract or any clause thereo — may be unconscionable, the parties shall be a —
orded a reasonable opportunity to present evidence as to its commercial setting, purpose and e —
ect to aid the court in making the determination.” The basic principle is o — course that, in order to avoid the danger that they might dispose o — viable claims prematurely, courts must allow the parties to develop an adequate record. Otherwise, i — “no a —
idavits, interrogatories, depositions, or evi- dence o — any sort have been submitted regarding the circumstances surrounding the transaction, a court can only speculate as to whether or not a contractual term was unconscionable.” We there — ore hold that the district court erred by ruling, solely on the basis o — the pleadings, that GM’s durational limitations on any and all implied warranties were both “reasonable” and “conscionable” as a matter o — law. The court will be equipped to address that question only a — ter plainti —
s have had an opportunity — whether in con- nection with a motion — or summary judgment or at trial — to present evidence that,
or example, they had no “meaning — ul choice” but to accept the limited warranties, or that the durational limitations “unreasonably” — avored the de — endant. That said, we turn to the separate question o — whether there are nevertheless, as GM claims, alternative grounds on which we could a —
irm the dismissal order here at issue.
B The argument is straight --- orward. It is that, while the dismissed plainti ---
s might well have been entitled to go — orward and present evidence in support o — a “ — acially viable” claim, their amended complaint simply “ — ailed to allege any — acts — rom which it would appear that the durational limitations were unconscionable.” On our reading, however, the amended complaint more than su —
iciently particular- izes the alleged “overreaching.” It speci — ies ten separate “reasons” why GM’s imposition o — durational limitations on the operation o — implied warranties was both “unreason- able” and “unconscionable.” Plainti —
s alleged, — or example, that “due to unequal bar- gaining power and lack o — e —
ective warranty competition among dominant — irms in the automobile manu — acturing industry, purchasers had no meaning — ul alternative to accepting GM’s attempted limitation o — the duration o — the implied warranty.” Here, the claim is that the plainti —
s’ contractual relationship with GM was tainted by an absence o — “meaning — ul choice” and a substantial “disparity in . . . bargaining power” — — acts which, i — proven, clearly would establish “unconscionability.” Similarly, plainti —
s’ allegation that “diesel engines are designed to and ordinarily do — unction — or periods substantially in excess o — those speci — ied in GM’s warranties” obviously implicates the “reasonableness” o — the durational limitations — hence their e —
ectiveness under § 2308 o — the Act. 18 • Warranties 543
Perhaps most signi
icantly, plainti —
s also alleged that GM knew o — inherent de — ects in its diesel engines — but — ailed to warn its customers o — the consequential likelihood o — “catastrophic — ailures.” The claim is, o — course, that GM imposed its durational limitations on the opera- tion o — implied warranties in the course o — bargaining tainted by the “concealment o — relevant — acts”; that, ipso — acto, plainti —
s had no “meaning — ul choice” when they accepted the limitations; and that the disclaimers themselves were there — ore uncon- scionable as a matter o — law. GM argues vigorously, however, that its alleged “knowledge” o — various de — ects — even i — proven — has no bearing whatsoever on the “reasonableness” o — its warranty disclaimers. The district court apparently agreed. It relied on the — ollowing passage
rom a recent Second Circuit decision, on which GM now stakes much o — its case: Virtually all product — ailures discovered in automobiles a — ter expiration o —
the express warranty can be attributed to a “latent de --- ect” that existed at
the time o --- sale or during the term o --- the warranty. All parts will wear out
sooner or later and thus have a limited e ---
ective li — e. Manu — acturers always have knowledge regarding the e —
ective li — e o — particular parts and the likeli- hood o — their — ailing within a particular period o — time . . . A rule that would make — ailure o — a part actionable based on such “knowledge” would render meaningless time/mileage limitations in warranty coverage. Abraham v. Volkswagen o — America, Inc., 795 F.2d 238, 250 (2d Cir. 1986). We think Abraham is clearly distinguishable, however, at least inso — ar as the plainti —
s there challenged the “reasonableness” o — durational limitations on express limited warranties. The claim in this case is di — — erent. The plainti —
s here allege that, even i — GM’s limitations on express warranties were o — “reasonable” duration, its knowledge o — certain “inherent de — ects” in the diesel engines rendered all parallel limitations on implied warranties “unconscionable.” As should be clear, the crucial distinction is that drawn by the express terms o — § 2308 between the “reasonableness” o — limitations on express warranties and the “conscionability” o — accompanying limi- tations on implied warranties. GM argues that therein lies no meaning — ul di —
erence, inasmuch as § 2308 o — the Act expressly authorizes limitations o — implied warran- ties to the duration o — “reasonably” limited express warranties. What the company ignores, however, is that the statute authorizes such limitations only i — they are also “conscionable.” The concepts o — “reasonableness” and “conscionability” are obviously related; but
or present purposes there are also, as suggested, certain critical di —
erences. Deter- mining whether temporal warranty limitations are o — “reasonable duration” requires the court to determine nothing more than — or how long, given past experience, con- sumers legitimately can expect to enjoy the use o — a product “worry- — ree.” Courts should — ocus, in other words, on whether purchasers should “reasonably” expect that, a — ter a certain period, the product might well need repair. Herein lies the essence o —
544 18 • Warranties
plainti
s’ claim that “diesel engines are designed to and ordinarily do — unction — or . . . periods substantially in excess o — those speci — ied in GM’s . . . warranties”; and we must agree that, in the — ace o — this threshold challenge only to the “reasonableness” o —
the warranty disclaimers, GM’s alleged knowledge o
various “inherent de — ects” in its products simply has no relevance. Considered in isolation, the claim presents but one, purely objective question: viz., whether it is “reasonable” to expect a diesel engine supplied by any manu — acturer to operate “without incident” — or a given period o — time. Here, the separate, subjective question o — whether the manu — acturer knew that its product would not meet those expectations simply need not — and indeed should not — ever arise. Determining whether the imposition o — warranty limitations was “unconsciona- ble,” however, requires a court to consider somewhat broader questions. “Objective reasonableness” is certainly relevant; but so also is the — undamental — airness o — the bargaining process. Indeed, it is — or this reason that, when presented with a claim that the inclusion o — certain contractual terms constituted unconscionable “overreach- ing,” courts typically look to the parties’ relative “bargaining power,” “sophistication,” “knowledge” and “expertise” — all o — which constitute relevant evidence o — whether their ultimate transaction was indeed tainted by an “absence o — meaning — ul choice.” Surveying the cases, one noted treatise observes that “judicial — indings o — lack o —
‘meaning
ul choice’ . . . are usually — ounded upon a recipe consisting o — one or more parts o — assumed consumer ignorance and several parts o — seller’s guile”; and it is at this level that courts have necessarily cast “unconscionability” in largely subjective terms. Relevant in any such case are speci — ic allegations that a seller abused his “superior knowledge” and the buyer’s relative ignorance, or that the seller’s actions were in some other way akin to “ — raud or duress in contract — ormation” — the claim o — course being that such behavior implicates the seller’s subjective good — aith, the “evenhandedness” o — the bargaining process, and thus the “conscionability” o — challenged contractual language. Here, proo — that GM knew o — and — ailed to disclose major, inherent product de — ects would obviously suggest that its imposition o — the challenged “durational limitations” on implied warranties constituted “overreaching,” and that the disclaimers themselves were there — ore “unconscionable.” When a manu — acturer is aware that its product is inherently de — ective, but the buyer has “no notice o — or ability to detect” the prob lem, there is per — orce a substantial disparity in the parties’ relative bargaining power. In such a case, the presumption is that the buyer’s acceptance o — limitations on his contractual remedies — including o — course any warranty disclaimers — was neither “knowing” nor “voluntary,” thereby rendering such limitations unconscionable and ine —
ective. Evidence o — the “knowledge o — a stronger party that the weaker party will be unable to receive substantial bene — its — rom the contract” — or any related showing that “the transaction involved elements o — deception” — should in most cases “contribute to a
inding o — unconscionability in the bargaining process.” R2d § 208 cmt. d. 18 • Warranties 545
That is in large measure what the plainti
s here have claimed; and we there — ore cannot say that their amended complaint — ailed to allege — acts which, i — proven to the court’s satis — action, could establish that, as a matter o — law, GM’s durational limitations on the operation o — implied warranties were indeed unconscionable. We there — ore hold that the district court erred by dismissing the claims o — those named plainti —
s who alleged that they — irst encountered substantial di —
iculties with their diesel-equipped GM cars only a — ter the purported expiration o — all express and implied warranties. In so doing, we express no opinion and intimate no view on what may be proven on the matter, as opposed to what we have held was, at this stage, adequately pleaded to withstand the Rule 12(b)(6) motion.
IV The remaining substantive question is whether the district court also erred by dis- missing those plainti ---
s who alleged damages based solely on the “diminished resale value” o — their diesel-equipped GM cars. We think it — air to say that plainti —
s’ theory here is a novel one. Indeed, they cite no case in which a court has speci — ically held that the implied warranty o — merchant- ability protects against unanticipated losses in resale value. Instead, plainti —
s rely pri- marily on cases in which: (1) courts certi — ied or upheld the certi — ication o — nationwide classes whose members included “all owners” o — an allegedly de — ective vehicle; and (2) the damages allegedly su —
ered by the members o — such a class included “diminished resale value.” We — ind these cases singularly unhelp — ul, however, — or the simple reason that in not one did a court address the substantive question o — whether the implied warranty o —
merchantability protects against an unanticipated diminution in secondary market values. … Finding no real support — or their position in the cases, plainti —
s are there — ore le — t with the bare language o — § 2-314 o — the Code, which de — ines and gives shape to the “implied warranty o — merchantability.” Under § 314(2)(c), “goods to be merchantable must be at least such as . . . are — it
or the ordinary purposes — or which such goods are used.” Predictably, plainti —
s argue
rom this that, since “one o — the ordinary purposes . . . o — purchasing new automo- biles . . . is to be able to resell the car eventually,” the implied warranty o — merchant- ability encompasses “loss o — resale value” claims. We are not persuaded, however, that § 2-314 reaches nearly that — ar. The di —
iculty is that, so — ar as these plainti —
s are concerned, GM’s diesel-equipped cars have served the traditionally recognized “purpose” — or which automobiles are used. Since cars are designed to provide transportation, the implied warranty o — merchantability is simply a guarantee that they will operate in a “sa — e condition” and “substantially — ree o — de — ects.” Thus, “where a car can provide sa — e, reliable transportation, it is generally considered merchantable”. 546 18 • Warranties
So de
ined, “merchantability” clearly does not encompass consumer expectations that a product will hold its value; and it is — or this reason that several courts have rejected claims similar to those pressed here. We simply cannot say that the implied warranty o — merchantability encompasses more than these courts have held, and we there — ore a —
irm the district court’s dismissal o — those plainti —
s who alleged damages attributable only to “lost resale value.” … VI In summary, we reverse that portion o — the district court’s order dismissing the claims o — those plainti —
s who alleged breaches o — warranty by reason o — mechanical di —
iculties occurring a — ter the purported expiration o — all express and implied war- ranties; we a —
irm that portion dismissing the claims o — those plainti —
s who alleged breaches o — warranty solely by reason o — diminutions in resale value; and we remand the case — or — urther proceedings consistent with this opinion. SO ORDERED.
Re --- lection Contracts are temporal instruments: they structure risk and allocate bene --- its across time. In most transactions, per --- ormance un --- olds in the --- uture, and so does --- ailure. Contract law must decide who bears the risk o --- that --- ailure — based on what the par- ties promised, what they knew, and how the agreement was structured. Warranties make this dynamic explicit. They don’t just guarantee per --- ormance; they de --- ine the period during which a certain degree o --- per --- ormance is guaranteed. But that period is not always chosen neutrally. A seller who knows when --- ailure is likely to occur — and when liability can be cut o ---
— can shape warranty terms to shi — t risk strategically. The structure o — the warranty becomes the contractual embodi- ment o — an in — ormation asymmetry — which, when leveraged too sharply, exceeds the boundaries o — ethical business practices. Carlson presents just such a case. The plainti —
s allege that GM sold de — ective die- sel engines but limited both express and implied warranties to a period that expired be — ore de — ects typically appeared. That choice — about how long protection should last — was not incidental. It was, allegedly, a way to avoid responsibility — or a — ail- ure — oreseeable only by GM. The legal dispute centers on unconscionability, but the deeper tension is about timing, knowledge, and power: Who knew what? Who con- trolled the contract terms? And who was better positioned to bear the risk? The court’s analysis points toward an important insight. Warranty disputes are not just about whether a product was merchantable at the time o — sale. They are also about how time was used to allocate risk — and whether that allocation was — air. When contracts are written in advance by one party and presented without negotiation, the structure o — the deal deserves scrutiny. Especially when timing itsel — is used to o —
load
oreseeable harm onto the less in — ormed party. 18 • Warranties 547
Contract law may appear to treat time as a neutral backdrop. This case reminds us that time can be used — like any other term — as a tool o — risk design. The question is whether that design should always be en — orced.
Discussion 1. The plainti ---
s argued that GM’s durational limitation on the implied warranty o —
merchantability was unconscionable because GM allegedly knew about latent de — ects in its diesel engines. Should a manu — acturer’s knowledge o — de — ects a —
ect the en — orceability o — warranty disclaimers? Why or why not?
- The court remanded the case to determine whether there was procedural uncon- scionability in the bargaining process. What evidence might the plainti —
s pre sent to prove procedural unconscionability? How might GM counter these arguments?
-
Substantive unconscionability
ocuses on whether terms are unreasonably one- sided. Do you think a one-year limitation on implied warranties is inherently un — air in the context o — automobiles? What — actors should courts consider when evaluating — airness in this context?
-
The court held that the implied warranty o
merchantability guarantees — itness — or ordinary purposes, not resale value. Do you agree with this distinction? Should merchantability encompass market value in certain circumstances, such as when latent de — ects reduce a product’s resale price?
- Imagine that GM had included clearer disclaimers in its contracts stating that buy- ers assumed the risk o — latent de — ects beyond the warranty period. Would this have resolved the plainti —
s’ unconscionability claims? Why or why not?
-
This case highlights the interplay between
ederal law (the Magnuson-Moss War- ranty Act) and state warranty law. How does this overlap a —
ect buyers and sellers? Should one set o — rules take precedence, or is the dual system bene — icial?
Reading Tyson v. Ciba-Geigy Corp. When a product
ails, who’s responsible? The manu — acturer who wrote the label, the local dealer who gave in — ormal advice, or the customer who chose an o —
-label use? In Tyson, the court con — ronts a product — ailure that sits at the intersection o —
ormal disclaimers and in — ormal assurances. The plainti —
used a chemical herbicide to control weeds in soybean — ields. The product came with a printed label that disclaimed all implied warranties and gave speci — ic instructions — or 548 18 • Warranties
use. But the plainti ---
relied not on the label, but on oral advice — rom a local seller who recommended a di — — erent mixture and assured him it would “do a good job.” The court en — orced the manu — acturer’s disclaimer o — merchantability — — ind- ing the label language both conspicuous and valid. It also rejected the express warranty claim, holding that the oral statement amounted to pu —
ery, not a binding promise. Yet the court allowed the case to go — orward on a di — — erent theory: an implied warranty o —
itness — or a particular purpose, grounded in the plainti —
’s reliance on the seller’s skill and judgment. This case o —
ers two puzzles. First, how much protection do disclaimers o —
er — especially when the buyer never relied on the written terms? Second, when does seller advice rise to the level o — a legal warranty? The law draws sharp lines between pu —
ery, promise, and advice — but in practice, those lines o — ten blur, especially in in — ormal transactions involving technical goods. As you read, consider how courts balance written disclaimers against buyer expectations shaped by speech and trust. Who should bear the risk when a product — ails o —
-label? And what kinds o — statements should expose a seller to warranty liability, even when the manu — acturer has disclaimed it?
Tyson v. Ciba-Geigy Corp.
82 N.C. App. 626 (1986) Opinion by HENDRICK, J. ... In the present case, the evidence cited by plainti ---
in support o — the issue o — neg- ligence also supports the allegations o — breach o — warranty, which were raised by the pleadings. … Plainti —
assigns as error the trial court’s granting o — de — endants’ motions — or directed verdict. Plainti —
irst argues in support o — this assignment o — error that the evidence is su —
icient — or the jury to — ind that Ciba-Geigy breached an express warranty on the Dual 8E label that the product was reasonably — it — or the purposes re — erred to in the directions — or use. This argument is without merit. The label attached to the Dual 8E delivered to plainti —
contained the — ollowing express warranty: “Ciba-Geigy warrants that this product con — orms to the chemical descrip- tion on the label and is reasonably — it — or the purposes re — erred to in the Directions — or Use.” 18 • Warranties 549
Under the “Directions
or Use” the label instructs, “In soybeans, it [Dual 8E] may be applied alone or in combination with Sencor, Lexone, or Lorox in water or — luid — ertilizer with conventional ground sprayers.” The label also contains tables describing the necessary amount o — Dual 8E per acre when using Dual 8E alone or in conjunction with Sencor, Lexone or Lorox. The label does not contain directions — or mixing Dual 8E with Paraquat and a sur — actant. Vance Tyson testi — ied that he mixed the Dual 8E with Paraquat and a sur — actant and that he did not mix the Dual 8E in accordance with the directions — or use on the label. The record contains no evidence tending to show that the Dual 8E was not — it — or the purposes re — erred to in the directions — or use, and thus there is no evidence that this express warranty was breached by Ciba-Geigy. Plainti —
also contends that Ciba-Geigy breached the implied warranty o — mer- chantability and this warranty was ine —
ectively disclaimed on the Dual 8E label. This contention is also without merit. G.S. 25-2-316(2) provides, in pertinent part, as — ollows: “to exclude or modi — y the implied warranty o — merchantability or any part o — it the language must mention merchantability and in case o — a writing must be conspicuous, and to exclude or modi — y any implied warranty o —
itness the exclusion must be by a writing and conspicuous.” HN7G.S. 25-1-201(10) provides that whether a term or clause is “conspicuous” is — or decision by the court and that language in the body o — a — orm is “conspicuous” i — it is in larger or contrasting type or color. The label on the Dual 8E in the present case contains the — ollowing language: “Ciba-Geigy makes no other express or implied warranty o — Fitness or Mer- chantability or any other express or implied warranty.” This language is in darker and larger type than the other language on the label and is there — ore “conspicuous,” as de — ined by G.S. 25-1-201(10). We hold, there — ore, that Ciba-Geigy e —
ectively disclaimed any implied warranties o — merchantability or — itness. Plainti —
argues that he presented su —
icient evidence — or the jury to — ind that Farm Chemical breached express warranties relating to the e —
ectiveness o — Dual 8E to kill crabgrass in the no-till cultivation o — soybeans. Plainti —
contends that the statements o — the sales representative o — Farm Chemical that the Dual 8E, when mixed with Para- quat and a sur — actant, would “do a good job” created an express warranty. G.S. 25-2-313(1)(a) provides that “Any a —
irmation o —
act or promise made by the seller to the buyer which relates to the goods and becomes part o — the basis o — the bargain creates an express warranty that the goods shall con — orm to the a —
irmation or promise.” 550 18 • Warranties
A salesman’s expression o
his opinion in “the pu —
ing o — his wares” does not create an express warranty. Thus, statements such as “supposed to last a li — etime” and “in per — ect condition” do not create an express warranty. Similarly, the statement made by the salesman in the present case that the Dual 8E would “do a good job” is a mere expression o — opinion and did not create an express warranty. Finally, plainti —
contends that the trial court erred in granting de — endant Farm Chemical’s motion — or directed verdict on the issue o — breach o — implied warranty. We agree with this contention. G.S. 25-2-315 de — ines implied warranty o —
itness — or particular purpose as — ollows: Where the seller at the time o — contracting has reason to know any particular pur- pose — or which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or — urnish suitable goods, there is unless excluded or modi — ied under the next section an implied warranty that the goods shall be — it — or such purpose. The evidence in the present case, when considered in the light most — avorable to plainti —
, tends to show that plainti —
contacted de — endant Farm Chemical to order the herbicides Lasso and Lorox, — or the no-till cultivation o — soybeans. He spoke with Mr. Gregory, an employee o — Farm Chemical, on the telephone and told him that he was planning the no-till cultivation o — soybeans on 145 acres o — his land and described the type o — soil on the land. Mr. Gregory gave Dual 8E a good recommendation and told plainti —
that it would “do a good job,” would be less expensive to use than the chemicals he had used the previous year and would also be less risky to use on plain- ti —
’s type o — land. He — urther told plainti —
that Dual 8E could be mixed with Paraquat and a sur — actant to replace Lasso and Lorox. He also told plainti —
the amount o — Dual 8E per acre that he should use. Plainti —
testi — ied that based upon Mr. Gregory’s rec- ommendation and his past business dealings with Farm Chemical, he decided to use Dual 8E and ordered thirty- — ive gallons — rom Farm Chemical. Vance Tyson testi — ied that he mixed the chemicals in accordance with Mr. Gregory’s instructions, but that the Dual 8E was ine —
ective in killing crabgrass. Plainti —
also introduced evidence tending to show that Dual 8E must be mixed with Sencor, Lexone or Lorox and either Ortho Paraquat CL or Roundup. This evidence is su —
icient to support a — inding that the seller, Farm Chemical, had reason to know o — the particular purpose, the no-till cultivation o — soybeans, — or which the product was required and that plainti —
was relying on its recommenda- tion when he ordered the Dual 8E. There is no evidence in the record indicating that de — endant Farm Chemical disclaimed any warranties relating to the Dual 8E. Thus, the evidence in the record is su —
icient — or a jury to — ind that Farm Chemical made an implied warranty relating to the — itness o — the Dual 8E — or plainti —
’s purpose and that this warranty was breached. We hold, there — ore, that the trial court erred in directing a verdict — or de — endant Farm Chemical on the issue o — breach o — an implied warranty o —
itness — or particular purpose. By their cross-appeal, de — endants contend that the trial court erred in allowing plainti —
’s motion to amend his complaint made at the end o — plainti —
’s evidence to 18 • Warranties 551
allege that de
endants’ acts constituted un — air and deceptive trade practices in viola- tion o — G.S. 75-1.1. A — ter the trial court allowed plainti —
’s motion to amend, it allowed de — endants’ motions — or directed verdict on all issues. In plainti —
’s appeal, he has not contended that the trial court erred in granting de — endants’ motions — or directed ver- dict on the issue o — un — air and deceptive trade practices. There — ore, it is unnecessary
or us to address de — endants’ assignment o — error on cross-appeal. For the — oregoing reasons, directed verdict — or de — endant Ciba-Geigy Corporation is a —
irmed. Directed verdict — or de — endant Farm Chemical is reversed and remanded
or a new trial with respect to plainti —
’s claim — or breach o — an implied warranty o —
itness — or particular purpose as to de — endant Farm Chemical and any and all damages resulting there — rom. A —
irmed in part, reversed in part.
Re --- lection Tyson shows how contract law draws --- ormal boundaries around what counts as a promise — but those boundaries don’t always re --- lect how deals are actually made. Vance Tyson didn’t rely on the manu --- acturer’s label when choosing an herbicide. He relied on the advice o --- a local dealer who told him that Dual 8E would “do a good job” when mixed in a way not authorized by the label. The label disclaimed all warran- ties. The advice, by contrast, came in --- ormally — by phone, through trust, and without negotiation. Legally, the express warranty claim --- ails: the dealer’s statement was too vague to rise above pu ---
ery. The merchantability claim against the manu — acturer — ails too, blocked by a conspicuous disclaimer. But the case doesn’t end there. Perhaps in a nod to legal realism — re — lecting how reasonable consumers actually make decisions — the court holds that Tyson may still have a claim. Not because o — what the seller promised, but because o — what the seller knew and how the buyer relied. Under UCC § 2-315, i — a seller knows the buyer’s par ticular purpose and recommends a product — or that purpose, an implied warranty o —
itness may arise — even without explicit promises and even absent — raud. This shi — ts the — rame. The issue is not just what the contract says but also how the transaction took shape. That makes the implied warranty o —
itness a kind o — relational doctrine: one that anchors legal duty in context, not just in text. Tyson reminds us that — ormal disclaimers can — oreclose some claims, but not all. Courts may still look beyond the document to the interaction that gave rise to the sale, especially when the buyer reasonably relied on a seller’s apparent expertise. This isn’t a case about timing or strategic warranty design. It’s about whether legal obligation can arise through ordinary commercial talk — talk that isn’t quite a promise, but still carries weight when the product — ails. 552 18 • Warranties
Discussion 1. The court held that the dealer’s statement — that the herbicide would “do a good job” — was too vague to constitute an express warranty under UCC § 2-313. This line between pu ---
ery and en — orceable promise is o — ten blurry. When does a seller’s assurance cross into legal commitment? How should courts assess in — ormal com- mercial talk that in — luences purchasing decisions, especially when it re — erences a buyer’s speci — ic needs?
-
Ciba-Geigy’s disclaimer o
implied warranties was upheld as “conspicuous” under UCC § 2-316. Do you agree with the court’s reasoning? Should manu — acturers be able to disclaim merchantability in all consumer contexts, or are there circum- stances where disclaimers should be limited by public policy or practical e —
ect?
-
Unlike merchantability, the implied warranty o
itness — or particular purpose sur- vived — because the dealer knew the buyer’s purpose and recommended a product
or it. What makes this warranty more resilient in cases like this? Should that resil- ience depend on the buyer’s ability to prove actual reliance on seller expertise?
-
This case invites re
lection on where legal obligation comes — rom: — ormal written terms or relational context. I — Tyson had received a brochure with the same dis- claimer language as the manu — acturer’s label, would your view o — the case change? Does the buyer’s relationship with a local dealer merit di — — erent treatment than a remote or anonymous sale?
-
Ciba-Geigy success
ully disclaimed warranties; Farm Chemical (the dealer) did not. Does this distinction seem — air? Should courts treat intermediary sellers di — -
erently than manu — acturers when both are part o — the same commercial chain? How should responsibility be allocated when di — — erent actors supply in — ormation, products, and disclaimers?
-
Tyson used the product in a way not contemplated by the manu
acturer’s label. Does that matter? Should buyer deviation — rom labeled use cut o —
claims — espe- cially when the deviation — ollowed a seller’s advice? How should courts weigh buyer agency against seller inducement?
Reading Ardagh Metal Packaging USA Corp. v. Am. CRAFT Brewery, LLC. Ardagh capstones both this chapter on warranties and the broader module on interpretation by showing how warranty law and contract interpretation converge in practice. The dispute in this case involves a packaging supplier and a beverage company, clashing over product per — ormance and long-term purchasing obligations. While part o — the case turns on warranties, much o — it 18 • Warranties 553
centers on how courts interpret contractual language when the parties disagree about what their agreement actually requires. There are two strands to — ollow. First, the warranty issue in Part I.B: ACB alleges that Ardagh’s cans — ailed to — unction properly, breaching the implied warranty o —
itness — or a particular purpose. But the contract includes a con spicuous disclaimer, and the court en — orces it under UCC § 2-316. This holding ties directly to the doctrines on how implied warranties work, how disclaim- ers operate, and when unconscionability might still provide relie — to a disap- pointed buyer. Second, and more extensively, the court tackles interpretation in Part III: what does it mean — or a buyer to commit to purchase a certain “Annual Minimum Volume”? Can short — alls roll over year to year? How should courts interpret phrases like “ — ollowing calendar year” in the context o — a multi-year agreement? This is classic interpretive work, and it’s why this case closes the entire module and not just the chapter. Even when the doctrinal headline is “warranty,” the real work o — ten lies in parsing contract text. The larger point is that warranty law isn’t isolated — it’s embedded in the architecture o — contract interpretation. En — orcing or disclaiming a warranty o — ten hinges on how a court reads the surrounding agreement. By ending here, we come — ull circle: back to the tools o — interpretation, applied now in the con- text o — warranties. As you read, track both dimensions. Why was the warranty disclaimer en — orceable despite the product — ailure claim? How did the court resolve the disagreement over volume obligations? And more broadly, what does this case reveal about how commercial parties structure long-term deals — and how courts work to make those deals legally coherent?
Ardagh Metal Packaging USA Corp. v.
American CRAFT Brewery, LLC
718 F. Supp. 3d 871 (2024) Opinion by DANIEL, J.
Ardagh Metal Packaging USA Corp. (“Ardagh”) and American Cra --- t Brewery, LLC (“ACB”) entered into a contract --- or the purchase o --- aluminum beverage cans. Ardagh
iled suit against ACB, alleging that ACB breached its purchasing obligations under the contract. ACB answered the complaint and asserted various counterclaims and a —
irmative de — enses against Ardagh. Ardagh now moves — or partial dismissal o — ACB’s coun- terclaims under Federal Rule o — Civil Procedure 12(b)(6), to strike certain o — ACB’s a —
irmative de — enses under Federal Rule o — Civil Procedure 12( — ), and — or a declaratory 554 18 • Warranties
judgment against ACB on Count II o
the complaint under Federal Rule o — Civil Pro- cedure 12(c). For the reasons below, Ardagh’s motion to dismiss is granted in part and denied in part; its motion to strike is granted; and its motion — or judgment on the pleadings as to Count II is granted. Background Ardagh manu — actures and supplies various metal and glass packaging to brand owners. ACB, a manu — acturer o — alcoholic beverages, is one o — Ardagh’s customers. Ardagh and ACB entered into an agreement (the “Initial Agreement”), e —
ective Janu- ary 1, 2020, pursuant to which Ardagh agreed to supply and ACB agreed to purchase twelve ounce “sleek” aluminum beverage can bodies and associated can ends. In December 2020, the parties amended their agreement (the “Amended Agree- ment” and, together with the Initial Agreement, the “Agreement”). Relevant here, the Amended Agreement modi — ied the Initial Agreement by: 1. extending the term o — the Initial Agreement through January 1, 2027; 2. adding twelve ounce and twenty- — our ounce “standard” aluminum beverage cans and associated can ends — or purchase; and 3. providing minimum can purchase volumes — or the years 2021 through 2026 (“Annual Minimum Volume”). Ardagh alleges that ACB — ailed to meet its Annual Minimum Volume purchase obligations — or the years 2021 and 2022, and re — used to provide reasonable assurances that it would make up its purchasing short — alls or be able to per — orm its contractual obligations — or the time remaining on the contract. Ardagh’s two-count complaint raises a claim — or breach o — contract (Count I) and seeks a declaratory judgment in its — avor (Count II). ACB answered the complaint and asserted various counterclaims and a —
irmative de — enses against Ardagh. Certain o — ACB’s counterclaims stem — rom Ardagh’s use o — a particular varnish and wax-based lubricant that is alleged to have caused a “dark, sticky buildup” on the beverage cans, resulting in slowdowns and breakdowns on ACB’s pro cessing lines. ACB alleges that Ardagh was aware o — the issues that its materials caused during the — illing process, but continued to use them anyway in breach o — the Agree- ment. As a result o — Ardagh’s alleged use o — unsuitable varnish and lubricant, ACB raises counterclaims — or breach o — contract (Counts II and III), breach o — the duty o —
good
aith and — air dealing (Counts IV and V), breach o — warranty o —
itness — or a par ticular purpose (Counts VI and VII), and negligent misrepresentation (Count VIII). Ardagh now moves to dismiss certain o — these counterclaims under Rule 12(b)(6), and to strike certain o — ACB’s a —
irmative de — enses under Rule 12( — ). Ardagh — urther moves this Court — or a declaratory judgment on Count II o — the complaint. … 18 • Warranties 555
Analysis
I. Ardagh’s Rule 12(b)(6) Motion To Dismiss ACB’s Counterclaims ...
B. Breach o --- Warranty o --- Fitness --- or a Particular Purpose (Counts
VI and VII) Next, Ardagh moves to dismiss ACB’s counterclaims --- or breach o --- warranty o ---
it- ness — or a particular purpose. ACB alleges that Ardagh breached the implied warranty o —
itness by using unsuitable varnish and wax lubricant that rendered the beverage cans un — it — or their intended purpose. Ardagh argues that these counterclaims must be dismissed because they are barred by the Amended Agreement’s warranty disclaimer. New York’s Uni — orm Commercial Code provides that every contract carries an implied warranty o —
itness unless excluded or modi — ied. N.Y. U.C.C. Law § 2-315. To exclude an implied warranty o —
itness, “the exclusion must be by a writing and conspicuous.” N.Y. U.C.C. Law § 2-316(2). Conspicuous means that the writing is “so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it.” N.Y. U.C.C. Law § 1-201(b)(10). “Whether a term is ‘con spicuous’ or not is a decision — or the court.” N.Y. U.C.C. Law § 1-201(b)(10). In this case, Section 20.8 o — the Initial Agreement provides: 20.8 EXPRESS WARRANTIES. EXCEPT FOR THE EXPRESS WARRAN- TIES SET FORTH ABOVE, ARDAGH MAKES NO OTHER WARRANTIES OF ANY KIND, WHETHER EXPRESS OR IMPLIED, STATUTORY OR ARISING BY COURSE OF DEALING OR PERFORMANCE, CUSTOM, USAGE IN THE TRADE OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. The Agreement’s disclaimer meets the statutory requirements to exclude the implied warranty o —
itness — or a particular purpose. Section 20.8 clearly and explic itly disclaims all implied warranties, including the warranty o —
itness — or a particular purpose. Further, and contrary to ACB’s arguments in response, the disclaimer is su —
iciently conspicuous. The disclaimer uses capital letters and is set o —
in its own discrete para- graph. O — the myriad sections included in the Agreement, only two other paragraphs use text in all capital letters, while the remainder o — the Agreement uses regular text. The disclaimer is thus presented in such a way that a reasonable person ought to have noticed it. Nevertheless, ACB contends that there are other — actors that may a —
ect the en — orce- ability o — the disclaimer, such as whether the provision is substantively unconsciona- ble. This argument stems — rom the principle that, even i — a disclaimer meets the basic criteria — or validity, New York’s U.C.C. separately provides that a court may void such a clause i — it — inds it “to have been unconscionable at the time it was made.” N.Y. U.C.C. 556 18 • Warranties
Law § 2-302). A determination o
unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made, which means a showing o — absence o — meaning — ul choice on the part o — the parties together with contract terms which are unreasonably — avorable to the other party. Beyond asserting that Ardagh was aware o — the intended use o — the cans when the parties entered into the contract, ACB provides no explanation as to how the war- ranty disclaimer is procedurally or substantively unconscionable. Rather, the basis — or ACB’s argument appears to be that a determination o — unconscionability should await development o — a — actual record. The determination o — unconscionability, however, is a question o — law properly be — ore the court on a motion to dismiss. Here, there are no allegations — rom which this Court can plausibly in — er unequal bargaining power, deceptive tactics, or any other procedural irregularities in contract — ormation between these two commercially sophisticated parties. And ACB’s conclusory allegation o — substantive unconsciona- bility is not su —
icient to withstand a motion to dismiss. Accordingly, Ardagh’s motion to dismiss Counts VI and VII is granted. . . .
III. Ardagh’s Motion --- or Judgment on the Pleadings on Count II Finally, Ardagh moves --- or a declaratory judgment against ACB on Count II o ---
the complaint under Rule 12(c). Speci
ically, Ardagh seeks a declaration stating that, under Sections 2.2 and 2.2.1 o — the Amended Agreement: ACB has a contractual duty to purchase the Annual Minimum Volume o — aluminum beverage cans — rom Ardagh each calendar year — rom 2021 through 2026; should ACB — ail to purchase the minimum number o — aluminum cans in a given calendar year, the short — all must be purchased by ACB the — ollowing calendar year; and regardless o — any — ailure by ACB to meet its purchase obligations, the Agreement’s termination date is not to extend beyond January 1, 2028. As noted above, the parties’ Amended Agreement is governed by New York law. Under New York law, a contract that is clear, complete, and subject to only one reason- able interpretation must be en — orced according to the plain meaning o — the language chosen by the contracting parties. When the parties dispute the meaning o — the con- tract, the threshold question is whether the contract terms are ambiguous, which is a question o — law — or the Court to decide on a claim-by-claim basis. The language o — a contract is unambiguous where it has a de — inite and precise meaning, unattended by danger o — misconception in the purport o — the contract itsel — , and concerning which there is no reasonable basis — or di —
erence o — opinion. By con- trast, ambiguity exists where a contract term could suggest more than one mean- ing when viewed objectively by a reasonably intelligent person who has examined the context o — the entire integrated agreement and who is cognizant o — the customs, 18 • Warranties 557
practices, usages and terminology as generally understood in the particular trade or business. Ambiguity can arise — rom either the language o — the contract itsel — or the in — erences that can be drawn there — rom, but ambiguity does not exist simply because the parties urge di — — erent interpretations o — the contract’s language. Additionally, a court must avoid any interpretation o — the contract that would be absurd, commercially unrea- sonable, or contrary to the reasonable expectations o — the parties. Where a contract’s language is clear and unambiguous, interpretation is a matter o — law, and the Court may decide a claim turning on that interpretation on a Rule 12(c) motion. I — , however, the language o — a contract is ambiguous, its interpretation presents a question o —
act that is not amenable to resolution at the pleadings stage. The parties dispute centers on the meaning o — Sections 2.2 and 2.2.1 o — the Amended Agreement, which provide, in relevant part, as — ollows:
2.2 Supply Minimum. During the term o --- the Amended Agreement, ACB
will purchase --- rom Ardagh 12 oz. Sleek, 24 oz. and 12 oz. standard can bod-
ies and associated can ends in the Annual Minimum Volume and up to the
Annual Maximum Volume as outlined below. During the calendar year as
noted in the chart below,5 --- rom 2021 through 2026, customer will purchase
the minimum number o --- 12 oz. Sleek, 24 oz. and 12 oz. standard can bodies
and their associated ends --- or shipment to ACB’s US locations and ACB may
elect to purchase up to the Annual Maximum Volume per calendar year as
noted below, and Ardagh shall supply such Aluminum Beverage Cans as
ordered by ACB up to the Annual Maximum Volume per year. Should ACB
wish to purchase more than the Annual Maximum Volume in a calendar
year, the Parties will work together in good --- aith regarding Ardagh supply-
ing such quantities. . . .
2.2.1 Minimum Volumes. Beginning January 1, 2021, Ardagh shall supply
100% o --- ACB’s orders up to the Annual Maximum Volumes above. Should
Customer --- ail to purchase the Annual Minimum Volumes during the appli-
cable calendar year, the volume short --- all will be purchased by Customer
in the --- ollowing calendar year and the term o --- this Amended Agreement
shall be extended until all such purchases have been made. For clari --- ica-
tion, ACB shall be required to purchase such Annual Minimum Volumes
as noted above in the relevant calendar year. Should ACB obtain cans or
ends exceeding such Annual Minimum Volume --- rom a third party a --- ter
purchasing the minimum noted above, any and all costs associated with
such third-party supply are the responsibility o --- Customer.
Ardagh argues that the language o
these provisions makes clear that ACB has a contractual duty to purchase the Annual Minimum Volumes during each calendar year and that any short — all in a given year must be cured within the — ollowing calen- dar year to avoid breach o — the Agreement. It — ollows that, should ACB — ail to meet its 558 18 • Warranties
purchasing obligations in 2026, the
inal calendar year o — the Agreement, the term o —
the contract (and, there
ore, ACB’s ability to cure) shall not extend beyond January 1, 2028 (the end o — the “ — ollowing calendar year”). ACB, on the other hand, contends that the Amended Agreement provides no limi- tations on the extent to which short — alls may be rolled over into subsequent years and contemplates a — lexible extension policy under which the terms o — the contract may be extended until all Annual Minimum Volumes are purchased. In other words, ACB argues that its obligations to purchase Annual Minimum Volumes can be rolled over into subsequent years perpetually. Alternatively, ACB advances that Section 2.2 is ambiguous, thereby precluding judgment on the pleadings at this stage. Here, the language o — the Amended Agreement clearly and unambiguously requires that ACB purchase the Annual Minimum Volume o — cans that correspond to each cal- endar year — rom 2021 through 2026. Sections 2.2 and 2.2.1 use mandatory language, i.e. “will” and “shall be required,” when describing ACB’s minimum purchase require- ments — or these years. By contrast, the Amended Agreement uses permissive terms, i.e., “may elect,” when describing the Annual Maximum Volume o — purchases per year. A contract should be construed, wherever possible, in such a way as to reconcile and give e —
ect to all o — its provisions. Applying that principle here, it is clear that the Amended Agreement contemplated a minimum purchasing requirement applicable to each o — the calendar years — rom 2021 through 2026. Any contrary interpretation would render the distinction between the mandatory “will” as to the Annual Mini- mum Volumes and the discretionary “may” as to the Annual Maximum Volumes meaningless. This same principle undercuts ACB’s perpetual rollover argument. Indeed, ACB advances a reading o — the contract that would provide — or “an adaptable minimum- maximum volume — ramework” and would avoid termination o — the contract unless and until ACB meets its Annual Minimum Volume purchasing obligations. Such a reading, however, de — ies the basic tenets o — contract interpretation. First, interpreting the Amended Agreement as allowing — or perpetual rollover until all minimum vol- ume purchases have been made would render Section 2.2’s chart and its correspond- ing Annual Minimum Volume requirements — or each calendar year meaningless. Second, Section 2.2.1 provides that, “Should [ACB] — ail to purchase the Annual Minimum Volumes during the applicable calendar year, the volume short — all will be purchased by [ACB] in the — ollowing calendar year.” The plain and ordinary meaning o — the term “ — ollowing,” is “that comes a — ter or next in order, sequence, or time; succeeding, subsequent, ensuing.” Following, Ox — ord English Dictionary. Employing the term “ — ollowing” be — ore the singular phrase “cal- endar year” thus runs counter to ACB’s perpetual rollover position and, instead, con- templates a limited, one-year cure period — or any short — all. The remainder o — the — oregoing provision, which reads, “the term o — this Amended Agreement shall be extended until all such purchases have been made,” does not alter 18 • Warranties 559
this conclusion. ACB contends that this provision makes clear that any purchasing short — alls will continue to rollover into the “ — ollowing calendar year[s]” inde — initely until “all [Annual Minimum Volume] purchases have been made.” This interpretation, however, does not give e —
ect to the contract as a whole. Here, the Amended Agreement de — ines ACB’s purchasing obligations by each “calendar year,” — rom 2021 through 2026, and provides — or a clear end date o — January 1, 2027. This end date was speci — ically negotiated by the parties as part o — their amend- ment to the terms o — the Original Agreement, which originally provided — or an end date o — January 1, 2024. Had the parties intended — or a “ — lexible” and “long-term” structure, as ACB so contends, the inclusion o — a de — ined end date would not be necessary. The Court recognizes that the Amended Agreement’s “Term” provision states that the January 1, 2027 end date “may be extended per the Minimum Volume Sec- tion 2.2.1.” In turn, Section 2.2.1 provides that “the volume short — all will be purchased by [ACB] in the — ollowing calendar year and the term o — this Amended Agreement shall be extended until all such purchases have been made.” According to ACB, these provisions show that the end date o — the Amended Agree- ment is determinable, not by the de — ined date o — January 1, 2027, but by the date in which all Annual Minimum Volume purchases have been made. But such an inter- pretation is not commercially reasonable since no rational commercial entity would incur obligations in exchange — or a purely discretionary option to per — orm. Indeed, such an interpretation would e —
ectively render ACB’s promises under the contract illusory. By contrast, the argument advanced by Ardagh that these provisions work in tan- dem to extend the contract, at most, to January 1, 2028 (assuming a 2026 purchasing short — all) is commercially sensible. As explained above, the plain meaning o — the term “ — ollowing calendar year” implies a one-year cure period to make up any purchasing short — all — rom the previous calendar year. Giving e —
ect to both the “ — ollowing calen- dar year” provision and the term-extension provision that allows the contract to be extended beyond the de — ined January 1, 2027 end date means that ACB would have
rom January 1, 2027 to December 31, 2027 to make up any short — alls — or — ailing to meet its Annual Minimum Volume purchases in 2026. For these reasons, the Court concludes that Sections 2.2 and 2.2.1 o — the Amended Agreement are not ambiguous. Rather, the contract’s terms plainly impose an Annual Minimum Volume purchase obligation on ACB — or each calendar year — rom 2021 through 2026; that any purchasing short — all during the applicable calendar year shall be cured within the — ollowing calendar year; and, because the cure period — or any 2026 purchasing short — all would extend — rom January 1, 2027 to December 31, 2027 (i.e., the “ — ollowing calendar year”), the contract may be extended beyond the de — ined end date o — January 1, 2027, until all such purchases are made, but terminate no later than January 1, 2028. Accordingly, Ardagh’s motion — or judgment on the pleadings on Count II o — the complaint is granted. 560 18 • Warranties
Conclusion Ardagh Metal Packaging USA Corp.’s partial motion to dismiss De --- endant Amer- ican Cra --- t Brewery, LLC’s counterclaims is granted in part and denied in part; its motion to strike a ---
irmative de — enses is granted; and its motion — or judgment on the pleadings is granted.
Re --- lection
Ardagh rounded out our discussion o --- warranties with an e ---
ective disclaimer o —
the implied warranty o
itness — or a particular purpose. The court not only inter- preted the disclaimer’s language as en — orceable, but also clari — ied that even a — ormally valid disclaimer can be overcome by unconscionability — be — ore holding that claims o — unconscionability must be plausibly pleaded to survive a motion to dismiss and can be resolved by the court as a matter o — law. In doing so, the opinion o —
ers a textbook illustration o — how disclaimers can be structured to eliminate implied warranties, while also demonstrating the limits o — unconscionability as a tool to invalidate even sharply one-sided provisions when the parties are deemed to have had meaning — ul bargaining opportunities. Ardagh also returns us to the deeper structure o — contractual interpretation. The court’s ruling on Ardagh’s motion — or judgment on the pleadings showcases a methodical deployment o — canons o — construction — especially the presumption that each contractual term must be given e —
ect, and the avoidance o — readings that would render key provisions super — luous. The court invoked the ordinary meaning canon in construing “ — ollowing calendar year” to limit ACB’s cure period — or short — all pur- chases, and harmonized that interpretation with the agreement’s — ixed end-date and volume schedule. By emphasizing internal coherence and commercial reasonable- ness, the court rejected the de — endant’s attempt to read — lexibility into what the text treated as — irm commitments. At the same time, the case le — t room — or relational context to shape contractual meaning where the express language is silent or indeterminate. The court allowed claims based on the implied duty o — good — aith and — air dealing to proceed — so long as they were pled as alternatives rather than duplicates o — the express breach claims. In doing so, it acknowledged that even where a contract is silent on a particular var- nish or lubricant, a party may still violate the agreement by exercising discretion in ways that — rustrate the counterparty’s legitimate expectations. This rein — orces a core principle we’ve seen throughout the course: not all obligations need to appear in the
our corners o — the contract. Some arise — rom structural expectations o — cooperation and mutual purpose embedded in commercial relationships. Ardagh is a capstone case not because it breaks new ground, but because it consoli- dates key ideas: that contracts are construed to preserve their internal logic, and that includes the structure and operation o — warranties, the disciplined use o — interpretive tools, and the enduring relevance o — implied duties. 18 • Warranties 561
Discussion 1. The court upheld Ardagh’s disclaimer o --- the implied warranty o ---
itness — or a par ticular purpose, emphasizing its conspicuous — ormatting and the parties’ commer- cial sophistication. Do you agree with the court’s approach? Should courts be more skeptical o — warranty disclaimers even in business-to-business contracts?
-
The implied warranty o
itness requires the buyer to rely on the seller’s expertise — or a particular purpose. ACB claimed it relied on Ardagh, but the court — ound its alle- gations too general. What would a stronger claim o — reliance look like in this setting?
-
The parties disagreed about whether ACB could cure a volume short
all in the “ — ollowing calendar year.” The court rejected ACB’s interpretation by invoking the ordinary meaning rule and the canon against surplusage. What do these canons reveal about how courts manage ambiguity in commercial contracts?
-
The court allowed ACB’s claim
or breach o — the duty o — good — aith and — air dealing to proceed, but only as an alternative to the express breach claim. Why does that distinction matter, and when should courts recognize an implied duty even when no express term is breached?
-
The court en
orced a disclaimer, rejected unconscionability, applied interpretive canons, and preserved room — or good — aith claims. What vision o — contract law does Ardagh represent? Does it prioritize — ormal structure, commercial — airness, or something else?
Problems Problem 18.1. Unsinkable Boat Acme Boat Co. advertises its new speedboat model as “unsinkable” and “capable o --- withstanding any storm.” Bob purchases the boat based on these claims. During a moderate thunderstorm, the boat takes on water and nearly sinks, requiring Bob to be rescued. Bob wants to sue Acme --- or breach o --- express warranty. What result? See Keith v. Buchanan, 173 Cal. App. 3d 13 (1985).
Problem 18.2. Will It Blend? Sarah buys a new blender — rom Kitchenware Inc., a well-known retailer o — kitchen appliances. The — irst time she uses the blender to make a smoothie, the blade assembly comes loose and damages the motor, rendering the blender unusable. Sarah wants to sue Kitchenware Inc. — or breach o — the implied warranty o — merchantability. What — actors will the court consider? See Denny v. Ford Motor Co., 87 N.Y.2d 248 (1995). 562 18 • Warranties
Problem 18.3. Underwater Sealant Tom visits a local hardware store and tells the salesperson he needs a sealant — or his boat that will work underwater. The salesperson recommends “AquaSeal,” assuring Tom it’s per — ect — or underwater applications. Tom uses the sealant, but it — ails to work underwater, causing his boat to leak. Does Tom have a valid claim — or breach o — the implied warranty o —
itness — or a particular purpose? See Gall v. Allegheny County Health Department, 521 Pa. 68 (1989).
Problem 18.4. “As Is” Carol purchases a used car — rom Dave’s Dealership. The sales contract includes a clause in the same — ont and size as the rest o — the contract that states: “This vehicle is sold AS IS. There are no warranties which extend beyond the description on the — ace hereo — .” A week a — ter the purchase, the car’s transmission — ails. Carol wants to sue — or breach o — implied warranties. Will the as-is clause protect Dave’s Dealership? See Lecates v. Hertrich Pontiac Buick Co., 515 A.2d 163 (Del. Super. Ct. 1986). Module V
Per --- ormance and Breach
Contracts are en
orceable promises, in the sense that they create legal obligations. But the obligation to per — orm promises depends on how the contract is structured and what events transpired a — ter its — ormation. This module delves into what hap- pens when parties’ promises move — rom the realm o — intention to the messy reality o — execution. This module examines the doctrines that determine when obligations are due, how — ar per — ormance must go to meet those obligations, and when — ailure to per — orm is excused or becomes a breach. Many disputes over per — ormance begin with a — oundational question: what must happen be — ore a party’s obligations arise? Chapter 19 explores conditions, which de — ine when per — ormance is triggered. These conditions, whether explicitly stated, implied by context, or constructed by courts, act as switches dictating the — low o —
duties between parties in a contractual circuit. A missed condition can short-circuit the entire arrangement. Yet, as courts analyze whether conditions have been met, they o — ten grapple with the tension between strict en — orcement and equitable relie — . Through this lens, you will examine how conditions allocate risk and shape the sequencing o — obligations. You will also learn how most contracts contain implied mutual conditions: contractual promises are dependent on one another. What i — per — ormance doesn’t — ully meet the mark? Do you have to per — orm your promise even i — your counterparty — ailed to per — orm theirs? Chapter 20 takes up the doctrines o — substantial per — ormance and material breach, which address the quality o — per — ormance and its consequences. Substantial per — ormance is a doctrine o — bal- ance. It ensures that a party who has done enough to — ul — ill the essence o — the contract
563
564 Module V • Per — ormance and Breac
still receives the bene
it o — the bargain, even i — minor de — ects remain. On the other hand, material breach strikes at the heart o — a contract’s purpose. When per — ormance
alls so — ar short that the promisee’s expectations are — undamentally undermined, the law permits suspension or termination o — obligations. Together, these doctrines cap- ture the constant negotiation between per — ect execution and practical — ul — illment. Not all breaches occur a — ter per — ormance begins. Some happen in advance. Antici- patory repudiation addresses situations where one party signals, in words or actions, that it will not per — orm be — ore per — ormance is due. Chapter 21 explores the aggrieved party’s responses: can they immediately treat the contract as breached, or must they seek assurances be — ore acting? Courts balance the need to protect reliance and mitigate harm with the principle that parties should not prematurely overreact to uncertainty. Then there are times when no one is at — ault, but per — ormance becomes impossible or loses its purpose. The doctrine o — excuse, discussed in Chapter 22, comes into play when un — oreseen events — a natural disaster, a regulatory change, or the destruction o —
critical goods — upend the assumptions underlying the contract. Courts use doctrines like impracticability and — rustration o — purpose to determine whether the a —
ected party should be excused, balancing — airness with the expectation that parties should bear the risks they assume. Finally, this module considers how parties adapt their agreements to changing cir- cumstances. Chapter 23 on modi — ication and discharge examines the tools available to adjust obligations while preserving the contract’s integrity. Unlike initial contract
ormation, modi — ications under modern law o — ten dispense with the need — or new consideration, — ocusing instead on good — aith and mutual assent. Whether by — ormal amendment, rescission, or in — ormal waiver, this doctrine highlights the adaptability o — contracts in the — ace o — evolving realities. The doctrines in this module provide more than a roadmap — or resolving disputes. They illuminate the delicate interplay between — airness and e —
iciency, autonomy and accountability, risk allocation and reliance. They equip you with the analytical tools needed to navigate per — ormance disputes, — rom determining whether a party has done “enough” to assessing when an obligation has been discharged. Most importantly, this module underscores that per — ormance is not just about the letter o — the promise but the realities o — living up to it. Chapter 19 Conditions
To understand when per
ormance is required and when it is not, lawyers and law students must — irst master the concept o — “conditions.” A condition is an event whose occurrence or non-occurrence triggers a contractual obligation. Promises are o — ten subject to conditions. For example, Xavier says to LaVel, “I will wash and detail your car on Friday, but only i — it is not raining, in exchange — or $50.” LaVel agrees. Xavier’s promise is subject to a condition. He must wash and detail LaVel’s car only i — it does not rain on Friday. I — it is raining, the condition did not occur, and Xavier’s obliga- tion is not due. A condition in contract law is like a switch in an electrical circuit. Imagine a circuit with a power source, a light bulb, and a switch that controls the — low o — electricity. When the switch is o —
, the circuit is incomplete, and the light bulb stays o —
. Similarly, in contract law, a condition is an event that must occur (or not occur) to activate a contractual duty. I — the condition is met, this is like — lipping the switch to the “on” position — per — ormance becomes due, and the obligation is triggered. I — the condition is not met, the switch remains “o —
.” And per — ormance is not due.
♦
Figure 19.1. Circuit with power, amp meter, light, and switch.
Credit: MikeRun. CC ASA 4 license.
This chapter provides a structured
ramework — or analyzing conditions, guid- ing students through a step-by-step process: — irst, identi — y conditions as express or implied; second, classi — y conditions as precedent, subsequent, or concurrent; third, determine whether the condition occurred through — actual inquiry; — ourth, explore how excuses or waivers might address the non-occurrence o — a condition; and — inally, assess the consequences o — non-occurrence, including whether obligations are dis-
565
566 19 • Conditions
charged, remedies are justi
ied, or equitable considerations apply. Each step builds on the — oundational idea that conditions are designed to balance autonomy and — air- ness. They allow parties to speci — y the exact circumstances under which their obliga- tions will arise while also ensuring that these mechanisms remain — lexible enough to accommodate un — oreseen inequities. Understanding conditions is critical — or navigating contractual disputes and struc- turing agreements. Whether a party’s duty depends on securing — inancing, provid- ing timely notice, or meeting per — ormance milestones, the doctrine o — conditions determines how these obligations are triggered or discharged. This analysis not only clari — ies the parties’ expectations but also rein — orces broader principles o — contract law, including e —
iciency, reliance, and equity. The insights gained — rom this chapter will lay the groundwork — or exploring per — ormance, breach, and remedies in subsequent chapters. By mastering the doc- trine o — conditions, students will be equipped to address the complexities o — contrac- tual relationships with both analytical precision and practical — oresight.
Rules A. Identi --- ying Conditions Identi --- ying conditions is a --- undamental precursor to assessing the en --- orceability o --- contractual obligations. A condition is an event or set o --- circumstances that must be satis --- ied in order --- or a contractual duty to arise. For a contractual duty to become due, all conditions on that duty must be met. Conversely, i --- a condition is not satis --- ied, this will likely discharge a contractual duty, terminating the obligation due to --- ailure o --- a condition.
A condition is an event, not certain to occur, which must occur, unless its
non-occurrence is excused, be --- ore per --- ormance under a contract becomes due.
R2d § 224. For example, in an insurance contract between an insurance company and an insured, the contract might state that the insurance company will not pay --- or the insured’s losses “unless those losses involve property damage due to natural causes such as --- lood, hurricane, or tornado.” This means the insurance company’s duty to pay does not become due unless a condition (an event) occurs. The event that must occur here is that the insured experiences property damage due to natural causes such as --- lood, hurricane, or tornado. This is an event, not certain to occur, but which must occur in order --- or the company to have a duty to pay.
Conditions are categorized into “express conditions” and “implied conditions.” The legal implications o --- each di ---
er, so it is crucial to correctly categorize a condition as express or implied. 19 • Conditions 567
- Express Conditions Express conditions are explicitly stated within the language o — the contract. For instance, in a real estate contract, an express condition might state that the buyer’s obligation to purchase the property is “contingent upon” the buyer’s securing — inanc- ing by a speci — ic date. Similarly, in an employment agreement, a clause might speci — y that the employer will pay out a bonus to the employee “only” i — the employee meets certain per — ormance targets within a — iscal year. These are examples o — express condi- tions because they are explicitly written into the contract language, clearly demon- strating that the parties intended and agreed to these exact terms. Parties o — ten choose to explicitly condition their contractual obligations upon the occurrence o — some event in order to reduce the risk o — — uture unknowns. For exam- ple, i — a buyer o — real estate does not know whether they can secure — inancing — rom a bank, the buyer will not want to be bound to a contract to buy the real estate unless she can get the — inancing. By including an express condition, the buyer makes it clear that her obligation to purchase the property only comes due i — she can secure the — inanc- ing. The seller, by agreeing to these terms, assumes the risk that the buyer cannot get the — inancing and that the property sale will not go through. Express conditions are critical — or managing risk and resolving disputes. They clearly delineate the obligations and contingencies agreed upon by the parties. In practice, this clarity reduces the likelihood o — disputes and — osters smoother contract per — ormance because each party knows be — orehand precisely when and how their duties will be triggered or discharged. Express conditions are o — ten signaled by speci — ic phrases, such as “i — ,” “only i — ,” “on condition that,” “provided that,” “subject to,” or “otherwise.” For example, the term “Payment shall be due i — and only i — the shipment arrives without de — ects” establishes an express condition. I — the shipment does not arrive without de — ects, the payment will not be due. You can identi — y such express conditions using the techniques that you learned in Chapter 15 regarding interpreting intrinsic evidence. The most important — eature o — express conditions is that they are strictly con- strued. Partly or “substantially” satis — ying an express condition is not enough. Courts apply strict interpretation to express conditions, adhering closely to the plain meaning o — the contractual language. For example, in Dove v. Rose Acre Farms, Inc., 434 N.E.2d 931 (1982), the court strictly en — orced a condition requiring per — ect attendance — or a bonus, ruling that even minor deviations disquali — ied the plain- ti —
rom receiving payment. Dove got sick and missed two work days, but he still wanted his bonus. The Indiana Court o — Appeals determined that he did not meet the express condition, so he did not merit the bonus. This case illustrates how strict interpretation upholds the precise terms agreed upon, thus ensuring contractual clarity and predictability. Once you identi — y an express condition, you should initially assume that it must be completely and per — ectly satis — ied be — ore any promises subject to that condition 568 19 • Conditions
become obligatory. However, when there is ambiguity as to whether a term is an express condition or not, courts tend to consider the overall context and intent o — the parties to decide whether the contract really contains an express condition. Courts generally aim to adopt an interpretation that will avoid a — or — eiture.
In resolving doubts as to whether an event is made a condition o --- an obligor’s
duty, and as to the nature o --- such an event, an interpretation is pre --- erred
that will reduce the obligee’s risk o ---
or — eiture, unless the event is within the obligee’s control or the circumstances indicate that he has assumed the risk. R2d § 227(1).
A
or — eiture is a denial o — a party’s compensation under the contract — or a per — ormance that they have already rendered or — or preparations to per — orm that they have already taken.
“For --- eiture” is used to re --- er to the denial o --- compensation that results when the
obligee loses his right to the agreed exchange a --- ter he has relied substantially,
as by preparation or per --- ormance on the expectation o --- that exchange. R2d
§ 229, cmt. b.
Courts recognize that express conditions, because they must be strictly con- strued, can have harsh consequences. Consider an insurance policy in which an insured makes premium payments in exchange — or an insurance company’s prom- ise to pay covered losses. The policy states that a claim will “only be covered i — the insured gives notice o — the covered loss within ten days.” I — this is an express condi- tion — which it is clearly written to be — then — ailing to give notice o — the loss within ten days will completely deny the insured their compensation under the policy. The insured will su —
er a — or — eiture o — the entire bene — it o — the policy, which they paid — or through premiums. To mitigate the risk o —
or — eitures, in cases o — ambiguity, courts may — ind that what appears to be an express condition is, in — act, a promise or an implied condi- tion — assuming this interpretation is — easible and would not e —
ectively rewrite the contract. As you will learn below, implied conditions, as well as promises, are satis-
ied by substantial per — ormance, so they tend to be less harsh in their e —
ect than express conditions. For example, i — the notice condition above were implied, rather than express, giving notice within eleven days would su —
ice. Thus, courts can use the tools o — interpretation to balance the need to retain the integrity o — the contract as written and the need to uphold the value o —
airness.
- Implied Conditions Implied conditions are not explicitly stated in the contract but are in — erred — rom
acts or law. Unlike express conditions, implied conditions are subject to the stan- dard o — substantial per — ormance. Implied conditions are satis — ied by substantial per — ormance o — the condition. They are not strictly construed. 19 • Conditions 569
An event may be made a condition either by the agreement o --- the parties or
by a term supplied by the court. R2d § 226.
a. Implied-in-Fact Conditions
Implied-in- --- act conditions can arise --- rom contractual language, but they o --- ten arise --- rom the behavior and expectations o --- the contracting parties. For example, in a services contract, i --- a cleaning company has consistently used eco- --- riendly prod- ucts to carry out its services, and the client has accepted this without objection, this conduct may create an implied condition that eco- --- riendly products will continue to be used. Similarly, in a rental agreement, i --- a landlord has previously allowed tenants to sublet with notice, an implied condition might arise that subletting is permissible under similar terms unless explicitly prohibited in the agreement. Implied-in- --- act conditions originate in several ways, including contractual lan- guage, course o --- per --- ormance, course o --- dealing, and usage o --- trade. Contractual Language. The parties may not expressly state in their contract that an event is a condition on a party’s duty to per --- orm, but when read in context, the contractual language may reveal a condition was impliedly intended. For example, in Morrison v. Bare, 2007-Ohio-6788 (Ohio Ct. App. 2007), which you will read below, a contract --- or the sale o --- residential property included a “special condition” that the seller would provide the buyer with a copy o --- a --- urnace repair bill within --- ourteen days. This appeared, on its --- ace, to be an express condition requiring the seller to supply the repair bill within --- ourteen days. But the court reviewed the evidence and decided that this provision included an implied condition that the seller actually repair the --- urnace. Course o --- Per --- ormance. The actions o --- the parties under the current contract may establish an implied condition. For instance, i --- a buyer consistently requires speci --- ic packaging --- or goods and the seller complies, the packaging requirement may become an implied condition. Course o --- Dealing. Past transactions between the same parties can establish implied conditions. For example, i --- a series o --- contracts always included inspection as a prerequisite --- or payment, this behavior might imply that inspection is a condition precedent to payment. Usage o --- Trade. Practices commonly accepted within a particular industry can cre- ate implied conditions. For example, in the shipping industry, it is standard practice
or carriers to provide advance notice o — delivery to the consignee, which might create an implied condition requiring such notice. Similarly, in the grain trade, it is custom- ary — or goods to meet speci — ic quality standards, and such standards may become implied conditions even i — not explicitly mentioned in the contract. Since implied-in- — act conditions o — ten require reviewing evidence — rom outside the contract, you may identi — y implied-in- — act conditions using the techniques that you learned in Chapter 16 regarding extrinsic evidence. 570 19 • Conditions
b. Implied-in-Law (Constructive) Conditions Implied-in-law conditions originate --- rom presumed intent. Presumed intent re --- ers to the in --- erred expectations and purposes o --- the contracting parties, based on the contract’s overall context and circumstances, but not necessarily on what these parties actually did or said. Recognizing implied-in-law conditions requires understanding how contract law usually interprets agreements. For example, i --- a contract --- or the delivery o --- perishable goods omits a speci --- ic deliv- ery date, a court might in --- er that the parties intended --- or delivery to occur promptly to prevent spoilage. Similarly, in a contract involving custom-made goods, a court might presume the parties intended per --- ormance to align with reasonable production timelines. Courts supply implied-in-law conditions to achieve justice. For example, in the case o --- a construction contract where a contractor completes 95% o --- a project but
ails to — inalize minor details due to un — oreseen circumstances, a court may impose an implied-in-law condition requiring payment — or the completed work to prevent unjust enrichment o — the project owner. This ensures — airness while acknowledging the substantial per — ormance o — contractual obligations. Implied-in-law conditions ensure that obligations are per — ormed in a logical sequence and in a manner consistent with — airness. For instance, in a construction contract, the court may imply that the owner’s obligation to pay is conditioned upon the contractor’s substantial completion o — the project. In sum, the identi — ication o — conditions, whether express or implied, is essential to determining the en — orceability o — contractual obligations. By closely examining contractual language, the conduct o — the parties, and relevant trade practices, prac titioners can accurately identi — y and interpret conditions. This — oundational analysis ensures that obligations are understood and disputes are resolved in alignment with the parties’ intentions and legal principles.
B. Classi
ying Conditions Once conditions are identi — ied, they need to be classi — ied. Classi — ying conditions is a critical step in understanding how they a —
ect the creation, continuation, or dis- charge o — contractual obligations. Conditions are categorized based on their timing and the speci — ic role they play within the contract. Students should use this classi — i- cation to identi — y how each condition impacts the en — orceability o — obligations and the sequence in which duties are per — ormed. There are three main classi — ications: conditions precedent, conditions subsequent, and conditions concurrent. There is also a category called “promissory conditions,” which consists o — conditions that are also promises. 19 • Conditions 571
- Conditions Precedent A condition precedent is an event that must occur be — ore a contractual duty arises. Using the analogy o — the electrical circuit, — or conditions precedent, the switch starts in the “o —
” position. The condition is not satis — ied until the event occurs. A condition precedent can be used to control whether a duty to per — orm a single promise is due or whether an entire contract comes into e —
ect. Conditions precedent are very common in contracts where per — ormance depends on external — actors that are beyond a party’s control. For example, in real estate pur- chase agreements, buyers’ obligations to purchase property are — requently made conditional on buyers’ ability to secure — inancing by a speci — ic date. Similarly, in li — e insurance contracts, insurers’ duty to pay the policy amount is almost always condi- tional upon the insured’s death during the policy period. Conditions precedent protect the party whose duty is subject to the condition by ensuring that a duty will not be imposed at all unless the speci — ied event occurs. This shelters parties — rom premature obligations they did not intend to undertake. For example, consider a — inancing contingency in a real estate contract, which states that the buyer is not under a duty to purchase unless she secures a mortgage. The purpose o — this condition is to shield the buyer — rom being obligated to purchase property that she cannot a —
ord. When analyzing conditions precedent, always determine what event must occur be — ore a contractual duty becomes due. Look — or “magic words” like “only i — ,” “con- tingent upon,” “subject to,” or “provided that” to spot these conditions. Lastly, keep in mind that these are conditions, not necessarily promises. Unless a condition prece dent is also — ramed as a promise, neither party is promising that the event will occur. Rather, the condition merely acts as a switch that turns a duty on or o —
. We discuss this distinction — urther in the section on promissory conditions, below.
- Conditions Subsequent A condition subsequent is an event that, i — it occurs, extinguishes a duty that has already arisen. These conditions are less common, but they play a signi — icant role in contracts where obligations are tied to ongoing circumstances. Conditions subsequent are less protective o — the party whose duty is subject to the condition. Using the analogy o — the electrical circuit, — or conditions subsequent, the switch starts in the “on” position. The duty is activated unless the subsequent event occurs. I — the event occurs, then the duty is discharged (released). I — under the terms o — the contract the occurrence o — an event discharges a duty o — per — ormance that has arisen, that event is called a condition subsequent. R2d § 230. For instance, a lease agreement might state that a tenant is obligated to pay rent but include a condition that terminates the tenant’s obligation to pay rent “i — the property is 572 19 • Conditions
rendered uninhabitable due to un
oreseen events, such as a natural disaster.” Similarly, an employment agreement might speci — y that an employer has a duty to provide an employee with bene — its but include a condition stating that “the employer’s duty to provide bene — its ends upon the employee’s resignation or termination — or cause.” Conditions subsequent are use — ul when parties have ongoing obligations to each other that they intend to end upon the occurrence o — some event. Conditions sub- sequent can be used to mitigate the risk that a — uture event will occur that makes the contract unduly costly or that eliminates the underlying justi — ication — or it. In Chapter 22, you will learn about the doctrines o — impracticability and — rustration o —
purpose. These doctrines provide a party with an “excuse”
or their — ailure to per — orm upon the occurrence o — an un — oreseen supervening event a — ter contract — ormation. Many courts and commentators have theorized that these doctrines are based on the concept o — conditions subsequent. In either case, a duty to per — orm under a contract is discharged by the occurrence o — some — uture event. When seeking conditions subsequent, look — or language like “unless,” “shall cease upon,” or “will terminate i — ” to recognize these conditions. Look — or contract language whose e —
ect is to clari — y that a party has a duty but that this duty will cease to exist i —
some contingency occurs. You may by now have recognized that distinguishing between conditions prece dent and conditions subsequent is somewhat o — a philosophical exercise. As a purely technical matter, most conditions subsequent could be reengineered and — ormulated as conditions precedent. Take the example o — the — inancing condition. This could be phrased either as a condition precedent or a condition subsequent. The contract might say, “Buyer is obligated to purchase the house only i — buyer obtains a mortgage.” This is a condition precedent. But the contract might instead say, “Buyer must buy the house unless buyer cannot obtain a mortgage.” This is a condition subsequent. I — the buyer cannot get — inancing, the result is — unctionally the same, but the conditions are structured di —
erently. The distinction matters — or two reasons. First, as noted above, i — a condition is structured as a condition precedent, the plainti —
in a breach o — contract dispute has the burden to prove that all conditions on the de — endant’s duty have been satis — ied. In contrast, i — the condition is structured as a condition subsequent, the burden would be on the de — endant to show that their existing duty has been discharged by the occur- rence o — some event. Second, even though the technical e —
ect o — both types o — conditions is similar, the rhetorical and emotional impact is di — — erent. Would you — eel di —
erently i — someone said, “You can practice law unless you — ail the bar exam,” versus, “You can only prac- tice law only i — you pass the bar exam”? Some students respond that the — irst phrasing, which includes a condition subsequent, provides a higher expectation o — receiving the result. Technically, both conditions have the same e —
ect: a condition on practic- ing law is not — ailing the bar, and a condition on practicing law is passing the bar. But 19 • Conditions 573
the use o
“only i — ” instead o — “unless” implicitly suggests a higher bar to achieving the desired result.
- Conditions Concurrent Conditions concurrent are events that must occur simultaneously — or the parties’ respective obligations to become due. These conditions are common in contracts involving mutual exchanges o — per — ormance, where each party’s per — ormance is dependent on the other’s readiness and willingness to per — orm. For example, in a sales contract, the seller’s duty to deliver goods and the buyer’s duty to pay — or those goods are typically conditions concurrent. Each party’s obli- gation is conditioned on the other’s per — ormance, thus ensuring a simultaneous exchange o — value. Students should assess how conditions concurrent balance risks and ensure — airness in mutual exchanges. For example, they can evaluate whether the language o — the contract su —
iciently ties each party’s duty to the other’s per — ormance, thereby minimizing the risk o — one party — ailing to — ul — ill their obligations. Where the per — ormances o — the parties are to be exchanged under an exchange o — promises, the parties must render these per — ormances simultaneously unless the language or circumstances indicate otherwise. R2d § 234. This classi — ication rein — orces the principle o — reciprocity in contract per — ormance and minimizes risks associated with one party’s non-per — ormance. Students should consider reciprocity as a key — actor when determining whether a conditions concur- rent is present. By — ocusing on whether the obligations are genuinely reciprocal, they can better analyze the — airness and balance within the contract’s terms. Examine whether the contract language ensures reciprocal obligations are balanced and simultaneous. Structurally, you might identi — y risks associated with one party’s potential non-per — ormance and consider how conditions concurrent minimize these risks. Textually, consider phrases like “simultaneous exchange” or “dependent upon” as intrinsic evidence that such conditions exist.
- Promissory Conditions Promissory conditions are both conditions and promises; they are conditions that a party promises will come to pass. Promissory conditions typically take the — orm o —
a promise to ensure that a condition will be satis
ied. The e —
ect o —
ailure o — a promis- sory condition is both the discharge o — a party’s duty and a breach o — contract. To give a simple example, imagine a contractor agrees to build a wall — or a car — ac- tory and guarantees that the other party will be satis — ied with the wall. This is both a promise and a condition. I — the other party is not satis — ied with the wall, the contractor does not get paid, and the contractor is in breach o — contract because they — ailed to
ul — ill their promise. 574 19 • Conditions
Promissory conditions are not the norm. Most conditions are not promises; they are just conditions. Thus, non-occurrence o — most conditions is not a breach o — contract. Non-occurrence o — a condition is not a breach by a party unless they are under a duty that the condition occur. R2d § 225(3). To decide whether a condition is a contractual obligation as well, courts closely examine both the language o — the contract and the circumstances o — the agreement. Courts do not subject a party to breach o — contract lightly. I — a contract is not com- pletely clear that a condition is also a promise, a court will likely not view it that way. For example, in Morrison v. Bare, excerpted below, a buyer’s obligation to purchase a home was conditional on the seller’s repair o — a broken — urnace. The buyer argued that this condition was also a promise and that, because the seller — ailed to repair the
urnace, the seller was in breach o — contract. The court disagreed, holding that, in
act, the seller did not promise to repair the — urnace; rather, the seller promised to sell the house, and the buyer promised to buy the house subject to the condition that the seller repair the — urnace. Because the seller did not repair the — urnace, the buyer was — ree to walk away — rom the deal. The contractual “switch” was o —
, and the buyer did not have to per — orm their obligation o — paying — or the house. But the buyer could not sue the seller — or — ailing to repair the — urnace. The buyer’s options were limited to not purchasing the house or to waiving the condition and going — orward with the purchase regardless. (You will learn about waiver below.) On the other hand, sometimes a condition really is also a promise. I — a party unam- biguously undertakes in a contract to ensure that a condition comes to pass, then
ailing to — ollow through on this promise will expose them to a claim — or breach o —
contract while also absolving the other party o
their own duty to per — orm. Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc., 259 F.2d 137 (2d Cir. 1958), excerpted below, provides an example o — a promissory condition. The parties entered a contract — or the sale o — rice. The contract stated that a shipment o — rice was to be delivered in December 1952, with two weeks’ notice — rom the buyer. The reason
or this two-week notice provision was to ensure that the buyer gave the seller ship- ping instructions at least two weeks be — ore the desired shipping date so that the seller knew where and how the goods should be delivered (e.g., identi — ying the ship and the dock). The buyer — ailed to give timely notice, and the seller re — used to per — orm. The seller argued that its duty was discharged due to the — ailure o — a condition (giving timely notice), and that, in — act, the buyer was in breach o — contract due to its — ailure to give two weeks’ notice. It was clear to everyone involved that the reason — or the seller’s re — usal to per — orm was that the market price o — rice had gone up since they entered the contract, and the seller could make more money by dealing with a new buyer. Regard- less, the court held — or the seller, — inding that the notice provision was a promissory condition — both a promise and a condition. The buyer breached a promise, and the seller’s obligation to deliver the rice was discharged due to the — ailure o — a condition. You will see the concept o — promissory conditions again in the next chapter, where you will learn that most obligations in a contract are mutually dependent on each other. 19 • Conditions 575
When parties make a bilateral exchange o
promises, each o — these promises is likely conditional on the per — ormance o — the other promise. They are mutually dependent implied promissory conditions, also called “constructive conditions o — the exchange.” Recall that most contracts involve an exchange o — promises. These are bilateral con- tracts, in which one party makes a promise in exchange — or the other party’s promise. In most bilateral contracts, each party’s duty to per — orm is conditional on the other party’s mutual per — ormance. I — one party — ails to substantially per — orm, they may be in breach. Additionally, one party’s substantial per — ormance may be a precondition to the other’s corresponding obligation, so a — ailure to per — orm can discharge the other party’s duty altogether. Thus, when per — ormance breaks down, courts must decide whether the breach is serious enough to excuse the other party’s obligations. To understand the impact o — mutually dependent promissory conditions, consider the — ollowing example: Ben says to Cathy, “I’ll sell you my bicycle on Thursday — or $45.” Cathy accepts, promising to show up at the appointed time and location so they can make the exchange. What happens i — Cathy does not show up? Does Ben have to give Cathy his bike? The answer, as you will learn in the next chapter, is no. Ben’s and Cathy’s prom- ises are conditional upon each other. I — Cathy does not show up with the money, then a condition on Ben’s per — ormance has not been met. Cathy did not per — orm, and she did not even deliver a substantial per — ormance. Thus, Ben does not have to per — orm. Note that Cathy, in these — acts, is also in breach o — contract. Ben could sue her — or breach o — contract i — he wished. However, to do so, Ben would have to aver in his complaint that he is ready and able to per — orm by bringing Cathy the bike; otherwise, Cathy hersel — would have no duty to per — orm. This is the power o — mutually depen- dent promissory conditions. In sum, classi — ying conditions as precedent, subsequent, or concurrent, and iden- ti — ying promissory conditions provides a structured — ramework — or analyzing con- tractual obligations. By understanding the timing and — unction o — conditions, you can evaluate the en — orceability and sequence o — duties within a contract. Subsequent sections will build on this — ramework to address how conditions are satis — ied, what happens when conditions — ail, and how conditions can be waived or excused.
C. Determining Whether Conditions Are Satis — ied Once conditions are identi — ied and classi — ied, the next step is to determine whether the condition has been satis — ied. This step assesses whether the designated event or state o — a —
airs occurred as required by the contract. In practice, when a plainti —
brings a claim — or breach o — contract alleging that the de — endant — ailed to per — orm as promised in the contract, the plainti —
will have the bur- den o — proving that all conditions precedent to the de — endant’s duty to per — orm have 576 19 • Conditions
been satis
ied. The plainti —
will typically plead in the complaint that all conditions pre cedent to the de — endant’s duty have been met, and, as the dispute progresses, the plainti —
will eventually need to prove this through evidence. This will likely involve gathering evidence, such as written records, emails, per — ormance logs, or other documentation con — irming the occurrence o — the condition under the speci — ic terms o — the contract. Remember that — or express conditions, strict compliance is required. This means that determining the satis — action o — an express condition — ocuses solely on whether the condition was — ully per — ormed. Even minor deviations or omissions will result in the — ailure o — the condition. For instance, imagine that a contract — or the sale o — goods states, “Unless the seller makes the delivery by December 31, no payment will be due.” The seller’s delivery on January 1 constitutes — ailure o — the condition, even though the seller is only one day late. Precise adherence to express conditions may seem harsh, but it supports predictability in contractual obligations. The — ailure to satis — y an express condition typically means the corresponding obligation does not arise, and so this analysis may be a key turning point in assessing the en — orceability o — duties. In contrast, — or implied conditions, substantial per — ormance satis — ies the condi- tion. This inquiry is more nuanced and will be addressed in Chapter 20 on substan- tial per — ormance and material breach. At this stage, just understand that substantial per — ormance is not per — ect per — ormance, but it still largely delivers the bene — it o — the bargain. For example, in a contract requiring a buyer to provide shipping instruc- tions two weeks be — ore the delivery date, i — this is merely an implied condition, then supplying the instructions nine days be — ore delivery may well su —
ice. The question would be whether that per — ormance is substantial — whether the short — all is a “venial”
ault — or whether the delay materially impairs the value o — the bargain — or the seller. On the other hand, i — “two weeks’ notice” is an express condition, then a — ailure to comply with the speci — ied timing — even i — there is a good reason — or being just a — ew hours late — means the condition would not be satis — ied, and the obligation contingent upon it would not arise. The next section explores the consequences o — the — ailure o —
a condition.
D. Failure o
Conditions When an express condition is not per — ectly satis — ied, the condition has — ailed. Fail- ure o — a condition will typically result in the discharge (release) o — a party’s obligations under the contract. For conditions precedent, the duty never arises unless the condi- tion is satis — ied. Thus, the party who would have been subject to that duty does not have to per — orm at all. Their duty is discharged. I — the per — ormance o — a duty is subject to the occurrence o — a condition, that per — ormance is not due unless the condition occurs or its non-occurrence is excused. R2d § 225(1). For example, in a contract to purchase real estate that is contingent on securing
inancing, the buyer’s obligation to purchase the property is discharged i — the buyer 19 • Conditions 577
ails to secure — inancing. Similarly, conditions subsequent operate to terminate a duty that has already arisen. Finally, in an insurance contract, the insurer’s duty to cover a claim may be discharged i — the insured — ails to — ile the claim within the policy’s speci-
ied deadline. Importantly, just because a condition has — ailed does not mean any promise has been breached. Unless the condition was also a promise (called a “promissory condi- tion” and discussed below), — ailure o — the condition does not constitute a breach o —
contract because the condition was not a legal obligation to per
orm. However, the non-occurrence can still result in inequities, especially when one party has con — erred bene — its or incurred costs in reliance on the anticipated per — ormance. While legal remedies such as damages are unavailable in these situations, equitable remedies like restitution may be granted to prevent unjust enrichment. When a party’s — ailure to satis — y a condition results in harm to the other party, equitable remedies such as restitution may be awarded to prevent unjust enrichment. R2d § 229. For instance, i — the buyer’s — ailure to secure — inancing was due to negligence, the seller might retain an earnest money deposit as liquidated damages. Conversely, i —
the
inancing condition was excused due to the seller’s — ailure to cooperate, the buyer could seek restitution — or expenses incurred in preparing to purchase the property, such as inspection or appraisal — ees. In addition, reliance and restitution remedies may be available when one party has con — erred bene — its or incurred costs in anticipation o — per — ormance. These remedies aim to restore the non-breaching party to their pre-contract position or compensate
or losses incurred due to reliance on the contract. The non-occurrence o — a condition can have pro — ound e —
ects on contractual obli- gations and remedies. By systematically analyzing discharge, remedies, and equitable considerations, students can develop a comprehensive understanding o — how courts address these issues. This — inal step in conditional analysis ensures that outcomes align with — airness, predictability, and the parties’ original expectations.
E. Excuse or Waiver Even i — a condition has not been satis — ied, it may be excused by a court or waived by a party under speci — ic circumstances. Courts may excuse the non-occurrence o —
a condition to avoid disproportionate
or — eiture. The parties may voluntarily waive a condition through their actions or through explicit agreement.
- Excuse by Courts Courts have the authority to excuse the non-occurrence o — a condition when en — orcing it strictly would result in disproportionate — or — eiture. Recall that a — or — ei- ture, in contract law, means the denial o — a party’s compensation under a contract. 578 19 • Conditions
I
strict en — orcement o — a non-material (unimportant) condition would require a party to — orego ( — or — eit) the bene — its they contracted to obtain, and i — the — or — eiture is disproportionate to the harm caused by — ailure o — the condition, a court may excuse the condition. To the extent that the non-occurrence o — a condition would cause dispropor- tionate — or — eiture, a court may excuse the non-occurrence o — that condition unless its occurrence was a material part o — the agreed exchange. R2d § 229. For example, consider a lease agreement requiring a tenant to provide proo — o —
insurance by the
irst day o — the lease term. I — the tenant delivers the insurance certi — i- cate two days late but the landlord’s risk has not increased as a result, a court might excuse the non-occurrence o — the condition to prevent the tenant — rom losing their lease. This would be true especially where the tenant has taken actions in reliance on the lease, like giving up some other lease and moving into the new premises. The court’s decision would hinge on whether the insurance deadline was a material part o — the agreed exchange or simply an ancillary requirement. By excusing the condition, the court preserves the contract’s primary purpose while avoiding a disproportionate penalty — or the tenant. Courts can also excuse a condition when the non-occurrence o — the condition was due to the — ault or bad — aith o — the party seeking to en — orce it. For example, i — a landlord imposes a condition requiring proo — o — insurance but then actively avoids accepting the tenant’s submission o — the certi — icate, this bad- — aith conduct would weigh heavily in — avor o — excusing the condition. Similarly, i — a buyer — ails to provide shipping instructions on time because the seller withheld necessary in — ormation, the seller’s
ault may justi — y excusal. These — actors ensure that excusing the condition aligns with principles o —
airness while preventing opportunistic behavior by the en — orcing party. Giving courts authority to excuse a condition serves the principles o —
airness and equity while maintaining the integrity o — the contractual relationship.
- Waiver by Parties A condition may also be waived i — the party entitled to en — orce it voluntarily relin- quishes their right to do so. Waiver can occur explicitly, through clear statements or agreements, or implicitly, through conduct that demonstrates an intent not to en — orce the condition. This analysis — ocuses on the actions and communications o — the parties to determine whether a waiver has occurred. For example, imagine a landlord who repeatedly accepts late rent payments with- out objection. Over time, the landlord’s conduct may be interpreted as a waiver o — the condition requiring timely payment. This scenario illustrates the importance o — clear and consistent behavior, as courts o — ten in — er waiver — rom a pattern o — conduct that contradicts the en — orcement o — the original condition. This implicit waiver would pre- vent the landlord — rom later en — orcing strict compliance with the payment deadline unless proper notice is given to reinstate the condition. 19 • Conditions 579
Similarly, i
a seller explicitly in — orms a buyer that a shipment deadline can be extended without penalty, the seller has waived the condition tied to the original deadline. Explicit waivers di —
er — rom implicit ones in that they involve clear and direct communication leaving little room — or ambiguity. This clarity is crucial in avoiding disputes, as both parties can rely on the explicit statement to guide their actions. For instance, the buyer in this scenario may con — idently delay the shipment without — ear o — breach, knowing that the seller has explicitly modi — ied the deadline. This example demonstrates how explicit communications can modi — y the en — orcement o — a condi- tion and highlight the need — or care — ul documentation to avoid disputes. In analyzing waiver, students should — ocus on identi — ying whether the waiving party’s conduct or statements demonstrate a clear intention to relinquish the condi- tion. Courts will consider whether the other party reasonably relied on the waiver and whether reinstating the condition would create un — air surprise or hardship. In sum, excuses and waivers play a vital role in tempering the harsh rule that requires strict compliance with express conditions. These doctrines — it into the broader — ramework o — conditional analysis by providing mechanisms — or — lexibility when strict en — orcement would undermine equity or the practical intent o — the agree- ment. By addressing these exceptions, courts can uphold — airness without eroding the reliability o — contractual obligations.
F. Conditions o
Satis — action Conditions o — satis — action are a unique kind o — condition in contract law, and they come with special rules. Conditions, as you now know, are events that are not certain to occur but whose occurrence determines whether a contractual duty is due. So — ar, we have been assess- ing conditions that take the — orm o — external events outside the parties’ control. But what happens when the “event” is the satis — action o — a person or even one o — the par- ties to the contract? This creates what is called a “condition o — satis — action.” A condition o — satis — action exists when a party’s per — ormance is conditional on their being satis — ied with the other party’s per — ormance. For example, a landlord o —
ers to rent you her house — or the summer only i — the landlord is satis — ied with your credit score. This is a condition o — satis — action. I — the landlord is not satis — ied with your credit score, she does not have to rent her house to you. Satis — action conditions can usually be identi — ied because the contract uses words like “satis — y,” “satis — ied,” or “satis — action,” but any other synonym would be treated similarly. The key — eature is that one party’s approval o — the other party’s per — ormance is required be — ore the — irst party’s per — ormance is due. Satis — action clauses, while they can be structurally simple, create a challenge — or contract law because whether someone is satis — ied is o — ten a subjective question, and parties may have strong incentives to lie. For example, i — one party’s per — ormance is 580 19 • Conditions
conditional on its satis
action with the other party’s per — ormance, the — irst party can simply lie about whether it is satis — ied and use this as an excuse to absolve itsel — o —
legal liability. Contract law has responded with special rules regarding how to deal with these so-called “conditions o — satis — action.” There are two di — — erent standards o — satis — ac- tion. The — irst, and pre — erred, standard is that o — reasonable, objective satis — action. The second standard is that o — honest, subjective satis — action. No matter which standard is applied, conditions o — satis — action are subject to the requirement that parties to a contract act with good — aith and — air dealing toward one another regarding their contractual obligations. This means that a party cannot dishonestly claim dissatis — action to gain a material advantage over a contract coun- terparty — even where the standard is subjective. How, then, do courts choose which standard to apply? As you will learn in Morin Building Products Co., Inc. v. Baystone Construction, Inc., 717 F.2d 413 (7th Cir. 1983), the objective standard is applied in commercial agreements where satis — ac- tion depends upon criteria like “commercial quality, operative — itness, or mechani- cal utility which other knowledgeable persons can judge.” In commercial situations, courts generally apply a rule o — reasonable or objective satis — action, asking whether a reasonable person in the position o — the promisor would or should be satis — ied with the per — ormance. For example, in a plumbing contract where a plumber agrees to — ix your plumbing in exchange — or payment subject to your being satis — ied, the key question is obviously one o — utility and operative — itness. The plumber’s work would be judged based on whether a reasonable person would be satis — ied. You could not escape your duty to pay by claiming you are not personally satis — ied i — a reasonable person would be. In contrast, the subjective standard o — honest good — aith is employed when the contract involves “personal aesthetics or — ancy.” In agreements regarding personal or artistic matters, such as a contract — or an artist to paint your portrait, it is simply not
easible to apply a reasonable standard o — satis — action. As anyone who has evaluated a photo o — themselves can attest, people have very di — — erent standards o — satis — action when it comes to their personal appearance. Thus, in a contract to paint a portrait, a court would apply a subjective standard unless the contract says otherwise. The buyer will be the sole judge o — their portrait and might not be satis — ied even i — a reasonable person would be. As they say, one person’s trash is another person’s treasure; there is no account- ing — or taste. When an objective standard is not applicable as a matter o — law, courts then need to determine whether the promisor is actually satis — ied in — act. Courts, and potentially a jury, will have to evaluate the credibility o — the party claiming dissatis — ac- tion. I — they are, in reality, satis — ied, they will have to per — orm their side o — the deal. Courts are very hesitant to apply a subjective standard to conditions o — satis — action. They tend to apply an objective standard whenever — easible, asking whether a reason- able person would be satis — ied under similar circumstances. 19 • Conditions 581
When it is a condition o --- an obligor’s duty that they be satis --- ied with respect
to the obligee’s per --- ormance or with respect to something else, and it is practi-
cable to determine whether a reasonable person in the position o --- the obligor
would be satis --- ied, an interpretation is pre --- erred under which the condition
occurs i --- such a reasonable person in the position o --- the obligor would be satis-
ied. R2d § 228. The reason courts pre — er the objective standard is that they generally strive to avoid a — or — eiture. Remember that express conditions must be per — ectly per — ormed; other wise, a promise subject to that condition does not have to be per — ormed at all. This is a harsh result that can be very un — air. Satis — action clauses raise the same problem, and worse. I — satis — action were judged solely based on a party’s subjective mindset, this could — requently lead to — or — eiture. A party could law — ully re — use to pay, simply by claiming dissatis — action with the per — ormance, even i — the per — ormance was reason- ably good. Contract law is not designed to bene — it those who are unduly picky and unreasonable. To mitigate the risk o —
or — eitures, courts tend to apply the objective standard where
easible, unless the parties unambiguously indicate that a subjective standard applies or the contract is one — or which an objective standard makes no sense (like the per- sonal portrait). For example, in Morin, Baystone, a general contractor — or General Motors, hired Morin, a subcontractor, to build an aluminum-siding wall — or a General Motors plant. The parties included a satis — action clause that appeared to give General Motors signi — icant discretion to judge whether it was satis — ied with the wall Morin built. A General Motors agent — ound Morin’s aluminum siding wanting — even though, under an objective reasonable person standard, the wall was undisputedly acceptable. The court, in an opinion by the — amous judge Richard Posner, held that an objective rea- sonable person standard should be applied, even though the contract seemed to imply that “acceptability shall rest strictly with the Owner.” This case illustrates courts’ general pre — erence — or an objective standard in commercial contracts. A — ter all, the building — or which the aluminum siding was intended was a — actory — not usually intended to be a thing o — beauty. I — the “parties really intended General Motors to have the right to reject Morin’s work — or — ailure to satis — y the private aesthetic taste o — General Motors’ representative,” Judge Posner reasoned, they would have clearly said so in their contract. But the contract language was instead “ambiguous” as to whether the parties intended “to subject Morin’s rights to aesthetic whim.”
G. Re
lections on Conditions The doctrine o — conditions provides a structured — ramework — or analyzing when and how contractual obligations arise, are en — orced, or are discharged, o —
ering critical tools — or managing risk and setting clear per — ormance expectations in contracts. By 582 19 • Conditions
identi
ying and classi — ying conditions, evaluating their satis — action, and addressing excuses or consequences o — non-occurrence, you develop a deeper understanding o —
how contracts allocate risks and de
ine per — ormance expectations. Conditions underscore the principles o — autonomy and — airness in contract law. They allow parties to structure their agreements with precision while ensuring that un — oreseen circumstances or inequities can be addressed through equitable doctrines like waiver and restitution. This balance re — lects contract law’s broader goal o — aligning the parties’ intent with practical realities to promote both predictability and — lexibility in en — orcement. Strict interpretation o — express conditions reduces the risk o — judicial overreach by limiting courts to the language chosen by the parties, thereby upholding their autonomy in dra — ting the contract. Furthermore, this approach enhances predictabil- ity, as parties can rely on clear, unambiguous terms to guide their per — ormance and expectations. By respecting the intent o — the parties as re — lected in their agreement, courts strengthen contractual certainty. However, strict interpretation is tempered by
airness doctrines that excuse the non-occurrence o — a condition to avoid dispropor- tionate — or — eiture. This balance ensures that parties’ expectations are protected while mitigating unjust outcomes in exceptional cases. The analysis o — conditions lays the — oundation — or evaluating how contractual obli- gations are — ul — illed and what happens when they are not. In the next chapter, you will explore how most bargain contracts involve mutually dependent promises that oper- ate as implied promissory conditions, and you will learn the special rules that apply to evaluating per — ormance and breach o — these constructive conditions.
Cases Reading Morrison v. Bare. Our --- irst case about conditions, Morrison, illus- trates a clear example o --- a condition. The case involves the purchase and sale o ---
a house, where the real estate purchase agreement had a section titled “Special Conditions.” In this section, the parties wrote that the seller would provide the buyer with a copy o — a repair bill — or the — urnace. This case is use — ul not only — or its — acts and analysis thereo — but also — or its thorough description o — the law o — conditions. The Ohio Court o — Appeals quotes and discusses treatises by Corbin, Williston, Murray, and Farnsworth, as well as the R2d, as they pertain to conditions and their impact. In Morrison, the seller tried (and — ailed) to argue that he was only supposed to — urnish a bill, and the bill need not show that a cracked heat exchanger (which is part o — a — urnace that heats the house) had been repaired. Re — lect back on the canons o — construction, and think about why the seller’s position did not 19 • Conditions 583
re
lect a reasonable interpretation o — the written agreement. In any event, the court dismissed the seller’s semantic gambit. This case illustrates what happens when a condition does not occur. To understand this point, pay care — ul attention to what remedies the plainti —
wanted. Note that the buyer, Mr. Morrison, is the plainti
as well as the appel- lant, signi — ying that he must have lost at trial. At trial, the buyer asked the court — or an order o — speci — ic per — ormance requiring the seller to sell the house to him. Moreover, the buyer wanted the price to be the contract price minus the cost o — repairing the — urnace. The court correctly re — used to require the seller to sell the house at a lower cost because that is not how conditions — unction. Conditions are not independent promises, where the — ailure to bring about such independent promises could be a breach that results in an award o — money damages that equals the cost o —
the breach. Rather, conditions are merely switches, which turn on or o ---
con- tractual promises. Since the condition did not occur in this case, the buyer’s promise to buy the house was not triggered, and the buyer could right — ully re — use to conclude the purchase. Alternatively, the buyer could waive the non-occurrence o — this condition and conclude the purchase anyway, pursuant to the original terms. But the buyer had no right to demand that the seller sell the house at a lower price than originally agreed. As you read this case, highlight the speci — ic language showing that the seller did not guarantee, warrant, or otherwise promise to — ix the — urnace. This lan- guage made clear that the condition was not a promise. You will want to com- pare this with the next case, Internatio, where the condition was a promise, known as a promissory condition. Why was the condition in Morrison not a promise, whereas the condition in Internatio was?
Morrison v. Bare
2007-Ohio-6788 (Ohio Ct. App. 2007) DICKINSON, J.
Introduction Jack W. Morrison Jr. is in the business o --- buying houses, re --- urbishing them, and renting them to college students. Tom Campensa, a real estate agent, showed Mr. Morrison a house owned by Jonas Bare. Mr. Morrison noticed a sticker on the
urnace that indicated it had a cracked heat exchanger. A — ter checking with Mr. Bare, Mr. Campensa told Mr. Morrison that the — urnace had been repaired in 2004. 584 19 • Conditions
Mr. Morrison executed a contract to purchase the house, but included a “special condition” in the contract that Mr. Bare would provide him a copy o — the 2004 — urnace repair bill within 14 days. Mr. Bare supplied a copy o — a 2004 bill — or repairs, but those repairs did not include replacing the heat exchanger. Instead o — closing on the house, Mr. Morrison sued Mr. Bare — or speci — ic per — ormance and breach o — contract and sued Mr. Bare, Mr. Campensa, and Mr. Campensa’s real estate agency — or — raud. The trial court granted summary judgment to all three de — endants, and Mr. Mor- rison appealed. His sole assignment o — error is that the trial court incorrectly granted the de — endants summary judgment. This court a —
irms the trial court’s judgment because: (1) Mr. Morrison neither per — ormed his part o — the contract nor showed his “readiness and ability” to do so; (2) the requirement that Mr. Bare provide a bill showing that the heat exchanger was repaired was a condition — or Mr. Morrison’s per — ormance, not a promise; and (3) Mr. Morrison did not justi — iably rely upon Mr. Campensa’s statement that the heat exchanger had been repaired. Background Mr. Morrison noticed a — or-sale sign on the house at issue in this case and told Mr. Campensa he would like to look at it. Mr. Campensa walked through the house with Mr. Morrison and Mr. Morrison’s — ather. The house was in disrepair, and the utilities were disconnected. During the walkthrough, Mr. Morrison noticed a sticker on the — urnace that indicated it had a cracked heat exchanger. When he was deposed, he said the sticker had caused him concern because he knew that a cracked heat exchanger meant the — urnace would have to be replaced. He — urther testi — ied that he questioned Mr. Campensa about the heat exchanger and Mr. Campensa said that he would check with the seller, Mr. Bare, to see whether it had been — ixed. At some point a — ter the walkthrough, Mr. Campensa talked to Mr. Bare about the — urnace. Mr. Campensa testi — ied that he told Mr. Bare that the — urnace had a sticker on it indicating that it had a cracked heat exchanger and that Mr. Bare told him the — urnace had been repaired. Mr. Bare testi — ied that he did not recall whether Mr. Campensa had speci — ically mentioned the cracked heat exchanger, but that he had told Mr. Campensa the — urnace had been repaired. Either way, Mr. Morrison and Mr. Campensa agree that Mr. Campensa told Mr. Morrison that the heat exchanger had been repaired. Mr. Morrison did a second walkthrough o — the house, this time with an inspector. He testi — ied that his purpose — or having the inspector look at the house with him was to try to estimate the cost o — needed repairs and to “generally just look[] around the property.” The utilities were still o —
at the time o — his second walkthrough. During the second walkthrough, Mr. Morrison concluded that the kitchen — loor would have to be replaced. He and his inspector also noted some problems with windows and drywall. 19 • Conditions 585
They looked at the sticker on the
urnace, but did not attempt to independently deter- mine whether the heat exchanger had been repaired. Following his second walkthrough, Mr. Morrison made a written o —
er to pur- chase the house — or $40,000, using a — orm real estate purchase agreement. The — orm included a provision permitting Mr. Morrison to have the house inspected and, i — not satis — ied, to noti — y Mr. Bare within — ourteen days o — the date o — the agreement. I — any unsatis — actory conditions could not be resolved, Mr. Morrison could void the agree- ment or accept the property in its “as is” condition. The — orm — urther provided that, i — Mr. Morrison did not have the home inspected or did not noti — y Mr. Bare o — any unsatis — actory conditions, he would take the property in its “as is” condition. Under the heading “Special Conditions,” Mr. Morrison wrote: “Seller to supply buyer with copy o —
urnace repair bill — rom 2004 within 14 days.” Mr. Campensa acknowledged at his deposition that the purpose o — the “special condition” was to allow Mr. Morrison to satis — y himsel — that the heat exchanger had been repaired. At the same time he signed the written o —
er, Mr. Morrison also signed a property dis- closure — orm in which he acknowledged that he was purchasing the property “as is.” Four days a — ter he made his written o —
er, Mr. Morrison signed an amendment to that o —
er, removing his right to inspect the property. The amendment — urther pro- vided that Mr. Morrison recognized that neither Mr. Bare nor Mr. Campensa was warranting the property in any manner: In exercising or waiving their right to inspect, the Buyer(s) are not relying upon any representation about the property made by the Seller(s), Broker(s), Agent(s), other than those representations speci — ied in the purchase agree- ment. The Buyer(s) understand that the Seller(s), Broker(s), Agent(s), and/or inspector(s) do not warrant or guarantee the condition o — the property in any manner whatsoever. Three days later, Mr. Bare signed both the — orm purchase agreement and the amendment, thereby accepting Mr. Morrison’s o —
er to purchase the house. Prior to the date set — or closing, Mr. Campensa obtained a copy o — the 2004 — urnace repair bill. That bill indicated that repairs totaling $234 had been made to the — urnace, but that the heat exchanger had not been repaired. In — act, it included a quote to replace the — urnace — or $1600 and a notation that, i — a new — urnace was installed within 30 days, the $234 — or repairs would be deducted — rom the cost o — the new — urnace. Mr. Campensa telephoned Mr. Morrison and told him that the heat exchanger had not been repaired. At that point, Mr. Morrison told Mr. Campensa that he would close on the house only i — Mr. Bare either replaced the — urnace or reduced the purchase price in an amount equal to what it would cost to replace the — urnace. Mr. Bare was unwilling to do either. Mr. Campensa sent Mr. Morrison a copy o — the bill, along with a proposed adden- dum to the purchase agreement. The proposed addendum provided that Mr. Morri- son agreed to accept the property with the — urnace “in its as is condition and assume 586 19 • Conditions
all responsibility
or its repair and/or replacement.” Mr. Morrison re — used to execute the proposed addendum. Prior to the date set — or closing, Mr. Morrison — iled his complaint in this case. Mr. Bare subsequently sold the house to another purchaser, who re — urbished it and rented it to college students.
This Court’s Standard o --- Review Mr. Morrison’s sole assignment o --- error is that the trial court incorrectly granted the de --- endants summary judgment. In reviewing an order granting summary judg- ment, this Court applies the same test a trial court is required to apply in the --- irst instance: whether there are any genuine issues o --- material --- act and whether the mov- ing party is entitled to judgment as a matter o --- law.
Mr. Morrison’s Contract Claims
By his --- irst cause o --- action, Mr. Morrison alleged that he was entitled to spe- ci --- ic per --- ormance o --- his contract with Mr. Bare. In order to be entitled to speci --- ic per --- ormance o --- a contract, a plainti ---
must either have per — ormed his part o — the con- tract or show his “readiness and ability” to do so. Mr. Morrison did neither. He had not paid the purchase price — or the property and he had told Mr. Campensa that he was unwilling to do so unless Mr. Bare replaced the — urnace or reduced the purchase price. As discussed below, the contract did not require Mr. Bare to replace the — urnace or reduce the purchase price. Accordingly, Mr. Morrison is not entitled to speci — ic per — ormance. Additionally, by the time the trial court granted summary judgment in this case, the property had been sold to a third party. When property has been trans — erred to a bona
ide purchaser, speci — ic per — ormance is not available. Mr. Morrison has not argued that the person who purchased the property — rom Mr. Bare was not a bona — ide pur- chaser. Accordingly, this is a second reason he is not entitled to speci — ic per — ormance. By his second cause o — action, Mr. Morrison sought damages — or breach o — con- tract. Mr. Bare has argued that the “special condition” was satis — ied when he provided Mr. Morrison a copy o — the 2004 bill — or repairs to the — urnace, even though, instead o — showing that the heat exchanger had been repaired, it showed that it had not been repaired. There can be no doubt that, in order to satis — y the “special condition” that Mr. Mor- rison included in his o —
er, the repair bill had to show that the heat exchanger had been repaired. Mr. Campensa, who was Mr. Bare’s agent, acknowledged that the purpose o — the “special condition” was to allow Mr. Morrison to satis — y himsel — that the heat exchanger had been — ixed: Q. All right. On line 103 it says, “Seller to supply buyer with copy o —
urnace repair bill — rom 2004 within 14 days,” correct? A. Correct. Q. Why was that provision put in the contract? 19 • Conditions 587
A. Because there was the potential that that was cracked in there was a
cracked thing and Jack wanted to know i --- it was --- ixed or not.
Q. Okay. Because you believed it had been repaired based on your conversa-
tion with Jonas Bare, correct?
A. Yes.
Q. And you had told Jack that it had been repaired, did you not?
A. Yes.
Q. So Jack wanted to make sure as part o --- this deal that that --- urnace had
already been repaired, correct?
A. Correct.
Mr. Bare’s argument that he satis --- ied the condition by supplying a bill showing that the heat exchanger had not been repaired is, at best, disingenuous. Both parties knew at the time they entered the contract that the bill Mr. Bare needed to supply to satis --- y the “special condition” was a bill showing that the heat exchanger had been repaired. That, however, does not mean that Mr. Bare breached the purchase agreement by not delivering a bill that showed the heat exchanger had been repaired and by not replacing the --- urnace or lowering the purchase price. To begin with, the contract does not include a promise by Mr. Bare that, i --- the heat exchanger was not repaired in 2004, he would replace the --- urnace or reduce the purchase price. Further, the “special condition” that Mr. Morrison included in the contract was just that, a condition, not a promise:
[P]romise and condition are very clearly di --- --- erent in character. One who
makes a promise thereby expresses an intention that some --- uture per --- ormance
will be rendered and gives assurance o --- its rendition to the promisee. Whether
the promise is express or implied, there must be either words or conduct by
the promisor by the interpretation o --- which the court can discover promis-
sory intention; a condition is a --- act or an event and is not an expression o ---
intention or an assurance. A promise in a contract creates a legal duty in the
promisor and a right in the promisee; the --- act or event constituting a condition
creates no right or duty and is merely a limiting or modi --- ying --- actor. 8 Cath-
erine M.A. McCauli ---
, Corbin On Contracts, Section 30.12 (rev. ed. 1999). Mr. Campensa told Mr. Morrison that the heat exchanger had been repaired. Mr. Morrison made his o —
er to purchase the house contingent upon receiving proo —
that it had been: In contract law, “condition” is an event, other than the mere lapse o — time, that is not certain to occur but must occur to activate an existing contractual duty, unless the condition is excused. The — act or event properly called a condition occurs during the per — ormance stage o — a contract, i.e., a — ter the contract is
ormed and prior to its discharge. John Edward Murray Jr., Murray on Con- tracts, Section 99B (4th ed. 2001) (emphasis in original). 588 19 • Conditions
While the
ailure to per — orm a promise is a breach o — contract, the — ailure to satis — y a condition is not: A promise is always made by the act or acts o — one o — the parties, such acts being words or other conduct expressing intention. A — act can be made to oper- ate as a condition only by the agreement o — both parties or by the construction o — the law. The purpose o — a promise is to create a duty in the promisor. The purpose o — constituting some — act as a condition is always the postponement or discharge o — an instant duty (or other speci — ied legal relation). The non-
ul — illment o — a promise is called a breach o — contract, and creates in the other party a secondary right to damages. It is the — ailure to per — orm a legal duty. The non-occurrence o — a condition will prevent the existence o — a duty in the other party; but it may not create any remedial rights and duties at all, and it will not unless someone has promised that it shall occur. Corbin On Con- tracts, at Section 30.12. The — act that, to satis — y the “special condition,” Mr. Bare would have had to do something (supply the bill showing that the heat exchanger had been repaired) did not mean that it was a promise rather than a condition. A condition can be an act to be done by one o — the parties to the contract: Virtually any act or event may constitute a condition. The event may be an act to be per — ormed or — orborne by one o — the parties to the contract, an act to be per — ormed or — orborne by a third party, or some — act or event over which neither party, or any other party, has any control. Murray on Contracts, at Section 99C. In this case, Mr. Bare had partial control over the condition. Even i — he had a bill showing that the heat exchanger had been repaired in 2004, he could have chosen not to deliver it to Mr. Morrison, in which case the condition would not have been satis-
ied. It also, however, was partially out o — his control. Since the heat exchanger had not been repaired in 2004, he was unable to satis — y the condition. The material part o —
the condition was that Mr. Morrison had to be satis
ied that the heat exchanger had been repaired. Section 225 o — the Restatement (Second) o — Contracts (1981) describes the conse- quences o — the non-occurrence o — a condition: (1) Per — ormance o — a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused. (2) Unless it has been excused, the non-occurrence o — a condition discharges the duty when the condition can no longer occur. (3) Non-occurrence o — a condition is not a breach by a party unless he is under a duty that the condition occur. In this case, Mr. Morrison’s duty to pay the purchase price did not come due because Mr. Bare could not produce a 2004 bill showing that the heat exchanger had 19 • Conditions 589
been repaired. Once it became clear that it was impossible
or Mr. Bare to produce such a bill, Mr. Morrison could have excused the condition and closed on the prop- erty. Alternatively, he could have treated his duty to close as discharged and the con- tract terminated: [I] — a time comes when it is too late — or the condition to occur, the obligor is entitled to treat its duty as discharged and the contract as terminated. II E. Allan Farnsworth, Farnsworth On Contracts, Section 8.3 (3rd ed. 2004). By in — orming Mr. Campensa that he was unwilling to close on the house unless Mr. Bare replaced the — urnace or reduced the purchase price, Mr. Morrison chose to treat his duty to pay the original purchase price as discharged and the contract as terminated. His proposal to go — orward under di — — erent conditions was, in e —
ect, an o —
er to enter into a new contract; a new contract that Mr. Bare was — ree to reject, which he did. Upon the — ailure o — the “special condition” that he included in the real estate pur- chase agreement, Mr. Morrison treated the agreement as terminated, as he was enti- tled to do. The — ailure o — the “special condition” was not a breach o — contract. There are no genuine issues o — material — act, and Mr. Bare is entitled to judgment as a matter o — law on Mr. Morrison’s demand — or speci — ic per — ormance and on his breach o — contract claim. To the extent Mr. Morrison’s assignment o — error is addressed to the trial court’s summary judgment on his contract claims, it is overruled.
Mr. Morrison’s Fraud Claim [Discussion o --- Morrison’s --- raud claim omitted.]
III. Mr. Morrison’s assignment o --- error is overruled. The judgment o --- the Summit County Common Pleas Court is a ---
irmed. Judgment a —
irmed.
Re --- lection The Morrison case shows that conditions are not promises, i.e., the --- ailure to cause a condition to occur is not a breach o --- a promise. Rather, conditions are merely switches that cause another contractual promise to be due --- or per --- ormance or not.
Many sophisticated agreements distinguish between “buyer’s conditions” and “sell- er’s conditions.” For example, in the standard --- orm --- or the purchase and sale o --- pre-
erred stock between a startup company and a venture capital investment — irm, there are two sections named “Conditions to the Purchasers’ Obligations at Closing” and “Conditions o — the Company’s Obligations at Closing.” I — any o — the conditions to the purchasers’ obligations do not occur, then the venture capital investment — irm is not required to purchase the stock. I — any o — the conditions to the company’s obligations do not occur, then the startup company is not obligated to sell. Alternatively, each side 590 19 • Conditions
can waive the non-occurrence o
its own conditions and thereby require the other party to close anyway. But neither party can sue the other — or the non-occurrence o —
a condition. It may be help — ul to think o — conditions as i — they are owned by one party to the contract or the other. In the pre — erred stock purchase example above, the conditions to the purchaser’s obligations are, in a sense, held by the buyer. Like cards in a play- er’s hand, the condition can be played or ignored by its holder. Likewise, we might
rame the condition in Morrison (production o — a bill showing that the — urnace was repaired) as being owned by the buyer, Mr. Morrison. When the — urnace was not repaired, Mr. Morrison held this condition like a card that he could play (thereby extinguishing his obligation to purchase the house) or ignore (allowing the transac- tion to go through). To be clear, this is a valuable option. As the holder o — a condition that did not occur, Mr. Morrison had the option to ignore its non-occurrence and e —
ectively give away his right not to purchase the house. This is re — erred to as waiving the condition. This ability to waive a condition or not gives its holder leverage or power to — orce a renegotiation in some instances. Here, Mr. Morrison essentially o —
ered to “trade” this condition with the seller — or a lower purchase price. This was an o —
er to modi — y a contract that was supported by new consideration. We learn about parties’ volun- tary modi — ication o — contractual obligations in Chapter 23. For now, simply note that Mr. Morrison’s o —
er would have resulted in a lower purchase price i — Mr. Bare had accepted it. I — Mr. Bare really wanted to sell his house quickly, the parties could have agreed to buy and sell the house with a broken — urnace — or a lower price. But that is not how Mr. Bare responded to Mr. Morrison’s o —
er. Rather, Mr. Bare rejected the o —
er to modi — y their agreement. That le — t Mr. Morrison with two options: waive the condition and conclude the sale on the original terms promised, or assert that his obligations to purchase the house were not due because the condition had not occurred and walk away — rom the deal. The key point in this case was that Mr. Mor- rison did not have a third option to — orce Mr. Bare to sell the house — or less money. That is just not how conditions work as a matter o — law.
Discussion 1. The court ruled that the term regarding --- ixing the heat exchanger was a condition and not a promise. How should the buyer have revised the contract i --- he intended that term to be a promise? 2. Was one party in this case trying to “pull a --- ast one” on the other? Do you see any evidence o --- bad --- aith or un --- air dealing? I --- so, how does that --- actor into the court’s resolution o --- this case?
19 • Conditions 591
Reading Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc. In Mor- rison, the court — ound that the “special condition” was just that: a condition, not a promise. But it is possible — or courts to determine that a term in a contract is both a condition and a promise. Such terms are called “promissory conditions,” and they per — orm both the — unction o — a promise (which when breached gives rise to damages) and o — a condition (the non-occurrence o — which means that a conditional promise does not need to be per — ormed). Note there is an important distinction between a conditional promise and a promissory condition. A conditional promise is a promise that only must be per — ormed i — the relevant condition occurs. In Morrison, the buyer, Mr. Mor- rison, made a conditional promise to pay — or the house; his promise to pay was conditioned on the repair o — the — urnace, and when the repair did not occur, Mr. Morrison was not obligated to buy the house. A promissory condition, as described in the next case, is both a promise and a condition. As a promise, it must be per — ormed, lest the party who made that promise be liable — or damages. As a condition, it — unctions as a switch that turns on the other party’s promise. As you read Internatio, make sure to highlight and annotate what the promissory condition is, and explain how the court — inds this term has the — eatures o — both a promise and a condition.
Internatio-Rotterdam, Inc. v. River Brand Rice
Mills, Inc.
259 F.2d 137 (2d Cir. 1958) HINCKS, Circuit Judge. Appeal --- rom the United States District Court, Southern District o --- New York, Walsh, Judge, upon the dismissal o --- the complaint a --- ter plainti ---
’s case was in. The de — endant-appellee, a processor o — rice, in July 1952 entered into an agreement with the plainti —
-appellant, an exporter, — or the sale o — 95,600 pockets o — rice. [A “pocket” is a quantity o — rice. The parties agreed upon its meaning and the court construed this term in the agreement in accordance with the parties’ intentions and industry custom.] The terms o — the agreement, evidenced by a purchase memorandum, indicated that the price per pocket was to be ‘$8.25 F.A.S. Lake Charles and/or Houston, Texas’; that shipment was to be ‘December, 1952, with two weeks call — rom buyer’; and that payment was to be by ‘irrevocable letter o — credit to be opened immediately payable against’ dock receipts and other speci — ied documents. [“F.A.S.” stands — or “ — reight alongside ship,” a shipment term that means the seller is responsible — or delivering the goods to directly next to the ship o — the buyer’s choice. 592 19 • Conditions
This is contrasted with “F.O.B.” which stands
or “ — ree on board” and means that the seller is responsible — or placing the goods onto the speci — ied ship. In both cases, note that the buyer must identi — y the ship so that the seller can place the goods alongside or on the proper ship.] In the — all, the appellant, which had already committed itsel — to supplying this rice to a Japanese buyer, was unexpectedly con — ronted with United States export restric- tions upon its December shipments and was attempting to get an export license — rom the government. December is a peak month in the rice and cotton seasons in Louisi- ana and Texas, and the appellee became concerned about shipping instructions under the contract, since congested conditions prevailed at both the mills and the docks. The appellee seasonably elected to deliver 50,000 pockets at Lake Charles and on December 10 it received — rom the appellant instructions — or the Lake Charles ship- ments. Thereupon it promptly began shipments to Lake Charles which continued until December 23, the last car at Lake Charles being unloaded on December 31. December 17 was the last date in December which would allow appellee the two- week period provided in the contract — or delivery o — the rice to the ports and ships designated. Prior thereto, the appellant had been having di —
iculty obtaining either a ship or a dock in this busy season in Houston. On December 17, the appellee had still received no shipping instructions — or the 45,600 pockets destined — or Houston. On the morning o — the 18th, the appellee rescinded the contract — or the Houston shipments, although continuing to make the Lake Charles deliveries. It is clear that one o — the reasons — or the prompt cancellation o — the contract was the rise in market price o — rice — rom $8.25 per pocket, the contract price, to $9.75. The appellant brought this suit — or re — usal to deliver the Houston quota. The trial court, in a reasoned but unreported opinion which dealt with all phases o — the case, held that New York would apply Texas law. We think this ruling right, but will not discuss the point because it is conceded that no di — — erent result would — ollow
rom the choice o — Louisiana law. The area o — contest is also considerably reduced by the appellant’s candid conces- sion that the appellee’s duty to ship, by virtue o — the two-week notice provision, did not arise until two weeks a — ter complete shipping instructions had been given by the appellant. Thus, on brie — , the appellant says:
we concede (as we have done --- rom the beginning) that on a --- air interpreta-
tion o --- the contract appellant had a duty to instruct appellee by December 17,
1952 as to the place to which it desired appellee to ship — at both ports, and
that, being late with its instructions in this respect, appellant could not have
demanded delivery (at either port) until sometime a --- ter December 31, 1952.
This position was taken, o
course, with a view to the contract provision — or ship- ment ‘December, 1952’: a two-week period ending December 31 would begin to run on December 17. But although appellant concedes that the two weeks’ notice to which appellee was entitled could not be shortened by the — ailure to give shipping 19 • Conditions 593
instructions on or be
ore December 17, it stoutly insists that upon receipt o — shipping instructions subsequent to December 17 the appellee thereupon became obligated to deliver within two weeks therea — ter. We do not agree. It is plain that a giving o — the notice by the appellant was a condition precedent to the appellee’s duty to ship. Obviously, the appellee could not deliver — ree alongside ship, as the contract required, until the appellant identi — ied its ship and its location. Thus the giving o — shipping instructions was what Pro — essor Corbin would classi — y as a ‘promissory condition’: the appellant promised to give the notice and the appellee’s duty to ship was conditioned on the receipt o — the notice. The crucial question is whether that condition was per — ormed. And that depends on whether the appellee’s duty o — shipment was conditioned on notice on or be — ore December 17, so that the appellee would have two weeks wholly within December within which to per — orm, or whether, as we understand the appellant to contend, the appellant could per — orm the condition by giving the notice later in December, in which case the appellee would be under a duty to ship within two weeks therea — ter. The answer depends upon the proper interpretation o — the contract: i — the contract properly interpreted made shipment in December o — the essence then the — ailure to give the notice on or be — ore December 17 was nonper — ormance by the appellant o — a condition upon which the appellee’s duty to ship in December depended. In the setting o — this case, we hold that the provision — or December delivery went to the essence o — the contract. In support o — the plainly stated provision o — the contract there was evidence that the appellee’s mills and the — acilities appurtenant thereto were working at — ull capacity in December when the rice market was at peak activity and that appellee had numerous other contracts in January as well as in December to — ill. It is reasonable to in — er that in July, when the contract was made, each party wanted the protection o — the speci — ied delivery period; the appellee so that it could schedule its production without undue congestion o — its storage — acilities and the appellant so that it could surely meet commitments which it in turn should make to its custom- ers. There was also evidence that prices on the rice market were — luctuating. In view o — this — actor it is not reasonable to in — er that when the contract was made in July — or December delivery, the parties intended that the appellant should have an option exercisable subsequent to December 17 to postpone delivery until January. That in e —
ect would have given the appellant an option to postpone its breach o — the contract, i — one should then be in prospect, to a time when, so — ar as could have been — oreseen when the contract was made, the price o — rice might be — alling. A postponement in such circumstances would inure to the disadvantage o — the appellee who was given no reciprocal option. Further indication that December delivery was o — the essence is — ound in the letter o — credit which was provided — or in the contract and established by the appellant. Under this letter, the bank was authorized to pay appellee only — or deliveries ‘during December, 1952.’ It thus appears that the appellant’s interpretation o — the contract, under which the appellee would be obligated, upon receipt o — ship- ping instructions subsequent to December 17, to deliver in January, would deprive the appellee o — the security — or payment o — the purchase price — or which it had contracted. 594 19 • Conditions
Since, as we hold, December delivery was o --- the essence, notice o --- shipping instruc- tions on or be --- ore December 17 was not merely a ‘duty’ o --- the appellant — as it con- cedes: it was a condition precedent to the per --- ormance which might be required o ---
the appellee. The nonoccurrence o
that condition entitled the appellee to rescind or to treat its contractual obligations as discharged. On December 18th the appel- lant unequivocally exercised its right to rescind. Having done so, its obligations as to the Houston deliveries under the contract were at an end. And o — course its obliga- tions would not revive therea — ter when the appellant — inally succeeded in obtaining an export permit, a ship and a dock and then gave shipping instructions; when it expressed willingness to accept deliveries in January; or when it accomplished a ‘liber- alization’ o — the outstanding letter o — credit whereby payments might be made against simple — orwarder’s receipts instead o — dock receipts. The appellant urges that by reason o — substantial part per — ormance on its part prior to December 17th, it may not be held to have been in de — ault — or its — ailure sooner to give shipping instructions. The contention has no basis in the — acts. As to the Houston shipments the appellant’s activities prior to December 17th were not in per — ormance o — its contract: they were merely preparatory to its expectation to per — orm at a later time. The mere establishment o — the letter o — credit was not an act o — per — ormance: it was merely an arrangement made by the appellant — or — uture per — ormance which as to the Houston deliveries because o — appellant’s — ailure to give shipping instructions were never made. From these preparatory activities the appellee had no bene — it whatever. The appellant also maintains that the contract was single and ‘indivisible’ and that consequently appellee’s continuing shipments to Lake Charles a — ter December 17 con- stituted an election to rea —
irm its total obligation under the contract. This position also, we hold untenable. Under the contract, the appellee concededly had an option to split the deliveries betwixt Lake Charles and Houston. The price had been — ixed on a per pocket basis, and payment, under the letter o — credit, was to be made upon the presentation o — dock receipts which normally would be issued both at Lake Charles or Houston at di — — erent times. The — act that there was a world market — or rice and that in December the market price substantially exceeded the contract price suggests that it would be more to the appellant’s advantage to obtain the Lake Charles delivery than to obtain no delivery at all. The same considerations suggest that by continuing with the Lake Charles delivery the appellee did not deliberately intend to waive its right to cancel the Houston deliveries. Conclusions to the contrary would be so greatly against sel — -interest as to be completely unrealistic. The only reasonable in — erence — rom the totality o — the — acts is that the duties o — the parties as to the Lake Charles shipment were not at all dependent on the Houston shipments. We conclude their duties as to shipments at each port were paired and reciprocal and that per — ormance by the parties as to Lake Charles did not preclude the appellee’s right o — cancellation as to Houston. Finally, we hold that the appellant’s claims o — estoppel and waiver have no basis in
act or in law. A —
irmed. 19 • Conditions 595
Re --- lection The Internatio case states that the term in question was a promissory condition and cites to Corbin --- or support. But, apparently, the court --- ound this conclusion o --- law so obvious that it --- ailed to quote the supporting treatise or to really analyze the issue. Let’s review what Corbin actually said in distinguishing promises and conditions:
A promise is always made by the act or acts o --- one o --- the parties, such acts
being words or other conduct expressing intention. A --- act can be made to oper-
ate as a condition only by the agreement o --- both parties or by the construction
o --- the law. First, Corbin reminds us that contractual promises (that is, promises that courts o ---
law will en
orce) can only be — ormed intentionally. The law does not impose contrac- tual obligations on unwilling parties. Conditions, on the other hand, can be created either by the expression o — intent by the parties or by constructions o — law. This chapter deals only with express condi- tions. Later, we will explore the doctrine o — implied conditions, which are construc- tions o — law. As mentioned above, courts should be reasonable in determining whether a term is intended to be a promise, a condition, or both (a promissory condition). This deter- mination should be made in light o — the purposes o — promises and conditions. Here, a seller cannot ship goods until the buyer provides a delivery address, so it is reasonable to construe the buyer’s provision o — the delivery address as a condition to the seller’s obligation to ship goods there. Also, the purpose o — a promise is to create a duty in the promisor. The purpose o —
constituting some
act as a condition is always the postponement or discharge o — an instant duty (or other speci — ied legal relation). Here, a seller typically wants to deliver goods and thus merit payment — or them, so it is reasonable to construe the buyer’s provision o — the delivery address as a promise to the seller. A contractual promise creates a duty to per — orm what is promised, whereas a con- dition acts as switch that turns on or o —
that duty to per — orm. The — unction or impact o — promises and conditions should also be taken into account when determining i — a term is a promise or a condition. The non- — ul — illment o — a promise is called a “breach o — contract” and creates in the other party a secondary right to damages. It is the — ailure to per — orm a legal duty. The non-occurrence o — a condition will prevent the existence o — a duty in the other party, but the non-occurrence o — a condition will not create any remedial rights or duties at all unless someone has promised that the condition shall occur. Corbin e —
ectively restates the rule that was necessary to decide Morrison: the non- occurrence o — a condition ( — ixing the — urnace) meant that the promise subject to that condition (paying — or the house) did not need to be per — ormed. But the non-occurrence o — the condition is not a breach o — a legal duty and does not itsel — give rise to damages. 596 19 • Conditions
Next, Corbin explains that a term can be both a promise and a condition:
A contract can be so made as to create a duty that the --- act operative as a con-
dition shall come into existence. . . . Such a condition might be described as a
promissory condition.
In other words, the parties might intend that a term is a promise, in that a party has a duty to per — orm it, and that the non-occurrence o — this promise extinguishes the other party’s duty to per — orm its end o — the bargain. This was a necessary reading in Internatio, which Corbin himsel — analyzes.
Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc. was a suit --- or
alleged breach o --- a contract to deliver goods. The promise was to deliver the
goods --- ree alongside (F.A.S.) a ship during the month o --- December, the ship
and place to be speci --- ied by the buyer. The buyer promised to give shipping
instructions at least two weeks prior to shipment. The situation was such that
time was held to be o --- the essence. Here the notice speci --- ying ship and place
was a “promissory condition”: the buyer promised to give notice at least two
weeks be --- ore the end o --- December; and notice was also a condition to the
seller’s duty to make delivery.
Let’s analyze the mutual promises in this case. The seller promised to deliver rice F.A.S., which means alongside a ship to be speci — ied by the buyer. That promise can- not be — ul — illed unless and until the buyer speci — ies the ship. It is impossible to deliver goods to an unspeci — ied location. There — ore, the buyer’s act o — speci — ying the ship was a condition to the seller’s duty to deliver the goods. But it was also a promise — the buyer had a duty to per — orm it. That dual role is what makes the buyer’s notice a promissory condition. I — the buyer
ails to provide notice, the seller is both excused — rom per — ormance (because the con- dition didn’t occur) and entitled to claim a breach (because the buyer — ailed to per-
orm a duty). However, the seller in Internatio did not pursue a claim — or damages. That might con — use students, but the reason is straight — orward: the breach turned out to bene — it the seller. The market price o — rice had risen, and the seller was able to resell the rice at a higher price. Since contract damages are intended to compensate
or actual losses, and the seller su —
ered none, it chose not to bring a claim.
Discussion 1. Did you notice that when the buyer --- ailed to provide a delivery address on time, the seller canceled the contract immediately? Was this a reasonable response? Why did the seller not attempt to work things out? 2. The buyer breached a promissory condition. Why did the seller not sue the buyer
or this breach? 19 • Conditions 597
-
What is happening to prices in the market
or rice during the time period o — this agreement? How, i — at all, do those commercial realities — actor into the court’s decision?
Reading Morin Building Products Co., Inc. v. Baystone Construction, Inc. As you will see in the — ollowing case, courts are very hesitant to apply a subjec- tive standard to conditions o — satis — action. Remember that express conditions must be completely per — ormed; otherwise, the conditional promise does not have to be per — ormed at all. This is a harsh result that can be un — air, in part, because o — the problems with proving someone’s subjective mindset. Consider how Judge Posner alleviates some o — the harshness o — this doctrine with his approach in Morin Building. Judge Posner’s opinion in this case illustrates how much courts dis — avor the subjective standard o — satis — action. The contract in Morin involved put- ting aluminum siding on an industrial warehouse. The contract used express language suggesting that payment — or this work was to be conditional on the buyer’s aesthetic satis — action with the work, and the buyer’s architect claimed that “viewed in bright sunlight — rom an acute angle the exterior siding did not give the impression o — having a uni — orm — inish.” With this claim o — aesthetic dissatis — action, the buyer re — used to pay — or the work. The court disagreed. The court re — used to apply a subjective standard to a contract that was obviously — or a commercial application. Judge Posner — ound that the seller did not intend to bind itsel — to the di —
icult and perhaps unobtain- able standard o — precisely matching newly milled aluminum to existing metal siding. Moreover, aesthetics are not particularly important — or industrial ware houses in general. Despite the express terms and intrinsic evidence requiring the buyer’s aesthetic satis — action, the court looked at reasonableness and trade usage to — ind that aesthetic quality should be judged by an objective, commer- cially reasonable standard. The court then — ound that the aluminum siding met this standard and decided the case in — avor o — the seller.
Morin Building Products Co., Inc. v. Baystone
Construction, Inc.
717 F.2d 413 (7th Cir. 1983) POSNER, J. This appeal --- rom a judgment --- or the plainti ---
in a diversity suit requires us to interpret Indiana’s common law o — contracts. General Motors, which is not a party to this case, hired Baystone Construction, Inc., the de — endant, to build an addition 598 19 • Conditions
to a Chevrolet plant in Muncie, Indiana. Baystone hired Morin Building Products Company, the plainti —
, to supply and erect the aluminum walls — or the addition. The contract required that the exterior siding o — the walls be o — “aluminum type 3003, not less than 18 B & S gauge, with a mill — inish and stucco embossed sur — ace texture to match — inish and texture o — existing metal siding.” The contract also provided “that all work shall be done subject to the — inal approval o — the Architect or Owner’s [General Motors’] authorized agent, and his decision in matters relating to artistic e —
ect shall be — inal, i — within the terms o — the Contract Documents”; and that “should any dispute arise as to the quality or — itness o — materials or workmanship, the decision as to accept- ability shall rest strictly with the Owner, based on the requirement that all work done or materials — urnished shall be — irst class in every respect. What is usual or customary in erecting other buildings shall in no wise enter into any consideration or decision.” Morin put up the walls. But viewed in bright sunlight — rom an acute angle the exterior siding did not give the impression o — having a uni — orm — inish, and General Motors’ representative rejected it. Baystone removed Morin’s siding and hired another subcontractor to replace it. General Motors approved the replacement siding. Bay- stone re — used to pay Morin the balance o — the contract price ($23,000) and Morin brought this suit — or the balance, and won. The only issue on appeal is the correctness o — a jury instruction which, a — ter quot- ing the contractual provisions requiring that the owner (General Motors) be satis — ied with the contractor’s (Morin’s) work, states: “Notwithstanding the apparent — inality o — the — oregoing language, however, the general rule applying to satis — action in the case o — contracts — or the construction o — commercial buildings is that the satis — action clause must be determined by objective criteria. Under this standard, the question is not whether the owner was satis — ied in — act, but whether the owner, as a reasonable person, should have been satis — ied with the materials and workmanship in question.” There was much evidence that General Motors’ rejection o — Morin’s exterior siding had been totally unreasonable. Not only was the lack o — absolute uni — ormity in the
inish o — the walls a seemingly trivial de — ect given the strictly utilitarian purpose o —
the building that they enclosed, but it may have been inevitable; “mill
inish sheet” is de — ined in the trade as “sheet having a nonuni — orm — inish which may vary — rom sheet to sheet and within a sheet, and may not be entirely — ree — rom stains or oil.” I — the instruction was correct, so was the judgment. But i — the instruction was incorrect — i —
the proper standard is not whether a reasonable man would have been satis
ied with Morin’s exterior siding but whether General Motors’ authorized representative in — act was — then there must be a new trial to determine whether he really was dissatis — ied, or whether he was not and the rejection there — ore was in bad — aith. Some cases hold that i — the contract provides that the seller’s per — ormance must be to the buyer’s satis — action, his rejection — however unreasonable — o — the seller’s per — ormance is not a breach o — the contract unless the rejection is in bad — aith. But most cases con — orm to the position stated in section 228 o — the Restatement (Second) o —
Contracts (1979): i
“it is practicable to determine whether a reasonable person in the 19 • Conditions 599
position o
the obligor would be satis — ied, an interpretation is pre — erred under which the condition [that the obligor be satis — ied with the obligee’s per — ormance] occurs i —
such a reasonable person in the position o
the obligor would be satis — ied.” We do not understand the majority position to be paternalistic; and paternalism would be out o — place in a case such as this, where the subcontractor is a substantial multistate enterprise. The requirement o — reasonableness is read into a contract not to protect the weaker party but to approximate what the parties would have expressly provided with respect to a contingency that they did not — oresee, i — they had — ore- seen it. There — ore the requirement is not read into every contract, because it is not always a reliable guide to the parties’ intentions. In particular, the presumption that the per — orming party would not have wanted to put himsel — at the mercy o — the pay- ing party’s whim is overcome when the nature o — the per — ormance contracted — or is such that there are no objective standards to guide the court. It cannot be assumed in such a case that the parties would have wanted a court to second-guess the buyer’s rejection. So “the reasonable person standard is employed when the contract involves commercial quality, operative — itness, or mechanical utility which other knowledge- able persons can judge. . . . The standard o — good — aith is employed when the contract involves personal aesthetics or — ancy.” We have to decide which category the contract between Baystone and Morin belongs in. The particular in which Morin’s aluminum siding was — ound wanting was its appearance, which may seem quintessentially a matter o — “personal aesthetics,” or as the contract put it, “artistic e —
ect.” But it is easy to imagine situations where this would not be so. Suppose the manager o — a steel plant rejected a shipment o — pig iron because he did not think the pigs had a pretty shape. The reasonable-man standard would be applied even i — the contract had an “acceptability shall rest strictly with the Owner” clause, — or it would be — antastic to think that the iron supplier would have subjected his contract rights to the whimsy o — the buyer’s agent. At the other extreme would be a contract to paint a portrait, the buyer having reserved the right to reject the portrait i — it did not satis — y him. Such a buyer wants a portrait that will please him rather than a jury, even a jury o — connoisseurs, so the only question would be his good
aith in rejecting the portrait. This case is closer to the — irst example than to the second. The building — or which the aluminum siding was intended was a — actory — not usually intended to be a thing o — beauty. That aesthetic considerations were decidedly secondary to considerations o —
unction and cost is suggested by the — act that the contract speci — ied mill- — inish aluminum, which is unpainted. There is much debate in the record over whether it is even possible to ensure a uni — orm — inish within and among sheets, but it is at least clear that mill — inish usually is not uni — orm. I — General Motors and Baystone had wanted a uni — orm — inish they would in all likelihood have ordered a painted siding. Whether Morin’s siding achieved a reasonable uni — ormity amounting to satis — actory commercial quality was susceptible o — objective judgment; in the language o — the Restatement, a reasonableness standard was “practicable.” 600 19 • Conditions
But this means only that a requirement o
reasonableness would be read into this contract i — it contained a standard owner’s satis — action clause, which it did not; and since the ultimate touchstone o — decision must be the intent o — the parties to the con- tract we must consider the actual language they used. The contract re — ers explicitly to “artistic e —
ect,” a choice o — words that may seem deliberately designed to put the con- tract in the “personal aesthetics” category whatever an outside observer might think. But the re — erence appears as number 17 in a list o — conditions in a general purpose
orm contract. And the words “artistic e —
ect” are immediately — ollowed by the quali — y- ing phrase, “i — within the terms o — the Contract Documents,” which suggests that the “artistic e —
ect” clause is limited to contracts in which artistic e —
ect is one o — the things the buyer is aiming — or; it is not clear that he was here. The other clause on which Baystone relies, relating to the quality or — itness o — work- manship and materials, may seem all-encompassing, but it is quali — ied by the phrase, “based on the requirement that all work done or materials — urnished shall be — irst class in every respect” — and it is not clear that Morin’s were not. This clause also was not dra — ted — or this contract; it was incorporated by re — erence to another — orm contract (the Chevrolet Division’s “Contract General Conditions”), o — which it is paragraph 35. We do not disparage — orm contracts, without which the commercial li — e o — the nation would grind to a halt. But we are le — t with more than a suspicion that the artistic-e —
ect and quality- — itness clauses in the — orm contract used here were not intended to cover the aesthetics o — a mill- — inish aluminum — actory wall. I — we are right, Morin might prevail even under the minority position, which makes good — aith the only standard but presupposes that the contract conditioned acceptance o — per — ormance on the buyer’s satis — action in the particular respect in which he was dissatis — ied. Maybe this contract was not intended to allow General Motors to reject the aluminum siding on the basis o — artistic e —
ect. It would not
ollow that the contract put Morin under no obligations whatsoever with regard to uni — ormity o —
inish. The contract expressly required it to use aluminum having “a mill — inish . . . to match — inish . . . o — existing metal siding.” The jury was asked to decide whether a reasonable man would have — ound that Morin had used aluminum su —
iciently uni — orm to satis — y the matching requirement. This was the right standard i — , as we believe, the parties would have adopted it had they — oreseen this dispute. It is unlikely that Morin intended to bind itsel — to a higher and perhaps unattain- able standard o — achieving whatever per — ection o — matching that General Motors’ agent insisted on, or that General Motors would have required Baystone to submit to such a standard. Because it is di —
icult — maybe impossible — to achieve a uni — orm
inish with mill- — inish aluminum, Morin would have been running a considerable risk o — rejection i — it had agreed to such a condition, and it there — ore could have been expected to demand a compensating increase in the contract price. This would have required General Motors to pay a premium to obtain a — reedom o — action that it could not have thought terribly important, since its objective was not aesthetic. I —
a uni
orm — inish was important to it, it could have gotten such a — inish by speci — ying painted siding. 19 • Conditions 601
All this is conjecture; we do not know how important the aesthetics were to Gen- eral Motors when the contract was signed or how di —
icult it really would have been to obtain the uni — ormity o —
inish it desired. The — act that General Motors accepted the replacement siding proves little, — or there is evidence that the replacement sid- ing produced the same striped e —
ect, when viewed — rom an acute angle in bright sunlight, that Morin’s had. When in doubt on a di —
icult issue o — state law it is only prudent to de — er to the view o — the district judge, here an experienced Indiana lawyer who thought this the type o — contract where the buyer cannot unreasonably withhold approval o — the seller’s per — ormance. Lest this conclusion be thought to strike at the — oundations o —
reedom o — contract, we repeat that i — it appeared — rom the language or circumstances o — the contract that the parties really intended General Motors to have the right to reject Morin’s work
or — ailure to satis — y the private aesthetic taste o — General Motors’ representative, the rejection would have been proper even i — unreasonable. But the contract is ambigu- ous because o — the quali — ications with which the terms “artistic e —
ect” and “decision as to acceptability” are hedged about, and the circumstances suggest that the parties probably did not intend to subject Morin’s rights to aesthetic whim. AFFIRMED.
Re --- lection The contract in Morin involved putting aluminum siding on a warehouse. Although the contract used express language suggesting that payment --- or this work was to be conditional on the buyer’s aesthetic satis --- action with the work, the court re --- used to apply such a subjective standard to a contract that was obviously --- or a commercial application. Morin shows how the process o --- contract interpretation and substantive contract law go hand in hand. Courts will avoid interpreting written agreements in a manner that leads to an absurd or un --- air result. Instead o --- relying on equitable powers, the court may simply understand the contract to mean something other than what it says. It appears that here the court read the contract to imply an objective standard o --- satis --- action despite its express language implying a subjective standard o --- satis-
action because the court suspected the promisor o — engaging in bad — aith to avoid contractual obligations. A seemingly similar case produced a di — — erent result. Ard Dr. Pepper Bottling Co. v. Dr. Pepper Co.1 concerned a long-term contract between Ard and Dr. Pepper in which Ard, a local bottler, promised to promote, distribute, and bottle Dr. Pepper’s soda in a designated Mississippi territory. In return, Dr. Pepper granted Ard an exclusive license and agreed to supply the syrup at set terms. Many o — Ard’s obligations — such as maintaining sanitary conditions, investing in advertising, and promoting the product — were — ramed in terms that gave Dr. Pepper discretion to judge whether
1. 202 F.2d 372 (5th Cir. 1953) 602 19 • Conditions
per
ormance was satis — actory. The contract stated that Dr. Pepper’s determination, i —
made in good
aith, would be — inal. The Ard court — ound that Dr. Pepper’s promise to license its product was con- ditioned on its subjective satis — action with Ard’s per — ormance. The court upheld Dr. Pepper’s decision to withhold — urther per — ormance based on its honest dissatis — ac- tion with Ard’s sanitation and promotional e —
orts. However, the court also made clear that even under a subjective standard, dissatis — action must be genuine: i — Dr. Pepper’s real motive had been to switch to a cheaper bottler and it merely claimed dissatis — ac- tion as a pretext, it would have violated the contract. Rather than distinguish the cases on their — acts, it may be more accurate to see them as re — lecting di — — erent jurisprudential philosophies. The Morin court invoked commercial context and extrinsic evidence to identi — y a latent ambiguity and limit opportunistic behavior. The Ard court, by contrast, emphasized textual primacy and
reedom o — contract, declaring: “The terms o — the present contract in the light o — its subject matter and o — the circumstances o — the parties leave little or no room — or con- struction or interpretation.” As you’ll see in the next section, R2d appears to — avor Morin’s approach: when a written agreement is reasonably susceptible to di — — erent interpretations, courts may consider extrinsic evidence to determine whether a condition o — satis — action should be interpreted as requiring objective reasonableness, rather than subjective discretion.
Discussion 1. Is there any aesthetic dimension to industrial construction projects? I --- so, what is it? Why did the parties include a term regarding aesthetic satis --- action in this contract --- or installation o --- aluminum siding on a warehouse?
-
Should courts consider extrinsic evidence when determining whether a contrac- tual term is a promise, a condition, or both? Identi — y at least one bene — it and at least one cost that arises when courts consider extrinsic evidence in contract interpretation.
Problems Problem 19.1. Renewal o --- a Restaurant Lease Cross Bay Chelsea (CBC) owned and operated a restaurant in Howard Beach, Queens, a neighborhood in New York, the location being rented --- rom J.N.A. Realty Corp. pursuant to a 10-year lease agreement, the term o --- which ran --- rom January 1, 1964, to December 31, 1974.19 • Conditions 603
Paragraph 58 o
that lease agreement granted tenant CBC an option to renew the lease o — the building in Howard Beach with landlord JNA, “provided that Tenant shall noti — y Landlord in writing by registered or certi — ied mail six (6) months prior to the last day o — the term o — the lease that tenant desires such renewal.” In other words, CBC was to noti — y JNA o — its intent to renew by June 31, 1974. Over the course o — the lease, CBC invested $40,000 in — ixtures and chattels in the restaurant building. In 1974, at the end o — the 10-year lease term, the restaurant busi- ness in that location was worth approximately $155,000. CBC — ailed to noti — y JNA o — its intent to renew by the end o — June. JNA ignored this and continued to bill CBC — or monthly rent, which CBC paid on time, until 30 days prior to end o — the lease term. On November 31, 1974, JNA in — ormed CBC in writing that JNA was not renewing the lease and that CBC would have to vacate the premises on December 31, 1974. CBC immediately responded in writing that they wished to exercise their right to renew the lease. JNA replied that time — or renewal had expired and attached a copy o — the contract with Paragraph 58 highlighted. CBC protested that this was the — irst time they had read Paragraph 58, but JNA moved — orward with eviction proceedings regardless. The case is now be — ore you, the judge. JNA has sued to evict CBC. CBC has coun- tersued — or breach o — contract. How should you rule? See J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc., 42 N.Y.2d 392 (1977).
Problem 19.2. Financial Satis
action On August 4, 1989, Hutton and MPI executed a — ranchise agreement wherein MPI sold a monogramming — ranchise to Hutton. The — ranchise agreement permitted Hut- ton to use MPI’s patented technology to sew monograms into t-shirts, hats, and bags using the Meistergram 800 XLC computerized monogramming machine that could be operated — rom home or at shopping mall kiosks. There were two major costs to start up Hutton’s monogram — ranchise small busi- ness. First, Hutton had to pay MPI — or the — ranchise agreement. Second, Hutton had to buy or lease a Meistergram 800 XLC machine. The purchase or lease o — the monogramming machine represented a critical component o — the required — inanc- ing because the entire operation revolved around the application o — monograms to imprintable items o — clothing. Be — ore signing, Hutton wrote an Appendix to the — ranchise agreement to which both parties agreed, which said that Hutton’s purchase o — the MPI — ranchise — or $25,000 was on condition that i — Hutton were “unable . . . to obtain — inancing suit- able to him” within ninety days o — signing the — ranchise agreement, he would then be entitled to a re — und o — the $25,000 — ranchise — ee. A — ter executing the — ranchise agreement and addendum, Hutton obtained a loan
rom Star Bank to cover the — ranchise — ee. The loan was secured by a mortgage exe- cuted by Hutton and his wi — e Pamela against their residence. 604 19 • Conditions
The issue in this case, however, arises because Hutton was unable to obtain “suit- able” — inancing — or the monogramming machine. To — acilitate the lease or purchase o — the monogramming machine, MPI issued a — ranchise-o —
ering in — ormational circular to Hutton. The circular, which MPI was required to provide under Ohio law, estimated that the total cost o — an MPI — ranchise varied between $32,420 and $36,720. The — ee paid by Hutton accounted — or $25,000 o — the $36,720 total estimated — ran- chise cost. The circular also estimated that the monogramming machine could be leased — or $520 per month — or sixty months or purchased at a total cost o — $21,000. On November 20, 1989, MPI recommended to Hutton a sixty-month lease through United Leasing Corporation. The monthly lease payments totaled $751.01, with a total equipment cost o — $45,060.60 over the li — e o — the lease. The lease also required Hutton to make a 10% down payment. Since Hutton considered these terms to be substantially less advantageous than the terms o —
ered in the MPI circular, he rejected United Leasing Corporation’s — inancing o —
er. Subsequently, Hutton’s — inancing applications were rejected by Trinity Leasing and Society Bank. A — ter rejecting United’s o —
er and being rejected by Trinity and Society, Hutton wrote to Larry Meyer, MPI’s president, requesting a re — und o — the $25,000 — ranchise
ee due to the di —
iculty he had experienced in securing — inancing. This request was denied, whereupon Hutton — iled suit. Discuss whether the term regarding MPI’s return o — Hutton’s — ranchise — ee is a promise, a condition, or both. I — a condition, discuss whether it is a condition pre cedent or condition subsequent, who holds the condition, and why. See Hutton v. Monograms Plus, Inc., 78 Ohio App. 3d 176 (1992). Chapter 20 Substantial Per — ormance and Material Breach
As you learned in the previous chapter, contractual conditions play a crucial role in determining when each party to a contract must per --- orm. In this chapter, you will learn that i --- one party materially --- ails to per --- orm its duty, then the other side may withhold or cancel its own per --- ormance because the nonper --- orming party’s promise is, in e ---
ect, a condition o — the other party’s duty. This linkage o — promises was not always the norm in English and early American law. Historically, courts tended to treat all promises as independent, meaning that each party had to per — orm its part o — the contract regardless o — whether the counterparty was — ul — illing its own duties. Parties were required to render their — ull per — ormance and then sue — or damages i — the other side did not do the same. In Kingston v. Preston, 99 Eng. Rep. 437 (K.B. 1773), excerpted later in this chapter, Lord Mans — ield — amously challenged this older view. The case concerned a silk mer- chant, Mr. Preston, who contracted with Mr. Kingston — or the sale o — a business. Kings- ton promised to provide adequate security — or the outstanding balance due to Preston, but Kingston — ailed to do so. Preston re — used to trans — er the business when Kingston o —
ered no real security. At trial, Kingston argued that Preston’s re — usal to deliver the business was a breach, leaving Kingston — ree to withhold payment until he sued. Lord Mans — ield, however, recognized an implied mutuality o — promises: Preston’s trans — er o — the business was implicitly conditional on Kingston’s provision o — security. By recognizing that the parties’ promises were mutually dependent, Mans — ield held that Kingston’s — ailure to provide security justi — ied Preston’s re — usal to deliver the busi- ness. This decision marked a turning point in the law. Courts began to presume that when two parties exchange promises within a single contract, those promises are most likely dependent, meaning each party’s duty to per-
orm is conditioned on the other side’s readiness and willingness to per — orm in return. This shi — t laid the — oundation — or the modern doctrines o — substantial per — ormance and material breach, which balance the principle o — en — orcing mutual promises with the need to avoid disproportionate consequences — or minor de — ects. Over time, the logic o — Kingston shaped the common law — ramework. It led to the modern presumption that most contractual promises are implicitly conditional on
605
606 20 • Substantial Per — ormance and Material Breach
each other’s per
ormance. Yet treating these implied conditions just like express con- ditions was occasionally harsh. An example o — this harshness arises when a party delivers most o — the bene — it but
ails in a small way. Under the strict compliance rule — or express conditions, even a tiny deviation completely invalidates the other side’s duty o — per — ormance. This harsh outcome did not sit well with courts who saw the need — or — lexibility. They recognized that some measure o — short — all should still entitle the per — orming party to receive the bargained- — or exchange, particularly i — the de — ect can be remedied easily or does not deprive the other side o — the essential substance o — the deal. In Jacob & Youngs v. Kent, 230 N.Y. 239 (1921), which you will also read in this chapter, Judge Cardozo brought relie — to parties who substantially delivered what they promised but did not comply to the last letter. In Jacob & Youngs, a builder used the wrong brand o — pipe when constructing a luxury home. The homeowner re — used to pay, claiming that the contract explicitly demanded “Reading pipe” throughout. Car- dozo, however, — ound that the builder’s deviation was insigni — icant — a mere “venial”
ault. The substituted pipe was o — equal quality and — unction, so the homeowner received virtually all the bene — its o — the bargain. According to Cardozo, treating that small mistake like a complete — ailure to meet a condition would be unjust. He explained that courts should not deliver “oppressive ret- ribution” on a party that made an unintentional and minor mistake. Instead, he intro- duced the concept o — substantial per — ormance into the law, allowing the non-breaching party only to recover minor damages (i — appropriate) while remaining obligated to pay most or all o — the contract price — so long as the material purpose o — the contract was achieved. This shi — t re — lected a desire to avoid — or — eitures and to keep the contract alive when, in — airness, the essential substance o — the agreement had been delivered. While Jacob & Youngs revolutionized the way courts approach implied conditions in the context o — services and real estate, the UCC has adopted a stricter — ramework
or the sale o — goods. The UCC largely codi — ies a per — ect tender rule, which allows a buyer to reject goods “i — the goods or the tender o — delivery — ail in any respect to con-
orm to the contract.” The UCC’s per — ect tender rule stands in contrast to the doctrine o — substantial per — ormance, re — lecting the di —
ering priorities in transactions involving goods versus services. At — irst glance, the UCC’s per — ect tender rule resembles the older rule — or express conditions, where any deviation allowed the other party to re — use per — ormance. How- ever, the UCC does not stop there. It tempers this strict rule with a series o — excep- tions, rights to cure, and limitations on rejection and revocation. Sellers who deliver noncon — orming goods may still make good on the deal i — they can o —
er a timely cure. Buyers who have accepted goods can revoke that acceptance only i — a de — ect sub- stantially impairs the goods’ value. Installment contracts can be canceled altogether only i — the de — ect in one installment “substantially impairs” the value o — the entire contract. Taken together, these statutory mitigations show that the UCC embraces a more measured stance in practice, despite its seemingly absolute starting principle. 20 • Substantial P er — ormance and Material Breach 607
In exploring the rules that --- ollow, we will navigate these parallel but distinct ana- lytical --- rameworks. The law o --- common law contracts a --- ter Jacob & Youngs --- ocuses on substantial per --- ormance and material breach --- or most service and real-estate deals. The UCC’s per --- ect tender rule and related provisions dictate the outcome --- or sales o --- goods. Both systems share a general idea that a party’s right to withhold or cancel per --- ormance arises --- rom the --- ailure o --- a condition, whether express or implied. Both systems also re --- lect a pre --- erence --- or avoiding disproportionate --- or --- eitures and encour- aging opportunities to cure. Understanding how these doctrines evolved — --- rom the --- ormal independence o ---
promises in early law, through Kingston’s recognition o
mutual dependency, and cul- minating in Jacob & Youngs’s doctrine o — substantial per — ormance on the one hand and the UCC’s quali — ied per — ect tender rule on the other — will help students gain a deeper appreciation o — how courts and legislatures strive to balance predictability with — airness.
Rules A. Analyzing De --- ective Per --- ormance under Common Law
Common law courts begin by assuming that most contractual promises in a single agreement are mutually dependent. This means that each party’s duty to per --- orm is implicitly conditional on the other party’s substantial per --- ormance or tender o ---
per
ormance. The — amous case Jacob & Youngs v. Kent, discussed in the introduction and presented below, helped to cement this doctrine in the realm o — construction and services. Today, the R2d’s structured approach guides courts in identi — ying whether a party has per — ormed, whether the breach is material, and whether the nonbreaching party can withhold or cancel its own obligations.
-
Identi
ying the Breach A central principle in common law is that even a slight deviation is still a breach: When per — ormance o — a duty under a contract is due any non-per — ormance is a breach. R2d § 235(2). This language is absolute. I — a party promised to deliver something or per — orm some service, any short — all — rom that promise, no matter how small, meets the de — inition o —
breach. As you will learn in the module on remedies, any breach gives rise to a claim
or damages. However, when it comes to determining whether a breach by one party gives the other the right to withhold or cancel its own per — ormance, the law distin- guishes between a minor breach (substantial per — ormance) and a material breach. 608 20 • Substantial Per — ormance and Material Breach
Assume a tailor promises to sew a suit using wool
abric in a speci — ic shade o — navy blue by June 1. I — the tailor — inishes on time but the — abric is slightly lighter than the agreed-upon shade, the tailor has technically breached. Whether this justi — ies the cus- tomer in re — using the suit (or withholding payment) depends on whether the devia- tion is material or not.
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Evaluating Materiality A material breach is serious enough to justi — y the nonbreaching party in suspend- ing or withholding its own per — ormance until the breaching party cures. I — no cure occurs within a reasonable time, the nonbreaching party may treat the breach as total, cancel the contract, and seek remedies. To determine materiality, courts apply the — actors in R2d § 241. That section explains:
In determining whether a
ailure to render or to o —
er per — ormance is mate- rial, the — ollowing circumstances are signi — icant: (a) the extent to which the injured party will be deprived o — the bene — it which he reasonably expected; (b) the extent to which the injured party can be adequately compen- sated — or the part o — that bene — it o — which he will be deprived; (c) the extent to which the party — ailing to per — orm or to o —
er to per — orm will su —
er — or — eiture; (d) the likelihood that the party — ailing to per — orm or to o —
er to per — orm will cure his — ailure, taking account o — all the circumstances including any reasonable assurances; (e) the extent to which the behavior o — the party — ailing to per — orm or to o —
er to per — orm comports with standards o — good — aith and — air dealing.
Courts weigh these
actors as a whole and do not simply tally them. A single — actor (e.g., bad — aith) may push a breach into material territory. Consider a homeowner who pays a carpenter to install a set o — customized wood cabinets. The homeowner’s main expectation is that the cabinets will be sturdy and well- — itted. I — the carpenter uses slightly cheaper hinges than speci — ied, due to an administrative mistake in ordering parts, the homeowner might lose a small — raction o — expected value, and the carpenter can replace the hinges easily. Damages are simple to measure, and the carpenter did not act in bad — aith. The court might — ind the breach is not material, requiring the homeowner to pay the contract price, minus any minor damages — or the cheaper hinges. Conversely, consider a landowner who hires a builder to construct a house — or $300,000. The contract explicitly states that the builder must use pressure-treated wood — or the structural — raming to ensure the house’s long-term durability and resistance to decay. Pressure-treated wood is a non-negotiable term in the contract 20 • Substantial P er — ormance and Material Breach 609
Obligee’s Obligor’s
Good Faith Good Faith
Obligee’s remedies Obligor’s likelihood
at law o --- cure
Obligee’s Obligor’s
deprivation --- or --- eiture
Figure 20.1. Factors in balancing test to distinguish between
substantial per --- ormance and material breach.
because the house is being built in a humid climate, where untreated wood is highly susceptible to premature decomposition and structural — ailure. Instead, the builder uses regular, untreated wood — or the — raming to save money, which reduces their costs by $20,000. The builder does not in — orm the landowner o —
this substitution, assuming the landowner will not notice. However, shortly a
ter com- pletion, the landowner hires a home inspector who discovers the issue. Fixing the prob lem would require demolishing the house and rebuilding it entirely, as the structural integrity o — the building is compromised. The untreated wood signi — icantly reduces the expected li — espan o — the home and poses sa — ety risks, particularly i — le — t unaddressed. Here, the builder’s actions constitute a material breach. The use o — untreated wood violates a critical term o — the agreement, which deprives the landowner o — the bene — it o — a structurally sound home. The breach a —
ects the core purpose o — the contract, cannot be remedied without demolishing the house, and was done in bad — aith to save costs. A is entitled to treat the contract as terminated, re — use to pay the balance, and seek damages — or the cost o — reconstruction and other losses.
- Withholding Payment At common law, courts encourage sel — -help to resolve per — ormance disputes with- out immediate litigation. I — a breach is material, the innocent party can suspend its own per — ormance until the breacher cures. This can motivate the breaching party to
ix errors and preserve the contract. I — the breach is minor, however, the nonbreaching party has a duty to keep per — orm ing and may instead sue — or damages. The mere existence o — a small breach does not 610 20 • Substantial Per — ormance and Material Breach
excuse the other side
rom per — orming its part o — the bargain. In the examples above, the duty is to pay. The party must pay the contract price — or the substantial per — ormance, although they can later sue — or breach to the extent per — ormance was de — ective. Suppose a homeowner contracts with a painter to paint all interior walls in a speci-
ied color. The painter has completed hal — the house but used a shade slightly o —
rom what was promised, and the homeowner catches it mid-project. The home- owner might insist that the painter correct the shade — or the remainder and possibly repaint the completed walls. I — the painter re — uses, the breach may become material i — it undermines the homeowner’s reasonable expectations about consistent color. At that point, the homeowner can withhold — inal payment until the painter cures by repainting the de — ective walls.
- Cancelling the Contract I — a breach is material, the breaching party may still have a cure period to — ix the de — ective per — ormance. R2d § 242 instructs courts on when a material breach becomes total. The rule says: In determining the time a — ter which a party’s uncured material — ailure to ren- der or to o —
er per — ormance discharges the other party’s remaining duties to render per — ormance under the rules stated in §§ 237 and 238, the — ollowing circumstances are signi — icant: (a) those stated in § 241; (b) the extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements; (c) the extent to which the agreement provides — or per — ormance without delay, but a material — ailure to per — orm or to o —
er to per — orm on a stated day does not o — itsel — discharge the other party’s remaining duties unless the circumstances, including the language o — the agreement, indicate that per — ormance or an o —
er to per — orm by that day is important. Courts look to whether the breaching party can still cure without causing major inconvenience or additional expense to the nonbreaching side. I — waiting — or a cure becomes harm — ul, or i — the contract explicitly makes time o — the essence, the court may — ind a total breach. Total breach — rees the innocent party — rom all obligations, including — uture per — ormance or payment. For example, June, a homeowner, contracts with a builder to construct an 8’ × 10’ wooden deck. The builder completes the deck. During a standard post-construction inspection, June discovers that the top boards are — astened using screws that are not weatherproo — . While this compromises the deck’s long-term durability, the builder is ready and willing to — ix the problem by replacing the — asteners with appropriate deck- ing screws, at no additional cost, within one week. 20 • Substantial P er — ormance and Material Breach 611
Here, the breach is material because it a
ects the deck’s durability, but it is not total. The builder’s willingness and ability to cure the de — ect within a reasonable time — rame means June must allow the builder to remedy the issue and cannot immediately cancel the contract. Conversely, August, a di — — erent homeowner, contracts with a builder to construct a wooden deck designed to support the weight o — a hot tub, with local code requiring materials rated — or at least 2,000 pounds. The builder completes the deck, but during a post-construction inspection, August discovers that the builder used materials rated
or only 250 pounds — — ar below what is necessary to sa — ely support a hot tub. Cor- recting the issue to meet code requires dismantling and entirely rebuilding the deck. When con — ronted, the builder o —
ers to add an additional stringer as a remedy but dismisses August’s concerns as overblown, re — using to — ully rebuild the deck. Here, the breach is total. The use o — inadequate materials violates both the con- tract’s speci — ications and local sa — ety codes, rendering the deck un — it — or its intended purpose. The builder’s dismissive response and unwillingness to provide a proper cure leave August unable to rely on the builder to deliver what was promised. August is justi — ied in canceling the contract and seeking damages — or reconstruction and any other losses.
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Summary o
Common Law Framework Under the common law, courts strive to prevent injustice — rom overly strict en — orcement o — implied conditions. They do so by examining whether a breach is trivial or material, allowing a cure period — or material breaches, and distinguishing partial — rom total breach. This approach is — lexible, encouraging contract completion and discouraging unnecessary — or — eiture. At the same time, it respects the Kingston v. Preston principle that the per — ormance o — each party is, by de — ault, conditional on the other’s readiness and willingness to per — orm. In the next section, we will see how the UCC handles similar issues with goods contracts. The UCC adopts a per — ect tender rule, an approach that appears stricter than common law substantial per — ormance, yet it tempers that rule with rights to cure, revocation, and limitations on cancellation — or installment contracts.
B. Analyzing De
ective Per — ormance under the UCC The UCC adopts a — ramework that di —
ers sharply — rom common law substantial per — ormance. Rather than asking whether a deviation is material, the UCC starts by asking whether the goods “ — ail in any respect to con — orm to the contract.” UCC § 2-601. I — there is any — ailure, the buyer may reject the goods entirely, even i — the de — ect is minor. This is known as the per — ect tender rule. At — irst glance, it resembles a strict 612 20 • Substantial Per — ormance and Material Breach
en
orcement o — conditions. However, the UCC so — tens this rule through rights to cure, limited revocation a — ter acceptance, and special rules — or installment contracts.
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Per
ect Tender Rule: UCC § 2-601 UCC § 2-601 states that i — goods or the tender o — delivery — ail in any respect to con-
orm to the contract, the buyer may reject the entire shipment, accept it, or accept any commercial units and reject the rest. This approach appears stricter than the common law’s material breach analysis. Even a small de — ect in quality, quantity, or timing gives the buyer the power to reject. Consider a buyer who orders 500 red chairs — or an event. The seller delivers 490 red chairs and 10 blue chairs. Under the per — ect tender rule, that is a noncon — ormity. The buyer may re — use the entire shipment, even i — the noncon — orming portion is only 2% o — the total.
- Seller’s Right to Cure: UCC § 2-508 Although the per — ect tender rule lets buyers reject noncon — orming goods, the seller o — ten has a right to cure the de — ect. UCC § 2-508 provides two scenarios where the seller may still tender con — orming goods: • First, i — there is still time le — t under the contract, then the seller may seasonably noti — y the buyer o — its intent to cure and then make a proper delivery be — ore the deadline. • Second, i — the seller had reasonable grounds to believe the noncon — orming goods would be acceptable, then the seller can still cure within a — urther rea- sonable time. This right to cure prevents immediate cancellation in many cases. It also parallels the cure period that common law provides — or a material breach. The di —
erence is that the UCC’s per — ect tender rule initially grants buyers the right to reject — or any de — ect, but then o —
ers the seller a quick opportunity to make things right. Return to the scenario where a buyer orders 500 red chairs — or an event, but the seller delivers 490 red chairs and 10 blue chairs. I — the time — or per — ormance has not expired, the seller can in — orm the buyer o — its intent to deliver ten red chairs by the contract deadline. The buyer should then accept the cure i — it arrives on time. What i — the buyer orders 500 red chairs, but the seller delivers 490 red chairs and 10 blue chairs — but the seller reasonably believed that the color was irrelevant because the buyer intended to cover them with black — abric? I — the delivery date in the con- tract already passed, the question is whether late delivery would be reasonable. For example, i — the contract speci — ied delivery by January 1, and the buyer intended to use the chairs — or an event on February 1, then delivery o — the remaining red chairs by January 15 would be reasonable. Again, the buyer should then accept the cure i — the chairs arrive by then. 20 • Substantial P er — ormance and Material Breach 613
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Revocation o
Acceptance I — a buyer accepts the goods initially, perhaps believing they con — orm, UCC § 2-608 allows later revocation i — the goods have a noncon — ormity that “substantially impairs its value to him” and was not discovered (or reasonably discoverable) upon initial inspection. The buyer may revoke only i — it reasonably relied on the seller’s assurances or i — discovering the de — ect earlier was impractical. This substantial impairment standard mirrors some o — the materiality language in common law. Small or easily — ixable de — ects usually do not allow a buyer to revoke acceptance once it has been made. For example, a buyer orders — ive specialized machines. Each machine appears — ine upon delivery, so the buyer pays. A — ew weeks later, motors begin to — ail, revealing a manu — acturing de — ect that makes the machines almost worthless. The buyer may revoke acceptance because this de — ect substantially impairs the machines’ value and the de — ect was not apparent during initial inspection.
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Installment Contracts: UCC § 2-612 The UCC also tempers the per — ect tender rule — or installment contracts, where goods are delivered and accepted in separate lots. UCC § 2-612 allows the buyer to reject an individual noncon — orming installment i — the de — ect substantially impairs the value o — that installment and cannot be cured. Canceling the entire contract, however, requires the de — ect to substantially impair the value o — the entire contract. For instance, a year-long contract calls — or the seller to deliver one hundred apples each month. In April, the apples arrive bruised. The buyer may reject the April lot i — the apples’ de — ect substantially impairs their value. The buyer may not cancel the entire contract unless the April de — ect (or multiple de — ects across deliveries) substan- tially impairs the entire year-long deal. I — the seller assures a proper cure — or May, the buyer must accept — uture shipments i — they con — orm.
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Comparing UCC to Common Law The UCC’s per — ect tender rule might look harsher than the substantial per — ormance standard. Yet the UCC moderates this harshness with seller’s rights to cure, partial acceptance and rejection, revocation o — acceptance only — or substantial de — ects, and the installment contract rules. In practice, many o — these provisions mirror the com- mon law’s desire to maintain the contract, i — practical, while still allowing a buyer more leeway to reject goods that do not meet contract speci — ications.
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Summary o
the UCC Framework Under the UCC, buyers initially have broad rejection powers. Any deviation opens the door — or rejection. However, the seller’s statutory right to cure, as well as the limi- tations on revocation and the rules — or installment contracts, signi — icantly reduce the chance o — a total and immediate repudiation. As in the common law, courts encourage 614 20 • Substantial Per — ormance and Material Breach
sel
-help by providing avenues to — ix de — ective per — ormance. The UCC simply starts
rom a premise o — strict tender and then builds in ways to mitigate unjust — or — eitures. In the — inal analysis, the UCC and common law both strive to balance — airness with e —
iciency. The per — ect tender rule en — orces precise expectations but also acknowledges that commerce thrives on practical solutions, which is why cure rights and install- ment rules exist. The common theme is that parties should get what they bargained
or, but a minor or easily recti — ied de — ect should not always lead to a catastrophic
ailure o — the contract.
C. Re
lections on Per — ormance This chapter introduced several new concepts. First, most contracts involve an exchange o — mutual promises, where the per — ormance o — one promise is conditioned on the per — ormance o — the other. The mutual per — ormances under an exchange o —
promises are thus implied conditions concurrent with each other. This was called “mutual conditions” in Kingston and is also re — erred to as “mutual and simultaneous promises.” Implied conditions, like those — ound under an exchange o — promises, are subject to the doctrine o — substantial per — ormance. This doctrine balances — airness with prac- ticality by allowing minor deviations in per — ormance to satis — y the implied condition and make the counterparty’s per — ormance due. By reducing the risk o —
or — eitures — or minor mistakes, substantial per — ormance promotes e —
iciency in contract en — orce- ment and ensures that parties receive the essential bene — its o — their bargains without being penalized — or trivial imper — ections. This means that, unlike express conditions, which must be completely per — ormed to trigger their return per — ormances, promises subject to implied conditions must be per — ormed when the implied condition is substantially per — ormed. Until the mutual promise is substantially per — ormed, the counterparty may withhold its per — ormance. This usually comes up when one party re — uses to pay the other because services were not completely per — ormed. The substantial per — ormance doctrine ensures that a party who delivers the core bene — its o — a contract is not un — airly denied compensation due to trivial imper — ections. A party who materially breaches ( — ails to substantially per — orm) has a reasonable amount o — time, known as a “cure period,” to repair the de — ective per — ormance. This doctrine o — material breach re — lects the value o — sel — -help by providing the breaching party an opportunity to recti — y their — ailure and maintain the contract. By encourag- ing resolution without immediate termination, it promotes contractual stability and minimizes litigation, allowing parties to address per — ormance issues while preserving their relationship. When this cure period expires, however, the material breach escalates into a state o —
total breach. At this point, the nonbreaching party gains the law
ul right to withhold or suspend per — ormance and may also cancel the contract, extinguishing any — uture 20 • Substantial P er — ormance and Material Breach 615
obligations under it. This right to cancel empowers the nonbreaching party to protect themselves — rom — urther harm and underscores the importance o — clear per — ormance standards in maintaining contractual balance. The UCC, however, does not apply the doctrine o — substantial per — ormance. This stricter approach re — lects the nature o — goods transactions, where precision and con — ormity to the contract terms are o — ten critical to the buyer’s purpose. The UCC employs the per — ect tender rule, which holds that a buyer can reject goods that do not completely con — orm to the contract in every way. In addition, buyers o — goods subject to the UCC can revoke acceptance o — noncon — orming goods when the noncon — or- mance substantially impairs the goods’ value to the buyer.
Cases Reading Kingston v. Preston. In 1773, a --- amous English judge named The Right Honorable William Murray, First Earl o --- Mans --- ield (who is re --- erred to more simply as Lord Mans --- ield), recognized that when parties make mutual promises to each other, these promises are o --- ten intended to be implied condi- tions to their obligations.
The original text o --- this --- amous case is reproduced below. Although the entire decision is less than a thousand words, it uses old language, British spell- ing, and grammatical structure that would charitably be described today as a run-on sentence. To retain the color and texture o --- this historic case while enhancing readability, the original text has been edited by adding paragraph breaks. Try your best to understand the --- acts o --- this case and the three kinds o --- covenants identi --- ied by Lord Mans --- ield in his analysis. A --- ter the case, this casebook will explore the modern meaning o --- these critical concepts.
Kingston v. Preston
99 Eng. Rep. 437 (K.B. 1773) MANSFIELD, J. It was an action o --- debt, --- or non-per --- ormance o --- covenants contained in certain articles o --- agreement between the plainti ---
and the de — endant. The declaration stated; That, by articles made the 24th o — March, 1770, the plainti —
, — or the considerations therein-a — ter mentioned, covenanted, with the de — endant, to serve him — or one year and a quarter next ensuing, as a covenant-servant, in his trade o — a silk-mercer, at £200 a year, and in consideration o — the premises, the de — endant covenanted, that at the end o — the year and a quarter, he would give up his business o — a mercer to the plainti —
, and a nephew o — the de — endant, or some other person to be nominated. By the de — endant, 616 20 • Substantial Per — ormance and Material Breach
and give up to them his stock in trade, at a
air valuation; and that, between the young traders, deeds o — partnership should be executed — or 14 years, and — rom and immedi- ately a — ter the execution o — , the said deeds, the de — endant would permit the said young traders to carry on the said business in the de — endant’s house. Then the declaration stated a covenant by the plainti —
, that he would accept the business and stock in trade, at a — air valuation, with the de — endant’s nephew, or such other person, &c. and execute such deeds o — partnership, and, — urther, that the plain- ti —
should, and would, at, and be — ore, the sealing and delivery o — the deeds, cause and procure good and su —
icient security to be given to the de — endant, to be approved o — by the de — endant, — or the payment o — £250 monthly, to the de — endant, in lieu o — a moiety o — the monthly produce o — the stock in trade, until the value o — the stock should be reduced to £4000. Then the plainti —
averred, that he had per — ormed, and been ready to per — orm, his covenants, and assigned — or breach on the part o — the de — endant, that he had re — used to surrender and give up his business, at the end o — the said year and a quarter. The de — endant pleaded, 1. That the plainti —
did not o —
er su —
icient security; and, 2. That he did not give su —
icient security — or the payment o — the £250, &c. And the plainti —
demurred generally to both pleas. On the part o — the plainti —
, the case was argued by Mr. Buller, who contended, that the covenants were mutual and independent, and, there — ore, a plea o — the breach o —
one o
the covenants to be per — ormed by the plainti —
was no bar to an action — or a breach by the de — endant o — one o — which he had bound himsel — to per — orm, but that the de — endant might have his remedy — or the breach by the plainti —
, in a separate action. On the other side, Mr. Grose insisted, that the covenants were dependent in their nature, and, there — ore, per — ormance must be alleged: the security to be given — or the money, was mani — estly the chie — object o — the transaction, and it would be highly unreasonable to construe the agreement, so as to oblige the de — endant to give up a bene — icial business, and valuable stock in trade, and trust to the plainti —
’s per- sonal security, (who might, and, indeed, was admitted to be worth nothing) — or the per — ormance o — his part. In delivering the judgment o — the Court, Lord Mans — ield expressed himsel — to the
ollowing e —
ect: There are three kinds o — covenants:
- Such as are called mutual and independent, where either party may recover dam- ages — rom the other, — or the injury he may have received by a breach o — the covenants in his — avor, and where it is no excuse — or the de — endant, to allege a breach o — the cov- enants on the part o — the plainti —
. 2. There are covenants which are conditions and dependent, in which the per — ormance o — one depends on the prior per — ormance o — another, and, there — ore, till this prior condition is per — ormed, the other party is not liable to an action on his covenant. 20 • Substantial P er — ormance and Material Breach 617
-
There is also a third sort o
covenants, which are mutual conditions to be per-
ormed at the same time; and, in these, i — one party was ready, and o —
ered, to per — orm his part, and the other neglected, or re — used, to per — orm his, he who was ready, and o —
ered, has — ul — illed his engagement, and may maintain an action — or the de — ault o — the other; though it is not certain that either is obliged to do the — irst act. His Lordship then proceeded to say, that the dependence, or independence o — cove- nants, was to be collected — rom the evident sense and meaning o — the parties, and, that, however transposed they might be in the deed, their precedency must depend on the order o — time in which the intent o — the transaction requires their per — ormance. That, in the case be — ore the Court, it would be the greatest injustice i — the plainti —
should prevail: the essence o — the agreement was, that the de — endant should not trust to the personal security o — the plainti —
, but, be — ore he delivered up his stock and business, should have good security — or the payment o — the money. The giving such security, there — ore, must necessarily be a condition precedent. Judgment was accordingly given — or the de — endant, because the part to be per-
ormed by the plainti —
was clearly a condition precedent.
Re --- lection The Kingston case introduces what are sometimes called the “Kingston covenants.” The taxonomy o --- promises and their interdependence that Lord Mans --- ield provided in this --- amous case remains relevant today, although the terminology varies slightly.
Discussion 1. Prior to Kingston, what recourse would one party have had when its counterparty breached an agreement? More speci --- ically, what legal rights would the silk mer- chant in Kingston have had i --- there were no such thing as dependent covenants? 2. When parties exchange promises, do they usually intend those promises to be independent or dependent? Explain your reasoning.
Reading Jacob & Youngs, Inc. v. Kent. As you will see in this next case, the law treats implied conditions di —
erently — rom express conditions. Recall — rom the prior chapter that express conditions precedent must be completely per-
ormed be — ore the promise subject to that condition needs to be per — ormed at all. This so-called doctrine o — complete per — ormance can lead to harsh and unjust results, which courts can equitably ameliorate through the excuse doc- trine, discussed Chapter 22. 618 20 • Substantial Per — ormance and Material Breach
The law o --- implied promises developed di ---
erently. In 1921, then-Judge Ben- jamin Cardozo (who later became an Associate Justice o — the Supreme Court o —
the United States) established the doctrine o
substantial per — ormance.
Jacob & Youngs, Inc. v. Kent
230 N.Y. 239 (1921) CARDOZO, J. The plainti ---
built a country residence — or the de — endant at a cost o — upwards o —
$77,000, and now sues to recover a balance o
$3,483.46, remaining unpaid. The work o — construction ceased in June, 1914, and the de — endant then began to occupy the dwelling. There was no complaint o — de — ective per — ormance until March, 1915. One o — the speci — ications — or the plumbing work provides that “all wrought iron pipe must be well galvanized, lap welded pipe o — the grade known as ‘standard pipe’ o — Reading manu — acture.” The de — endant learned in March, 1915, that some o — the pipe, instead o —
being made in Reading, was the product o
other — actories. The plainti —
was accord- ingly directed by the architect to do the work anew. The plumbing was then encased within the walls except in a — ew places where it had to be exposed. Obedience to the order meant more than the substitution o — other pipe. It meant the demolition at great expense o — substantial parts o — the completed structure. The plainti —
le — t the work untouched, and asked — or a certi — icate that the — inal payment was due. Re — usal o — the certi — icate was — ollowed by this suit. The evidence sustains a — inding that the omission o — the prescribed brand o — pipe was neither — raudulent nor will — ul. It was the result o — the oversight and inattention o — the plainti —
’s subcontractor. Reading pipe is distinguished — rom Cohoes pipe and other brands only by the name o — the manu — acturer stamped upon it at intervals o —
between six and seven
eet. Even the de — endant’s architect, though he inspected the pipe upon arrival, — ailed to notice the discrepancy. The plainti —
tried to show that the brands installed, though made by other manu — acturers, were the same in quality, in appearance, in market value and in cost as the brand stated in the contract — that they were, indeed, the same thing, though manu — actured in another place. The evi- dence was excluded, and a verdict directed — or the de — endant. The Appellate Division reversed, and granted a new trial. We think the evidence, i — admitted, would have supplied some basis — or the in — er- ence that the de — ect was insigni — icant in its relation to the project. The courts never say that one who makes a contract — ills the measure o — his duty by less than — ull per — ormance. They do say, however, that an omission, both trivial and innocent, will sometimes be atoned — or by allowance o — the resulting damage, and will not always be the breach o — a condition to be — ollowed by a — or — eiture. The distinction is akin to that between dependent and independent promises, or between promises and conditions 20 • Substantial P er — ormance and Material Breach 619
(Anson on Contracts [Corbin’s ed.], sec. 367; 2 Williston on Contracts, sec. 842). Some promises are so plainly independent that they can never by — air construction be conditions o — one another. Others are so plainly dependent that they must always be conditions. Others, though dependent and thus conditions when there is departure in point o — substance, will be viewed as independent and collateral when the departure is insigni — icant. Considerations partly o — justice and partly o — presumable intention are to tell us whether this or that promise shall be placed in one class or in another. The simple and the uni — orm will call — or di — — erent remedies — rom the multi — arious and the intricate. The margin o — departure within the range o — normal expectation upon a sale o — common chattels will vary — rom the margin to be expected upon a contract — or the construction o — a mansion or a “skyscraper.” There will be harshness sometimes and oppression in the implication o — a condition when the thing upon which labor has been expended is incapable o — surrender because united to the land, and equity and reason in the implication o — a like condition when the subject-matter, i — de — ective, is in shape to be returned. From the conclusion that promises may not be treated as dependent to the extent o — their uttermost minutia without a sacri — ice o — justice, the progress is a short one to the conclusion that they may not be so treated without a perversion o — intention. Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. I — something else is in view, it must not be le — t to implication. There will be no assumption o — a purpose to visit venial — aults with oppressive retribution. Those who think more o — symmetry and logic in the development o — legal rules than o — practical adaptation to the attainment o — a just result will be troubled by a classi — ication where the lines o — division are so wavering and blurred. Something, doubtless, may be said on the score o — consistency and certainty in — avor o — a stricter standard. The courts have balanced such considerations against those o — equity and
airness, and — ound the latter to be the weightier. The decisions in this state commit us to the liberal view, which is making its way, nowadays, in jurisdictions slow to wel- come it. Where the line is to be drawn between the important and the trivial cannot be settled by a — ormula. “In the nature o — the case precise boundaries are impossible.” The same omission may take on one aspect or another according to its setting. Substitu- tion o — equivalents may not have the same signi — icance in — ields o — art on the one side and in those o — mere utility on the other. Nowhere will change be tolerated, however, i — it is so dominant or pervasive as in any real or substantial measure to — rustrate the purpose o — the contract. There is no general license to install whatever, in the builder’s judgment, may be regarded as “just as good.” The question is one o — degree, to be answered, i — there is doubt, by the triers o — the — acts, and, i — the in — erences are certain, by the judges o — the law. We must weigh the purpose to be served, the desire to be grati — ied, the excuse — or deviation — rom the letter, the cruelty o — en — orced adherence. Then only can we tell whether literal — ul — ilment is to be implied by law as a condition. This is not to say that the parties are not — ree by apt and certain words to e —
ectuate a purpose that per — ormance o — every term shall be a condition o — recovery. That ques- tion is not here. This is merely to say that the law will be slow to impute the purpose, 620 20 • Substantial Per — ormance and Material Breach
in the silence o
the parties, where the signi — icance o — the de — ault is grievously out o —
proportion to the oppression o
the — or — eiture. The will — ul transgressor must accept the penalty o — his transgression. For him there is no occasion to mitigate the rigor o —
implied conditions. The transgressor whose de
ault is unintentional and trivial may hope — or mercy i — he will o —
er atonement — or his wrong. In the circumstances o — this case, we think the measure o — the allowance is not the cost o — replacement, which would be great, but the di —
erence in value, which would be either nominal or nothing. Some o — the exposed sections might perhaps have been replaced at moderate expense. The de — endant did not limit his demand to them, but treated the plumbing as a unit to be corrected — rom cellar to roo — . In point o —
act, the plainti —
never reached the stage at which evidence o — the extent o — the allowance became necessary. The trial court had excluded evidence that the de — ect was unsub- stantial, and in view o — that ruling there was no occasion — or the plainti —
to go — arther with an o —
er o — proo — . We think, however, that the o —
er, i — it had been made, would not o — necessity have been de — ective because directed to di —
erence in value. It is true that in most cases the cost o — replacement is the measure. The owner is entitled to the money which will permit him to complete, unless the cost o — completion is grossly and un — airly out o — proportion to the good to be attained. When that is true, the measure is the di —
erence in value. Speci — ications call, let us say, — or a — oundation built o — granite quarried in Vermont. On the completion o — the building, the owner learns that through the blunder o — a subcontractor part o — the — oundation has been built o —
granite o
the same quality quarried in New Hampshire. The measure o — allowance is not the cost o — reconstruction. “There may be omissions o — that which could not a — terwards be supplied exactly as called — or by the contract without taking down the building to its — oundations, and at the same time the omission may not a —
ect the value o — the building — or use or otherwise, except so slightly as to be hardly appreciable.” The rule that gives a remedy in cases o — substantial per — ormance with compensation — or de — ects o — trivial or inappreciable importance, has been developed by the courts as an instrument o — justice. The measure o — the allowance must be shaped to the same end. The order should be a —
irmed, and judgment absolute directed in — avor o — the plain- ti —
upon the stipulation, with costs in all courts. McLAUGHLIN, J. (dissenting). I dissent. The plainti —
did not per — orm its contract. Its — ailure to do so was either intentional or due to gross neglect which, under the uncontradicted — acts, amounted to the same thing, nor did it make any proo — o — the cost o — compliance, where compli- ance was possible. Under its contract it obligated itsel — to use in the plumbing only pipe (between 2,000 and 2,500 — eet) made by the Reading Manu — acturing Company. The — irst pipe delivered was about 1,000 — eet and the plainti —
’s superintendent then called the atten- tion o — the — oreman o — the subcontractor, who was doing the plumbing, to the — act that the speci — ications annexed to the contract required all pipe used in the plumbing to 20 • Substantial P er — ormance and Material Breach 621
be o
the Reading Manu — acturing Company. They then examined it — or the purpose o —
ascertaining whether this delivery was o
that manu — acture and — ound it was. Therea — - ter, as pipe was required in the progress o — the work, the — oreman o — the subcontractor would leave word at its shop that he wanted a speci — ied number o —
eet o — pipe, without in any way indicating o — what manu — acture. Pipe would therea — ter be delivered and installed in the building, without any examination whatever. Indeed, no examination, so — ar as appears, was made by the plainti —
, the subcontractor, de — endant’s architect, or anyone else, o — any o — the pipe except the — irst delivery, until a — ter the building had been completed. Plainti —
’s architect then re — used to give the certi — icate o — completion, upon which the — inal payment depended, because all o — the pipe used in the plumbing was not o — the kind called — or by the contract. A — ter such re — usal, the subcontractor removed the covering or insulation — rom about 900 — eet o — pipe which was exposed in the basement, cellar and attic, and all but 70 — eet was — ound to have been manu — ac- tured, not by the Reading Company, but by other manu — acturers, some by the Cohoes Rolling Mill Company, some by the National Steel Works, some by the South Chester Tubing Company, and some which bore no manu — acturer’s mark at all. The balance o — the pipe had been so installed in the building that an inspection o — it could not be had without demolishing, in part at least, the building itsel — . I am o — the opinion the trial court was right in directing a verdict — or the de — endant. The plainti —
agreed that all the pipe used should be o — the Reading Manu — acturing Company. Only about two- — i — ths o — it, so — ar as appears, was o — that kind. I — more were used, then the burden o — proving that — act was upon the plainti —
, which it could eas- ily have done, since it knew where the pipe was obtained. The question o — substantial per — ormance o — a contract o — the character o — the one under consideration depends in no small degree upon the good — aith o — the contractor. I — the plainti —
had intended to, and had complied with the terms o — the contract except as to minor omissions, due to inadvertence, then he might be allowed to recover the contract price, less the amount necessary to — ully compensate the de — endant — or damages caused by such omissions. But that is not this case. It installed between 2,000 and 2,500 — eet o — pipe, o — which only 1,000 — eet at most complied with the contract. No explanation was given why pipe called — or by the contract was not used, nor was any e —
ort made to show what it would cost to remove the pipe o — other manu — acturers and install that o — the Reading Manu — acturing Company. The de — endant had a right to contract — or what he wanted. He had a right be — ore making payment to get what the contract called — or. It is no answer to this suggestion to say that the pipe put in was just as good as that made by the Reading Manu — acturing Company, or that the di —
erence in value between such pipe and the pipe made by the Reading Manu — acturing Company would be either “nominal or nothing.” De — endant contracted — or pipe made by the Reading Manu — ac- turing Company. What his reason was — or requiring this kind o — pipe is o — no impor- tance. He wanted that and was entitled to it. It may have been a mere whim on his part, but even so, he had a right to this kind o — pipe, regardless o — whether some other kind, according to the opinion o — the contractor or experts, would have been “just 622 20 • Substantial Per — ormance and Material Breach
as good, better, or done just as well.” He agreed to pay only upon condition that the pipe installed were made by that company and he ought not to be compelled to pay unless that condition be per — ormed. The rule, there — ore, o — substantial per — ormance, with damages — or unsubstantial omissions, has no application. What was said by this court in Smith v. Brady (supra) is quite applicable here: “I suppose it will be conceded that everyone has a right to build his house, his cot- tage or his store a — ter such a model and in such style as shall best accord with his notions o — utility or be most agreeable to his — ancy. The speci — ications o — the contract become the law between the parties until voluntarily changed. I — the owner pre — ers a plain and simple Doric column, and has so provided in the agreement, the con- tractor has no right to put in its place the more costly and elegant Corinthian. I — the owner, having regard to strength and durability, has contracted — or walls o — speci-
ied materials to be laid in a particular manner, or — or a given number o — joists and beams, the builder has no right to substitute his own judgment or that o — others. Having departed — rom the agreement, i — per — ormance has not been waived by the other party, the law will not allow him to allege that he has made as good a building as the one he engaged to erect. He can demand payment only upon and according to the terms o — his contract, and i — the conditions on which payment is due have not been per — ormed, then the right to demand it does not exist. To hold a di — — erent doc- trine would be simply to make another contract, and would be giving to parties an encouragement to violate their engagements, which the just policy o — the law does not permit.” (p. 186.) I am o — the opinion the trial court did not err in ruling on the admission o — evi- dence or in directing a verdict — or the de — endant. For the — oregoing reasons I think the judgment o — the Appellate Division should be reversed and the judgment o — the Trial Term a —
irmed.
Re --- lection
One way to understand the dissent’s criticisms o --- the majority opinion without throwing out Cardozo’s substantial contribution to legal doctrine is to distinguish what is radical in his opinion. The criticisms boil down to a singular complaint that Cardozo transmogri --- ied a clear express condition into an implied one. Remember that the contract was written in a manner that would reasonably lead to the conclu- sion that the parties intended the installation o --- Reading pipe to be an express condi- tion precedent to Kent’s obligation to pay Jacob & Youngs. In Cardozo’s e ---
ort to reach a more equitable result — and perhaps seeking to de — ine a new doctrine in contract law — he ignores the plain meaning o — the written agreement. Cardozo is not alone in doing this: look back to cases like Nānākuli and Sierra Diesel in Module IV, and you will see that judges who take a more subjective approach to contract interpretation will ignore the plain meaning when justice so requires. For an objective jurist like the dissenter McLaughlin, this is error. 20 • Substantial P er — ormance and Material Breach 623
But once we get past Cardozo’s strong application o --- the subjective approach to contract interpretation, such that we accept that this contract does not have an express condition to use a certain brand o --- pipe but at best an implied one, then the power and importance o --- his opinion become clear. By creating the doctrine o --- substantial per --- ormance o --- implied conditions, Cardozo --- inishes in 1921 what Lord Mans --- ield started in 1773. The law today is now better aligned with what people would expect
rom their contractual relationships. The majority o — jurisdictions and the R2d have generally adopted Cardozo’s approach — at least inso — ar as to recognize that an implied condition need only be substantially per — ormed — or the promise conditioned on that implied condition to become due. As you review the R2d’s rules on the impact o — per — ormance and non- per — ormance, consider whether it goes as — ar as Cardozo did.
Discussion The dissent is critical to read in this case because in it, Judge McLaughlin points out the problems with Judge Cardozo’s approach. These discussion questions center around this vigorous dissent.
1. McLaughlin criticizes Cardozo’s new doctrine --- or violating parties’
reedom o — contract. Both the majority and the dissent seem to agree that contracts interpretation should accord with the parties’ intentions. When a contract expressly states a condition, why should a court assume that party did not intent to make its promises dependent on the com- plete per — ormance o — that condition?
2. McLaughlin criticizes Cardozo’s --- act --- inding by questioning whether the
builder’s error was really so trivial and innocent. We do not know why
the builder --- ailed to use the speci --- ied brand o --- pipe. We also do not know
whether Reading pipe is better than other brands — or, --- or that matter,
whether branded pipe is better than pipe which is not branded. Courts
are not experts in the quality o --- pipe, so how is this court justi --- ied in
asserting that these pipes were identical?
3. McLaughlin criticizes Cardozo’s application o --- equitable principles in
this case as leading to unjust results in other cases. I --- parties’ contracts
will not be interpreted to mean what they say, how shall parties plan
their business a ---
airs? Might Kent’s pro — ession as an attorney have in — lu- enced Cardozo’s decision? Is it possible that Kent was trying to use the court to save money on his mansion? 624 20 • Substantial Per — ormance and Material Breach
Reading Khiterer v. Bell. The next case illustrates how a modern trial court applies Cardozo’s rather loose — ramework. Read this case twice. The — irst time you read it, consider it in light o — Cardozo’s decision. Highlight the rule that the court employed and the — acts analyzed under it, and write annotations explain- ing how those — acts impact the outcome o — the rule. Then, review the R2d’s
ive- — actor balancing test, and care — ully note what those — ive — actors are. Then, return to Khiterer. As you read Khiterer, apply its — acts to the balancing-test rule provided by the R2d. Compare your experience analyzing this case under Cardozo’s loose stan- dard with analyzing it under the R2d’s — ormal rule. Do you arrive at a di — — erent result? Was it easier or harder to per — orm this analysis with a loose standard or with a — ormal rule? Does one approach require more or — ewer — acts or more or less evidence than the other? Which o — these approaches do you think is more likely to help judges arrive at the right result in the majority o — cases?
Khiterer v. Bell
800 N.Y.S.2d 348 (Civ. Ct. 2005) JACK M. BATTAGLIA, J. A patient who proves breach o --- a contract --- or pro --- essional dental services, but does not also prove personal or economic harm, may recover only nominal damages --- or the breach.
Inna Khiterer began treating with Dr. Mina Bell in October 2001. The treatment included root canal therapy on two teeth and the --- abrication and --- itting o --- crowns --- or those teeth, as well as the --- abrication and --- itting o --- a replacement crown --- or a third tooth. The crowns were --- itted in June 2002, and, a --- ter several broken appointments, Ms. Khiterer last saw Dr. Bell in December 2002. Ms. Khiterer treated with another dentist the --- ollowing summer, and, according to her testimony at trial, learned that the crowns with which she was --- itted by Dr. Bell were not --- abricated in accordance with their agreement. Speci --- ically, the crowns were made totally o --- porcelain, rather than o --- porcelain on gold as they, allegedly, should have been. Ms. Khiterer’s complaint in this Small Claims Part action alleges “de --- ective services rendered and breach o --- contract.” Advised prior to trial that any claim in the nature o --- dental malpractice required expert proo --- , Ms. Khiterer elected to proceed on her breach o --- contract claim only. “A breach o --- contract claim in relation to the rendition o --- medical or dental services by a physician or dentist will withstand a test o --- its legal su ---
iciency only when based upon an express special promise to e —
ect a cure or accomplish some de — inite result.” A contract cause o — action might be based upon a “speci — ic promise to deliver a baby without administration o — blood.” 20 • Substantial P er — ormance and Material Breach 625
The agreement alleged here,
or dental services including root canal therapy and the — abrication and — itting o — crowns made o — porcelain on gold, had as its predomi- nant purpose the — urnishing o — services, and is, there — ore, governed by the general law o — contracts and not by Article 2 o — the Uni — orm Commercial Code. As will appear, however, the result would be the same in any event. Ms. Khiterer testi — ied that, because she had previously been — itted with crowns made o — porcelain on gold (actually an 86% gold alloy, as Dr. Bell explained), she requested that the three crowns that she would receive — rom Dr. Bell also be made o —
porcelain on gold. Ms. Khiterer also o
ered the testimony o — a — riend, Sergei Leon- tev, who said that he was present during a conversation between Ms. Khiterer and Dr. Bell, and heard Dr. Bell assure Ms. Khiterer that she would be receiving three “golden-based crowns.” Mr. Leontev also testi — ied that he made a similar agreement with Dr. Bell that was later changed to all-porcelain crowns. Dr. Bell testi — ied that she had no independent recollection o — any conversation with Ms. Khiterer about the composite material — or the crowns. She testi — ied — urther that an all-porcelain crown was therapeutically superior to a crown containing any metal, including the gold alloy, because the presence o — metal created a risk o — patient reac- tion. The cost to her, she said, o — an all-porcelain crown and a porcelain-on-metal crown is the same, but the cement that binds the all-porcelain crown is more expensive. Dr. Bell presented a copy o — Ms. Khiterer’s chart, showing an entry — or the — irst visit on October 21, 2001 o — “crowns metal- — ree.” Impressions — or the crowns, however, were apparently taken seven months later on May 30, 2002. Ms. Khiterer presented a summary o — all treatment she received — rom Dr. Bell, handwritten by Dr. Bell, showing the notations — or two teeth “rct/post/crown/p — m” and — or one additional tooth “p — m.” Dr. Bell explained that “rct” stood — or “root canal therapy” and that “p — m” stood — or “porcelain — used metal.” She maintained that “p — m” was shorthand — or any crown no matter the composition, but did not satis — actorily explain the then-redundant nota- tion “crown/p — m.” The Court — inds that the contract between Ms. Khiterer and Dr. Bell called — or crowns made o — porcelain on gold, but that the crowns with which Ms. Khiterer was
itted were made o — all porcelain. There is no evidence that Dr. Bell intentionally substi- tuted all porcelain — or porcelain on gold. Intent is not required, o — course, — or a breach o — contract, but, as will appear, it may a —
ect the remedy — or the breach. Dr. Bell pointed to an entry in Ms. Khiterer’s chart — or June 5, 2002, the date the crowns were — itted, that reads, “Patient satis — ied w/esthetic [sic] cementation,” as evidence that Ms. Khiterer was satis — ied with the all-porcelain crowns. But the entry cannot bear that weight, particularly in light o — the evidence that Ms. Khiterer could not and did not know that the crowns were all porcelain until her teeth were x-rayed by her successor dentist. The damages recoverable in a contract action against a doctor or dentist “are restricted to payments made and to the expenditures — or nurses or medicines or other damages that — low — rom the breach.” The precise scope o — this damage — ormula is not entirely clear. It would include the amount o — the — ee paid or due to the doctor or 626 20 • Substantial Per — ormance and Material Breach
dentist, but, as the decisions make clear, would not include “pain and su
ering.” It would seem, there — ore, that Ms. Khiterer would be entitled to recover as damages at least the — ee she paid to Dr. Bell — or the — abrication and — itting o — the three crowns. The opinions, however, appear to assume that there had not been substantial per — ormance o — the contract by the doctor. Developed in the context o — construction contracts, the substantial per — ormance doctrine allows the contractor to recover or retain the contract price — or the work, with a deduction — or the cost o — completion or correction to contract requirements. The doctrine is applicable to employment contracts, real estate brokerage agreements, and leases, and no reason suggests itsel —
or not applying the doctrine as well to con- tracts — or medical or dental services. As articulated by Judge Cardozo in his seminal opinion in Jacob & Youngs v. Kent: “The courts never say that one who makes a contract — ills the measure o — his duty by less than — ull per — ormance. They do say, however, that an omission, both trivial and innocent, will sometimes be atoned — or by allowance o — the resulting damage, and will not always be the breach o — a condition to be — ollowed by a — or — eiture.” The doctrine is required by justice, so as not “to visit venial — aults with oppressive retribution,” and “the transgressor whose de — ault is unintentional and trivial may hope — or mercy i — he will o —
er atonement — or his wrong.” But “the will — ul transgressor must accept the pen- alty o — his transgression.” “The interrupted work may have been better than called — or in the plans. Even so, there can be no recovery i — the contractor will — ully and without excuse has substituted something else.” “Conveying a bene — it upon a party does not ipso — acto constitute substantial per — ormance.” “A contractor is not entitled to compensation — rom an owner even — or improvements which bene — it the owner unless that is a bene — it — or which an owner agreed to pay.” “Substitution o — equivalents may not have the same signi — icance in — ields o — art on the one side and in those o — mere utility on the other.” “Nowhere will change be tolerated, however, i — it is so dominant or pervasive as in any real or substantial measure to — rustrate the purpose o — the contract. . . . There is no general license to install whatever, in the builder’s judgment, may be regarded as ‘just as good’ . . . . We must weigh the purpose to be served, the desire to be grati — ied, the excuse — or devia- tion — rom the letter, the cruelty o — en — orced adherence.” Where substantial per — ormance has been rendered, the remedy is the cost o — com- pletion or correction, unless that cost “is grossly and un — airly out o — proportion to the good to be attained. When that is true, the measure is the di —
erence in value.” The “di —
erence in value rule” is applied to avoid “economic waste.” But where the de — ect in per — ormance is substantial, the cost o — completion or correction will be awarded “notwithstanding the relatively small — ee . . . charged — or services rendered.” Here, as already noted, there is no evidence that Dr. Bell intentionally substituted all porcelain — or porcelain on gold as the material — rom which Ms. Khiterer’s crowns 20 • Substantial P er — ormance and Material Breach 627
were to be
abricated. The all-porcelain crowns were clearly suitable — unctionally — or the intended purpose; indeed, there is no evidence to contradict Dr. Bell’s opinion that they were better. Nor was there evidence to contradict her testimony o — eco- nomic equivalence, and Ms. Khiterer testi — ied that the — ee she was charged by Dr. Bell was signi — icantly less than the — ee she had been quoted by other dentists. There is no evidence o — physical harm to Ms. Khiterer — rom the all-porcelain crowns; although she testi — ied that two o — the crowns have been replaced by porcelain-on-gold crowns, there was no evidence that the replacement was necessitated by the composition o —
the all-porcelain crowns. And Ms. Khiterer was satis
ied with the all-porcelain crowns
rom an aesthetic perspective. I — , there — ore, there is to be a determination that Dr. Bell did not substantially per-
orm her contract with Ms. Khiterer — or, to put it di —
erently, that her per — ormance was substantially de — ective — it must rest on recognition o — a patient’s right to control, without quali — ication, any material that would become part o — her body. The only decision o — which this Court is aware that seems relevant to the issue suggests that the contract action against a doctor or dentist does not extend that — ar. In Semel v. Culli — ord, the patient alleged that the doctor “ — ailed to accomplish what he speci — ically undertook and agreed to do, take out all o — the wire sutures” that had been implanted in the patient during previous open-heart surger. The court held that, “as dra — ted,” the patient’s contract cause o — action could not withstand the doctor’s motion — or summary judgment. Although the court saw “an issue o —
act concerning the extent o — the surgery [the doctor] actually contracted to per — orm, the only damage said to have been sustained is . . . pain and su —
ering items o — injury not obtainable in a contract action.” Tort cases concerning lack o — consent to medical treatment address a somewhat similar issue. “Every human being o — adult years and sound mind has a right to deter- mine what shall be done with his own body; and a surgeon who per — orms an operation without his patient’s consent, commits an assault, — or which he is liable — or damages.” But, i — the patient “ — ails to prove any damages causally related to her lack o — consent,” she may recover only nominal damages. And so, when a patient sued her dentist because “the wrong tooth had been extracted,” but “the tooth that was extracted was badly diseased and should have been extracted,” a judgment — or the patient could not stand. The court noted that “no injuri- ous results to the patient were proved” and “no special contract was made.” A dissent- ing judge disagreed on the latter issue, — inding proo — o — a “breach o — a special contract resulting in a trespass.” He would have allowed damages “predicated . . . upon the additional expense the patient would be required to incur — or contemplated bridge work by reason o — the absence o — the tooth extracted.” There was no suggestion o — an award o — general damages, unrelated to proo — o — physical or economic harm. Whether the — orm o — action is contract or tort, “the inquiry must always be, what is an adequate remedy to the party injured”; “the law awards to the party injured a 628 20 • Substantial Per — ormance and Material Breach
just indemnity
or the wrong which has been done him, and no more.” The tort cases
or lack o — consent to medical treatment support a conclusion that an invasion o — the interest to control one’s body is not compensable beyond an award o — nominal dam- ages, in the absence o — proo — o — other harm, presumably including, in an appropriate case, emotional harm. The Court concludes that Dr. Bell’s breach o — her contract with Ms. Khiterer, — it- ting her with all-porcelain crowns rather than porcelain-on-gold crowns, was not substantial, so as to warrant a return o — her total — ee. An award based upon the cost o —
replacement (which, in any event, has not been established by competent evidence) would be “grossly and un — airly out o — proportion to the good to be obtained.” And, under the circumstances here, the “di —
erence in value rule” yields an award o — only nominal damages, to which Ms. Khiterer is entitled upon proo — o — breach o — contract. The Court’s analysis and conclusion are supported by an analysis o — Ms. Khiterer’s claim, and the conclusion that would be reached, under Article 2 o — the Uni — orm Commercial Code. The contract description o — the goods, porcelain-on-gold crowns, would constitute “an express warranty that the goods shall con — orm to the descrip- tion.” (See UCC § 2-313 [1][b].) Ms. Khiterer could reject the crowns i — they “ — ail[ed] in any respect to con — orm to the contract.” (See UCC § 2-601.) But Ms. Khiterer’s use o — the crowns — or approximately two years would constitute acceptance o — them (see UCC § 2-606 [1][c]); and, consistent with the substantial per — ormance doctrine in general contract law, Ms. Khiterer could revoke her acceptance o — the crowns only i — the “non-con — ormity substantially impair[ed] [their] value” (see UCC § 2-608 [1].) Without a substantial impairment o — value, Ms. Khiterer’s acceptance would stand, and she would be obligated to pay — or the crowns “at the contract rate.” (See UCC § 2-607 [1].) She would retain a claim — or damages, however, measured by the “di — -
erence . . . between the value o — the goods accepted and the value they would have had i — they had been as warranted.” (See UCC § 2-714 [2].) Applying that — ormula, her damages would be nominal. Judgment is awarded to Ms. Khiterer — or $10.00, plus disbursements.
Re --- lection As you may have surmised --- rom analyzing Khiterer both under Cardozo’s standard
or substantial per — ormance, and also under the R2d’s — ive- — actor rule, there are costs and bene — its to both rules and standards. A standard like the one Cardozo provides — or determining substantial per — ormance gives judges a wide degree o —
reedom in deciding what justice requires — or a certain case. But this — reedom inherently means that it is harder — or parties to predict how courts will rule. A rule like the R2d’s results in a more structured analysis. That structure gives parties more advance notice about how courts will evaluate circum- stances where one party withheld per — ormance. This makes it easier to plan actions that will not violate the law. But this also means that parties could plan their actions 20 • Substantial P er — ormance and Material Breach 629
not to violate the speci
ic blackletter law while violating the spirit o — contract law in general, and that other parties who deserve relie — under the law might not receive it
or technical reasons. Whether a rule or a standard is better depends in large part on what this speci — ic law is trying to accomplish. Recall that the R2d’s approach to this aspect o — contract law is to encourage parties to engage in sel — -help. To accomplish this end, the R2d needs to provide parties clarity about what is or is not law — ul. A rule is a better tool than a standard when the goal is giving parties certainty or clarity in advance about how courts will decide such cases. This allows parties to accurately predict how courts will behave and to plan their actions accordingly. This may explain why the R2d pro- vides a more — ormal — ive- — actor test in the — orm o — a rule and not a standard, so par- ties can determine with greater certainty whether or not to withhold per — ormance in response to their counterparties’ breach.
Discussion 1. When you apply the R2d test to the --- acts in Khiterer, do you arrive at the same legal result? 2. Are you suspicious o --- either Khiterer’s or Bell’s motives in this case? Does either
party appear to be acting in bad --- aith? Or was this just an innocent and good- --- aith mistake?
Problems Problem 20.1. Direct Timber Shipment In the nineteenth century, a ship captain and a timber producer entered into a contract --- or the shipment o --- timber --- rom Riga, the capital o --- Latvia, to Portsmouth, United Kingdom. The contract speci --- ied that the ship would “sail with the --- irst --- avor- able wind direct to Portsmouth.” The contract also has a “Choice o --- Law” clause that speci --- ies: “The validity o --- this agreement, its construction, interpretation, and en --- orcement, and the rights o --- the parties hereto shall be determined under, and construed in accordance with, the laws o --- the State o --- Delaware.” Assume --- or purposes o --- this problem that Delaware --- ollows the R2d and has adopted the UCC. Instead o --- sailing directly to Portsmouth, the ship stopped along the way in Copen- hagen, Denmark, where it was detained --- or several weeks. Upon arriving at Ports- mouth, the producer’s agent accepted delivery o --- the timber, but the producer re --- used to pay the ship captain, citing both the delay and the detour.
630 20 • Substantial Per — ormance and Material Breach
. - _...;:i...
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l. · · · -
Figure 20.2. Map showing the relative locations o ---
Riga, Copenhagen, and Portsmouth.
How would you characterize the promises and/or conditions in this agreement? Based on that characterization, analyze whether or not the timber producer’s duty to pay the ship captain has come due. See Bornmann v. Tooke, 170 Eng. Rep. 991 (1807).
Problem 20.2. Sewer System This case involves a sewer system that was not — ully completed. In June 2004, appel- lant Roberts Contracting Company, Inc. (Roberts) agreed to build and complete a sewer system — or appellee Valentine-Wooten Road Public Facility Board (VWR) by April 12, 2005. The contract provided that VWR would pay $2,088,166 — or Roberts to build the sewer system, which was to be accepted by the City o — Jacksonville, and that, i — Roberts did not complete the work on time, it would pay $400 per day until completion. Roberts received an extension — rom VWR until October 20, 2005, but did not — inish the job by then. Although VWR agreed to obtain all necessary easements, it did not resolve dis- putes with two landowners, Pickens and Harris, until very late in the project. Those issues, along with wet weather and a contract dispute between the project engineer, Bond Consulting Engineers, Inc., and Pulaski County delayed construction. The par- ties disagree about whether VWR’s — ailure to — ul — ill its obligations hindered Roberts’s ability to per — orm. By — all 2005, Roberts had installed and tested the sewer lines, and had installed
ive pump stations and the — orce-main pipes and related equipment. But the pump station on the Pickens property still lacked power, and Mr. Harris had damaged a
orce main on his property that Roberts had, at VWR’s direction, placed outside the easement. The Pickens easement was — inally settled in January 2006, but the 20 • Substantial P er — ormance and Material Breach 631
Harris dispute was not resolved until May 2006. Further, Bond Consulting Engi- neers stopped its on-site supervision o — the job in December 2005 a — ter a dispute with Pulaski County over payment. More than a year past the original completion date, with at least one extension granted, Roberts walked o —
the job, and VWR re — used to pay all o — Roberts’s last bill. The sewer system was not operational. A video inspection per — ormed by Jacksonville Waste Water Utility in November 2006, more than a year a — ter the lines had been suc- cess — ully tested, revealed numerous de — ects and debris in the sewer system. Roberts took the position that the problems in the lines had developed during the year-long interval between its completion o — the lines and the taping. On May 16, 2006, VWR re — used to pay Roberts the entire amount o — a bill on the ground that it had not completed all o — the work. The pay estimate indicated that retainage ( — rom work already per — ormed and partially paid) at that time was $104,408.30, and that Roberts had earned an additional $57,532.50, which had not yet been paid. Roberts re — used to per — orm — urther and asserted that the purportedly incomplete work was not within the scope o — the contract. It also claimed that its ability to per — orm had been hampered by VWR’s — ailure to per — orm its obligations. Roberts sued VWR — or breach o — contract, alleging that Roberts had substantially per — ormed, and seeking $162,502.80. VWR — iled a counterclaim — or damages caused by Roberts’s — ailure to complete and repair the system.
Evaluate the competing claims based on whether the parties substantially per-
ormed pursuant to the rule articulated in the R2d. Speci — ically, evaluate whether any — ailure to completely, substantially, or materially per — orm has any impact on the other party’s duty to per — orm its obligations. Make sure to characterize any contractual obligations as mutual or independent promises, conditions, or promis- sory conditions.
See Roberts Contracting Co. v. Valentine-Wooten Rd. Pub. Facility Bd., 2009 Ark. App. 437.
Problem 20.3. Newspaper Stock As o — July 8, 1961, Paul Spindler was the owner o — a majority o — the shares o — S & S Newspapers, a corporation which, since April 1, 1959, had owned and operated a newspaper in Santa Clara known as the Santa Clara Journal. In addition, Spindler, as president o — S & S Newspapers, served as publisher, editor, and general manager o —
the Journal. On July 8, 1961, Spindler entered into a written agreement with Sheldon Sackett whereby the latter agreed to purchase 6,316 shares o — stock in S & S Newspapers, this number representing the total number o — shares outstanding. The contract provided
or a total purchase price o — $85,000 payable as — ollows: 632 20 • Substantial Per — ormance and Material Breach
• $6,000 on or be --- ore July 10,
• $20,000 on or be --- ore July 14, and
• $59,000 on or be --- ore August 15. In addition, the agreement obligated Sackett to pay interest at the rate o --- 6% on any unpaid balance. And --- inally, the contract provided --- or delivery o --- the --- ull amount o --- stock to Sackett --- ree o --- encumbrances when he made his --- inal payment under the contract. Sackett paid the initial $6,000 installment on time and made an additional $19,800 payment on July 21. On August 10, Sackett gave Spindler a check --- or the $59,200 balance due under the contract; however, due to the --- act that the account on which this check was drawn contained insu ---
icient — unds to cover the check, the check was never paid. Meanwhile, however, Spindler had acquired the stock owned by the minority shareholders o — S & S Newspapers, had endorsed the stock certi — icates, and had given all but 454 shares to Sackett’s attorneys to hold in escrow until Sackett had paid Spin- dler the $59,200 balance due under the contract. However, on September 1, a — ter the $59,200 check had not cleared, Spindler reclaimed the stock certi — icates held by Sackett’s attorney. Therea — ter, on September 12, Spindler received a telegram — rom Sackett which stated that the latter “had secured payments [ — or] our transaction and was ready, willing and eager to trans — er them” and that Sackett’s new attorney would contact Spindler’s attorney. In a return telegram, Spindler gave Sackett the name o — Spindler’s attorney. Subsequently, Sackett’s attorney contacted Spindler’s attorney and arranged a meeting to discuss Sackett’s per — ormance o — the contract. At this meeting, which was held on September 19 at the o —
ice o — Sackett’s attorney, in response to Sackett’s representation that he would be able to pay Spindler the bal- ance due under the contract by September 22, Spindler served Sackett with a notice to the e —
ect that unless the latter paid the $59,200 balance due under the contract plus interest by that date, Spindler would not consider completing the sale and would assess damages — or Sackett’s breach o — the agreement. Also discussed at this meeting was the newspaper’s urgent need — or working capi- tal. Pursuant to this discussion, Sackett on the same date paid Spindler $3,944.26 as an advance — or working capital. However, Sackett — ailed to make any — urther payments or to communicate with Spindler by September 22, and on that date, the latter, by letter addressed to Sackett, again extended the time — or Sackett’s per — ormance until September 29. Again, Sackett
ailed to tender the amount owed under the contract or to contact Spindler by that date. The next communication between the parties occurred on October 4 in the — orm o — a telegram by which Sackett advised Spindler that Sackett’s assets were now — ree, having previously been tied up in his divorce proceedings; that he was “ready, eager 20 • Substantial P er — ormance and Material Breach 633
and willing to proceed to . . . consummate all details o
our previously settled sale and purchase.” Accordingly, Sackett, in this telegram, urged Spindler to have his attorney contact Sackett’s attorney “regarding any un — inished details.” In response to this telegram, Spindler’s attorney, on October 5, wrote a letter to Sackett’s attorney stating that as a result o — Sackett’s delay in per — orming the contract and his previous unwillingness to consummate the agreement, “there will be no sale and purchase o — the stock.” Following this letter, Sackett’s attorney, on October 6, telephoned Spindler’s attor- ney and o —
ered to pay the balance due under the contract over a period o — time through a “liquidating trust.” This proposal was rejected by Spindler’s attorney, who, however, in — ormed Sackett’s attorney at that time that Spindler was still willing to consummate the sale o — the stock, provided Sackett would pay the balance in cash or its equivalent. No tender or o —
er o — cash or its equivalent was made, and Sackett therea — ter — ailed to communicate with Spindler until shortly be — ore the commence- ment o — suit. During the period scheduled — or Sackett’s per — ormance o — the contract, Spindler
ound it increasingly di —
icult to operate the paper at a pro — it, particularly due to the lack o — adequate working capital. In an attempt to remedy this situation, Spindler obtained a $4,000 loan by mortgaging various items o — his personal property. In addi- tion, in November, Spindler sold hal — o — his stock in S & S Newspapers — or $10,000. Therea — ter, in December, in an e —
ort to minimize the cost o — operating the newspaper, Spindler converted the paper — rom a daily to a weekly. Finally, in July 1962, Spindler repurchased — or $10,000 the stock which he had sold the previous November and sold the — ull 6,316 shares — or $22,000, which netted Spindler $20,680 a — ter payment o —
brokerage commission. Sackett (the — laky buyer) then commenced this action against Spindler (the seller), claiming that Spindler had breached his promise to sell the stock to Sackett. a. Did Sackett completely per — orm, such that Spindler had to per — orm his obli- gations under the contract? b. Did Sackett substantially per — orm or materially breach, such that Spindler could withhold his per — ormance but not cancel the contract? c. Did Sackett have time to cure, or did he totally breach his promise to Spin- dler, such that Spindler was legally able to cancel the contract? See Sackett v. Spindler, 248 Cal. App. 2d 220 (1967). Chapter 21 Repudiation
Contracts are built on the expectation o --- per --- ormance, but what happens when one party signals it will not meet its obligations be --- ore per --- ormance is due? This is the central question addressed by the doctrine o --- anticipatory repudiation. The repudia- tion doctrine allows the aggrieved party to take immediate action, such as suspending per --- ormance, seeking assurances, or pursuing remedies, rather than waiting --- or an inevitable breach to occur. These actions bene --- it the aggrieved party by avoiding --- ur- ther losses, preserving their contractual rights, and creating an opportunity to address the breach e ---
iciently be — ore the situation worsens. This chapter examines how courts determine when a party’s words, actions, or — ailures rise to the level o — repudiation, and it explores the legal remedies available in response. Repudiation can take two primary — orms. The — irst is simple repudiation, where a party makes a clear and unequivocal statement or takes an action that demonstrates an intent not to per — orm. For the intent to be unequivocal, it must leave no reason- able doubt about the party’s re — usal to — ul — ill their obligations. Vague or conditional statements, such as “We might not be able to deliver,” are generally insu —
icient to meet this standard. The second — orm arises — rom reasonable insecurity, when circumstances give one party legitimate concern about the other’s ability or willingness to per — orm. For instance, discovering that a supplier has missed key deadlines with other clients or is
acing insolvency could constitute reasonable insecurity. In such cases, the insecure party can demand adequate assurances. I — the assurances are not provided within a reasonable time, the — ailure itsel — becomes a repudiation, which triggers the same consequences as a total breach. The legal — ramework governing repudiation is designed to balance — airness and predictability by sa — eguarding the stability o — contractual relationships. This balance ensures that parties are not le — t in prolonged uncertainty while also protecting their rights to clear and equitable remedies in the — ace o — repudiation. The procedure — or demanding assurances provides a structured way to address uncertainty without pre- maturely treating the contract as breached. At the same time, the — ailure to provide those assurances within a reasonable time allows the aggrieved party to act decisively to protect their interests. On the one hand, this — ramework protects parties — rom being — orced to endure prolonged uncertainty or harm caused by a counterparty’s re — usal to per — orm. On the
635
636 21 • Repudiation
other hand, it requires clarity and proportionality to avoid un
airly penalizing a party based on mere doubts or misunderstandings. Through the lens o — common law principles and statutory provisions in the R2d and UCC, this chapter explores the mechanics and implications o — anticipatory repu- diation. It examines key doctrines, such as the di —
erence between uncertainty and unequivocal re — usal; the proper procedure — or demanding assurances; and the conse- quences o —
ailing to provide those assurances. Case examples and practical problems illustrate how these principles are applied in real-world disputes. By the end o — this chapter, you will have gained a deeper understanding o — how contract law addresses repudiation. Whether dealing with direct re — usals, ambigu- ous signals, or insecurity-based demands, knowing these doctrines will equip you to navigate per — ormance disputes with con — idence and precision.
Rules A. Repudiation
A simple repudiation is a direct and unequivocal statement or action that a party will not per --- orm an obligation. Both the R2d and the UCC recognize repudiation and analyze it in similar ways.
-
Determining Whether a Statement Is a Repudiation A statement is a repudiation under the common law i — a party unequivocally re — uses to per — orm:
A repudiation is a statement by the obligor to the obligee indicating that the obligor will commit a breach that would o — itsel — give the obligee a claim — or damages — or total breach under § 243. R2d § 250(a).
Under the UCC, a similar principle appears in § 2-610. A party repudiates when it communicates an intent not to per --- orm, and that re --- usal substantially impairs the contract’s value to the other side:
[Anticipatory repudiation is] [w]hen either party repudiates the contract with
respect to a per --- ormance not yet due the loss o --- which will substantially impair
the value o --- the contract to the other. NH UCC § 2-610.
In both cases, uncertainty or hesitation does not amount to repudiation. The intent not to per --- orm must be clear. Saying, “I am not sure I can --- ul --- ill the contract,” is insu --- -
icient. Saying, “I will not — ul — ill the contract under any circumstances,” constitutes repudiation. 21 • Repudiation 637
What contract law requires to constitute simple repudiation is a clear re
usal. A clear re — usal is something like saying, “I will not deliver these goods.” This su —
ices — or repu- diation. A mere worry, such as “I might be late,” does not. The law demands unequivo- cal language or conduct that leaves no real uncertainty about the party’s intent. For example, Chris hires Nadia to paint his house next month. One week be — ore painting begins, Nadia says, “I have decided not to paint at all.” This is a straight — or- ward repudiation under R2d § 250(a). On the other hand, i — Nadia says, “I’m not sure i —
I’ll have enough time, but I’ll try,” this is not a repudiation. Nadia’s statement expresses doubt, not a re — usal. Another example: a manu — acturer o — shoes tells a retailer, “I have shut down my — actory and cannot — ill your order.” This is a repudiation under UCC § 2-610. The retailer may act immediately to — ind another supplier. But i — the shoe manu — acturer tells the retailer, “We are experiencing delays due to supply chain issues, but we are doing everything we can to — ul — ill your order,” then this is not a repudiation because it does not unequivocally signal an intent not to per — orm.
- Determining Whether an Action Is a Repudiation Actions may amount to repudiation i — they clearly signal an intent not to per — orm or i — they make per — ormance impossible: A repudiation is a voluntary a —
irmative act which renders the obligor unable or apparently unable to per — orm without such a breach. R2d § 250(b). Examples include selling goods promised to another party under a contract, dis- mantling a — actory required — or production under a contract, or mortgaging or selling property that is the subject o — a contract. In these cases, actions speak louder than words. Courts look at whether the conduct leaves no reasonable doubt that the party intends not to per — orm. For example, Chris contracts to sell a speci — ic car to Lisa. Be — ore the delivery date, Chris sells the car to another buyer. This act makes per — ormance impossible and constitutes a repudiation under R2d § 250(b). On the other hand, i — Lisa discovers that Chris’s car is still listed — or sale online a — ter she contracts with Chris to buy it, that leaves doubt as to his intentions and does not constitute a repudiation. Another example: a construction company contracts to build a house — or a client. Two weeks be — ore work begins, the company sells all its construction equipment and — ires its workers. These voluntary acts render per — ormance apparently impossible and consti- tute repudiation under UCC § 2-610. However, i — the company’s workers go on strike, that creates reasonable insecurity about the company’s ability to build the house but does not constitute a simple repudiation. The distinction hinges on whether the actions unequivocally indicate an intent to breach or make per — ormance impossible. Ambiguity or uncertainty is insu —
icient. Courts assess the context, including whether the obligor took voluntary steps that clearly demonstrate an inability or unwillingness to — ul — ill the contract. 638 21 • Repudiation
-
Applying the Impact o
Repudiation When repudiation is clear, the law treats it like a total breach. R2d § 253 and UCC § 2-610 each allow the non-repudiating party to: (1) Stop its own per — ormance. (2) Seek alternatives or cover. (3) Sue — or damages without waiting — or the due date. The rule is more clearly spelled out in the UCC provision, which states: [Upon anticipatory repudiation,] the aggrieved party may (a) — or a commercially reasonable time await per — ormance by the repudiat- ing party; or (b) resort to any remedy — or breach, even though he has noti — ied the repu- diating party that he would await the latter’s per — ormance and has urged retraction; and (c) in either case suspend his own per — ormance or proceed in accordance with the provisions o — this Article on the seller’s right to identi — y goods to the contract notwithstanding breach or to salvage un — inished goods. NH UCC § 2-610. This rule comes — rom Hochster v. De La Tour, 118 Eng. Rep. 922 (Queen’s Bench, 1853), where an employer told a courier well in advance that his services would not be used. The court let the courier sue at once, rather than wait — or the scheduled start date. For example, Theo contracts with Amber to design a website by May 1. On April 15, Amber says, “I won’t be able to do it.” Theo can immediately hire another designer, then hold Amber liable — or any extra cost. Amber’s statement is a direct repudiation, which has the e —
ect o — her total breach.
B. Reasonable Insecurity and the Demand
or Adequate Assurances Sometimes, a party suspects that the other side will not or cannot per — orm, but the evidence is less explicit than “I re — use.” In such cases, the insecure party can demand adequate assurances. I — those assurances do not come, the — ailure to give adequate assurances itsel — can be a repudiation — equivalent to a total breach.
-
Grounds
or Insecurity Under R2d § 251, a party may demand assurances i — “reasonable grounds arise” to believe that the other side will not per — orm. Under UCC § 2-609, a party must make this demand in writing — or goods contracts, and the insecurity must meet 21 • Repudiation 639
a commercial standard o
reasonableness. Minor rumors or vague doubts are not enough. The perceived risk must be signi — icant, such that a reasonable person would
ear nonper — ormance. For example, Aria agrees to renovate Sam’s kitchen. Sam hears — rom a credible source that Aria sold all her tools and plans to move to another state. Sam now has reasonable grounds — or insecurity. Sam can call Aria and ask her to explain how she plans to — ul — ill the contract. Until Aria responds, Sam may re — use to let Aria begin any — urther work and re — use to pay any advance — unds. But, until Sam a —
ords Aria a reasonable time to respond, he may not cancel the contract. In a UCC context, Delta Electronics orders 2,000 memory chips — rom ChipTek. Delta learns that ChipTek is in — inancial trouble, having missed payroll the past month. Delta should send a written request — or assurance that ChipTek can still deliver. I —
ChipTek stays silent or responds with “We’re not sure yet,” Delta can probably treat the silence or vague reply as a — ailure to assure. But ChipTek must give Delta the oppor- tunity to o —
er assurances that it is in a — inancial position to pay.
- Demanding Assurances: Proportionality Any demand — or assurances about — uture per — ormance must be proportional to the reasonable insecurity. Asking to see a simple proo — o — solvency or a supplier contract may be — air. Requiring the other side’s entire — inancial history might be too extreme. Good — aith underlies these rules. Harassing or baseless demands can back — ire and possibly constitute a breach by the insecure party. For example, Omni Foods sees news that its produce supplier, VeggieCorp, lost hal — its — ields to — looding. Omni writes, “Please show me evidence that you can still harvest enough produce.” VeggieCorp replies with a clear plan detailing how it will source — rom partner — arms. This is adequate assurance. Omni must keep the contract. I — VeggieCorp had ignored Omni or o —
ered no plan, that silence could become a repudiation. However, i — Omni demands access to VeggieCorp’s — inancial statements
or the past — ive years, that would likely exceed what is reasonable under the circum- stances. Such an overreaching demand could back — ire, leading to unnecessary con — lict or undermining Omni’s good — aith.
- Failure to Assure as Repudiation Under both R2d § 251(2) and UCC § 2-609(4), i — the demanded assurance is not provided within a reasonable time, the insecure party may treat the — ailure as a repudiation. This creates the same result as an outright re — usal: a total breach. The nonbreaching party can cancel the contract, secure a substitute, and sue — or dam- ages. However, it can be challenging to determine the exact moment when insecurity crosses into repudiation. The risk o — getting that analysis wrong is that the party claim- ing the other repudiated becomes the wrong — ul, breaching party. 640 21 • Repudiation
For example, Quad Copter Inc. is a company that builds custom drones. Surveil- lance Corp. orders — rom Quad Copter one hundred drones — or delivery in eight weeks. Two weeks later, Surveillance hears — rom an industry source that Quad Copter’s main — actory has shut down due to a — ire. Concerned, Surveillance writes the — ollowing to Quad Copter: “We have reliable in — ormation that your production capacity has been compromised. Please provide evidence o — how you will meet our order on time.” Day 1: Quad Copter responds vaguely: “We’re working on solutions and hope to resolve this soon.” This response does not provide adequate assurance but also does not constitute a clear repudiation. Surveillance cannot yet treat this as a breach but may repeat its demand. Day 5: Surveillance writes back: “Your prior response was insu —
icient. Please pro- vide a detailed production plan within — ive days, or we will consider this a — ailure to assure.” Quad Copter remains silent. Day 11: Quad Copter’s silence a — ter the second demand creates a stronger basis
or Surveillance to treat the — ailure as a repudiation under both R2d § 251(2) and UCC § 2-609(4). Surveillance cancels the contract, sources drones — rom another sup- plier, and noti — ies Quad Copter o — its intent to claim damages — or the additional costs incurred. This timeline demonstrates the di —
iculty o — determining when insecurity transi- tions to repudiation. Had Surveillance acted prematurely, — or example, on Day 5, a — ter Quad Copter’s vague initial response, Surveillance might have breached the contract by overreacting. The case underscores the importance o — clear, proportional demands and patience when seeking assurances.
- Retraction Repudiation A repudiating party can sometimes retract its repudiation be — ore the other side relies on it or — ormally cancels. R2d § 256 and UCC § 2-611 allow retraction i — no material change o — position has occurred. However, once the insecure party commits resources or hires a replacement, it is too late. The repudiator must then bear liability
or breach. For example, a concert pianist contracts with a piano maker — or delivery in two months. The piano maker announces that a — ire will prevent delivery. The pianist takes no action. Days later, the maker repairs its workshop and con — irms delivery is back on schedule. The pianist must accept the retraction i — he has not yet sought a substi- tute. However, i — the pianist responded to the maker’s announcement by purchasing a new piano, the subsequent retraction would be ine —
ective. His reliance on the initial repudiation renders its retraction invalid. 21 • Repudiation 641
C. Re
lections on Repudiation The doctrine o — anticipatory repudiation provides a vital — ramework — or manag- ing uncertainty in contractual relationships. By allowing parties to take immediate actions such as suspending per — ormance, seeking assurances, or pursuing alternative arrangements, the doctrine minimizes the risks associated with prolonged uncer- tainty and enables parties to address potential breaches proactively. It ensures that parties do not have to wait — or an inevitable — ailure when nonper — ormance becomes certain, empowering them to act decisively to protect their interests. By addressing both clear re — usals and insecurity-based concerns, the doctrine balances — airness and e —
iciency while preserving the integrity o — contractual obligations. At its core, anticipatory repudiation is designed to protect reliance by prevent- ing wasted resources and enabling timely decision-making. This ensures that parties can redirect their e —
orts and resources e —
ectively when a breach becomes imminent. A clear and unequivocal re — usal to per — orm constitutes a total breach enabling the aggrieved party to withhold their own per — ormance and seek remedies immediately. This immediate response minimizes — urther losses and allows the nonbreaching party to pursue alternatives without unnecessary delay. The doctrine also emphasizes the importance o — communication and transparency. In situations where one party suspects nonper — ormance but lacks direct evidence o —
re
usal, the ability to demand adequate assurances bridges the gap. This mechanism encourages cooperation by requiring the potentially breaching party to con — irm their intent and ability to per — orm. I — assurances are provided, the contract remains intact. I — they are not, the law treats the — ailure as a repudiation, which then permits the aggrieved party to protect themselves and seek remedies. By o —
ering these two pathways, simple repudiation and insecurity-based demands, contract law ensures both predictability and — lexibility. Predictability allows parties to rely on structured remedies and plan their next steps with con — idence, while — lexibility ensures that contracts can adapt to un — oreseen challenges without immediate termi- nation. Together, these principles uphold the broader goals o —
airness and e —
iciency in contract law, creating stability in commercial relationships. The R2d and the UCC re — lect this balance by providing structured rules that align with commercial realities. These doctrines help maintain trust and stability in contractual relationships while allowing parties to navigate un — oreseen challenges with con — idence. Anticipatory repudiation is not merely about addressing — ailures; it is about manag- ing risk and preserving value. It equips parties with tools to respond proportionately to uncertainty, thereby — ostering open communication and reducing the likelihood o — unnecessary disputes. Through this lens, the doctrine highlights contract law’s broader commitment to balancing reliance, e —
iciency, and — airness in commercial transactions. 642 21 • Repudiation
Cases Reading McCloskey & Co. v. Minweld Steel Co. Cases are not decided in a vac- uum. Rather, judicial opinions re --- lect the realities o --- their time. Some cases, like this next one, are best understood in light o --- contemporary circumstances.
The dispute in McCloskey arose in the summer o --- 1950, which coincides pre- cisely with the beginning o --- the Korean War on June 25, 1950. American troops were deployed to the region in July o --- that same year to de --- end the “38th Par- allel,” the geographic boundary between the Democratic People’s Republic o ---
Korea to its north and the Republic o
Korea to its south. Despite having similar names, these governments could not have been more di — — erent. The Demo cratic People’s Republic o — Korea, now re — erred to as North Korea, was a Com- munist regime, while the Republic o — Korea, now re — erred to as South Korea, was a pro-Western Democracy. The Korean War was thus seen by America as a war against Communism itsel — , and America was prepared to put — ull e —
ort into this war. The war ended in July 1953, a — ter millions o — soldiers and civilians had lost their lives. Wars require a lot o — steel. During World War II, which had ended just
ive years earlier, there were — requent shortages o — steel and other metals. One could not purchase a new tube o — toothpaste or a tub o — shaving cream without
irst turning in the old container. Ration books issued by the O —
ice o — Price Administration gave American — amilies a limited number o — coupons to pur- chase necessities like car tires, and a national speed limit o — 35 miles per hour was instituted to conserve gasoline. Recent memories o — this severe wartime rationing may have justi — ied anxiety about similar limits being imposed during the Korean War. Meanwhile, taxes were raised to pay — or the war e —
ort, and wages did not keep apace. Labor unions were upset about the declining purchase power o —
working-class Americans. The steel unions were in an especially strong position to demand higher wages, as their products were vital to the war e —
ort and to the economy at large. Steel worker strikes were threatened several times. President Harry S. Truman responded by threatening to nationalize the steel industry, just as President Woodrow Wilson had nationalized the railroad industry to prevent workers — rom striking during World War I. A 1948 amendment to the Selective Service Act allowed the President to seize industrial — actories that
ailed to — ul — ill government orders, so threats on all sides were very real and likely to result in severe disruptions and shortages. Although the steel workers did not strike during the times relevant to this case, they did plan to go on strike starting on April 9, 1952. President Truman made good on his threats, nationalizing the entire American steel industry 21 • Repudiation 643
on that very day. In a case better suited
or a constitutional law casebook, the Supreme Court o — the United States determined that the president lacked the authority to seize the steel mills, ending this brie — period o — industrial nationalization. Pennsylvania, the jurisdiction in which McCloskey originated, produced much o — the nation’s steel in the 1950s. It is thus a — itting site — or this — amous case that asks whether a steel — abricator repudiated its promise.
McCloskey & Co. v. Minweld Steel Co.
220 F.2d 101 (3d Cir. 1955) McLAUGHLIN, Circuit Judge. Plainti ---
-appellant, a general contractor, sued on three contracts alleging an antici- patory breach as to each. At the close o — the plainti —
’s case the district judge granted the de — ense motions — or judgment on the ground that plainti —
had not made out a cause o — action. By the contracts involved the principal de — endant, a — abricator and erector o — steel, agreed to — urnish and erect all o — the structural steel required on two buildings to be built on the grounds o — the Hollidaysburg State Hospital, Hollidaysburg, Pa. and to
urnish all o — the long span steel joists required in the construction o — one o — the two buildings. Two o — the contracts were dated May 1, 1950 and the third May 26, 1950. By Article V o — each o — the contracts: Should the Sub-Contractor (the de — endant herein) . . . at any time re — use or neglect to supply a su —
iciency . . . o — materials o — the proper quality, . . . in and about the per — ormance o — the work required to be done pursuant to the provisions o — this agreement, or — ail, in the per — ormance o — any o — the agree- ments herein contained, the Contractor shall be at liberty, without prejudice to any other right or remedy, on two days’ written notice to the Sub-Contractor, either to provide any such . . . materials and to deduct the cost thereo —
rom any payments then or therea — ter due the Sub-Contractor, or to terminate the employment o — the Sub-Contractor — or the said work and to enter upon the premises. There was no stated date in the contracts — or per — ormance by the de — endant sub- contractor. Article VI provided — or completion by the subcontractor o — its contract work “by and at the time or times herea — ter stated to-wit”: Samples, Shop Drawings and Schedules are to be submitted in the quantities and manner required by the Speci — ications, — or the approval o — the Architects, immediately upon receipt by the Sub-Contractor o — the contract drawings, or as may be directed by the Contractor. All expense involved in the submission 644 21 • Repudiation
and approval o --- these Samples, Shop Drawings and Schedules shall be borne
by the Sub-Contractor.
All labor, materials and equipment required under this contract are to be
urnished at such times as may be directed by the Contractor, and in such a manner so as to at no time delay the — inal completion o — the building. It being mutually understood and agreed that prompt delivery and instal- lation o — all materials required to be — urnished under this contract is to be the essence o — this Agreement.
Appellee Minweld Steel Co., Inc., the subcontractor, received contract drawings and speci — ications — or both buildings in May, 1950. On June 8, 1950, plainti —
McClos- key & Co. wrote appellee asking when it might “expect delivery o — the structural steel”
or the buildings and “also the time estimated to complete erection.” Minweld replied on June 13, 1950, submitting a schedule estimate o — expecting to begin delivery o —
the steel by September 1, and to complete erection approximately November 15. On July 20, 1950 plainti —
wrote Minweld threatening to terminate the contracts unless the latter gave unquali — ied assurances that it had e —
ected de — inite arrangements — or the procurement, — abrication and delivery within thirty days o — the required materials. On July 24, 1950 Minweld wrote McCloskey & Co. explaining its di —
iculty in obtain- ing the necessary steel. It asked McCloskey’s assistance in procuring it and stated that, “We are as anxious as you are that there be no delay in the — inal completion o — the buildings or in the per — ormance o — our contract.” Plainti —
-appellant claims that by this last letter, read against the relevant — acts, de — endant gave notice o — its positive intention not to per — orm its contracts and thereby violated same. Some re — erence has already been made to the background o —
the July 24th letter. It concerned Minweld’s trouble in securing the steel essential
or per — ormance o — its contract. Minweld had tried unsuccess — ully to purchase this — rom Bethlehem Steel, US Steel and Carnegie-Illinois. It is true as appellant urges that Min- weld knew and was concerned about the tightening up o — the steel market. And as is evident — rom the letter it, being a — abricator and not a producer, realized that without the help o — the general contractor on this hospital project particularly by it enlist- ing the assistance o — the General State Authority, Minweld was in a bad way — or the needed steel. However, the letter conveys no idea o — contract repudiation by Minweld. That company admittedly was in a desperate situation. Perhaps i — it had moved earlier to seek the steel its e —
ort might have been success — ul. But that is mere speculation
or there is no showing that the mentioned producers had they been solicited sooner would have been willing to provide the material. Minweld — rom its written statement did, we think, realistically — ace the problem con — ronting it. As a result it asked its general contractor — or the aid which the latter, by the nature o — the construction, should have been willing to give. Despite the cir- cumstances there is no indication in the letter that Minweld had de — initely abandoned all hope o — otherwise receiving the steel and so — inishing its undertaking. One o — the 21 • Repudiation 645
mentioned producers might have relented. Some other supplier might have turned up. It was McCloskey & Co. who eliminated whatever chance there was. That concern instead o — aiding Minweld by urging its plea — or the hospital construction materials to the State Authority which represented the Commonwealth o — Pennsylvania took the position that the subcontractor had repudiated its agreement and then moved quickly to have the work completed. Shortly therea — ter, and without the slightest trouble as
ar as appears, McCloskey & Co. procured the steel — rom Bethlehem and brought in new subcontractors to do the work contemplated by the agreement with Minweld. Under the applicable law Minweld’s letter was not a breach o — the agreement. The suit is in the — ederal court by reason o — diversity o — citizenship o — the parties. Though there is no express statement to that e —
ect the contracts between the parties would seem to have been executed in Pennsylvania with the law o — that state applicable. In McClelland v. New Amsterdam Casualty Co.,1 the Pennsylvania Supreme Court held in a case where the subcontractor had asked — or assistance in obtaining credit, “In order to give rise to a renunciation amounting to a breach o — contract, there must be an absolute and unequivocal re — usal to per — orm or a distinct and positive statement o — an inability to do so.” Minweld’s conduct is plainly not that o — a contract breaker under that test. Restatement o — Contracts, Comment (i) to Sec. 318 (1932) speaks clearly on the point saying:
Though where a ---
irmative action is promised mere — ailure to act, at the time when action has been promised, is a breach, — ailure to take preparatory action be — ore the time when any per — ormance is promised is not an anticipatory breach, even though such — ailure makes it impossible that per — ormance shall take place, and though the promisor at the time o — the — ailure intends not to per — orm his promise.
Appellant contends that its letter o
July 20, requiring assurances o — arrangements which would enable appellee to complete delivery in thirty days, constituted a — ixing o — a date under Article VI o — the contracts. The short answer to this is that the thirty day date, i —
ixed, was never repudiated. Appellee merely stated that it was unable to give assurances as to the preparatory arrangements. There is nothing in the contracts which authorized appellant to demand or receive such assurances. The district court acted properly in dismissing the actions as a matter o — law on the ground that plainti —
had not made out a prima — acie case. The order o — the district court o — July 14, 1954 denying the plainti —
’s motions — or
indings o —
acts, to vacate the judgments and — or new trials will be a —
irmed.
1. 322 Pa. 429 (1936). 646 21 • Repudiation
Re --- lection In reading the McCloskey case, did you wonder why the McCloskey Corporation was so concerned about Minweld’s ability to obtain the steel needed --- or its build- ing? To pressure one’s counterparty so o --- ten and so early into the relationship belies some deeper tensions. Did America’s entrance into the Korean War and the potential nationalization o --- steel mills impact how reasonable parties would behave under these speci --- ic circumstances? Or does this judicial decision re --- lect general principles that persist throughout time? Even judges on the same court may not agree about whether law is immutable or relative. Consider another Pennsylvania case about repudiation: 2401 Pennsylvania Avenue Corp. v. Federation o --- Jewish Agencies o --- Greater Philadelphia, 507 Pa. 166 (1985). In 2401, Chie --- Justice Nix, writing --- or the majority, concluded that a determi- nation o --- repudiation required a --- inding that the purported repudiating party make an “absolute and unequivocal re --- usal to per --- orm or a de --- inite and positive statement o --- an inability to --- ul --- ill its obligations under the contract.” In doing so, Pennsylvania staked out a minority position o --- requiring a much higher standard than the R2d, which requires only an apparent inability to per --- orm. Justice Larsen dissented, arguing that Pennsylvania law does not comply with how modern business transactions actually operate. Larsen cited the --- ollowing portions
rom the treatise on contracts written by Dr. John Murray, who taught contract law in Pittsburgh, Pennsylvania:
The modern view as to what constitutes a repudiation may be stated as --- ol-
lows: A positive statement by the obligor to the obligee which is reasonably
interpreted by the obligee to mean that the obligor will not or cannot per --- orm
his contractual duty constitutes a repudiation.
Statements o --- doubt by the obligor as to his ability or willingness to per-
orm are insu —
icient though such statements may suggest reasonable grounds
or insecurity and ultimately constitute a repudiation. Moreover, language which, alone, would not be su —
icient to constitute a repudiation, may con- stitute a repudiation when accompanied by some nonper — ormance by the obligor. A positive mani — estation that the obligor cannot or will not per — orm need not be expressed in language. It may be in — erred — rom conduct which is wholly inconsistent with an intention to per — orm. Any voluntary a —
irma- tive act which actually or apparently precludes the obligor — rom per — orming amounts to a repudiation.
It would seem that Pennsylvania is a jurisdiction at war with itsel
, at least with regard to the doctrine o — repudiation. Even at the time o — McCloskey, the courts in Pennsylvania might have been moving toward a relaxed standard — or what counts as repudiation. As you consider the R2d’s approach via the cases and problems below, think about whether McCloskey would have been decided di —
erently i — it occurred in another place or time. 21 • Repudiation 647
Discussion 1. When you read Minweld’s letter, does it seem like an unequivocal re --- usal to per-
orm? Why or why not?
-
Why did McCloskey treat Minweld’s letter as a repudiation? Was this a good-
aith interpretation o — the letter, or did McCloskey have ulterior motives?
Reading Hornell Brewing Co., Inc. v. Spry. Hornell Brewing required the court to determine whether and when one party had reasonable insecurity about the other’s per — ormance. Students looking — or sharp lines and easy answers will be disappointed. Matters such as reasonableness occur on a continuum. Insecurity develops over time as trust erodes. There may be some points where insecurity is obviously unreasonable and others where insecurity is obviously present, but most circumstances requiring legal advice — all somewhere in between. Lawyers must operate in this gray area between the lines, giving advice regarding — uzzy concepts and ambiguous — acts. This type o — predicament is known in philosophy as the sorites paradox. Sorites is derived — rom the Greek word — or “heap” (σωρός), as in a heap o — sand. The paradox goes something like this: I — you take a heap o — sand and remove one grain, is it still a heap? I — so, how many grains must one remove to turn the heap o — sand into a mere pile? There is, o — course, no absolute number o —
grains o
sand that constitute a heap. Likewise, there is no absolute amount o — insecurity that makes it inherently reasonable to demand assurances, nor is there a speci — ic quantity o — assurance that adequately resolves such insecu- rity. Although the rule that a party who is reasonably insecure can demand adequate assurance is straight — orward enough, it can be di —
icult to determine exactly when it is reasonable to — eel insecurity, what assurance is reasonable to demand, and whether an insecure party has been reasonably reassured. The next case will help you better understand how courts will analyze the reason- ableness o — parties in such a case.
Hornell Brewing Co., Inc. v. Spry
174 Misc. 2d 451 (N.Y. Sup. Ct. 1997) LOUISE GRUNER GANS, Justice. Plainti ---
Hornell Brewing Co., Inc. (“Hornell”), a supplier and marketer o — alco- holic and non-alcoholic beverages, including the popular iced tea drink “Arizona,” commenced this action — or a declaratory judgment that any rights o — de — endants 648 21 • Repudiation
Stephen A. Spry and Arizona Tea Products Ltd. to distribute Hornell’s beverages in Canada have been duly terminated, that de — endants have no — urther rights with respect to these products, including no right to market and distribute them, and that any such rights previously trans — erred to de — endants have reverted to Hornell. In late 1992, Spry approached Don Vultaggio, Hornell’s Chairman o — the Board, about becoming a distributor o — Hornell’s Arizona beverages. Vultaggio had heard about Spry as an extremely wealthy and success — ul beer distributor who had recently sold his business. In January 1993, Spry presented Vultaggio with an ambitious plan
or distributing Arizona beverages in Canada. Based on the plan and on Spry’s reputa- tion, but without — urther investigation, Hornell in early 1993 granted Spry the exclu- sive right to purchase Arizona products — or distribution in Canada, and Spry — ormed a Canadian corporation, Arizona Iced Tea Ltd., — or that express purpose. Initially, the arrangement was purely oral. In response to Spry’s request — or a let- ter he needed to secure — inancing, Hornell provided a letter in July 1993 con — irming their exclusive distributorship arrangement, but without spelling out the details o — the arrangement. Although Hornell usually had detailed written distributorship agree- ments and the parties discussed and exchanged dra — ts o — such an agreement, none was ever executed. In the meantime, Spry, with Hornell’s approval, proceeded to set himsel — up as Hornell’s distributor in Canada. During 1993 and until May 1994, the Hornell line o — beverages, including the Arizona beverages, was sold to de — endants on 10-day credit terms. In May 1994, a — ter an increasingly problematic course o — business dealings, Hornell de — acto terminated its relationship with de — endants and perma- nently ceased selling its products to them. The problem dominating the parties’ relationship between July 1993 and early May 1994 was de — endants’ — ailure to remit timely payment — or shipments o — beverages received — rom plainti —
. Between November and December 1993, and February 1994, de — endants’ unpaid invoices grew — rom $20,000 to over $100,000, and their $31,000 check to Hornell was returned — or insu —
icient — unds. Moreover, de — endants’ 1993 sales in Canada were — ar below Spry’s initial projections. In March and April 1994, a series o — meetings, telephone calls, and letter com- munications took place between plainti —
and de — endants regarding Spry’s constant arrearages and the need — or him to obtain a line and/or letter o — credit that would place their business relationship on a more secure — ooting. These contacts included a March 27, 1994 letter to Spry — rom Vanguard Financial Group, Inc. con — irming “the approval o — a $1,500,000 revolving credit — acility” to Arizona Tea Products Ltd., which never materialized into an actual line o — credit; Spry sent Hornell a copy o — this letter in late March or early April 1994. All these exchanges demonstrate that during this period plainti —
had two distinct goals: to collect the monies owed by Spry, and to stabilize their — uture business rela- tionship based on proven, reliable credit assurances. These exchanges also establish that during March and April, 1994, Spry repeatedly broke his promises to pay by 21 • Repudiation 649
a speci
ied deadline, causing Hornell to question whether Vanguard’s $1.5 million revolving line o — credit was genuine. On April 15, 1994, during a meeting with Vultaggio, Spry arranged — or Vultaggio to speak on the telephone with Richard Worthy o — Metro Factors, Inc. The testimony as to the content o — that brie — telephone conversation is con — licting. Although Worthy testi — ied that he identi — ied himsel — and the name o — his company, Metro Factors, Inc., Vultaggio testi — ied that he believed Worthy was — rom an “unusual lending institu- tion” or bank which was going to provide Spry with a line o — credit, and that nothing was expressly said to make him aware that Worthy represented a — actoring company. Worthy also testi — ied that Vultaggio told him that once Spry cleared up the arrears, Hornell would provide Spry with a “$300,000 line o — credit, so long as payments were made on a net 14 day basis.” According to Vultaggio, he told Worthy that once he was paid in — ull, he was willing to resume shipments to Spry “so long as Steve — ul — ills his requirements with us.” Hornell’s April 18, 1994 letter to Spry con — irmed certain details o — the April 15 conversations, including that payment o — the arrears would be made by April 19, 1994. However, Hornell received no payment on that date. Instead, on April 25, Hornell received — rom Spry a proposed letter — or Hornell to address to a company named “Metro” at a post o —
ice box in Dallas, Texas. Worthy originally sent Spry a dra — t o —
this letter with “Metro Factors, Inc.” named as the addressee, but in the copy Vultag- gio received the words “Factors, Inc.” were apparently obliterated. Hornell copied the dra — t letter on its own letterhead and sent it to Metro over Vultaggio’s signature. In relevant part, the letter stated as — ollows: Gentlemen: Please be advised that Arizona Tea Products, Ltd. (ATP), o — which Steve Spry is president, is presently indebted to us in the total amount o — $79,316.24 as o —
the beginning o --- business Monday, April 25, 1994. We sell to them on “Net 14
days” terms. Such total amount is due according to the --- ollowing schedule: . . .
Upon receipt o --- $79,316.24. (which shall be applied to the oldest balances
irst) by 5:00 P.M. (EST) Tuesday, May 2, 1994 by wire trans — er(s) to the account described below, we shall recommence selling product to ATP on the
ollowing terms: 1) All invoices — rom us are due and payable by the 14th day — ollowing the release o — the related product. 2) We shall allow the outstanding balance owed to us by ATP to go up to $300,000 so long as ATP remains “current” in its payment obligations to us. Wiring instructions are as — ollows: . . . Hornell received no payment on May 2, 1994. It did receive a wire trans — er — rom Metro o — the — ull amount on May 9, 1994. Upon immediate con — irmation o — that pay- ment, Spry ordered 30 trailer loads o — “product” — rom Hornell, at a total purchase 650 21 • Repudiation
price o
$390,000 to $450,000. In the interim between April 25, 1994 and May 9, 1994, Hornell learned — rom several sources, including its regional sales manager Baumkel, that Spry’s warehouse was empty, that he had no managerial, sales or o —
ice sta —
, that he had no trucks, and that in e —
ect his operation was a sham. On May 10, 1994, Hornell wrote to Spry, acknowledging receipt o — payment and con — irming that they would extend up to $300,000 o — credit to him, net 14 days cash “based on your prior representation that you have secured a $1,500,000. US line o —
credit.” The letter also stated,
Your current balance with us re --- lects a 0 [zero] balance due. As you know,
however, we experienced considerable di ---
iculty and time wasted over a — ive week time period as we tried to collect some $130,000 which was 90–120 days past due. Accordingly, be — ore we release any more product, we are asking you to pro- vide us with a letter con — irming the existence o — your line o — credit as well as a personal guarantee that is backed up with a personal — inancial statement that can be veri — ied. Another option would be — or you to provide us with an irrevocable letter o — credit in the amount o — $300,000. Spry did not respond to this letter. Spry never even sent Hornell a copy o — his agreement with Metro Factors, Inc., which Spry had signed on March 24, 1994 and which was — ully executed on March 30, 1994. On May 26, 1994, Vultaggio met with Spry to discuss termination o — their business relationship. Vultaggio presented Spry with a letter o — agreement as to the termination, which Spry took with him but did not sign. A — ter some months o —
utile negotiations by counsel this action by Hornell ensued. At the outset, the court determines that an en — orceable contract existed between plainti —
and de — endants based on the uncontroverted — acts o — their conduct. Under Article 2 o — the Uni — orm Commercial Code, parties can — orm a contract through their conduct rather than merely through the exchange o — communications constituting an o —
er and acceptance. Section 2-204(1) states: “A contract — or sale o — goods may be made in any manner su —
icient to show agreement, including conduct by both parties which recognizes the existence o — such a contract.” Sections 2-206(1) and 2-207(3) expressly allow — or the — ormation o — a contract partly or wholly on the basis o — such conduct. 1 White & Summers, Uni — orm Commercial Code, ibid. Here, the conduct o — plainti —
and de — endants which recognized the existence o —
a contract is su
icient to establish a contract — or sale under Uni — orm Commercial Code sections 2-204(1) and 2-207(3). Both parties’ undisputed actions over a period o — many months clearly mani — ested mutual recognition that a binding obligation was undertaken. Following plainti —
’s agreement to grant de — endant an exclusive distribu- torship — or Canada, de — endant Spry took certain steps to enable him to commence 21 • Repudiation 651
his distribution operation in Canada. These steps included hiring counsel in Canada to — orm Arizona Tea Products, Ltd., the vehicle through which de — endant acted in Canada, obtaining regulatory approval — or the labelling o — Arizona Iced Tea in con-
ormity with Canadian law, and obtaining importation approvals necessary to import Arizona Iced Tea into Canada. De — endants subsequently placed orders — or the pur- chase o — plainti —
’s products, plainti —
shipped its products to de — endants during 1993 and early 1994, and de — endants remitted payments, albeit not timely nor in — ull. Under the Uni — orm Commercial Code, these uncontroverted business dealings constitute “conduct . . . su —
icient to establish a contract — or sale,” even in the absence o — a speci — ic writing by the parties. Notwithstanding the parties’ con — licting contentions concerning the duration and termination o — de — endants’ distributorship, plainti —
has demonstrated a basis — or law-
ully terminating its contract with de — endants in accordance with section 2-609 o — the Uni — orm Commercial Code. Section 2-609(1) authorizes one party upon “reasonable grounds — or insecurity” to “demand adequate assurance o — due per — ormance and until he receives such assurance . . . i — commercially reasonable suspend any per — ormance
or which he has not already received the agreed return.” The O —
icial Comment to section 2-609 explains: This section rests on the recognition o — the — act that the essential purpose o — a contract between commercial men is actual per — ormance and they do not bar- gain merely — or a promise, or — or a promise plus the right to win a lawsuit and that a continuing sense o — reliance and security that the promised per — ormance will be — orthcoming when due, is an important — eature o — the bargain. I — either the willingness or the ability o — a party to per — orm declines materially between the time o — contracting and the time — or per — ormance, the other party is threat- ened with the loss o — a substantial part o — what he has bargained — or. A seller needs protection not merely against having to deliver on credit to a shaky buyer, but also against having to procure and manu — acture the goods, perhaps turning down other customers. Once he has been given reason to believe that the buyer’s per — ormance has become uncertain, it is an undue hardship to
orce him to continue his own per — ormance. Whether a seller, as the plainti —
in this case, has reasonable grounds — or insecurity is an issue o —
act that depends upon various — actors, including the buyer’s exact words or actions, the course o — dealing or per — ormance between the parties, and the nature o — the sales contract and the industry. Subdivision (2) de — ines both “reasonableness” and “adequacy” by commercial rather than legal standards, and the O —
icial Comment notes the application o — the good — aith standard. Once the seller correctly determines that it has reasonable grounds — or insecurity, it must properly request assurances — rom the buyer. Although the Code requires that the request be made in writing, UCC § 2-609(1), courts have not strictly adhered to this 652 21 • Repudiation
ormality as long as an unequivocal demand is made. A — ter demanding assurance, the seller must determine the proper “adequate assurance.” What constitutes “adequate” assurance o — due per — ormance is subject to the same test o — commercial reasonable- ness and — actual conditions. Applying these principles to the case at bar, the overwhelming weight o — the evi- dence establishes that at the latest by the beginning o — 1994, plainti —
had reasonable grounds to be insecure about de — endants’ ability to per — orm in the — uture. De — endants were substantially in arrears almost — rom the outset o — their relationship with plainti —
, had no — inancing in place, bounced checks, and had — ailed to sell even a small — raction o — the product de — endant Spry originally projected. Reasonable grounds — or insecurity can arise — rom the sole — act that a buyer has
allen behind in his account with the seller, even where the items involved have to do with separate and legally distinct contracts, because this “impairs the seller’s expecta- tion o — due per — ormance.” Here, de — endants do not dispute their poor payment history, plainti —
’s right to demand adequate assurances — rom them and that plainti —
made such demands. Rather, de — endants claim that they satis — ied those demands by the April 15, 1994 telephone conversation between Vultaggio and Richard Worthy o — Metro Factors, Inc., — ollowed by Vultaggio’s April 18, 1994 letter to Metro, and Metro’s payment o —
$79,316.24 to Hornell, and that therea
ter plainti —
had no right to demand — urther assurance. The court disagrees with both plainti —
and de — endants in their insistence that only one demand — or adequate assurance was made in this case to which there was and could be only a single response. Even accepting de — endants’ argument that payment by Metro was the sole condition Vultaggio required when he spoke and wrote to Metro, and that such condition was met by Metro’s actual payment, the court is per- suaded that on May 9, 1994, Hornell had — urther reasonable grounds — or insecurity and a new basis — or seeking — urther adequate assurances. De — endants cite the UCC — or the proposition that “[i] — a party demands and receives speci — ic assurances, then absent a — urther change o — circumstances, the assurances demanded and received are adequate, and the party who has demanded the assur- ances is bound to proceed.” Repeated demands — or adequate assurances are within the contemplation o — section 2-609. Here, there was a — urther change o — circumstances. Vultaggio’s reported conversa- tion with Worthy on April 15 and his April 25 letter to Metro both anticipate that once payment o — de — endants’ arrears was made, Hornell would release up to $300,000 worth o — product on the — urther condition that de — endants met the 14 day payment terms. The arrangement, by its terms, clearly contemplated an opportunity — or Hor- nell to test out de — endants’ ability to make payment within 14-day periods. By placing a single order worth $390,000 to $450,000 immediately a — ter receipt o —
Metro’s payment, Spry not only demanded a shipment o
product which exceeded the proposed limit, but placed Hornell in a position where it would have no opportunity 21 • Repudiation 653
learn whether Spry would meet the 14-day payment terms, be
ore Spry again became indebted to Hornell — or a very large sum o — money. At this point, neither Spry nor Worthy had — ully in — ormed Hornell what assur- ance o — payment Metro would be able to provide. Leaving aside the question whether the — actoring arrangement with Metro constituted adequate assurance, Hornell never received any documentation to substantiate Spry’s purported agreement with Metro. Although Spry’s agreement with Metro was — ully executed by the end o — March, Spry never gave Hornell a copy o — it, not even in response to Hornell’s May 10, 1994 demand. The March 27, 1994 letter — rom Vanguard coincided with the date Spry signed the Metro agreement, but contained only a vague re — erence to a $1.5 million “revolving credit — acility,” without mentioning Metro Factors, Inc. Moreover, based on the Vanguard letter, Hornell had expected that payment would be — orthcoming, but Spry once again o —
ered only excuses and empty promises. These circumstances, coupled with in — ormation received in early May (on which it reasonably relied) that Spry had misled Hornell about the scope o — his operation, created new and more acute grounds — or Hornell’s insecurity and entitled Hornell to seek — urther adequate assurance — rom de — endants in the — orm o — a documented line o —
credit or other guarantee. De — endants’ — ailure to respond constituted a repudiation o — the distributor- ship agreement, which entitled plainti —
to suspend per — ormance and terminate the agreement. Even i — Hornell had seen Spry’s agreement with Metro, in the circumstances o — this case, the agreement did not provide the adequate assurance to which plainti —
was entitled in relation to de — endants’ $390,000–$450,000 order. Spry admitted that much o — the order was to be retained as inventory — or the summer, — or which there would be no receivables to — actor within 14 days. Although the question o — whether every aspect o — Hornell’s May 10 demand — or credit documentation was reasonable is a close one, given the entire history o — the relationship between the parties, the court deter- mines that the demand was commercially reasonable. This case is unlike Pittsburgh- Des Moines Steel Co. v. Brookhaven Manor Water Co., 532 F.2d 572 (7th Cir.1976), cited by de — endants, in that plainti —
’s demand — or credit assurances does not modi — y or contradict the terms o — an elaborated written contract. The court notes in conclusion that its evaluation o — the evidence in this case was signi — icantly in — luenced by Mr. Spry’s regrettable lack o — credibility. The court agrees with plainti —
, that to an extent — ar greater than was known to Hornell in May 1994, Mr. Spry was not truth — ul, — ailed to pay countless other creditors almost as a matter o —
course, and otherwise engaged in improper and deceptive business practices. For the — oregoing reasons, it is hereby ORDERED and ADJUDGED that plainti —
Hornell Brewing Co., Inc. have a declaratory judgment that de — endants Stephen A. Spry and Arizona Tea Products, Ltd. were duly terminated and have no continuing rights with respect to plainti —
Hornell Brewing Co.’s beverage products in Canada or elsewhere. 654 21 • Repudiation
Re --- lection Although Spry’s entire pattern o --- behavior constitutes grounds --- or reasonable inse- curity, it is di ---
icult to pin down exactly which action tipped the scales and created Hornell’s right to demand assurance. It may also be hard to — ix exactly when Hornell gained the right to cancel its contract with Spry. Remember that the parties — and their attorneys — usually do not have knowledge o — all the — acts and circumstances at the time they must decide how to act. Parties act with incomplete in — ormation about the circumstances and uncertainty with regard to how a court would inter- pret those circumstances and thereby assign rights and responsibilities. Parties who cancel a contract or threaten to cancel it i — they do not receive certain assurances o —
per
ormance are taking the risk that a court might — ind their action wrong — ul.
Discussion 1. When exactly did Spry give Hornell grounds to demand assurances? Which spe- ci --- ic action by Spry engendered this right in Hornell? 2. I --- you were the attorney --- or Hornell, when exactly would you advise your client that Spry had repudiated? Which speci --- ic act made it reasonable --- or Hornell to cancel the contract? 3. What are the risks to Hornell o --- canceling or threatening to cancel its contract with Spry be --- ore Spry technically repudiated?
Problems Problem 21.1. The Rumored Bankruptcy RingGold Pharmacy purchases its house-branded, over-the-counter inventory
rom MiracleDrug Distributors. MiracleDrug has an exclusive arrangement with RingGold. Under the contract, RingGold is not permitted to purchase house-branded products — rom any other distributor. Earlier this week, Erin Ringgold, the owner o — the pharmacy, heard a rumor — rom another reliable pharmacist that MiracleDrug was near bankruptcy. I — true, RingGold would have to quickly — ind another distributor willing to package and sell products that the pharmacy would sell under the RingGold name. What should Erin do? Should RingGold cancel the contract with MiracleDrug based upon this rumor? 21 • Repudiation 655
Problem 21.2. Circuit Boards EI manu — actures electronic components — or military and civilian aircra — t. On March 1, 2015, EI was awarded a contract to supply components — or military aircra — t. The contract included detailed speci — ications and a strict deadline o — August 31, 2015,
or delivery o — the components. On March 15, 2015, EI subcontracted with Circuits, Inc. (Circuits) to manu — acture and supply certain circuit boards that EI needed to make the components — or the military contract. EI had never worked with Circuits. The subcontract required Circuits to meet the strict speci — ications o — the military con- tract, pass sample testing during manu — acture, and deliver the required circuit boards by July 31, 2015. In early April, Al (EI’s president) learned that Circuits was having — inancial di —
icul- ties, had several judgments entered against it, and was running late on making deliv- eries under its existing contracts with other customers. Also, the — irst circuit board that EI received — rom Circuits — ailed the test. Al immediately wrote to the president o — Circuits and asked — or an updated — inancial statement — rom Circuits and written veri — ication that it would be able to deliver circuit boards complying with the contract speci — ications on time. He also asked that Circuits provide another circuit board — or testing. In early May, having received no response to his earlier demand, Al repeated his request in writing to Circuits’s president. As o — today, Al has received no response
rom Circuits. Concerned about Circuits’s ability to per — orm, Al has — ound another supplier — or the circuit boards, Boards, Inc. (Boards), which has the required circuit boards in its inventory. A purchase o — the circuit boards — rom Boards will cost EI $20,000 more (inclusive o — shipping costs) than the contract price with Circuits. Respond to the
ollowing questions with a thorough legal analysis: a. Was EI within its rights to demand assurances — rom Circuits that it would be able to — ul — ill its obligations under the subcontract, and what is the e —
ect o — Circuits’s — ailure to respond? b. Can EI buy the circuit boards it needs — rom Boards, and, i — so, is there any basis — or EI to recover the $20,000 excess cost — rom Circuits?
Problem 21.3. “No Use”
or the Space On November 8, 1973, the Federation o — Jewish Agencies o — Greater Philadelphia (the “Lessee”) and 2401 Pennsylvania Avenue Corp. (the “Lessor”) signed a two-year lease — or — our — loors o — o —
ice space at 1528 Walnut Street in Philadelphia (the “Space”). The lease term was set to begin May 1, 1974 and end April 30, 1976. An addendum acknowledged that the start date might be delayed until “no later than August 31, 1974,” due to complications involving the existing tenant. At the time o — contracting, both parties understood that part o — the Space was still occupied by Catalytic, Inc., whose lease would not expire until August 31, 1974. A 656 21 • Repudiation
contemporaneous letter
rom Lessor (which Lessee received be — ore signing the lease) noted that Catalytic expected to vacate in May and promised that Lessor would make “every e —
ort” to deliver possession as close to May 1 as possible. In mid-1974, a construction strike delayed Catalytic’s move-out. Catalytic in — ormed Lessor that it might not vacate by August 31 and requested a 90-day extension. Lessor initially declined, citing its obligations under the lease. Around the same time, Lessee purchased another property — or its permanent headquarters. A week later, Lessee’s general counsel sent a letter to Lessor stating: “We have no use — or the space in the Walnut Street building and believe there are serious doubts about the validity o — the lease under these circum- stances. We are unwilling to agree to any extension o — Catalytic’s tenancy unless we are released — rom liability under the lease.” Lessee did not take possession o — the Space, made no preparations to occupy it, and did not respond to a rent invoice sent in September. It made no — urther commu- nication. Lessor, interpreting the July letter and subsequent silence as an anticipatory repudiation, entered into an agreement with Catalytic allowing it to remain in posses- sion — or 90 more days. Lessor then sued Lessee — or breach o — contract. Did the Lessee anticipatorily repudiate the lease? See 2401 Pennsylvania Ave. Corp. v. Federation o — Jewish Agencies o — Greater Phila- delphia, 507 Pa. 166, (1985). Chapter 22 Excuse
Imagine a concert venue that sells out o
tickets — or an event months in advance, only — or the venue to burn down days be — ore the event. Or a supplier who is unable to deliver goods due to an unexpected trade embargo. Contracts are built on the premise that parties will — ul — ill their promises, but what happens when un — oreseen events disrupt per — ormance? The doctrines o — excuse address this critical question by providing a legal — ramework — or determining when obligations can be discharged due to circumstances beyond a party’s control. These doctrines ensure that contract law remains — air and adaptable by balancing the need to en — orce promises with the reality that not all risks can or should be borne by the per — orming party. The doctrines o — impossibility, impracticability, and — rustration o — purpose — orm the
oundation o — this analysis. Under common law, impossibility applies when per — ormance becomes literally impossible due to an un — oreseen event, such as the destruction o — spe- ci — ic goods or the death o — a party whose personal services are central to the contract. Impracticability, a more — lexible standard, extends relie — when per — ormance becomes unreasonably di —
icult or expensive due to un — oreseen circumstances. Frustration o —
purpose
ocuses on situations where the core purpose o — the contract is undermined, even though per — ormance remains technically possible. Each doctrine serves to allo- cate risk in ways that align with — airness and commercial reasonableness. The UCC builds on these common law principles, particularly through UCC § 2-615, which governs commercial impracticability in the sale o — goods. Unlike com- mon law impracticability, § 2-615 explicitly incorporates considerations o —
oresee- ability and the allocation o — risk between the parties. This provision ensures that risks reasonably anticipated or contractually assigned are not used to excuse per — ormance, emphasizing the importance o — clear agreements in commercial transactions. Force majeure clauses — urther illustrate how parties can proactively manage risks by de — in- ing the events that may excuse per — ormance. These doctrines are not merely theoretical but highly practical. They play a crucial role in commercial contracts, particularly during times o — crisis. The COVID-19 pan- demic, — or example, brought renewed attention to the importance o — excuse doctrines, as parties grappled with disrupted supply chains, government-imposed restrictions, and radically altered market conditions. For instance, many suppliers were unable to
ul — ill contracts due to — actory shutdowns, which — orced courts to evaluate whether such disruptions constituted impracticability under common law or commercial
657
658 22 • Excuse
impracticability under UCC § 2-615. These cases illustrated how excuse doctrines were applied to balance — airness with the need to uphold contractual obligations in unprecedented circumstances. In such cases, courts must balance the principle o —
holding parties to their promises with the recognition that en
orcing a contract under extreme circumstances may lead to unjust outcomes. This chapter explores the doctrines o — excuse in depth, analyzing their applica- tion under common law and the UCC. Through case studies and practical exam- ples, you will gain an understanding o — how courts evaluate claims o — impossibility, impracticability, and — rustration o — purpose, as well as how parties can anticipate and manage risks through care — ul dra — ting. By the end o — this chapter, you will not only understand the legal standards — or excuse but also appreciate how these doctrines serve as practical tools — or addressing uncertainty and managing risk in contractual relationships.
Rules A. Foreseeability Foreseeability is the cornerstone o --- the contract law excuse doctrines. Be --- ore deter- mining whether a party’s per --- ormance should be excused, courts --- irst analyze the event that allegedly disrupted the agreement. Not all disruptions warrant relie --- . For an event to support an excuse, it must meet speci --- ic criteria and be deemed truly un --- oreseeable at the time o --- contracting. An event, --- or purposes o --- excuse, is an occurrence that materially alters the con- ditions under which the contract was expected to be per --- ormed. Examples o --- such events include natural disasters, the destruction o --- essential goods, signi --- icant changes in law, or unexpected economic disruptions. To quali --- y as a basis --- or excuse, the event must --- undamentally a ---
ect per — ormance, going beyond mere inconvenience or addi- tional cost. For instance, i — a supplier agrees to deliver oranges to a buyer but the orchard’s entire crop is destroyed by an unprecedented blight, this destruction constitutes an event that may trigger an excuse analysis. By contrast, i — the supplier’s costs merely rise by 20% due to seasonal labor shortages, a — oreseeable industry risk, the increased cost alone does not quali — y as a disruptive event. Courts expect parties to account — or ordinary risks inherent in their business dealings. Once an event is identi — ied, courts evaluate its — oreseeability. Foreseeability asks whether the event was reasonably predictable at the time the contract was made. I —
the event was
oreseeable, the parties are generally expected to have accounted — or it in their agreement, either through speci — ic provisions or by implicitly bearing the associated risks. Courts are less likely to excuse per — ormance in such cases. For example, consider a contract — or the delivery o — steel during a period o — geopo litical tension. I — war breaks out in a region central to steel production, leading to 22 • Excuse 659
embargoes, courts will likely
ind the event — oreseeable i — the tension was widely reported be — ore the contract was signed. The supplier could have anticipated poten- tial disruptions and incorporated clauses addressing this risk. On the other hand, i —
the steel mill is destroyed by an unexpected earthquake in a region with no history o
seismic activity, the event would likely be deemed un
oreseeable. Another example highlights how courts analyze — oreseeability concerning industry norms. Imagine a company that contracts to ship goods through a speci — ic canal. I —
the canal is temporarily closed due to routine maintenance scheduled and publicly announced be — ore the contract’s — ormation, the closure is — oreseeable. By contrast, i —
an unannounced blockade occurs due to sudden political upheaval, the closure may quali — y as un — oreseeable. The distinction hinges on what a reasonable party in the same industry could have anticipated at the time o — contracting. Courts also evaluate — oreseeability in the context o — speci — ic clauses, such as — orce majeure provisions. These clauses typically enumerate events considered un — oresee- able and beyond the parties’ control. I — the event aligns with the types speci — ied in the clause, such as “natural disasters” or “government actions,” it is more likely to support an excuse. However, even with such a clause, the party invoking it must show that the event genuinely disrupted per — ormance in a way that was not contemplated or mitigated by the agreement. Foreseeability balances — airness and predictability. By limiting excuses to un — ore- seeable events, courts encourage care — ul dra — ting and allocation o — risks. At the same time, they provide relie — in truly exceptional circumstances, in order to ensure that parties are not un — airly penalized — or events beyond their reasonable anticipation. This — ocus on — oreseeability underscores its critical role in determining whether the doctrines o — excuse apply.
B. Common Law Doctrines o
Excuse The common law doctrines o — excuse provide the — oundation — or determining when a party’s per — ormance may be discharged due to un — oreseen events. These doc- trines — impossibility, impracticability, and — rustration o — purpose — o —
er distinct but related paths — or relie — . Together, they balance the principle o — holding parties accountable — or their agreements with ensuring — airness when extraordinary circum- stances arise.
- Impossibility Impossibility applies when per — ormance becomes objectively impossible. This means that no one, not just the obligated party, could per — orm under the con- tract. Common examples include the destruction o — a unique item necessary — or per — ormance or the death o — a person essential to — ul — illing the contract. The landmark case Taylor v. Caldwell, 122 E.R. 309 (1863), illustrates this doc- trine. In Taylor, a music hall was destroyed by — ire be — ore the date o — a scheduled 660 22 • Excuse
per
ormance. The court excused both parties, reasoning that the continued existence o — the music hall was an implied condition precedent to the obligation to rent the hall. Because per — ormance was impossible, the contract was discharged. This case demonstrates one well-established basis — or impossibility: the destruction o — a thing necessary — or per — ormance. Without that thing, per — ormance is impossible, and its nonexistence constitutes a — ailure o — a basic assumption underlying the contract. Restatement (Second) o — Contracts § 263 explains this principle: I — the existence o — a speci — ic thing is necessary — or the per — ormance o — a duty, its — ailure to come into existence, destruction, or such deterioration as makes per — ormance impracticable is an event the non-occurrence o — which was a basic assumption on which the contract was made. Similarly, when a contract requires personal per — ormance, the death or incapacity o — the obligated individual is treated like the destruction o — a necessary thing. R2d § 262 re — lects this: I — the existence o — a particular person is necessary — or the per — ormance o — a duty, his death or such incapacity as makes per — ormance impracticable is an event the non-occurrence o — which was a basic assumption on which the con- tract was made. For example, suppose a collector contracts to purchase an original Bob Ross paint- ing that Ross personally planned to create. I — Ross dies be — ore completing the painting, the contract would be discharged — or impossibility because Ross’s unique artistic vision and personal involvement were essential. Contrast this with a contract — or #23 o — 50 in Ross’s “Mountain Serenity” series, where trained artists produce indistinguishable paintings and Ross only adds his signature. I — Ross dies be — ore signing #23, per — ormance becomes partially impossible. A court might justi — y modi — ications, such as allowing the collector to purchase an unsigned version or receive a substitute remedy. Despite its clear applications, impossibility is interpreted narrowly. Courts require strong evidence that per — ormance is entirely un — easible. For example, i — a contractor’s machinery breaks down but replacement equipment is available, impossibility does not apply. Courts expect parties to mitigate challenges unless doing so would impose extraordinary burdens.
- Impracticability Impracticability broadens the doctrine o — impossibility by addressing situations where per — ormance, while technically possible, has become excessively di —
icult or expensive due to un — oreseen events. R2d § 261 establishes this doctrine, excusing per — ormance when: Where, a — ter a contract is made, a party’s per — ormance is made impracti- cable without his — ault by the occurrence o — an event the non-occurrence o —
22 • Excuse 661
which was a basic assumption on which the contract was made, his duty . . .
is discharged. . . .
In Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966), excerpted below, a shipping company argued that the closure o --- the Suez Canal made its per --- ormance impracticable. The court rejected the claim, --- inding that the alternate route was merely inconvenient and not unreasonably expensive. This case highlights how courts weigh the severity o --- the hardship.
Increased costs alone do not justi --- y impracticability. The disruption must signi --- i- cantly alter the nature o --- per --- ormance beyond the normal risks o --- a contract. For instance, a natural gas supplier might claim impracticability i --- a sudden embargo causes prices to skyrocket ten --- old, but not i --- market --- luctuations lead to modest increases in costs. Similarly, a builder contracting to construct a bridge might claim impracticability i --- a trade embargo makes steel ten times more expensive, --- undamen- tally altering the agreement’s assumptions.
-
Frustration o
Purpose Frustration o — purpose — ocuses on the reason behind the contract rather than the act o — per — ormance itsel — . Under this doctrine, a party may be excused i — an un — ore- seen event destroys the principal purpose o — the contract, rendering per — ormance essentially meaningless. In Krell v. Henry, 2 K.B. 740 (1903), a tenant rented an apartment to view the coro- nation o — King Edward VII. When the coronation was postponed, the court excused the tenant, reasoning that the purpose o — the rental — viewing the coronation — had been — rustrated. Renting the apartment was neither impossible nor impracticable, but the coronation’s cancellation destroyed the contract’s core purpose. R2d § 265 re — lects this principle: Where, a — ter a contract is made, a party’s principal purpose is substantially
rustrated without his — ault by the occurrence o — an event the non-occurrence o — which was a basic assumption on which the contract was made, his remain- ing duties to render per — ormance are discharged, unless the language or the circumstances indicate the contrary. Courts closely scrutinize whether the — rustrated purpose was truly central to the contract and whether the event was un — oreseeable.
C. Excuse under the UCC For contracts involving the sale o — goods, the UCC provides speci — ic rules — or deter- mining when per — ormance may be excused due to un — oreseen events. These rules,
ound in UCC §§ 2-613 and 2-615, adapt and re — ine common law doctrines o — excuse 662 22 • Excuse
to address the unique circumstances o
goods transactions. While the UCC and com- mon law share similar principles, the UCC’s provisions are tailored to the commercial context, emphasizing practicality and — airness.
-
Casualty to Identi
ied Goods Under UCC § 2-613, per — ormance is excused i — speci — ic goods identi — ied in the con- tract are destroyed, damaged, or lost without — ault be — ore the risk o — loss passes to the buyer. This provision mirrors the common law doctrine o — impossibility but applies exclusively to contracts — or the sale o — goods where the goods’ identity is essential to per — ormance. Suppose a jeweler contracts to sell a rare diamond that is speci — ically identi — ied in the agreement to a buyer. I — the diamond is destroyed in a — ire be — ore delivery and without the seller’s — ault, the contract is discharged under UCC § 2-613. The dia- mond’s destruction makes per — ormance objectively impossible because the contract depends on delivering that speci — ic diamond. However, i — the goods are not identi — ied or i — suitable substitutes are available, UCC § 2-613 does not apply. For example, i — a seller agrees to deliver 1,000 generic widgets but a — ire destroys part o — the inventory, the seller may still be required to source replacement widgets. The UCC’s — ocus on commercial practicality means that per — ormance is only excused when substitution is truly impossible.
-
Failure o
Presupposed Conditions (UCC § 2-615) UCC § 2-615 expands on the common law doctrine o — impracticability by excus- ing per — ormance when un — oreseen contingencies make per — ormance commercially impracticable. This provision applies to all sellers o — goods and emphasizes — airness and e —
iciency in addressing disruptions. Under § 2-615(a), a seller is excused — rom per — ormance i — an un — oreseen event occurs, the non-occurrence o — which was a basic assumption o — the contract, and the event makes per — ormance impracticable. Additionally, the seller must have acted in good — aith and without — ault. Unlike § 2-613, which — ocuses on the destruction o —
speci
ic goods, § 2-615 addresses broader contingencies, such as supply chain disrup- tions, embargoes, or signi — icant labor shortages. For instance, a supplier contracts to deliver steel to a manu — acturer at a — ixed price. I — an unanticipated international embargo on steel imports makes pro- curement ten times more expensive, the supplier might invoke UCC § 2-615 to excuse per — ormance. The court would consider whether the cost increase renders per — ormance commercially impracticable and whether the event was un — oreseeable at the time o — contracting. UCC § 2-615(b) requires sellers to allocate available goods among customers in a reasonable and — air manner i — partial per — ormance is possible. This allocation 22 • Excuse 663
requirement ensures that sellers do not act opportunistically by
avoring higher- paying customers. For example, i — a drought reduces a grain supplier’s harvest, the supplier must distribute the remaining grain equitably among its customers.
- Procedural Requirements The UCC imposes additional procedural requirements when a seller seeks excuse under § 2-613 or § 2-615. Most notably, the seller must provide timely notice to the buyer. This notice must explain the nature o — the disruption and, where applicable, outline any proposed modi — ications or partial per — ormance. The notice requirement ensures transparency and allows the buyer to take appropriate steps, such as sourcing alternatives or renegotiating the agreement. For example, i — a lumber supplier cannot deliver the agreed quantity due to a — orest
ire, the supplier must promptly noti — y the buyer. Failure to provide notice could result in the supplier’s losing the protection o — the UCC’s excuse provisions.
-
Di
erences between the UCC and Common Law While the UCC’s excuse provisions share — oundational principles with com- mon law doctrines, they emphasize the commercial realities o — goods transactions. The UCC explicitly addresses partial per — ormance, allocation o — goods, and notice requirements, re — lecting its — ocus on maintaining — airness and e —
iciency in commerce. Additionally, the UCC’s provisions are o — ten more — orgiving o — disruptions, provided the seller acts in good — aith and adheres to procedural requirements. However, the UCC retains the common law’s high bar — or excuse. Sellers must demonstrate that the disruption was un — oreseeable, substantial, and beyond their con- trol. By balancing these requirements with practical solutions, the UCC ensures that excuse doctrines serve both — airness and predictability in commercial transactions.
D. Force Majeure Clauses and Contractual Risk Allocation Force majeure clauses are a common contractual mechanism — or managing the risk o — un — oreseen events that might disrupt per — ormance. Unlike the doctrines o —
excuse under the common law and the UCC, which operate as de
ault rules, — orce majeure clauses allow parties to preemptively allocate risk and de — ine the scope o —
permissible excuses within their agreement. By speci
ying the types o — events that excuse per — ormance, these clauses provide greater predictability and clarity in the event o — a disruption. A — orce majeure clause typically identi — ies extraordinary events or circumstances that excuse a party’s per — ormance. Common examples include natural disasters (e.g., hurricanes, earthquakes, — loods), acts o — war, terrorism, labor strikes, pandemics, and 664 22 • Excuse
governmental actions. The clause may also speci
y procedural requirements, such as notice obligations, and outline the remedies available to the a —
ected party. For instance, a standard — orce majeure clause might state: “Neither party shall be liable — or any — ailure or delay in per — ormance due to events beyond their reasonable control, including but not limited to acts o — God, war, labor disputes, or governmen- tal restrictions, provided that the a —
ected party provides timely written notice to the other party.” While — orce majeure clauses address un — oreseen events, the concept o —
oresee- ability plays a critical role in their interpretation. Courts o — ten examine whether the event was genuinely un — oreseeable at the time o — contracting and whether the clause adequately anticipated the risk. I — the event was — oreseeable but not explicitly listed in the clause, courts may be reluctant to excuse per — ormance. Consider a contract executed during the early stages o — a geopolitical con — lict. I —
the
orce majeure clause — ails to mention war or embargoes, a court might — ind that the parties should have — oreseen potential disruptions and accounted — or them. Con- versely, a clause explicitly listing such events would likely excuse per — ormance in the event o — an escalation.
Dra --- ting E ---
ective Force Majeure Clauses The e —
ectiveness o — a — orce majeure clause depends on its clarity and comprehensiveness. Key considerations when dra — ting include: Speci — icity. The clause should clearly de — ine the events that trigger excuse. Broad, vague terms like “un — oreseen circumstances” may lead to disputes. Causation. The clause should require the party seeking excuse to dem- onstrate that the event directly caused the — ailure or delay in per — ormance. Mitigation. Many clauses include a duty to mitigate the impact o — the disruptive event. For example, a party might be required to explore alter- native means o — per — ormance. Notice. The clause should speci — y how and when the a —
ected party must noti — y the other party o — the disruption. For example, consider this clause: I — a party’s per — ormance is delayed or prevented due to acts o — God, natural disasters (including earthquakes, — loods, and hurricanes), pandemics, acts o — government or regulatory authorities, war, riots, or other similar events beyond the party’s reasonable control (each, a “Force Majeure Event”), such party shall: 22 • Excuse 665
(a) noti --- y the other party in writing within 5 days o ---
becoming aware o --- the Force Majeure Event, speci --- ying the
nature and expected duration o --- the disruption;
(b) demonstrate that the Force Majeure Event directly
caused the delay or --- ailure to per --- orm; and
(c) make reasonable e ---
orts to mitigate the e —
ects o — the Force Majeure Event, including seeking alternative methods to per — orm its obligations. Per — ormance shall be excused only — or the duration o — the Force Majeure Event and only to the extent that the event prevents per — ormance. The above — orce majeure clause demonstrates the key considerations o —
speci --- icity, causation, mitigation, and notice by clearly de --- ining the obliga-
tions o --- the parties and providing detailed guidance on how they should
respond to a disruptive event. Speci --- icity is addressed by listing examples
o --- quali --- ying events, such as natural disasters, pandemics, and acts o ---
government, which eliminates ambiguity and reduces the likelihood o ---
disputes over whether a particular event quali --- ies as --- orce majeure. The
requirement to demonstrate that the event directly caused the delay or
ailure ensures that causation is explicitly established, thus preventing par- ties — rom using unrelated disruptions as an excuse — or nonper — ormance. Mitigation is addressed by requiring the a —
ected party to make reasonable e —
orts to reduce the impact o — the disruption, including “seeking alterna- tive methods o — per — ormance,” which clari — ies the expectations placed on the party invoking the clause. Finally, the clause incorporates a clear notice requirement mandating written noti — ication within a speci — ied time — rame and detailing the nature and expected duration o — the disruption. These provisions ensure that the clause is both practical and en — orceable by bal- ancing the need — or — lexibility in extraordinary circumstances with the parties’ mutual reliance on the terms o — their agreement.
The application o
orce majeure clauses o — ten depends on the speci — ic language o —
the agreement and the context o
the disruption. During the COVID-19 pandemic,
or instance, many disputes arose over whether generic re — erences to “acts o — God” or “governmental actions” encompassed pandemic-related restrictions. Courts analyz- ing these cases have emphasized the importance o — precise language and the causal link between the event and nonper — ormance. Consider a manu — acturer unable to deliver goods due to a government-imposed lockdown. I — the contract’s — orce majeure clause explicitly includes “pandemics” and “governmental orders,” the manu — acturer is likely to be excused. However, i — the clause 666 22 • Excuse
is silent on such events, the manu
acturer might need to rely on de — ault doctrines o —
excuse, which impose stricter requirements. Force majeure clauses coexist with, but do not replace, the common law and UCC doctrines o — excuse. Instead, they supplement these de — ault rules by allowing parties to de — ine their own standards — or excuse. For instance, a — orce majeure clause might provide relie —
or events that would not satis — y the strict requirements o — impractica- bility or — rustration o — purpose. However, i — the clause does not cover the event, the de — ault rules may still apply. This interplay is particularly important in commercial contexts where parties value predictability and control over risk allocation. By care — ully dra — ting — orce majeure clauses, parties can reduce uncertainty and avoid reliance on judicial interpretation o — common law or statutory doctrines.
E. Re
lections on Excuse The doctrines o — excuse — impossibility, impracticability, and — rustration o —
purpose — illustrate the legal system’s commitment to balancing the rigid en
orce- ment o — contracts with — airness in extraordinary circumstances. These doctrines rec- ognize that while contracts are built on promises, those promises must be understood within their context. Context includes un — oreseen events such as the destruction o —
speci
ic goods, sudden changes in law or regulation, or widespread disruptions like natural disasters. By addressing these realities, the doctrines ensure that contractual obligations align with the practical challenges parties may — ace, which — acilitates — air exchanges and e —
ective risk management. Impossibility, the strictest o — the excuse doctrines, emphasizes the importance o —
clear contractual terms and the allocation o
risks. By requiring per — ormance to be lit- erally impossible, this doctrine underscores the signi — icance o —
oreseeability and the need — or parties to account — or potential disruptions when dra — ting their agreements. Impracticability, by contrast, introduces a more — lexible standard. It provides relie —
when per
ormance becomes unreasonably di —
icult or expensive due to un — oreseen events, re — lecting the principle that — airness sometimes necessitates rebalancing obli- gations. Similarly, — rustration o — purpose addresses situations where the — undamen- tal purpose o — a contract is destroyed, making per — ormance inequitable even when it remains technically possible. These doctrines collectively ensure that contracts remain — air and meaning — ul under extraordinary circumstances. The UCC’s treatment o — commercial impracticability under § 2-615 builds on these common law principles while providing additional clarity. It explicitly addresses
oreseeability, causation, and risk allocation, to ensure that disruptions not reason- ably anticipated or contractually assigned do not excuse per — ormance. Force majeure clauses, commonly included in commercial contracts, — urther illustrate how these doc- trines operate in practice. By de — ining speci — ic events that excuse per — ormance, these clauses enable parties to proactively allocate risks and reduce the potential — or disputes. 22 • Excuse 667
The COVID-19 pandemic underscored the relevance and adaptability o
excuse doctrines. During the pandemic, courts grappled with cases involving disrupted sup- ply chains, government-imposed restrictions, and altered market conditions. These disputes highlighted the tension between holding parties to their promises and avoid- ing mani — estly un — air outcomes. Courts relied on doctrines o — excuse to navigate these challenges, which rea —
irmed excuse’s importance in maintaining contractual integrity and — airness during unprecedented times. Ultimately, the doctrines o — excuse embody the dual goals o — contract law: pre- dictability and — airness. Doctrines like impossibility uphold contractual reliability by en — orcing strict standards, while — rustration o — purpose ensures — airness by address- ing situations where the contract’s core purpose has been undermined. This balance enables the legal system to uphold agreements while adapting to extraordinary cir- cumstances, as demonstrated in cases involving natural disasters, regulatory changes, and other un — oreseen events. By understanding these doctrines, students gain the ability not only to evaluate claims o — excuse but also to dra — t contracts that anticipate and e —
ectively manage risks, which ensures continued stability and equity in contrac- tual relationships.
Cases
Reading Taylor v. Caldwell. Historically, courts held parties to contracts regardless o — circumstances. By the mid-nineteenth century, however, courts recognized that parties should not be — orced to carry out obligations that were made impossible by some intervening event. In this — amous case, the plainti —
s agreed to rent Surrey Music Hall and Gardens — rom de — endant. According to the court, be — ore the appointed date, the hall burned down due to a — ire that was neither party’s — ault. (The Western Morning News o — Plymouth, Devon, England, reported on June 12, 1861, that the — ire was due to negligence o — third-party plumbing contractors that de — en- dant hired.) The court held that the de — endant was excused — rom providing the hall because it could not have — oreseen its burning down. Likewise, the plainti —
was not responsible
or this risk. Accordingly, the court excused both parties’ per — ormances under the agreement. The next two cases, Taylor and Krell, are perhaps two o — the most important cases under English law — or understanding modern American contract law. Although the American common law system was substantially inherited — rom the English system, the systems have been dri — ting apart — rom even be — ore the American Revolution began in 1775, yet they have also dovetailed — rom time to time since then. 668 22 • Excuse
Taylor v. Caldwell
122 E.R. 309 (1863) The declaration alleged that by an agreement, bearing date the 27th May, 1861, the de --- endants [Caldwell & Bishop] agreed to let, and the plainti ---
s [Taylor & Lewis] agreed to take, on the terms therein stated, The Surrey Gardens and Music Hall, New- ington, Surrey, — or the — ollowing days, that is to say, Monday the 17th June, 1861, Mon- day the 15th July, 1861, Monday the 5th August, 1861, and Monday the 19th August, 1861, — or the purpose o — giving a series o —
our grand concerts and day and night — êtes, at the Gardens and Hall on those days respectively, at the rent or sum o — £1001 — or each o — those days. On the trial, be — ore Blackburn J., at the London Sittings a — ter Michaelmas Term, 1861, it appeared that the action was brought on the — ollowing agreement: Royal Surrey Gardens, 27th May, 1861. Agreement between Messrs. Caldwell & Bishop, o — the one part, and Messrs. Taylor & Lewis o — the other part, whereby the said Caldwell & Bishop agree to let, and the said Taylor & Lewis agree to take, on the terms hereina — ter stated, The Surrey Gardens and Music Hall, Newington, Surrey, — or the — ollowing days: [Monday the 17th June, 1861, Monday the 15th July, 1861, Monday the 5th August, 1861, and Monday the 19th August, 1861] — or the purpose o — giving a series o —
our grand concerts and day and night — êtes at the said Gardens and Hall on those days respectively at the rent or sum o — £1001 — or each o — the said days. The said Caldwell & Bishop agree to — ind and provide at their own sole expense, on each o — the a — oresaid days, — or the amusement o — the public and persons then in the said Gardens and Hall, an e —
icient and organised military and quadrille band, the united bands to consist o —
rom thirty- — ive to — orty members; al — resco entertainments o — various descriptions; coloured minstrels,
ireworks and — ull illuminations; a ballet or divertissement, i — permitted; a wizard and Grecian statues; tight rope per — ormances; ri — le galleries; air gun shooting; Chinese and Parisian games; boats on the lake, and (weather per- mitting) aquatic sports, and all and every other entertainment as given nightly during the months and times above mentioned. . . . And the said Taylor & Lewis agree to pay the a — oresaid respective sum o —
£1001. in the evening o --- the said respective days by a crossed cheque, and also
to --- ind and provide, at their own sole cost, all the necessary artistes --- or the said
concerts, including Mr. Sims Reeves, God’s will permitting. [The contract was signed by signed by J. Caldwell and C. Bishop and witnessed by S. Denis.] On the 11th June the Music Hall was destroyed by an accidental --- ire, so that it became impossible to give the concerts. The judgment o --- the Court was now delivered by BLACKBURN J.
22 • Excuse 669
[Blackburn’s recitation o
the — acts omitted as it is virtually identical to the state- ment o —
acts given by the court reporter above.] The e —
ect o — the whole is to shew that the existence o — the Music Hall in the Surrey Gardens in a state — it — or a concert was essential — or the — ul — ilment o — the contract, such entertainments as the parties contemplated in their agreement could not be given without it. A — ter the making o — the agreement, and be — ore the — irst day on which a concert was to be given, the Hall was destroyed by — ire. This destruction, we must take it on the evidence, was without the — ault o — either party, and was so complete that in conse- quence the concerts could not be given as intended. And the question we have to decide is whether, under these circumstances, the loss which the plainti —
s have sus- tained is to — all upon the de — endants. The parties when — raming their agreement evi- dently had not present to their minds the possibility o — such a disaster, and have made no express stipulation with re — erence to it, so that the answer to the question must depend upon the general rules o — law applicable to such a contract.
Figure 22.1. The Adelphi Theatre Calendar revised, reconstructed and ampli --- ied.
Credit: Al --- red L. Nelson, Gilbert B. Cross, Joseph Donohue. CC-A 3.0 License.
[Lengthy discussion o
precedent in English and Roman law omitted. In summary, where promises are independent, the contractor must per — orm or pay damages — or 670 22 • Excuse
not per
orming. But when there is some express stipulation that the destruction o — a person or thing shall excuse per — ormance, or when such excuse is a condition implied by law, then the destruction o — said person or thing shall excuse the per — ormance conditioned on its existence.] [Here,] excuse is by law implied, because — rom the nature o — the contract it is apparent that the parties contracted on the basis o — the continued existence o — the particular person or chattel. In the present case, looking at the whole contract, we
ind that the parties contracted on the basis o — the continued existence o — the Music Hall at the time when the concerts were to be given; that being essential to their per — ormance. We think, there — ore, that the Music Hall having ceased to exist, without — ault o —
either party, both parties are excused, the plainti
s — rom taking the gardens and pay- ing the money, the de — endants — rom per — orming their promise to give the use o — the Hall and Gardens and other things. Consequently the rule must be absolute to enter the verdict — or the de — endants [Caldwell & Bishop, such that they do not have to pay
or — ailing to provide the use o — Surrey Music Hall]. Rule absolute.
Re --- lection While it may seem obvious a --- ter reading Taylor that neither party should be obli- gated to per --- orm under a contract where its subject matter was destroyed, the court does not address why the owners o --- Surrey Music Hall did not bear responsibility --- or ensuring it remained. Why did the owners o --- the hall not bear the risk o --- its loss? The owners were in a better position to prevent --- ires or to maintain insurance that would cover the liability resulting --- rom this loss.
Discussion 1. Consider how the doctrine o --- mistake would apply to this case. A party is only entitled to void a contract on the basis o --- mistake where that party does not bear the risk o --- that mistake. Should a party be able to use the excuse de --- ense where its per --- ormance became impossible due to the party’s own --- ault? What would be the
economic impact o --- such a rule? 2. How could a court determine whether the impossibility o --- a party’s per --- ormance is due to that party’s --- ault? Tort law uses the idea o --- proximate causation to determine
ault — or negligence. Does contract law incorporate some idea o — proximate causa- tion — or impossibility? Should it? I — so, how? 22 • Excuse 671
Reading Krell v. Henry. In Taylor, the owner-seller was excused, but buyers can be excused as well. In Krell v. Henry, 2 K.B. 740 (1903), another English case, a man rented an apartment at a signi — icantly above-market rate simply because it a —
orded an excellent view o — the King’s coronation. The King, however, got appendicitis, and the coronation was postponed. A court — ound that the buyer was excused — rom renting the room because his purpose in renting it was com- pletely — rustrated by the postponement.
Krell v. Henry
2 K.B. 740 (1903) VAUGHAN WILLIAMS, L.J. The real question in this case is the extent o --- the application in English law o --- the principle o --- the Roman law which has been adopted and acted on in many English decisions, and notably in the case o --- Taylor v. Caldwell. That case at least makes it clear that where, --- rom the nature o --- the contract, it appears that the parties must
rom the beginning have known that it could not be — ul — illed unless, when the time
or the — ul — ilment o — the contract arrived, some particular speci — ied thing continued to exist, so that when entering into the contract they must have contemplated such continued existence as the — oundation o — what was to be done; there, in the absence o — any express or implied warranty that the thing shall exist, the contract is not to be considered a positive contract, but as subject to an implied condition that the parties shall be excused in case, be — ore breach, per — ormance becomes impossible — rom the perishing o — the thing without de — ault o — the contractor. Thus — ar it is clear that the principle o — the Roman law has been introduced into the English law. The doubt in the present case arises as to how — ar this principle extends. The Roman law dealt with obligationes de certo corpore. Whatever may have been the limits o — the Roman law, the case o — Nickoll v. Ashton makes it plain that the English law applies the principle not only to cases where the per — ormance o — the contract becomes impossible by the cessation o — existence o — the thing which is the subject-matter o — the contract, but also to cases where the event which renders the contract incapable o — per — ormance is the cessation or non-existence o — an express condition or state o — things, going to the root o — the contract, and essen- tial to its per — ormance. Now what are the — acts o — the present case? The contract is contained in two letters o — June 20 which passed between the de — endant and the plainti —
’s agent, Mr. Cecil Bisgood. These letters do not mention the coronation [o — King Edward VII and Alexandria that was scheduled — or June 26, 1902], but speak merely o — the taking o — [plainti —
and owner] Mr. Krell’s chambers, or, rather, o — the use o — them, in the 672 22 • Excuse
daytime o
June 26 and 27, — or the sum o — £751, £251 then paid, balance £501 to be paid on the 24th. But the a —
idavits, which by agreement between the parties are to be taken as stating the — acts o — the case, shew that the plainti —
exhibited on his premises, third — loor, 56A, Pall Mall, an announcement to the e —
ect that windows to view the Royal coronation procession were to be let, and that the de — endant was induced by that announcement to apply to the housekeeper on the premises, who said that the owner was willing to let the suite o — rooms — or the purpose o — seeing the Royal procession — or both days, but not nights, o — June 26 and 27. In my judgment the use o — the rooms was let and taken — or the purpose o — seeing the Royal procession. It was not a demise o — the rooms, or even an agreement to let and take the rooms. It is a licence to use rooms — or a particular purpose and none other. And in my judgment the taking place o — those processions on the days proclaimed along the proclaimed route, which passed 56A, Pall Mall, was regarded by both contracting parties as the
oundation o — the contract; and I think that it cannot reasonably be supposed to have been in the contemplation o — the contracting parties, when the contract was made, that the coronation would not be held on the proclaimed days, or the processions not take place on those days along the proclaimed route; and I think that the words imposing on the de — endant the obligation to accept and pay — or the use o — the rooms
or the named days, although general and unconditional, were not used with re — erence to the possibility o — the particular contingency which a — terwards occurred. It was suggested in the course o — the argument that i — the occurrence, on the pro- claimed days, o — the coronation and the procession in this case were the — oundation o — the contract, and i — the general words are thereby limited or quali — ied, so that in the event o — the nonoccurrence o — the coronation and procession along the proclaimed route they would discharge both parties — rom — urther per — ormance o — the contract. [Counsel argued that the — ollowing hypothetical is analogous to the instant case:] I — a cabman was engaged to take someone to Epsom on Derby Day at a suitable enhanced price — or such a journey, say £10, both parties to the contract would be discharged in the contingency o — the race at Epsom — or some reason becoming impos- sible. [This was counsel’s e —
ort to make a slippery slope argument; that is, i — the court excuses the renter’s payment in this case, it must also excuse many other payments, and this cannot be the correct result because too many contractual promises would thus be excused.] [Judge Williams distinguished the counsel’s hypothetical thus:] But I do not think this — ollows, — or I do not think that in the cab case the happening o — the race would be the — oundation o — the contract. No doubt the purpose o — the engager would be to go to see the Derby, and the price would be proportionately high; but the cab had no special quali — ications — or the purpose which led to the selection o — the cab — or this particular occasion. Any other cab would have done as well. 22 • Excuse 673
Figure 22.2. Procession passing along a busy London thorough --- are during the Coronation o --- Edward VII (1841–1910) on August 9, 1902. The view --- rom the apartment
on Pall Mall would have been similar to this. Public domain work.
Moreover, I think that, under the cab contract, the hirer, even i
the race went o —
, could have said, “Drive me to Epsom; I will pay you the agreed sum; you have noth- ing to do with the purpose — or which I hired the cab,” and that i — the cabman re — used he would have been guilty o — a breach o — contract, there being nothing to quali — y his promise to drive the hirer to Epsom on a particular day. Whereas in the case o — the coronation, there is not merely the purpose o — the hirer to see the coronation procession, but it is the coronation procession and the relative position o — the rooms which is the basis o — the contract as much — or the lessor as the hirer; and I think that i — the King, be — ore the coronation day and a — ter the contract, had died, the hirer could not have insisted on having the rooms on the days named. It could not in the cab case be reasonably said that seeing the Derby race was the
oundation o — the contract, as it was o — the licence in this case. Whereas in the present case, where the rooms were o —
ered and taken, by reason o — their peculiar suitability
rom the position o — the rooms — or a view o — the coronation procession, surely the view o — the coronation procession was the — oundation o — the contract, which is a very di — — erent thing — rom the purpose o — the man who engaged the cab — namely, to see the race — being held to be the — oundation o — the contract. [The judge, having distinguished the Epsom cab analogy — rom the instant case, goes on to discuss general rules that can apply in all such cases.] 674 22 • Excuse
Each case must be judged by its own circumstances. In each case one must ask onesel — : 1. First, what, having regard to all the circumstances, was the — oundation o — the contract? 2. Secondly, was the per — ormance o — the contract prevented? 3. Thirdly, was the event which prevented the per — ormance o — the contract o —
such a character that it cannot reasonably be said to have been in the contem-
plation o --- the parties at the date o --- the contract? I --- all these questions are answered in the a ---
irmative (as I think they should be in this case), I think both parties are discharged — rom — urther per — ormance o — the contract. I think that the coronation procession was the — oundation o — this contract, and that the non-happening o — it prevented the per — ormance o — the contract; and, secondly, I think that the non-happening o — the procession, to use the words o — Sir James Hannen in Baily v. De Crespigny, was an event o — such a character that it cannot reasonably be supposed to have been in the contemplation o — the contracting parties when the contract was made, and that they are not to be held bound by general words which, though large enough to include, were not used with re — erence to the possibility o — the par ticular contingency which a — terwards happened. The test seems to be whether the event which causes the impossibility was or might have been anticipated and guarded against. It seems di —
icult to say, in a case where both parties anticipate the happening o — an event, which anticipation is the — ounda- tion o — the contract, that either party must be taken to have anticipated, and ought to have guarded against, the event which prevented the per — ormance o — the contract. [Extensive discussion o — English case law omitted.] It is not essential to the application o — the principle o — Taylor v. Caldwell that the direct subject o — the contract should perish or — ail to be in existence at the date o — per — ormance o — the contract. It is su —
icient i — a state o — things or condition expressed in the contract and essential to its per — ormance perishes or — ails to be in existence at that time. In the present case the condition which — ails and prevents the achievement o — that which was, in the contemplation o — both parties, the — oundation o — the contract, is not expressly mentioned either as a condition o — the contract or the purpose o — it; but I think — or the reasons which I have given that the principle o — Taylor v. Caldwell ought to be applied. This disposes o — the plainti —
’s claim — or £501 unpaid balance o — the price agreed to be paid — or the use o — the rooms. . . . I think this appeal ought to be dismissed.
Re --- lection Krell o ---
ers a more sophisticated analysis than Taylor, which is unsurprising given that Krell bene — ited — rom Taylor and other precedent analyses. But the Krell court does ©
22 • Excuse 675
Figure 22.3. Le Derby de 1821 à Epsom, an 1821 painting by
Théodore Géricault in the Louvre Museum, showing The Derby
(the main horse race or “course de chevaux”) o --- that year. Public
domain work distributed by DIRECTMEDIA Publishing GmbH.
© © not seem to explicitly discuss why the tenant (Henry) or, alternatively, the landlord (Krell) bears any risk or responsibility — or the cancellation o — an event. Instead, the court seems to excuse the tenant because the landlord is in a better position to a —
ord the loss o — the rental. (The landlord can re-let the premises, presumably — or a similar rate, when the coronation is reconvened.) This appears to be based on the reliance interest, which you will learn about in Chapter 24. But it does not account — or the expectancy interest, which, as you will learn, is the basis — or the typical measure o —
damages, known as expectation damages. This deviation --- rom the norm signi --- ies that
the court was considering equitable basis --- or excuse.
Discussion
1. Why is --- oreseeability the basis --- or the --- rustration o --- purpose excuse? Should a
court consider instead, or also, which party bears the risk o ---
rustration o — pur- pose? How would this consideration change the outcome in this case? 2. How would the rule apply to similar matters, such as renting an expensive hotel room in order attend the Super Bowl, where the event is canceled due to an out- break o — a virulent disease?
©
676 22 • Excuse
-
How does the Krell rule impact the incentives on parties to be care
ul, or careless, when transacting about goods, services, or real or intellectual properties that are to be used — or a particular purpose? Speci — ically, does this rule encourage parties to disclose their purposes, or does it encourage them to keep in — ormation private?
Reading Transatlantic Financing Corp. v. United States. Transatlantic shows how the doctrine — ormerly known as “impossibility” has broadened into “impracticability.” (The correlated doctrine o —
rustration o — purpose has like- wise broadened, as you will see in the case — ollowing Transatlantic.) Transatlantic also shows the limits o — the excuse doctrine. Impracticability does not require impossibility o — per — ormance, but it does require per — ormance to be so onerous that it would be unconscionable — or a court to require it. You will learn in the module on remedies that courts usually award an aggrieved party money damages calculated pursuant to the expectation interest when one party breaches a contract. This measure o — damages is use — ul because it ensures parties to a contract get what they expected (or its monetary value). As you will learn in subsequent chapters, this measure o — damages encourages an e —
icient result: per — ormance when it is socially bene — icial and payment when it is not. But excusing per — ormance has a di — — erent legal result than either requiring per — ormance or payment. Excusing per — ormance makes it as i — the contract was not — ormed. This can leave parties in a di —
icult position, and, moreover, it puts courts in the challenging role o — trying to assess what damages should be owed when the expectation interest must be disregarded. Today, courts may excuse per — ormance even where it is not strictly impos- sible but only highly impracticable, such that it has become un — air to hold both parties to the bargain. The — ollowing case outlines the modern test — or deter- mining whether to grant the excuse o — impracticability.
Transatlantic Financing Corp. v. United States
363 F.2d 312 (D.C. Cir. 1966) J. SKELLY WRIGHT, Circuit Judge: This appeal involves a voyage charter between Transatlantic Financing Corpora- tion, operator o --- the SS CHRISTOS, and the United States covering carriage o --- a --- ull cargo o --- wheat --- rom a United States Gul --- port to a sa --- e port in Iran. The District Court dismissed a libel --- iled by Transatlantic against the United States --- or costs attributable to the ship’s diversion --- rom the normal sea route caused by the closing o --- the Suez Canal. We a ---
irm. 22 • Excuse 677
On July 26, 1956, the Government o
Egypt nationalized the Suez Canal Com pany and took over operation o — the Canal. On October 2, 1956, during the interna- tional crisis which resulted — rom the seizure, the voyage charter in suit was executed between representatives o — Transatlantic and the United States. The charter indicated the termini o — the voyage but not the route. On October 27, 1956, the SS CHRISTOS sailed — rom Galveston — or Bandar Shapur, Iran, on a course which would have taken her through Gibraltar and the Suez Canal. On October 29, 1956, Israel invaded Egypt. On October 31, 1956, Great Britain and France invaded the Suez Canal Zone. On November 2, 1956, the Egyptian Government obstructed the Suez Canal with sunken vessels and closed it to tra —
ic. On or about November 7, 1956, Beckmann, representing Transatlantic, contacted Potosky, an employee o — the United States Department o — Agriculture, who appellant concedes was unauthorized to bind the Government, requesting instructions con- cerning disposition o — the cargo and seeking an agreement — or payment o — additional compensation — or a voyage around the Cape o — Good Hope. Potosky advised Beck- mann that Transatlantic was expected to per — orm the charter according to its terms, that he did not believe Transatlantic was entitled to additional compensation — or a voyage around the Cape, but that Transatlantic was — ree to — ile such a claim. Follow- ing this discussion, the CHRISTOS changed course — or the Cape o — Good Hope and eventually arrived in Bandar Shapur on December 30, 1956. Transatlantic’s claim is based on the — ollowing train o — argument. The charter was a contract — or a voyage — rom a Gul — port to Iran. Admiralty principles and practices, especially stemming — rom the doctrine o — deviation, require us to imply into the contract the term that the voyage was to be per — ormed by the “usual and customary” route. The usual and customary route — rom Texas to Iran was, at the time o — contract, via Suez, so the contract was — or a voyage — rom Texas to Iran via Suez. When Suez was closed this contract became impossible to per — orm. Consequently, appellant’s argument continues, when Transatlantic delivered the cargo by going around the Cape o — Good Hope, in compliance with the Government’s demand under claim o — right, it con — erred a bene — it upon the United States — or which it should be paid in quantum meruit. The doctrine o — impossibility o — per — ormance has gradually been — reed — rom the earlier — ictional and unrealistic strictures o — such tests as the “implied term” and the parties’ “contemplation.” It is now recognized that “A thing is impossible in legal con- templation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.” The doctrine ultimately represents the ever-shi — ting line, drawn by courts hope — ully responsive to commercial practices and mores, at which the community’s interest in having contracts en — orced according to their terms is outweighed by the commercial senselessness o — requiring per — ormance. When the issue is raised, the court is asked to construct a condition o — per — ormance based on the changed circumstances, a process which involves at least three rea- sonably de — inable steps. First, a contingency — something unexpected — must have 678 22 • Excuse
occurred. Second, the risk o
the unexpected occurrence must not have been allocated either by agreement or by custom. Finally, occurrence o — the contingency must have rendered per — ormance commercially impracticable. Unless the court — inds these three requirements satis — ied, the plea o — impossibility must — ail. The — irst requirement was met here. It seems reasonable, where no route is men- tioned in a contract, to assume the parties expected per — ormance by the usual and cus- tomary route at the time o — contract. Since the usual and customary route — rom Texas to Iran at the time o — contract was through Suez, closure o — the Canal made impossible the expected method o — per — ormance. But this unexpected development raises rather than resolves the impossibility issue, which turns additionally on whether the risk o —
the contingency’s occurrence had been allocated and, i
not, whether per — ormance by alternative routes was rendered impracticable. Proo — that the risk o — a contingency’s occurrence has been allocated may be expressed in or implied — rom the agreement. Such proo — may also be — ound in the surrounding circumstances, including custom and usages o — the trade. The contract in this case does not expressly condition per — ormance upon availability o — the Suez route. Nor does it speci — y “via Suez” or, on the other hand, “via Suez or Cape o — Good Hope.” Nor are there provisions in the contract — rom which we may properly imply that the continued availability o — Suez was a condition o — per — ormance. Nor is there anything in custom or trade usage, or in the surrounding circumstances generally, which would support our constructing a condition o — per — ormance. The numerous cases requiring per — ormance around the Cape when Suez was closed, indicate that the Cape route is generally regarded as an alternative means o — per — ormance. So the implied expectation that the route would be via Suez is hardly adequate proo — o —
an allocation to the promisee o
the risk o — closure. In some cases, even an express expectation may not amount to a condition o — per — ormance. The doctrine o — devia- tion supports our assumption that parties normally expect per — ormance by the usual and customary route, but it adds nothing beyond this that is probative o — an alloca- tion o — the risk. I — anything, the circumstances surrounding this contract indicate that the risk o —
the Canal’s closure may be deemed to have been allocated to Transatlantic. We know or may sa — ely assume that the parties were aware, as were most commercial men with interests a —
ected by the Suez situation, see The Eugenia, supra, that the Canal might become a dangerous area. No doubt the tension a —
ected — reight rates, and it is argu- able that the risk o — closure became part o — the dickered terms. We do not deem the risk o — closure so allocated, however. Foreseeability or even recognition o — a risk does not necessarily prove its allocation. Parties to a contract are not always able to pro- vide — or all the possibilities o — which they are aware, sometimes because they cannot agree, o — ten simply because they are too busy. Moreover, that some abnormal risk was contemplated is probative but does not necessarily establish an allocation o — the risk o — the contingency which actually occurs. In this case, — or example, nationalization by Egypt o — the Canal Corporation and — ormation o — the Suez Users Group did not 22 • Excuse 679
necessarily indicate that the Canal would be blocked even i
a con — rontation resulted. The surrounding circumstances do indicate, however, a willingness by Transatlantic to assume abnormal risks, and this — act should legitimately cause us to judge the impracticability o — per — ormance by an alternative route in stricter terms than we would were the contingency un — oreseen. We turn then to the question whether occurrence o — the contingency rendered per — ormance commercially impracticable under the circumstances o — this case. The goods shipped were not subject to harm — rom the longer, less temperate Southern route. The vessel and crew were — it to proceed around the Cape. Transatlantic was no less able than the United States to purchase insurance to cover the contingency’s occurrence. I — anything, it is more reasonable to expect owner-operators o — vessels to insure against the hazards o — war. They are in the best position to calculate the cost o — per — ormance by alternative routes (and there — ore to estimate the amount o —
insurance required), and are undoubtedly sensitive to international troubles which uniquely a —
ect the demand — or and cost o — their services. The only — actor operating here in appellant’s — avor is the added expense, allegedly $43,972.00 above and beyond the contract price o — $305,842.92, o — extending a 10,000 mile voyage by approximately 3,000 miles. While it may be an overstatement to say that increased cost and di —
iculty o — per — ormance never constitute impracticability, to justi — y relie — there must be more o — a variation between expected cost and the cost o — per — orming by an available alter- native than is present in this case, where the promisor can legitimately be presumed to have accepted some degree o — abnormal risk, and where impracticability is urged on the basis o — added expense alone. We conclude, there — ore, as have most other courts considering related issues aris- ing out o — the Suez closure, that per — ormance o — this contract was not rendered legally impossible. Even i — we agreed with appellant, its theory o — relie — seems untenable. When per — ormance o — a contract is deemed impossible it is a nullity. In the case o —
a charter party involving carriage o
goods, the carrier may return to an appropriate port and unload its cargo, subject o — course to required steps to minimize damages. I — the per — ormance rendered has value, recovery in quantum meruit — or the entire per — ormance is proper. But here Transatlantic has collected its contract price, and now seeks quantum meruit relie —
or the additional expense o — the trip around the Cape. I — the contract is a nullity, Transatlantic’s theory o — relie — should have been quan- tum meruit — or the entire trip, rather than only — or the extra expense. Transatlantic attempts to take its pro — it on the contract, and then — orce the Government to absorb the cost o — the additional voyage. When impracticability without — ault occurs, the law seeks an equitable solution, and quantum meruit is one o — its potent devices to achieve this end. There is no interest in casting the entire burden o — commercial disaster on one party in order to preserve the other’s pro — it. Apparently the contract price in this case was advantageous enough to deter appellant — rom taking a stance on damages consistent with its theory o — liability. In any event, there is no basis — or relie — . A —
irmed. 680 22 • Excuse
Re --- lection The Transatlantic court used the --- ollowing three-part test --- or determining when excuse is merited on the basis o --- impracticability:
1. An unexpected occurrence must have happened;
2. The risk o --- the unexpected occurrence must not have been allocated by con-
tract or custom; and
3. The unexpected occurrence must have rendered per --- ormance commercially
impracticable.
These elements were not met in Transatlantic. While the closure o --- the Suez Canal may have been unexpected, there remained a commercially reasonable alternative route. This case clearly shows that increased cost alone is insu ---
icient to prove that per — ormance is impracticable. This accords with the broader contract notion that par- ties generally bear the risks associated with their own per — ormance.
Discussion 1. I --- the court had excused the contract in Transatlantic, assuming that the United States had not yet paid anything --- or shipment, how much should the United States have paid Transatlantic? Answer this based on your intuition and allow yoursel --- to change your view a --- ter you learn the rules regarding money damages.
-
I
the cost o — delivering the wheat to Iran becomes more expensive than the value o — the wheat itsel — as a result o — geopolitical issues involving shipping that were beyond the control o — either party, should Transatlantic be required to deliver the wheat anyway? What does justice require? What judgment is most economically e —
icient? Is there a di —
erence between equitable results and e —
icient results in cases regarding commercial matters?
Reading Adbar, L.C. v. New Beginnings C-Star. Frustration o
purpose oper- ates in much the same way that impracticability does, but it is phrased in such a way that this tends to be a buyer’s excuse, whereas impracticability tends to be a seller’s excuse. As you read Adbar, think about whether the buyer’s purpose in renting a building was totally or substantially — rustrated, and also think about who should bear the risk that the event which caused the purported — rustration would occur. 22 • Excuse 681
Adbar, L.C. v. New Beginnings C-Star
103 S.W.3d 799 (Mo. Ct. App. 2003) GLENN A. NORTON, Judge. Adbar, L.C. appeals the judgment in --- avor o --- New Beginnings C Star on Adbar’s claim --- or breach o --- lease. We reverse in part and a ---
irm in part.
I. Background New Beginnings provides rehabilitation services --- or alcohol and drug abuse to both adults and adolescents. In the --- all o --- 1999, New Beginnings was searching --- or a new location and entered into negotiations with Adbar --- or lease o --- a building in the City o --- St. Louis. New Beginnings received a preliminary indication --- rom the City’s zoning administrator that its use o --- the property constituted a permitted use under the zoning regulations. New Beginnings and Adbar subsequently entered into a three- year lease. The total rent due --- or the three-year term was $273,000. A --- ter the lease was executed, the City denied New Beginnings’ application --- or an occupancy permit on the grounds that the operation constituted a nuisance use under the zoning regulations. At trial, Alderman Freeman Bosley, Sr. testi --- ied that due to his opposition to New Beginnings moving into his Ward, he had called the zoning administrator and asked him to reverse his preliminary indication that New Begin- nings’ operation constituted a permitted use.
New Beginnings appealed the denial o --- the occupancy permit to the board o ---
adjustment. Alderman Bosley and other neighborhood residents testi
ied in oppo- sition to New Beginnings at the board’s hearing. The board a —
irmed the denial o —
the permit. New Beginnings then sought a writ, which was granted by the circuit court, and New Beginnings was issued an occupancy permit. Alderman Bosley con- tacted the judge who issued the writ and asked him to reverse his decision. The judge declined. A — ew weeks later, at the City counselor’s request, the City revoked New Beginnings’ occupancy permit. New Beginnings — iled a motion — or contempt with the circuit court. The motion was granted, and the City re-issued the occupancy permit. A — ter the permit was reissued, New Beginnings began preparing to move in, including having some construction done on the building. At this same time, Alder- man Bosley contacted then State Representative Paula Carter, chairwoman o — the appropriations committee responsible — or New Beginnings’ state — unding. Alder- man Bosley asked Representative Carter to “pull the — unding” — or New Beginnings. Alderman Bosley did not get a commitment — rom Representative Carter, but told her that “i — you don’t get their — unding, you are going to have trouble running” — or re-election. New Beginnings alleges that it was then contacted by Michael Couty, director o —
the Missouri Division o
Alcohol and Drug Abuse, who threatened to rescind all 682 22 • Excuse
state contracts with New Beginnings i
it moved into the new location. New Begin- nings convened a meeting o — its board o — directors to conduct a con — erence call with Director Couty. New Beginnings alleges that during that con — erence call Director Couty repeated his threat to rescind — unding i — it moved into the new location. At the end o — the meeting, New Beginnings’ board decided not to occupy the building they had leased — rom Adbar. At trial Director Couty denied making any such threats to New Beginnings. Adbar — iled a petition — or breach o — the lease. New Beginnings asserted a de — ense o — legal impossibility. On the — irst day o — the trial, New Beginnings was granted leave to amend its answer to add the de — ense o — commercial — rustration. Following a bench trial, the trial court ruled that New Beginnings was excused — rom its per — ormance under the lease because o — commercial — rustration. This appeal — ollows.
II. Discussion
On review o --- this court-tried case, we will sustain the judgment o --- the trial court unless there is no substantial evidence to support it, it is against the weight o --- the evi- dence, it erroneously declares the law, or it erroneously applies the law. We accept the evidence and in --- erences --- avorable to the prevailing party and disregard all contrary evidence. We will de --- er to the --- actual --- indings o --- the trial judge, who is in a superior position to assess credibility; however, we independently evaluate the court’s conclu- sions o --- law.
A. Commercial Frustration In its --- irst point on appeal, Adbar asserts that the trial court erroneously applied the law when it excused New Beginnings’ per --- ormance under the lease due to the doctrine o --- commercial --- rustration. We agree. [Under common law,] the doctrine o --- commercial --- rustration grew out o --- demands o --- the commercial world to excuse per --- ormance under contracts in cases o --- extreme hardship. Under the doctrine o --- commercial --- rustration, i --- the occurrence o --- an event, not --- oreseen by the parties and not caused by or under the control o --- either party, destroys or nearly destroys the value o --- the per --- ormance or the object or purpose o ---
the contract, then the parties are excused
rom — urther per — ormance. I — , on the other hand, the event was reasonably — oreseeable, then the parties should have provided — or its occurrence in the contract. The absence o — a provision in the contract providing — or such an occurrence indicates an assumption o — the risk by the promisor. In determining — oreseeability, courts consider the terms o — the contract and the circumstances surrounding the — ormation o — the contract. The doctrine o — com- mercial — rustration should be limited in its application so as to preserve the certainty o — contracts. [Here, in this case,] New Beginnings alleged that the troubles it — aced obtaining its occupancy permit, along with the actions o — Alderman Bosley and Director Couty, 22 • Excuse 683
combined to rise to commercially
rustrate the lease agreement with Adbar. Ultimately, New Beginnings’ — unding was never rescinded. In this case the intervening event was merely the possibility that the — unding may be rescinded. For an organization that receives — unding — rom the State, the possibility that their — unding may be reduced or even completely rescinded is — oreseeable. Furthermore, while the zeal with which Alderman Bosley attempted to keep New Beginnings out o — his ward may have been surprising to the parties, it is certainly
oreseeable that a drug and alcohol abuse treatment — acility might encounter neigh- borhood resistance when attempting to move into a new location. At trial, the CEO o — New Beginnings admitted that both the elimination o — New Beginnings’ — unding and opposition — rom neighborhood groups were — oreseeable. [Citations to analogous cases omitted.] The possibility that New Beginnings’ — unding may be threatened was — oreseeable. Yet, New Beginnings did not provide — or that possibility in the lease. There — ore, New Beginnings assumed the risk that their — unding may be threatened and that it might
rustrate the purpose o — the lease. In addition to this event being — oreseeable, neither the value o — the per — ormance nor the purpose o — the lease was destroyed. The purpose o — the lease was to allow New Beginnings to operate a rehabilitation center at the location o — the property. New Beginnings’ — unding was never rescinded or even restricted. Alderman Bosley’s con- tinued inter — erence with New Beginnings e —
orts to provide rehabilitation treatment to addicts o — drugs and alcohol certainly made, and would have continued to make, business di —
icult — or New Beginnings. However, neither the value o — the per — ormance nor the object or purpose o — the lease was destroyed or nearly destroyed. There — ore, the doctrine o — commercial — rustration does not excuse New Begin- nings’ per — ormance under the lease. Point I is granted.
III. Conclusion The judgment that New Beginnings is excused --- rom the lease under the de --- ense o --- commercial --- rustration is reversed and the cause is remanded --- or a new trial in accordance with this opinion. The judgment in all other respects is a ---
irmed.
Re --- lection The New Beginnings case is an example o --- a --- oreseeable event that occurred. Since the event was --- oreseeable, it cannot be grounds --- or excuse due to --- rustration o ---
purpose. Why was it — oreseeable in this case that an addiction treatment — acility would meet resistance to its operation by local government o —
icials? There is a concept called NIMBY, which stands — or “not in my backyard.” It re — ers to local opposition to 684 22 • Excuse
development that would be a net positive
or society as a whole. The residents who oppose the development are called Nimbys, and their viewpoint is called Nimbyism. Wikipedia lists a variety o — projects that are likely to be opposed by local residents: • housing development • power plants • retail parks • bicycle and • quarries • railways pedestrian • prisons • highway expansions in — rastructure • pubs and bars • airports • skyscrapers • adult entertainment • seaports • homeless shelters clubs • nuclear waste • oil wells • concert venues repositories • chemical plants • — irearms dealers • storage — or weapons • industrial parks • cell towers o — mass destruction • military bases • electricity pylons • cannabis dispensaries • sewage treatment and recreational can- • abortion clinics systems nabis shops • children’s homes • — racking • methadone clinics • nursing homes • wind turbines • accommodation o —
• youth hostels persons applying --- or
• desalination plants
• sports stadiums asylum, re --- ugees, and
• land --- ill sites displaced persons
• shopping malls
• incinerators Perhaps you can see some similarities among the items on this list. When a pro- moter proposes a development that typically engenders a NIMBY reaction, it is rea- sonably --- oreseeable that the promoter might not gain local government support --- or that development project. Since local government support is o --- ten required --- or development projects such as the addiction treatment clinic in New Beginnings to operate, courts generally will not
ind that the promotor’s per — ormance (e.g., paying rent) is excused where operating permits are not — orthcoming — rom the local authorities.
Discussion 1. When an entrepreneur embarks on a business project, such as developing a concert venue or a methadone clinic, should that entrepreneur bear the risk that local gov- ernments may oppose the project? Should the person transacting with the entre- preneur bear this risk? 2. In general, which contractual party should bear the economic risk that govern- ment will prevent some activity?
22 • Excuse 685
Problems Problem 22.1. Super Bowl LV On January 1, 2020, Alex, who lives in Minnesota, decides she wants to get away
rom the cold winter and go to Florida to attend Super Bowl LV in Tampa. On that day, she enters into the — ollowing transactions: • Alex agrees to buy — rom Will two tickets to Super Bowl LV, which is scheduled to be held at the Raymond James Stadium in Tampa Bay, Florida, on Sunday, February 7, 2021, — or $1,000 each. • Alex purchases two round-trip airplane tickets — rom Delta Airlines — or travel on Friday, February 5, 2021, — rom Minneapolis-Saint Paul International Air- port to Tampa International Airport, — or $125 each. • Alex agrees to rent — rom Colin his one-bedroom apartment in Tampa the — our nights — rom Friday, February 5, to Tuesday, February 9, — or $500 per night ($2,000 total). Colin’s apartment is located in Cove Apartments on the Bay at 4003 S. West Shore Blvd., Tampa, FL. In March 2020, the novel coronavirus known as COVID-19 began in — ecting people worldwide. Governments responded by shutting down businesses and limiting in- person gatherings throughout that spring and summer. Some airlines canceled — lights and re — unded passengers — or travel in early April and May, though con — usion contin- ued through the year. On December 15, 2020, Alex decided to cancel her trip and asked Will, Colin, and Delta Airlines — or a re — und. They all re — used, noting the — ollowing — acts: • Delta Airlines stated that, unless the Florida, Minnesota, or — ederal government orders another shutdown, it will be — lying the MSP-TPA route, so her travel is possible. Alex has purchased a standard- — are ticket, which has a $200 change — ee. • Colin made plans to stay at his mother’s house in West Palm Beach, Florida, in order to make his apartment available to Alex. He did not rent it to others during the Super Bowl period because Alex had reserved it. He also hired a pro — es- sional cleaning company to sanitize the vacant apartment be — ore her arrival, a service — or which he put down a $100 non-re — undable deposit. • Will cannot resell the Super Bowl LV tickets to someone else — or the price Colin agreed to pay because, as o — that date, the NFL Commissioner Roger Goodell still has not announced whether in person attendance will be permit- ted at the game. The Tampa Bay Times quoted Commissioner Goodell as say- ing, “We will be working with public o —
icials and the health o —
icials to de — ine [the capacity — or the game] as we get closer to the game.” Will added that he will re — und Alex i — the NFL re — unds him — or his ticket. Note that these are real locations and events, so you can use the internet to learn more about them. Do some online research about things like comparable price, 686 22 • Excuse
Figure 22.4. Map showing the relative locations o --- the rented
apartment and the --- ootball stadium.
location, and other details that are signi
icant to your analysis o — this case. You should also look at news articles to determine when canceling live attendance at the Super Bowl due to COVID-19 became reasonably — oreseeable. Based on these — acts and your research, discuss: a. Whether Alex has the immediate right to cancel her promises to pay Colin and/or Will, and whether she is legally entitled to receive a re — und — rom Delta Airlines. b. Whether Alex would have the right to cancel or receive a re — und i — it turns out that she will not be permitted by the NFL to attend the game live and in person. c. Whether Alex would have the right to cancel or receive a re — und i — it turns out that the — ederal government prohibits any attendance at the game. d. Whether Alex’s request — or a cancellation or a re — und constitutes a repu- diation or provides grounds — or Colin, Will, or Delta Airlines to demand assurance. 22 • Excuse 687
Problem 22.2. Lot Number 1285 Naomi purchased 3 tons o — nitrogen — ertilizer — or her — arm — rom Grozit, a local — eed and — ertilizer distributor. Ever care — ul, be — ore Naomi signed the purchase agreement, she visited the warehouse, inspected the — ertilizer, and had 3 tons o — it set aside — or her and designated as “Lot Number 1285.” The purchase agreement dated March 1 speci-
ied that Grozit would deliver “Lot Number 1285” to Naomi on May 1. Un — ortunately, a small — ire destroyed Lot Number 1285 on April 15. Grozit has other — ertilizer o — the same type that is available, but the market price has risen, and Grozit insists that the prior agreement is now void and that Naomi must sign a new purchase agreement at a higher price i — she wants the — ertilizer. Is Grozit within its rights? Analyze whether Grozit’s per — ormance is excused.
Problem 22.3. Excessive Rain Bob is a potato broker. Bob entered into a contract with McDonald’s to provide 80 tons o — potatoes to be delivered by November 1. There was excessive rain in the Midwest that ruined the potato crop, thus raising the price o — potatoes nationwide by 25% and making the contract with McDonald’s relatively unpro — itable — or Bob. Bob claims that this un — oreseen event should excuse his per — ormance under the contract. McDonald’s demands that he either deliver the potatoes or be liable — or breach o —
contract. All o — Bob’s contracts — or obtaining potatoes were with — armers in the Midwest, none o — whom have any potatoes — or sale. McDonald’s was aware o — Bob’s regional a —
iliations with — armers and contracted with potato brokers in many di — — erent regions around the country speci — ically to protect against localized and regional crop — ailures. Analyze who wins the breach o — contract dispute. Chapter 23 Modi — ication and Discharge
Imagine you’ve hired a contractor to renovate your kitchen. Hal
way through — a — ter he’s ripped out your cabinets and hauled away your stove — he complains that material costs have tripled because o — unexpected supply-chain issues. The contractor says he can no longer break even unless you agree to adjust the price. You agree to double his
ee, in part because you know it will be impossible to get someone else to — inish the job
or your original price. Is that — air, given that no one — oresaw such drastic cost hikes? Alternatively, what i — the contractor is merely taking advantage o — your dependence by demanding extra payment a — ter the cabinets are torn out? Where do we draw the line between legitimate, good- — aith renegotiation and un — air opportunism? In contract law, these questions highlight a — undamental tension. On the one hand, we value the certainty o — holding people to their promises (pacta sunt servanda). On the other, we recognize that circumstances o — ten change in ways that warrant a — resh look at the deal. Contracts should remain — lexible enough to handle genuine shi — ts in market conditions, unanticipated di —
iculties, or evolving business needs. Sometimes, the most equitable result is a small modi — ication — like adjusting the project timeline or cost. Other times, parties might decide that ending the arrangement entirely (dis- charging the contract) is best — or everyone. Historically, common law insisted that contract modi — ications required — resh con- sideration, thus ensuring that no party gave up a right without something new in return. Modern contract law has relaxed that stance, recognizing that good — aith and
airness may allow certain changes even without strict — ormalities. Still, there are sa — e- guards to prevent one-sided demands — like jacking up a price mid-project purely to exploit another’s vulnerability. This chapter explores how and why parties alter their agreements, the boundaries that courts impose to keep modi — ications and discharges — air, and the policy debates about balancing stability with adaptability. It also examines how to reassign rights and duties, or entirely substitute new parties, through assignment, delegation, and novation. By the end, students will understand how contract law seeks to preserve the integrity o — promises while allowing parties the — reedom to address li — e’s inevitable twists and turns.
689
690 23 • Modi — ication and Discharge
Rules A. Changing Contractual Obligations The term “modi --- ication” generally re --- ers to any change in the contract’s terms. Most modi --- ications adjust certain aspects o --- the original contract while preserving the rest. These changes can involve price, schedule, scope o --- per --- ormance, or even the parties per --- orming the promises or receiving the consideration. Modi --- ications can be problematic because they create opportunities --- or coercive conduct. Once parties enter a contractual relationship, they o --- ten act in reliance on their counterparty’s promises to per --- orm. This reliance can leave one party vulner- able to exploitation, particularly i --- obtaining a substitute per --- ormance is impractical or costly. Such situations can give the counterparty signi --- icant leverage to demand more --- avorable terms. For example, imagine you live in Pennsylvania and plan to sell your car. A prospec- tive buyer in Cali --- ornia o ---
ers you $12,000 — or the car, while similar buyers near you would only pay $10,000. To deliver the car, you estimate $500 in gas and tolls, $300 — or two nights in a hotel, and $200 — or a one-way plane ticket home, totaling $1,000. The extra $1,000 pro — it makes the hassle worthwhile, so you accept the o —
er. In per — ormance o — your promise, you drive the car to Cali — ornia. However, upon arrival, the buyer in — orms you they will only pay $10,000. Now what should you do? Driving the car back to Pennsylvania would cost $800, and you’re already out $200 — or the plane ticket. In Pennsylvania, you could only sell the car — or $10,000 a — ter re-listing it and going through the sales process again. Ultimately, you are better o —
accepting the $10,000 o —
er in Cali — ornia rather than returning home, so you reluctantly agree to modi — y the contract. Does something about this situation seem un — air to you? It likely does. The buyer exploited your reliance on their promise to extract more value — rom the transac- tion. This scenario illustrates how modi — ications can sometimes become tools — or opportunism. The key question is: how should contract law address situations like this? The law regulates modi — ications to balance — lexibility and — airness while preventing exploitation. The traditional preexisting duty rule prohibits a party — rom demanding additional consideration — or obligations they are already bound to per — orm. Modern contract law, however, recognizes the need — or — lexibility and allows certain modi-
ications i — they are made in good — aith or are — air and equitable under un — oreseen circumstances. By emphasizing commercial reasonableness alongside — airness, the UCC rein — orces this balance and ensures that modi — ications adapt to practical realities without enabling coercion. 23 • Modi — ication and Discharge 691
- The Preexisting Duty Rule Historically, courts addressed coercive contract modi — ications by applying the pre- existing duty rule. According to this rule, doing or promising what a party is already legally obligated to do cannot serve as valid consideration to support another party’s promise. The R2d § 73 articulates the rule as — ollows: Per — ormance o — a legal duty owed to a promisor which is neither doubt — ul nor the subject o — honest dispute is not consideration; but a similar per — ormance is consideration i — it di —
ers — rom what was required by the duty in a way which re — lects more than a pretense o — bargain. The preexisting duty rule o — ten arises in situations where one party attempts to renegotiate terms to gain a better deal without providing anything new in exchange. For example, a contractor may promise to complete a construction project in exchange
or more money than originally agreed. Similarly, an employee might agree to con- tinue per — orming their current job duties in exchange — or a higher salary. In such cases, unless the new promise signi — icantly di —
ers — rom what the promisor is already bound to do, it is not valid consideration. Perhaps the most — amous case illustrating the preexisting duty rule is Alaska Pack- ers’ Association v. Domenico, 117 F. 99 (9th Cir. 1902), which you will read below. In the spring o — 1900, Domenico and his associates hired a group o — sailors — rom the Alaska Packers’ Association to — ish — or salmon at Pyramid Harbor, Alaska. The sailors agreed to per — orm this work in exchange — or a speci — ied wage. However, once trans- ported — rom San Francisco to Alaska, the sailors organized and demanded double pay
or the same work they had already agreed to per — orm. With no practical alternative, Domenico reluctantly agreed to their demand to salvage the — ishing season. Upon returning to San Francisco, Domenico paid the sailors their original wage but re — used to pay the additional amount. The sailors sued — or breach o — contract. The Ninth Circuit Court o — Appeals ruled in — avor o — Domenico. The court rea- soned that contract modi — ication requires su —
icient consideration. A promise to per-
orm an existing duty does not involve taking on or relinquishing a legal obligation and, there — ore, o —
ers no consideration. Since the sailors’ demand involved merely per — orming their preexisting contractual duties, their promise was insu —
icient to sup- port Domenico’s agreement to pay more. Without new consideration, the modi — ica- tion was unen — orceable. Promising to per — orm a preexisting duty cannot be consideration because such a promise does not involve relinquishing or taking on a legal duty. The promising party already has the duty to per — orm, so it is really promising nothing at all. “Nothing” is, o —
course, insu
icient as consideration, since “consideration” is, by de — inition, something o — legal value given in exchange — or a promise. 692 23 • Modi — ication and Discharge
-
Modern Relaxation o
the Preexisting Duty Rule The Alaska Packers’ Association court applied a strict interpretation o — the preexist- ing duty rule, reasoning that contracts cannot be modi — ied without new consideration. Under this approach, modi — ications represent new promises that must be supported by a bargained- — or exchange o — value. I — the parties agree to a modi — ication, but no new consideration is given, then the modi — ication will not be en — orceable in court. However, more recent case law highlights the limitations o — this rule. The preexist- ing duty rule was designed to prevent one party — rom exploiting a counterparty who has placed themselves in a vulnerable position by relying on contractual promises. Yet, the rule itsel — creates signi — icant issues. It o — ten prohibits contract modi — ications even when they re — lect voluntary, mutually bene — icial adjustments to un — oreseen cir- cumstances. For example, in a construction project, what i — a contractor’s costs have risen unexpectedly? I — the contractor cannot complete their obligations without addi- tional compensation, would it not be — air to allow the parties to adjust their compen- sation accordingly? The preexisting duty rule is both over-inclusive and under-inclusive. It is over- inclusive because it — ails to di —
erentiate between justi — ied and unjusti — ied modi — ica- tion requests, o — ten impeding good- — aith adjustments to contracts. At the same time, it is under-inclusive because even the most coercive modi — ication might be upheld i —
supported by nominal consideration — a mere “peppercorn.” This
ormal requirement can obscure substantive un — airness. For these reasons, modern courts have dramatically moved away — rom a strict appli- cation o — the preexisting duty rule. One common workaround is rescission (discussed below) and recontracting. Courts allow parties who wish to modi — y their agreement to — irst mutually rescind the existing contract and then execute a new agreement. This three-step process — entering a contract, rescinding it, and — orming a new con- tract — ensures that each promise is supported by mutual consideration. While the
inal outcome mirrors a unilateral modi — ication, the — ormal distinction satis — ies the traditional requirement o — consideration. Some courts have simply ignored the preexisting duty rule, while others have explicitly rejected its rigid application. One o — the most notable cases illustrating this evolution is Angel v. Murray 113 R.I. 482 (1974), which appears later in this chapter. In Angel, a garbage collector contracted with the City o — Newport — or waste disposal services. Mid-contract, he requested additional compensation due to an unexpected population surge, which signi — icantly increased the scope o — his work. The court upheld the modi — ication, despite the absence o — new consideration — rom the garbage collector. It reasoned that the modi — ication was — air and equitable because it addressed un — oreseen circumstances that altered the — undamental assumptions underlying the original agreement. The court’s decision demonstrated a practical approach aligning with modern common law principles that prioritize — airness and adaptability over strict adherence to — ormalistic rules. 23 • Modi — ication and Discharge 693
R2d § 89, which cites Angel v. Murray in its comments, adopts a
lexible approach to contract modi — ications and allows them to be en — orced without additional consid- eration i — certain conditions are met. This modern standard emphasizes — airness and practicality over rigid — ormalism: A promise modi — ying a duty under a contract not — ully per — ormed on either side is binding i — the modi — ication is — air and equitable in view o — circumstances not anticipated by the parties when the contract was made. R2d § 89(a). Under R2d § 89(a), a modi — ication is binding i — it is “ — air and equitable” in view o — un — oreseen circumstances that signi — icantly alter the — easibility or conditions o —
per
ormance. For example, i — a contractor building a house experiences delays due to external — actors beyond their control (though not rising to the level o — impracticabil- ity), an agreed extension o — the timeline would be en — orceable, provided it re — lects good- — aith negotiations. Conversely, a buyer’s agreeing to pay more solely because o —
an unsupported demand by the seller would
ail the — airness standard. R2d § 89(c) provides an alternative basis — or en — orcing modi — ications through promissory estoppel. This allows a modi — ication to be binding i — one party detrimen- tally relies on it, even without proo — that the modi — ication was — air or based on changed circumstances. (See Chapter 8 — or — urther discussion o — promissory estoppel.) Finally, R2d § 89(b) recognizes that statutes, like the UCC or others, can make modi — ications en — orceable without the need — or changed circumstances or reliance. For example, the Uni — orm Written Obligations Act, as adopted in Pennsylvania, eliminates the requirement — or consideration as long as a written contract includes an express intent to be bound. While its application is limited geographically, this act exempli — ies the broader move away — rom strict — ormalism in contract law. In sum, the preexisting duty rule created signi — icant barriers to modi — ying con- tracts by prioritizing strict — ormalism over practical realities. The modern approach, as re — lected in the common law and R2d § 89, embraces — lexibility by acknowledging that un — oreseen circumstances and — airness can justi — y modi — ications. This evolution demonstrates the law’s e —
ort to balance traditional principles with the practical need
or adaptability in contractual relationships.
-
Modi
ications under the UCC The UCC is even more permissive o — contract modi — ication than both the tra- ditional rule and the R2d. Under the traditional rule, modi — ications require new consideration to be binding. The R2d relaxes this requirement by allowing modi — i- cations without new consideration i — they are — air and equitable in light o — changed circumstances. The UCC goes — urther by eliminating the consideration requirement altogether: An agreement modi — ying a contract within this Article needs no consideration to be binding. UCC § 2-209(1). 694 23 • Modi — ication and Discharge
However, while the UCC does not explicitly require changed circumstances, the good- — aith requirement may serve a similar purpose. Good — aith ensures that modi-
ications are honest, commercially reasonable, and not opportunistic, re — lecting an implicit expectation o — legitimacy behind any changes to the contract. This standard emphasizes commercial practicality and trust between parties, — ocusing on the intent and honesty o — the modi — ication rather than — ormalistic rules. For example, a supplier selling industrial components agrees to lower prices due to reduced manu — acturing costs. This modi — ication is en — orceable under UCC § 2-209 i — the change re — lects genuine good — aith. Conversely, i — a supplier arbitrarily raises prices without justi — ication and the buyer agrees under duress to avoid supply disrup- tion, the modi — ication may be invalidated — or lacking good — aith. UCC § 1-201(b)(20) de — ines good — aith as “honesty in — act and the observance o —
reasonable commercial standards o
air dealing.” This principle acts as a sa — eguard against opportunistic behavior and ensures that modi — ications are consistent with eth- ical and practical norms. Good — aith is particularly important in commercial transac- tions where — lexibility is necessary but trust must be preserved. For instance, i — a supplier selling electronics modi — ies delivery terms due to unex- pected shipping delays and genuinely communicates the reasons to the buyer, this re — lects good — aith. Conversely, raising prices without a legitimate reason, especially i — it exploits the buyer’s dependency, demonstrates bad — aith and undermines en — orceability. Courts evaluate good — aith by considering several — actors. They ask whether the modi — ication was proposed with honest intent or motivated by opportunism, and whether it aligns with reasonable industry practices and re — lects commercial stan- dards relevant to the agreement. Transparency is also key; courts examine whether the reasons — or the change were clearly communicated and adequately justi — ied. Together, these — actors ensure that UCC § 2-209 modi — ications maintain a balance between — lex- ibility and ethical business practices. For example, imagine a supplier selling industrial-grade steel adjusts the price o — goods mid-contract due to a sudden spike in raw material costs caused by global market disruptions. The supplier provides industry reports and invoices to demonstrate the legitimacy o — the increase, aligning with reasonable commercial standards. This would represent a good — aith modi — ication. However, i — the supplier raises prices arbitrarily, citing market — luctuations without providing any documen- tation or aligning with known industry practices, the price increase would — ail to meet commercial standards o —
air dealing. The modi — ication might not be en — orce- able, even i — the other party agreed to it.
-
Modi
ication Doctrines When parties to a contract wish to alter their obligations, they may use modi — ica- tion doctrines to replace, rede — ine, or discharge their existing duties. These doctrines re — lect the law’s — lexibility in allowing parties to adapt their agreements while main- taining a structured approach to en — orceability. 23 • Modi — ication and Discharge 695
a. Substituted Contracts A substituted contract occurs when the parties create a new agreement that entirely replaces the old one. The original contract is discharged, and the substituted contract becomes the operative agreement. To be en --- orceable, the substituted contract must meet the usual requirements o --- a valid contract: mutual assent, consideration, and legal purpose. (1) A substituted contract is a contract that is itsel --- accepted by the obligee in satis --- action o --- the obligor’s existing duty. (2) The substituted contract dis- charges the original duty and imposes a new one in its place. R2d § 279. For example, suppose a homeowner and contractor agree to build an addition --- or $50,000. Midway through the project, they both decide to expand the addition’s scope, which increases the price to $75,000. They dra --- t and sign a new agreement that --- ully replaces the original. The original contract is no longer en --- orceable; only the substi- tuted contract governs their relationship. b. Substituted Per --- ormance Substituted per --- ormance occurs when the parties agree to satis --- y an existing duty with a di --- --- erent per --- ormance. Unlike substituted contracts, substituted per --- ormance keeps the original agreement intact until the agreed substitution is carried out. This doctrine, de --- ined in R2d § 278, ties discharge directly to the completion o --- the new per --- ormance rather than the --- ormation o --- a new agreement. (1) Where an obligee accepts, in satis --- action o --- the obligor’s duty, a per --- ormance o ---
ered by the obligor that di —
ers — rom what was due, the duty is discharged i — the per — ormance is rendered. (2) Where per — ormance is o —
ered by a third person and accepted by the obligee in satis — action o — the obligor’s duty, the duty is discharged. R2d § 278. For example, suppose a tenant owes back rent to a landlord. The parties agree that the tenant will repaint the property instead o — paying the rent. I — the tenant completes the painting, the landlord’s claim — or rent is discharged. This illustrates how substi- tuted per — ormance discharges the duty upon execution, which di —
erentiates it — rom an accord, where the duty is merely suspended until satis — action occurs.
c. Accord and Satis --- action
Accord and satis --- action is a two-step process --- or discharging an obligation through substitute per --- ormance. An accord is an agreement to accept a di --- --- erent per --- ormance in satis --- action o --- an existing duty, while satis --- action is the execution o --- that substitute per --- ormance, which discharges the original duty. R2d § 281 explains that the original duty is suspended during the accord and --- ully discharged only upon per --- ormance o ---
the satis
action. (1) An accord is a contract under which an obligee promises to accept a stated per — ormance in satis — action o — the obligor’s existing duty. Per — ormance o — the 696 23 • Modi — ication and Discharge
accord discharges the original duty. (2) Until per --- ormance o --- the accord, the
original duty is suspended unless there is a breach o --- the accord by the obligor
that discharges the accord. (3) Breach o --- the accord by the obligee does not
discharge the original duty. R2d § 281 For example, in Pinnel’s Case, 5 Co. Rep. 117a (1602), Judge Sir Edward Coke held that payment o --- a lesser sum cannot discharge a greater debt unless accompanied by valid consideration. Exceptions noted by the court, such as a new time or place o ---
payment or non-monetary consideration (e.g., a horse, hawk, or robe), emphasize that alternative bene — its can satis — y a debt i — they con — er unique value to the creditor. Courts have since interpreted these exceptions to re — lect the importance o — mutual intent and the creditor’s ability to derive bene — it — rom alternative per — ormance. The reasoning in Pinnel’s Case underscores that an accord must be supported by valid consideration to distinguish it — rom the original obligation. However, Foakes v. Beer, 54 L.J.Q.B. 130 (Queen’s Bench 1884), highlighted a nuanced exception: collect- ing an uncertain or disputed debt can provide new value su —
icient to support consid- eration. This re — lects the idea that resolving a dispute itsel — constitutes a tangible bene — it to the creditor. While the strict rule — rom Pinnel’s Case remains in — luential, modern adaptations, including R2d § 281, suggest that changed circumstances or good- — aith negotiations may justi — y en — orcement o — an accord and satis — action even without tra- ditional consideration. This approach prioritizes — airness and commercial practicality.
B. Changing Contractual Parties Parties to contracts have rights and responsibilities. Within limits, contractual rights can be assigned (trans — erred) to others, and responsibilities to per — orm can be delegated (trans — erred) to third parties. In addition, through a process called “nova- tion,” a new party can replace an original party in the contract. These changes let par- ties adapt to new circumstances while preserving en — orceability. Each approach o —
ers a di — — erent way to trans — er rights, duties, or both, and understanding these distinctions helps ensure smooth transitions in contractual relationships. The primary doctrines o — trans — er include assignment, delegation, and novation.
- Assignment Assignment occurs when a party trans — ers their contractual rights to a third party. The assignor (the original holder o — the rights) relinquishes their claim, and the assignee (the new holder) steps into their position, becoming entitled to en — orce those rights against the obligor. R2d § 317(1) de — ines assignment as: An assignment o — a right is a mani — estation o — the assignor’s intention to trans-
er it by virtue o — which the assignor’s right to per — ormance by the obligor is extinguished in whole or in part and the assignee acquires a right to such per — ormance. 23 • Modi — ication and Discharge 697
Assignments are typically permitted unless the contract states otherwise. For example, a landlord rents an apartment to a tenant under a one-year lease. Hal — way through the lease, the tenant assigns their right to occupy the apartment to a subten- ant. Upon proper notice to the landlord, the subtenant gains the right to en — orce the lease terms against the landlord, such as the right to habitability. However, unless explicitly released, the original tenant (assignor) may remain secondarily liable i — the subtenant (assignee) — ails to per — orm. Assignment helps parties trans — er the bene — its o — a contract, such as payments or services, without altering the underlying obligations. This makes assignment a practi- cal tool in — inancing or simpli — ying transactions, as long as it does not materially a —
ect the obligor’s per — ormance.
- Delegation Delegation occurs when a party trans — ers their contractual duties to a third party. The delegator (the original obligor) passes primary responsibility — or completing that duty to the delegee (the new obligor). However, under common law, the delegator remains secondarily liable — or per — ormance unless the obligee agrees to release them. R2d § 318(1) provides: An obligor can properly delegate the per — ormance o — his duty to another unless the delegation is contrary to public policy or the terms o — his promise. Delegation is generally permissible unless the contract involves personal services or duties requiring speci — ic expertise. For example, a contractor hired to build a house may delegate speci — ic construction tasks, such as — raming, to a subcontractor. The subcontractor per — orms the delegated duty, but the original contractor (delega- tor) remains liable i — the subcontractor — ails to meet the contract’s requirements. However, i — the contract explicitly prohibits delegation, or i — the delegation is unrea- sonable, such as in a personal services agreement with a bespoke artist, it would be unen — orceable. Delegation allows tasks to be reassigned — or e —
iciency while ensuring the original obligor remains accountable. This approach is common in industries like construc- tion, where general contractors rely on subcontractors but stay responsible — or overall project per — ormance.
- Novation Novation involves substituting a new party into the contract and completely releases the original party — rom their obligations. This doctrine requires the consent o — all three parties: the original obligor, the obligee, and the substituted party. R2d § 280 de — ines novation as: A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee o — the original duty. 698 23 • Modi — ication and Discharge
For example, a lender loans money to Borrower A, who later requests to trans
er the debt to Borrower B. I — the lender agrees, Borrower B assumes the obligation to repay the loan, and Borrower A is — ully discharged. This substitution replaces the original contract, and Borrower B becomes solely liable — or per — ormance. Novation replaces the original obligor with a new party who assumes their rights and duties. It provides a clean break — or the original obligor. The process ensures that the obligee’s interests are protected while enabling the contract to continue seamlessly with the new party. While assignment and delegation preserve the original contract’s terms and involve partial trans — er o — rights or duties, novation — ully replaces a party and discharges the original obligor. These distinctions re — lect the balance between contractual — lexibility and the need to maintain clarity and en — orceability in obligations. Assignment and delegation — acilitate ongoing contracts by allowing parties to adjust responsibilities without starting over. Novation, by contrast, is suitable — or situ- ations requiring a clean break — rom the original obligor. Together, these doctrines ensure that contracts remain adaptable to evolving circumstances while preserving their integrity and en — orceability.
C. Ending Contractual Obligations The term “modi — ication” generally re — ers to a speci — ic change to a contract’s terms, such as a change to the price, an aspect o — per — ormance, or the schedule — or per — ormance. Although, conceptually, a modi — ication can include a complete elimi- nation o — contractual rights and responsibilities without imposing new ones, this is more typically called “discharge.” This section addresses the — our main ways in which parties agree to end contractual obligations.
- Rescission Rescission occurs when both parties agree to terminate their contract retroactively, restoring them to their pre-contractual positions. A rescission is the most extreme
orm o — contract discharge because it makes things as i — the contract never happened at all. R2d § 283 de — ines rescission as: An agreement under which each party promises to discharge all o — the other party’s remaining duties o — per — ormance under an existing contract. Recission always requires mutual assent. However, recission does not require consideration i — neither party has per — ormed because the law assumes each party is getting the bene — it o — being released — rom that unper — ormed obligation. (A con- tract where neither party has yet — ully per — ormed is called an “executory contract.”) For example, i — a buyer and seller agree to rescind a contract — or the sale o — a car be — ore either party has per — ormed, the rescission is en — orceable without additional 23 • Modi — ication and Discharge 699
consideration. Or imagine that a landlord and tenant enter a lease agreement. The housing market changes dramatically shortly into the lease term, resulting in the landlord’s wishing to rent to someone else and the tenant’s wishing to live elsewhere. Here, the parties might mutually agree to rescind their lease, thus restoring them to their pre-contractual positions. Courts may also allow rescission as a remedy in cases involving mistake, misrepresentation, or other equitable grounds. Like mistake and misrepresentation, a rescission unwinds a contract, as i — it never occurred. Rescission ends the contract entirely and restores both parties to their pre- contractual positions. Rescission operates retroactively, undoing the agreement as i —
it never existed. An agreement o — rescission may be in writing or oral, yet it must be a bilateral act (by both parties) to discharge each other’s duties to per — orm some as-yet unper — ormed obligation.
- Release A release is a unilateral act in which one party relinquishes their right to en — orce a contractual obligation, thereby discharging the other party — rom their duty. Most states require that releases be — ormalized in writing. Some jurisdictions also require consideration — or releases to be en — orceable. A release is a writing providing that a duty owed to the maker o — the release is discharged immediately or on the occurrence o — a condition. R2d § 284(1). A release, then, is just a written statement by which one party — rees the other party
rom a contractual duty. Unlike mutual rescission, a release does usually require con- sideration because it is one-sided and so triggers the preexisting duty rule. In a release, one party is giving up a legal right, but the other party is not necessarily giving any- thing in exchange. Traditionally, a release had to be made under seal, which is a type o —
ormal con- tract that does not require consideration. In modern courts, a release generally must be in writing and supported by consideration. Alternatively, a release may be e —
ective without consideration pursuant to statute or because the released party reasonably relied on the release. Releases o — ten appear in settlement agreements. For example, imagine that a car accident victim agrees to settle their claim with an at- — ault driver — or $50,000. As part o — the agreement, the victim signs a release stating that they relinquish any — urther claims arising — rom the accident.
- Renunciation Renunciation occurs when a party voluntarily abandons or surrenders any right to en — orce a contractual claim, e —
ectively discharging the other party’s duty to per — orm with respect to that claim. Under common law, renunciation can be accomplished 700 23 • Modi — ication and Discharge
without consideration, but the manner in which the renunciation is made determines whether it — ully or only partially discharges a duty, per R2d § 277: (1) A written renunciation signed and delivered by the obligee discharges without consideration a duty arising out o — a breach o — contract. (2) A renunciation by the obligee on his acceptance — rom the obligor o — some per — ormance under a contract discharges without consideration a duty to pay damages — or a breach that gives rise only to a claim — or damages — or partial breach o — contract. A written renunciation can thus discharge the obligor’s duty arising — rom a total breach o — contract. Even i — the obligee receives no additional per — ormance, the signed writing alone su —
ices to relinquish all claims associated with that breach. For example, i — a landlord, a — ter discovering a tenant’s violation o — the lease, sends a signed letter explicitly stating, “I renounce any right to collect damages — or your breach,” the land- lord’s right to recover is discharged in — ull. An oral renunciation can only e —
ect a partial breach, meaning that oral renuncia- tion is only e —
ective where the obligee accepts some per — ormance — rom the obligor. This — orm o — renunciation covers breaches that are not serious enough to constitute a total breach. For instance, i — a contractor deviates slightly — rom building speci — ica- tions, and the landowner says, “Don’t worry about those minor de — ects — I waive any damages,” while still allowing the contractor to complete the job, the landowner’s damages claim — or partial breach is renounced. A silent renunciation may be implied in very limited circumstances, particularly i —
the obligor reasonably relies on such conduct to conclude that the obligee has aban- doned the right to en — orce damages. I — the obligee’s words or actions induce the obli- gor to — orego e —
orts to remedy the breach, a court may treat the obligee’s conduct as an en — orceable renunciation to avoid injustice.
-
Cancellation Cancellation re — ers to the termination o — — uture contractual obligations. It is o — ten exercised unilaterally under speci — ic contractual provisions. The UCC addresses can- cellation in the context o — goods contracts under § 2-209(4), which states: A contract modi — ication, rescission, or waiver must meet the requirements o —
good
aith to be binding. For example, a supplier may cancel a contract with a buyer who — ails to make timely payments, provided the contract includes a cancellation clause. Cancellation terminates the parties’ — uture obligations but does not a —
ect rights or duties that have already vested, such as payment — or goods delivered be — ore cancellation. 23 • Modi — ication and Discharge 701
D. Re
lections on Modi — ications and Discharge By examining how contracts can be altered or discharged through mutual assent, this chapter highlights a central tension in contract law: the desire to honor parties’
reedom to bind themselves through promises (pacta sunt servanda) while preventing coercive or unjust outcomes. The evolution — rom strict doctrines like the preexisting duty rule, which once rigidly required new consideration — or any modi — ication, to more — lexible standards shows how courts have grown sensitive to practical reali- ties. Modern approaches accommodate un — oreseeable changes in circumstances and emphasize — airness and good — aith. These principles ensure that contracts remain resil- ient instruments capable o — adapting to new conditions without becoming vehicles
or exploitation. Ultimately, modi — ication and discharge by assent re — lect a broader contract policy, one that values both predictability and — lexibility and seeks to — oster genuine collaboration between parties rather than blind en — orcement o — terms that may have become inequitable. Understanding these doctrines not only equips stu- dents to navigate contract disputes e —
ectively but also o —
ers insight into the deeper policy considerations that guide courts in shaping a just and e —
icient legal — ramework.
Cases Reading Alaska Packers’ Association v. Domenico. Perhaps the most --- amous case involving the preexisting duty rule is the --- ollowing one, Alaska Packers’ Association, in which some sailors re --- used to work unless they were paid more than they originally bargained --- or. As you read this case, think about what the preexisting duty rule is and whether it makes sense.
Spoiler alert! The Alaska Packers’ Association case makes a compelling argu- ment --- or a strict application o --- the preexisting duty rule, which states that con- tracts cannot be modi --- ied without new consideration. But more recent case law shows why this rule creates problems o --- its own. The cases that --- ollow will sharpen your understanding o --- why the preexisting duty rule has more recently
allen out o — — avor. But, — or now, enjoy this classic case.
Alaska Packers’ Association v. Domenico
117 F. 99 (9th Cir. 1902) ROSS, Circuit Judge. The libel in this case was based upon a contract alleged to have been entered into between the libelants and the appellant corporation on the 22d day o --- May, 1900, at
702 23 • Modi — ication and Discharge
Pyramid Harbor, Alaska, by which it is claimed the appellant promised to pay each o — the libelants, among other things, the sum o — $100 — or services rendered and to be rendered. In its answer the respondent denied the execution, on its part, o — the contract sued upon, averred that it was without consideration, and — or a third de — ense alleged that the work per — ormed by the libelants — or it was per — ormed under other and di — — erent contracts than that sued on, and that, prior to the — iling o — the libel, each o —
the libelants was paid by the respondent the
ull amount due him thereunder, in con- sideration o — which each o — them executed a — ull release o — all his claims and demands against the respondent. The evidence shows without con — lict that on March 26, 1900, at the city and county o — San Francisco, the libelants entered into a written contract with the appellants, whereby they agreed to go — rom San Francisco to Pyramid Harbor, Alaska, and return, on board such vessel as might be designated by the appellant, and to work — or the appellant during the — ishing season o — 1900, at Pyramid Harbor, as sailors and — isher- men, agreeing to do “regular ship’s duty, both up and down, discharging and loading; and to do any other work whatsoever when requested to do so by the captain or agent o — the Alaska Packers’ Association.” By the terms o — this agreement, the appellant was to pay each o — the libelants $50 — or the season, and two cents — or each red salmon in the catching o — which he took part. On the 15th day o — April, 1900, 21 o — the libelants signed shipping articles by which they shipped as seamen on the Two Brothers, a vessel chartered by the appellant — or the voyage between San Francisco and Pyramid Harbor, and also bound themselves to per — orm the same work — or the appellant provided — or by the previous contract o —
March 26th; the appellant agreeing to pay them there
or the sum o — $60 — or the season, and two cents each — or each red salmon in the catching o — which they should respec- tively take part. Under these contracts, the libelants sailed on board the Two Brothers — or Pyramid Harbor, where the appellants had about $150,000 invested in a salmon cannery. The
Figure 23.1. Cannery at Pyramid Harbor, 1899. Public domain work.
23 • Modi — ication and Discharge 703
libelants arrived there early in April o
the year mentioned, and began to unload the vessel and — it up the cannery. A — ew days therea — ter, to wit, May 19th, they stopped work in a body, and demanded o — the company’s superintendent there in charge $100 — or services in operating the vessel to and — rom Pyramid Harbor, instead o — the sums stipulated — or in and by the contracts; stating that unless they were paid this additional wage they would stop work entirely, and return to San Francisco. The evidence showed, and the court below — ound, that it was impossible — or the appellant to get other men to take the places o — the libelants, the place being remote, the season short and just opening; so that, a — ter endeavoring — or several days without success to induce the libelants to proceed with their work in accordance with their contracts, the company’s superintendent, on the 22d day o — May, so — ar yielded to their demands as to instruct his clerk to copy the contracts executed in San Francisco, including the words “Alaska Packer’s Association” the end, substituting, — or the $50 and $60 payments, respectively, o — those contracts, the sum o — $100, which document, so prepared, was signed by the libelants be — ore a shipping commissioner whom they had requested to be brought — rom Northeast Point; the superintendent, however, tes- ti — ying that he at the time told the libelants that he was without authority to enter into any such contract, or to in any way alter the contracts made between them and the company in San Francisco. Upon the return o — the libelants to San Francisco at the close o — the — ishing season, they demanded pay in accordance with the terms o — the alleged contract o — May 22d, when the company denied its validity, and re — used to pay other than as provided — or by the contracts o — March 26th and April 5th, respectively. Some o — the libelants, at least, consulted counsel, and, a — ter receiving his advice, those o — them who had signed the shipping articles be — ore the shipping commissioner at San Francisco went be — ore that o —
icer, and received the amount due them thereunder, executing in consideration thereo — a release in — ull, and the others paid at the o —
ice o — the company, also receipt- ing in — ull — or their demands. … The real questions in the case as brought here are questions o — law, and, in the view that we take o — the case, it will be necessary to consider but one o — those. Assuming that the appellant’s superintendent at Pyramid Harbor was authorized to make the alleged contract o — May 22d, and that he executed it on behal — o — the appellant, was it supported by a su —
icient consideration? From the — oregoing statement o — the case, it will have been seen that the libelants agreed in writing, — or certain stated compensation, to render their services to the appellant in remote waters where the season — or conducting — ishing operations is extremely short, and in which enterprise the appellant had a large amount o — money invested; and, a — ter having entered upon the discharge o — their contract, and at a time when it was impossible — or the appellant to secure other men in their places, the libelants, without any valid cause, absolutely re — used to continue the services 704 23 • Modi — ication and Discharge
they were under contract to per
orm unless the appellant would consent to pay them more money. Consent to such a demand, under such circumstances, i — given, was, in our opin- ion, without consideration, — or the reason that it was based solely upon the libelants’ agreement to render the exact services, and none other, that they were already under contract to render. The case shows that they will — ully and arbitrarily broke that obligation. As a matter o — course, they were liable to the appellant in damages, and it is quite probable, as sug- gested by the court below in its opinion, that they may have been unable to respond in damages. But we are unable to agree with the conclusions there drawn, — rom these
acts, in these words:
Under such circumstances, it would be strange, indeed, i --- the law would not
permit the de --- endant to waive the damages caused by the libelants’ breach,
and enter into the contract sued upon, — a contract mutually bene --- icial to all
the parties thereto, in that it gave to the libelants reasonable compensation
or their labor, and enabled the de — endant to employ to advantage the large capital it had invested in its canning and — ishing plant.
Certainly, it cannot be justly held, upon the record in this case, that there was any voluntary waiver on the part o — the appellant o — the breach o — the original contract. The company itsel — knew nothing o — such breach until the expedition returned to San Francisco, and the testimony is uncontradicted that its superintendent at Pyra- mid Harbor, who, it is claimed, made on its behal — the contract sued on, distinctly in — ormed the libelants that he had no power to alter the original or to make a new contract, and it would, o — course, — ollow that, i — he had no power to change the origi- nal, he would have no authority to waive any rights thereunder. The circumstances o —
the present case bring it, we think, directly within the sound and just observations o
the supreme court o
Minnesota in the case o — King v. Railway Co.:1
No astute reasoning can change the plain --- act that the party who re --- uses to
per --- orm, and thereby coerces a promise --- rom the other party to the contract to
pay him an increased compensation --- or doing that which he is legally bound to
do, takes an unjusti --- iable advantage o --- the necessities o --- the other party. Surely
it would be a travesty on justice to hold that the party so making the promise
or extra pay was estopped — rom asserting that the promise was without con- sideration. A party cannot lay the — oundation o — an estoppel by his own wrong, where the promise is simply a repetition o — a subsisting legal promise. There can be no consideration — or the promise o — the other party, and there is no war- rant — or in — erring that the parties have voluntarily rescinded or modi — ied their
1. 61 Minn. 482 (1895). 23 • Modi — ication and Discharge 705
contract. The promise cannot be legally en --- orced, although the other party has
completed his contract in reliance upon it.
In Lingen
elder v. Brewing Co., 103 Mo. 578, 15 S.W. 844, the court, in holding void a contract by which the owner o — a building agreed to pay its architect an additional sum because o — his re — usal to otherwise proceed with the contract, said:
It is urged upon us by respondents that this was a new contract. New in what?
Jungen --- eld was bound by his contract to design and supervise this building.
Under the new promise, he was not to do anything more or anything di --- --- erent.
What bene --- it was to accrue to Wainwright? He was to receive the same
service --- rom Jungen --- eld under the new, that Jungen --- eld was bound to tender
under the original, contract.
What loss, trouble, or inconvenience could result to Jungen --- eld that he had
not already assumed? No amount o --- metaphysical reasoning can change the
plain --- act that Jungen --- eld took advantage o --- Wainwright’s necessities, and
extorted the promise o ---
ive per cent on the re — rigerator plant as the condition o — his complying with his contract already entered into. Nor had he even the — limsy pretext that Wainwright had violated any o —
the conditions o --- the contract on his part. Jungen --- eld himsel --- put it upon the
simple proposition that ‘i --- he, as an architect, put up the brewery, and another
company put up the re --- rigerating machinery, it would be a detriment to the
Empire Re --- rigerating Company,’ o --- which Jungen --- eld was president.
To permit plainti ---
to recover under such circumstances would be to o —
er a premium upon bad — aith, and invite men to violate their most sacred contracts that they may pro — it by their own wrong. That a promise to pay a man — or doing that which he is already under con- tract to do is without consideration is conceded by respondents. The rule has been so long imbedded in the common law and decisions o — the highest courts o — the various states that nothing but the most cogent reasons ought to shake it. [Citing a long list o — authorities.] … What we hold is that, when a party merely does what he has already obli- gated himsel — to do, he cannot demand an additional compensation there-
or; and although, by taking advantage o — the necessities o — his adversary, he obtains a promise — or more, the law will regard it as nudum pactum, and will not lend its process to aid in the wrong. … It results — rom the views above expressed that the judgment must be reversed, and the cause remanded, with directions to the court below to enter judgment — or the respondent, with costs. It is so ordered. 706 23 • Modi — ication and Discharge
Re --- lection
Alaska Packers’ Association is a --- amous case that that is --- requently read in law school even though it does not re --- lect current law. We read this case in part to show how law evolves. In this instance, the law may have evolved because one rule proved to be more costly than an alternative rule. While many di --- --- erent types o --- costs exist within our legal system, this case illuminates two important ones in particular. First, there are litigation costs, which include the time and money that parties and soci- ety spend on attorneys, courtrooms, juries, judges, expert witnesses, consultants, paralegals, etc. Litigation costs are generally lower when rules are simpler because
ewer — acts are required to evaluate simpler rules. But simpler rules may produce a di — — erent type o — cost, known as an “error costs.” I — a rule is too simple, it may gener- ate what are called Type I and Type II errors. Type I errors, or “ — alse positive” errors, occur when courts — ind — or plainti —
s and require a remedy even where there was no harm. Type II errors, or “ — alse negative” errors, occur when courts — ind — or de — endants and re — use a remedy even where there was some harm. Both types o — errors result in error costs. In this case, the simple rule “any contract modi — ication requires new consideration” can result in Type I errors where the party extorted some modi — ication in return — or nominal consideration, and it can result in Type II errors where the parties — reely and
airly agreed to some modi — ication but did not stipulate any consideration. A more complex standard, such as the modern “ — air and reasonable modi — ication” standard
ound in the R2d and the cases and problems below, may result in — ewer error costs. But more complex standards may also require more litigation costs. There are many costs to consider when evaluating the e —
iciency o — legal rules and systems. When you evaluate legal change, consider whether a new rule probably pro- duces more costs or — ewer costs than an old one. A rule which on its — ace appears to be — airer in theory can turn out to be harsher in practice i — it raises costs upon litigants and skews decisions in — avor o — the rich and power — ul. A rule that appears good on its
ace can be detrimental — or society i — it generates social costs that exceed its bene — its. While e —
iciency is certainly not the only goal o — a legal system, e —
iciencies merit some consideration, especially in the context o — commercial law, such as contract law.
Discussion 1. Do you think that the sailors took un --- air advantage o --- circumstances in this case? I ---
so, why was this case not decided as a matter o
breach o — the implied duty o — good
aith and — air dealing?
-
What does the preexisting duty rule add to the duty o
good — aith and — air dealing? 23 • Modi — ication and Discharge 707
Reading Angel v. Murray. In this next case, a waste disposal company con- tracted with the City o — Newport, Rhode Island, — or waste disposal services. Pursuant to the — ive-year agreement, the waste disposal company was entitled to receive a set amount o — money in return — or removing all the waste materials generated within the city limits. However, the city’s population grew surpris- ingly and substantially during the contract term. The waste disposal company petitioned the city council — or a pay increase to compensate — or the additional waste, and the council agreed. A citizen o — Newport named Al — red L. Angel brought a civil action against the city Director o — Finance, John E. Murray, Jr., alleging that the city o —
i- cial wrong — ully overpaid the waste disposal company. The citizen’s argument was based on the preexisting duty rule: the agreement to increase the disposal company’s pay was invalid because it was unsupported by new consideration; there — ore, the city wrong — ully paid the additional amount. The Supreme Court o — Rhode Island disagreed. It — ound that the contract modi — ication was — air and reasonable under the circumstances o — a dramatic and un — oreseen population increase that resulted in much greater expense and less pro — it — or the waste disposal company. The council was not coerced or sub- ject to any undue in — luence. Unlike in Alaska Packers’ Association, where the Alaska Packers’ Association had no commercial alternative but to agree to pay the sailors more than they originally agreed to work — or, the city could have hired some other waste disposal company. In this case, there was no coercion or duress. Moreover, the Angel court expressly disavowed the preexisting duty rule: Although the preexisting duty rule has served a use — ul purpose inso — ar as it deters parties — rom using coercion and duress to obtain additional compensation, it has been widely criticized as a general rule o — law.
The Angel court goes on to cite the 1963 edition o
Corbin on Contracts, upon which the R2d was substantially based. There has been a growing doubt as to the soundness o — this doctrine as a matter o — social policy. In certain classes o — cases, this doubt has in — luenced courts to re — use to apply the rule, or to ignore it, in their actual decisions. Like other legal rules, this rule is in process o — growth and change, the process being more active here than in most instances. The result o — this is that a court should no longer accept this rule as — ully established. It should never use it as the major premise o — a decision, at least without giving care — ul thought to the circumstances o — the particular case, to the moral deserts o — the parties, and to the 708 23 • Modi — ication and Discharge
social --- eelings and interests that are involved. It is certain that the
rule, stated in general and all-inclusive terms, is no longer so well-
settled that a court must apply it though the heavens --- all.
The UCC, which was principally authored by Corbin’s protégé, Llewellyn, completely dispenses with the requirement o --- consideration --- or an agreement to modi --- y a contract --- or the sale o --- goods.
An agreement modi --- ying a contract within this Article needs no consider-
ation to be binding. NH UCC § 2-209(1).
The R2d contemplates this statutory section, again showing its tendency toward the relaxation o --- the preexisting duty rule:
A promise modi --- ying a duty under a contract not --- ully per --- ormed on either
side is binding to the extent provided by statute. R2d § 89(2).
Harmony between the R2d and UCC continues, with both including an additional exception to the preexisting duty rule where one party reasonably relied on the modi --- ication:
A promise modi --- ying a duty under a contract not --- ully per --- ormed on either
side is binding to the extent that justice requires en --- orcement in view o ---
material change o --- position in reliance on the promise. R2d § 89(3).
The UCC’s language is di --- --- erent, but its impact is similar:
A party who has made a waiver a ---
ecting an executory portion o — the con- tract may retract the waiver by reasonable noti — ication received by the other party that strict per — ormance will be required o — any term waived, unless the retraction would be unjust in view o — a material change o — position in reliance on the waiver. NH UCC § 2-209(5). We thus see that both the common law and the UCC are moving away
rom a hardline preexisting duty rule and toward a more — lexible standard that allows — or greater degrees o —
reedom regarding mutual assent — or contract modi — ication.
Angel v. Murray
113 R.I. 482 (1974) ROBERTS, C.J. This is a civil action brought by Al --- red L. Angel and others against John E. Mur- ray, Jr., Director o --- Finance o --- the City o --- Newport, the city o --- Newport, and James L. Maher, alleging that Maher had illegally been paid the sum o --- $20,000 by the Director o --- Finance and praying that the de --- endant Maher be ordered to repay the city such
23 • Modi — ication and Discharge 709
7-
~
RJ.!ODE ISLAND.
Figure 23.2. Tourist’s map o --- Newport, Rhode Island.
sum. The case was heard by a justice o
the Superior Court, sitting without a jury, who entered a judgment ordering Maher to repay the sum o — $20,000 to the city o —
Newport. Maher is now be
ore this court prosecuting an appeal. The record discloses that Maher has provided the city o — Newport with a re — use- collection service under a series o —
ive-year contracts beginning in 1946. On March 12, 1964, Maher and the city entered into another such contract — or a period o —
ive years commencing on July 1, 1964 and terminating on June 30, 1969. The con- tract provided, among other things, that Maher would receive $137,000 per year in return — or collecting and removing all combustible and noncombustible waste materi- als generated within the city. In June o — 1967 Maher requested an additional $10,000 per year — rom the city coun- cil because there had been a substantial increase in the cost o — collection due to an unexpected and unanticipated increase o — 400 new dwelling units. Maher’s testimony, which is uncontradicted, indicates the 1964 contract had been predicated on the — act that since 1946 there had been an average increase o — 20 to 25 new dwelling units per year. A — ter a public meeting o — the city council where Maher explained in detail the reasons — or his request and was questioned by members o — the city council, the city council agreed to pay him an additional $10,000 — or the year ending on June 30, 1968. Maher made a similar request again in June o — 1968 — or the same reasons, and the city council again agreed to pay an additional $10,000 — or the year ending on June 30, 1969. The trial justice — ound that each such $10,000 payment was made in violation o —
law. His decision, as we understand it, is premised on two independent grounds. First, he — ound that the additional payments were unlaw — ul because they had not been rec- ommended in writing to the city council by the city manager. Second, he — ound that 710 23 • Modi — ication and Discharge
Maher was not entitled to extra compensation because the original contract already required him to collect all re — use generated within the city and, there — ore, included the 400 additional units. The trial justice — urther — ound that these 400 additional units were within the contemplation o — the parties when they entered into the contract. It appears that he based this portion o — the decision upon the rule that Maher had a preexisting duty to collect the re — use generated by the 400 additional units, and thus there was no consideration — or the two additional payments. I. [Part I discusses the — irst basis — or the trial court’s decision, that the payment increase was unlaw — ul because it was not requested in writing, but this is not relevant to the contract issue. The appellate court ruled that a written request was not required as a matter o — law. Although a statute literally stated that such increases must be in writing, “this court will not undertake to read an enactment literally i — to do so would result in attributing to the Legislature an intention that is contradictory o — or incon- sistent with the evident purposes o — the act.”] II. Having — ound that the city council had the power to modi — y the 1964 contract without the written recommendation o — the city manager, we are still con — ronted with the question o — whether the additional payments were illegal because they were not supported by consideration. A [Omitted.] B It is generally held that a modi — ication o — a contract is itsel — a contract, which is unen — orceable unless supported by consideration. . . . In Rose v. Daniels,2 this court held that an agreement by a debtor with a creditor to discharge a debt — or a sum o —
money less than the amount due is unen
orceable because it was not supported by consideration. Rose is a per — ect example o — the preexisting duty rule. Under this rule an agree- ment modi — ying a contract is not supported by consideration i — one o — the parties to the agreement does or promises to do something that he is legally obligated to do or re — rains or promises to re — rain — rom doing something he is not legally privileged to do. In Rose there was no consideration — or the new agreement because the debtor was already legally obligated to repay the — ull amount o — the debt. Although the preexisting duty rule is — ollowed by most jurisdictions, a small minority o — jurisdictions, Massachusetts, — or example, — ind that there is consideration
or a promise to per — orm what one is already legally obligated to do because the new
2. 8 R.I. 381 (1866) 23 • Modi — ication and Discharge 711
promise is given in place o
an action — or damages to secure per — ormance. See Swartz v. Lieberman, 323 Mass. 109 (1948) . . . . Swartz is premised on the theory that a prom- isor’s — orbearance o — the power to breach his original agreement and be sued in an action — or damages is consideration — or a subsequent agreement by the promisee to pay extra compensation. This rule, however, has been widely criticized as an anomaly. The primary purpose o — the preexisting duty rule is to prevent what has been re — erred to as the “hold-up game.” [Citing Corbin.] A classic example o — the “hold-up game” is — ound in Alaska Packers’ Ass’n v. Domenico, 117 F. 99 (9th Cir. 1902). [See Alaska Packers’ Association case, above.] Another example o — the “hold-up game” is — ound in the area o — construction con- tracts. Frequently, a contractor will re — use to complete work under an unpro — itable contract unless he is awarded additional compensation. The courts have generally held that a subsequent agreement to award additional compensation is unen — orceable i — the contractor is only per — orming work which would have been required o — him under the original contract. See, e.g., Lingen — elder v. Wainwright Brewery Co., 103 Mo. 578 (1891), which is a leading case in this area. These examples clearly illustrate that the courts will not en — orce an agreement that has been procured by coercion or duress and will hold the parties to their original contract regardless o — whether it is pro — itable or unpro — itable. However, the courts have been reluctant to apply the preexisting duty rule when a party to a contract encounters unanticipated di —
iculties and the other party, not in — luenced by coercion or duress, voluntarily agrees to pay additional compensation — or work already required to be per — ormed under the contract. For example, the courts have — ound that the original contract was rescinded, Linz v. Schuck, 106 Md. 220, 67 A. 286 (1907); abandoned, Connelly v. Devoe, 37 Conn. 570 (1871), or waived, Michaud v. McGregor, 61 Minn. 198, 63 N.W. 479 (1895). Although the preexisting duty rule has served a use — ul purpose inso — ar as it deters parties — rom using coercion and duress to obtain additional compensation, it has been widely criticized as a general rule o — law. With regard to the preexisting duty rule, one legal scholar [Corbin] has stated: There has been a growing doubt as to the soundness o — this doctrine as a matter o — social policy. . . . In certain classes o — cases, this doubt has in — luenced courts to re — use to apply the rule, or to ignore it, in their actual decisions. Like other legal rules, this rule is in process o — growth and change, the process being more active here than in most instances. The result o — this is that a court should no longer accept this rule as — ully established. It should never use it as the major premise o — a decision, at least without giving care — ul thought to the circumstances o — the particular case, to the moral deserts o — the parties, and to the social — eelings and interests that are involved. It is certain that the rule, stated in general and all-inclusive terms, is no longer so well-settled that a court must apply it though the heavens — all. 712 23 • Modi — ication and Discharge
The modern trend appears to recognize the necessity that courts should en
orce agreements modi — ying contracts when unexpected or unanticipated di —
iculties arise during the course o — the per — ormance o — a contract, even though there is no consider- ation — or the modi — ication, as long as the parties agree voluntarily. Under the Uni — orm Commercial Code, s 2-209(1) . . . ”(a)n agreement modi — ying a contract ( — or the sale o — goods) needs no consideration to be binding.” Although at
irst blush this section appears to validate modi — ications obtained by coercion and duress, the comments to this section indicate that a modi — ication under this section must meet the test o — good — aith imposed by the Code, and a modi — ication obtained by extortion without a legitimate commercial reason is unen — orceable. The modern trend away — rom a rigid application o — the preexisting duty rule is re — lected by s 89D(a) o — the American Law Institute’s Restatement Second o — the Law o — Contracts, which provides “A promise modi — ying a duty under a contract not — ully per — ormed on either side is binding (a) i — the modi — ication is — air and equitable in view o — circumstances not anticipated by the parties when the contract was made.” We believe that s 89D(a) is the proper rule o — law and — ind it applicable to the — acts o — this case. It not only prohibits modi — ications obtained by coercion, duress, or extor- tion but also — ul — ills society’s expectation that agreements entered into voluntarily will be en — orced by the courts. See generally Horwitz, The Historical Foundations o —
Modern Contract Law, 87 Harv.L.Rev. 917 (1974). Section 89D(a), o
course, does not compel a modi — ication o — an unpro — itable or un — air contract; it only en — orces a modi-
ication i — the parties voluntarily agree and i — (1) the promise modi — ying the original contract was made be — ore the contract was — ully per — ormed on either side, (2) the underlying circumstances which prompted the modi — ication were unanticipated by the parties, and (3) the modi — ication is — air and equitable. The evidence, which is uncontradicted, reveals that in June o — 1968 Maher requested the city council to pay him an additional $10,000 — or the year beginning on July 1, 1968, and ending on June 30, 1969. This request was made at a public meeting o — the city council, where Maher explained in detail his reasons — or making the request. Therea — ter, the city council voted to authorize the Mayor to sign an amendment to the 1964 contract which provided that Maher would receive an additional $10,000 per year — or the duration o — the contract. Under such circumstances we have no doubt that the city voluntarily agreed to modi — y the 1964 contract. Having determined the voluntariness o — this agreement, we turn our attention to the three criteria delineated above. First, the modi — ication was made in June o — 1968 at a time when the — ive-year contract which was made in 1964 had not been — ully per — ormed by either party. Second, although the 1964 contract provided that Maher collect all re — use generated within the city, it appears this contract was premised on Maher’s past experience that the number o — re — use-generating units would increase at a rate o — 20 to 25 per year. Furthermore, the evidence is uncontradicted that the 23 • Modi — ication and Discharge 713
1967–1968 increase o
400 units “went beyond any previous expectation.” Clearly the circumstances which prompted the city council to modi — y the 1964 contract were unanticipated. Third, although the evidence does not indicate what proportion o — the total this increase comprised, the evidence does indicate that it was a “substantial” increase. In light o — this, we cannot say that the council’s agreement to pay Maher the $10,000 increase was not — air and equitable in the circumstances. The judgment appealed — rom is reversed, and the cause is remanded to the Superior Court — or entry o — judgment — or the de — endants.
Re --- lection
Angel presents a somewhat unusual procedural posture. Note who the parties are in the case: a citizen is suing the director o ---
inance o — a governmental entity and a waste management service. The government entity and the waste management service were the parties to the contract. Thus, the parties to the case are not the same as the parties to the contract. In — act, both parties to the contract appear on the same side o — the “v.” The court does not explicitly address whether this unusual posture impacted its disposition, but it stands to reason that it does. The simple — act that both parties to the contract want it to be en — orceable tends to show that the alteration to that agreement was not only mutual but reasonable.
Discussion 1. Some scholars say that Angel abrogated the preexisting duty rule. Others say that Angel merely --- ollowed precedent that had already abrogated it. As you read the court’s opinion in Angel, did you --- ind that the court was changing the law, or does the court merely recognize that the law about the preexisting duty rule has already changed? 2. There are similar discussions about whether the R2d (which was dra --- ted around
the time that Angel was decided) modi --- ied the preexisting duty rule in an activist
attempt to change judicial outcomes, or whether the R2d was simply restating the
law as it had changed. Notably, R2d § 89 (“Modi --- ication o --- an Executory Contract”)
is new. The --- irst Restatement o --- Contracts does not have a parallel provision. Read
the comments to R2d § 89 and discuss whether the R2d is merely restating the law
as it has changed since Alaska Packers’ Association, or whether the R2d is pushing
the law in a new direction.
714 23 • Modi — ication and Discharge
Reading Birdsall v. Saucier. Remember that contract parties are o
ten not lawyers. They may not even become aware o — the legal consequences o — some o — their actions until their agreement turns into a dispute in court, at which point lawyers and judges have to — igure out how the parties’ intentions map onto legal concepts. One concept that parties rarely consider in advance o — agreeing to modi — y a contract is whether they intend to make a substituted contract or an accord and satis — action. It is the lawyer’s job to recognize that the law presumes parties to be making accords, not substitutions, even where the parties do not plainly express their intention to merely suspend, not supersede, a prior agreement. Birdsall v. Saucier, 1992 WL 37731 (Conn. Super. Ct. Feb. 24, 1992), involves a relatively common situation where a creditor provides its debtor with an alternative way to repay the debt. Such situations are generally regarded as accords, not substitutions, but the reasoning in this case will help you to under- stand why courts would — ind one or the other. Admittedly, the Birdsall case is a bit long, but it relates the pertinent details o — the — amous Pinnel’s Case, and, in this author’s opinion, this modern court’s discussion o — those — acts is much more readable than the original case — rom 1602. A second concept is distinguishing between a novation, on the one hand, and an assignment or a delegation on the other. This issue will be discussed a — ter the Birdsall case.
Birdsall v. Saucier
1992 WL 37731 (Conn. Super. Ct. Feb. 24), a ---
’d, 29 Conn. App. 921 (1992) JOHN M. BAILEY, Judge. One o — the peculiarities o — the common law is that a creditor may accept anything in satis — action o — a liquidated debt except a lesser sum o — money. Almost — our centuries ago, Sir Edward Coke opined that a creditor might take “a horse, hawk, or robe” i —
he chose and that would be accord and satis
action in Pinnel’s Case.3 The only thing that he may not take is ninety cents on the dollar. The present case involves a modern debtor who did not have a horse, hawk, or robe but did settle a debt with the assign- ment o — a promissory note o — a third party. The court holds that this assignment, which was satis — actory to the creditor at the time (much to her present chagrin), was su —
icient consideration to satis — y the debt. Virginia Birdsall is a real estate broker who does business under the names o — Bird- sall Agency and Birdsall Realty in Middlebury. Roy Birdsall (“Birdsall”) is a real estate
3. 77 Eng.Rep. 237 (C.P. 1602). 23 • Modi — ication and Discharge 715
broker in her employ. Fernando Saucier (“Saucier”) is a real estate entrepreneur who at the time o — the events in question was the president and sole shareholder o — B & S Realty o — Bristol, Inc. (“B & S”). The only substantial asset o — B & S, a now-dissolved corporation, was a large o —
ice and restaurant building in Bristol. The Birdsalls are the plainti —
s in this action; Saucier and B & S are the de — endants. Their dispute was tried to the court on October 17–18, 1991. From the evidence submitted at the hearing, the court — inds the — ollowing — acts. In the spring o — 1985, Saucier wanted to sell the building owned by B & S. He had previously met Birdsall in connection with the sale o — some Bristol apartments and, on May 1, 1985, entered into an open listing agreement with the Birdsall Agency to sell the building owned by B & S. This agreement is a written contract signed by Bird- sall and Saucier (signing — or B & S). The agreement states that “In consideration o —
your e
orts to sell said property, I/we agree that i — you are able to procure a customer ready, willing and able to buy said property at a sale price o — $1,275,000 or at a price or terms acceptable to me/us, I/we will pay you a commission o — ten % o — the gross sale price.” The open listing was to remain in e —
ect — or 180 days. Armed with this agreement, Birdsall went to work. Eventually he — ound two buyers
or the building, Mark Silverstein and Aryeh Shander. On August 6, 1985, Silverstein and Shander signed an agreement with B & S, agreeing to purchase the building — or $1,150,000. The closing was to take place within thirty days. B & S was to pay the Birdsall Agency “whatever commission is due to the broker.” The closing occurred on August 15, 1985. At some point between August 6 and August 15, Saucier met with Birdsall. Although extensive documentation has been submitted on most aspects o — the case, the details o — this meeting have been lost in the vague memories o — the participants. Birdsall testi — ied that Saucier asked him to take some o — his commission (which at 10% o — the purchase price would have been $115,000) in “paper” and some in cash. According to Birdsall it was understood that about hal — o — the commission would be in “paper,” but the terms were not otherwise discussed. Saucier testi — ied in somewhat greater detail. A — ew days be — ore the clos- ing he realized that very little cash would be le — t a — ter closing costs. He approached Birdsall and told him that i — the closing were to go through, arrangements would have to be made. Birdsall said (according to Saucier) “I don’t need money. I’d rather take payments.” He said that he would take a third mortgage on the property in question. He (Birdsall) — urther said that he — elt very com — ortable and con — ident taking pay- ment — rom the doctors. (Silverstein and Shander were physicians.) Saucier agreed with Birdsall’s testimony that the exact terms o — payment were not discussed. Saucier’s testimony was amply corroborated by the events about to be described. The court
inds it credible. Birdsall and Saucier were both present at the closing. The building, o — course, was purchased by Silverstein and Shander — or $1,150,000. As part o — this purchase price, they assumed a mortgage to one Nathan Ma — ale in the amount o — $560,000. A sec- ond mortgage was given to Saucier in the amount o — $295,000. (For reasons never 716 23 • Modi — ication and Discharge
explained to the court, the proceeds o
the sale were paid to Saucier personally rather than to B & S.) The Birdsall Agency received a check in the amount o — $29,500, which it subsequently endorsed and deposited. The balance o — Birdsall’s compensation was what the parties termed “paper.” The documents constituting this compensation must be described in some detail. Silverstein and Shander gave a third mortgage to Saucier in the amount o — $73,000. This was accompanied by a mortgage note in the same amount. The note provided
or quarterly payments o — interest — or — ive years commencing on January 1, 1986. The interest speci — ied was ten percent per annum, and the quarterly interest payments were consequently $1,825. At the end o — this period, on August 1, 1991, the unpaid principal balance was to be paid in — ull. The note expressly provides that its obligations “shall be without personal recourse against any individual, partnership or corporate maker and the mortgagee’s sole recourse in the event o — a de — ault shall be against the mortgaged property.” At the closing, Saucier assigned his entire interest in this note to Birdsall. At or shortly a — ter the closing (Saucier testi — ied that it was within a week) Birdsall gave B & S a written receipt. The receipt acknowledges the payment o — $29,500 as a commission — or the sale to Silverstein and Shander and the assignment o — the $73,000 note. It concludes with the words “Commission paid in — ull.” It is signed by Birdsall. Birdsall thus received a cash payment o — $29,500 and a $73,000 note. The sum o — these two amounts is $102,500. This is not the sum that was originally to have been Birdsall’s — ee. That original sum was to have been $115,000 (ten percent o — the $1,150,000 purchase price). In other words, Birdsall, on the — ace o — it, received $12,500 less than he was due. On the stand, however, Birdsall expressly disavowed any claim to the $12,500 di — -
erence. He certainly registered no complaint at the time. As just recounted, he gave B & S a receipt stating that his commission had been “paid in — ull.” There is no evi- dence whatsoever o — any contemporaneous dissatis — action with this arrangement. The court — inds that Birdsall — and, by in — erence, his employer, Virginia Birdsall (who did not testi — y) — was satis — ied with what he received. Perhaps the reason — or this lies in simple mathematics. Had the note — rom Silver- stein and Shander been — ully paid, Birdsall would have received $22,500 in interest payments plus $73,000 in principal (admittedly a — ter a delay o —
ive and a hal — years). These payments when added to the $29,500 check that Birdsall received at the clos- ing, would have equaled $125,000, or $10,000 more than he was originally entitled to receive. O — course, Birdsall was also aware — rom his previous meeting with Saucier that, i — he had not been willing to take part o — his compensation in “paper,” the closing would not have gone through and his practical ability to collect the — ee he was legally owed might well have been seriously impaired. It is a — air in — erence — rom these — acts that there was a meeting o — the minds between Birdsall and Saucier that the $29,500 in cash and the assignment o — the $73,000 note were to constitute — ull satis — action o — any claim — or commission against Saucier that Birdsall might have. 23 • Modi — ication and Discharge 717
In any event, the building was sold, and Birdsall had his check and his “paper.” Birdsall proceeded to contentedly collect his interest payments — rom Silverstein and Shander — or three years. Then, Birdsall’s bargain melted into the air. The last inter- est payment paid was that o — January 1, 1989 (apparently paid sometime in Decem- ber 1988). On April 1, 1989, Birdsall’s mailbox was as bare as Mother Hubbard’s cupboard. So, — or that matter, was Saucier’s. (Saucier was owed a substantially greater amount on his second mortgage.) Demands to Silverstein and Shander — rom all quar- ters proved — ruitless. Nothing was paid therea — ter. At some point a — ter the de — ault, Saucier asked Birdsall to — ind a new buyer — or the building. Birdsall was eager to do this since a sale o — the building might result in the payment o — his $73,000 note. Nothing, however, was put in writing between Saucier and Birdsall, and as — ar as the record indicates, the owners o — the building, Silverstein and Shander, were wholly unaware o — this arrangement at the time. Birdsall eventually
ound an interested purchaser, one Anthony Rugens. On October 25, 1989, Rugens signed a written o —
er to purchase the building — or $25,000 plus the assumption o —
all indebtedness (including the indebtedness to Birdsall). Silverstein and Shander, however, never signed the o —
er. On October 27, 1989, Saucier’s attorney signed a complaint commencing a — oreclosure action against them. Saucier v. Silverstein, No. CV-89-0437356S (Hart — ord-New Britain J.D.). The Birdsalls allege in their complaint that Saucier told Birdsall that he did not wish to have the building sold during or a — ter the — oreclosure action and that i — Birdsall stopped his e —
ort to sell the property, Saucier would pay him the $73,000. No credible evidence has been advanced to support this claim. On the contrary, Saucier testi — ied that he planned the — oreclosure action independently, and that Rugens independently decided not to pursue his bid until the — oreclosure was over so that Birdsall would be out o — the picture. Rugens did not testi — y. The court — inds Saucier’s testimony on this matter credible. Because o — his interest in the premises, Birdsall was named as a co-de — endant in the — oreclosure action. On June 18, 1990, a judgment o — strict — oreclosure was entered. Because the value o — the property was by now greatly diminished, Birdsall’s note and mortgage were rendered worthless. His mortgage was not redeemed. On March 22, 1991, the Birdsalls commenced the present action. The complaint is in three counts. The — irst count seeks recovery o — $73,000 as the allegedly unpaid balance o — the plainti —
s’ commission — or their services under the open listing agreement o — May 1, 1985. The second count alleges that Saucier is liable
or the unpaid debts o — B & S (which dissolved shortly a — ter the 1985 closing) and that one o — these debts is the $73,000 owed to the plainti —
s. The third count alleges that Saucier breached his agreement to pay Birdsall $73,000 i — Birdsall dropped his e —
orts to sell the building at the time o — the — oreclosure. As already noted, the — actual basis o — the third count has simply not been established, and that count will not be — urther discussed. Because the — irst two counts involve the same underlying debt, they can be conveniently discussed together. As an a —
irmative de — ense to the — irst two counts, 718 23 • Modi — ication and Discharge
the de
endants have pleaded accord and satis — action. The court — inds that de — ense to be established. “An accord is a contract between creditor and debtor — or the settlement o — a claim by some per — ormance other than that which is due. Satis — action takes place when the accord is executed.” An accord, however, is an agreement, and an agreement will not be considered binding by the courts unless it is supported by consideration. At an early date in English history it was held that a creditor could not take — ive pounds in satis — action o — a — i — teen pound debt because he received no consideration
or the other ten pounds. Cumber v. Wane, 93 Eng.Rep. 613 (1718); Pinnel’s Case, supra. From the day this rule was announced, however, it has been recognized that dictates o —
airness and considerations o — business require that the rule be subject to certain exceptions. One well known exception is that an accord may be made “when there is a good — aith dispute about the existence o — a debt or about the amount that is owed.” That exception is not applicable here. There are, however, other well- established exceptions that are highly relevant to the instant case. It was, in the — irst place, recognized in Pinnel’s Case itsel — that, while a lesser sum cannot be satis — action — or a greater sum, “the gi — t o — a horse, hawk, or robe . . . in satis-
action is good.” 77 Eng.Rep. at 237. From that day to this, it has not been doubted that, A liquidated money demand may, with the consent o — the parties, be dis- charged by the delivery o — property in payment thereo — or by delivery o — part money and part property; i — the latter is received by the creditor in — ull dis- charge o — the indebtedness, there is a good accord and satis — action. The relative value o — the property is immaterial as a —
ecting the validity o — the accord and satis — action. 1 Am.Jur.2d Accord and Satis — action Sect. 40 (1962). This exception has long been acknowledged in Connecticut. In Warren v. Skin- ner, 20 Conn. 559 (1850), which recognized both the ancient English rule and its traditional exceptions, it was stated that an agreement in satis — action o — a debt will be recognized when it “rests on a new and adequate consideration; as where the debtor pays a part o — the debt . . . in a collateral article, agreed to be received in — ull payment.” The Connecticut Supreme Court subsequently — ound this exception applicable in Rose v. Hall, 26 Conn. 392 (1857) (holding a combination o — bills o — exchange and cloth to be adequate consideration), and Bull v. Bull, 43 Conn. 455 (1876) (holding a debt to be satis — ied by the payment o — some pictures). O — course, not every debtor has a stock o — cloth or pictures handy to pay o —
his debts. Commercially sensible arrangements are acceptable as well. In particular, it is well established that “[t]he acceptance, by a creditor, o — the note o — a third person, in satis — action o — an existing debt, is an extinguishment o — such original indebtedness, and constitutes a good accord and satis — action thereo — , whether the note be — or the — ull amount o — the debt, or — or a lesser sum.” 23 • Modi — ication and Discharge 719
This latter exception has been recognized in Connecticut
or over a hundred years. In Argall v. Cook, 43 Conn. 160, 166 (1875), it was held that a note endorsed by a third person may be taken in accord and satis — action o — a debt even when the note is — or a lesser amount. The Supreme Court [o — Connecticut] explained that, “The additional security which [the creditor] received by the indorsement was a su —
icient legal con- sideration — or the discharge.” Id. Birdsall argues that the assignment here cannot extinguish the underlying debt unless it amounts to a novation. This is not, however, the case. “ ‘Novation’ is a term usually used to re — er to instances in which a new party is introduced into a new contract.” A novation “creates a new contractual duty.” 15 Sam- uel Willison, A Treatise on the Law o — Contracts Sect. 1865 at 590 (3d ed. 1972). A substitution o — a new creditor brought about by an assignment “is seldom re — erred to as a novation.” 6 Arthur Corbin, Corbin on Contracts Sect. 1297 at 216 (1962). “Thus,” as Corbin explains, “i — we suppose that A owes B $100, B can assign his right to C, without A’s assent.” Id. That is exactly what happened here. The real question here is a — actual one: did the parties — i.e. Birdsall and Saucier — agree that the settlement agreement itsel — constituted satis — action o — the original cause o — action or did they instead agree that the per — ormance o — the agreement was to be the satis — action. This depends entirely “upon the intention o — the parties.” While there is “a strong presumption that the plainti —
would not, claiming a substantially undisputed amount to be due her, accept a mere promise to pay a much smaller sum in discharge o — the larger amount,” id., that presumption is not applicable here, and to the extent that it is applicable, it is overcome by the — acts. Here, Birdsall did not “accept a mere promise to pay a much smaller sum in dis- charge o — the larger amount.” As explained above, the note that he accepted, had it been — ully paid, would have given him a larger sum at the end. In any event, there is no credible evidence that either party intended that the original debt o — Saucier to Birdsall was to continue a — ter the assignment o — the note. There is, in contrast, cred- ible evidence that both parties intended that the original debt was to be extinguished by the assignment. Were the — acts otherwise, Birdsall — an experienced real estate broker — would not have given Saucier a written receipt stating “commission paid in
ull.” It bears repeating that Birdsall was willing to do this because he wanted to save the deal and knew that a bird in the hand was worth two in the bush. Birdsall was satis — ied with the monetary payment o — $29,500 and the note assigned to him by Saucier. He took money — rom Silverstein and Shander — or three years with- out complaint. The debt that B & S owed to Birdsall was extinguished, and both par- ties intended it to be so. By any measure, the assignment o — the note constituted a new and valid consideration. When Birdsall signed his receipt “commission paid in — ull,” there was accord and satis — action. Because o — this he cannot now recover against the de — endants no matter how bad his bargain has turned out to be. Judgment shall enter — or the de — endants. 720 23 • Modi — ication and Discharge
Re --- lection A substituted contract immediately replaces an old obligation with a new one. An accord and satis --- action, on the other hand, does not immediately destroy the old obli- gation but merely suspends it until the promised accord has either been per --- ormed, in which case the remaining duties are discharged, or breached, in which case the obligee can select to sue either --- or breach o --- the new accord or --- or breach o --- the old obligation.
The Birdsall court assumes that parties in this case intend an accord, not a sub- stitution. This is the de --- ault assumption when a debtor agrees to be paid something less than the --- ull amount claimed. The thinking is that obligees do not reduce their rights --- or no reason, so courts should interpret purported contractual modi --- ication as intended to make the obligee better o ---
in some way.
Discussion 1. The law o --- contracts purports to codi --- y reasonable parties’ intentions when bargaining. The law o --- sales, in particular, is said to have developed --- rom cus- tom amid merchants’ guilds. In this way, contracts rules such as the presump- tion that parties generally intend to make an accord and satis --- action instead o --- a substituted contract --- unction as de --- ault rules. But does this rule re --- lect ordinary intentions? 2. Consider whether you had any notion o --- “accord and satis --- action” be --- ore taking this course. I --- you were Saucier and had no knowledge o --- the R2d’s de --- ault pre- sumption, would you have presumed that you were entitled to payment on the old note until you received payment o --- the new one? Or would you have intended to give up your rights to the old note in exchange --- or rights to the new one?
Problems Problem 23.1. Fair and Reasonable Modi --- ication Angel dismisses the preexisting duty rule and replaces it with the ability to modi --- y a contract on --- air and equitable terms. Do you think this case moves the law in the right or wrong direction? Discuss and explain your position.
Problem 23.2. Accord and Satis
action Birdsall explains why the court believed parties generally intend an accord and satis — action, and not a substituted contract, when one party agrees to take less than 23 • Modi — ication and Discharge 721
it was owed under the original contract. Do you agree with this presumption, or is it misplaced? In answering this question, make sure to explain the di —
erence in
orm and — unction between a substituted contract, on the one hand, and accord and satis — action, on the other. Then discuss what merits a presumption that the parties intended to engage in one o — these two — orms. Module VI
Remedies
What happens when promises --- ail? The term “remedy” comes --- rom the Anglo- French concept o --- curing a wrong, and in contract law, remedies restore balance when expectations are broken. Imagine a contractor who vanishes be --- ore completing a proj ect or a supplier who --- ails to deliver essential goods. Courts use remedies to address these breaches. In cra --- ting remedies, courts have signi --- icant discretion and seek to balance a vari- ety o --- interests. On the one hand, courts seek to compensate the injured party and deter --- uture promise breaking by providing a remedy that approximates the loss the injured party su ---
ered due to the breach. On the other hand, courts strive to ensure a
air outcome overall and grant just remuneration to both parties — or any bene — its they con — erred, to the extent possible. At its core, contract law aims to protect three interests. First, the expectation inter- est is the injured party’s interest in receiving the bene — it o — their bargain. Second, the reliance interest is the injured party’s interest in being reimbursed — or losses they incurred as a result o — relying on a promise. Third, the restitution interest is either party’s interest in having returned to them the value o — bene — its they con — erred on the other party, in order to avoid unjust enrichment. The R2d spells out the three interests protected through contract remedies: Judicial remedies under the rules stated in this Restatement serve to protect one or more o — the — ollowing interests o — a promisee:
723
724 Module VI • Remedies
(a) his “expectation interest,” which is his interest in having the bene --- it
o --- his bargain by being put in as good a position as he would have been
in had the contract been per --- ormed,
(b) his “reliance interest,” which is his interest in being reimbursed --- or
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 bene --- it that he has con --- erred on the other party. R2d § 344. Crucially, even though they overlap, these three interests are typically mutually exclusive. A court typically designs a remedy to protect only one o --- them. The expec- tation interest usually takes precedence. I --- courts tried to protect all three interests at the same time, they would likely end up giving the plainti ---
a wind — all (overcompensa- tion) by awarding the plainti —
multiple recoveries — or the same harm. Even though ordering a breaching party to per — orm their promise might seem like the most natural way to remediate a breach o — contract, courts rarely grant spe- ci — ic per — ormance. Instead, contract law typically protects these interests by awarding money damages. The purpose o — contract damages is usually to protect the injured party’s expectation interest by giving them the — inancial bene — it, though not the literal bene — it, o — their bargain. That said, courts are empowered to grant a variety o — rem- edies, ranging — rom ordering a party to pay money due under a contract to ordering a party to per — orm their promises (speci — ic per — ormance). The judicial remedies available — or the protection o — the interests stated in § 344 include a judgment or order (a) awarding a sum o — money due under the contract or as damages, (b) requiring speci — ic per — ormance o — a contract or enjoining its non-per — ormance, (c) requiring restoration o — a speci — ic thing to prevent unjust enrichment, (d) awarding a sum o — money to prevent unjust enrichment, (e) declaring the rights o — the parties, and ( — ) en — orcing an arbitration award. R2d § 345. This module systematically explores the primary judicial remedies in contract law. Chapter 24 introduces students to contract remedies by analyzing what happens when one party completely — ails to per — orm. Expectation damages are the primary rem- edy — or nonper — ormance; they are calculated based on the expectation interest (the net bene — it o — the bargain). However, in some cases, the injured party may seek reli- ance damages as an alternative, especially when expectation damages are di —
icult to prove. When awarding damages — or the breach o — contract, courts must ensure that the injured party is — airly compensated — or the total collapse o — the contract. Module VI • Remedies 725
Chapter 25 deepens the analysis by exploring scenarios where per
ormance is de — ective but not entirely absent. In these cases, where promises are partially — ul — illed, courts must determine how to compensate the injured party — or the loss in value due to the de — ective per — ormance. Expectation damages in de — ective per — ormance cases usually take the — orm o — either the cost o — repair or completion, or the diminished value o — the per — ormance. You will learn how to assess which o — these measures is most appropriate in various situations. Chapter 26 shi — ts to the legal limits on damages. Not all damages are recoverable, and this chapter examines how the law has evolved to impose limits on a plainti —
’s damages — or breach o — contract. Doctrines such as — oreseeability, certainty, and avoid- ability (also known as the “duty to mitigate”) are explored. These limits are critical in practice because they can signi — icantly reduce the amount o — damages a party can recover. Chapter 27 examines non-monetary remedies. It explores how courts use remedies such as speci — ic per — ormance, rescission, and restitution to address situations where
inancial compensation alone is insu —
icient. Although monetary remedies are the most common, this chapter equips students with the tools to recognize when a non- monetary remedy may be warranted. Finally, Chapter 28 discusses remedies — or third parties. Under traditional contract law, the privity rule held that only parties to a contract had rights to sue under it. The rationale was that contracts are private agreements, and only parties who explicitly agreed to be bound by the terms should have rights to en — orce them. However, mod- ern contract law has developed exceptions to this rule, occasionally granting remedies to third parties whom the contract parties intended to bene — it. The modern rationale is that when parties mani — est mutual assent to con — er rights on third parties, those intended bene — iciaries should be able to seek remedies under the contract. Together, these chapters provide a comprehensive understanding o — contract rem- edies. By examining how courts balance compensation, predictability, and — airness, students will gain insight into how contract law resolves disputes while upholding its central goal o — ensuring that agreements are en — orceable. Chapter 24 Money Damages — or Nonper — ormance
Imagine you entered a contract with the city to rent its largest event hall
or your annual charity gala. You arrive on the agreed-upon date only to — ind the venue locked and deserted — no sta —
, no explanation, and no alternate arrangement. Your event is set to begin within hours, so your losses are signi — icant: you may have to scramble — or a last-minute venue at a much higher price or cancel the gala outright, which would render meaningless your months o — planning as well as jeopardize ticket sales and donor goodwill. This situation exempli — ies total nonper — ormance, where the breaching party pro- vides nothing that they promised under the contract. In response, courts typically award expectation damages, which aim to give you the bene — it o — the bargain — the position you would have occupied had the city — ully per — ormed. For instance, you might recover the di —
erence in cost between the agreed-upon event hall and whatever “cover” arrangement you manage to secure at the eleventh hour, along with any lost pro — its you can reasonably demonstrate (such as re — unded ticket sales). But i — your expected gains are too uncertain to calculate, you might instead pursue reliance dam- ages, which reimburse out-o — -pocket expenses like marketing — ees or deposits you paid in reliance on the city’s promise. Because expectation damages protect the expectation interest, they stand as the de — ault remedy in contract law. Yet the law stops short o — allowing recovery beyond the economic value o — the contract itsel — . Punitive damages, designed to punish wrongdoing, generally do not apply, even i — the breach is deliberate or — eels mor- ally troubling. One notable outgrowth o — this limit is the idea o — e —
icient breach: a party might choose to breach deliberately when a more lucrative opportunity arises, provided that it pays the injured party’s expectation damages. Returning to the gala example, i — the city rents the hall to a major corporate client o —
ering ten times your rental — ee, the law permits that e —
icient outcome as long as you are — ully compensated
or — oreseeable losses — though many — ind this notion morally unsettling. This chapter explains in detail how courts calculate expectation damages in cases o — total nonper — ormance, including direct losses (like the increased price you pay — or a last-minute venue) and indirect or consequential losses (such as rush service — ees or lost donations). It then examines reliance damages as an alternative when the bene — it
727
728 24 • Money Damages — or Nonper — ormance
o
the bargain is too speculative to prove. Finally, it discusses how the UCC — rames these same concepts in the sale-o — -goods context, using — ormulas that apply when a buyer or seller — ails to per — orm. By understanding how money damages address a complete — ailure to per — orm, students will develop a strong — oundation — or examining incomplete or de — ective per — ormance, limitations on damages, and the possibility o —
non-monetary remedies, which are covered in the chapters that
ollow.
Rules A. Expectation Damages Expectation damages compensate the injured party --- or the value o --- the per --- ormance they reasonably anticipated. The goal is to place the injured party in the same position they would have occupied i --- the contract had been per --- ormed without breach. Courts calculate expectation damages by combining --- our components: loss in value, incidental damages, consequential damages, and costs avoided. The sum o ---
the
irst three components, minus any costs avoided, yields the — inal damages award. Subject to the limitations stated in §§ 350-53, the injured party has a right to damages based on his expectation interest as measured by (a) the loss in the value to him o — the other party’s per — ormance caused by its — ailure or de — iciency, plus (b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to per — orm. R2d § 347. Expectation damages are typically divided into direct damages, the direct loss in value the plainti —
su —
ers due to the nonper — ormance, and indirect damages, the indirect losses — lowing — orm the breach, including both incidental and consequential damages.
- Direct Expectation Damages (Direct Loss in Value) Direct damages, also called “general damages,” encompass the direct loss in value plainti —
experiences as a result o — the breach. Direct damages approximate the gap between the per — ormance promised under the contract and what the injured party actually received. I — no per — ormance occurs at all, the loss in value is total because the plainti —
received nothing. Importantly, though, this does not mean the plainti —
gets the — ull value o — what was promised. The reason is that plainti —
s typically — ind a substitute per — ormance — mean- ing that they “cover” by — inding another contractor to deliver the same or equivalent goods or services. And the law typically imputes on plainti —
s a duty to cover (mitiga- tion is addressed in Chapter 26.) Thus, even i — a plainti —
does not cover, their damages 24 • Money Damages — or Nonper — ormance 729
will typically be subtracted by the market price o
the same or equivalent goods or services. As a result, the way courts usually calculate direct expectation damages due to total nonper — ormance is by giving the plainti —
the di —
erence between the contract price and the price o — a substitute per — ormance. The substitute per — ormance is either the cost o — the cover that the plainti —
actually secures or the cost o — the cover that the plainti —
could reasonably secure on the open market. For example, suppose that Landowner hires Builder, a construction company, to construct a barn — or a total price o — $100,000. Builder breaches by unjusti — iably termi- nating the contract be — ore any work is done. Landowner is able to — ind a new contrac- tor to build the barn — or $120,000. What amount would put Landowner in the same position Landowner would occupy i — the contract had been per — ormed? The answer is $20,000, the di —
erence between Landowner’s cost o — cover ($120,000) and the con- tract price ($100,000). Note that even i — Landowner did not cover by hiring this substitute builder, Landowner’s damages would still likely have been subtracted by $120,000, assum- ing that a substitute contractor were reasonably available at that price on the open market. I — Landowner — inds a substitute Builder at the same $100,000 price — meaning that Landowner manages to cover at the contract price — then the loss in value is zero, though Landowner may still recover other damages i — they incur additional costs tied to the breach. What i — Landowner — inds a substitute Builder — or only $90,000 on the open mar- ket? I — so, Landowner’s damages may be negative, so zero. Landowner entered what is called a “losing contract.” Landowner might obtain “nominal damages” — symbolic damages in the amount o — , say, $10 — in order to demonstrate that a party prevailed. But Landowner cannot recover more as a result o — the breach than they could have recovered had the contract been per — ormed.
- Incidental Damages Incidental damages cover reasonable expenses the injured party incurs while react- ing to the breach, such as costs — or arranging substitute per — ormance, storing rejected goods, or expediting delivery. In other words, incidental damages are expenses that the injured party incurs — rom mitigating (reducing) the harm caused by the breach. As you will learn in Chapter 26, plainti —
s are required to use reasonable e —
orts to mitigate the breach, or else their recovery will be reduced accordingly. Thus, the law compensates plainti —
s — or those mitigation e —
orts. Imagine that Landowner, who owns several horses, incurs $2,000 renting a space to house the horses while the building o — a new barn is delayed due to the Builder’s breach. These costs quali — y as incidental damages i — they are reasonable and directly related to the breach. However, i — the Landowner spent $10,000 sending the horses on 730 24 • Money Damages — or Nonper — ormance
a tour o
the world, those costs would not be incidental damages, as they lack a direct connection to the breach.
- Consequential Damages Consequential damages address losses resulting — rom the injured party’s special circumstances, provided that the breaching party had reason to — oresee those losses at the time o — contracting. For example, i — a homeowner contracts to — ix a leak in her roo —
prior to the rainy season, and the roo
ing company breaches, the homeowner might seek compensation — or damage to her wooden — loors when rain seeps into her home. A common — orm o — consequential damages is lost pro — its, meaning the pro — its a party loses as a result o — the breach due to particular circumstances o — which the breaching party is aware. The — amous case Hadley v. Baxendale, 56 Eng. Rep. 145, 9 Exch. 341 (1854), which deals with lost pro — its, appears in Chapter 26. In Hadley, a mill was stopped due to a broken sha — t. The mill owner contracted with a transporta- tion company to arrange delivery o — a replacement sha — t, but the delivery was delayed. The question in the case was whether the mill could obtain the lost pro — its caused by the mill being stopped during the period o — the delay. As you will learn in Chapter 26, consequential damages — and indeed all — orms o —
contract damages — are limited by the doctrine o
oreseeability. The damages must have been reasonably — oreseeable to the breaching party at the time o — contracting or else they cannot be recovered. In Hadley, the court held that the lost pro — its due to the delay in delivering the mill sha — t were not recoverable because the transportation company had no reason to know the mill was stopped. Damages are not recoverable — or loss that the party in breach did not have reason to — oresee as a probable result o — the breach when the contract was made. R2d § 351.
I --- the injured party is able to cover by --- inding a substitute per --- ormance, then they are unlikely to su ---
er lost pro — its. Indeed, parties have a duty to mitigate their losses by covering where it is reasonably — easible to do so. But sometimes, it is not possible to obtain a substitute per — ormance or there is an unavoidable delay in — inding a sub- stitute per — ormance, and the injured party su —
ers losses as a result. Return to the example o — the landowner who is seeking to build a barn. Imagine Landowner in — ormed Builder at contract — ormation that the barn was going to be used as the base — or Landowner’s new walnut — arming operation and that the — arm was scheduled to begin operations in October. Builder’s — ailure to build the barn delays the opening o — the — arm until December, and Landowner is unable to sell nearly as many walnuts as planned. Landowner’s lost pro — its — rom the missed walnut sales may be recoverable as consequential damages. However, i — Landowner never mentions the walnut — arming operation or that the barn was essential — or making walnut sales, the lost pro — its would be too un — oreseeable to be recoverable as consequential damages. 24 • Money Damages — or Nonper — ormance 731
Moreover, i
Landowner could easily have covered ( — or instance, by hiring another contractor to build the barn), then these avoidable losses would not be recoverable.
- Costs Avoided Costs avoided reduce the — inal damages award by accounting — or expenses the injured party saved as a result o — the breach. This prevents overcompensation. Parties should not gain a wind — all due to a breach. The non-breaching party is entitled only to the expected bene — it o — the bargain. Damages based on the injured party’s expectation interest are reduced by any cost or other loss that he has avoided by not having to per — orm. R2d § 347(c).
You already saw this principle at work in the direct “loss in value” calculation above. Remember that the injured party in a breach o — contract case does not typically get the
ull value o — the lost per — ormance. They get the value o — the lost per — ormance minus the contract price they would have had to pay. Thus, the loss in value — ormula typi- cally automatically incorporates avoided costs by subtracting out the contract price. However, sometimes, there are additional avoided costs to consider. For example, imagine Landowner would have had to spend the contract price o — $100,000 plus an extra $3,000 to hire a bulldozer to clear the land around the barn. Because Builder breaches, Landowner does not have to pay Builder the contract price o — $100,000 or the extra $3,000 — or the bulldozer. Instead, Landowner is able to cover by hiring a di —
erent contractor, who is willing to do the whole job — or $120,000, including the bull- dozing — or no extra — ee. Landowner’s damages would be $120,000, minus the contract price o — $100,000 and minus the $3,000 saved on bulldozing. The result is $17,000 in expectation damages. This example shows how avoided costs can signi — icantly reduce recovery and must be accounted — or in the damages — ormula. The burden is on the de — endant to prove costs avoided. Thus, in this example, the burden would be on Builder to prove these save costs. I — Builder is unable to provide supporting evidence, the court is unlikely to treat this as a cost avoided because it is too speculative. In sum, the — ormula — or calculating expectation damages can be stated as: Expectation Damages = Loss in Value + Incidental Damages + Consequential Damages − Costs Avoided Let us apply this — ormula to the case. Assume Landowner contracted with Builder to build the barn at a price o — $100,000. Builder — ails to show up. Landowner eventu- ally is able to — ind another contractor to do the job — or $120,000. Landowner incurs an additional $2,000 in housing the horses during the period o — the delay. Landowner does not, however, incur the $3,000 cost to hire a bulldozing company, since this service is now included in the new cover contract. Additionally, Builder knew the barn was to be used — or Landowner’s walnut — arming operation and that Landowner 732 24 • Money Damages — or Nonper — ormance
would lose walnut sales i
the barn’s construction were delayed. Landowner can prove the — arm lost $5,000 in walnut sales as a result o — the delay. The damages calculation would be: Loss in Value: $20,000 above contract price — or substitute contractor (“cost o — cover” minus contract price) + Incidental Damages: $2,000 (housing the horses) + Consequential Damages: $5,000 (lost walnut sales, i —
oreseeable) − Costs Avoided: $3,000 (canceled bulldozing costs) = Total Damages = $20,000 + $2,000 + $5,000 − $3,000 = $ 24,000 This — ormula ensures that the injured party is — ully compensated — or the loss o — their bargain while avoiding overcompensation. By addressing each component systemati- cally, courts aim to replicate the position the injured party would have occupied i — the contract had been — ully per — ormed.
B. Reliance Damages Reliance damages o —
er an alternative route — or recovery when expectation damages are di —
icult to measure. These damages — ocus on reimbursing the injured party — or costs incurred in preparing — or or partially per — orming under the contract. Crucially, plainti —
s cannot typically get both reliance and expectation damages. Instead, reliance damages are utilized as an alternative, when the plainti —
cannot prove their expecta- tion damages or when, — or some reason, none are recoverable under the contract. Reliance damages aim to restore the injured party to their pre-contract position. They do not attempt to provide the bene — it o — the bargain but instead — ocus on undo- ing losses incurred while relying on the other party’s promise. This makes them par- ticularly use — ul when expectation damages are speculative or impossible to calculate. Damages based on reliance interest include expenditures made in preparation
or per — ormance or in per — ormance, minus any loss the injured party would have su —
ered i — the contract had been — ully per — ormed. R2d § 349. Consider a homebuyer who spends $5,000 hiring an interior decorator to draw up plans — or decorating a new home a — ter signing a contract — or the purchase o — a house. Seller — ails to deliver the house, leaving Homebuyer without need o — the inte- rior decorator’s plans. No money has changed hands, and Homebuyer could purchase a nearly identical property on the open market, so her expectation damages are zero. But Homebuyer may in the alternative seek reliance damages — or her $5,000 decorator costs. These expenses are directly tied to Homebuyer’s reliance on Seller’s promise to deliver the home. On the other hand, suppose Homebuyer spends $20,000 on an unrelated interior design project that has no connection to the promised house. Since this expenditure 24 • Money Damages — or Nonper — ormance 733
does not arise
rom the supplier’s breach, it is not recoverable as reliance damages. Courts require a clear causal link between the costs incurred and the breached prom- ise. The injured party must prove causation by showing that the expenditures resulted directly — rom the contract. Importantly, reliance damages are subject to the same limitations as expectation damages. As discussed Chapter 26, in order to prevent overcompensation, courts do not award damages that are not — oreseeable, that are not provable with reasonable certainty, or that the plainti —
could have avoided by taking reasonable steps to miti- gate their losses. Thus, reliance costs must be — oreseeable, provable, and not easily avoidable. For example, in the illustration above, i — Homebuyer could easily have obtained a re — und — rom the decorator, then the decorator’s — ees would not be recoverable — rom Seller. Or imagine that the decorator’s plans were easily salvageable because they could just as well have been used in a substitute home. These losses might not be recoverable — rom Seller either. The injured party has a duty to mitigate their losses by taking reasonable steps to salvage or recoup their expenditures. A — inal point to understand is that, in general, courts hold that reliance damages cannot exceed the bene — it that the injured party would have received i — the contract had been — ully per — ormed. This limitation ensures that reliance damages do not create a wind — all — or the injured party. Damages are not recoverable — or loss that the injured party would have su — -
ered even i — the contract had been per — ormed. R2d § 349. For instance, i — Homebuyer, in anticipation o — the home sale contract, spent $100,000 on new — urniture — or the new home, and the value o — the house itsel — was $50,000, the Homebuyer’s reliance damages would not encompass the — ull $100,000. Even assuming this expenditure on — urniture were — oreseeable, provable, and not easily salvaged (such as through returning or reselling the new — urniture), a recov- ery o — $100,000 would overcompensate the plainti —
because it would put the plain- ti —
in a better position than i — the contract were per — ormed. Instead, Homebuyer would obtain a maximum o — $50,000 — the expenditures made in reliance on the contract ($100,000), less the contract price which the Homebuyer no longer has to pay ($50,000). Reliance damages aim to restore the injured party to the position they would have been in had the contract not been made, without granting them more than they rea- sonably anticipated gaining. This — ormula can be expressed as: Reliance Damages = Expenditures Made − Loss Avoided Reliance damages o —
er a practical solution when expectation damages are uncer- tain, — ocusing on — airness and the actual costs incurred by the injured party. By ensur- ing that recovery is closely tied to the breach, courts prevent overcompensation while providing meaning — ul relie — . 734 24 • Money Damages — or Nonper — ormance
C. UCC Remedies When a contract involves the sale o — goods, the UCC re — ines expectation and reli- ance principles to address the realities o — commercial transactions. This section trans- lates those core concepts into speci — ic remedies — or buyers and sellers. It explains how aggrieved buyers may recover damages through cover, market price damages, and incidental/consequential damages. It then discusses how breaching buyers may be liable — or the seller’s resale damages, market price damages, or lost pro — its.
-
Buyer’s Remedies The remedies available to buyers under the UCC ensure buyers can secure substi- tute goods or recover — inancial losses directly tied to the breach. Tools like cover and market price damages are designed to re — lect the buyer’s need to mitigate damages by obtaining substitutes, while incidental and consequential damages account — or the broader impacts o — the seller’s — ailure to per — orm.
a. Cover Buyers who do not receive goods may obtain substitutes in a reasonable manner and then recover the di ---
erence in cost, i — any, — rom the breaching seller. The buyer may “cover” by making in good — aith and without unreasonable delay any reasonable purchase o — or contract to purchase goods in substitution
or those due — rom the seller. The buyer may recover — rom the seller as damages the di —
erence between the cost o — cover and the contract price together with any incidental or consequential damages, but less expenses saved in conse- quence o — the seller’s breach. NH UCC § 2-712. For example, suppose a clothing retailer contracts to purchase one hundred hand- made scarves at $25 each. When the seller — ails to deliver the scarves, the retailer cov- ers by paying $30 each to secure the same scarves — rom another supplier. The loss in value is $5 per scar — , resulting in $500 total. I — the retailer — inds substitute scarves at the same $25 price— meaning that the retailer manages to cover at the contract price — then the loss in value is zero, though the retailer may still recover other damages i — they incur additional costs tied to the breach. What i — the retailer — inds substitute scarves — or only $20 on the open market? I — so, the retailer’s damages may be negative. The retailer entered what is called a “losing contract.” The retailer might obtain nominal damages, or symbolic damages, in the amount o — , say, $10, in order to demonstrate that a party prevailed. But the retailer cannot recover more as a result o — the breach than she could have recovered had the contract been per — ormed. Cover Damages = Cost o — Cover − Contract Price + Incidental Damages + Consequential Damages − Expenses Saved 24 • Money Damages — or Nonper — ormance 735
Here is a hypothetical that demonstrates this calculation. A bakery orders 100 pounds o — specialty — lour at $3.00 per pound — rom a mill. The mill — ails to deliver, so the bakery quickly purchases the same — lour — rom another supplier at $3.50 per pound, plus $50 in expedited shipping. The bakery did not need to pay $20 — or stand- ing shipping via the miller’s third-party carrier. The cover damages calculation is as
ollows: Cost o — Cover: $3.50 per pound × 100 pounds = $350 − Contract Price: $3.00 per pound × 100 pounds = $300 + Incidental Damages: $50 (expedited shipping) − Expenses Saved: $20 (standard shipping not required) = Cover Damages = $350 − $300 + $50 − $20 = $80 Assuming it acted reasonably, the bakery can recover $80 in cover damages — rom the mill. I — the bakery had chosen an unreasonably expensive substitute (e.g., purchas- ing artisanal — lour — or $6 per pound), however, the recovery might have been limited to the cost o — reasonable alternatives.
b. Market Price Damages I --- the buyer decides not to or cannot cover, it may still recover damages based on the di ---
erence between the contract price and the relevant market price. The measure o — damages — or non-delivery or repudiation by the seller is the di —
erence between the market price at the time when the buyer learned o — the breach and the contract price together with any incidental and consequential damages, but less expenses saved. NH UCC § 2-713. What i — the bakery could not — ind a substitute supplier — or less than $3.25 per pound, so it reasonably chooses not to buy at all? I — the local market price at the time o — breach is $3.25, the bakery may recover $0.25 per pound, multiplied by the 100 pounds it expected. Alternatively, i — the market price drops to $2.80 a — ter the breach, the buyer’s recovery diminishes accordingly. A — alling market reduces damages because the gap between the contract price and market price narrows. Market Price Damages = Market Price at Time o — Breach − Contract Price + Incidental Damages + Consequential Damages − Expenses Saved Since the bakery could not — ind a substitute supplier — or less than $3.25 per pound and decides not to buy at all, cover damages are inapplicable. The local market price at the time o — breach is $3.25, and the contract price was $3.00 per pound. Further assume that the bakery incurs $50 in incidental storage costs — or yeast it could not use and had to store until suitable wheat arrived. In addition, the bakery saved $20 that it did not spend on shipping the wheat. Here is how the damages calculate: 736 24 • Money Damages — or Nonper — ormance
Market Price: $3.25 per pound × 100 pounds = $325
− Contract Price: $3.00 per pound × 100 pounds = $300
+ Incidental Damages: $50 (storage costs)
− Expenses Saved: $20 (standard shipping not required)
= Market Price Damages = $325 − $300 + $50 − $20 = $55 The bakery may recover $55 in market price damages.
c. Incidental and Consequential Damages Buyers may also recover incidental and consequential damages that arise directly
rom the breach, so long as these damages are — oreseeable. The UCC codi — ies common law concepts: Incidental damages resulting — rom the seller’s breach include expenses reason- ably incurred in inspection, receipt, transportation, and care and custody o —
goods right --- ully rejected. Consequential damages include any loss resulting
rom general or particular requirements and needs o — which the seller had reason to know and which could not reasonably be prevented by cover or otherwise. NH UCC § 2-715(1)–(2). For example, the bakery pays $100 to store partial shipments o —
lour delivered late by its miller. Because these extra storage — ees directly result — rom the breach, they count as incidental damages. Similarly, i — the bakery in — orms the miller that timely delivery is critical — or a pro — - itable holiday event, and the breach causes the bakery to miss those holiday sales, it might recover lost pro — its as consequential damages — assuming the miller knew or should have known about the signi — icance o — the holiday timing. By contrast, i — the bakery never mentioned any special timing or events, a major loss o — holiday pro — its may not be recoverable, as the miller could not — oresee the sig- ni — icance o — the missed date. (As you will learn in Chapter 26, un — oreseeable damages are generally not recoverable.)
-
Seller’s Remedies Seller’s remedies under the UCC address the speci — ic — inancial risks sellers — ace when buyers breach contracts. These remedies are designed to restore the seller to the position they would have been in i — the buyer had per — ormed. Resale damages allow sellers to recover the gap between the contract price and a reasonable resale price, while market price damages provide a substitute when resale is not — easible. In cases where these remedies — all short, sellers can recover lost pro — its by demonstrating that the breach deprived them o — additional sales opportunities. By — ocusing on com- mercially reasonable actions and actual — inancial harm, the UCC ensures that sellers receive — air compensation tailored to the nature o — their business losses. 24 • Money Damages — or Nonper — ormance 737
a. Resale Damages When the buyer repudiates or --- ails to pay, the seller may resell the goods in good
aith and recover the di —
erence between the resale price and the original contract price. Where the resale is made in good — aith and in a commercially reasonable manner, the seller may recover the di —
erence between the resale price and the contract price together with any incidental damages, but less expenses saved in consequence o — the buyer’s breach. NH UCC § 2-706. For instance, the bakery orders 100 pounds o — specialty — lour — or $3.00 per pound
rom its miller, then wrong — ully re — uses delivery. The miller resells it at $2.75 per pound on the open market. The miller can recover $0.25 per pound plus any inciden- tal resale costs (such as a small — ee — or listing on an online marketplace). Conversely, i — the miller waits months — or a better price and stores the — lour in sub- standard conditions that lead to spoilage, a court may deem its resale commercially unreasonable, which could limit or negate recovery. Resale Damages = Contract Price − Resale Price + Incidental Damages − Expenses Saved I — the miller reasonably incurs $25 in incidental costs — or listing the goods on an online marketplace and saves $10 on avoided packaging expenses, then here is the calculation: Contract Price: $3.00 per pound × 100 pounds = $300 − Resale Price: $2.75 per pound × 100 pounds = $275 + Incidental Damages: $25 (listing costs) − Expenses Saved: $10 (avoided packaging) = Resale Damages = ($300 − $275 + $25 − $10) = $40 The miller may recover $40 in resale damages.
b. Market Price Damages I --- the seller opts not to resell, or i --- a resale would require commercially unreason- able e ---
ort, or i — the seller attempts to resell but cannot — ind a buyer willing to pay a reasonable price, the seller may recover the di —
erence between the contract price and the market price at the time and place — or tender. The measure o — damages — or non-acceptance or repudiation by the buyer is the di —
erence between the market price at the time and place — or tender and the unpaid contract price, together with any incidental damages, but less expenses saved. NH UCC § 2-708(1). For example, i — the miller’s original contract with the bakery was $3.00 per pound, but the market price is $2.75 at the time o — tender, the miller may recover $0.25 per pound. 738 24 • Money Damages — or Nonper — ormance
Alternatively, i
the local market price — or specialty — lour soars to $3.25, and the miller does not resell, its damages might be negative or zero. It loses the opportunity to capitalize on a — avorable market, and the court’s calculation o — $3.25 minus the contract price o — $3.00 may not yield meaning — ul damages. Market Price Damages = Contract Price − Market Price at Time o — Tender + Incidental Damages − Expenses Saved I — the contract price was $3.00 per pound and the market price at the time and place o — tender is $2.75 per pound, and i — the miller incurs $20 in incidental storage costs — or holding the goods and saves $15 on avoided delivery expenses, here is the calculation: Contract Price: $3.00 per pound × 100 pounds = $300 − Market Price: $2.75 per pound × 100 pounds = $275 + Incidental Damages: $20 (storage costs) − Expenses Saved: $15 (avoided delivery expenses) = Market Price Damages = $300 — $275 + $20 − $15 = $30 The miller may recover $30 in market price damages.
c. Lost Pro --- its A seller may recover lost pro --- its when neither resale damages nor market price damages --- ully compensate it, especially i --- the seller could have sold additional goods despite the buyer’s breach. This situation only arises where the seller is a volume seller, which means the seller could have sold additional units to other buyers but --- or this buyer’s breach.
I --- the measure o --- damages provided in subsection (1) is inadequate to put the
seller in as good a position as per --- ormance would have done, the measure o ---
damages is the pro --- it (including reasonable overhead) which the seller would
have made --- rom --- ull per --- ormance, together with any incidental damages, due
allowance --- or costs reasonably incurred, and due credit --- or payments or pro-
ceeds o --- resale. NH UCC § 2-708(2). For instance, a particular miller has a vast capacity to mill --- lour. Even i --- it resells a buyer’s 100-pound order to another buyer, it remains a lost volume seller because it could have sold an additional 100 pounds to that new buyer. That miller can there --- ore recover the pro --- it it would have earned under the breached sales contract contract — provided it proves its surplus capacity and actual lost volume. Conversely, i --- the miller is a small-scale operation that produces a --- ixed amount o ---
lour per season, and it resells the same 100 pounds it would otherwise have sold, then it cannot claim lost pro — its. It has no extra capacity, so the breach did not cost it a second sale. 24 • Money Damages — or Nonper — ormance 739
Lost Pro --- its = Pro --- it on the Breached Sale
+ Incidental Damages − Costs Avoided Here is the calculation --- or a lost-volume seller:
Pro --- it on the Breached Sale: $0.50 per pound × 100 pounds = $50
+ Incidental Damages: $30 (advertising costs)
− Costs Avoided: $10 (avoided packaging expenses)
= Lost Pro --- its = $50 + $30 − $10 = $70 The high-capacity miller may recover $70 in lost pro --- its.
D. Re
lections on Money Damages — or Nonper — ormance Viewed in the broader landscape o — contract law, money damages — or nonper — or mance serve not only to compensate the injured party but also to in — luence each side’s decision-making long be — ore a breach ever occurs. By promising compensation — or lost value when one party — ails to per — orm at all, the law encourages potential breach- ers to care — ully weigh the costs and bene — its o — reneging on their promises. In many ways, the right to recover damages — unctions as a built-in deterrent that raises the “price” o — walking away and incentivizes parties to honor their obligations or, at the very least, negotiate a mutually acceptable modi — ication. Yet, as we’ve seen with the notion o — an e —
icient breach, the law doesn’t insist on per — ormance at any cost. A party may decide that (risking) paying the other side’s expectation damages is worthwhile i — a more lucrative opportunity arises. This bal- ance between deterrence and — lexibility underscores a key principle o — modern con- tract law: rather than punishing every breach, the system — ocuses on ensuring that injured parties are made whole. In turn, this enables a dynamic marketplace where parties can reallocate resources when doing so might bene — it both sides economically (even i — it — eels unsettling — rom a moral standpoint). Ultimately, the doctrines explored in this chapter rein — orce the core idea that dam- ages shape behavior — by guiding when parties choose to per — orm, renegotiate, or breach. In understanding how courts calculate expectation and reliance damages, students gain insight into the subtle pressures at work in every deal. This sets the stage
or examining more nuanced breaches in subsequent chapters, where partial or de — ec- tive per — ormance and non-monetary remedies — urther illustrate how the law balances
airness, predictability, and economic e —
iciency. 740 24 • Money Damages — or Nonper — ormance
Cases Reading Hawkins v. McGee. At --- irst glance, this case might look like a quaint
ootnote in legal history, but don’t let its age or odd nickname — the “Hairy Hand” case — — ool you. This brie — dispute has captivated generations o — law stu- dents precisely because it weaves together the principles o — contract — ormation, the subtleties o — promise versus pu —
ery, and the core concept o — expectation damages in a way — ew other cases do. In — act, it even stole the spotlight in the
amous opening scene o — The Paper Chase (1973). You might imagine there was something delight — ully dramatic about a doctor who supposedly promised his patient a “100% per — ect hand,” only to end up giving the patient something unexpectedly covered in hair. But once you dig deeper, you’ll see that beneath the tantalizing — acts lies a lesson about how — ar the courts will go to protect (or re — use to protect) a contracting party’s grand assurances. As you read the court’s opinion, look — or how the judges distinguish between a statement o — opinion and a legally en — orceable guarantee. Ask yoursel —
whether it truly makes sense
or a reasonable person to have taken the doctor literally when he pledged to make the plainti —
’s hand “100% per — ect.” Is there a meaning — ul di —
erence, in the world o — contract law, between a surgeon’s hope-
ul prognosis and an actual promise? Notice, too, how the court discusses dam- ages: it neither measures them by how terrible the operation turned out to be, nor by the pain the patient endured. Notably, pain and su —
ering was expected in such surgery, so that cannot be part o — expectation damages. Instead, expec- tation — ocuses on the di —
erence between what was promised and how the out- come — ell short o — that promise — a core hallmark o — how damages work in contract disputes. Don’t worry i — some parts seem puzzling or incomplete at — irst glance. Con- tracts cases o — ten leave loose threads that students have the chance to tie up in subsequent readings or re — lections on the case. For now, concentrate on the court’s approach to the doctor’s words and the nature o — the disappointment the plainti —
experienced. Keep a mental note o — the quirks o — language, context, and presumed knowledge that pop up along the way. By — ocusing on those details, you’ll begin to see how contract law addresses the gaps between what people say, what they mean, and what they deliver. And i — you — ind your mind wandering to the bizarre image o — a hairy hand, let that be a reminder that contract law — though sometimes seen as abstract — can have very tangible, and occasionally un — orgettable, consequences. 24 • Money Damages — or Nonper — ormance 741
Hawkins v. McGee
84 N.H. 114 (1929) Opinion by JUDGE MARBLE. The operation in question consisted in the removal o --- a considerable quantity o ---
scar tissue
rom the palm o — the plainti —
’s right hand and the gra — ting o — skin taken
rom the plainti —
’s chest in place thereo — . The scar tissue was the result o — a severe burn caused by contact with an electric wire, which the plainti —
received about nine years be — ore the time o — the transactions here involved. There was evidence to the e —
ect that be — ore the operation was per — ormed the plain- ti —
and his — ather went to the de — endant’s o —
ice and that the de — endant in answer to the question, “How long will the boy be in the hospital?” replied, “Three or — our days . . . not over — our; then the boy can go home, and it will be just a — ew days when he will be able to go back to work with a per — ect hand.” Clearly this and other testimony to the same e —
ect would not justi — y a — inding that the doctor contracted to complete the hospital treatment in three or — our days or that the plainti —
would be able to go back to work within a — ew days therea — ter. The above statements could only be construed as expressions o — opinion or predictions as to the probable duration o — the treatment and plainti —
’s resulting disability, and the — act that these estimates were exceeded would impose no contractual liability upon the de — endant. The only substantial basis — or the plainti —
’s claim is the testimony that the de — en- dant also said be — ore the operation was decided upon, “I will guarantee to make the hand a hundred per cent per — ect hand” or “a hundred per cent good hand.” The plain- ti —
was present when these words were alleged to have been spoken, and i — they are to be taken at their — ace value, it seems obvious that proo — o — their utterance would establish the giving o — a warranty in accordance with his contention. The de — endant argues, however, that even i — these words were uttered by him, no reasonable man would understand that they were used with the intention o — entering into any “contractual relation whatever,” and that they could reasonably be under- stood only “as his expression in strong language that he believed and expected that as a result o — the operation he would give the plainti —
a very good hand.” It may be conceded, as the de — endant contends, that be — ore the question o — the making o — a contract should be submitted to a jury, there is a preliminary question o — law — or the trial court to pass upon, i.e. “whether the words could possibly have the meaning imputed to them by the party who — ounds his case upon a certain interpretation,” but it cannot be held that the trial court decided this question erroneously in the present case. It is unnecessary to determine at this time whether the argument o — the de — endant based upon “common knowledge o — the uncertainty which attends all surgical opera- tions” and the improbability that a surgeon would ever contract to make a damaged part o — the human body “one hundred per cent per — ect” would, in the absence o —
742 24 • Money Damages
or Nonper — ormance
countervailing considerations, be regarded as conclusive,
or there were other — actors in the present case which tended to support the contention o — the plainti —
. There was evidence that the de — endant repeatedly solicited — rom the plainti —
’s — ather the oppor- tunity to per — orm this operation, and the theory was advanced by plainti —
’s counsel in cross-examination o — de — endant, that he sought an opportunity to “experiment on skin gra — ting” in which he had had little previous experience. I — the jury accepted this part o — plainti —
’s contention, there would be a reasonable basis — or the — urther conclu- sion that i — de — endant spoke the words attributed to him, he did so with the intention that they should be accepted at their — ace value, as an inducement — or the granting o —
consent to the operation by the plainti
and his — ather, and there was ample evidence that they were so accepted by them. The question o — the making o — the alleged contract was properly submitted to the jury. The substance o — the charge to the jury on the question o — damages appears in the
ollowing quotation: “I — you — ind the plainti —
entitled to anything, he is entitled to recover — or what pain and su —
ering he has been made to endure and what injury he has sustained over and above the injury that he had be — ore.” To this instruction the de — endant seasonably excepted. By it, the jury was permitted to consider two elements o — damage, (1) pain and su —
ering due to the operation, and (2) positive ill e —
ects o —
the operation upon the plainti
’s hand. Authority — or any speci — ic rule o — damages in cases o — this kind seems to be lacking, but when tested by general principle and by analogy, it appears that the — oregoing instruction was erroneous. By “damages” as that term is used in the law o — contracts, is intended compensa- tion — or a breach, measured in the terms o — the contract. The purpose o — the law is to put the plainti —
in as good a position as he would have been in had the de — endant kept his contract. The measure o — recovery is based upon what the de — endant should have given the plainti —
, not what the plainti —
has given the de — endant or otherwise expended. The only losses that can be said — airly to come within the terms o — a contract are such as the parties must have had in mind when the contract was made, or such as they either knew or ought to have known would probably result — rom a — ailure to comply with its terms. The present case is closely analogous to one in which a machine is built — or a certain purpose and warranted to do certain work. In such cases, the usual rule o — damages
or breach o — warranty in the sale o — chattels is applied and it is held that the measure o — damages is the di —
erence between the value o — the machine i — it had corresponded with the warranty and its actual value, together with such incidental losses as the parties knew or ought to have known would probably result — rom a — ailure to comply with its terms. The rule thus applied is well settled in this state. As a general rule, the measure o —
the vendee’s damages is the di
erence between the value o — the goods as they would have been i — the warranty as to quality had been true, and the actual value at the time o — the sale, including gains prevented and losses sustained, and such other damages as could be reasonably anticipated by the parties as likely to be caused by the vendor’s 24 • Money Damages — or Nonper — ormance 743
ailure to keep his agreement, and could not by reasonable care on the part o — the vendee have been avoided. We, there — ore, conclude that the true measure o — the plainti —
’s damage in the pre sent case is the di —
erence between the value to him o — a per — ect hand or a good hand, such as the jury — ound the de — endant promised him, and the value o — his hand in its present condition, including any incidental consequences — airly within the con- templation o — the parties when they made their contract. Damages not thus limited, although naturally resulting, are not to be given. The extent o — the plainti —
’s su —
ering does not measure this di —
erence in value. The pain necessarily incident to a serious surgical operation was a part o — the contribution which the plainti —
was willing to make to his joint undertaking with the de — endant to produce a good hand. It was a legal detriment su —
ered by him which constituted a part o — the consideration given by him — or the contract. It represented a part o — the price which he was willing to pay — or a good hand, but it — urnished no test o — the value o — a good hand or the di —
erence between the value o — the hand which the de — endant promised and the one which resulted — rom the operation. It was also erroneous and misleading to submit to the jury as a separate element o — damage any change — or the worse in the condition o — the plainti —
’s hand resulting
rom the operation, although this error was probably more prejudicial to the plainti —
than to the de
endant. Any such ill e —
ect o — the operation would be included under the true rule o — damages set — orth above, but damages might properly be assessed — or the de — endant’s — ailure to improve the condition o — the hand even i — there were no evidence that its condition was made worse as a result o — the operation. It must be assumed that the trial court, in setting aside the verdict, undertook to apply the same rule o — damages which he had previously given to the jury, and since this rule was erroneous, it is unnecessary — or us to consider whether there was any evidence to justi — y his — inding that all damages awarded by the jury above $500 were excessive. De — endant’s requests — or instructions were loosely drawn and were properly denied. A considerable number o — issues o —
act were raised by the evidence, and it would have been extremely misleading to instruct the jury in accordance with de — endant’s request number 2, that “The only issue on which you have to pass is whether or not there was a special contract between the plainti —
and the de — endant to produce a per — ect hand.” Equally inaccurate was de — endant’s request number 5, which reads as — ollows: “You would have to — ind, in order to hold the de — endant liable in this case, that Dr. McGee and the plainti —
both understood that the doctor was guaranteeing a per — ect result
rom this operation.” I — the de — endant said that he would guarantee a per — ect result and the plainti —
relied upon that promise, any mental reservations which he may have had are immaterial. The standard by which his conduct is to be judged is not internal but external. De — endant’s request number 7 was as — ollows: “I — you should get so — ar as to — ind that there was a special contract guaranteeing a per — ect result, you would still have to — ind — or the de — endant unless you — urther — ound that a — urther operation would 744 24 • Money Damages — or Nonper — ormance
not correct the disability claimed by the plainti
.” In view o — the testimony that the de — endant had re — used to per — orm a — urther operation, it would clearly have been erroneous to give this instruction. The evidence would have justi — ied a verdict — or an amount su —
icient to cover the cost o — such an operation, even i — the theory underlying this request were correct. It is unlikely that the questions now presented in regard to the argument o — plain- ti —
’s counsel will arise at another trial, and, there — ore, they have not been considered. New trial.
Re --- lection Reading Hawkins v. McGee reminds us how power --- ully the law o --- contracts can shape our understanding o --- promises, hopes, and actual outcomes. The lawsuit arose out o --- a doctor’s bold “guarantee,” a statement that might have been nothing more than rosy optimism in everyday li --- e but here carried real legal implications once a court interpreted it as a binding promise. The case underscores that contract damages generally seek to give the injured party the economic bene --- it o --- what was promised rather than to punish the breaching party or to address every harm that might --- ollow. That’s why the court --- ocused on the di ---
erence between a “100% per — ect hand” and the imper — ect result the plainti —
ultimately received rather than on the pain endured dur- ing surgery. From the court’s vantage point, that pain was part o — the deal — something the plainti —
was willing to exchange — or the hand he bargained — or. Though the doctor per — ormed the surgery, the court treated the — ailure to deliver the promised outcome — a per — ect hand — as the equivalent o — a complete — ailure to per — orm the contract. By — raming the doctor’s guarantee as the core obligation, the court justi — ied viewing the promise as unmet, even though some e —
ort was made. This is why Hawkins v. McGee — its into this chapter on nonper — ormance: the essence o — this contract was the result promised (a per — ect hand), and the — ailure to achieve that result amounted to nonper — ormance o — the primary obligation. This — raming rein — orces a key concept o — contract law: a breach can be so — undamental that it e —
ectively nulli — ies the partial actions taken toward — ul — illing the contract. I — you’re scratching your head over how to price the expectation interest in a “per — ect” hand (or a hairy one, — or that matter), that’s partly the point: contract law has to con- tend with some rather odd calculations. And yet, Hawkins shows that these abstract- seeming measures o — value have very real e —
ects on people’s lives and decisions. Would you — eel com — ortable making a grand promise to a prospective patient i — you knew that a court might later hold you strictly accountable — or it? Or, would you couch your words more care — ully, knowing that someone might take your promises at — ace value? In contract disputes, it o — ten boils down to how courts de — ine “expectation.” I — you promise someone the moon — whether that means a guaranteed surgical outcome or a — ail-proo — product — you might pay handsomely i — you — all short. Still, reading about this hairy hand might leave you wondering whether tort law (or common sense) could 24 • Money Damages — or Nonper — ormance 745
have handled the doctor’s responsibility di
erently. For our purposes, that’s part o — the lesson. You’ve now seen that contract law’s singular — ocus on the promised bargain can sometimes produce interesting — i — not downright bizarre — results. And as the next chapters explore more intricate ways that damages are measured and limited, keep in mind how seemingly simple deals can become complicated once human expectations and disappointments come into play.
Discussion 1. In Hawkins v. McGee, the court awarded expectation damages. How did it calculate those damages, and why did the court reject awarding damages --- or pain and su ---
er- ing? What does this tell us about the di —
erence between contract and tort damages?
-
The court analogized the hairy hand to a machine that
ailed to per — orm as war- ranted. How does this analogy help clari — y the measure o — damages? Are there limits to this analogy when applied to cases involving human bodies?
-
Suppose the jury had awarded damages
or the plainti —
’s emotional distress result- ing — rom the operation. Would that align with the principles o — expectation dam- ages in contract law? Why or why not?
-
Consider the idea o
“e —
icient breach.” I — Dr. McGee had knowingly promised more than he could deliver, would awarding only expectation damages still deter this kind o — overpromising? Should the law allow punitive damages in such cases to discourage reckless guarantees?
-
I
Hawkins had been unable to prove the exact di —
erence in value between the promised “100% per — ect hand” and the actual “hairy hand,” how might reliance or restitution damages have served as alternatives? Would they have been easier or harder to calculate in this case??
Problems Problem 24.1. Dynamo Products
Dynamo Products entered into a contract to sell Republic Manu --- acturing a large- scale lithium wall battery --- or Republic’s new --- actory, --- or a price o --- $130,000. The battery was delivered to Republic. Republic inspected the battery --- ully and accepted it. Under the contract, Republic was to pay Dynamo --- or the battery thirty days a --- ter delivery; however, Republic --- ailed to make payment. Assuming that Republic thereby breached, what damages should a court order Republic to pay to Dynamo?
746 24 • Money Damages — or Nonper — ormance
Problem 24.2. Joe the Plumber Samuel Joseph “Joe” Wurzelbacher, a plumber, had a contract with the Bistro Hotel to replace the old cast iron pipes in the hotel with copper pipes. The agreed-upon contract price was $20,000. Be — ore Joe started work, Bistro repudiated the contract. Bistro had paid nothing in advance. Joe had expected to pay workers and suppliers $15,000 and expected to earn a pro — it o — $5,000 — rom the contract. Assuming that Bistro’s repudiation is a total breach, what damages should a court order Bistro to pay to Joe?
Problem 24.3. Gateway Packaging Gateway Packaging o — Scranton, Pennsylvania, signed a contract with Xanadu Freight Lines to take 14,000 un — olded cardboard boxes to Pennington’s Online Sales Company in Youngstown, Ohio, with a shipping date o — June 18. Gateway in — ormed Xanadu that “time was o — the essence” and that the shipment must occur on that date, or Pennington’s would re — use the shipment. Gateway was to pay $1,000 to Xanadu to carry the — reight to Youngstown. On June 17, Xanadu in — ormed Gateway that it had entered into too many shipping contracts and that it would not be able to take the boxes to Youngstown. Gateway then contacted another company, Cassiopeia Trucking, and had to pay them $1,600 to take the boxes to Youngstown the next day. What damages should a court order Xanadu to pay to Gateway?
Problem 24.4. The Oysters Haver — ield Aquatic Farms raises various shell — ish, including oysters. Angstrom Food Distributors buys — ood — rom producers and sells it to restaurants and — ood processors. Angstrom placed an order with Haver — ield — or 400 pounds o — oysters to be delivered on August 1; the agreed-upon price was $6 per pound. Angstrom then entered into contracts with six restaurants and a — ood processor to resell the oysters at $10 per pound. During July, the market price — or oysters was rising, and when the market price reached $7 per pound, Haver — ield sent Angstrom an email stating that Haver — ield was repudiating the contract. Haver — ield resold the oysters to another dis- tributor — or $7 per pound. a. What is Angstrom’s remedy i — it is able to cover by purchasing oysters — rom another source — or $6.50 per pound, and it also spent an extra $100 arranging — or the substitute purchase? b. What is Angstrom’s remedy i — it is unable to cover? c. What is Angstrom’s remedy i — it could have covered by purchasing oysters — rom another source but chose not to? Chapter 25 Money Damages — or De — ective Per — ormance
What i
you hire a contractor to build a sleek new deck? You imagine summer cookouts and long conversations under the stars. But, un — ortunately, the resulting construction does not comply with sa — ety codes. At — irst glance, you have something: a deck. Yet, it is riddled with — laws. Should the contractor bear the — ull cost o — tearing everything out and starting over, or is it su —
icient to pay you the di —
erence between a per — ect deck and the wobbly one you received? Would the analysis di —
er i — the deck passed inspection but was smaller than you bargained — or, or, in your view, less aes- thetically pleasing? These questions — rame the law’s approach to de — ective per — ormance. When a con- tract is partially per — ormed — but not well per — ormed — courts must determine how to compensate the injured party without imposing waste — ul costs on the breaching party. This chapter builds on the discussion o — total nonper — ormance — rom Chapter 24. That chapter addressed scenarios where no aspect o — the bargain was — ul — illed, leaving the injured party empty-handed. Here, the analysis becomes more nuanced. Something has been delivered — a structure, a product, or a service — but it — alls short o — the con- tractual standard. Courts must decide whether to classi — y the de — ect as minor or mate- rial, whether repair costs are reasonable, and whether economic waste justi — ies opting
or — inancial compensation instead o — physical remediation. This balance between the expectation interest o — the injured party and the avoid- ance o — waste re — lects key goals o — contract law: — airness, e —
iciency, and ensuring pre- dictable outcomes. The principles that courts apply in these situations, such as the cost o — completion versus diminution in value, ensure that remedies align with the speci — ics o — the de — ect and the broader economic implications. This chapter explores doctrines developed by courts and legislators under both the common law and the UCC to address de — ective per — ormance. It examines when it is appropriate to award damages — or the cost o — completing or repairing the work versus paying the di —
erence in value. The UCC’s emphasis on the value o — de — ective goods contrasts with the common law’s — lexibility in accounting — or material de — ects. The chapter also considers practical — actors, including the — easibility o — repairs, — ore- seeability o — the de — ect, and the policy imperative to avoid wind — all gains or crushing
747
748 25 • Money Damages — or De — ective Per — ormance
liabilities. By the end o
the chapter, students will have a structured — ramework — or assessing whether an injured party should receive — unds — or repair, accept a value- based award, or claim additional incidental and consequential damages arising — rom incomplete or — aulty per — ormance.
Rules A. Loss in Value Revisited De --- ective per --- ormance di ---
ers — rom total nonper — ormance in one critical way: something has been delivered, but it — alls short o — the contract’s standards. Imag- ine hiring a contractor to remodel your home’s kitchen. The contractor installs new cabinets and appliances, but the countertops are poorly constructed, and the — looring looks misaligned. You have a kitchen — yet it isn’t the kitchen you bargained — or. How should a court remedy that short — all? This chapter builds on the core idea o — expectation damages discussed in Chap- ter 24. Recall the equation — or determining expectation damages: Expectation Damages = Loss in Value + Incidental Damages + Consequential Damages − Costs Avoided The — ocus in this chapter is on how to measure loss in value. Recall that in nonper — or mance cases, the loss in value is typically the cost o — obtaining a substitute per — ormance, or other losses that — low — rom the breach. However, in de — ective per — ormance cases, courts must choose between awarding the cost o — completion — essentially, ordering the de — endant to pay to — ix the — laws — or awarding the diminution in value — dam- ages approximating how much less the per — ormance is worth due to the de — ects. Each approach has its place. Sometimes, the injured party deserves enough money to make the work per — ect. Other times, awarding the — ull repair cost would be so expensive and disproportionate that it amounts to economic waste. In those scenarios, courts may award only the di —
erence in value.
-
Cost o
Completion Cost o — completion awards a monetary amount equivalent to the cost o — com- pleting the per — ormance or the cost o — repairing the de — ects. This measure o — dam- ages aims to give the injured party exactly what they had envisioned. I — replacing de — ective items or redoing shoddy work makes practical sense, courts o — ten — avor this measure. R2d § 348(2) provides courts with the initial option to award the reasonable cost o —
remedying a de
ect or completing per — ormance, i — the owner elects this option. I — a breach results in de — ective or un — inished construction . . . [the owner] may recover damages based on . . . the reasonable cost o — completing per — ormance 25 • Money Damages — or De — ective P er — ormance 749
or o --- remedying the de --- ects i --- that cost is not clearly disproportionate to the
probable loss in value to him. R2d § 348(2)(b).
However, as you can see above, this option is not generally available i
the cost o —
remedying the de
ect or completing per — ormance is “clearly disproportionate to the probable loss in value” o — the project. Consider a scenario in which a construction company uses the wrong grade o —
roo
ing material in a high-end home. I — the owner paid — or a roo — designed to last — i — ty years, awarding the cost to remove the subpar materials and install the correct ones might be appropriate. This remedy restores the owner’s original bargain. Courts look
or a genuine need, however. I — the — ix is outrageously expensive relative to the bene — it it brings, judges hesitate to impose that cost on the breaching party. I — the same roo —
was installed on a run-down shack that would likely not stand
or 10 years anyway, then courts might deem the cost o — completion to be economic waste and instead measure expectation damages in terms o — diminution in value.
- Diminution in Value Diminution in value awards a monetary sum equivalent to the di —
erence in value between what was promised and what was delivered. Sometimes the — ull cost o — repair or completion requires more dollars than common sense would allow. In those cases, courts turn to diminution in value, which compensates the owner — or the drop in market value caused by the de — ect. R2d § 348(2) explains that i — repairing a — law would cost — ar more than it adds in value, courts should instead award the “diminution in the market price o — the property” — i.e., the diminution in market value.
I --- a breach results in de --- ective or un --- inished construction . . . [the owner]
may recover damages based on (a) the diminution in the market price o ---
the property caused by the breach, or (b) the reasonable cost o --- completing
per --- ormance or o --- remedying the de --- ects i --- that cost is not clearly dispropor-
tionate to the probable loss in value to him. R2d § 348(2).
The landmark case Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962), appearing later in this chapter, illustrates this principle. In Peevyhouse, a coal company promised to restore the Peevyhouses’ property a --- ter the Peevyhouses leased it to the coal company --- or the purpose o --- “strip mining.” The coal company re --- used to per --- orm the promised restorations to the property. Doing so would have cost tens o --- thousands o --- dollars but enhanced the land’s market value by only a --- ew hun- dred dollars. The court concluded that awarding those steep cleanup costs would be unreasonably waste --- ul. The court thus granted the Peevyhouses only a modest sum to re --- lect the diminished value o --- their land. Critics still debate whether this outcome shortchanged the Peevyhouses, but the case underscores how courts strive to balance
airness to the injured party with proportionality. 750 25 • Money Damages — or De — ective Per — ormance
- Economic Waste Courts label it “economic waste” when a — ix is so expensive that it makes little sense in light o — the project’s goal. Recall the case o — Jacob & Youngs v. Kent in Chapter 20, above, where the contrac- tor, Jacob & Youngs, installed the wrong brand o — pipes in the mansion that the owner, Kent, had contracted to be built. The brand o — pipes barely altered the market value o — the house, i — at all. Requiring the contractor to tear up the pipes or demolish the entire house to make this minor adjustment would have been absurd. Courts do not want to impose crushing costs — or minimal bene — its. Imagine that the court in Jacob & Youngs had awarded Kent the — ull cost o — repair that he requested. Ask yoursel — , would Kent really have torn down his — reshly built mansion just to eliminate a minor de — ect? I — the answer is “no,” then awarding Kent the cost o — completion would hand him a wind — all resulting in overcompensation without justi — ication. Remember: contract law only seeks to give parties the bene — it o — what they bar- gained — or, not more. I — the owner were awarded the — ull cost o — completion and chose to simply use that money to build, say, a — ancy gazebo, this would not re — lect the goal o — contract remedies. The owner would get — ar more than he bargained — or — a new gazebo plus a new mansion. At the same time, courts do not want to reward a breaching party that makes a truly unmarketable construction or deliberately employs substandard materials. The diminution in value measure can be e —
ective here. Granting a monetary sum that approximates the di —
erence between what was promised and what was actually deliv- ered can provide su —
icient compensation to the injured party without encouraging waste — ul reconstruction or supplying an unjusti — ied wind — all. You can apply this thought experiment to the Peevyhouse case. You might think the result was un — air. A — ter all, the plainti —
s obtained an award o — only $300, even though the cost o — restoring their land would have been $29,000. But imagine that the court had instead ordered Garland Coal to pay the — ull $29,000 that the Peevyhouses requested. Would they really have spent that money restoring a — ar corner o — their un — armable land to be — lat again? This seems unlikely. Thus, the Peevyhouses would have been handed a bucket o — cash to do with as they please. At the same time, it also would have been economically waste — ul to require Gar- land Coal to do this work by awarding speci — ic per — ormance, as the dissent proposed. Garland Coal would have spent $29,000, but the land’s market price would have gone up only by around $300. This is not how contract law remedies work. Contract law aims to — ul — ill the par- ties’ expectation interest by providing the bene — it o — the bargain, not by handing out wind — alls or by encouraging waste — ul projects. 25 • Money Damages — or De — ective P er — ormance 751
-
Substantial Per
ormance and Material Breach In many de — ective per — ormance disputes, the question o — substantial per — ormance arises. Recall that a breaching party who delivers a substantial per — ormance is still owed their compensation under the contract. The breach is deemed “minor.” The injured party can seek damages but must pay the contract price. On the other hand, a breaching party who — ails to deliver substantial per — ormance is in material breach. The counterparty’s duty to per — orm and compensate the breacher under the contract is discharged. The injured party can withhold their per — ormance and also seek damages. In de — ective per — ormance scenarios, it is o — ten necessary to determine whether the de — ect amounts to a material breach or a minor breach. I — the breaching party mostly completed the job but slipped on a — ew details, courts may well view the breach as minor. I — the breach is minor, the injured party will still owe their compensation under the contract, though this sum will be o —
set by any damages owed to compen- sate — or the breach. I — the court decides the breach was minor, the court is more likely to select the diminution in value measure, thus allowing the injured party to recover the di —
erence in value between what they got and what was promised, rather than the — ull repair cost. Recall, again, Jacob & Youngs, where Judge Cardozo — ound that using the wrong brand o — pipes in a mansion was a minor breach and awarded the homeowner only the di —
erence in value, which was “either nominal or nothing,” rather than awarding the — ull cost o — tearing up the house to replace the pipes. I — , however, the de — ect crosses into material breach territory — say, a structural — law that endangers the integrity o — a building — a court may be more inclined to award the
ull cost o — repair, i.e., the money needed — or a complete overhaul. Thus, the distinction between material and minor breach can help judges, and law students, tailor damages to the severity o — the de — ect. When a de — ect is minor, the injured party still receives most o — the promised value. In such cases, awarding
ull repair costs could lead to overcompensation and economic waste, and the cost o —
repair is likely to be disproportionate to the actual harm caused by the de
ect. Redoing the piping in a mansion because the brand o — pipe is “Cohoes” rather than “Reading” might cost many thousands o — dollars, even though the market value o — the house is virtually unchanged. Courts will likely seek to avoid awarding excessive damages in “minor breach” cases. In such cases, courts are more likely to award the di —
erence in value re — lecting the actual impact o — the de — ect. When a de — ect is severe, however, this undermines the essential purpose o — the contract. In these cases, diminished value o — ten underestimates the harm caused by the breach. A structurally unsound roo — that leaks or poses sa — ety risks is not just a cosmetic issue; it prevents the property — rom being usable or sa — e as promised. In these “material breach” cases, a court is more likely to award the — ull cost o — repair to ensure the injured party can restore the promised — unctionality and sa — ety. 752 25 • Money Damages — or De — ective Per — ormance
- Conclusion: Deciding between “Diminution in Value” or “Cost o — Repair” Determining which measure o — loss in value is appropriate — or de — ective per — ormance scenarios boils down to a — ew essential questions. Does the de — ect amount to a mate- rial breach? How central is the de — ect to the project’s purpose? Is the repair — easible or so massive that it strains common sense? Will granting the cost o — completion yield a wind — all or simply get the injured party what it genuinely needs? Judges weigh these questions by considering the — acts and recalling broader contract policies — especially the goal o — securing the injured party’s expectation interest (that is, delivering the value o — the promised per — ormance), while also avoiding economic waste when repair would cost — ar more than the value it adds. They also consider — oreseeability rules to ensure that the breaching party is not blindsided by extreme liability — or issues it could not have anticipated. Ultimately, cost o — completion and diminution in value both protect the same interest: ensuring that the nonbreaching party receives the bene — it o — the bargain — or its monetary equivalent. Which o — these remedies a court chooses depends on its determination o — how thoroughly a nonbreaching should be restored. I —
ull restora- tion is possible and not absurd, cost o — completion will prevail. I —
ull restoration will destroy disproportionate resources, a diminution award will su —
ice. By threading this needle, courts strive to promote — airness, encourage care — ul per — ormance, and prevent the needless destruction o — labor and materials.
B. UCC Provisions
or De — ective Per — ormance De — ective per — ormance under the UCC presents distinct challenges. Recall that in the nonper — ormance scenario, the seller — ails to deliver goods as promised, or the buyer re — uses to accept or pay — or goods as promised. Under the UCC, direct expec- tation damages in the nonper — ormance scenario generally amount to the di —
erence between the substitute per — ormance, based on the cover or the market price, and the contract price. De — ective per — ormance is di — — erent. With de — ective per — ormance, goods are deliv- ered, but they are “noncon — orming,” meaning that they — ail to con — orm to the con- tract’s terms. The UCC, you’ll recall, is exceptionally strict. It does not distinguish between material and minor breach. Instead, the UCC adopts the per — ect tender rule, which holds that any divergence — rom the contract speci — ication is a breach that justi-
ies the counterparty in withholding payment. The goods may also be in breach o —
a warranty, meaning that they do not live up to the standard expressly or impliedly promised by the seller. Either way, the seller is in breach, and under the UCC, the buyer has signi — icant rights and remedies. When a buyer receives de — ective goods, the buyer must make a decision. On the one hand, assuming the de — ect is caught in time, the buyer can reject the goods. I —
25 • Money Damages
or De — ective P er — ormance 753
the buyer already accepted the goods but later discovers a de
ect that substantially impairs the goods’ value, the buyer can revoke their acceptance and reject the goods therea — ter. Sellers, you’ll recall, may have a right to cure the de — ect, depending on the situation. See UCC § 2-508. But in general, a buyer who rejects goods does not have to pay — or them and can get back any money paid. On the other hand, the buyer may choose to accept the goods and seek damages — or breach o — contract. These damages will take the — orm o — de — ective per — ormance damages, which the UCC re — ers to simply as “breach o — warranty” damages. UCC § 2-714. Take the — ollowing example. Imagine a logistics company orders a — leet o — trucks and receives vehicles with — aulty brakes. Unlike total nonper — ormance, where nothing is delivered, de — ective per — ormance leaves the buyer with noncon — orming goods that require strategic choices. Should the buyer reject the trucks entirely? Or, should the buyer accept the trucks and demand compensation — or the cost o — brake repairs? What i — the buyer does not discover the de — ect until a — ter the time — or rejection has passed? Can the buyer revoke acceptance upon discovering latent de — ects in the brakes that substantially impair the trucks’ value — even though the trucks may have been used
or hundreds or thousands o — miles? I — the buyer accepts the de — ective — leet, what will the buyer’s damages be? This section explores how the UCC addresses these scenarios through tailored remedies — or buyers and sellers, thus ensuring that both parties have tools to mitigate their losses and achieve — airness. Some o — this content will be — amiliar to you — rom Chapter 20 on per — ormance and breach. This is a good opportunity to consolidate your understanding.
-
Buyer’s Remedies
or De — ective Per — ormance by Seller “De — ective per — ormance” under the UCC generally re — ers only to a seller’s breach. The buyer’s duty is generally to accept and pay — or con — orming goods. Incomplete payment by a buyer does not present special challenges in determining loss in value to the seller. The buyer simply must complete the payment owed under the contract. The — ar more challenging de — ective per — ormance situation is where the seller deliv- ers noncon — orming goods, and the buyer is con — ronted with a variety o — choices and potential remedies. The UCC speci — ically addresses buyers’ remedies — or de — ective per — ormance. We will review these rules now.
a. Buyer’s Right to Reject Noncon --- orming Goods Recall that buyers have the right to immediately reject goods i --- the goods “ --- ail in any respect to con --- orm to the contract.” UCC § 2-601. This is known as the per --- ect tender rule. Subject to the provisions o --- this Article on breach in installment contracts (§ 2-612) and unless otherwise agreed under the sections on contractual754 25 • Money Damages — or De — ective Per — ormance
limitations o
remedy (§§ 2-718 and 2-719), i — the goods or the tender o — deliv- ery — ail in any respect to con — orm to the contract, the buyer may: (a) reject the whole; or (b) accept the whole; or (c) accept any commercial unit or units and reject the rest. NH UCC § 2-601. To take advantage o — this option, the buyer must reject the goods within a reason- able time, and buyers must noti — y sellers promptly. Once goods are rejected, buyers are responsible — or holding them with reasonable care to allow the seller an opportu- nity to retrieve them. UCC § 2-602. Let’s say that a manu — acturer orders 1,000 steel bolts designed to withstand 100 Newton-meters. Upon testing, the bolts — ail when 95 Newton-meters is applied to them; thus, the goods are noncon — orming. The buyer may immediately reject the entire shipment and demand a re — und o — any o — the price that has been paid, in addi- tion to obtaining cover or market damages, as appropriate. UCC § 2-711. However, i — the buyer delays rejection — or months while using some o — the bolts in production, the right to reject may be — or — eited, as the delay undermines the seller’s ability to mitigate the breach. At this point, the buyer’s options shi — t: the buyer can either seek to revoke acceptance, as discussed below, or alternatively keep the goods and sue — or breach o — contract based on the seller’s delivery o — noncon — orming goods. Note, too, that the seller is likely in breach o — an express warranty because the seller promised that the bolts would withstand 100 Newton-meters, when they did not. There is thus signi — icant, i — not complete, overlap between the buyer’s remedy — or a sell- er’s delivery o — noncon — orming goods and the buyer’s remedy — or breach o — warranty.
b. Revocation o --- Acceptance Revocation applies when buyers initially accept goods but later discover a de --- ect that substantially impairs their value. UCC § 2-608. A buyer can revoke acceptance i --- the de --- ect was not initially apparent, or i --- the buyer accepted the goods based on the seller’s assurances that the de --- ect would be cured. Revocation must occur within a reasonable time a --- ter discovering the de --- ect, and the buyer must noti --- y the seller promptly. This option allows the buyer to treat the transaction as i --- the goods were rejected --- rom the outset. Importantly, the per --- ect tender rule does not apply to revocation o --- acceptance, as it does to initial rejection o --- goods. Buyers can only revoke acceptance upon discov- ering a de --- ect that substantially impairs the value o --- the goods to the buyer. This is similar to the common law’s conception o --- a material breach. Returning to the bolts example in the previous subsection, let’s say it’s not typical to test the bolts in this manner. Standard bolts are supposed to comply with Interna- tional Organization --- or Standardization (ISO) standards --- or such bolts. This compli- ance probably constitutes a warranty or an implied term in the bolts contract, even i --- it25 • Money Damages — or De — ective P er — ormance 755
was not expressly stated. I
a retailer like Home Depot purchases these bolts, it would not usually test them be — ore selling them. A — ter selling these bolts — or a — ew months, a customer who used them in a high-torque application reports that they broke pre- maturely. Home Depot then tests a random sample o — the bolts and — inds that about 30% do not meet spec. What then? A buyer who discovers some goods are de — ective a — ter accepting them has two options. The buyer’s — irst option is to revoke acceptance. This would turn this situa- tion into a nonper — ormance situation. The buyer’s remedy would usually take the — orm o — a re — und o — any o — the purchase price paid, plus either cover damages, i — the buyer chooses to cover by purchasing reasonably similar goods, or market damages, i — the buyer does not choose to cover. The damages would be the di —
erence between the contract price and either the buyer’s cost o — cover or the market price, as appropriate. UCC §§ 2-711, 2-712, 2-713. The buyer’s second option is to keep the goods and seek damages based on the de — ect. This can be considered, in essence, a price adjustment. The UCC’s de — ault remedy in this situation, pursuant to UCC § 2-714, is damages based on diminution in value, meaning the di —
erence between the value o — the goods as promised and the value o — the goods as delivered. The buyer keeps the goods but e —
ectively obtains a reduction in price. (This “price adjustment” remedy is described — urther in the next section.) In the hypothetical above, Home Depot’s ability to revoke acceptance o — the bolts hinges on whether the bolts’ — ailure to meet the required standards substantially impairs their value. I — the bolts are intended — or high-torque applications where — ailure could result in sa — ety risks or operational ine —
iciencies, the de — ect might quali — y as a substantial impairment. The buyer could revoke acceptance and collect nonper — or mance damages — a re — und, plus cover or market damages. However, i — the bolts are suitable — or the vast majority o — applications that Home Depot consumers use them
or, the impairment may not rise to the level required — or revocation. The buyer would still be able to sue — or damages to compensate — or the de — ect. (This same remedy would apply i — the buyer did not even try to revoke acceptance and simply sued — or damages.) The details o — this remedy are addressed directly below.
c. Di ---
erence-in-Value Damages (Price Adjustment) A buyer who could otherwise reject or revoke acceptance o — goods also maintains the option to keep the goods and recover damages based on the di —
erence between the goods’ value as delivered and the goods’ value as promised. As mentioned above, these damages are, in e —
ect, a price adjustment. The buyer gets to keep the goods, but at a lower price that re — lects their actual value. UCC § 2-714 provides the — ramework — or this “di —
erence in value” measure. (1) Where the buyer has accepted goods and given noti — ication . . . he may recover as damages — or any non-con — ormity o — tender the loss resulting in the 756 25 • Money Damages — or De — ective Per — ormance
ordinary course o --- events --- rom the seller’s breach as determined in any manner
which is reasonable.
(2) The measure o --- damages --- or breach o --- warranty is the di ---
erence at the time and place o — acceptance between the value o — the goods accepted and the value they would have had i — they had been as warranted, unless special circumstances show proximate damages o — a di — — erent amount. (3) In a proper case any incidental and consequential damages under the next section may also be recovered. NH UCC § 2-714. The — ormula can be expressed as: Di —
erence in Value Damages (Price Adjustment) = Promised Value − Actual Value + Incidental Damages + Consequential Damages − Expenses Saved For example, Mike’s Mechanical purchases 10,000 bolts — or $1 per bolt, under the assumption that the bolts meet a standard o — withstanding 100 Nm. Be — ore selling any o — them, Mike tests them and — inds that the bolts — ail to meet this standard, substan- tially reducing their value to $0.50 per bolt. Mike incurs $500 in incidental damages — or testing the bolts and loses $300 in pro — it — or orders he could not ship until receiving compliant bolts. Mike saves $200 by not shipping the de — ective bolts to customers. Using the UCC price adjustment
ormula: Promised Value: 10,000 bolts × $1.00 = $10,000 –Actual Value: 10,000 bolts × $0.50 = $5,000 + Incidental Damages: $500 (testing bolts) + Consequential Damages: $300 (lost orders) –Expenses Saved: $200 (shipping expenses saved) = Price Adjustment Damages = $10,000 − $5,000 + $500 + $300 − $200 = $5,600 Mike would be entitled to $5,600 in price adjustment damages under UCC § 2-714.
d. Incidental and Consequential Damages As demonstrated above, buyers may also recover incidental and consequential damages stemming --- rom the seller’s breach. These concepts are the same as when applied to money damages --- or nonper --- ormance, a topic discussed in Chapter 24.
(1) Incidental damages resulting --- rom the seller’s breach include expenses rea-
sonably incurred in inspection, receipt, transportation and care and custody
o --- goods right --- ully rejected, any commercially reasonable charges, expenses
or commissions in connection with e ---
ecting cover and any other reasonable expense incident to the delay or other breach. 25 • Money Damages — or De — ective P er — ormance 757
(2) Consequential damages resulting --- rom the seller’s breach include
(a) any loss resulting --- rom general or particular requirements and needs
o --- which the seller at the time o --- contracting had reason to know and
which could not reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting --- rom any breach
o --- warranty. NH UCC § 2-715.
-
Seller’s Ability to Provide
or Alternative Remedies through Contract You may be wondering why, when you receive de — ective goods — rom a seller, the outcome is not usually a lawsuit — or damages. Usually, you noti — y the seller that some- thing is wrong, and they send you a replacement or a re — und. This is mainly because parties typically resort to sel — -help. Sellers are aware o — buy- ers’ rights to a remedy, so when sellers ship de — ective goods, they are likely to do what they can to make it right. I — there is an opportunity to cure or take some other action that will make buyers happy, like a price adjustment, sellers will likely take it without the threat o — a lawsuit. The other reason is that, as with most o — contract law, these rules are only de — ault rules. Sellers can “contract around” the UCC’s remedies and provide their own rem- edies through contract. For example, the seller o — a cellphone might indicate in the contract o — sale that the buyer’s remedies in the case o — a de — ect are limited to a re — und or replacement o — parts. The UCC provides — or this possibility in UCC § 2-719, which states:
the agreement may provide --- or remedies in addition to or in substitution --- or
those provided in this Article and may limit or alter the measure o --- damages
recoverable under this Article, as by limiting the buyer’s remedies to return
o --- the goods and repayment o --- the price or to repair and replacement o --- non-
con --- orming goods or parts; and resort to a remedy as provided is optional
unless the remedy is expressly agreed to be exclusive, in which case it is the sole
remedy. NH UCC § 2-719.
These alternative remedies are generally optional, meaning that buyers can choose to sue — or damages instead. But the contract can potentially make an alternative rem- edy “exclusive, in which case it is the sole remedy.” I — a seller chooses to limit buyers’ remedies or eliminate buyers’ options to sue — or damages altogether, then this will likely require additional analysis. As you learned in Chapter 18 on warranties, i — sell- ers include disclaimers o — waraties, sellers have to give buyers appropriate notice and
ollow the UCC’s rules. The next chapter, on limitations on money damages, addresses additional restrictions and instances where courts might not en — orce limitations on buyers’ remedies. 758 25 • Money Damages — or De — ective Per — ormance
C. Re
lections on Money Damages — or De — ective Per — ormance De — ective per — ormance — orces us to con — ront the essence o — contract law: balanc- ing the injured party’s right to the bene — it o — their bargain with the practical realities o — addressing what went wrong. Remedies in these cases do more than compensate
or losses; they embody deeper values o — e —
iciency, — airness, and the integrity o —
agreements. Consider the classic tension between cost o — completion and diminution in value. On the sur — ace, it seems like a straight — orward issue: should the law demand a — ull
ix, or is — inancial compensation enough? These questions reveal the law’s nuanced balancing act between justice and pragmatism. Cost o — completion might restore what was promised, but it can also lead to absurd outcomes, such as tearing down a house to replace a hidden pipe that neither diminishes value nor a —
ects — unctionality. Courts must decide when — ul — illing a literal promise is worth the cost, and when a propor- tional monetary award better achieves — airness. The concept o — economic waste captures this tension. Contract law does not exist to punish breaches or en — orce per — ection at any cost. Instead, it seeks to avoid waste while holding breaching parties accountable. Cases like Peevyhouse v. Garland Coal & Mining Co. illustrate this principle vividly, even as their outcomes spark debate. They prompt a crucial question: what does — airness look like when a de — ect is vital to one party but trivial to another? Under the UCC, buyers’ remedies — or de — ective goods add — urther complexity. The right to reject, revoke acceptance, or adjust the price o —
ers — lexibility but also opens the door to disputes. How severe must a de — ect be to justi — y rejection? How much time should sellers have to cure de — ects? These are practical questions that courts must answer while balancing the en — orcement o — contracts with the realities o — commercial relationships. Sellers are not without recourse either. Remedies like resale damages and lost pro — its ensure they are not un — airly penalized, re — lecting the law’s commit- ment to equity on both sides o — a breach. At its core, de — ective per — ormance reminds us that remedies are not just about dol- lars and cents. They also sa — eguard — airness, reliance, and trust. Courts must en — orce agreements in ways that are reasonable and proportionate, without demanding unat- tainable per — ection. The trust underpinning the legal system — and the relationships it protects — depends on its ability to balance competing interests and — oster coopera- tion. By adhering to principles like — oreseeability, proportionality, and avoiding wind-
alls, contract law creates a — ramework that not only resolves disputes but sustains the broader system o — trade and commerce. 25 • Money Damages — or De — ective P er — ormance 759
Cases Reading Peevyhouse v. Garland Coal & Mining Co. This --- amous case, Peevy house, is arguably the most power --- ul illustration o --- the o --- the rule you learned above: Courts will not generally require the breaching party to pay the --- ull cost remedying a de --- ective per --- ormance i --- doing so would be economically waste-
ul. When the cost o — completion is clearly disproportionate to the reduction in market value o — the land or project, courts instead use the diminution-in-value measure. This generally takes the — orm o — the diminution in the market price o — the property or project caused by the breach.
Peevyhouse v. Garland Coal & Mining Co.
382 P.2d 109 (Okla. 1962) W.R. WALLACE, JR., Judge. In the trial court, plainti ---
s Willie and Lucille Peevyhouse sued the de — endant, Gar- land Coal and Mining Company, — or damages — or breach o — contract. Judgment was
or plainti —
s in an amount considerably less than was sued — or. Plainti —
s appeal and de — endant cross-appeals. In the brie — s on appeal, the parties present their argument and contentions under several propositions; however, they all stem — rom the basic question o — whether the trial court properly instructed the jury on the measure o — damages. Brie — ly stated, the — acts are as — ollows: plainti —
s owned a — arm containing coal deposits, and in November, 1954, leased the premises to de — endant — or a period o —
ive years — or coal mining purposes. A “stripmining” operation was contemplated in which the coal would be taken — rom pits on the sur — ace o — the ground, instead o —
rom underground mine sha — ts. In addition to the usual covenants — ound in a coal mining lease, de — endant speci — ically agreed to per — orm certain restorative and remedial work at the end o — the lease period. It is unnecessary to set out the details o — the work to be done, other than to say that it would involve the moving o — many thousands o — cubic yards o — dirt, at a cost estimated by expert witnesses at about $29,000.00. However, plainti —
s sued — or only $25,000.00. …. Plainti —
s contend that the true measure o — damages in this case is what it will cost plainti —
s to obtain per — ormance o — the work that was not done because o — de — endant’s de — ault. De — endant argues that the measure o — damages is the cost o — per — ormance “limited, however, to the total di —
erence in the market value be — ore and a — ter the work was per — ormed.” …. 760 25 • Money Damages — or De — ective Per — ormance
We there
ore hold that where, in a coal mining lease, lessee agrees to per — orm certain remedial work on the premises concerned at the end o — the lease period, and therea — ter the contract is — ully per — ormed by both parties except that the remedial work is not done, the measure o — damages in an action by lessor against lessee — or damages — or breach o — contract is ordinarily the reasonable cost o — per — ormance o — the work; however, where the contract provision breached was merely incidental to the main purpose in view, and where the economic bene — it which would result to lessor by
ull per — ormance o — the work is grossly disproportionate to the cost o — per — ormance, the damages which lessor may recover are limited to the diminution in value resulting to the premises because o — the non-per — ormance. …. Under the most liberal view o — the evidence herein, the diminution in value result- ing to the premises because o — non-per — ormance o — the remedial work was $300.00. A — ter a care — ul search o — the record, we have — ound no evidence o — a higher — igure, and plainti —
s do not argue in their brie — s that a greater diminution in value was sus- tained. It thus appears that the judgment was clearly excessive, and that the amount
or which judgment should have been rendered is de — initely and satis — actorily shown by the record. IRWIN, J (dissenting). By the speci — ic provisions in the coal mining lease under consideration, the de — en- dant agreed as — ollows: 7b Lessee agrees to make — ills in the pits dug on said premises on the property line in such manner that — ences can be placed thereon and access had to oppo- site sides o — the pits. 7c Lessee agrees to smooth o —
the top o — the spoil banks on the above premises. 7d Lessee agrees to leave the creek crossing the above premises in such a condi- tion that it will not inter — ere with the crossings to be made in pits as set out in 7b. 7 — Lessee — urther agrees to leave no shale or dirt on the high wall o — said pits. …. De — endant admits that it — ailed to per — orm its obligations that it agreed and con- tracted to per — orm under the lease contract and there is nothing in the record which indicates that de — endant could not per — orm its obligations. There — ore, in my opinion de — endant’s breach o — the contract was wil — ull and not in good — aith. …. De — endant has received its bene — its under the contract and now urges, in substance, that plainti —
s’ measure o — damages — or its — ailure to per — orm should be the economic value o — per — ormance to the plainti —
s and not the cost o — per — ormance. …. 25 • Money Damages — or De — ective P er — ormance 761
In the instant action de
endant has made no attempt to even substantially per — orm. The contract in question is not immoral, is not tainted with — raud, and was not entered into through mistake or accident and is not contrary to public policy. It is clear and unambiguous and the parties understood the terms thereo — , and the approximate cost o —
ul — illing the obligations could have been approximately ascertained. There are no conditions existing now which could not have been reasonably anticipated when the contract was negotiated and executed. The de — endant could have per — ormed the con- tract i — it desired. It has accepted and reaped the bene — its o — its contract and now urges that plainti —
s’ bene — its under the contract be denied. I — plainti —
s’ bene — its are denied, such bene — its would inure to the direct bene — it o — the de — endant. There — ore, in my opinion, the plainti —
s were entitled to speci — ic per — ormance o — the contract and since de — endant has — ailed to per — orm, the proper measure o — damages should be the cost o — per — ormance. Any other measure o — damage would be holding
or naught the express provisions o — the contract; would be taking — rom the plainti —
s the bene — its o — the contract and placing those bene — its in de — endant which has — ailed to per — orm its obligations; would be granting bene — its to de — endant without a resulting obligation; and would be completely rescinding the solemn obligation o — the contract
or the bene — it o — the de — endant to the detriment o — the plainti —
s by making an entirely new contract — or the parties.
Re --- lection
The court in Peevyhouse e ---
ectively said that that the de — endant breached its con- tract and in doing so made plainti —
s’ land uglier. That appears to be true. The image below shows how mining terra — orms — lat land into hills. Note that the process also stopped a small river — rom — lowing through the land. The question was whether de — endant had to pay — or restoration o — the land to its prior state — which, as you can imagine, would be a considerable expense — or merely — or the diminution o — its value. The latter, diminution o — value, was selected because it more closely approximated the — inancial deal the parties struck or would have struck. Given that some damage was — oreseeable, the extent o — the damage was beyond what the Peevyhouses bargained — or. The court there — ore awarded them the di —
erence between what they got (some cash and totally destroyed land) and what they had bargained — or (some cash and moderately damaged land) according to the reasonably
oreseeable outcome o — their agreement. The court’s business about “reasonable cost” and “unreasonable economic waste” is a poetic way o — identi — ying this as a commercial agreement, whereas courts dealing with noncommercial agreements might instead use the concept o — a reasonable per- son. But this distinction also makes cases somewhat easier to resolve because we have a sharper view o — the reasonable person in commercial contexts than we do in non- commercial contexts: we generally presume that commercial parties are economically 762 25 • Money Damages — or De — ective Per — ormance
Figure 25.2. “Garland Coal sure le --- t a lot o --- hills behind.” Credit: Tim Root,
“Case o --- the Day — Monday, June 15, 2020,” Tree and Neighbor Blog.
rational, i.e., they want to make money. Parties to commercial agreements allocate risk and reward in the manner that they deem most likely to generate the most pro — it
or themselves. Here, the court e —
ectively — ound that a commercially reasonable bar- gain could have been struck in exchange — or the total destruction o — Peevyhouse’s land, but no commercially reasonable strip miner would have bargained — or the cost o — totally restoring land to per — ect condition a — ter it had mined the resources out o —
it. The court then en
orced the terms o — the commercially reasonable bargain, thus putting commercial reality in line with contractual obligations.
Discussion 1. The Peevyhouses were paid --- or use o --- their land by a strip-mining company. Was some damage to the land --- oreseeable? 2. How do you square the commercial reality o --- strip mining with the plain meaning o --- the written term to restore the land? 3. I --- the court made Garland Coal pay the Peevyhouses the estimated cost to restore the land to its original condition, would the Peevyhouses spend the money on doing that? Does your answer to this question impact whether courts should award
this remedy? I --- so, why?
25 • Money Damages — or De — ective P er — ormance 763
Reading North American Foreign Trading Corp. v. Direct Mail Specialist. Once a court determines that a party breached an agreement, it usually must assess damages. Plainti —
s generally seek maximal damages, but such an award is not always in the interests o — justice. The — ollowing case regards an aggrieved seller who seeks direct damages in the — orm o — lost pro — its plus incidental dam- ages in the — orm o — storage — ees and interest costs. It is these incidental damages which here are more questionable. Be — ore delving into the case, consider the bigger picture o — why incidental damages are awarded to sellers. The purpose o — incidental damage awards is to encourage sellers to make the best use o — goods that buyers re — used to take. Sellers are incentivized to retrieve, store, and resell these goods because they can, in theory, collect damages — or reasonable costs so incurred. I — these incen- tives work, then breaches are less likely to result in wasted and ruined goods. Not wasting valuable goods is generally positive — or social wel — are, but the rule can also be abused by sellers who spend unreasonable time or costs with regard to repudiated, rejected, or revoked goods. The next case discusses how courts should apply the rule in a manner that strikes the appropriate balance.
North American Foreign Trading Corp. v.
Direct Mail Specialist
697 F. Supp. 163 (S.D.N.Y. 1988) KRAM, Judge. In this breach o --- contract action, plainti ---
s are suing to recover on a contract through which they were to provide certain goods to de — endant. De — endant and the additional counterclaim de — endant have counterclaimed — or breach o — contract and — raud. Pres- ently be — ore the Court is plainti —
s’ motion in limine — or a determination o — the proper method o — calculating the appropriate amount o — statutory pre-judgment interest in this action. The dispute over this legal issue has stymied the parties’ attempts at a negotiated settlement. Background Based on an a —
irmation submitted by plainti —
s, the — ollowing appear to be the — acts relevant to the present motion. In May, 1983, the parties met to discuss the sale o — a blackjack game to de — endant DMS, Inc. (“DMS”). Through an exchange o — correspon- dence, the parties agreed that plainti —
North American Foreign Trading Corporation (“NAFTC”) would supply de — endant with a total 164,968 units in minimum monthly installments o — 15,000 units at a cost o — $12 per unit. De — endant provided plainti —
s with a deposit o — $100,000 to be applied only to the last shipment. 764 25 • Money Damages — or De — ective Per — ormance
NAFTC made monthly shipments o
15,000 units to de — endant — rom May, 1983 through August, 1983. DMS paid the contract price o — $ 12 per unit — or each o — these shipments. In September, 1983, DMS requested NAFTC to delay the monthly ship- ments until February or March, 1984 to allow DMS to consume its current inventories. By letter dated September 15, 1983, Gordon Nelms, de — endant’s representative, stated the reasons — or requesting the delay, noted that plainti —
s had re — used to delay ship- ments and then proceeded to cancel the outstanding purchase order — or that month. Nelms concluded the letter by stating that “no — urther shipments will be accepted by this organization.” Plainti —
s commenced this action shortly therea — ter. Plainti —
s state that they attempted to sell the remaining 104,968 units, but only managed to sell small quanti- ties during the period — rom September, 1983 through mid-1986. In mid-1986, plain- ti —
s began selling the product in bulk to a single purchaser at a price o — $11 per unit. All o — the units were eventually sold. Plainti —
s still have possession o — de — endant’s $100,000 deposit.
Discussion On the assumption that plainti ---
s would prevail on all issues, plainti —
s argue that it would be entitled to recover: (1) the contract price o — the goods less the amount realized by NAFTC upon resale o — the goods, (2) storage and insurance costs and (3) interest at the statutory rate o — nine percent (9%) on the — ull contract price and the storage and insurance costs — or the period September, 1983 through the time o — resale in mid-1986 and interest on the contract price less the amount received upon resale
or the period o — mid-1986 through the time o — judgment. De — endant counters that plainti —
s would only be entitled to interest on the net amount o — damages, i.e., the contract price plus storage and insurance costs less the amount received upon resale. Since jurisdiction in this action is premised on diversity o — citizenship, the Court will apply New York law. Section 5001(a) o — the Civil Practice Law and Rules (“CPLR”) o — New York states that “Interest shall be recovered upon a sum awarded because o — a breach o — per — ormance o — a contract.” (McKinney’s 1963). Section 5001(b) states that Interest shall be computed — rom the earliest ascertainable date the cause o —
action existed, except that interest upon damages incurred therea --- ter shall be
computed --- rom the date incurred. Where such damages were incurred at vari
ous times, interest shall be computed upon each item --- rom the date it was
incurred or upon all o --- the damages --- rom a single reasonable intermediate date. De --- endant argues that the statute speaks --- or itsel --- and restricts any computa- tion o --- interest to the net amount o --- damages, or the “sum awarded” --- or breach o ---
per
ormance. Plainti —
s, choosing not to discuss the nuances o — this limiting lan- guage, stresses that the purpose behind this section and the damage sections o — the Uni — orm Commercial Code as applied in New York is to put a party in the same position it would have enjoyed but — or the breach. The Court — inds merit in each parties’ argument. 25 • Money Damages — or De — ective P er — ormance 765
Each side calls the Court’s attention to a
ew cases, none o — which directly reaches the question presently be — ore the Court. In Intermeat, Inc. v. American Poultry, Inc., the Court awarded the seller interest on the — ull contract price — or the period — rom the date o — breach until the buyer remitted — urther monies to seller, and therea — ter, on the di —
erence between the contract price and the monies remitted. Although the Court awarded interest consistent with plainti —
s’ position in this case, one important di —
er- ence must be noted. In Intermeat, the seller had shipped the goods to the buyer who then repudiated the contract but retained possession o — the goods. Similarly, in Bulk Oil (U.S.A.), Inc. v. Sun Oil Trading Co., the buyer accepted deliv- ery o — the goods and therea — ter repudiated the contract. In this case, on the other hand, the seller retained possession o — the goods be — ore and a — ter the alleged repudia- tion. Thus, any argument made that interest should be awarded on the — ull contract price makes greater sense in the cases cited by plainti —
s in light o — the — act that the seller had already delivered the goods to the buyer. De — endant’s cases are also distinguishable, though — or di — — erent reasons. De — endant cites Pro-Specialties, Inc. v. Thomas Funding Corp., — or the proposition that interest should be awarded only on the net amount recovered. In that case, the seller sought damages — rom a third-party guarantor. The buyer de — aulted in August, 1982 and the guarantor made only one payment o — $5000 in October, 1982. The District Court awarded damages to the seller in the amount o — the outstanding invoices less the $5000 received — rom the guarantor, and then awarded interest on this net amount o —
damages
rom the date o — breach in August, 1982. Although the Court awarded interest in a manner consistent with de — endant’s posi- tion in this case, the Court believes that the cases are — actually distinguishable. In Pro-Specialties, the delay between the time o — breach and the time the seller received the $5000 was only two to three months, and the $5000 received was only a — raction o — the amount due. The seller thus received interest on the bulk o — the contract price
rom the date o — breach, and the lost time-value o — the $5000 — or the three months was relatively minuscule. In this case, on the other hand, plainti —
s claim that they had to wait some three years be — ore receiving any signi — icant amount o — money due on the contract. De — endant’s theory o — the appropriate interest recovery would deny plainti —
s any substantial recovery — or the — unds not received during those three years. Under the provisions o — New York’s Uni — orm Commercial Code seller’s damages can be calculated in a — ew ways, depending on the circumstances. See N.Y. U.C.C. §§ 2-703 et seq. The seller may resell the goods and recover the di —
erence between the contract price and the resale price, plus incidental damages, assuming the resale was accomplished in a commercially reasonable time. Id. § 2-706. An aggrieved party must mitigate damages by resale i —
easible. I — the aggrieved seller — ails to resell in a commercially reasonable time, then damages can be calculated as the di —
erence between the unpaid contract price and the market price o — the goods at the time and place o — tender, plus incidental damages. N.Y. U.C.C. § 2-708(1). I — that amount is inadequate to put the seller in as good a position as per — ormance would 766 25 • Money Damages — or De — ective Per — ormance
have done, then damages may be calculated by awarding the seller the lost pro
it, including reasonable overhead and incidental damages. Id. § 2-708(2). The seller may also sue — or the price o — the goods, plus incidental damages, either — or goods accepted by the seller or — or “goods identi — ied to the contract i — the seller is unable a — ter rea- sonable e —
ort to resell them at a reasonable price or the circumstances reasonably indicate that such e —
ort will be unavailing.” Id. § 2-709. The damages provisions are designed to put the seller in the same position he would have enjoyed had the buyer not breached the contract. N.Y. U.C.C. § 1-106 (U.C.C. provisions should be construed liberally so that the aggrieved party may be put in the position he would have enjoyed had the other party — ully per — ormed). De — endant’s proposed method o — interest calculation would not put plainti —
s in the same position they would have enjoyed had de — endant per — ormed — i — resale during the three-year period between the time o — breach and mid-1986, when the goods were in — act resold, was not reasonably — easible at a reasonable price. I — resale was not reasonably — easible, then plainti —
s su —
ered losses during the three-year period
or the lost time value o — the money they would have received had de — endant — ully per — ormed. In Bulk Oil, the Second Circuit recognized that an aggrieved seller could recover as incidental damages interest payments made to a bank that would not have been made had the buyer per — ormed. Similarly, in Intermeat, the Court awarded as incidental damages — inance charges the seller incurred as a result o — the buyer’s breach. The Sec- ond Circuit intimated that the time value o — money is recoverable in noting that “the rate used in computing statutory interest is an assumption about the value o — the use o — money.” The Court thus decides that plainti —
s would be entitled to recover interest at the statutory rate on the contract price (less the $100,000 deposit) — rom the date o —
breach until the time at which the seller could reasonably have resold the goods with reasonable e —
ort — or a reasonable price. Plainti —
s are entitled to such interest only i —
the delay was reasonable under the circumstances. I
the delay were unreasonable, plainti —
would be entitled to interest on damages based on the di —
erence between the contract price and the market price at the time o — breach or some reasonable time therea — ter, see N.Y. U.C.C. § 2-708(1), or on the lost pro — it, see N.Y. U.C.C. § 2-708(2). Whether the three-year delay be — ore the goods were resold was reasonable is a ques- tion that remains to be resolved at trial. SO ORDERED.
Re --- lection North American demonstrates how courts will evaluate sellers’ remedies under the UCC. Recall that sellers are not entitled to consequential damages, but incidental damages may be available to sellers who expect costs in dealing appropriately with repudiated, rejected, or revoked goods. North American thus provides an e ---
ective review o — the rules regarding UCC damages — or sellers. 25 • Money Damages — or De — ective P er — ormance 767
This case also brings up a new concept that is worth highlighting: time value o
money. The simple version o
this idea is that, in ordinary economic conditions, a dollar today is worth more than a dollar tomorrow. For one thing, you can spend a dollar that you have presently, but you cannot spend a dollar you do not yet have, and this alone tends to make having the dollar sooner more valuable. Also, the — uture is inherently uncertain, and there is some risk that dollars promised in the — uture never arrive, whereas the one in your wallet is already in your possession. Time value o —
money is related to the interest rate, which is the amount one pays to borrow money. The — act that people pay interest to borrow money shows that having money now is worth more than having that money later, and that value is measurable by the interest paid — or the privilege o — having that money sooner. Another way to think o — the time value o — money is as a discount rate: money in the — uture is (generally) worth less than money today, and the longer into the — uture one expects to receive money, the greater the diminution in its value. For this reason, we say that — uture dollars are “discounted” in relation to present value. For example, i — we can determine that receiving a dollar in a week is worth ninety cents today — mean- ing, you would be indi —
erent between receiving a dollar in a week or ninety cents today — we can say that that — uture dollar is subject to a 10% discount. For present purposes, it is critical to note that courts must take economic reality into account when measuring damages. Lawyers and law pro — essors (who have a repu- tation — or being averse to mathematics in general) tend to overlook such economic complexities as time value o — money. The North American court itsel — laments this point in a — ootnote not included in the excerpt. The court criticizes a 1984 law review article titled An Economic Analysis o — the Lost-Volume Retail Seller, 49 Albany L. Rev. 889 (1985), observing that “This Comment, though quite complete in most respects, does not discuss the time value o — money as an element o — economic damages, re — lect- ing a lack o — discussion o — this topic generally in this area.” Fortunately, the law and economics movement has made great progress in the past
orty years. Courts, academics, and even practicing attorneys have greater knowledge o — economic principles, and these principles are applied to render judicial decisions that re — lect business reality. Students who plan to practice commercial law should like- wise consider how to expand their knowledge o — and com — ort with using economic concepts and analysis to make legal arguments.
Discussion 1. The North American court remands the question o --- whether the three-year period be --- ore reselling the goods at issue was reasonable. What --- actors should the trial court consider when determining what constitutes a reasonable time to resell goods?
768 25 • Money Damages — or De — ective Per — ormance
-
What is the logical connection between the economic concept o
time value o —
money and the legal concept o
awarding incidental damages — or interest?
Reading Ramirez v. Autosport. Ramirez is a relatively modern classic. The case is popular in part because the Supreme Court o — New Jersey takes the time and e —
ort to extensively discuss and describe the meaning and purpose o — UCC remedies. In addition, its subject matter — the purchase and sale o — an RV — is not especially technical. The court also does an excellent job analyzing the readily comprehensible — acts o — this case under the UCC rules. You can thus derive two bene — its — rom reading Ramirez. First, the case reviews the UCC remedies and explains them by integrating case law and commentary — rom a variety o — leading authorities, thus helping you understand what this complex area o — law involves and requires. Second, it analyzes an understandable (albeit un — ortunate) situation under these rules, thus helping you to see how UCC remedies analysis should be conducted. As you read Ramirez, take the oppor- tunity to re — ine your knowledge o — UCC remedies and to learn, by example, how to analyze — acts and cra — t balanced arguments under these rules.
Ramirez v. Autosport
88 N.J. 277 (1982) POLLACK, J. This case raises several issues under the Uni --- orm Commercial Code (“the Code” and “UCC”) concerning whether a buyer may reject a tender o --- goods with minor de --- ects and whether a seller may cure the de --- ects. We consider also the remedies avail- able to the buyer, including cancellation o --- the contract. The main issue is whether plainti ---
s, Mr. and Mrs. Ramirez, could reject the tender by de — endant, Autosport, o —
a camper van with minor de
ects and cancel the contract — or the purchase o — the van. The trial court ruled that Mr. and Mrs. Ramirez right — ully rejected the van and awarded them the — air market value o — their trade-in van. The Appellate Division a —
irmed in a brie — per curiam decision which, like the trial court opinion, was unre- ported. We a —
irm the judgment o — the Appellate Division.
I Following a mobile home show at the Meadowlands Sports Complex, Mr. and Mrs. Ramirez visited Autosport’s showroom in Somerville. On July 20, 1978 the Ramirezes and Donald Gra ---
, a salesman — or Autosport, agreed on the sale o — a new camper and the trade-in o — the van owned by Mr. and Mrs. Ramirez. Autosport and the Ramirezes signed a simple contract re — lecting a $14,100 purchase price — or the new 25 • Money Damages — or De — ective P er — ormance 769
van with a $4,700 trade-in allowance
or the Ramirez van, which Mr. and Mrs. Ramirez le — t with Autosport. A — ter — urther allowance — or taxes, title and documentary — ees, the net price was $9,902. Because Autosport needed two weeks to prepare the new van, the contract provided — or delivery on or about August 3, 1978. On that date, Mr. and Mrs. Ramirez returned with their checks to Autosport to pick up the new van. Gra —
was not there so Mr. White, another salesman, met them. Inspection disclosed several de — ects in the van. The paint was scratched, both the electric and sewer hookups were missing, and the hubcaps were not installed. White advised the Ramirezes not to accept the camper because it was not ready. Mr. and Mrs. Ramirez wanted the van — or a summer vacation and called Gra —
sev- eral times. Each time Gra —
told them it was not ready — or delivery. Finally, Gra —
called to noti — y them that the camper was ready. On August 14 Mr. and Mrs. Ramirez went to Autosport to accept delivery, but workers were still touching up the outside paint. Also, the camper windows were open, and the dining area cushions were soaking wet. Mr. and Mrs. Ramirez could not use the camper in that condition, but Mr. Leis, Auto- sport’s manager, suggested that they take the van and that Autosport would replace the cushions later. Mrs. Ramirez countero —
ered to accept the van i — they could with- hold $2,000, but Leis agreed to no more than $250, which she re — used. Leis then agreed to replace the cushions and to call them when the van was ready. On August 15, 1978 Autosport trans — erred title to the van to Mr. and Mrs. Ramirez, a — act unknown to them until the summer o —
- Between August 15 and Sep- tember 1, 1978 Mrs. Ramirez called Gra —
several times urging him to complete the preparation o — the van, but Gra —
constantly advised her that the van was not ready. He — inally in — ormed her that they could pick it up on September 1. When Mr. and Mrs. Ramirez went to the showroom on September 1, Gra —
asked them to wait. And wait they did — — or one and a hal — hours. No one — rom Autosport came — orward to talk with them, and the Ramirezes le — t in disgust. On October 5, 1978 Mr. and Mrs. Ramirez went to Autosport with an attor- ney — riend. Although the parties disagreed on what occurred, the general topic was whether they should proceed with the deal or Autosport should return to the Ramirezes their trade-in van. Mrs. Ramirez claimed they rejected the new van and requested the return o — their trade-in. Mr. Lustig, the owner o — Autosport, thought, however, that the deal could be salvaged i — the parties could agree on the dollar amount o — a credit — or the Ramirezes. Mr. and Mrs. Ramirez never took possession o — the new van and repeated their request — or the return o — their trade-in. Later in October, however, Autosport sold the trade-in to an innocent third party — or $4,995. Autosport claimed that the Ramirez’ van had a book value o — $3,200 and claimed
urther that it spent $1,159.62 to repair their van. By subtracting the total o — those two — igures, $4,159.62, — rom the $4,995.00 sale price, Autosport claimed a $600-700 pro — it on the sale. On November 20, 1978 the Ramirezes sued Autosport seeking, among other things, rescission o — the contract. Autosport counterclaimed — or breach o — contract. 770 25 • Money Damages — or De — ective Per — ormance
II Our initial inquiry is whether a consumer may reject de --- ective goods that do not con --- orm to the contract o --- sale. The basic issue is whether under the UCC, adopted in New Jersey as N.J.S.A. 12A:1-101 et seq., a seller has the duty to deliver goods that con --- orm precisely to the contract. We conclude that the seller is under such a duty to make a “per --- ect tender” and that a buyer has the right to reject goods that do not con --- orm to the contract. That conclusion, however, does not resolve the entire dispute between buyer and seller. A more complete answer requires a brie --- statement o --- the history o --- the mutual obligations o --- buyers and sellers o --- commercial goods. In the nineteenth century, sellers were required to deliver goods that complied exactly with the sales agreement. That rule, known as the “per --- ect tender” rule, remained part o --- the law o --- sales well into the twentieth century. By the 1920’s the doctrine was so entrenched in the law that Judge Learned Hand declared “[t]here is no room in commercial contracts --- or the doctrine o --- substantial per --- ormance.” The harshness o --- the rule led courts to seek to ameliorate its e ---
ect and to bring the law o — sales in closer harmony with the law o — contracts, which allows rescission only
or material breaches. Nevertheless, a variation o — the per — ect tender rule appeared in the Uni — orm Sales Act. The chie — objection to the continuation o — the per — ect tender rule was that buyers in a declining market would reject goods — or minor noncon — ormities and — orce the loss on surprised sellers. To the extent that a buyer can reject goods — or any noncon — ormity, the UCC retains the per — ect tender rule. Section 2-106 states that goods con — orm to a contract “when they are in accordance with the obligations under the contract.” Section 2-601 autho- rizes a buyer to reject goods i — they “or the tender o — delivery — ail in any respect to con — orm to the contract.” The Code, however, mitigates the harshness o — the per — ect tender rule and balances the interests o — buyer and seller. See R2d § 241 cmt. b. The Code achieves that result through its provisions — or revocation o — acceptance and cure. Initially, the rights o — the parties vary depending on whether the rejection occurs be — ore or a — ter acceptance o — the goods. Be — ore acceptance, the buyer may reject goods
or any noncon — ormity. Because o — the seller’s right to cure, however, the buyer’s rejec- tion does not necessarily discharge the contract. Within the time set — or per — ormance in the contract, the seller’s right to cure is unconditional. Some authorities recom- mend granting a breaching party a right to cure in all contracts, not merely those — or the sale o — goods. See R2d ch. 10, especially §§ 237 and 241. Underlying the right to cure in both kinds o — contracts is the recognition that parties should be encouraged to communicate with each other and to resolve their own problems. The rights o — the parties also vary i — rejection occurs a — ter the time set — or per — ormance. A — ter expiration o — that time, the seller has a — urther reasonable time to cure i — he believed reasonably that the goods would be acceptable with or without a money allowance. The determination o — what constitutes a — urther reasonable time 25 • Money Damages — or De — ective P er — ormance 771
depends on the surrounding circumstances, which include the change o
position by and the amount o — inconvenience to the buyer. Those circumstances also include the length o — time needed by the seller to correct the noncon — ormity and his ability to sal- vage the goods by resale to others. Thus, the Code balances the buyer’s right to reject noncon — orming goods with a “second chance” — or the seller to con — orm the goods to the contract under certain limited circumstances. A — ter acceptance, the Code strikes a di — — erent balance: the buyer may revoke acceptance only i — the noncon — ormity substantially impairs the value o — the goods to him. This provision protects the seller — rom revocation — or trivial de — ects. It also prevents the buyer — rom taking undue advantage o — the seller by allowing goods to depreciate and then returning them because o — asserted minor de — ects. Because this case involves rejection o — goods, we need not decide whether a seller has a right to cure substantial de — ects that justi — y revocation o — acceptance. Other courts agree that the buyer has a right o — rejection — or any noncon — ormity, but that the seller has a countervailing right to cure within a reasonable time. We conclude that the per — ect tender rule is preserved to the extent o — permitting a buyer to reject goods — or any de — ects. Because o — the seller’s right to cure, rejection does not terminate the contract. A — urther problem, however, is identi — ying the remedy available to a buyer who rejects goods with insubstantial de — ects that the seller — ails to cure within a reasonable time. The Code provides expressly that when “the buyer right — ully rejects, then with respect to the goods involved, the buyer may cancel.” “Cancellation” occurs when either party puts an end to the contract — or breach by the other. Nonetheless, some con — usion exists whether the equitable remedy o — rescis- sion survives under the Code. The Code eschews the word “rescission” and substitutes the terms “cancellation,” “revocation o — acceptance,” and “right — ul rejection.” Although neither “rejection” nor “revocation o — acceptance” is de — ined in the Code, rejection includes both the buyer’s re — usal to accept or keep delivered goods and his noti — ication to the seller that he will not keep them. Revocation o — acceptance is like rejection, but occurs a — ter the buyer has accepted the goods. Nonetheless, revocation o — acceptance is intended to provide the same relie — as rescission o — a contract o — sale o — goods. In brie — , revocation is tantamount to rescission. Similarly, subject to the seller’s right to cure, a buyer who right — ully rejects goods, like one who revokes his acceptance, may cancel the contract. We need not resolve the extent to which rescission — or rea- sons other than rejection or revocation o — acceptance, e.g. — raud and mistake, survives as a remedy outside the Code. Accordingly, we recognize that explicit Code remedies replace rescission, and disapprove suggestions the UCC expressly recognizes rescis- sion as a remedy. Although the complaint requested rescission o — the contract, plainti —
s actually sought not only the end o — their contractual obligations, but also restoration to their 772 25 • Money Damages — or De — ective Per — ormance
pre-contractual position. That request incorporated the equitable doctrine o
restitu- tion, the purpose o — which is to restore plainti —
to as good a position as he occupied be — ore the contract. In UCC parlance, plainti —
s’ request was — or the cancellation o — the contract and recovery o — the price paid. General contract law permits rescission only — or material breaches, and the Code restates “materiality” in terms o — “substantial impairment.” The Code permits a buyer who right — ully rejects goods to cancel a contract o — sale. Because a buyer may reject goods with insubstantial de — ects, he also may cancel the contract i — those de — ects remain uncured. Otherwise, a seller’s — ailure to cure minor de — ects would compel a buyer to accept imper — ect goods and collect — or any loss caused by the noncon — ormity. Although the Code permits cancellation by rejection — or minor de — ects, it permits revocation o — acceptance only — or substantial impairments. That distinction is consis- tent with other Code provisions that depend on whether the buyer has accepted the goods. Acceptance creates liability in the buyer — or the price, and precludes rejection. Also, once a buyer accepts goods, he has the burden to prove any de — ect. By contrast, where goods are rejected — or not con — orming to the contract, the burden is on the seller to prove that the noncon — ormity was corrected. Underlying the Code provisions is the recognition o — the revolutionary change in business practices in this century. The purchase o — goods is no longer a simple transac- tion in which a buyer purchases individually-made goods — rom a seller in a — ace-to-
ace transaction. Our economy depends on a complex system — or the manu — acture, distribution, and sale o — goods, a system in which manu — acturers and consumers rarely meet. Faceless manu — acturers mass-produce goods — or unknown consumers who purchase those goods — rom merchants exercising little or no control over the quality o — their production. In an age o — assembly lines, we are accustomed to cars with scratches, television sets without knobs and other products with all kinds o —
de
ects. Buyers no longer expect a “per — ect tender.” I — a merchant sells de — ective goods, the reasonable expectation o — the parties is that the buyer will return those goods and that the seller will repair or replace them. Recognizing this commercial reality, the Code permits a seller to cure imper — ect tenders. Should the seller — ail to cure the de — ects, whether substantial or not, the bal- ance shi — ts again in — avor o — the buyer, who has the right to cancel or seek damages. In general, economic considerations would induce sellers to cure minor de — ects. Assum- ing the seller does not cure, however, the buyer should be permitted to exercise his remedies under the Code. The Code remedies — or consumers are to be liberally con- strued, and the buyer should have the option o — canceling i — the seller does not provide con — orming goods. To summarize, the UCC preserves the per — ect tender rule to the extent o — permit- ting a buyer to reject goods — or any noncon — ormity. Nonetheless, that rejection does not automatically terminate the contract. A seller may still e —
ect a cure and preclude un — air rejection and cancellation by the buyer. 25 • Money Damages — or De — ective P er — ormance 773
III The trial court --- ound that Mr. and Mrs. Ramirez had rejected the van within a rea- sonable time. The court --- ound that on August 3, 1978, Autosport’s salesman advised the Ramirezes not to accept the van and that on August 14, they rejected delivery and Autosport agreed to replace the cushions. Those --- indings are supported by substantial credible evidence, and we sustain them. Although the trial court did not --- ind whether Autosport cured the de --- ects within a reasonable time, we --- ind that Autosport did not e ---
ect a cure. Clearly the van was not ready — or delivery during August, 1978 when Mr. and Mrs. Ramirez rejected it, and Autosport had the burden o — proving that it had corrected the de — ects. Although the Ramirezes gave Autosport ample time to correct the de — ects, Autosport did not demonstrate that the van con — ormed to the contract on September 1. In — act, on that date, when Mr. and Mrs. Ramirez returned at Autosport’s invitation, all they received was discourtesy. On the assumption that substantial impairment is necessary only when a purchaser seeks to revoke acceptance, the trial court correctly re — rained — rom deciding whether the de — ects substantially impaired the van. The court properly concluded that plain- ti —
s were entitled to “rescind” — i.e., to “cancel” — the contract. Because Autosport had sold the trade-in to an innocent third party, the trial court determined that the Ramirezes were entitled not to the return o — the trade-in, but to its — air market value, which the court set at the contract price o — $4,700. A buyer who right — ully rejects goods and cancels the contract may, among other possible remedies, recover so much o — the purchase price as has been paid. The Code, however, does not de — ine “pay” and does not require payment to be made in cash. A common method o — partial payment — or vans, cars, boats and other items o —
personal property is by a “trade-in.” When concerned with used vans and the like, the trade-in market is an acceptable, and perhaps the most appropriate, market in which to measure damages. It is the market in which the parties dealt; by their voluntary act they have established the value o — the traded-in article. In other circumstances, a measure o — damages other than the trade-in value might be appropriate. The ultimate issue is determining the — air market value o — the trade-in. This Court has de — ined — air market value as “the price at which the property would change hands between a willing buyer and a willing seller when the — ormer is not under any com- pulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge o — relevant — acts.” Although the value o — the trade-in van as set — orth in the sales contract was not the only possible standard, it is an appropriate measure o —
air market value. For the preceding reasons, we a —
irm the judgment o — the Appellate Division. 774 25 • Money Damages — or De — ective Per — ormance
Re --- lection Part II o --- Ramirez e ---
ectively — unctions as a mini-treatise on UCC buyers’ remedies. It makes two critical points regarding UCC remedies. First, the UCC nominally has a per — ect tender rule, but this does not give buyers the right to reject goods willy-nilly. Rather, buyers have a good- — aith obligation which extends to their rejection rights. Sellers, meanwhile, have some right to cure, and buyers have some obligation to give them time to cure. Remember, the goal o — contract law is not to meet venial — aults with harsh oppression but rather to ensure that parties receive the mutual bene — its o — their commercial agreements. The UCC, in particular, encourages behavior that maximizes social wel — are by encouraging parties to work things out be — ore litigating their issues.
Discussion 1. Is substantial per --- ormance or per --- ect tender the more appropriate standard? Why should this standard be di --- --- erent in contracts --- or services versus contracts --- or goods? 2. Does the UCC really require per --- ect tender in the --- irst instance? Or must the rule be read more so --- tly such that there is room --- or sellers to err without --- or --- eiting their right to payment?
Problems Problem 25.1. Yugo Motors Blake ordered a luxury automobile loaded with accessories --- rom Yugo Motors --- or a contract price o --- $66,000. When the car arrived, Blake discovered that it lacked --- our o --- the --- eatures that Blake had ordered. Yugo re --- used to take back the car and order a new one. What damages should be awarded to Blake?
Problem 25.2. Not-So-Elite Builders Maria contracts with Elite Builders to renovate her kitchen — or $50,000. Elite — in- ishes the renovation, but the new countertops are misaligned, and the backsplash is uneven. Fixing these issues would cost $10,000, but the de — ects reduce the home’s value by only $2,000. What damages should Maria recover i — she values the aesthetic improvements? Would the remedy change i — the de — ects were merely cosmetic and did not a —
ect the home’s — unctionality? 25 • Money Damages — or De — ective P er — ormance 775
Problem 25.3. Ace Printing Ace Printing contracts to buy a high-speed printer — rom TechMach — or $120,000. The printer is delivered and — unctions, but it produces smudges on every tenth page, which violates the contract’s speci — ications. Repairing the printer would cost $30,000, but the diminished value due to the smudges is $15,000. Ace also spent $2,000 in test- ing the printer to ensure it meets industry standards. Should the court award Ace the cost o — repair or diminution in value? Why? What incidental damages, i — any, is Ace entitled to recover?
Problem 25.4. Faulty Li
t A luxury apartment developer purchases — our high-end elevators — rom RapidLi — t
or $1.2 million. Following installation, two o — the elevators occasionally mal — unction and stop between — loors. The repair costs — or the elevators would total $400,000, while the diminished value o — the building due to unreliable elevators is $200,000. RapidLi — t o —
ers to repair the elevators within two months at no cost, but the developer re — uses the o —
er. Can the developer re — use RapidLi — t’s o —
er to cure the de — ects? I — the court awards damages, should it award the cost o — repair or the diminished value? Chapter 26 Limitations on Money Damages
Money damages, designed to make injured parties whole, are the cornerstone o
contract law remedies. Yet even this
undamental principle has limits. Imagine agree- ing to deliver machine parts to a — actory — or $10,000, with a 1% penalty — or each day o —
delay. You deliver ten days late and expect to pay a $1,000 penalty. Instead, you’re hit with a $10 million lawsuit because the — actory claims they lost a government contract. They never told you about this deal during negotiations. Should you really bear the burden o — such extraordinary losses? This scenario highlights the central challenge o — balancing — air compensation — or injured parties with reasonable limits on liability
or breaching parties. This example underscores a critical challenge in contract law: balancing — air compensation — or injured parties with reasonable protection — or breaching parties. Without clear boundaries, damages can become wildly disproportionate to the harm caused. Such risks o — disproportionate liability could undermine predictability and discourage commercial agreements. To address this, contract law employs doctrines that keep money damages aligned with actual harm while preventing speculative or excessive recoveries. These doctrines help to ensure that remedies remain — air and practical, which supports trust in contracts as reliable tools — or commerce. This chapter explores three key doctrines that limit money damages: — oreseeability, certainty, and mitigation. Each ties closely to the core interests contract law seeks to protect. Foreseeability, as the cornerstone o — the expectation interest, ensures that dam- ages re — lect only those risks the breaching party reasonably expected at the time o —
contracting. This protects the integrity o
the bargain by aligning compensation with what the parties actually agreed to give and get. Certainty also supports the expectation interest by requiring damages to be grounded in concrete, provable harm, thus ensuring that compensation is accurate and not speculative. This prevents courts — rom awarding damages based on guesswork or hypothetical losses. Mitigation, on the other hand, connects primarily to the reliance interest. It prevents injured parties — rom passively allowing damages to grow and instead encourages them to minimize their losses. This doctrine provides a legal incentive — or parties to act respon- sibly, even in the event o — breach, while — ostering — airness and economic e —
iciency.
777
778 26 • Limitations on Money Damages
Together, these doctrines create a
ramework that balances — air compensation with reasonable limits on liability, thus enabling contracts to remain reliable tools — or eco- nomic exchange. By examining these doctrines, you will see how courts navigate the tension between — airness and e —
iciency. Through clear rules that align money dam- ages with provable harm, contract law provides parties with predictable outcomes and encourages them to engage in reasonable risk management. Understanding these limitations not only helps one to anticipate the results o — litigation but also to dra — t agreements that minimize disputes and align with commercial realities.
Rules A. Foreseeability Foreseeability is one o --- the --- oundational doctrines limiting money damages in con- tract law. It ensures that damages are tied to the risks the breaching party knew or should have known about at the time the contract was --- ormed. By aligning damages with the expectation interest o --- the nonbreaching party, --- oreseeability ensures that remedies re --- lect the reasonable expectations o --- both parties, particularly the breach- ing party, who should not be held liable --- or risks it could not have reasonably antici- pated. R2d § 351(1) provides:
Damages are not recoverable --- or loss that the party in breach did not have rea-
son to --- oresee as a probable result o --- the breach when the contract was made. Similarly, NH UCC § 2-715(2)(a) states:
Consequential damages resulting --- rom the seller’s breach include any loss
resulting --- rom general or particular requirements and needs o --- which the seller
at the time o --- contracting had reason to know and which could not reasonably
be prevented by cover or otherwise. To evaluate whether damages are --- oreseeable, courts ask whether the breaching party knew or should have known about the other party’s circumstances at the time o --- contracting. R2d § 351(2) explains:
Loss may be --- oreseeable as a probable result o --- a breach because it --- ollows --- rom
the breach (a) in the ordinary course o --- events, or (b) as a result o --- special
circumstances, beyond the ordinary course o --- events, that the party in breach
had reason to know.
Foreseeability hinges on what the breaching party knew or should have known at the time o --- contracting. This includes not only actual knowledge but also constructive knowledge, i.e., in --- ormation that a reasonable person in the breaching party’s position would have known given the circumstances. For instance, in a contract --- or delivery services, a breaching party knew or should have known o --- a buyer’s reliance on a
26 • Limitations on Money Damages 779
timely delivery i
the buyer explicitly communicated their needs during negotiations or paid — or rush delivery. In a sale o — goods, the seller knew or should have known that the buyer’s operations depend on timely — ul — illment because the contract com- municates that “time is o — the essence” or it contains a representation that the seller understands the parts are “mission critical.” However, one cannot collect damages — or all losses resulting — rom delays simply by writing “time is o — the essence” in a contract. Damages must be — oreseeably related to the breach. The — amous case o — Hadley v. Baxendale, 56 Eng. Rep. 145, 9 Exch. 341 (1854), which appears later in this chapter, illustrates this limitation. In Hadley, Mr. Hadley and Mr. Anor, as partners, owned a mill in the city o —
Gloucester, England. One day, the central cranksha
t o — a critical steam engine at the mill broke. Hadley arranged — or W. Joyce & Co. to make a new cranksha — t, and he hired Baxendale to transport the new cranksha — t to the mill. But Baxendale — ailed to deliver the cranksha — t on time. Hadley sued — or the cost o — his mill being out o — service
or longer than expected. Baron Sir Edward Hall Alderson, sitting as judge in the Court o — Exchequer, con- sidered whether Hadley should be allowed to recover these lost pro — its — rom Baxen- dale. First, Judge Alderson set — orth the rule regarding such consequential damages: Where two parties have made a contract which one o — them has broken, the damages which the other party ought to receive in respect o — such breach o —
contract should be such as may --- airly and reasonably be considered either
arising naturally, i.e., according to the usual course o --- things, --- rom such breach
o --- contract itsel --- , or such as may reasonably be supposed to have been in the
contemplation o --- both parties, at the time they made the contract, as the prob-
able result o --- the breach o --- it.
Judge Alderson then --- ound, as a matter o ---
act, that delays — rom shipment are — ore- seeable. One question, however, remained: whether Baxendale reasonably supposed that his delay would cost the mill lost pro — its. The court heard convincing testimony that most mills had at least one spare cranksha — t, such that the delay o — a replacement cranksha — t should not cause the mill to remain shut down. Baxendale, — or his part, had no special reason to know that Hadley lacked this spare part. Since a shipper in ordi- nary circumstances would not expect his delay to cause such lost pro — its, and since there was nothing in this case which took its — acts out o — the ordinary, Baxendale was not liable — or Hadley’s lost pro — its. The case still stands as the paradigmatic example o —
the
oreseeability limit on damages.
B. Certainty The certainty doctrine ensures that damages awarded in breach o — contract cases are based on concrete, provable losses rather than speculation. Expectation damages, the typical remedy — or breach o — contract, requires — oresight because it asks what the 780 26 • Limitations on Money Damages
value would have been had the contract been per
ormed. The question begs a coun- ter — actual answer, which has inherent challenges: how does a litigant — actually prove something that did not happen? To address the problem, courts require a reasonable degree o — certainty. This ensures that the remedies align with the compensatory goal o — contract law: to put the injured party in the position they would have been in had the breach not occurred. By requiring reasonable certainty, the doctrine also prevents awards that go beyond compensation, which ensures that damages do not unintentionally create wind — alls
or the injured party. Damages are not recoverable — or loss beyond an amount that the evidence permits to be established with reasonable certainty. R2d § 352. This general principle is re — lected in speci — ic provisions o — the UCC that empha- size the need — or reliable proo — o — damages in various contexts. For example, UCC § 2-715(2)(b) allows recovery o — consequential damages only when they “could not reasonably be prevented” and “result — rom the seller’s breach,” ensuring that claims are tied to demonstrable harm. Certainty o — damages is especially relevant in cases involving lost pro — its, new busi- nesses, or complex contractual relationships. Established businesses typically have the — inancial records, historical data, and market analyses needed to prove lost pro — its with reasonable certainty. By contrast, new ventures — ace greater challenges. Courts are generally skeptical o — awarding lost pro — its to businesses without a track record unless they can provide robust evidence, such as comparable market data or expert testimony. For example, a commercial storage — acility has ten storage units on premises. All are leased out consistently — or the past ten years, and each currently generates $1,000 in monthly rental income. The — acility hires a construction company to build an eleventh unit by a certain date. I — the construction company completes construc- tion two months late, the — acility can likely prove that its expectation damages include $2,000 in lost pro — its. However, i — an entrepreneur wants to build an entirely new com- mercial storage — acility in a rural location that does not have any other storage options nearby, and i — the contractor is late in this project, proving lost pro — its with certainty is much harder. Without evidence o — rent rates, those damages are too speculative to recover.
C. Mitigation The doctrine o — mitigation (sometimes called the “duty to mitigate” or the “doc- trine o — avoidability”) requires an injured party to take reasonable steps, not extraor- dinary e —
orts, to minimize one’s own losses that result — rom a breach. Put di —
erently, i — you can avoid or lessen your damages by taking sensible action, the law expects you 26 • Limitations on Money Damages 781
to do so. Because contract law discourages waste and ine
iciency, it will not compen- sate a party — or losses that could have been prevented without undue risk, burden, or humiliation.
Damages are not recoverable --- or loss that the injured party could have avoided
without undue risk, burden, or humiliation. R2d § 350.
I Imagine an employment contract --- or a one-year term at $60,000, to be paid monthly at $5,000 per month. Three months in, a --- ter paying $15,000, the employer
ires the employee without cause. The employee immediately looks — or comparable work, spends one month and $500 on the job search, and secures a new position that pays $32,000 — or the remaining eight months o — the year. Because the employee made good- — aith e —
orts to — ind substitute work, her damages would typically be the di —
er- ence between the original salary ($60,000) and her new earnings ($32,000), plus job search expenses ($500), minus the amount already paid ($15,000). Her net recovery would be $13,500. A — ter a success — ul lawsuit, the court would award damages su —
i- cient to make her — inancially whole — that is, to put her in the same position she would have occupied had the employer — ully per — ormed. I — instead she had sat at home without looking — or another job, or turned down comparable positions out o — spite, a court could reduce or deny recovery — or those avoidable losses. Even though her total lost income might appear to be $45,000 (the remaining nine months o — the contract a — ter the $15,000 she already received), a court might — ind she could have reasonably mitigated $32,000 o — that amount. In that case, her damages would be reduced to $13,000, plus any job search expenses she might have incurred. A party is thus advised to mitigate damages and not simply let them “pile up.” Again, mitigation requires reasonable — not extraordinary — e —
orts. An employer who breaches can’t insist that the employee take any job at any wage; the replacement position must be reasonably comparable. I — the employment was — or computer pro- gramming, she does not have to take a job as a correction o —
icer. I — she was hired to be the CEO o — a mid-size bank, courts would not expect her to accept a position as a custodian in the subway. Mitigation — ocuses on what an ordinary, prudent person would do in the same situation: step up to reduce harm, but not at the expense o — one’s dignity or — inancial well-being. The UCC applies the mitigation principle to the sale o — goods. Under UCC § 2-712, a buyer has the right to cover by procuring substitute goods in good — aith. Under UCC § 2-706, a seller may resell goods in a commercially reasonable manner to minimize damages. Both provisions re — lect contract law’s broader goal o — preventing avoidable losses. Consider a scenario where Precision Lasers agrees to buy 1,000 specialized micro- chips — rom ThinkPC at $10 per chip. ThinkPC delivers only 600. Precision, need- ing the — ull shipment to meet its own obligations, purchases 400 replacement chips 782 26 • Limitations on Money Damages
elsewhere, at $11 per chip. Precision sues
or the extra cost o — $1 per chip. I — the court
inds that Precision acted reasonably, it will award $400 in cover damages, plus appro- priate incidental costs. I — Precision had not tried to cover and instead canceled its downstream orders while seeking $20 in lost pro — its per laser, the court would probably reject that approach. Precision would have — ailed to mitigate its damages by making no reasonable e —
ort to obtain the missing chips. Consider another example. Focus Technologies re — uses to accept 500 custom chips
rom ThinkPC, at $15 per chip. ThinkPC resells them at $12 each and then sues Focus. I — ThinkPC acted promptly and resold at a — air price, then the court will award dam- ages — or the $3 di —
erence per chip, plus incidental expenses — or storage and resale. But i — ThinkPC does nothing and leaves the chips in a warehouse, then trashes them years later, a court would likely deny lost-pro — it damages and re — use any incidental damages
or the disposal. ThinkPC did not resell but rather piled up unnecessary losses in a way that undercuts the law’s goal o — avoiding waste.
D. Re
lections on Limitations on Money Damages The doctrines limiting money damages in contract law — — oreseeability, certainty, and mitigation — ensure that — airness and predictability remain central to resolving disputes while adapting remedies to evolving commercial realities. These doctrines not only connect to the core purposes o — contract law, such as protecting expectation and reliance interests, but also highlight the law’s practical goals: — ostering trust in agreements and encouraging parties to act responsibly. The — oreseeability doctrine ensures that damages are tied to the risks contemplated by the parties when they entered into the agreement. This doctrine allows parties to assess potential risks up — ront, which creates a more stable — oundation — or agreements. By — ocusing on what the breaching party reasonably expected, — oreseeability provides a — air boundary — or liability and strengthens trust in the contracting process. The certainty doctrine rein — orces the expectation interest by requiring concrete proo — o — loss, thus ensuring that damages awarded align with actual harm rather than speculation. This requirement prevents courts — rom overcompensating injured parties or awarding damages based on hypothetical outcomes. Certainty, there-
ore, protects the integrity o — contract remedies while emphasizing — airness and accountability. The mitigation doctrine connects primarily to the reliance interest by encouraging injured parties to act reasonably to limit their losses. This doctrine ensures that dam- ages do not un — airly accumulate and promotes e —
iciency by discouraging waste — ul inaction. It aligns with the broader goals o — contract law by balancing the responsibili- ties o — both parties in addressing breaches. 26 • Limitations on Money Damages 783
Together, these doctrines
orm a cohesive — ramework that shapes how courts assess contract disputes. They ensure that remedies remain practical and proportionate by balancing — air compensation — or injured parties with reasonable limits on liability — or breaching parties. This balance — osters con — idence in contract law’s ability to provide
air and predictable outcomes, thereby encouraging the use o — contracts as reliable tools — or commerce. At the same time, the boundaries these doctrines set encourage care — ul planning and negotiation. Contracts must adapt to the realities o — modern commerce, where risks are increasingly complex and stakes are higher than ever. How might — oresee- ability evolve to address the challenges posed by global supply chain disruptions or rapid technological changes? Can the doctrine o — mitigation — ully capture the nuances o — today’s digital and remote work environments? These questions underscore that contract law is not just about resolving past disputes but also about shaping agree- ments that meet — uture challenges. By understanding these doctrines, students and practitioners alike can approach contract disputes with a deeper appreciation — or how courts navigate the tension between — airness and e —
iciency. These limitations on money damages are not con- straints; they are vital tools — or rein — orcing trust and ensuring that contract law evolves alongside the dynamic needs o — modern commerce.
Cases Reading Hadley v. Baxendale. One o --- the most --- amous and most durable cases in the law o --- contracts is Hadley v. Baxendale, a British case decided by the Court o --- Exchequer in 1854. In Hadley, a mill had to shut down because a car- rier was slow in delivering a cranksha --- t to replace a broken one, and the owners o --- the mill sought to recover their lost pro --- its --- rom the carrier. However, the court ruled in --- avor o --- the carrier because the mill owners had not in --- ormed the carrier that this would be the consequence o --- any delay (and the carrier might have assumed that the mill had a spare sha --- t). The rule that emerges --- rom the case is that a breaching party is not liable --- or lost pro --- its unless the “special cir- cumstances” giving rise to the loss were “ --- airly and reasonably contemplated” by the parties at the time that the contract was entered into.
The contract in Hadley was --- or shipment o --- a cranksha --- t --- or a steam mill. The language o --- this case is a bit archaic, so summaries and guide points have been added in [brackets]. Paragraph breaks have also been added, since the court did not seem to possess a “return” key and o --- ten went on --- or dozens o --- lines at a time. Otherwise, the reprinted case is mostly --- aith --- ul to the original, in order to retain the color and tone o --- the court’s --- amous language.
784 26 • Limitations on Money Damages
The R2d contains the modern statement o --- the rule on the reasonable --- ore- seeability limitations o --- awards o --- expectation damages:
A court may limit damages --- or --- oreseeable loss by excluding recovery --- or loss
o --- pro --- its, by allowing recovery only --- or loss incurred in reliance, or other
wise i --- it concludes that in the circumstances justice so requires in order to
avoid disproportionate compensation. R2d § 351(3).
Hadley v. Baxendale
56 Eng. Rep. 145, 9 Exch. 341 (1854)
[Summary: Hadley ran a steam mill that broke its cranksha --- t. Baxendale promised to deliver a cranksha --- t to a manu --- acturer within two days, but it took ten extra days. Because o --- Baxendale’s delay, Hadley’s mill was out o --- commission during that time. Hadley sued Baxendale --- or the delay as measured by lost pro --- its. Baxendale de --- ended on the ground that a reasonable courier in his position would believe that Hadley had a spare cranksha --- t so that the delay would not cause lost pro --- its. The trial court awarded lost pro --- it damages to Hadley, and Baxendale appealed.] At the trial be --- ore Crompton, J., at the last Gloucester Assizes, it appeared that the plainti ---
s carried on an extensive business as millers at Gloucester; and that, on the 11th o — May, their mill was stopped by a breakage o — the crank sha — t by which the mill was worked. The steam-engine was manu — actured by Messrs. Joyce & Co., the engineers, at Greenwich, and it became necessary to send the sha — t as a pattern — or a new one to Greenwich. The — racture was discovered on the 12th, and on the 13th the plainti —
s sent one o —
their servants to the o
ice o — the de — endants, who are the well-known carriers trad- ing under the name o — Pick — ord & Co., — or the purpose o — having the sha — t carried to Greenwich. The plainti —
s’ servant told the clerk that the mill was stopped, and that the sha — t must be sent immediately; and in answer to the inquiry when the sha — t would be taken, the answer was, that i — it was sent up by twelve o’clock that day, it would be delivered at Greenwich on the — ollowing day. On the — ollowing day the sha — t was taken by the de — endants, be — ore noon, — or the purpose o — being conveyed to Greenwich, and the sum o — 2l. 4s. was paid — or its car- riage — or the whole distance; at the same time the de — endants’ clerk was told that a special entry, i — required, should be made to hasten its delivery. The delivery o — the sha — t at Greenwich was delayed by some neglect; and the conse- quence was, that the plainti —
s did not receive the new sha — t — or several days a — ter they would otherwise have done, and the working o — their mill was thereby delayed, and they thereby lost the pro — its they would otherwise have received. 26 • Limitations on Money Damages 785
Figure 26.1. Steam mill in Yaroslavl, Russia, by unknown artist.
Public domain work.
[Hadley won in the lower court. The trial court awarded him lost pro
its — or Bax- endale’s negligent delay.] On the part o — the de — endants, it was objected that these damages were too remote, and that the de — endants were not liable with respect to them. The learned Judge le — t the case generally to the jury, who — ound a verdict with 25l. damages beyond the amount paid into Court. [Baxendale appealed, arguing that he did not know that Hadley would su —
er this loss; there — ore, he should not be liable — or paying — or it.] Whateley, in last Michaelmas Term, obtained a rule nisi — or a new trial, on the ground o — misdirection. The judgment o — the [Appellate] Court was now delivered by ALDERSON, B. We think that there ought to be a new trial in this case; but, in so doing, we deem it to be expedient and necessary to state explicitly the rule which the Judge, at the next trial, ought, in our opinion, to direct the jury to be governed by when they estimate the damages. Now we think the proper rule is such as the present is this: Where two parties have made a contract which one o — them has broken, the damages which the other party ought to receive in respect o — such breach o — contract should be such as may — airly and reasonably be considered either: arising naturally, i.e., according to the usual course o — things, — rom such breach o — contract itsel — , or such as may reasonably be supposed to have been in the contemplation o — both parties, at the time they made the con- tract, as the probable result o — the breach o — it. 786 26 • Limitations on Money Damages
I
the special circumstances under which the contract was: actually made where communicated by the plainti —
s to the de — endants, and thus known to both parties, Then the damages resulting — rom the breach o — such a contract, which they would reasonably contemplate, would be the amount o — injury which would ordinarily
ollow — rom a breach o — contract under these special circumstances so known and communicated. But, on the other hand, i — these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount o — injury which would arise generally, and in the great multitude o — cases not a —
ected by any special circumstances, — rom such a breach o —
contract. Such loss would neither have — lowed naturally — rom the breach o — this contract in the great multitude o — such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence o — such breach o — contract, communicated to or known by the de — endants. The Judge ought, there — ore, to have told the jury, that, upon the — acts then be — ore them, they ought not to take the loss o — pro — its into consideration at all in estimating the damages. There must there — ore be a new trial in this case. Rule absolute. [Remanded to trial court to determine whether Hadley’s damages were reasonably
oreseeable to Baxendale under the new rule stated above.]
Re --- lection Kenney Hegland wrote an amusing re --- lection on this storied case. In his words:
“O --- course zombies could have shown up and kept the mill going.”
Whether Hadley is the best o --- cases or the worst o --- cases, it surely is the
most popular o --- cases, and the most cited.
Hadley, a miller, contracted with Baxendale, a carrier, to have a broken
sha --- t sent to the manu --- acturer --- or repairs. Due to some neglect, the sha --- t
was not sent on time, and Hadley lost pro --- its due to the delay; so, he sued,
and he won.
On appeal, the court granted a new trial, and the jury was to be instructed
not to consider lost pro --- its because the circumstances did not show that the
mill would lose pro --- its i --- the sha --- t was not delivered on time. Who knows?
Maybe Hadley had another sha --- t he could use; maybe another machine
had broken and the mill couldn’t run anyway; or maybe zombies arrived
26 • Limitations on Money Damages 787
to save the day. Not to quibble, but it would be a very bad day to have two
essential machines break down; and as to the backup sha --- t, was Hadley
compulsive?
O --- course, had Hadley told Baxendale that his was a unique case and
that he had a pressing need --- or the sha --- ts things might have turn[e]d out
di ---
erently. Alas, he only said that the “article to be carried was the broken sha — t o — a mill and that the plainti —
s were millers o — the mill.” Hold on there! In the — irst paragraph we are told that Hadley told Baxendale, “the mill was stopped, that the sha — t must be delivered immediately, and that a special entry, i — necessary, must be made to hasten its delivery.” Now my short- term memory is not what it used to be, but come on, — ive short paragraphs? Maybe the clerk who transcribed the opinion was in his cups — gin was very popular. But let us just put this down as a — ake statement o —
acts and move on. Baxendale made a promise, he did not keep it, and that breach injured Hadley. Why should he, rather than Hadley, take the loss? The jury thought he should, but the court tells us that this would be the “greatest injustice.” In tort law, you take the plainti —
as you — ind her — none o — this “be — ore you throw that apple let me tell you I have a very rare heart condition” non- sense. Why give the promisor a break? Between the two, it is more likely that the promisor would envision consequents o — breach, as he is — ocusing on whether he can keep his word; the promisee is — ocusing on the price. It seems, however, that the greatest injustice does not turn on — ault or who can better envision the harm, but rather on the harm that would — low i — the jury did not buy into the notion o — a cheap contract. But that is another article, and justice is beyond my scope. “[I] — the jury [is] le — t without any de — inite rule to guide [it], it will . . . mani — estly lead to the greatest injustice.” Put aside the notion that jurors might have a better idea o — justice than do judges and — ocus instead on the notion “we cannot trust jurors.” A core notion in the law is that [. . . ] we cannot trust anyone to do the right thing. Jurors are roped in by the instructions (which they must — ollow), by parties via their care — ully dra — ted contracts (which they o — ten ignore), and by judges[, and], alas, by Hadley. O — course, Hadley did not start the — ire. But are we sure that without instructions jurors would in — lict the greatest injustice? Without precedent would judges be all over the lot? Why not at least think the unthinkable: junk it all and simply instruct — olks to do the right thing. Do you do the right thing without — irst reciting rules to — ollow? Without Hadley, would the wild rumpus begin? Kenney Hegland, Hadley v. Baxendale, in Daniel Barnhizer et al., The Best and Worst o — Contracts Decisions: An Anthology, 45 Fla. St. U. L. Rev. 887, 992–93 (2018). 788 26 • Limitations on Money Damages
Discussion 1. Hadley distinguishes between incidental and consequential damages, as does the R2d. But is this distinction necessary? Not all courts distinguish between di --- --- erent kinds o --- indirect damages in this way. 2. As an alternative to distinguishing between incidental damages, which directly arise --- rom direct damages, and consequential damages, which indirectly arise and only count as damages where they are reasonably --- oreseeable, could a court sim- pli --- y this analysis with a rule that says all indirect damages count to the extent they are reasonably --- oreseeable? 3. Do the separate concepts o --- incidental and consequential damages do some addi- tional work beyond making reasonably un --- oreseeable losses unrecoverable?
Problems Problem 26.1 Freezer Failure GeneCorp is a startup company that provides customized genetic sequencing --- or medical diagnostic purposes. This business relies on using cryogenic --- reezers that stably maintain extremely cold temperatures. GeneCorp contracts with Below Zero, Inc., a re --- rigeration company, to deliver and install a custom --- reezer --- or $275,000. During negotiations, GeneCorp provided speci --- ications --- or the --- reezer’s per --- ormance but did not disclose that it was expecting $25 million in venture capital --- unding that is contingent on proving GeneCorp’s concept with its --- irst customers. Below Zero delays installation by two months due to a supply chain issue, and GeneCorp loses the venture --- inance contract. GeneCorp sues --- or the $25 million in lost --- unding. What --- acts support GeneCorp’s claim that the damages were --- oreseeable? What --- acts support Below Zero’s de --- ense that the damages were not --- oreseeable? How would the analysis change i --- GeneCorp had explicitly in --- ormed Below Zero about the --- inancing contract during negotiations?
Problem 26.2 Jack’s Furniture Jack operates a small custom — urniture business with inconsistent sales. He con- tracts with Elite Lumber to deliver $25,000 worth o — rare wood — or a high-pro — ile commission. When placing the order, Jack explained his client’s request and expressed how this was a big deal — or his business. Elite Lumber breaches by delivering de — ective materials, which causes Jack to lose the commission. Jack claims $75,000 in lost pro — its but presents only an unsigned email — rom the potential client and no prior earnings data to support his claim. 26 • Limitations on Money Damages 789
Can Jack recover the $75,000 in lost pro
its? Why or why not? Would the result di —
er i — Jack had presented signed contracts and detailed pro — it margins — rom similar past commissions? What steps could Jack have taken to strengthen his claim — or damages?
Problem 26.3 Shipping Servers StreamTech, a company that builds streaming servers, contracts to sell $500,000 worth o — servers to Alpha Streaming. Alpha repudiates the contract two weeks be — ore delivery, citing market downturns. Despite the notice, StreamTech ships the servers to Alpha and incurs $15,000 in transportation costs. StreamTech — ails to — ind another buyer — or the servers and sues Alpha — or the — ull $500,000 plus the $15,000 in trans- portation costs. Should StreamTech recover the transportation costs? Why or why not? How might StreamTech’s claim — or the $500,000 change i — it had made reasonable e —
orts to — ind a substitute buyer? What are Alpha’s best arguments — or reducing its liability?
Problem 26.4 De
enses Down CrowdStrike enters a contract with Delta Airlines to de — end against hacks and malware — or $1 million per year. The contract includes a liability cap limiting damages to the contract price — or any breach. Liability caps are common in the cybersecurity industry due to the high stakes o — potential breaches. CrowdStrike delivers a de — ec- tive so — tware update, which causes Delta’s entire computer network to go down. As a result, Delta has to cancel hundreds o —
lights. It loses $10 million in revenue and pays an additional $2 million in penalties to the FAA — or delayed and canceled — lights. Delta sues CrowdStrike — or $12 million, arguing that the liability cap is unconscionable given the scale o — the losses. Is the liability cap en — orceable? Does it apply to both the lost revenue and the FAA penalties? Would the analysis change i — the de — ective so — tware created a public sa — ety risk by causing an airplane to crash? How might CrowdStrike de — end the reasonableness o — the liability cap, consider- ing industry norms and the negotiated terms o — the contract?
Problem 26.5 Seeds o
Dispute Zoe’s Organic Farms contracts with Harvest Supply to deliver $50,000 worth o —
organic seeds
or the upcoming planting season. The contract includes a clause lim- iting consequential damages to $25,000 and requires disputes to be resolved under 790 26 • Limitations on Money Damages
UCC provisions. Harvest Supply delivers non-organic seeds, which causes Zoe to lose her organic certi — ication and miss out on a $200,000 government subsidy. Zoe sues — or $200,000, arguing that the damage cap is unconscionable and that Harvest Supply — ailed to mitigate damages by not inspecting the seeds be — ore shipment. Har- vest Supply counters that Zoe’s — ailure to mitigate by planting replacement seeds also contributed to the losses. Analyze how — oreseeability, certainty, mitigation, and the contractual limitations interact in this case. Which arguments are strongest — or Zoe, and which are strongest — or Harvest Supply? How should the court resolve the con — licting principles in this dispute? Chapter 27 Alternative Remedies
When contracts are breached, courts typically award monetary damages to com- pensate the injured party. This approach aligns with the — undamental principle o —
restoring the injured party to the position they would have occupied had the contract been per — ormed. Yet some situations demand more than money can provide. What i —
the subject matter o
the contract is unique, irreplaceable, or essential to the injured party’s purpose? What i — the harm caused cannot be — ully measured in monetary terms? In these cases, courts may turn to alternative remedies. Alternative remedies — like speci — ic per — ormance, replevin, injunctions, and restitu- tion — extend beyond monetary relie — . They compel a party to act, re — rain — rom acting, or return bene — its con — erred under a contract. These remedies re — lect the exceptional power o — equity in contract law, but they also raise unique challenges. Equitable rem- edies require court supervision and must balance — airness and practicality. Courts are particularly cautious about issuing orders that impose undue burdens on one party or restrain — undamental — reedoms, such as the right to earn a living. This chapter explores these extraordinary remedies and the principles guiding their application. It begins by examining speci — ic per — ormance, — ocusing on cases where monetary damages are inadequate. Replevin allows recovery o — wrong — ully withheld goods, while injunctions en — orce promises to re — rain — rom certain actions, o — ten in the context o — non-compete or non-disclosure agreements. Restitution seeks to prevent unjust enrichment by restoring bene — its con — erred, while liquidated damages clauses attempt to de — ine the parties’ remedies in advance. As you work through these concepts, consider the balancing act courts per — orm in awarding alternative remedies. Why are these remedies so rarely granted? What sa — eguards prevent their misuse? And how might modern challenges — like disputes involving digital assets, intellectual property, or custom so — tware — shape their — uture application? These questions highlight the evolving nature o — contract law and its capacity to address complex disputes while preserving — airness and e —
iciency.
791
792 27 • Alternative Remedies
Rules A. Speci --- ic Per --- ormance
Speci --- ic per --- ormance is a court order directing one party to a contract to per --- orm its obligations under that contract. The result is the rendering, as nearly as practicable, o --- a promised per --- ormance through a judgment or decree. It is a court-ordered rem- edy that requires precise --- ul --- illment o --- a legal or contractual obligation.
Subject to the rules stated in §§ 359–69, speci --- ic per --- ormance o --- a contract
duty will be granted in the discretion o --- the court against a party who has
committed or is threatening to commit a breach o --- the duty. R2d § 357(1).
The common law might order speci
ic per — ormance when one party wrong — ully re — uses to trans — er land. Real estate is traditionally considered unique due to its intrin- sic qualities, such as location and character, and — actors like geographical location or historical signi — icance can render some real estate irreplaceable. A court might order a seller to trans — er title to land via speci — ic per — ormance. Similarly, custom-made goods o — ten hold distinct qualities that make them impos- sible to replace with monetary compensation. NH UCC § 2-716(1) allows courts to require a breaching party to complete the manu — acture and delivery o — goods:
Speci --- ic per --- ormance may be decreed where the goods are unique or in other
proper circumstances.
For example, a buyer contracts to purchase a custom-designed so --- a. The seller wrong --- ully --- ails to complete the work. The buyer demands the so --- a. In determining whether to grant speci --- ic per --- ormance instead o --- the typical remedies --- or nonper --- or mance as discussed in Chapter 24, the court must weigh several --- actors. These --- actors include whether the so --- a is truly unique, whether the buyer acted in good --- aith, and whether ordering speci --- ic per --- ormance imposes undue burden on the seller. I --- the buyer did not act with entirely “clean hands,” any bad --- aith on the part o --- the buyer disquali --- ies him --- rom obtaining speci --- ic per --- ormance.
Speci --- ic per --- ormance is only granted when monetary damages are inappropriate or inadequate, as when the sale o --- real estate or a rare article is involved. It is an equitable remedy that lies within the court’s discretion to award when the common law remedy is insu ---
icient, either because damages would be inadequate or because the damages could not possibly be established. Speci — ic per — ormance is also termed “speci — ic relie — ” or “per — ormance in specie.” Speci — ic per — ormance overlaps with replevin (discussed in the next section). But replevin is — ocused on recovering goods wrong — ully withheld, while speci — ic per — ormance addresses broader obligations, like completing a custom project. 27 • Alternative Remedies 793
B. Replevin Replevin is an equitable remedy that allows a party to recover speci — ic goods wrong — ully withheld by another. It is particularly relevant in cases involving unique, scarce, or essential goods where monetary damages would be inadequate to address the harm caused by the breach. NH UCC § 2-716 speci — ies this remedy: The buyer has a right o — replevin — or goods identi — ied to the contract i — , a — ter reasonable e —
ort, the buyer is unable to e —
ect cover — or such goods or the cir- cumstances reasonably indicate that such e —
ort will be unavailing. Since parties must make reasonable e —
orts to cover, the replevin provision ensures that buyers can recover identi — ied goods when e —
orts to secure substitutes — ail or when alternative remedies are impractical or insu —
icient. “Identi — ied” means the goods exist and can be located. This distinguishes replevin
rom speci — ic per — ormance, which could require a manu — acturer to produce some goods that do not currently exist. Replevin only applies to goods already made and wrongly withheld. For example, in a contract — or a custom-designed yacht, replevin might allow the buyer to recover the yacht i — it is completed but wrong — ully withheld. In exceptional cases, speci — ic per — ormance might be used i — the seller re — uses to — inish constructing the yacht. Both remedies ensure that injured parties receive what they were promised rather than a — inancial substitute.
C. Injunction An injunction, also known as a “negative injunction” or “prohibitory injunction,” is a court-ordered prohibition that prevents an action. In other words, an injunction is a court order not to do something one promised to do. It is the opposite o — speci — ic per — ormance, which is where a court requires a party to complete per — ormance under a contract. Subject to the rules stated in §§ 359–69, an injunction against breach o — a contract duty will be granted in the discretion o — the court against a party who has committed or is threatening to commit a breach o — the duty i — (a) the duty is one o —
orbearance, or (b) the duty is one to act and speci — ic per — ormance would be denied only — or reasons that are inapplicable to an injunction. R2d § 357(2). In general, a court will not grant injunctive relie — unless — our conditions are satis — ied: 1. Likelihood o — serious and irreparable harm. (Without the injunction, the party seeking the injunction will likely su —
er serious and irreparable harm.) 2. Availability o — an adequate remedy at law. (The party seeking the injunction cannot be adequately compensated by means o — an award o — money damages.) 794 27 • Alternative Remedies
3. Balancing the equities between the parties. (The bene --- it o --- the injunction
to the party seeking the injunction outweighs the harm to the party against
whom the injunction is sought.)
4. Public interest. (Granting the injunction will not unduly harm the public
interest.) There are three common types o --- contractual provisions that a party might seek to en --- orce by means o --- a prohibitory injunction: (1) non-compete agreements, (2) non- solicitation agreements, and (3) non-disclosure agreements. These are speci --- ic types o --- the more general category (4) negative covenants.
- Non-Compete Agreements A non-compete agreement is an agreement not to accept employment with a com- petitor or to set up a competing business. In certain businesses and pro — essions, it is common — or employees to be required to sign a non-compete. The law o — most states dis — avors non-competes and will en — orce them only to pro- tect a legitimate business purpose, not simply to eliminate competition. Furthermore, courts routinely strike down or limit non-compete agreements i — they cover an overly long time period, have an overly broad geographic scope, or are in con — lict with the public interest. As with all contractual provisions, the employee must receive consideration — or signing the non-compete. I — an employer attempts to impose a non-compete on an existing employee as a condition o — — uture employment, the employer would be wise to o —
er some material inducement. Moreover, i — an employer — ires an employee without cause, the courts are less likely to en — orce the non-compete agreement.
-
Non-Solicitation Agreements Non-solicitation agreements are a more targeted — orm o — non-compete agreement and are more likely to be en — orced than a general non-compete. Solicitation o — existing customers or — ellow employees during the period o — employment is a serious breach o — the duty o — loyalty that an employee owes to an employer. A non-solicitation agree- ment represents an attempt to extend that duty once employment has terminated. As with non-competes, however, a court may — ind that a non-solicitation agreement is unreasonably broad in its duration or geographic scope.
-
Non-Disclosure Agreements The parties to a contract may enter into a non-disclosure agreement prohibiting the disclosure or use o — trade secrets or customer lists. Notably, however, non-disclosure o — trade secrets may be en — orced even in the absence o — an express non-disclosure 27 • Alternative Remedies 795
agreement. The Uni
orm Trade Secrets Act (UTSA) has been adopted in nearly all states. The UTSA prohibits the misappropriation o — trade secrets, i.e., the disclosure or use o — trade secrets which were obtained by “improper means.” Under this statute, the courts are authorized to enjoin a — ormer employee — rom disclosing in — ormation that the — ormer employee knows is to be kept con — idential.
-
En
orceability o — Negative Covenants Speci — ic (equitable) en — orceability o — these “negative covenants” varies — rom state to state. Pursuant to the UTSA, prohibitory injunctions en — orcing non-disclosure o —
trade secrets may be issued even in the absence o
an express non-disclosure agree- ment. Non-compete and non-solicitation agreements may be limited or invalidated i —
they are too broad in duration or geographic scope, or i
they are in con — lict with the public interest. Courts are more likely to en — orce restrictive covenants against a party that has sold a business than they are against a — ormer employee.
D. Restitution The purpose o — awarding restitution damages is to prevent unjust enrichment. This is the only type o — monetary damages — or breach o — contract that is recover- able by both the breaching party and the injured party. When a breach occurs, the party who breached may be unjustly enriched unless the law grants a remedy to the injured party, but it is also possible that the party who did not breach may be unjustly enriched unless the law grants the breaching party a remedy. A party is entitled to restitution under the rules stated in this Restatement only to the extent that he has con — erred a bene — it on the other party by way o — part per — ormance or reliance. R2d § 370. The measure o — restitution damages is the value o — the bene — it that one party con-
erred upon the other party. For example, i — a contractor abandoned work on the con- struction o — a garage when the structure was partially completed, the owner is entitled to the return o — any partial payment that was made to the contractor, and the contrac- tor is presumptively entitled to restitution — or the value o — the work that was per — ormed. A breaching party who acted in bad — aith may be denied any recovery — or restitution. I — a sum o — money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either (a) the reasonable value to the other party o — what he received in terms o — what it would have cost him to obtain it
rom a person in the claimant’s position, or (b) the extent to which the other party’s property has been increased in value or his other interests advanced. R2d § 371. The purpose o — restitutionary remedies is to restore the state o — a —
airs that existed be — ore the contract was — ormed (also known as the status quo ante). The restorative 796 27 • Alternative Remedies
purpose o
restitution contrasts with expectation damages, whose purpose is to place a party in the position it would have been in i — the other party had — ully per — ormed. The purpose o — restitution and reliance, however, are very similar. Both look back to the status quo ante. So how do they di —
er? Restitution is a body o — law that is based on unjust enrichment. Unjust enrichment occurs when one party un — airly bene — its at the expense o — another, such as when one retains a bene — it con — erred by another without giving proper compensation reason- ably expected under the circumstances in exchange — or that bene — it. Restitutionary remedies in contract law, there — ore, are based not on the plainti —
’s loss but rather on the de — endant’s gain. The bene — it that one party received — rom the other party in the per — ormance o — a contract may include goods, land, securities, services, or money. Restitution thus consists o — returning the value o — those items, services, or money to the other party. Reliance damages, on the other hand, — ocus on costs incurred by the plainti —
. This is distinguishable — rom restitution damages, which — ocus on bene — its received by the de — endant. Recovery — or restitution is measured by the value o — the bene — it that was con — erred upon the other party, not the contract price, which distinguishes restitution — rom expectation damages. However, restitution under contract law may be limited by the contract price. I — the parties entered into a valid contract, many courts would be reluc- tant to grant a party more in restitution than what it would have earned under the contract that it bargained — or. Many courts would — ind that the contract price should represent a ceiling on the amount o — restitution that a party is entitled to recover. Restitution is a unique remedy in that, in many cases, both parties are entitled to it. Both parties may be required to disgorge the bene — its received under the bargain, which may, in turn, e —
ectively return the parties to the status quo ante.
E. Liquidated Damages and Penalties Liquidated damages are contractually agreed-to, predetermined amounts o — money that a party will owe — or breach o — contract. I — the parties to a contract have properly agreed on liquidated damages, the sum they — ixed will be the measure o — damages — or a breach, regardless o — whether the amount exceeds or — alls short o — the actual damages. Liquidated damages are also known as “stipulated damages” or “estimated damages.” For example, a manu — acturer agrees to supply a specialty component — or $50,000. The contract includes a liquidated damages clause requiring $5,000 in damages i —
either party cancels within thirty days o
the delivery date. This amount is reasonable i — it re — lects the costs incurred — or materials and scheduling adjustments. However, i —
the clause instead required $100,000 in damages
or a $50,000 contract, it would prob ably be deemed unreasonable because the damages would — ar exceed the anticipated harm. Unreasonable liquidated damages are called “penalties” and are not honored. 27 • Alternative Remedies 797
Damages --- or breach by either party may be liquidated in the agreement but
only at an amount that is reasonable in the light o --- the anticipated or actual
loss caused by the breach and the di ---
iculties o — proo — o — loss. A term — ixing unreasonably large liquidated damages is unen — orceable on grounds o — public policy as a penalty. R2d § 356. NH UCC § 2-718(1) mirrors this concept: Damages — or breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light o — the anticipated or actual harm caused by the breach, the di —
iculties o — proo — o — loss, and the inconve nience or non — easibility o — otherwise obtaining an adequate remedy. A term
ixing unreasonably large liquidated damages is void as a penalty. Pro — essor Atiyah explains how courts distinguish between reasonable liquidated damages and unreasonable penalties: The distinction between a penalty and genuine liquidated damages, as they are called, is not always easy to apply, but the Courts have made the task simpler by laying down certain guiding principles. In the — irst place, i — the sum payable is so large as to be — ar in excess o — the probable damage on breach, it is almost certainly a penalty. Secondly, i — the same sum is expressed to be payable on any one o — a number o — di — — erent breaches o — varying importance, it is again probably a penalty, because it is extremely unlikely that the same damage would be caused by these varying breaches. Thirdly, where a sum is expressed to be payable on a certain date, and a — urther sum in the event o — de — ault being made, this latter sum is prima — acie a penalty, because mere delay in payment is unlikely to cause damage. Finally, it is to be noted that the mere use o — the words “liquidated damages” is not decisive, — or it is the task o — the Court and not o — the parties to decide the true nature o — the sum payable. P.S. Atiyah, An Introduction to the Law o — Contract 389–90 (5th ed. 1995). Liquidated damages must there — ore be reasonable. Liquidated damages that are unreasonably large constitute a penalty rather than compensation and are unen — orce- able, and liquidated damages that are unreasonably small may be unconscionable and unen — orceable. The reasonableness o — the amount o — liquidated damages depends upon the interaction o — two — actors: (1) whether the amount o — liquidated damages re — lects the anticipated or actual harm caused by the breach, and (2) the di —
iculties that the aggrieved party would have in proving loss.
F. Liability Caps and Exculpatory Clauses The inverse o — liquidated damages provisions — which may be unen — orceable where they are unreasonably high — are liability caps and exculpatory clauses, which are en — orceable unless they are unreasonably low. 798 27 • Alternative Remedies
Liability caps limit the maximum amount a party can recover in the event o
a breach. These caps provide clarity and risk management regarding worst-case sce- narios. While neither the R2d nor the UCC explicitly — ocuses on liability caps as a distinct topic, both o —
er — rameworks — or understanding and en — orcing such provi- sions within the broader context o — limiting remedies. A liability cap that is unrea- sonably low or grossly disproportionate may be deemed unconscionable or against public policy, paralleling the treatment o — liquidated damages. I — such limitations — ail their essential purpose, such as by leaving one party without any meaning — ul remedy, they may be set aside. For example, i — a liability cap prevents recovery — or de — ective goods that cause signi — icant losses, the court may allow broader remedies to ensure
airness. Consider a sales contract where the parties agree to cap liability at 1% o — the total contract price per day — or delays. On a $1 million deal, this equates to $10,000 per day, which does not appear unreasonably low given the proportionality to the contract’s overall value. However, i — the liability cap were set at $1 per day, such an amount would likely be deemed nominal and unen — orceable, as it — ails to provide a meaning — ul remedy and could be considered unconscionable Courts examine whether a liability cap re — lects a genuine e —
ort to allocate risks
airly or simply seeks to deprive one party o — an adequate remedy. Courts generally uphold such provisions unless they are unconscionable or violate public policy. Exculpatory clauses exclude liability — or certain types o — breaches. Unlike liability caps, which usually speci — y a dollar or percentage maximum, exculpation categori- cally sets contract liability to zero — or a certain kind o — breach. These provisions are explicitly addressed in the UCC and evaluated under broader principles o —
airness and public policy in the R2d. While UCC § 2-719 allows parties to limit or alter remedies — such as restricting recovery to the return o — goods or repair/replacement o — de — ective parts — exculpa- tory clauses are suspect in some circumstances. For consumer goods, limitations on personal injury damages are presumed unconscionable, although limitations on com- mercial losses are typically upheld. Common law likewise scrutinizes exculpatory clauses — or — airness and reasonable- ness and will not en — orce terms that violate public policy or grossly disadvantage one party. For instance, clauses waiving liability — or intentional misconduct or gross negligence are typically unen — orceable. I — a daycare center includes a clause in its enrollment agreement stating that it is not liable — or minor injuries caused by ordinary negligence, such as a child tripping while playing, this clause is en — orceable because it aligns with public policy. However, i — the clause attempted to disclaim liability — or gross negligence, such as death result- ing — rom — ailing to supervise children altogether, it would violate public policy and be unen — orceable. 27 • Alternative Remedies 799
G. Rescission and Re
ormation Contracts occasionally — ail to re — lect the true agreement o — the parties or are marred by — undamental — laws. In such cases, courts may grant rescission or re — ormation to address these issues and achieve — airness. Rescission cancels the contract entirely, restoring the parties to their pre-contractual positions. Rescission is appropriate when an agreement cannot be salvaged. A party may have a claim — or rescission o — a contract i — the contract was made under circumstances o —
raud, mistake, duress, or undue in — luence that pre- vented a meeting o — the minds. R2d § 164. For instance, a buyer and seller agree to a real estate transaction based on the mutual belie — that the property includes buildable land. Subsequent discovery reveals that the land is subject to a conservation easement prohibiting development. The court grants rescission, returning the purchase price to the buyer and restoring the land to the seller, as the mutual mistake undermined the — oundation o — the agreement. Rescission may also be conditioned on the return o — any bene — its con — erred under the contract — meaning that rescission may be combined with restitution. Courts try to ensure that rescission — ully restores the status quo, thus preventing either party
rom retaining advantages gained through the voided agreement. Re — ormation retains the contract but adjusts its terms to align with the parties’ original intent. It addresses speci — ic errors without undoing the entire deal. Where a written agreement — ails to accurately re — lect the terms agreed upon by the parties due to mistake or misrepresentation, a court may order re — orma- tion to align the contract with their actual intent. R2d § 155. For example, two businesses negotiate a supply agreement — or 1,000 units o — a prod- uct, but the — inal written contract mistakenly states “100 units.” Both parties intended the higher quantity. Upon discovering the error, the court re — orms the contract to re — lect the agreed-upon terms o — 1,000 units. Re — ormation is particularly valuable when parties rely on a written agreement that inaccurately re — lects their deal due to inadvertent dra — ting errors. Unlike rescission, it preserves the essence o — the contract while correcting the mistake.
H. Nominal Damages The purpose o — awarding nominal damages (usually in the amount o — $1 or $10) is to acknowledge that the breaching party committed a breach and that the aggrieved party, though uninjured, is the victor o — the lawsuit. I — the breach caused no loss or i — the amount o — the loss is not proved under the rules stated in this Chapter, a small sum — ixed without regard to the amount o — loss will be awarded as nominal damages. R2d § 346. 800 27 • Alternative Remedies
Nominal damages may be legally signi
icant — or a number o — reasons, including assigning court costs and awarding attorney’s — ees. In complex litigation involving multiple parties, a nominal victory against one party may insulate a party — rom liabil- ity to other parties. In any event, they are symbolic o — one party’s victory.
I. Re
lections on Alternative Remedies Alternative remedies address situations where typical nonper — ormance or de — ec- tive per — ormance remedies are inadequate to ensure — airness or justice. The alterna- tive remedies discussed in this chapter have both — orward-looking and corrective aims. Forward-looking remedies, like injunctions, prevent — uture harm or en — orce obligations. Corrective remedies, like restitution, address past injustices by restoring balance. Restitution is unique among contract remedies because it — ocuses on the wrong- doer’s gain rather than the injured party’s loss. For instance, a court might require a breaching party to return pro — its gained — rom an opportunistic breach, thus ensuring that the breaching party does not un — airly bene — it. Restitution departs — rom contract law’s usual — ocus on economic e —
iciency, reliance, or autonomy, because it originates in its own body o — law — distinct — rom contract — and may apply even in cases that do not involve a contract at all. As a student o — contract law, consider how these remedies operate, not only as tools
or en — orcement but as expressions o — the law’s capacity to address human complex- ity. When analyzing a case, ask yoursel — , does a monetary remedy su —
ice, or does the situation demand a more nuanced approach? The answer may reveal the enduring signi — icance o — restitution and non-money damages in achieving justice in the intri- cate world o — contracts.
Cases Reading Bauer v. Sawyer. Courts generally pre --- er to award money damages to resolve contract disputes. But money is not always a su ---
icient remedy — or an aggrieved contract party. For one thing, it can be hard to value certain bro- ken promises, even when the courts recognize that such promises have signi — i- cant value. Also, parties sometimes make promises that contemplate speci — ic per — ormance and not money damages — or breach. In Bauer, a party agreed to join a medical partnership and promised not to compete with it even i — he departed. Such promises, known as non-compete agreements, are rather contentious. On the one hand, they obviously restrain trade — the doctor who promises not to compete cannot practice his trade 27 • Alternative Remedies 801
during the time and in the place contemplated by the non-compete — and restraints o — trade are dis — avored in law. On the other hand, i — you look at the situation ex ante, i.e., be — ore the parties agreed to work together in the — irst place, you may — ind that the parties would never have agreed to work together i — one party did not have assurances that the other party would not take advan- tage o — that work by opening a competing shop just down the block. As you read this case, think about balancing these two concerns: the con- cern that restraints o — trade are either unconscionable or bad — or public policy and social wel — are, and the concern that parties will not cooperate in the — irst place i — they cannot prevent competition that arises — rom their prior collabora- tion. A business does not want to generate its own competition, a — ter all.
Bauer v. Sawyer
8 Ill. 2d 351 (1956) Opinion by SCHAEFER, J. All o --- the parties to this action are doctors. Prior to March 31, 1954, they were associated together in a medical partnership known as the Kankakee Clinic. On that date Dr. P.W. Sawyer, the principal de --- endant, withdrew --- rom the partnership and in May o --- 1954 he opened o ---
ices — or the practice o — medicine and surgery in the city o —
Kankakee. Five o
the eleven remaining partners instituted this action, alleging that the partnership agreement prohibited a retiring partner — rom practicing medicine in the city o — Kankakee and seeking an injunction to restrain Dr. Sawyer — rom violating the agreement. The other six remaining partners were joined as de — endants. They admitted the allegations o — the complaint, but sought no relie — against Dr. Sawyer. Dr. Sawyer also admitted the allegations o — the complaint, but de — ended on the ground that the partnership agreement contemplated that a withdrawing partner had the alternative right to per — orm the agreement or to pay liquidated damages. The case was submitted upon the pleadings and a stipulation o —
acts. The circuit court entered a decree dis- missing the complaint. The Appellate Court reversed, and we granted leave to appeal. The partnership agreement provides that the interest o — an individual partner may be terminated by retirement based on physical incapacity, by voluntary withdrawal, or by expulsion — or unpro — essional conduct or — or — ailure to carry out the provisions o — the agreement. In each instance the remaining partners are to purchase the inter- est o — the outgoing partner at a stated percentage o — its value as shown on the partner- ship books: 100 per cent in case o — retirement — or incapacity, 80 per cent in case o —
voluntary withdrawal, and 75 per cent in case o
expulsion. By the agreement each partner covenants that a — ter the termination o — his interest he will not engage in the practice o — medicine, surgery or radiology within a radius o — 25 miles o — Kankakee — or a period o —
ive years. The agreement also provides that i — the — ormer partner violates 802 27 • Alternative Remedies
this covenant, he shall
or — eit any unpaid portion o — the purchase price o — his interest. In the case o — a partner withdrawing voluntarily, one hal — the purchase price is payable 30 days a — ter withdrawal and the other hal — is to be evidenced by notes payable in one year which are to be delivered to an escrow agent, who is directed to cancel the notes upon certi — ication by the remaining partners that the — ormer partner has resumed practice. At the time o — his withdrawal — rom the — irm Dr. Sawyer was paid 40 per cent o — the value o — his partnership interest, and a note — or the remaining 40 per cent was turned over to an escrow agent in accordance with the agreement. Although Dr. Sawyer admits that he resumed practice in Kankakee in violation o — the contract, he contends that the contract ought not to be speci — ically en — orced against him, (1) because it is an unreasonable restraint o — trade and contrary to pub- lic policy, and (2) because it contains a provision — or liquidated damages which bars speci — ic en — orcement. The principles governing cases o — this kind were stated in Ryan v. Hamilton, in which a contract by a physician not to engage in practice in a speci — ied community was en — orced by injunction: “That contracts in general restraint o — trade are generally held to be illegal is beyond controversy. But the rule admits o — well de — ined exceptions, and among the exceptions are contracts o — the kind and character presented in this case. Contracts o — this class, where the limitation as to territory is reasonable and there exists a legal consideration — or the restraint, are valid and en — orceable in equity, and in such cases relie — by injunction is customary and proper.” In determining whether a restraint is reasonable it is necessary to consider whether en — orcement will be injurious to the public or cause undue hardship to the promisor, and whether the restraint imposed is greater than is necessary to protect the promisee. In this case the interest o — the public is in having adequate medical protection, and it is o — course true, as suggested by Dr. Sawyer, that i — the injunction is granted the number o — doctors available in the Kankakee community will be reduced. A stipula- tion entered into by the parties, however, shows that there are now 70 doctors serving the area. We are unable to say that the reduction o — this number by one will cause such injury to the public as to justi — y us in re — using to en — orce this contract. In any case, there is no reason why Dr. Sawyer cannot serve the public interest equally well by practicing in another community. No special hardship to Dr. Sawyer appears which would justi — y the denial o — relie — in this case. He may resume practice in Kankakee a — ter — ive years and in the meantime he may practice elsewhere. The territorial limita- tion to the city o — Kankakee and the surrounding area is not, we think, unreasonable in the light o — modern methods o — transportation and communication. Agreements unlimited in time have hereto — ore been en — orced, although other authorities hold that the restraint must be limited in time as well as space. We need not here consider whether a time limitation is essential, because in any event the pre sent — ive-year period does not appear unreasonable. It thus appears that the agreement is not contrary to public policy by the tests that have hereto — ore been employed. Dr. Sawyer contends, however, that the prior cases 27 • Alternative Remedies 803
decided by this and other courts are distinguishable because they involved either the sale o — an established practice or the taking o — a newcomer into an established prac- tice, as employee or partner. Pointing out that in this case there was no express sale o —
the practice o
any o — the partners, and each o — the partners was a practicing physician when the agreement was entered into, he argues that “I — there is no established prac- tice sold and no newcomer as a potential usurper, there is no need — or the restraint being en — orced by injunction.” With this contention we do not agree. No case is cited which holds that the mem- bers o — a partnership may not by their agreement reasonably protect themselves against the competition o — an outgoing partner. Indeed such agreements are classic illustrations o — reasonable restraints o — trade. “A legitimate method o — enhancing the good will o — continuing partners in pro — essional, as well as commercial, partnerships is to secure — orbearance — rom competition by a retired partner. He may agree not to compete, within reasonable limits as to time and space, and such an undertaking will be en — orced by injunction. . . . The contract o — a partner not to compete with the partnership either directly or indirectly is not opposed to public policy; but such an agreement must be ancillary to the relation or contract o — partnership or to a contract by which a partner disposes o — his interest.” Our own decision in Storer v. Brock en — orced an agreement, entered into between two doctors upon the dissolution o — their partnership, which restricted the — uture practice o — the retiring partner. The distinction attempted to be drawn is without merit. The most signi — icant o — the two remaining contentions o — the de — endant relates to the e —
ect o — the — or — eiture clause. Under the partnership agreement the purchase price to be paid to an outgoing partner is payable in equal annual installments. In the event o — a retirement — or incapacity, there is one installment; i — there is voluntary with- drawal, as in this case, there are two installments, and in the case o — an ouster there are three installments. The — irst installment is payable thirty days a — ter the withdrawal and notes are issued — or the other installments. Interest is payable on the outstand- ing balance, and the partners have the privilege o — prepayment. The notes are to be deposited with an escrow agent, who is directed to deliver them to the outgoing part- ner on the due date, unless the remaining partners have certi — ied that the outgoing partner has breached the conditions o — the agreement limiting his subsequent practice o — medicine. I — the remaining partners make such a certi — ication, the agreement pro- vides that the “escrow agent shall turn over and deliver the remaining unpaid notes to the makers thereo —
or cancellation, it being the intention o — the parties hereto that the retiring or withdrawing Partner who has breached the [said] provisions . . . shall thereby — or — eit a portion o — the value o — his Partnership interest.” Dr. Sawyer claims that the contract gave him the option to resume practice by giv- ing up the unpaid portion o — the value o — his partnership interest, in this case $7451, which he characterizes as liquidated damages. O — course an agreement may be so
ormulated as to give an option to per — orm the contract or pay the stipulated damages. 804 27 • Alternative Remedies
That was the case in Davis v. Eisenstein, where the agreement provided that “Upon payment thereo — [o — the stipulated liquidated damages] this contract is to become null and void.” That agreement was held to give an option to each party to per — orm the contract or to pay the stipulated damages. There is no similar language in the present contract. On the contrary, the entire agreement indicates the intention o — the parties that the covenant restricting the — uture activities o — a — ormer partner was intended to be en — orced. Upon the assumption that the provision contemplates liquidated damages, it is also argued that the existence o — the liquidated damage clause bars the issuance o —
an injunction, and in support o
the argument, Bartholomae & Roesing Brewing and Malting Co. v. Modzelewski is relied upon. That case was decided upon many grounds. Its statements to the e —
ect that a provision — or liquidated damages operates as a bar to an injunction have been sharply criticized. In accordance with our earlier and later decisions and with the weight o — authority elsewhere, we hold that even i — the provi- sion in question is construed as one — or liquidated damages the right to an injunction is not barred. To the extent that the Modzelewski case may be thought to hold other wise, it is overruled. While this case was under advisement in the Appellate Court, the continuing part- ners, including the plainti —
s, certi — ied to the escrow agent that the condition as to sub- sequent practice had been breached by Dr. Sawyer. Under the agreement the escrow agent was required to return the notes to the makers — or cancellation. Dr. Sawyer contends that liquidated damages have been collected, and that it would there — ore be inequitable to en — orce per — ormance o — the agreement by injunction. Plainti —
s argue that their certi — ication was made with the thought that the clause was a penalty, and that the certi — ication so stated. They say that the penalty cannot be en — orced in its — ace amount and that they are still liable to Dr. Sawyer — or $7451, the amount o — the notes, less such actual damages as may have been sustained by the partnership. An agreement, made in advance o — breach, — ixing the damages there — or, is not en — orceable as a contract and does not a —
ect the damages recoverable — or the breach, unless (a) the amount so — ixed is a reasonable — orecast o — just com- pensation — or the harm that is caused by the breach, and (b) the harm that is caused by the breach is one that is incapable or very di —
icult o — accurate estimation. In the present case it is not disputed that damages are di —
icult to ascertain. Indeed, plainti —
s’ complaint so alleges. The more di —
icult question is whether the parties intended to — orecast and — ix the probable damages which would result — rom a breach. We think that they did not, and that they intended the clause as an additional sanc- tion, by way o — penalty, to en — orce per — ormance o — the covenant not to re-engage in practice. In determining intent the language used by the parties is signi — icant. Here, the parties speak not in the language o — damages, but in terms o —
or — eiture. Although it is not controlling, the use o — the word “ — or — eit” tends to exclude the idea o — liquidated damages. 27 • Alternative Remedies 805
So, too, the method o
payment suggests that the purpose o — the parties was to secure per — ormance rather than to settle damages. The money is withheld, in this instance — or a year, in the case o — an excluded partner — or two years. I — settlement o —
damages alone had been intended, it would have been su
icient to have provided — or initial payment o — the value o — the partnership interest, and — or subsequent recovery o — the stipulated amount o — damages in the event o — breach. There are other indications that the purpose o — the clause was not to — ix the amount o — damages. Although the covenant not to re-engage in practice runs — or — ive years, the clause in question covers only one year in the case o — a withdrawing partner and only two years in the case o — an expelled partner. No satis — actory reason explains why the provision, i — it is — or liquidated damages, does not cover the entire period o — the restraint. Nor, assuming that the clause is a liquidated damage provision, is there any satis — actory explanation o — what is to happen i — a breach occurs a — ter the escrow agent has delivered the notes to the outgoing partner. It can hardly be assumed that no dam- ages at all were intended. The suggestion o — de — endant that the plainti —
s would then be entitled to an injunction, or to actual damages, as assessed by a court or jury, has no support in the language o — the clause. Nor does the clause — ul — ill the requirement that the amount o — damages — ixed be a reasonable — orecast o — just compensation — or the harm caused by the breach. The de — endant suggests that a percentage o — the value o — the partnership interest is prob ably as good a measure o — damages as any test which could be devised by a court or jury. Assuming that, no reason appears — or the discrimination between withdrawing and expelled partners. I — a breach occurs during the — irst year, an expelled partner loses 50 per cent o — the value o — his interest in the partnership, while a withdrawing partner loses only 40 per cent. I — a breach occurs during the second year an expelled partner would lose 25 per cent, while a withdrawing partner would presumably be lia- ble — or actual damages, whether they were greater or less than 25 per cent o — the value o — his interest. These di —
erences seem to us impossible to explain on the assumption that the clause was intended as a — orecast o — just compensation — or the harm caused by a breach. The reason — or this discrimination does not appear to be that there would be greater damage in the case o — a breach by an expelled partner, but rather than there was thought to be greater likelihood o — a breach. Accordingly, more stringent sanc- tions to secure per — ormance were inserted. De — endant Sawyer argues that the — ailure to provide damages — or a breach occur- ring in the second and — ollowing years, in the case o — a withdrawing partner, may be explained on the ground that a physician’s goodwill would be largely lost i — he remained out o — practice — or a year, and damages in that situation would be negligible. But even i — we assume that a withdrawing physician’s goodwill is as perishable as de — endant suggests, we are unable to understand why an expelled physician’s goodwill would last longer. We conclude that the provision is a penalty and that the partners there — ore remain liable to Dr. Sawyer in the amount o — the outstanding unpaid balance. Plainti —
s’ 806 27 • Alternative Remedies
conduct was not, we think, inequitable or inconsistent with their theory o
recovery and does not bar injunctive relie — . The issuance o — an injunction need not await the assessment o — interim damages and the determination o — a net balance. Dr. Sawyer’s — inal contention is that the Appellate Court lacked jurisdiction to reverse the trial court, because the trial court was composed o — three judges and there — ore lacked jurisdiction to enter a valid — inal judgment. The record shows that because o — the importance o — the questions presented by this case the three judges o —
the Twel
th Judicial Circuit decided to hear the case en banc. We are o — the opinion that i — there was error in the organization o — the court, it was waived by the de — endant’s
ailure to raise the objection in the trial court. The judgment o — the Appellate Court, reversing the decree o — the trial court and remanding the cause with directions to issue the injunction, is a —
irmed, with — urther directions to proceed in accordance with the views expressed herein. Judgment a —
irmed.
Re --- lection Equitable remedies are exceptional, particularly where one party seeks to restrain the --- ree trade o --- another. The --- reedom to work and engage in trade is a --- undamental principle recognized in contract law, but like all rights, it is not absolute. Contract law acknowledges that parties can voluntarily agree to limit their rights under certain conditions, and courts are o --- ten called upon to en --- orce such agreements when --- air- ness and justice demand it.
For example, employers may require employees to enter into non-compete agree- ments in which they promise not to work --- or competitors a --- ter leaving their positions. Whether courts en --- orce such agreements depends on whether they are reasonable in scope, duration, and necessity to protect legitimate business interests. Courts are particularly cautious when asked to en --- orce these agreements through equitable rem- edies like injunctions. Unlike monetary damages, which merely compensate --- or a breach, an injunction compels a party to act or re --- rain --- rom acting — a signi --- icant intrusion into personal liberties. This caution re --- lects the broader principles o ---
airness and proportionality that underpin contract law. Courts strive to balance the autonomy o — contracting parties with the potential harm that en — orcement might cause. For instance, while monetary damages are o — ten deemed su —
icient, equitable remedies are reserved — or situations where they are truly necessary to achieve justice, such as when the subject matter o —
the agreement is unique or irreplaceable. As you consider these doctrines, re — lect on how courts navigate these tensions in modern contexts. How should principles o —
airness and proportionality apply to dis- putes involving non-compete clauses, particularly in industries where innovation and talent mobility are critical? How might courts address agreements involving emerging technologies, where the balance between protecting business interests and ensuring 27 • Alternative Remedies 807
individual
reedoms is increasingly complex? By grappling with these questions, stu- dents and practitioners alike can better understand how equitable remedies shape the law’s response to complex disputes and ensure that outcomes remain — air, e —
icient, and just.
Discussion 1. I --- the Bauer case did not involve doctors in a medical practice but instead involved a similar agreement between two eighteen-year-olds who agreed to operate a lem- onade stand together, would the court have reached a di --- --- erent result? Is the nature o --- the work signi --- icant in determining whether an agreement not to practice that trade within a certain time and space is valid? 2. Why did the doctors agree to the non-compete in the --- irst place? What business purpose did this provision solve? 3. Was there any evidence o --- bad --- aith in the Bauer case? In general, equitable rem- edies are special. What about this case was special such that it rose to the level o ---
meriting an equitable remedy?
Reading Van Wagner Advertising Corp. v. S & M Enterprises. Be
ore div- ing into the Van Wagner case, it’s help — ul to consider how courts evaluate speci — ic per — ormance as an equitable remedy. While monetary damages are the de — ault remedy — or breach o — contract, speci — ic per — ormance becomes rel- evant when monetary damages cannot adequately compensate the injured party. This remedy requires courts to care — ully weigh whether the subject matter o — the contract is unique and whether its value can be quanti — ied with reasonable certainty. The decision to grant speci — ic per — ormance o — ten hinges on whether there is a lack o — suitable substitutes, making monetary damages insu —
icient. In Van Wagner, the court was tasked with determining whether speci — ic per — ormance should be awarded — or the lease o — a billboard space in a unique Manhattan location. The case is notable — or its reasoning that uniqueness alone does not automatically justi — y speci — ic per — ormance. Instead, the court empha- sized that monetary damages were an adequate remedy because the value o — the advertising space could be calculated with reasonable certainty. This case raises key questions about the boundaries o — speci — ic per — ormance. What makes a contractual subject matter su —
iciently unique? When does the burden o — speci — ic per — ormance on the breaching party outweigh the injured 808 27 • Alternative Remedies
party’s interest in per
ormance? As you read, consider how the court balances the interests o — both parties and how its reasoning aligns with broader princi ples o —
airness and e —
iciency in contract law. Pay close attention to the court’s discussion o — “disproportionate burden” and how it uses this concept to deny speci — ic per — ormance. Think about how the decision — its into the economic — ramework discussed by Anthony Kronman, who suggests that speci — ic per — ormance is justi — ied when damages are too spec- ulative to measure accurately. Does the court’s reliance on the availability o —
market substitutes support or challenge Kronman’s view? As you engage with the case, re — lect on the practical implications o — the court’s reasoning — or modern contract disputes. How might this decision apply to cases involving digital assets, intellectual property, or other emerging mar- kets where uniqueness and valuation pose new challenges? Van Wagner pro- vides a — oundation — or understanding how courts balance equitable remedies with the practical realities o — commerce, and it o —
ers insights that remain rel- evant to evolving legal contexts.
Van Wagner Advertising Corp. v. S & M Enterprises
67 N.Y.2d 186 (1986) Opinion by Judge KAYE. Speci --- ic per --- ormance o --- a contract to lease “unique” billboard space is properly denied when damages are an adequate remedy to compensate the tenant and equitable relie --- would impose a disproportionate burden on the de --- aulting landlord. However, owing to an error in the assessment o --- damages, the order o --- the Appellate Division should be modi --- ied so as to remit the matter to Supreme Court, New York County,
or — urther proceedings with respect to damages. By agreement dated December 16, 1981, Barbara Michaels leased to plainti —
, Van Wagner Advertising, — or an initial period o — three years plus option periods total- ing seven additional years space on the eastern exterior wall o — a building on East 36th Street in Manhattan. Van Wagner was in the business o — erecting and leasing bill- boards, and the parties anticipated that Van Wagner would erect a sign on the leased space, which — aced an exit ramp o — the Midtown Tunnel and was there — ore visible to vehicles entering Manhattan — rom that tunnel. In early 1982 Van Wagner erected an illuminated sign and leased it to Asch Advertising, Inc. — or a three-year period commencing March 1, 1982. However, by agreement dated January 22, 1982, Michaels sold the building to de — endant S & M Enterprises. Michaels in — ormed Van Wagner o — the sale in early August 1982, and on August 19, 1982 S & M sent Van Wagner a letter purporting to cancel the lease as o —
October 18 pursuant to section 1.05, which provided: 27 • Alternative Remedies 809
Notwithstanding anything contained in the --- oregoing provisions to the con-
trary, Lessor (or its successor) may terminate and cancel this lease on not less
than 60 days prior written notice in the event and only in the event o --- a bona
ide sale o — the building to a third party unrelated to Lessor Van Wagner abandoned the space under protest and in November 1982 com- menced this action — or declarations that the purported cancellation was ine —
ective and the lease still in existence, and — or speci — ic per — ormance and damages. In the litigation the parties di —
ered sharply on the meaning o — section 1.05 o — the lease. Van Wagner contended that the lease granted a right to cancel only to the owner as it was about to sell the building — not to the new purchaser — so that the building could be conveyed without the encumbrance o — the lease. S & M, in contrast, con- tended that the provision clearly gave it, as Michaels’ successor by virtue o — a bona
ide sale, the right to cancel the lease on 60 days’ notice. Special Term denied Van Wagner’s motion — or a preliminary injunction, concluding that the lease by its terms gave S & M the authority to cancel and that Van Wagner was there — ore not likely to succeed on the merits. At a nonjury trial, both parties introduced parol evidence, in the — orm o — testimony about negotiations, to explain the meaning o — section 1.05. Additionally, one o — S & M’s two partners testi — ied without contradiction that, having already acquired other real estate on the block, S & M purchased the subject building in 1982 — or the ulti- mate purpose o — demolishing existing buildings and constructing a mixed residential- commercial development. The project is to begin upon expiration o — a lease o — the subject building in 1987, i — not sooner. Trial Term concluded that Van Wagner’s position on the issue o — contract interpre- tation was correct, either because the lease provision unambiguously so provided or, i — the provision were ambiguous, because the parol evidence showed that the parties to the lease intended that only an owner making a bona — ide sale could terminate the lease. They did not intend that once a sale had been made that any — uture purchaser could terminate the lease at will. Trial Term declared the lease valid and subsisting and — ound that the demised space is unique as to location — or the particular advertis- ing purpose intended by Van Wagner and Michaels, the original parties to the Lease. However, the court declined to order speci — ic per — ormance in light o — its — inding that Van Wagner has an adequate remedy at law — or damages. Moreover, the court noted that speci — ic per — ormance would be inequitable in that its e —
ect would be dis- proportionate in its harm to the de — endant and its assistance to plainti —
. Conclud- ing that the value o — the unique qualities o — the demised space has been — ixed by the contract Van Wagner has with its advertising client, Asch — or the period o — the con- tract, the court awarded Van Wagner the lost revenues on the Asch sublease — or the period through trial, without prejudice to a new action by Van Wagner — or subsequent damages i — S & M did not permit Van Wagner to reoccupy the space. On Van Wag- ner’s motion to resettle the judgment to provide — or speci — ic per — ormance, the court adhered to its judgment. 810 27 • Alternative Remedies
On cross appeals the Appellate Division a
irmed, without opinion. We granted both parties leave to appeal. Whether or not a contract provision is ambiguous is a question o — law to be resolved by a court. In our view, section 1.05 is ambiguous. Reasonable minds could di —
er as to whether the lease granted a purchaser o — the property a right to cancel the lease, or limited that right to successive sellers o — the property. However, Trial Term’s alternate
inding — that the parol evidence supported Van Wagner’s interpretation o — the provi- sion — was one o —
act. That — inding, having been a —
irmed by the Appellate Division and having support in the record, is beyond the scope o — our review. Thus, S & M’s cancellation o — Van Wagner’s lease constituted a breach o — contract. Given de — endant’s unexcused — ailure to per — orm its contract, we next turn to a consideration o — remedy — or the breach: Van Wagner seeks speci — ic per — ormance o —
the contract, S & M urges that money damages are adequate but that the amount o
the award was improper. Whether or not to award speci — ic per — ormance is a decision that rests in the sound discretion o — the trial court, and here that discretion was not abused. Considering
irst the nature o — the transaction, speci — ic per — ormance has been imposed as the remedy — or breach o — contracts — or the sale o — real property, but the contract here is to lease rather than sell an interest in real property. While speci — ic per — ormance is available, in appropriate circumstances, — or breach o — a commercial or residential lease, speci — ic per — ormance o — real property leases is not in this State awarded as a matter o — course. Van Wagner argues that speci — ic per — ormance must be granted in light o — the trial court’s — inding that the demised space is unique as to location — or the particular adver- tising purpose intended. The word “uniqueness” is not, however, a magic door to speci — ic per — ormance. A distinction must be drawn between physical di —
erence and economic interchangeability. The trial court — ound that the leased property is physi- cally unique, but so is every parcel o — real property and so are many consumer goods. Putting aside contracts — or the sale o — real property, where speci — ic per — ormance has traditionally been the remedy — or breach, uniqueness in the sense o — physical di —
er- ence does not itsel — dictate the propriety o — equitable relie — . By the same token, at some level all property may be interchangeable with money. Economic theory is concerned with the degree to which consumers are willing to substitute the use o — one good — or another, the underlying assumption being that every good has substitutes, even i — only very poor ones, and that all goods are ultimately commensurable. Such a view, however, could strip all meaning — rom uniqueness, — or i — all goods are ultimately exchangeable — or a price, then all goods may be valued. Even a rare manuscript has an economic substitute in that there is a price — or which any purchaser would likely agree to give up a right to buy it, but a court would in all prob- ability order speci — ic per — ormance o — such a contract on the ground that the subject matter o — the contract is unique. 27 • Alternative Remedies 811
The point at which breach o
a contract will be redressable by speci — ic per — ormance thus must lie not in any inherent physical uniqueness o — the property but instead in the uncertainty o — valuing it: What matters, in measuring money damages, is the volume, re — inement, and reliability o — the available in — ormation about substitutes — or the subject matter o — the breached contract. When the relevant in — ormation is thin and unreli- able, there is a substantial risk that an award o — money damages will either exceed or — all short o — the promisee’s actual loss. O — course this risk can always be reduced — but only at great cost when reliable in — ormation is di —
icult to obtain. Conversely, when there is a great deal o — consumer behavior generat- ing abundant and highly dependable in — ormation about substitutes, the risk o — error in measuring the promisee’s loss may be reduced at much smaller cost. In asserting that the subject matter o — a particular contract is unique and has no established market value, a court is really saying that it cannot obtain, at reasonable cost, enough in — ormation about substitutes to permit it to calcu- late an award o — money damages without imposing an unacceptably high risk o — undercompensation on the injured promisee. Conceived in this way, the uniqueness test seems economically sound. Anthony T. Kronman, Speci — ic Per — ormance, 45 U. Chi. L. Rev. 351 (1978). This principle is re — lected in the case law, and is essentially the position o — the Restatement (Second) o — Contracts § 360(a), which lists “the di —
iculty o — prov- ing damages with reasonable certainty” as the — irst — actor a —
ecting adequacy o —
damages. Thus, the — act that the subject o — the contract may be unique as to location — or the particular advertising purpose intended by the parties does not entitle a plainti —
to the remedy o — speci — ic per — ormance. Here, the trial court correctly concluded that the value o — the “unique qualities” o — the demised space could be — ixed with reasonable certainty and without impos- ing an unacceptably high risk o — undercompensating the injured tenant. Both parties complain: Van Wagner asserts that while lost revenues on the Asch contract may be adequate compensation, that contract expired February 28, 1985, its lease with S & M continues until 1992, and the value o — the demised space cannot reasonably be — ixed
or the balance o — the term. S & M urges that — uture rents and continuing damages are necessarily conjectural, both during and a — ter the Asch contract, and that Van Wagner’s damages must be limited to 60 days — the period during which Van Wagner could cancel Asch’s contract without consequence in the event Van Wagner lost the demised space. S & M points out that Van Wagner’s lease could remain in e —
ect — or the — ull 10-year term, or it could legitimately be extinguished immediately, either in conjunction with a bona — ide sale o — the property by S & M, or by a reletting o — the building i — the new tenant required use o — the billboard space — or its own purposes. Both parties’ contentions were properly rejected. 812 27 • Alternative Remedies
First, it is hardly novel in the law --- or damages to be projected into the --- uture. Par- ticularly where the value o --- commercial billboard space can be readily determined by comparisons with similar uses — Van Wagner itsel --- has more than 400 leases — the value o --- this property between 1985 and 1992 cannot be regarded as speculative. Sec- ond, S & M having success --- ully resisted speci --- ic per --- ormance on the ground that there is an adequate remedy at law, cannot at the same time be heard to contend that damages beyond 60 days must be denied because they are conjectural. I --- damages --- or breach o --- this lease are indeed conjectural, and cannot be calculated with reasonable certainty, then S & M should be compelled to per --- orm its contractual obligation by restoring Van Wagner to the premises. Moreover, the contingencies to which S & M points do not, as a practical matter, render the calculation o --- damages speculative. While S & M could terminate the Van Wagner lease in the event o --- a sale o --- the build- ing, this building has been sold only once in 40 years; S & M paid several million dol- lars, and purchased the building in connection with its plan --- or major development o --- the block. The theoretical termination right o --- a --- uture tenant o --- the existing build- ing also must be viewed in light o --- these circumstances. I --- any uncertainty is gener- ated by the two contingencies, then the bene --- it o --- that doubt must go to Van Wagner and not the contract violator. Neither contingency allegedly a ---
ecting Van Wagner’s continued contractual right to the space — or the balance o — the lease term is within its own control; on the contrary, both are in the interest o — S & M. Thus, neither the need to project into the — uture nor the contingencies allegedly a —
ecting the length o —
Van Wagner’s term render inadequate the remedy o
damages — or S & M’s breach o —
its lease with Van Wagner. The trial court, additionally, correctly concluded that speci — ic per — ormance should be denied on the ground that such relie — would be inequitable in that its e —
ect would be disproportionate in its harm to de — endant and its assistance to plainti —
. It is well settled that the imposition o — an equitable remedy must not itsel — work an inequity, and that speci — ic per — ormance should not be an undue hardship. This conclusion is not within the absolute discretion o — the Supreme Court. Here, however, there was no abuse o — discretion; the — inding that speci — ic per — ormance would disproportionately harm S & M and bene — it Van Wagner has been a —
irmed by the Appellate Division and has support in the proo — regarding S & M’s projected development o — the property. While speci — ic per — ormance was properly denied, the court erred in its assessment o — damages. Our attention is drawn to two alleged errors. First, both parties are dissatis — ied with the award o — lost pro — its on the Asch con- tract: Van Wagner contends that the award was too low because it — ailed to take into account incidental damages such as sign construction, and S & M asserts that it was too high because it — ailed to take into account o —
sets against alleged lost pro — its such as painting costs. Both arguments are precluded. Although the trial was not bi — urcated or limited to the issue o — liability, the Asch contract was placed in evidence and neither party chose to submit additional proo — o — incidental damages or other expenses — or that period. Nor — as is evident — rom the judgment — did the trial court understand 27 • Alternative Remedies 813
that any separate presentations would be made as to damages
or that period. Based on the Asch contract indicating revenues, and the lease indicating expenses, the trial court properly calculated Van Wagner’s lost pro — its. Having — ound that the value o — the space was — ixed by the Asch contract — or the entire period o — that contract, however, the court erred in awarding the lost revenues only through November 23, 1983. Dam- ages should have been awarded — or the duration o — the Asch contract. Second, the court — ashioned relie —
or S & M’s breach o — contract only to the time o — trial, and expressly contemplated that i — de — endant continues to exclude plainti —
rom the leased space action — or continuing damages may be brought. In requiring Van Wagner to bring a multiplicity o — suits to recover its damages the court erred. Damages should have been awarded through the expiration o — Van Wagner’s lease. Accordingly, the order o — the Appellate Division should be modi — ied, with costs to plainti —
, and the case remitted to Supreme Court, New York County, — or — urther proceedings in accordance with this opinion and, as so modi — ied, a —
irmed.
Re --- lection The Van Wagner case illustrates a key principle in contract law: equitable remedies like speci --- ic per --- ormance are extraordinary because they require court oversight and impose obligations that monetary damages cannot easily replace. The challenges in operationalizing speci --- ic per --- ormance necessitate a clear justi --- ication --- or ordering it. The court’s observation that the term “uniqueness” does not serve as a “magic door to speci --- ic per --- ormance” underscores the need --- or courts to care --- ully balance --- airness, practicality, and e ---
iciency when awarding remedies. In Van Wagner, the court re — used to grant speci — ic per — ormance — or the lease o — a unique advertising billboard. The court emphasized that monetary damages could adequately compensate the injured party. This decision highlights the principle that speci — ic per — ormance is reserved — or cases where monetary remedies are insu —
icient to make the injured party whole. Courts assess whether a contract’s subject matter lacks substitutes or whether substitutes are di —
icult to value. I — substitutes exist and can be easily quanti — ied, monetary damages become the pre — erred remedy because they avoid unnecessary judicial oversight and disproportionate burdens on the breaching party. This reasoning aligns with economic perspectives on speci — ic per — ormance, such as those articulated by Anthony Kronman. Kronman argues that speci — ic per — ormance is particularly valuable in cases where assessing monetary damages is uncertain due to the absence o — reliable market data or comparable substitutes. In Van Wagner, this reasoning supports the court’s decision that su —
icient market in — ormation about the billboard lease made monetary damages an adequate remedy. When market in — or- mation is robust, monetary damages are su —
icient to align with the principles o —
e
iciency and — airness. By contrast, when market substitutes are unavailable, spe- ci — ic per — ormance prevents undercompensation, thus ensuring that the injured party receives the — ull bene — it o — their bargain. 814 27 • Alternative Remedies
The court in Van Wagner also considered the “disproportionate burden” that spe- ci --- ic per --- ormance would have imposed on the breaching party. This re --- lects a broader concern in contract law that equitable remedies must not create new inequities. By tethering speci --- ic per --- ormance to cases o --- demonstrable necessity, and monetary damages to situations where they su ---
ice, courts preserve predictability in contract en — orcement while minimizing unnecessary costs. Looking ahead, the principles established in Van Wagner raise important questions about how speci — ic per — ormance might adapt to modern contexts. Digital assets, intel- lectual property, and unique technologies o — ten lack established market substitutes, challenging traditional notions o — uniqueness and valuation. Courts will need to con- sider how emerging markets and novel goods a —
ect the availability and appropriate- ness o — equitable remedies. As in Van Wagner, they must evaluate whether these assets truly lack substitutes or whether adequate compensation can be calculated using modern valuation techniques. Kronman’s analysis suggests that balancing — airness and e —
iciency will remain central to these determinations and will require courts to innovate while staying true to — oundational principles o — contract law. The interplay between economic theory and judicial discretion in Van Wagner underscores the critical role o — courts in maintaining — airness and e —
iciency. By grounding speci — ic per — ormance in necessity and reserving it — or exceptional cases, the decision highlights how contract law balances the interests o — injured parties with the realities o — equitable relie — . Students can use the reasoning in Van Wagner to analyze whether a remedy is appropriate in cases involving evolving markets; doing so will help them to assess the suitability o — speci — ic per — ormance in practice while consider- ing its implications — or justice and predictability in contract law.
Discussion 1. The Van Wagner court stated, “The word ‘uniqueness’ is not, however, a magic door to speci --- ic per --- ormance.” What --- actors do courts consider when evaluating whether a property is truly unique? How does the availability o --- reliable market
data in --- luence this determination? 2. Drawing on Kronman’s argument in the portion o --- his law review article that the court quoted, why might courts view speci --- ic per --- ormance as economically justi --- i- able only in cases where money damages are uncertain or unreliable? How does this align with the court’s reasoning in Van Wagner? 3. In Van Wagner, the court denied speci --- ic per --- ormance, partly because it would impose an inequitable burden on the breaching party. How should courts balance the hardships imposed on breaching parties with the rights o --- injured parties seek- ing speci --- ic per --- ormance? Does the “disproportionate burden” test risk undermin- ing --- airness?
27 • Alternative Remedies 815
-
I
Van Wagner were decided today in the context o — digital advertising or NFT markets, would the reasoning about uniqueness still hold? How might new types o —
technology or even new types o
contracts challenge traditional views o — substitut- ability and damages?
-
Kronman argues that speci
ic per — ormance operates as a property rule requiring the breaching party to negotiate — or release rather than simply pay damages. Do you agree with this characterization? How might this approach encourage or dis- courage e —
icient outcomes in contract law?
Problems Problem 27.1. Luxe Deposit Jasper contracts with Luxe Homes to build a custom vacation house. The contract includes a non-re --- undable deposit o --- $100,000. Luxe begins work and completes the
oundation and — raming but then breaches by abandoning the project without expla- nation. Jasper discovers that Luxe spent only $50,000 on materials and labor and retained the remaining $50,000. Jasper hires another contractor to complete the proj ect — or $200,000. Luxe claims that Jasper received the — ull bene — it o — its partial per — ormance because the — oundation and — raming are integral to the house. Luxe also argues that its breach was caused by un — oreseen economic hardship, making retention o — the deposit equitable under the circumstances. Jasper seeks restitution — or the $100,000 deposit. Should Jasper recover the — ull deposit, or should Luxe retain any portion o — it based on the value o — its work? Should restitution be measured by the value o — the bene — it con — erred to Jasper or by Luxe’s unjust gain?
Problem 27.2. The Ink Factory Pigment Producers, Inc., produces ink — or printers. However, sources o — raw materials — or several pigments are drying up. For example, the chemicals MX and diketene, used in the production o — yellow pigment, are in very short supply because o — a crackdown on air pollution in China and a — actory explosion there. Pigment Pro- ducers has a contract with Okinawa Chemical, a Japanese company, — or both MX and diketene. Assume the contract is governed by a jurisdiction that has adopted the UCC. I — Okinawa Chemical backs out o — the contract because it can obtain a higher price by selling Pigment Producers’ quota to other ink producers, can Pigment Producers obtain speci — ic per — ormance under UCC § 2-716? 816 27 • Alternative Remedies
Does the unique and irreplaceable nature o
MX and diketene support speci — ic per — ormance, or are money damages su —
icient? Does the global supply shortage quali — y as “other proper circumstances” under UCC § 2-716? Are there alternative suppliers, or is speci — ic per — ormance the only way to ade- quately protect Pigment Producers’ interests?
Problem 27.3. Pest Control Orkin Exterminating Co., a national pest control company, hired Tony A. Martin to work as a pest exterminator at their o —
ice in Miami, Florida, which provided pest control services throughout Miami-Dade County. At the time o — employment, the parties entered into a written contract containing a covenant not to compete. The covenant restricted Martin — rom engaging in the pest control business anywhere in Miami-Dade County — or two years — ollowing his termination o — employment. Martin voluntarily terminated his employment and began working in Miami-Dade County with one o — Orkin’s competitors. Orkin sued, asking — or an injunction pro- hibiting Martin — rom working as an exterminator in Miami-Dade County. Orkin also claims Martin has access to proprietary pest control methods, making an injunction necessary to prevent disclosure. Miami-Dade County has a total land area o — 2,431 square miles and a total popula- tion o — 2,700,000 people. Should the court en — orce Martin’s non- compete agreement by issuing an injunction? Is the covenant’s scope — covering all o — Miami- Dade County — or two years — reasonable? Do Orkin’s business interests outweigh Martin’s right to earn a living, or does public policy — avor competition? Would en — orcing the non-compete in a large, diverse economy like Miami-Dade County disproportionately harm competition or job mobility? Would monetary damages adequately protect Orkin’s interests instead o — an injunction?
Problem 27.4. The Victor’s Vintage Car Mia contracts to purchase a vintage sports car — rom Victor — or $120,000, believing it to be a rare — actory-original model. A — ter delivery, she discovers the car was exten- sively modi — ied with non-original parts. Victor claims he was unaware o — the modi-
ications and insists the sale is valid. Mia seeks rescission, arguing that the mutual mistake about the car’s originality undermines the agreement. Victor counters that the car’s current value, even with modi — ications, exceeds $120,000, and he o —
ers re — - ormation to adjust the sale terms to re — lect the true value o — the car. Victor also argues 27 • Alternative Remedies 817
that the modi
ications enhance the car’s per — ormance and rarity, increasing its value beyond the original terms. Should the court grant rescission or re — ormation? Does the mutual mistake justi — y rescission, or does re — ormation better address the parties’ intentions? Should the court consider whether the modi — ications enhance the car’s value?
Problem 27.5. Omega Medical Omega Medical Systems orders a specialized imaging device — rom Precision Tech
or $500,000. Precision agrees to deliver the device within three months, but a week be — ore delivery, Omega learns that Precision plans to sell the same device to another buyer — or $600,000. Omega has no alternative supplier and risks losing a lucrative con- tract with a hospital i — it does not secure the device on time. Omega sues — or replevin to recover the device. Precision Tech argues that canceling the sale to the other buyer would harm its long-term business relationships. Should the court grant replevin? Does the imaging device quali — y as unique, and does Omega’s inability to secure a substitute support replevin? Should the court prioritize the hospital’s immediate needs over Precision Tech’s commercial interests? Would monetary damages adequately address Omega’s harm, or is replevin nec- essary to prevent immediate and irreparable harm?
Problem 27.6. Green
ield Tech Green — ield Tech contracts with Silverlight Solutions to develop a custom so — tware application — or $500,000. Silverlight completes 70% o — the project but then breaches by terminating the contract without cause. Green — ield sues, seeking speci — ic per — ormance to compel Silverlight to — inish the project, restitution — or the $350,000 already paid, and replevin — or the partially completed so — tware code Silverlight retains. Silverlight argues that speci — ic per — ormance is impractical due to the remaining development timeline and the need to hire additional developers, which would impose a substan- tial burden. Silverlight also claims that restitution is unwarranted because Green — ield bene — ited — rom the completed work and monetized part o — the incomplete so — tware. Additionally, Silverlight contends that the partially completed code cannot be replev- ied because it is intangible. Should the court grant speci — ic per — ormance, restitution, or replevin? Does the partially completed so — tware quali — y — or replevin despite its intangible nature? How should the court address the intangible nature o — the so — tware in con- sidering Green — ield’s replevin claim? 818 27 • Alternative Remedies
Should restitution account
or the value o — Silverlight’s partial per — ormance, or should Green — ield recover the — ull $350,000? Should the court deduct Green — ield’s revenue — rom its use o — the incomplete so — tware when calculating restitution? Would speci — ic per — ormance impose an undue burden on Silverlight? Chapter 28 Third-Party Bene — iciaries
What happens when someone who never signed a contract seeks to en
orce it? This question lies at the heart o — the doctrine o — third-party bene — iciaries, which challenges the traditional requirement o — privity in contract law. Ordinarily, only the parties to a contract may en — orce its terms or be held liable under them. This rule ensures clarity and predictability in contractual relationships. Yet, in speci — ic circumstances, courts allow non-parties to claim en — orceable rights under a contract. These excep- tions highlight a critical tension in contract law: balancing the contracting parties’ autonomy — their right to control their agreements — with the legitimate interests o —
outsiders who may be signi
icantly impacted by those agreements, especially when reliance or substantial harm is involved. Consider the case o — the Athos I oil spill. In 2004, the oil tanker Athos I struck an abandoned anchor while navigating the Delaware River to a CITGO terminal, spilling hundreds o — thousands o — gallons o — crude oil. The cleanup costs soared, prompting Frescati Shipping, the tanker’s owner, to seek damages under a “sa — e berth” clause in a charter agreement between CITGO’s a —
iliates and a chartering intermediary. Frescati, not a signatory to the contract, argued it was an intended third-party bene — iciary o —
the promise. The case hinged on whether the contracting parties intended to con
er en — orceable rights on Frescati. This chapter explores when and why courts recognize third-party bene — iciary claims. By — ocusing on the intent o — the original contracting parties, courts distinguish intended bene — iciaries — who have en — orceable rights — — rom incidental bene — iciaries, who do not. Through cases like Frescati Shipping Co. v. Citgo Asphalt, 718 F.3d 184 (2013), and other examples, this chapter provides a — ramework — or analyzing such dis- putes. By the end, you will understand how the third-party-bene — iciary doctrine bal- ances — lexibility and predictability in contract law while honoring the intent behind contractual promises.
819
820 28 • Third-Party Bene — iciaries
Rules A. The Intent Test When a non-party to a contract seeks to en --- orce contractual rights, the thresh- old question is whether this non-party quali --- ies as an intended bene --- iciary. Contract law generally limits en --- orceable rights to the parties who sign the agreement, but an exception exists where the contracting parties clearly intended to con --- er a bene --- it on an outsider. Courts apply this principle cautiously to maintain the balance between party autonomy and --- airness.
(1) Unless otherwise agreed between promisor and promisee, a bene --- iciary o ---
a promise is an intended bene --- iciary i --- recognition o --- a right to per --- ormance
in the bene --- iciary is appropriate to e ---
ectuate the intention o — the parties and either (a) the per — ormance o — the promise will satis — y an obligation o — the promisee to pay money to the bene — iciary; or (b) the circumstances indicate that the promisee intends to give the bene — iciary the bene — it o — the promised per — ormance. (2) An incidental bene — iciary is a bene — iciary who is not an intended bene — i- ciary. R2d § 302. Courts answer the critical question o — whether both the promisor and the promisee intended to con — er a direct bene — it on the third party by examining the language o —
the contract and its surrounding circumstances. Evidence supporting this intent may include explicit provisions naming the third party as a bene — iciary, a requirement that the promisor per — orm directly — or the third party’s bene — it, or contextual — actors that show the third party’s reliance on the promised per — ormance. To en — orce rights as a third-party bene — iciary, the claimant must demonstrate they have not bene — itted incidentally but rather that the contracting parties bargained — or their bene — it. In Frescati Shipping Co. v. Citgo Asphalt, Frescati attempted to en — orce a “sa — e berth” clause in a contract between CITGO a —
iliates and Star Tankers. The sa — e berth promise was breached when the Athos I tanker collided with a submerged anchor, resulting in signi — icant oil-spill damages. Although Frescati was not a signa- tory to the contract, it argued that the clause directly bene — ited shipowners. The Third Circuit ruled in — avor o — Frescati, holding that it was an intended ben- e — iciary. The court reasoned that the sa — e berth clause was naturally aimed at protect- ing vessels and their owners, and it asked, “Who else could this promise reasonably protect i — not the ships docking at the port?” Courts distinguish intended bene — iciaries — rom incidental ones to avoid imposing un — oreseen obligations on promisors. For example, a local — isherman who relies on the sa — e conditions created by CITGO’s berth agreement may bene — it indirectly, but the contracting parties did not intend — or him to en — orce the promise. His reliance, though real, does not stem — rom the intent behind a contractual promise. Similarly, a 28 • Third-Party Bene — iciaries 821
Figure 28.1. The presence o
an abandoned anchor violated the sa — e berth provision in a contract between CITGO and Star Tankers. Frescati Shipping, owner and operator o — the Athos I tanker, was — ound to be an intended third-party bene — iciary o — this contract.
tugboat operator might see increased business
rom more vessels entering the port; however, unless CITGO and Star Tankers explicitly intended to bene — it tugboat opera- tors, they remain incidental bene — iciaries without en — orceable rights. Courts generally avoid allowing random bystanders to en — orce third-party rights. The doctrine o — third-party bene — iciaries hinges on the principle that contractual obli- gations should not be expanded to cover parties the promisor never agreed to serve. By requiring clear evidence o — intent, courts protect the autonomy o — the original con- tracting parties while ensuring — airness in en — orcement. This intent-driven approach rein — orces the balance between predictability in contract law and the equitable recog- nition o — legitimate third-party claims.
B. Creditor and Donee Bene
iciaries When courts determine whether a third party quali — ies as an intended bene — iciary, they o — ten distinguish between two speci — ic types: creditor bene — iciaries and donee bene — iciaries. These categories have roots in older common law but continue to serve as use — ul tools — or analyzing intent in modern contract disputes. While not exhaustive, they provide a structured way to understand why certain third parties may en — orce a contract. And courts still re — er to these categories today. A creditor bene — iciary may arise when a contract is designed to — ul — ill a — inancial obligation that the promisee already owes to a third party (provided that the parties intend to bene — it the third party). For example, i — a landlord owes a repair company — or renovations and contracts with a tenant to reduce the tenant’s rent in exchange — or the tenant’s paying the repair company directly, the repair company may become a creditor 822 28 • Third-Party Bene — iciaries
bene
iciary. This is because the tenant’s payment could — ul — ill the landlord’s obligation to the repair company. Again, this scenario re — lects a creditor bene — iciary only i — the landlord and tenant intended the repair company to bene — it — rom their agreement. By contrast, a donee bene — iciary may arise when the promisee intends to con — er a gi — t or gratuitous bene — it on the third party. Unlike a creditor bene — iciary, there is no preexisting obligation owed to the third party. However, the promisee’s intent to bene — it the third party must still be clear. A common example is a li — e insurance policy, where the insured person (the promisee) designates a bene — iciary to receive payment upon their death. In such cases, courts routinely recognize the bene — iciary’s right to en — orce the contract because the promisee’s intent to bene — it the third party is explicit and integral to the agreement. Sometimes, a third party might quali — y as both a creditor and a donee bene — iciary, depending on the nature o — the promise. For instance, a single promise might simul taneously satis — y a debt and provide an additional bene — it as a gi — t. I — a promisor agrees to pay $5,000 to a promisee’s — riend in satis — action o — a $3,000 debt and as a $2,000 gi — t, the — riend is a creditor bene — iciary — or $3,000 and a donee bene — iciary — or the remaining $2,000. Courts will care — ully parse the contract’s language and context to identi — y such dual roles. And, even i — a third party is not necessarily a creditor or donee bene — iciary, it might still be an intended bene — iciary in a broader sense. While these classi — ications are help-
ul in understanding intended bene — iciaries, courts o — ten adopt a broader approach. Rather than — ocusing strictly on whether a third party is a creditor or donee bene — i- ciary, modern analysis asks whether recognizing the third party’s rights aligns with the intent o — the contracting parties. This ensures that the law remains — lexible and capable o — addressing the nuances o — complex commercial and personal arrangements. Finally, it is essential to note that incidental bene — iciaries never — all into either cat- egory. While they may receive some bene — it — rom the contract, their ability to en — orce it is barred unless the contracting parties expressly intended to grant them en — orce- able rights. The terms “creditor bene — iciary” and “donee bene — iciary” implicitly re — er only to intended bene — iciaries. Courts use this distinction to prevent the expansion o —
liability beyond what the parties originally agreed upon, which preserves predictabil- ity and — airness in contract law. Remember that unintended (incidental) bene — iciaries do not have contractual rights under the third-party bene — iciaries doctrine.
C. De
enses While an intended bene — iciary may en — orce a contract, their rights are not abso- lute. Just as the promisee must — ace certain de — enses i — they sue the promisor, the same de — enses are generally available against the third-party bene — iciary. Courts aim to preserve — airness by ensuring that the bene — iciary’s rights do not exceed those o —
the promisee. 28 • Third-Party Bene — iciaries 823
One
oundational de — ense is the non- — ormation o — the contract itsel — . I — the under lying agreement is void or voidable — — or example, due to — raud, duress, mistake, lack o — consideration, or incapacity — then no rights can vest in the third party. A contract lacking mutual assent leaves both the promisee and any potential bene — iciary without en — orceable claims. Or i — a promisor argues that the contract was induced by — raudu- lent misrepresentation, a court may invalidate the agreement, leaving the third-party bene — iciary unable to en — orce it. Similarly, — ailure o — a condition precedent can serve as a de — ense against a third- party claim. Many contracts are conditional, meaning per — ormance is contingent upon certain events or actions. I — those conditions are not met, neither the promisee nor the bene — iciary may compel per — ormance. For example, a promisor might agree to pay a third party only i — the promisee delivers speci — ied goods or services. I — the promisee — ails to — ul — ill this condition, the third party’s rights are extinguished along with the promisee’s. Another common de — ense is contract modi — ication or rescission prior to the third party’s rights vesting. Under R2d § 311, the promisor and promisee generally retain the ability to alter or terminate their agreement without the third party’s consent until the bene — iciary’s rights vest. Rights typically vest when the bene — iciary materially changes their position in reliance on the promise, brings suit to en — orce it, or mani-
ests assent to the contract. For example, i — the promisee and promisor mutually agree to cancel a contract be — ore the third party takes action to rely on it, the bene — iciary loses the ability to en — orce the promise. De — enses rooted in the conduct o — the third party also arise. For instance, i — the bene — iciary acts in a way that breaches a related duty or releases the promisor — rom obligations, their rights may be diminished or barred. A bene — iciary who waives their rights explicitly or implicitly cannot later demand per — ormance. Additionally, equi- table de — enses like unclean hands or estoppel may apply i — the bene — iciary’s behavior undermines their claim to equitable relie — . The promisor may also assert any de — enses they could have raised against the promisee. This includes arguments such as — ailure o — consideration, impossibility or impracticability o — per — ormance, or — rustration o — purpose. For example, i — a natural disaster renders per — ormance impossible, the promisor may avoid liability to both the promisee and the bene — iciary. Finally, some contracts explicitly limit or disclaim third-party rights, creating a contractual de — ense. Courts generally en — orce such disclaimers as long as they are clear and unambiguous. I — a contract contains language explicitly barring third-party en — orcement, the bene — iciary’s claim will — ail even i — they might otherwise quali — y as an intended bene — iciary. In sum, while third-party bene — iciaries enjoy signi — icant rights under contract law, these rights are subject to the same limitations and de — enses as those a —
ecting the primary parties. This — ramework ensures that the extension o — en — orceable rights to 824 28 • Third-Party Bene — iciaries
non-parties does not un
airly expand liability or disrupt the expectations o — the origi- nal contracting parties.
D. Re
lections on Third-Party Bene — iciaries The doctrine o — third-party bene — iciaries sharpens the — ocus on some o — the most
undamental principles in contract law: honoring intent, en — orcing promises, and maintaining the boundaries o — privity. This doctrine provides — lexibility in a system that o — ten prioritizes rigid rules. Courts must adapt to complex multi-party arrange- ments while preserving the autonomy o — the contracting parties. The principle o — intent serves as the cornerstone o — this doctrine. Mani — estation o —
mutual intent ensures that en
orceable rights align with the purposes the contracting parties objectively contemplated when — orming their agreement. Courts must deter- mine whether the contracting parties clearly intended to con — er en — orceable rights on a non-party. This inquiry, grounded in both the language o — the contract and the surrounding circumstances, ensures that third-party claims do not un — airly disrupt the expectations o — the original parties. Cases like Frescati Shipping illustrate how courts weigh these considerations: courts distinguish between bene — iciaries whose rights were deliberately con — erred and those whose bene — its are incidental. At the same time, the doctrine exempli — ies contract law’s adaptability. Multi-layered commercial arrangements o — ten involve intricate relationships, where the promises made by contracting parties naturally overlap with the interests o — third parties. Such situations require courts to care — ully evaluate which claims merit en — orcement. The doctrine allows courts to recognize legitimate third-party claims without undermin- ing contractual predictability. By care — ully parsing intent, courts can strike a balance between en — orcing promises and limiting undue burdens on promisors. This balancing act highlights two o — contract law’s main objectives: By protecting reasonable third-party reliance, it ensures — airness. By avoiding undue burdens on contracting parties, it maintains e —
iciency. This care — ul calibration ensures that con- tract law remains practical in resolving disputes while upholding its core principles o — autonomy and predictability. As you re — lect on this doctrine, consider its implications — or modern disputes. How might courts assess intent in emerging contexts, such as decentralized networks, where traditional markers o — intent — like clear promises and mutual understand- ing — are less evident? In what ways might multi-party agreements, such as those in blockchain ecosystems, challenge traditional notions o — privity? By grappling with these questions, students and practitioners can better appreciate how third-party ben- e — iciary law — its into the larger — ramework o — contract law and ensures — airness without compromising the autonomy o — contracting parties. 28 • Third-Party Bene — iciaries 825
Cases Reading Sovereign Bank v. BJ’s Wholesale Club, Inc. Sovereign Bank explores whether a non-party to a contract can en --- orce its terms as a third-party bene --- i-
ciary. At the heart o --- the case is the question o --- whether Sovereign Bank, as a
Visa card issuer, was an intended bene --- iciary o --- a Member Agreement between
Fi --- th Third Bank and Visa. The agreement obligated Fi --- th Third to ensure that
merchants, including BJ’s, complied with Visa’s operating regulations, particu-
larly those governing security protocols --- or cardholder in --- ormation.
As you read, --- ocus on how the court determines intent. Look at the evidence Sovereign Bank presented to support its argument that it was an intended ben- e --- iciary, and assess whether this evidence demonstrates a clear intent by Fi --- th Third and Visa to con --- er en --- orceable rights on Sovereign Bank. The court’s application o --- R2d § 302 is central to this analysis. Consider why the court concludes that Sovereign Bank was, at most, an incidental bene --- iciary rather than an intended one.
Additionally, pay attention to the role o --- contractual language and con- text. The speci --- ic terms o --- the agreement, coupled with the broader regula- tory --- ramework o --- the Visa network, shaped the court’s interpretation. This case underscores how precise dra --- ting and an understanding o --- the operational environment can clari --- y or obscure third-party rights.
Through studying this case, students will gain a clearer understanding o ---
the boundaries o
third-party bene — iciary doctrine, particularly in the context o — complex commercial relationships. The decision demonstrates how courts balance the contracting parties’ intent with broader considerations o —
airness and en — orceability.
Sovereign Bank v. BJ’s Wholesale Club, Inc.
533 F.3d 162 (2008) Opinion by MCKEE, Circuit Judge. In these consolidated appeals, Sovereign Bank and the Pennsylvania State Employ- ees Credit Union appeal orders dismissing claims that arose --- rom the the --- t o --- certain credit card in --- ormation --- rom a retailer’s computer --- iles. For the reasons that --- ollow, we will reverse in part, and a ---
irm those orders in part. I. Background These consolidated appeals involve two law suits that arose — rom the the — t o — credit card in — ormation — rom the computer — iles o — a prominent retailer. Visa U.S.A., Inc., is a corporation, comprised o — an association o —
inancial institutions, which operates a 826 28 • Third-Party Bene — iciaries
credit card payment system known as “Visa.” Sovereign Bank and the Pennsylvania State Employees Credit Union (“PSECU”) are both members o — the Visa network. Sovereign and PSECU have a Membership Agreement with Visa that allows them to issue Visa cards to their respective customers and members. Within the Visa network, Sovereign and PSECU are re — erred to as “Issuers,” which means that they issue Visa cards to cardholders pursuant to the contracts they enter into with them. Fi — th Third Bank is also a member o — the Visa network, and it also has a Mem- bership Agreement with Visa. Within the network, Fi — th Third is re — erred to as an “Acquirer,” which means that Fi — th Third enters into contractual relationships with businesses that agree to accept Visa cards as payment — or their goods and services (“Merchants”). Acquirers process those transactions on behal — o — the Merchants. BJ’s Wholesale Club, Inc., is a Merchant. Accordingly, Fi — th Third and BJ’s have entered into a Merchant Agreement. Although Merchants participate in the Visa network, they are not members. Only — inancial institutions are eligible — or membership. There-
ore, Merchants have no contractual relationship directly with Visa. Every time a cardholder uses a Visa card to pay a Merchant — or goods or services, the Issuer, Acquirer and Merchant must interact to process and complete the transac- tion. The Merchant’s computer scanners — irst “read” the “Cardholder In — ormation” contained in the magnetic stripe on the back o — Visa cards as they are swiped through the — amiliar terminal at the checkout. The Merchant then sends the pertinent account in — ormation through the Visa network to the Issuer. The Issuer reviews the Card- holder In — ormation and, assuming the card is valid with su —
icient available credit, the Issuer authorizes the transaction, and so noti — ies the Merchant. Upon receiving that noti — ication, the Merchant completes the transaction with the cardholder, and then — orwards the receipt to the Acquirer who pays the Merchant pursuant to their agreement. The Acquirer then noti — ies the Issuer that payment has been received, and the Issuer pays the Acquirer and charges the cardholder. Visa has created an extensive set o — “Operating Regulations” to both govern and
acilitate transactions involving Visa cards. Those Regulations address virtually every aspect o — the Visa payment system, and impose both general and speci — ic require- ments on participants in the network. The disputes in these appeals center on certain security regulations including the Cardholder In — ormation Security Program (“CISP”). The CISP provisions apply to Issuers and Acquirers and include broad security requirements intended to protect Cardholder In — ormation. Those requirements include a prohibition against retaining or storing the data encoded in the — amiliar magnetic stripe on the back o — credit cards, i.e., Cardholder In — ormation, a — ter a consumer transaction is completed. One provision o — the Operating Regulations, entitled “En — orcement,” de — ines pro- cedures by which Visa can en — orce compliance with the Operating Regulations. That provision expressly allows Visa to take speci — ied remedial actions against Members who do not comply with the Operating Regulations, including levying — ines and penalties. En — orcement actions can be appealed to Visa’s Board o — Directors, but the 28 • Third-Party Bene — iciaries 827
Board’s decision is
inal. The Operating Regulations give Visa, and only Visa, the right to interpret and en — orce the Operating Regulations, and only Visa can determine whether a violation o — the Operating Regulations has occurred. The Operating Regulations also impose extensive security requirements on Issuers and Acquirers. Section 2.3 o — the Operating Regulations requires Issuers and Acquir- ers to ensure that their agents, service providers and Merchants comply with the Operating Regulations. The Visa Operating Regulations also include comprehensive provisions — or resolv- ing disputes between Visa members. These provisions allow members to challenge disputed charges through “chargeback” and representment procedures, in accordance with risk allocation judgments made by Visa. Disputes about the use o — these proce- dures are resolved by arbitration. Finally, the Operating Regulations also include “Compliance” provisions that apply when a Member’s violation o — a Regulation causes a — inancial loss to another Mem- ber who cannot be made whole by resorting to chargeback or representment. For example, a loss resulting — rom — raudulent charges using stolen data is allocated to the Issuer. However, the Issuer may use the Compliance proceedings to shi — t that loss to the Acquirer i — it resulted — rom the Acquirer’s violation o — an Operating Regulation. The Compliance provisions do not eliminate any rights a Member may have to pursue any legal remedies that may otherwise be available. Pursuant to their Membership Agreements with Visa, all Members o — the Visa network including Insurers and Acquirers, agree to be bound by the Operating Regu- lations. In addition, be — ore an Acquirer can enter into a Merchant Agreement with a Merchant, the Acquirer must — irst determine that the Merchant will abide by the Operating Regulations. Given the importance attached to uni — orm compliance, an Acquirer’s initial determination is deemed insu —
icient. Rather, an Acquirer must agree to ensure continued compliance with the Operating Regulations. Finally, the Acquirer must have a Merchant Agreement with each o — its Merchants. The Merchant Agreements may generally contain whatever extraneous provisions the Acquirer and Merchant agree upon, but, the Agreement must, at a minimum, contain the provi- sions o — Section 5.2 o — the Operating Regulations. These disputes involve § 5.2.h.3.b. That subdivision prohibits a Merchant — rom retaining or storing Cardholder In — ormation a — ter an Issuer authorizes a transac- tion. Like all Visa Members, Fi — th Third’s predecessor agreed to be bound by the Visa Operating Regulations and By-Laws, which are incorporated by re — erence into the Membership Agreement. The seeds that sprouted this litigation were sewn in February 2004, when Visa identi — ied a potential compromise o — electronically stored Cardholder In — ormation pertaining to certain Visa cards issued by Sovereign, PSECU and other — inancial insti- tutions. Electronic data on some credit cards had been copied and used to — raudu- lently obtain goods and services a — ter cardholders had used the cards at various BJ’s stores. Visa responded by issuing a “CAMS alert” to potentially a —
ected Issuers. Such 828 28 • Third-Party Bene — iciaries
CAMS alerts noti
y Visa members that Cardholder In — ormation may have been com- promised. The CAMS alert here noti — ied the Issuers that Visa cards which had been properly presented — or payment at BJ’s stores — rom July 2003 through February 2004 had been compromised and could be used to make — raudulent purchases. Sovereign responded to the February 2004 alert by cancelling some Visa cards and issuing new Visa cards to the a —
ected cardholders. Sovereign claims that the — raud was only possible because BJ’s improperly retained and stored the Cardholder In — or- mation — rom its customers’ cards instead o — deleting the data immediately a — ter a sales transaction was completed, as required by Visa Operating Regulation § 5.2.h.3.b. In Sovereign’s view, BJ’s — ailure to comply with the requirements o — § 5.2.h.3.b. breached a duty owed to Sovereign. Sovereign — urther contends that Fi — th Third — ailed to comply with the Operating Regulations by — ailing to ensure that BJ’s complied with § 5.2.h.3.b. According to Sovereign, BJ’s — ailure to delete the Cardholder In — ormation magneti- cally stored in Visa cards, and Fi — th Third’s — ailure to ensure that BJ’s complied with § 5.3.h.3.b, allowed the unauthorized and — raudulent use o — Cardholder In — ormation. Sovereign maintains that it was legally obligated to reimburse its cardholders — or the resulting — raudulent charges, and that it incurred expenses, and lost income and — ees
rom doing so. This purportedly included the costs o — issuing replacement cards to Cardholders (in an e —
ort to mitigate — urther losses), and loss o — goodwill o — its cus- tomer base. A — ter it discovered the breach o — security o — Cardholder In — ormation that had been retained in BJ’s system, PSECU also canceled approximately 20,000 Visa cards that it had issued to its members who had used the cards at BJ’s. It then reissued Visa cards with new account numbers and new Cardholder In — ormation at a cost o — approxi- mately $ 98,000.
II. Sovereign Bank v. BJ’s Wholesale Club and
Fi --- th Third Bank (No. 06-3392) On January 10, 2005, Sovereign sued Fi --- th Third and BJ’s in state court asserting a claim --- or negligence, breach o --- contract, and equitable indemni --- ication against each de --- endant. The suit was brought to recover the losses that resulted --- rom the --- raudulent use o --- Cardholders’ In --- ormation, lost --- ees and commissions, the value o --- the unau- thorized purchases and sales, and the cost o --- replacing Visa cards. [Procedural details omitted.] We discuss each o --- Sovereign’s arguments in turn.
A. Sovereign’s Breach o --- Contract Claim Against Fi --- th Third. As noted, Sovereign’s contract claim is based on the theory that it is a third-party bene --- iciary o --- Fi --- th Third’s Member Agreement with Visa. As also noted, that agree- ment required Fi --- th Third to ensure that BJ’s complied with the Visa Operating Regulations, and § 5.2.h.3.b. o --- that agreement prohibits Merchants --- rom retaining
28 • Third-Party Bene — iciaries 829
Cardholder In
ormation. Sovereign contends that Fi — th Third breached that contract by not ensuring BJ’s compliance. Historically, under Pennsylvania law, “in order — or a third party bene — iciary to have standing to recover on a contract, both contracting parties must have expressed an intention that the third-party be a bene — iciary, and that intention must have a —
irma- tively appeared in the contract itsel — .” Sovereign appropriately concedes that it is not an express third-party bene — iciary o —
the Visa-Fi
th Third Member Agreement. However, the Pennsylvania Supreme Court adopted § 302 o — the Restatement (Second) o — Contracts. That provision allows an “intended bene — iciary” to recover — or breach o — contract even though the actual par- ties to the contract did not express an intent to bene — it the third party. Section 302 provides as — ollows: [See above — or R2d text.] Under § 302, Sovereign’s contract claim depends on whether the “recognition o —
a right to per
ormance” in Sovereign “is appropriate to e —
ectuate the intentions o — ” both Visa and Fi — th Third in entering into their member agreement and whether “the circumstances indicate that” Visa (the promisee) “intend[ed]” to give Sovereign “the bene — it o — the promised per — ormance.” Fi — th Third relies in part on Miller’s testimony that he was not aware that Visa intended to create a direct right o — en — orcement under the Operating Regulations among Members and he has never seen a document that would allow a Member “to step into Visa’s shoes under its contract with other members” and en — orce the Operat- ing Regulations. Miller testi — ied in part as — ollows:
[T]he core purpose o --- the Operating Regulations is to set up the conditions
or participation in the system, to set up the rules and standards that apply to that ultimately — or the bene — it o — the Visa payment system, the members that participate in it and other stakeholders such as cardholders, merchants, and others who may participate in the system as well.
Fi --- th Third --- urther contends that Miller also made it clear that the Operating Reg- ulations’ prohibition against retaining Cardholder In --- ormation, which Fi --- th Third claims was enacted long a --- ter it entered into its agreement with Visa, was not to ben- e --- it any individual member or class o --- members. Rather, according to Miller:
[t]he purpose o --- the CISP program . . . is to maximize the value to the Visa
system as a whole. That can include the protection o --- any entity that may
be involved in the use or — or handling o --- cardholder data, so it’s to protect
a cardholder, the privacy o --- their in --- ormation, to protect their con --- idence
in using the Visa system, to protect issuers, to protect acquirers, to protect
merchants; and by creating a system that protects cardholder data, generally
it’s to maximize the usage and value o --- the Visa payment system --- or all o ---
those participants.
830 28 • Third-Party Bene — iciaries
Miller was asked whether, even though there may have been multiple purposes
or requiring the Acquirer to ensure Merchant compliance with the regulations, at least one such reason was to protect Issuers. Miller responded as — ollows: The part o — your question I’m struggling with is to say whether that was the purpose or not. I think I summarized what the purpose was. One o — the entities that is impacted by the Cardholder In — ormation Program is issuers, as well as acquirers, merchants and cardholders. So my understanding was the purpose was not directed at any one o — those entities but to maximize the value o — the system in protecting cardholder in — ormation — or all o — the participants. Finally, Fi — th Third notes that in responding to a question about whether Visa intended to give Issuers the bene — it o — the Acquirer’s compliance with the CISP, Miller testi — ied: Visa designed the CISP program to bene — it the Visa system as a whole, to drive con — idence in the integrity o — the Visa system, to drive greater, greater e —
iciency, to drive cardholder security, and to do that — rom requirements that apply to all Visa members that designed ultimately to yield a more e —
i- cient system on behal — o — all those participants. In sum, Fi — th Third contends that Miller’s deposition testimony clearly shows that the intent o — the Operating Regulations, and more particularly the prohibition on Merchant retention o — Cardholder In — ormation, is to bene — it the Visa system as a whole and not Sovereign or any particular Issuer in particular. Sovereign notes that in August 1993, Visa wrote a memorandum entitled “Reten- tion o — Magnetic-Stripe Data Prohibited.” The memorandum described a new sec- tion o — the Operating Regulations prohibiting the storage o — magnetic-stripe data, i.e., Cardholder In — ormation. It read in part as — ollows: To protect the Visa system and Issuers — rom potential — raud exposure cre- ated by databases o — magnetic-stripe in — ormation, Section 6.21 has been revised. E —
ective September 1, 1993, the retention or storage o — magnetic stripe data subsequent to the authorization o — a transaction is prohibited. Acquirers are obligated to ensure that their merchants do not store the magnetic-stripe in — ormation — rom Visa Cards — or any subsequent use. Sovereign contends that this August 1993 memorandum shows that Visa under- stood and clearly intended that Issuers such as Sovereign (and PSECU) would obtain direct bene — its — rom the requiring members to ensure that magnetic-stripe data was not retained. Sovereign — urther contends that other evidence obtained — rom Visa shows that Visa expressly understood and intended that the prohibition would provide direct bene — its to Issuers and that the type o — harm su —
ered by Sovereign was speci — ically intended to be avoided by compliance with the prohibition. Visa published an on-line 28 • Third-Party Bene — iciaries 831
article entitled “Issuers and Acquirers Are At Risk When Magnetic-Stripe Data Is Stored,” in May 2003. The article stated that the CISP “was established to preclude a compromise that could lead to the duplication o — valid magnetic-stripe data on coun- ter — eit or altered cards,” because such a data compromise “impacts Issuers, Acquirers, cardholder goodwill and the integrity o — the payment system.” Sovereign submits that this article is additional evidence that the prohibition against retaining Cardholder In — ormation contained in the magnetic strip was intended to directly bene — it Issuers. Finally, Sovereign relies on the — ollowing exchange during Miller’s deposition: Q: [by Fi — th Third’s counsel] Is it — air to say that the operating regulations are not intended to bene — it a single group o — participants, but the Visa payment system as a whole? Objection. Leading. A: [by Miller] It’s — air to say that the core purpose o — the operating regula- tions is to set up the conditions — or participation in the system, to set up rules and standards that apply to that ultimately — or the bene — it o — the Visa payment system, the members that participate in it and other stakeholders such as cardholders, merchants and others who may participate in the sys- tem as well. (emphasis added). Q: They may have some incidental bene — it; is that correct? Objection. Leading, and calls — or a legal conclusion. A: The bylaws and operating regulations, by their terms, apply only to mem- bers. So to the extent you mean they might have bene — its beyond the rules that apply to other stakeholders, that’s correct. They’re not directly parties to these rules. (emphasis added) Sovereign argues that, despite the best e —
orts o — Fi — th Third’s counsel, the italicized portions o — Miller’s testimony demonstrate that Visa understood that Issuers are more than incidental bene — iciaries o — the Member Agreements. Rather, it shows that Visa expressly understood that other classes o — participants, such as Issuers, were intended and — oreseeable bene — iciaries o — a Member Agreement, even though they are not par- ties to a particular agreement. Sovereign also argues that in granting summary judgment to Fi — th Third, the dis- trict court did not apply well-settled summary judgment standards. Rather, accord- ing to Sovereign, the district court acted like a — act- — inder by weighing con — licting or ambiguous evidence and making credibility determinations. The district court explained: In the — ace o — this evidence o — Visa’s intent [i.e., Miller’s deposition testi- mony], we do not believe that the single August 1993 re — erence to bene — itting issuers nor the ambiguous “core purpose” statement is su —
icient evidence to lead a reasonable jury to — ind — or [Sovereign] on the contract claim. 832 28 • Third-Party Bene — iciaries
It
urther commented:
It cannot be disputed that Sovereign bene --- its --- rom the prohibition on the
retention o --- magnetic-stripe data. It is probably also true that as an issuer
it has the greatest need --- or such a prohibition, and bene --- its the most --- rom
it, since its cardholders’ in --- ormation is at risk i --- a merchant or other entity
retains such data so that it is subject to the --- t. But one essential part o --- the test
or third-party-bene — iciary status is that the promisee, here Visa, must have intended to bene — it the third party. There is su —
icient evidence on summary judgment to state that Visa had no such intent. In sum, as Fi — th Third argues, Sovereign is at most an incidental bene — iciary o — the member agreement between Visa and Fi — th Third, and an incidental bene — iciary has no right to en — orce a contract, no matter how great a stake it might have in doing so.
[Procedural review omitted.] In order to be an intended bene — iciary o — the Visa-Fi — th Third Member Agree- ment, Sovereign has the burden o — producing, inter alia, su —
icient evidence that Visa intended to give it the bene — it o — the Fi — th Third’s promise to Visa to ensure that BJ’s complied with the provision o — the Member Agreement prohibiting Merchants — rom retaining Cardholder In — ormation. We believe that Sovereign met that burden. We do not, however, regard the May 2003 on-line article entitled “Issuers and Acquirers Are At Risk When Magnetic-Stripe Is Stored” as indicative o — an intent to bene — it a particular Issuer such as Sovereign or PSECU. That article simply states the reason — or the prohibition against retention o — Cardholder In — ormation, viz., a data compromise that could result — rom storage o — magnetic-stripe data “impacts Issuers, Acquirers, cardholder goodwill, and the integrity o — the system.” However, we do believe that Visa’s August 1993 memorandum, entitled “Retention o — Magnetic-Stripe Date Prohibited,” and Miller’s “core purpose” deposition testimony raise a genuine issue o — material — act regarding the intent o — the Visa and Fi — th Third Member Agree- ment. That was su —
icient to preclude the grant o — summary judgment on Sovereign’s breach o — contract claim. In his deposition, Miller testi — ied that the core purpose o — the Operating Regula- tions was to bene — it the Visa system and “the members that participate in it.” Admit- tedly, any indication o — an intent by Visa to speci — ically bene — it Issuers is arguably undermined by Miller’s re — erences to “other shareholders such as cardholders, mer- chants and others who may participate in the system as well.” Nonetheless, his testimony clearly suggests an intent by Visa to bene — it Issuers. An argument to the contrary is tantamount to claiming that since Visa intended to ben- e — it everyone who was part o — the Visa system, it did not speci — ically intend to bene — it anyone. However, the — act that it intended to bene — it several Members or classes o —
Members does not negate the possibility that it intended to bene
it individual Issuers such as Sovereign. 28 • Third-Party Bene — iciaries 833
Moreover, as recited earlier, the August 1993 memorandum provides, in relevant part: “To protect the Visa system and Issuers — rom potential — raud exposure created by databases o — magnetic-stripe in — ormation. . . . Acquirers are obligated to ensure that their merchants do not store the magnetic-stripe in — ormation — rom Visa Cards
or any subsequent use.” (emphasis added). Thus, the memorandum clearly states that Acquirers must act to protect Issuers by ensuring that their Merchants do not retain Cardholder In — ormation. Accordingly, the August 1993 memorandum is su —
icient evidence by itsel — to create a genuine issue about whether Visa intended to give Sov- ereign the bene — it o — Fi — th Third’s promise to Visa to ensure BJ’s compliance with the provisions o — the Visa-Fi — th Third Member Agreement. There — ore, we will reverse the district court’s grant o — summary judgment to Fi — th Third on the breach o — contract claim and remand — or — urther proceedings on that claim.
Re --- lection Sovereign Bank v. BJ’s Wholesale Club, Inc., illustrates the complexity o --- third-party bene --- iciary doctrine when applied to a multilayered commercial network like Visa’s. The case demonstrates how courts balance the strict requirements o --- contractual intent with the practical realities o --- modern business systems. Sovereign’s argument hinged on whether it was an intended bene --- iciary o --- the Visa–Fi --- th Third Member Agree- ment. The court’s decision turned on nuanced questions o --- intent requiring care --- ul scrutiny o --- both explicit contractual language and broader contextual evidence. The court’s analysis underscores the critical importance o --- clear language in de --- ining the rights and obligations o --- third parties. The Visa–Fi --- th Third Member Agreement contained no explicit re --- erence to Sovereign or other issuing banks as bene --- iciaries. This absence o --- express intent highlights the di ---
iculty o — in — erring third-party rights, even in a system where issuing banks undeniably bene — it — rom compliance with the Operating Regulations. The court’s reliance on R2d § 302 rein — orces the principle that en — orceable third-party rights must be grounded in demonstrable intent, not merely in practical advantages. The evidence presented by Sovereign — including Visa’s 1993 memorandum and the 2003 online article — illustrates the challenges o — proving intent in complex con- tractual arrangements. The court distinguished between general bene — its provided to participants in the Visa network and speci — ic bene — its con — erred on particular mem- bers, like Sovereign. Although the memorandum’s language supported Sovereign’s claim, the court deemed the broader context and deposition testimony by Visa’s rep- resentative insu —
icient to establish a clear intent to bene — it issuers as a distinct class. The case ultimately rested on whether a jury could reasonably interpret the agree- ment’s terms and the surrounding circumstances to suggest an intention to bene — it Sovereign. This decision highlights a recurring tension in contract law: the need to respect the autonomy o — the contracting parties while addressing the realities o — interdependent 834 28 • Third-Party Bene — iciaries
relationships. Sovereign’s reliance on Visa’s compliance structure, and that structure’s vulnerability to — raud, emphasizes the stakes involved in interpreting these agree- ments. However, the court’s hesitance to impose liability without unequivocal evi- dence o — intent re — lects the broader judicial caution against expanding third-party rights beyond what the contract expressly or implicitly supports. Sovereign Bank invites re — lection on how courts navigate the intersection o —
ormal contractual language and the — unctional dynamics o — large-scale commercial systems. It serves as a reminder that even in networks designed to create shared bene — its, the extension o — en — orceable rights remains tethered to the clear intent o — the original contracting parties.
Discussion 1. Should courts consider industry customs and practices when determining third- party bene --- iciary status, or should they limit their analysis to the --- our corners o ---
the contract? In this case, Visa’s operating regulations and Miller’s testimony about the system’s purpose provided contextual evidence o — intent. What are the advan- tages o — allowing courts to consider such evidence, and what risks or disadvantages might arise i — courts rely too heavily on it?
-
In complex commercial contexts, like the credit card network, how can parties dra — t contracts to clearly indicate their intent regarding third-party bene — iciaries? Re — lect on the absence o — express language in the Visa–Fi — th Third Member Agree- ment, and discuss how speci — ic language might have avoided this litigation. What tools or dra — ting strategies would you recommend to ensure clarity?
-
Do you think the court reached the right result in allowing this issue to go to a jury? Why or why not? Evaluate whether the evidence, including the 1993 memoran- dum and Miller’s testimony, was su —
icient to create a triable issue o —
act. Should courts be cautious in allowing juries to weigh in on ambiguous contractual terms, or was this the appropriate approach given the stakes — or Sovereign?
- What does this case reveal about the balance between party autonomy and the realities o — interdependent commercial relationships? Sovereign’s reliance on Visa’s compliance — ramework and that — ramework’s role in mitigating — raud highlight the interconnectedness o — the network. Should courts prioritize protecting the expec- tations o — individual participants like Sovereign, or should they — ocus on en — orc- ing the original parties’ contractual intent? How does this balance re — lect broader themes in contract law, such as predictability, equity, and e —
iciency? 28 • Third-Party Bene — iciaries 835
Problems Problem 28.1 Subaru Showdown
Subaru Distributors Corp. had an exclusive distribution agreement with Subaru o ---
America, Inc., granting it rights to distribute Subaru vehicles within a de
ined terri- tory. When Fuji Heavy Industries, the manu — acturer, began supplying nearly identical vehicles to Saab — or sale in the same territory, Subaru Distributors sued as a third- party bene — iciary o — the Subaru–Fuji agreement, claiming the arrangement violated its exclusivity. Does Subaru Distributors have standing to sue as a third-party bene — iciary? What — actors should the court consider in determining intent to bene — it? See Subaru Distributors Corp. v. Subaru o — America, Inc., 425 F.3d 119 (2d Cir. 2005).
Problem 28.2 Irrigation Irritations The United States entered into a contract with Copco, a power company, to con- struct and operate a dam as part o — a — ederal reclamation project. The contract aimed to allocate water resources in compliance with — ederal statutes and to serve down- stream needs, including irrigation — or agricultural landowners. Local irrigators sued, arguing they were third-party bene — iciaries entitled to en — orce the contract to ensure su —
icient water supply. Are the irrigators likely to succeed? How does the — ederal purpose o — the contract impact their claim? See Klamath Water Users Protective Ass’n v. Patterson, 204 F.3d 1206 (9th Cir. 1999).
Problem 28.3 Sewage Saga Franz Foods contracted with the City o — Green Forest to use the municipal sewer system — or its waste. The agreement required Franz Foods to process waste to pre- vent environmental harm. When waste discharges polluted a local creek, downstream landowners sued Franz Foods as third-party bene — iciaries o — the contract, claiming its
ailure to — ollow the agreement caused the pollution. Can the landowners en — orce the contract? What role does — oreseeability o — harm play in determining bene — iciary status? See Ratzla —
v. Franz Foods, 250 Ark. 1003 (1971). 836 28 • Third-Party Bene — iciaries
Problem 28.4 Symphony Strike The San Diego Symphony entered into a collective bargaining agreement with its musicians’ union. The agreement provided speci — ic audition procedures — or — illing orchestra vacancies. When the symphony bypassed the process to — ill a percussionist role, a union member who was not part o — the orchestra sued as a third-party bene — i- ciary, claiming he was entitled to an audition. Does the member have standing to en — orce the agreement? How do collective bargaining dynamics in — luence third-party bene — iciary claims? See Karo v. San Diego Symphony Orchestra Ass’n, 762 F.2d 819 (9th Cir. 1985).
Problem 28.5 Insurance Intent Landlord leased a property to Tenant and required Tenant to procure a property insurance policy naming both as insureds. Tenant obtained insurance through Trav- elers but — ailed to include Landlord as a named insured. A — ter a — ire destroyed part o —
the building, Landlord
iled a claim with Travelers, asserting rights as a third-party bene — iciary o — the insurance contract. Can Landlord en — orce the insurance policy? How does the lack o — explicit designation a —
ect the analysis? See Travelers Indemnity Co. v. Dammann & Co., 594 F.3d 238 (3d Cir. 2010).
∴
Table o — Cases
Academy Chicago Publishers v. Cheever, Frigaliment Importing Co., Ltd., v. 95, 304 B.N.S. International Sales Corp, 403, Adbar, L.C. v. New Beginnings C-Star, 404 681 Gianni v. R. Russel & Co., 488–490, Alaska Packers Association v. 496 Domenico, 691, 701 Hadley v. Baxendale, 730, 779, 783, 784, Angel v. Murray, 692, 693, 707, 708 787 Ardagh Metal Packaging USA Corp. v. Hamer v. Sidway, 158, 168, 169, 171 American CRAFT Brewery, LLC, 553 Hawkins v. McGee, 740, 741, 744, 745 Barrer v. Women’s National Bank, 346 Haynes Chemical Corp. v. Staples & Bauer v. Sawyer, 800, 801 Staples, 242, 243 Birdsall v. Saucier, 714 Hill v. Jones, 356, 357, 362 Carlson v. General Motors Corp., 536, Hornell Brewing Co., Inc. v. Spry, 647 537, 540 In re Motors Liquidation Co., 424, 425 Conrad v. Fields, 195 Internatio-Rotterdam, Inc. v. River Daughtrey v. Ashe, 530, 531 Brand Rice Mills, Inc., 591 DePrince v. Starboard Cruise Services, Jacob & Youngs, Inc. v. Kent, 617, 618 Inc., 312, 323 Khiterer v. Bell, 624 Drake v. Bell, 218, 221, 233, 235, 237, Kingston v. Preston, 605, 611, 615 252 Krell v. Henry, 661, 671 Edson v. Poppe, 218, 226, 250, 251 Le — kowitz v. Great Minneapolis Surplus Estate o — McGovern v. Commonwealth Store, Inc., 37, 80, 81 State Employees’ Retirement Bd., 382, Leonard v. Pepsico, Inc., 84, 85 383 Lucy v. Zehmer, 52, 54, 55, 61 First National Bank o — Lawrence v. Maryland National Bank v. United Methodist Home — or the Aged, Jewish Appeal Federation o — Greater 469–471 Washington, Inc., 204, 205 Fisher v. Congregation B’Nai Yitzhok, McCloskey & Co. v. Minweld Steel Co., 445, 451 642, 643 Flender Corp. v. Tippins International, McIntosh v. Murphy, 278, 285, 286 Inc., 147, 148 Mills v. Wyman, 218, 220, 221, 229, 235 Frescati Shipping Co. v. Citgo Asphalt, Morin Building Products Co., Inc. v. 819, 820 Baystone Construction, Inc., 580, 597
837
838 Table o — Cases
Morrison v. Bare, 569, 574, 582, 583 State Department o
Transportation v. Muir v. Kane, 218, 227, 253 Providence & Worcester Railroad Nānākuli Paving & Rock Co. v. Shell Oil Co., 140, 141 Co., 420, 456, 457 Stearns v. Emery-Waterhouse Co., 279, North American Foreign Trading Corp. 292, 304 v. Direct Mail Specialist, 763 Steinberg v. Chicago Medical School, Otten v. Otten, 200, 204 35, 97 Paci — ic Gas & Electric Co. v. G.W. Sterling v. Taylor, 292, 293 Thomas Drayage & Rigging Co., 491 Taylor v. Caldwell, 659, 667, 668, 671, Pappas v. Bever, 40, 189 674 Peevyhouse v. Garland Coal & Mining Transatlantic Financing Corp. v. United Co., 749, 758, 759 States, 661, 676 Pennsy Supply, Inc. v. American Ash Tyson v. Ciba-Geigy Corp., 548 Recycling Corp., 160, 172, 173 UAW-GM Human Resource Center v. Quebodeaux v. Quebodeaux, 363 KSL Recreation Corp., 501 Ra —
les v. Wichelhaus, 52, 62–64, 396 Van Wagner Advertising Corp. v. S & M Ramirez v. Autosport, 768 Enterprises, 807, 808 Ricketts v. Scothorn, 184, 192 Webb v. McGowin, 218, 222, 237, 238 Sherwood v. Walker, 309, 310, 320, 321 Webster St. Partnership, Ltd. v. Sheridan, Sierra Diesel Injection Service, Inc. v. 373, 377, 378 Burroughs Corp, 485, 509 Wood v. Boynton, 309, 316, 320 Smaligo v. Fireman’s Fund Insurance Wood v. Lucy, Lady Du —
-Gordon, Co., 114 165–166, 448 Sovereign Bank v. BJ’s Wholesale Club, Yaros v. Trustees o — University o — Pa., Inc., 825, 833 116 Index
A Acceptance, 32, 35–39, 45, 46, 48, 54, 60, 61, 801–804, 806–808, 816, 819, 820, 822– 69, 70, 77, 80, 82, 83, 85, 88, 89, 91, 94, 829, 831–836 96, 101–109, 111–116, 118–121, 123, 125, Agreement o — rescission, 699 127–134, 136, 137, 139–141, 144–152, Ambiguity, 22, 64, 72, 95, 132, 301, 303, 393, 191, 219, 227, 235, 241, 245, 284, 287, 290, 395–398, 400–403, 409–411, 414, 416, 302, 405, 406, 440, 441, 448, 507, 525, 544, 418–421, 423, 427, 439, 442, 453, 470, 474, 600, 606, 612, 613, 615, 628, 650, 700, 718, 491, 492, 495, 502, 506, 519, 520, 556, 557, 753–756, 758, 770–773 561, 568, 579, 602, 637, 665 Adequate assurance, 639, 640, 647, 651–653 Anticipatory breach, 643, 645 Adhesion, 19, 70, 71, 344, 418, 421 Anticipatory repudiation, 564, 635, 636, 638, Advertisements as o —
ers, 72, 73, 88 641, 656 Agreement, 3, 17, 19–24, 27–33, 35–39, 42, Assignment, 55, 238, 252, 365, 505, 548, 551, 44–46, 48, 51, 54, 56, 58–61, 63, 64, 69, 71, 584, 586, 589, 689, 696–698, 714, 716, 719 95–97, 100, 109, 113, 117, 118, 123–125, Attorney’s — ees, 125, 357, 423, 800 129–132, 134–136, 142, 143, 145, 148, 149, Autonomy theory, 19, 20 151, 153, 154, 156, 158, 165, 166, 169–171, Avoid surplusage rule, 416, 418 175, 177, 179, 183, 188, 191, 200–205, 209, 212, 213, 218, 221, 227, 228, 239–241, 243, B 245–247, 249, 250, 253–255, 258, 261, Bad — aith, 187, 341, 578, 590, 598, 601, 608, 263, 264, 266, 267, 270–277, 279–289, 609, 629, 694, 705, 792, 795, 807 292–301, 304, 309, 313–315, 321, 322, Bargain, 27, 30–33, 42, 44–52, 55, 60, 69–71, 324, 325, 327, 328, 330, 332, 335, 337–339, 77, 78, 103–105, 108, 113, 116, 118, 139, 341–346, 348–350, 352, 353, 355, 357, 358, 154, 158, 161, 162, 177, 181, 183, 188, 219, 360, 363–365, 367, 368, 370, 371, 376, 385, 221, 242, 266, 272, 307, 318, 319, 321, 322, 391–393, 396–406, 409, 411, 414–418, 351, 353, 362, 393, 465, 520–522, 527, 420, 422, 423, 425, 426, 431–437, 439–450, 530–536, 541, 549, 564, 576, 582, 596, 606, 452, 456–466, 468, 470–477, 481–512, 610, 651, 676, 691, 717, 719, 723, 724, 727, 514–517, 519, 522, 525, 526, 528, 530, 728, 731, 732, 745, 747, 749, 750, 752, 758, 533–535, 546, 553–560, 567, 569, 571, 572, 762, 777, 796, 813 574, 577–579, 582, 583, 585, 587–591, 595, Battle o — the — orms, 70, 130, 131, 135, 147, 597, 602, 603, 606, 607, 609, 610, 615–617, 148, 150 622, 624, 625, 629–633, 643–645, 648, 650, Bene — iciary, 30, 66, 205, 213, 214, 222, 250, 653, 656, 658, 659, 661–663, 665, 667–669, 266, 383, 387, 389, 436, 819–825, 828, 829, 672, 677, 678, 683, 687, 691–695, 697–699, 832–836 702, 704, 707, 708, 710–715, 717–719, 743, Bilateral, 28, 32, 33, 47, 48, 78, 110, 111, 155, 757, 761, 763, 770, 782, 794, 795, 797–799, 201, 575, 699
839
840 Index
Breach o
contract, 36, 38, 43, 44, 81, 88, 98, Course o — dealing, 119, 120, 394, 397–401, 151, 174, 197, 325, 350, 372, 392, 436, 447, 419, 439, 441, 442, 465–467, 491, 512, 514, 457, 482, 501, 502, 554, 572–575, 577, 584, 555, 569, 651 586, 588, 589, 595, 603, 624, 625, 628, 631, Course o — per — ormance, 150, 394, 397–401, 645, 656, 673, 687, 691, 700, 724, 725, 731, 419, 439–442, 446, 457, 459, 461, 463–466, 753, 754, 759, 760, 763, 769, 779, 785, 786, 469, 491, 512, 514, 569 795, 796, 807, 810, 813, 828, 829, 832, 833 Creditor bene — iciary, 821, 822
C D Cancellation, 278, 289, 339, 592, 594, 611, De — enses, 28, 52, 153, 211, 212, 261, 262, 320, 612, 661, 675, 686, 700, 768, 771, 772, 803, 329, 343, 371, 376, 553, 554, 560, 789, 822, 804, 809, 810 823 Capacity, 27, 107, 153, 190, 222, 371–377, Delegation, 505, 689, 696–698, 714 379, 382–385, 387–391, 472, 478, 593, 640, Destruction, 159, 276, 375, 564, 657–660, 685, 738, 791, 800 662, 666, 669, 670, 684, 752, 762 Catalogs as o —
ers, 76 Detrimental reliance, 29, 32, 108, 112, 113, Certainty, 8, 14, 24, 72, 76, 79, 95, 97, 174, 137, 187, 189, 190, 214, 277–279, 292, 355, 272, 273, 293, 295, 297–301, 307, 376, 377, 450, 451 399, 400, 402, 446, 481, 487, 491, 492, 495, Direct expectation damages, 728, 729, 752 499, 506, 582, 619, 629, 682, 689, 725, 733, Duty o — good — aith, 165, 344, 419, 420, 450, 777, 779, 780, 782, 790, 807, 811, 812 451, 476, 554, 560, 561, 706 Charitable subscriptions, 181, 182, 188, 190, 204, 205, 209, 211–213 E Charity, 189, 209, 215, 224, 225, 231, 233, 727 Equitable en — orceability, 200, 795 Complete per — ormance, 94, 270, 617, 623, 793 Equitable estoppel, 194, 287, 288 Concealment, 333, 334, 346, 356, 357, 360, Equitable remedies, 8, 11, 12, 450, 577, 635, 490, 543 791, 806–808, 813, 814 Condition precedent, 162, 494, 495, 569, 571, Evidence, 3, 21–25, 34, 40–42, 46, 58–60, 64, 572, 593, 594, 604, 617, 622, 660, 823 71, 75, 81, 96, 117, 120–122, 133, 137, 138, Condition subsequent, 571, 572, 604 140, 144, 153, 154, 170, 186, 190, 193, 194, Conditional gi — ts, 161, 162, 168 196, 204, 213, 214, 245–248, 251, 252, 256, Conditions concurrent, 570, 573, 614 263–265, 271–278, 280–282, 284, 285, Consequential damages, 728, 730–732, 734– 288, 289, 291–293, 295–304, 308, 313, 736, 748, 756, 757, 766, 778–780, 788, 789 314, 316–319, 325, 334, 339, 341–343, Consideration, 28, 29, 31–33, 36–39, 45, 46, 345, 352, 358, 359, 361, 364, 374, 378, 48–50, 82, 108–110, 112, 113, 122, 153– 384–389, 393–402, 404, 406, 408, 409, 413, 165, 167–172, 174–179, 181–183, 189, 414, 419–421, 423, 424, 427, 431, 436, 437, 191–195, 199–206, 209–214, 216–218, 439–447, 450–455, 457–461, 463–470, 220–225, 227–237, 239–244, 246–253, 473, 476, 481–500, 502–509, 511–519, 255–259, 261, 265, 267, 268, 277, 278, 292, 525, 527–529, 531, 532, 535, 536, 541, 542, 297, 298, 302, 308, 309, 317, 321–323, 339, 544, 547–550, 567, 569, 573, 576, 590, 593, 343, 369, 373, 380, 388, 389, 399, 425, 447, 597, 598, 601, 602, 618, 620, 622, 624–628, 449, 476, 488, 489, 492, 496, 498, 499, 514, 638–641, 652, 653, 660, 669, 682, 702, 703, 533, 534, 564, 590, 598, 615, 621, 675, 689– 712, 713, 715–717, 719, 731, 741–744, 760, 693, 695, 696, 698–708, 710–712, 714, 715, 773, 780, 807, 809, 810, 812, 820, 821, 825, 718, 719, 743, 760, 786, 794, 802, 810, 823 830–834 Consistent usage rule, 416 Expectation interest, 676, 723, 724, 727, 728, Constructive notice, 105 731, 744, 747, 750, 752, 777, 778, 782 Contractual liability, 45, 49, 70, 79, 123, 229, Express conditions, 566–568, 576, 579, 581, 377, 382, 741 582, 595, 597, 606, 614, 617 Index 841
Extrinsic evidence, 22, 40–42, 96, 204, 293, Inaction, 782 295–303, 394, 396–402, 409, 419, 439– Incapacity, 101, 107, 109, 113, 114, 262, 343, 446, 457, 467–469, 481, 485–487, 490, 491, 371, 372, 374–377, 382–385, 390, 660, 801, 494–496, 499, 500, 502, 507–509, 514, 519, 803, 823 569, 602 Incidental bene — iciary, 820, 825, 832 Incidental damages, 728–732, 734–739, 748, F 756, 763, 765, 766, 768, 775, 782, 788, 812 Failure o — mutual assent, 52–54, 62, 64, 315 In — ancy, 235, 236, 371–373, 375, 376, 379, 382 Fairness theory, 19 Installment contracts, 606, 611–613, 753 Firm o —
er, 108–110, 113 Intoxication, 262, 371, 375, 376, 392 Fitness — or a particular purpose, 160, 174, Intrinsic evidence, 393, 396–398, 400, 401, 512, 519, 522–525, 527, 529, 534, 548, 413, 414, 423, 424, 439, 442, 446, 496, 499, 553–555, 560–562 500, 509, 519, 567, 573, 597 Forbearance, 50, 112, 158, 159, 170, 171, 181, Irrevocability, 78, 108, 110 183, 189, 197, 202, 208, 211, 213, 228, 236, 278, 289, 711, 793, 803 L For — eiture, 186, 489, 496, 568, 577, 578, 581, Lapse o — time, 101, 102, 106, 587 582, 608, 611, 618, 620, 626, 803, 804 Law and equity, 6, 11, 12, 243 Formal contracts, 49, 50, 267, 271, 405 Legal en — orceability, 463 Formation, 13, 37, 39, 47–50, 52, 55, 60, 64, Legal meaning rule, 417, 418 70, 78, 96, 108, 112, 113, 127, 130, 131, Liquidated damages, 378, 501, 505, 577, 791, 135–137, 144, 145, 149, 153, 227, 253, 261, 796–798, 801–805 269, 272, 275–277, 315, 329, 376, 377, 422, 447, 455, 490, 491, 530, 544, 556, 563, 564, M 572, 650, 659, 678, 682, 695, 730, 740 Mailbox rule, 113, 127, 136–139 Fraudulent misrepresentation, 330–332, 367, Mani — estation o — mutual assent, 30, 39, 48, 51, 823 53, 67, 101, 136 Frustration o — purpose, 564, 572, 657–659, Marriage, 170, 189, 200, 211, 236, 264, 265, 661, 666, 667, 675, 676, 680, 683, 823 267, 268, 363, 365, 367, 381 Material breach, 563, 564, 576, 605, 607–610, G 612, 614, 751, 752, 754 General terms rule, 415, 418 Material — act, 53, 62, 302, 308, 311, 315, 321, Gi — ts, 15, 161, 162, 168, 183, 207, 208, 211, 322, 324, 325, 333–335, 351, 357, 360, 361, 213, 218, 223–225, 242, 243, 249 586, 589, 832 Good — aith and — air dealing, 96, 165, 167, 294, Material misrepresentation, 332, 336, 346, 335, 340, 419, 450, 476, 554, 560, 561, 580, 350, 352, 355 608, 706 Meeting o — the minds, 21, 37, 39, 46, 51, 52, Gratuitous promise, 161, 167, 176, 214, 250, 62, 97, 107, 124, 140, 314, 509, 716, 799 267 Mental illness, 371, 372, 374–376, 382, 383, Guardianship, 262, 371, 372, 375, 376 385, 388, 471 Merchantability, 34, 160, 174, 510, 512, 519, I 521–524, 526, 527, 529, 536–538, 540, Illusory promise, 164, 165, 167 545–549, 551, 552, 555, 561 Implied conditions, 566, 568, 569, 576, 595, Mirror image rule, 128–130, 140, 141, 146, 606, 611, 614, 615, 617, 620, 623 147, 150 Implied contract, 245, 467, 468 Mistake, 29, 52, 53, 153, 221, 222, 231, 252, Impossibility, 270, 408, 657–660, 662, 666, 253, 261, 296, 307–316, 318–328, 332, 335, 667, 670, 674, 676–678, 682, 823 351, 356, 359, 360, 453, 481, 490, 491, 495, Impracticability, 564, 572, 657–662, 666, 676, 497, 498, 503, 526, 606, 608, 629, 670, 699, 679, 680, 693, 823 761, 771, 799, 816, 817, 823 842 Index
Mistranscription, 313, 314, 328 Per
ormance, 11, 12, 28, 30–33, 37, 47, 48, Modi — ication, 123, 132, 140, 159, 201, 534, 51, 55, 61, 67, 72, 77, 78, 82, 83, 85, 89, 90, 539, 564, 590, 689–694, 698, 700, 701, 94, 98, 110–113, 127, 128, 134, 135, 150, 706–708, 710, 712, 713, 720, 739, 823 151, 155, 156, 159, 160, 165, 170, 175, 188, Money damages, 290, 525, 583, 676, 680, 724, 202, 218, 225, 250, 269–271, 277, 279, 280, 727, 728, 739, 747, 756–758, 777, 778, 782, 284, 287–289, 291, 294, 298, 299, 394, 395, 783, 793, 800, 810, 811, 814, 816 397–401, 403, 419, 420, 427, 428, 439–442, Mutual mistake, 53, 308, 310, 311, 314, 315, 446, 457–461, 463–467, 469, 472, 491, 494, 319, 320, 322, 323, 328, 799, 816, 817 495, 504, 512, 514, 515, 517, 526, 530, 532, 537, 546, 552, 555, 563–571, 573, 575–577, N 579–584, 586–589, 594, 596, 598–602, Negative covenants, 794, 795 605–623, 626–629, 632, 633, 635–639, 641, Negotiated terms rule, 417 643–645, 647, 651–654, 657–666, 670–672, Nominal consideration, 109, 167, 168, 692, 674, 676–680, 682–684, 687, 690, 691, 693, 706 695–698, 700, 708, 711, 712, 718, 719, 724, Nominal damages, 624, 627, 628, 729, 734, 725, 728–732, 738, 739, 747–753, 758–761, 799, 800 764, 765, 770, 774, 788, 791–793, 795, 796, Novation, 689, 696–698, 714, 719 800, 804, 805, 807–818, 820, 823, 829 Physical compulsion, 337, 338, 340, 366 O Plain meaning rule, 409, 413, 414, 418 Objectivity, 21, 499 Power o — acceptance, 69, 70, 80, 88, 89, 91, O —
er, 8, 14, 20, 31, 32, 35–39, 42, 46, 51, 54, 101–107, 109, 113–115, 127 55, 58, 60, 61, 63, 67, 69–73, 75–85, 87–96, Preliminary negotiations, 46, 69–71, 78, 95, 98, 99, 101–125, 127–133, 136, 138–151, 397, 398, 491, 497, 500, 508, 516 158, 162, 167, 181, 191, 204, 224, 227, Privity, 725, 819, 824 245, 251, 274, 287, 290, 292, 317, 318, 371, Prohibitory injunction, 793, 794 374–377, 419, 439, 456, 458, 460, 494, 503, Promise, 3, 17–20, 27–33, 35, 37, 39–43, 45, 513, 532, 537, 548, 585–587, 589, 590, 604, 47–51, 72, 77–79, 90, 91, 94, 108–113, 128, 606, 608, 610, 616, 620, 626, 633, 639, 650, 154–171, 175–179, 181–200, 202–204, 659, 690, 705, 717, 732, 733, 775, 794, 798 206, 208, 209, 211–214, 217–243, 246, O —
er and acceptance, 54, 85, 115, 128, 130, 247, 249–253, 255–259, 266, 267, 269, 133, 140, 146, 650 277–280, 285, 289–291, 305, 313, 345, 373, O —
ers — or rewards, 77, 78 393, 409, 420, 448–450, 482–484, 487, 489, Option contract, 108–113, 136 492–495, 498, 501, 502, 514, 519–522, 527, 528, 534, 536, 548, 549, 551, 552, 563–565, P 568, 571, 573–575, 577, 581, 583, 584, Parol evidence, 64, 295–297, 394, 398, 427, 587–591, 595–597, 602, 604, 605, 607, 614, 437, 439, 446, 450, 451, 453, 454, 465, 470, 617, 619, 623, 624, 633, 643, 645, 651, 670, 481, 482, 486–492, 494, 495, 497–500, 673, 690–693, 697, 704, 705, 708, 710–712, 502–507, 511–513, 517, 518, 527–529, 719, 723, 724, 727, 732, 733, 740, 743, 744, 809, 810 758, 787, 806, 819, 820, 822, 823, 832, 833 Part per — ormance, 113, 277, 279, 280, 288, Promissory acceptance, 111 594, 795 Promissory estoppel, 18, 50, 154, 174, 177, Partial breach, 700 181–192, 195–200, 203, 204, 214, 216, 228, Party admission, 271, 283 233, 259, 261, 277–279, 285, 286, 292, 304, Past consideration, 163, 164, 168, 224, 227, 447, 451, 693 251–253 Promissory restitution, 50, 154, 163, 164, Per — ect tender rule,, 606, 607, 611–615, 752– 217–222, 224–229, 233, 237, 250, 258, 259 754, 770–772, 774 Punitive damages, 204, 350, 727, 745 Index 843
R T Recission, 698 Total breach, 610, 611, 614, 635, 636, 638, Rejection, 101–104, 109, 113–115, 117, 119, 639, 641, 700, 746 120, 122, 123, 129, 135–137, 535, 598–601, Trade usage, 394, 397–401, 406, 419, 420, 606, 613, 753, 754, 758, 770–772, 774 442–444, 446, 457–461, 463, 464, 466, 512, Reliance damages, 188, 724, 727, 732, 733, 517, 597, 678 739, 796 Reliance on the promise, 176, 186, 189, 190, U 194, 279, 285, 708, 823 Unconscionable, 288–290, 312, 422, 423, 527, Reliance theory, 18 537–545, 547, 555, 556, 676, 789, 790, 797, Remedy, 11, 12, 18, 28, 32, 36, 72, 78, 156, 798, 801 173, 183, 188, 194, 210, 211, 238, 278, 289, Undue in — luence, 262, 329, 342, 343, 345, 363, 290, 320, 326, 510, 515, 525, 530, 611, 616, 365, 368, 370, 376, 385, 388, 389, 707, 799 620, 625–627, 633, 638, 643, 660, 699, 700, Unen — orceable, 29, 64, 98, 112, 155, 156, 175, 706, 723–725, 727, 746, 748, 749, 754, 755, 192, 214, 218, 220, 223, 224, 227, 233, 241, 757, 762, 771, 774, 779, 792, 793, 795–798, 253, 259, 261, 266, 272, 277, 278, 283, 285, 800, 807–814 287, 289, 290, 295, 344, 345, 382, 393, 449, Repudiation, 271, 281, 282, 341, 564, 613, 505, 691, 697, 710–712, 797, 798 635–641, 644, 646, 647, 653, 656, 686, 735, Unilateral mistake, 53, 311–314, 323–327, 737, 746, 765 360 Rescission, 11, 318, 319, 325, 328, 346, 350, Unjust enrichment, 36, 38, 154, 162, 197, 217, 352, 355, 360, 368, 526, 564, 692, 698–700, 219, 222, 223, 225, 228, 229, 233, 238, 570, 725, 769–772, 799, 816, 817, 823 577, 723, 724, 791, 795, 796 Restitution interest, 723, 724, 795 Revocation, 101, 104–106, 109, 111–113, 193, V 606, 611–613, 754, 755, 770–772 Void, 141, 143, 144, 218, 227, 239, 255, 256, 258, 262, 296, 315, 322, 336–340, 345, 351, S 367, 373, 377, 381, 392, 555, 585, 670, 687, Sale o — goods, 15, 16, 33, 34, 109, 130, 265, 705, 797, 804, 823 270, 271, 273, 277, 280, 281, 283, 284, 356, Voidable contractual duties, 371, 372, 374, 357, 399, 486, 576, 606, 650, 657, 661, 662, 375, 385 708, 712, 734, 770–772, 779, 781 Voluntary agreement, 3, 54, 221, 337, 371, Silence, 331, 333–336, 361, 362, 620, 639, 640, 376 656 Special manu — acture, 271, 281, 282 W Speci — ic per — ormance, 11, 12, 47, 55, 61, 67, Waiver, 170, 422, 452, 459, 460, 464, 515, 564, 85, 151, 188, 202, 279, 280, 294, 532, 583, 574, 577–579, 582, 594, 700, 704, 708 584, 586, 589, 724, 725, 750, 761, 791–793, Warranties, 31, 34, 69, 127, 133, 160, 357, 359, 800, 807–818 394, 421, 488, 503, 510–512, 515, 519–523, Statute o —
rauds, 28, 93, 109, 198, 218, 227, 525–530, 532, 534–547, 549–553, 555, 239, 241, 258, 261, 263–281, 283–302, 304, 560, 562, 757 305 Whole agreement rule, 416, 418 Subjectivity, 21, 22 Substantial per — ormance, 563, 568, 570, 575, 576, 605–607, 609–611, 613–615, 618, 620–623, 626, 628, 751, 770, 774 Suretyship, 264–267