The law of contracts is vast and ancient. This statutory supplements strives to provide the most essential pieces of modern contract law so students are not puzzled. To focus on critical references for learning contract law basics, I selected black-letter rules that all law students show know to succeed in a first-year course and to pass the bar exam. Selection requires judgments. Some will find this collection too long while others will find it too short. I hope that most readers find it to be just right. But to find these selections appropriate, you must approach them in the proper manner.

To begin, let’s establish what you are reading. Within these pages are rules, comments, and illustrations from the Restatement, Second, Contracts (R. 2d Contracts) and the Uniform Commercial Code (U.C.C.) Article 2, Sales. These are the two core statotury-like materials for most contract law courses. Contract law is state law, so each state will have its own contract law. Yet R. 2d Contracts and U.C.C. explain the general rules of law in virtually all U.S. jurisdictions. You are thus reading the closest approximation of the black-letter rules of “national” contract law.

The Restatement is effectively a treatise describing common law amid U.S. jurisdictions. You may have learned that treatises are non-binding. Yet R. 2d is a highly persuasive treatise that has almost the force of law in jurisdictions that follow it. Restatement rules, therefore, can be treated as black-letter rules of law in most contract law classrooms. The U.C.C. is a model statute, but it has been adopted in predominant part by virtually every U.S. jurisdiction, so it reflects binding statutory law across the U.S.

The Restatement authors helpfully provided comments and illustrations that make meaning of the rules. The comments explain the rules. Black-letter rules do not necessarily mean what they say to a lay person. Lawyers must read technical rules technically. The comments are your guide to the meaning of contract law rules in the terms and norms of the profession of contract law. On that note: welcome to the legal profession!

I recommend that students read at least the headings of every comment and maintain a functional knowledge regarding how these comments impact the application of the rules. I put these comment-heading in the Index in the back of this book so students are encouraged to become aware of these rule explanations. These explanations often color or change the patent meaning of rules, so you must be aware of them. The comment-headings are a sort of road map showing where you must sometimes take analysis in an unusual or counterintuitive direction.

The illustrations are often derived from quintessential cases. They show how the comments’ explanations of rules are applied in specific instances. If you find yourself confused about how the rules function, consider the illustrations to visualize the application of black-letter rules as explained by specific comments. The illustrations typically demonstrate how a specific comment impacts the plain meaning of the black-letter rule to which it corresponds; for this reason, I have listed the illustrations within corresponding comments. Illustrations often reflect the key facts from cases often taught in contract law courses. If you pay attention to the illustrations, recognizing key facts and identifying what rule and comment it illuminates, you will glean insights about important cases.

I have also included U.C.C. provisions where the statutory law deviates from the common law in an important way. As you probably know, statutes trump common law where they apply. Likewise, the U.C.C. trumps R. 2d Contracts principles where it applies. But the law of sales does not apply to every contract, nor does it provide important distinctions to every cases where it does apply. For this reason, I have included the U.C.C. only where it makes a material difference regarding cases you are likely to see in law school or on the bar exam.

Whenever you read a rule, you should attempt to understand it. One tried and true method for understanding rules is to “elementize” them, meaning, to break the rule apart into specific elements. By writing each rules in this manner, you begin to internalize the meaning of those rules, which will help you apply, analyze, and judge them later.

Finally, please note that rules, comments, and illustrations that follow are the intellectual property of the American Legal Institute and the National Conference of Commissioners on Uniform State Laws. I purchased limited rights to reproduce these rules for you, but you cannot lawfully copy or distribute them further without authorization from the ALI or ULC.

Good luck in your legal studies!

/s/ Seth C. Oranburg

Introduction

A preliminary question lawyers often answer prior to legal analysis of issues regarding contracts, what law applies?

While even a basic primer on the relationship between American common law and statutory is beyond the scope of this doctrine-specific Statutory Supplement, one key concept that applies here is that statutory law (which is enacted by legislatures) supercedes common law (which is made by judges) when statutory law applies. Thus is it important to know when statutory law applies to a contract, because that statutory law may supercede the common law principles of contracts and the specific terms of the contract itself. If a lawyer does not realize that statutory law governs some contract, that lawyer risks misinterpreting how courts will understand and enforce that contract.

Many statutory laws might apply to contracts because contracts can pertain to many different subject matters. For example, an employment contract is probably subject to the Fair Labor Standard Act of 1938, an investment contract is probably subject to the Securities Act of 1933, a contract for marketing the sale of a single-family home in New Hampshire is probably subject to the New Hampshire Real Estate Practice Act of 1994, and a contract for weatherizing a residential duplex in Vermont is probably subject to the Vermont Act 182 of 2022.

Introductory classes in contract law obviously cannot explore every different type of contract that is subject to some statute. However, introductory contracts classes often do discuss sales contracts, because the legislatures of all fifty states and many other U.S. jurisdiction adopted very similar or identical versions of statutory laws regarding contracts for sales of goods. The question asked and answered by the rules in this Statutory Supplement thus regard whether the law of sales of goods applies to a contract.

The answer to this question, however, is no longer uniform across U.S. jurisdiction. While all jurisdiction seem to agree as to basic definition such as what are goods and what are sales, commercial reality is often less black-and-white than black-letter law makes it appear. In particular, the question is difficult when a single contract regards both things are goods and things that are not. These are called mixed contracts. For example, a contract for delivery and installation of an air conditioning unit regards both goods (the unit) and services (its installation).

Until recently, common law answered the question of what law applies to mixed contracts by employing the predominant purpose test, which asks whether the contract is primarily for goods or for services. However, in 2022, the Uniform Law Commision promulgated an amended model statute of the law of sales that includes a new concept called a “hybrid transaction.” Currently, many state legislatures are deciding whether to adopt this amendment as part of a larger overhaul that modernizes commercial law with new concepts involving digital assets and electronic records. If history is any guide, it seems more likely than not that all state will eventually adopt some version of these new rules within the next few years.

While most of the 2022 amendments to commercial law pertain to other traditional law school courses such a secured transactions and to new concepts such as cryptocurrency, the modern hybrid transaction concept in one that most law students should presently consider as part of their introduction to contract law, because that concept will probably be effective in most jurisdiction for most of their careers, while they must also know the traditional predomindent purpose test, because that test will remain in effect in some places and will probably be tested on bar exams for at least the next few years. For this reason, this Statutory Supplement includes both the modern hybrid transaction concept and the traditional purpose test.

To limit confusion as to what test is old and what test is new, this Statutory Supplement cites to relevant state statutes in two jurisdiction. Citations to New Hampshire law demonstrate the modern hybrid transaction concept, because New Hampshire was one of the first jurisdiction to adopt the 2022 amendments, while citations to Vermont law demonstrate the traditional predominant purpose test, because Vermont is a jurisdiction that was not yet introduced a bill to adopt the 2022 amendments. Note that “N.H.R.S.A.” refers to the New Hampshire Revised Statutes Annotated, which contains New Hampshire’s adoption of the 2022 UCC amendments, and that “V.S.A.” refers to Vermot Statutes Annotated, which contains Vermont’s pre-2022 adoption of the UCC.

9A V.S.A. § 2-102 – U.C.C. Scope (pre-2022 amendments).

Unless the context otherwise requires, this Article [2] applies to transactions in goods;

it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

Editor’s note. “Goods” are defined by UCC § 2-105(1). While the U.C.C. definition is paramount when determining whether the U.C.C. applies to a contract, students may sharpen their understanding of this general term with some more specific examples.

Black’s Law Dictonary defines goods as “tangible or movable personal property other than money; esp., articles of trade or items of merchandise.” This definition, dating back to the 12^th^ century. This definition generally accords with the U.C.C. definition and includes: basic goods (goods that are used to make other goods), bulk goods (unpackaged goods that are stored, transported, and sold in variable, usually very large, quantities), bulky goods (goods that are obviously difficult to move because of their nature, their number, or their location), capital goods (goods such as equipment and machinery used for the production of other goods or services, a.k.a. industrial goods), commingled goods (goods that are physically mixed or united with other goods in such a way that their individual identity is lost in a product or undifferentiated mass), complementary goods (products that are typically used together, such as pancake syrup and pancake mix, or motion-picture projectors and film, consumer goods (goods bought or used primarily for personal, family, or household purposes, and not for resale or for producing other goods), customers' goods (goods belonging to the customers of a casualty-insurance policyholder), defective goods (goods that are imperfect in some material respect), distressed goods (damaged goods sold at unusually low prices or at a loss), durable goods (consumer goods that are designed to be used repeatedly over a long period; especially large things (such as cars, televisions, and furniture) that most people do not buy often, a.k.a. hard goods), finished goods (manufactured goods that are complete and ready for sale or distribution to consumers), fungible goods (goods that, by nature or trade usage, are the equivalent of any other like unit, such as coffee or grain), future goods (goods that will come into being, such as those yet to be manufactured), goods in transit (goods that have been shipped by the seller but have not yet been received by the purchaser), goods used in manufacture (goods or materials used as an integral part of manufacturing other goods, goods or materials consumed incidentally during the manufacturing process, or goods that are necessary to the existence of the manufacturing process), gray-market goods (goods bearing valid trademarks that are manufactured abroad and imported into the United States to compete with domestically manufactured goods bearing the same valid trademarks, a.k.a. parallel imports), household goods (goods that are used in connection with a home), mobile goods (goods that are normally used in more than one jurisdiction (such as shipping containers and road-construction machinery) and that are held by the debtor as equipment or leased by the debtor to others), nonconforming goods (goods that fail to meet contractual specifications, allowing the buyer to reject the tender of the goods or to revoke their acceptance), ordinary goods (goods that are anything other than mobile goods, minerals, or goods covered by a certificate of title), prize goods (goods captured at sea during wartime), and soft goods (consumer goods, such as clothing, that are not durable goods).

The U.C.C. may not apply to stolen goods (goods that have been wrongfully taken from their owner and goods acquired by robbery, theft, or larceny). See generally Omri Ben-Shahar, Property Rights in Stolen Goods: An Economic Analysis (2010).

Note that the legal definition of goods does not accord with the economic definition, which, according to the Cambridge Dictionary, means “a product or service that a person or organization is willing to pay for.” The U.C.C. specifically excludes services from its scope. Meanwhile, the legal definition of goods can include what economists define as bads, which are things with negative value, such as refuse, see Hal Varien, Intermediate Microeconomics, at 41 (2006), where one party pays to have the bads removed, see Pennsy Supply, Inc. v. Am. Ash Recycling Corp., 2006 PA Super 54 (2006). The legal definition of goods is thus in some ways narrower and in other ways broader than the economic definition.

N.H.R.S.A. 382-A § 2-102 – U.C.C. Scope (post-2022 amendments).

(1) Unless the context otherwise requires, and except as provided in subsection (3), this Article [2] applies to transactions in goods and, in the case of a hybrid transaction, it applies to the extent provided in subsection (2).

(2) In a hybrid transaction:

(a) If the sale-of-goods aspects do not predominate, only the provisions of this Article which relate primarily to the sale-of-goods aspects of the transaction apply, and the provisions that relate primarily to the transaction as a whole do not apply.

(b) If the sale-of-goods aspects predominate, this Article applies to the transaction but does not preclude application in appropriate circumstances of other law to aspects of the transaction which do not relate to the sale of goods.

(3) This Article does not:

(a) apply to a transaction that, even though in the form of an unconditional contract to sell or present sale, operates only to create a security interest; or

(b) impair or repeal a statute regulating sales to consumers, farmers, or other specified classes of buyers.

Compare 9A V.S.A. § 2-102 with N.H.R.S.A. 382-A § 2-102.

Editor’s note: Language added by the 2022 amendmenet is indiciated with [underline]{.underline}. Language deleted by the 2022 amendmenet is indiciated with ~~strikethrough~~.

[(1)]{.underline} Unless the context otherwise requires, [and except as provided in subsection (3),]{.underline} this Article [2] applies to transactions in goods~~; it does not apply to any~~ [and, in the case of a hybrid]{.underline} transaction, ~~which although~~ [it applies to the extent provided in subsection (2)]{.underline}.

[(2) In a hybrid transaction:]{.underline}

[(a) If the sale-of-goods aspects do not predominate, only the provisions of this Article which relate primarily to the sale-of-goods aspects of the transaction apply, and the provisions that relate primarily to the transaction as a whole do not apply.]{.underline}

[(b) If the sale-of-goods aspects predominate, this Article applies to the transaction but does not preclude application in appropriate circumstances of other law to aspects of the transaction which do not relate to the sale of goods.]{.underline}

[(3) This Article does not:]{.underline}

[(a) apply to a transaction that, even though]{.underline} in the form of an unconditional contract to sell or present sale ~~is intended to operate~~, [operates]{.underline} only as [to create]{.underline} a security transaction ~~nor does this article~~ [interest; or]{.underline}

[(b)]{.underline} impair or repeal ~~any~~ [a]{.underline} statute regulating sales to consumers, farmers[,]{.underline} or other specified classes of buyers.

[]{#_Toc161928112 .anchor}N.H.R.S.A. 382-A § 2-104 – Definitions: “Merchant”; “Between Merchants”.

(1) “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

…

(3) “Between merchants” means in any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

Editor’s note: The UCC here recognizes that different law should apply not only based on different subject matter of contracts (e.g., goods versus services) but also based on different parties to contacts (e.g., merchants versus non-merchants). The law of sales sometimes treats contracts by or between professional “merchants” differently than contracts for the same goods when one or both parties are not merchants. Thus, it is important to recognize which law applies to a given contract not only by evaluating the subject matter of that contract but also by evaluating the nature of the parties to that contract.

[]{#_Toc161928113 .anchor}N.H.R.S.A. 382-A § 2-105(1) – Definitions: “Goods”.

“Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than:

• the money in which the price is to be paid,

• investment securities (Article 8) and

• things in action.

“Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty.

Editor’s note: Older versions of the UCC used to refer to “chattels personal,” but that term was changed because the concept of chattels personal can refer to an intangible right such as intellectual property. For example, a person can own a patent, and some intellectual property law treats such patents as chattels personal. Patents, however, are not subject the UCC Articlce 2. Note that the language “moveable” and “identifiable” requires good to be tangible. Contracts involving intellectual property are thus beyond the scope of Article 2.

Neither unborn young or animals nor growing crops are movable and identifiable at the time of sale, so they would be excluded from Article 2 under the definition of good unless the UCC specifically included them, as it has done. There appears to be no clear theoretical reason why yet-to-be-grown crops are included in Article 2, while yet-to-be-manufactured goods are excluded. This appears to be a historical curiosity.

While yet-to-be-grown crops are included as “goods” and thus made subject to the UCC Article 2, investment securities are specifically excluded, so argricultural derivates, which are financial instruments based on the value of crops but not for the crops themselves, are excluded from Article 2. Distinguishing between argicultures derivatives, including so-called futures such as forward contracts, one the one hand, and sales contract for growing crops, on the other hand, can be difficult in close cases. However, in most cases, sales contracts for growing crops are distinguishable from investment contracts for futures in two ways: first, sales contracts must involve already-planted crops, whereas investment contract may involve to-be-planted crops; and, second, sales contracts typically require a particular farmer to sell their own crops (e.g., “all the corn Farmer Brows grows this year for $5 per bushell”), whereas investment contracts typically feature a promise to buy or sell a certain amount commody for a specific price in the future (e.g., “10,000 bushels of corn for $6.50 per bushell on September 27, 2029).

[]{#_Toc161928114 .anchor}N.H.R.S.A. 382-A § 1-201(b) – General Definitions: Agreement; Contract

(3) “Agreement”, as distinguished from “contract”, means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in Section 1-303.

…

(12) “Contract”, as distinguished from “agreement”, means the total legal obligation that results from the parties’ agreement as determined by [the Uniform Commercial Code] as supplemented by any other applicable laws.

Editor’s note: Many students of contract law are surprised to learn that a contract does not necessarily mean a written instrument. In legal terms, contract means the legal obligation between the parties. It does not mean the writing per se. The writing may contain unenforceable terms that do not obligate the parties, or the writing may be invalid for other reasons. An oral agreement, on the other hand, may bind parties to obligations, even though those obligations were never memorialized in writing. While contracts in writing are required in specific instances, the common law and the UCC clearly do not require them in all cases.

Chapter 1 | What Is a Contract?

[]{#_Toc161928116 .anchor}R. 2d Contracts § 1 – Contract Defined

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

a. Other meanings.

The word “contract” is often used with meanings different from that given here. It is sometimes used as a synonym for “agreement” or “bargain.” It may refer to legally ineffective agreements, or to wholly executed transactions such as conveyances; it may refer indifferently to the acts of the parties, to a document which evidences those acts, or to the resulting legal relations. In a statute the word may be given still other meanings by context or explicit definition. As is indicated in the Introductory Note to the Restatement of this Subject, definition in terms of “promise” excludes wholly executed transactions in which no promises are made; such a definition also excludes analogous obligations imposed by law rather than by virtue of a promise.

b. Act and resulting legal relations.

As the term is used in the Restatement of this Subject, “contract,” like “promise,” denotes the act or acts of promising. But, unlike the term “promise,” “contract” applies only to those acts which have legal effect as stated in the definition given. Thus the word “contract” is commonly and quite properly also used to refer to the resulting legal obligation, or to the entire resulting complex of legal relations. Compare U.C.C. § 1-201(11), defining “contract” in terms of “the total legal obligation which results from the parties’ agreement.”

c. Set of promises.

A contract may consist of a single promise by one person to another, or of mutual promises by two persons to one another; or there may be, indeed, any number of persons or any number of promises. One person may make several promises to one person or to several persons, or several persons may join in making promises to one or more persons. To constitute a “set,” promises need not be made simultaneously; it is enough that several promises are regarded by the parties as constituting a single contract, or are so related in subject matter and performance that they may be considered and enforced together by a court.

d. Operative acts other than promise.

The definition does not attempt to state what acts are essential to create a legal duty to perform a promise. In many situations other acts in addition to the making of a promise are essential, and the formation of the contract is not completed until those acts take place. For example, an act may be done as the consideration for a contract (see § 71), and may be essential to the creation of a legal duty to perform the promise (see § 17). Similarly, delivery is required for the formation of a contract under seal (see § 95). Such acts are not part of the promise, and are not specifically included in the brief definition of contract adopted here.

e. Remedies.

The legal remedies available when a promise is broken are of various kinds. Direct remedies of damages, restitution and specific performance are the subject of Chapter 16. Whether or not such direct remedies are available, the law may recognize the existence of legal duty in some other way such as recognizing or denying a right, privilege or power created or terminated by the promise.

1. A orally agrees to sell land to B; B orally agrees to buy the land and pays $ 1000 to A. The agreement is unenforceable under the Statute of Frauds. B’s right to restitution of the $ 1000, however, is governed by the same rules as if the agreement were enforceable. B has a right to recover the $ 1000 paid if A refuses to convey the land, but not if A is ready and willing to convey. By virtue of this indirect recognition of the duty to convey, the agreement is a contract.

f. Varieties of contracts.

The term contract is generic. As commonly used, and as here defined, it includes varieties described as voidable, unenforceable, formal, informal, express, implied (see Comment a to § 4), unilateral, bilateral. In these varieties neither the operative acts of the parties nor the resulting relations are identical.

g. “Binding promise.”

A promise which is a contract is said to be “binding.” As the term “contract” is defined, a statement that a promise is binding does not necessarily mean that any particular remedy is available in the event of breach, or indeed that any remedy is available. Because of the limitations inherent in stating or illustrating rules for the legal relations resulting from promises, it frequently becomes necessary to indicate that a legal duty to perform arises from the facts stated, assuming the absence of other facts. In order to avoid the connotation that the duty stated exists under all circumstances, the word “binding” or a statement that the promisor is “bound” is used to indicate that the duty arises if the promisor has full capacity, if there is no illegality or fraud in the transaction, if the duty has not been discharged, and if there are no other similar facts which would defeat the prima facie duty which is stated.

[]{#_Toc161928117 .anchor}R. 2d Contracts § 2 – Promise; Promisor; Promisee; Beneficiary

(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

(2) The person manifesting the intention is the promisor.

(3) The person to whom the manifestation is addressed is the promisee.

(4) Where performance will benefit a person other than the promisee, that person is a beneficiary.

a. Acts and resulting relations.

“Promise” as used in the Restatement of this Subject denotes the act of the promisor. If by virtue of other operative facts there is a legal duty to perform, the promise is a contract; but the word “promise” is not limited to acts having legal effect. Like “contract,” however, the word “promise” is commonly and quite properly also used to refer to the complex of human relations which results from the promisor’s words or acts of assurance, including the justified expectations of the promisee and any moral or legal duty which arises to make good the assurance by performance. The performance may be specified either in terms describing the action of the promisor or in terms of the result which that action or inaction is to bring about.

b. Manifestation of intention.

Many contract disputes arise because different people attach different meanings to the same words and conduct. The phrase “manifestation of intention” adopts an external or objective standard for interpreting conduct; it means the external expression of intention as distinguished from undisclosed intention. A promisor manifests an intention if he believes or has reason to believe that the promisee will infer that intention from his words or conduct. Rules governing cases where the promisee could reasonably draw more than one inference as to the promisor’s intention are stated in connection with the acceptance of offers (see §§ 19 and 20), and the scope of contractual obligations (see §§ 201, 219).

c. Promise of action by third person; guaranty.

Words are often used which in terms promise action or inaction by a third person, or which promise a result obtainable only by such action. Such words are commonly understood as a promise of conduct by the promisor which will be sufficient to bring about the action or inaction or result, or to answer for harm caused by failure. An example is a guaranty that a third person will perform his promise. Such words constitute a promise as here defined only if they justify a promisee in an expectation of some action or inaction on the part of the promisor.

d. Promise of event beyond human control; warranty.

Words which in terms promise that an event not within human control will occur may be interpreted to include a promise to answer for harm caused by the failure of the event to occur. An example is a warranty of an existing or past fact, such as a warranty that a horse is sound, or that a ship arrived in a foreign port some days previously. Such promises are often made when the parties are ignorant of the actual facts regarding which they bargain, and may be dealt with as if the warrantor could cause the fact to be as he asserted. It is then immaterial that the actual condition of affairs may be irrevocably fixed before the promise is made.

Words of warranty, like other conduct, must be interpreted in the light of the circumstances and the reasonable expectations of the parties. In an insurance contract, a “warranty” by the insured is usually not a promise at all; it may be merely a representation of fact, or, more commonly, the fact warranted is a condition of the insurer’s duty to pay (see § 225(3)). In the sale of goods, on the other hand, a similar warranty normally also includes a promise to answer for damages (see U.C.C. § 2-715).

1. A, the builder of a house, or the inventor of the material used in part of its construction, says to B, the owner of the house, “I warrant that this house will never burn down.” This includes a promise to pay for harm if the house should burn down.

2. A, by a charter-party, undertakes that the “good ship Dove,” having sailed from Marseilles a week ago for New York, shall take on a cargo for B on her arrival in New York. The statement of the quality of the ship and the statement of her time of sailing from Marseilles include promises to pay for harm if the statement is untrue.

e. Illusory promises; mere statements of intention.

Words of promise which by their terms make performance entirely optional with the “promisor” whatever may happen, or whatever course of conduct in other respects he may pursue, do not constitute a promise. Although such words are often referred to as forming an illusory promise, they do not fall within the present definition of promise. They may not even manifest any intention on the part of the promisor. Even if a present intention is manifested, the reservation of an option to change that intention means that there can be no promisee who is justified in an expectation of performance.

On the other hand, a promise may be made even though no duty of performance can arise unless some event occurs (see §§ 224, 225(1)). Such a conditional promise is no less a promise because there is small likelihood that any duty of performance will arise, as in the case of a promise to insure against fire a thoroughly fireproof building. There may be a promise in such a case even though the duty to perform depends on a state of mind of the promisor other than his own unfettered wish (see § 228), or on an event within the promisor’s control.

3. A says to B, “I will employ you for a year at a salary of $ 5,000 if I go into business.” This is a promise, even though it is wholly optional with A to go into business or not.

f. Opinions and predictions.

A promise must be distinguished from a statement of opinion or a mere prediction of future events. The distinction is not usually difficult in the case of an informal gratuitous opinion, since there is often no manifestation of intention to act or refrain from acting or to bring about a result, no expectation of performance and no consideration. The problem is frequently presented, however, whether words of a seller of goods amount to a warranty. Under U.C.C. § 2-313(2) a statement purporting to be merely the seller’s opinion does not create a warranty, but the buyer’s reliance on the seller’s skill and judgment may create an implied warranty that the goods are fit for a particular purpose under U.C.C. § 2-315. In any case where an expert opinion is paid for, there is likely to be an implied promise that the expert will act with reasonable care and skill.

A promise often refers to future events which are predicted or assumed rather than promised. Thus a promise to render personal service at a particular future time commonly rests on an assumption that the promisor will be alive and well at that time; a promise to paint a building may similarly rest on an assumption that the building will be in existence. Such cases are the subject of Chapter 11. The promisor may of course promise to answer for harm caused by the failure of the future event to occur; if he does not, such a failure may discharge any duty of performance.

4. A, on seeing a house of thoroughly fireproof construction, says to B, the owner, “This house will never burn down.” This is not a promise but merely an opinion or prediction. If A had been paid for his opinion as an expert, there might be an implied promise that he would employ reasonable care and skill in forming and giving his opinion.

g. Promisee and beneficiary.

The word promisee is used repeatedly in discussion of the law of contracts, and it cannot be avoided here. In common usage the promisee is the person to whom the promise is made; as promise is defined here, the promisee might be the person to whom the manifestation of the promisor’s intention is communicated. In many situations, however, a promise is complete and binding before the communication is received (see, for example, §§ 63 and 104(1)). To cover such cases, the promisee is defined here as the addressee. As to agents or purported agents of the addressee, see § 52 Comment c.

In the usual situation the promisee also bears other relations to the promisor, and the word promisee is sometimes used to refer to one or more of those relations. Thus, in the simple case of a loan of money, the lender is not only the addressee of the promise but also the person to whom performance is to be rendered, the person who will receive economic benefit, the person who furnished the consideration, and the person to whom the legal duty of the promisor runs. As the word promisee is here defined, none of these relations is essential.

Contractual rights of persons not parties to the contract are the subject of Chapter 14. The promisor and promisee are the “parties” to a promise; a third person who will benefit from performance is a “beneficiary.” A beneficiary may or may not have a legal right to performance; like “promisee”, the term is neutral with respect to right and duties. A person who is entitled under the terms of a letter of credit to draw or demand payment is commonly called a beneficiary, but such a person is ordinarily a promisee under the present definition.

[]{#_Toc161928118 .anchor}R. 2d Contracts § 3 – Agreement Defined; Bargain Defined

An agreement is a manifestation of mutual assent on the part of two or more persons. A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.

a. Agreement distinguished from bargain.

Agreement has in some respects a wider meaning than contract, bargain or promise. On the other hand, there are [quasi] contracts which do not require agreement [such as promises supported by promissory estoppel or promissory restitution]. The word “agreement” contains no implication that legal consequences are or are not produced. It applies to transactions executed on one or both sides, and also to those that are wholly executory. The word contains no implication of mental agreement. Such agreement usually but not always exists where the parties manifest assent to a transaction.

b. Manifestation of assent.

Manifestation of assent may be made by words or by any other conduct. Even silence in some circumstances is such a manifestation. Compare the definition of “agreement” in U.C.C. § 1-201(3).

c. Bargain distinguished from agreement.

Bargain has a narrower meaning than agreement, since it is applicable only to a particular class of agreements. It includes agreements which are not contracts, such as transactions where one party makes a promise and the other gives something in exchange which is not consideration, or transactions where what would otherwise be a contract is invalidated by illegality. As here defined, it includes completely executed transactions, such as exchanges of goods (barters) or of services, or sales where goods have been transferred and the price paid for them, although such transactions are not within the scope of this Restatement unless a promise is made.

d. Offer.

A bargain is ordinarily made by an offer by one party and an acceptance by the other party or parties, the offer specifying the two subjects of exchange to which the offeror is manifesting assent (see §§ 22 and 24).

e. Contract distinguished from bargain.

A contract is not necessarily a bargain. Thus, a promise to make a gift, if made under seal, may be a contract (see § 95), but it is not a bargain. Other contracts which are not bargains are the subject of §§ 82-94. Such contracts do not require manifestations of mutual assent in the form of offer and acceptance.

Chapter 2 | Capacity and Incapacity

[]{#_Toc161928120 .anchor}R. 2d Contracts § 12 – Capacity to Contract

(1) No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties. Capacity to contract may be partial and its existence in respect of a particular transaction may depend upon the nature of the transaction or upon other circumstances.

(2) A natural person who manifests assent to a transaction has full legal capacity to incur contractual duties thereby unless he is

(a) under guardianship, or

(b) an infant, or

(d) intoxicated.

a. Total and partial incapacity.

Capacity, as here used, means the legal power which a normal person would have under the same circumstances. Incapacity may be total, as in cases where extreme physical or mental disability prevents manifestation of assent to the transaction, or in cases of mental illness after a guardian has been appointed. Often, however, lack of capacity merely renders contracts voidable. Incapacity sometimes relates only to particular types of transactions; on the other hand, persons whose capacity is limited in most circumstances may be bound by particular types of transactions. In cases of partial disability, the law of mistake or of misrepresentation, duress and undue influence may be relevant.

b. Types of incapacity.

Historically, the principal categories of natural persons having no capacity or limited capacity to contract were married women, infants, and insane persons. Those formerly referred to as insane are included in the more modern phrase “mentally ill,” and mentally defective persons are treated similarly. Statutes sometimes authorize the appointment of guardians for habitual drunkards, narcotics addicts, spendthrifts, aged persons or convicts as in cases of mental illness. Even without the appointment of a guardian, civil powers of convicts may be suspended in whole or in part during imprisonment; and American Indians are for some purposes treated as wards of the United States government. The contractual powers of convicts and Indians are beyond the scope of the Restatement of this Subject. As to convicts, see Model Penal Code § 306.5.

c. Inability to manifest assent.

In order to incur a contractual duty, a party must make a promise, manifesting his intention; in most cases he must manifest assent to a bargain. The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct. Hence if physical disability prevents a person from acting, or if mental disability is so extreme that he cannot form the necessary intent, there is no contract. Similarly, even if he intends to engage in the conduct, there is no contract if the other party knows or has reason to know that he does not intend the resulting appearance of assent. In such cases it is proper to say that incapacity prevents the formation of a contract.

d. Married women.

At common law a married woman had no capacity to incur contractual duties, although courts of equity recognized a limited power with respect to property conveyed to her separate use. Modern statutes in most States have given married women full power to contract, and they are therefore omitted from the list in subsection (2) of persons who may not have full capacity. In some States, however, capacity is still denied with respect to particular types of contracts, such as contracts between husband and wife, contracts of suretyship, contracts for the sale of real property, or contracts relating to the management of community property.

e. Artificial persons.

The contractual powers of artificial persons such as corporations and governmental agencies are beyond the scope of the Restatement of this Subject. The tendency of modern legislation is to restrict the assertion of the defense of ultra vires by business corporations, and in effect to give them full capacity; what was once lack of capacity then resembles lack of authority as used in the law of agency. Where partnerships or unincorporated associations have no power to contract as such, contracts made in their names bind the members instead.

f. Necessaries.

Persons having no capacity or limited capacity to contract are often liable for necessaries furnished to them or to their wives or children. Though often treated as contractual, such liabilities are quasi-contractual: the liability is measured by the value of the necessaries rather than by the terms of the promise. The rules governing such liabilities are beyond the scope of the Restatement of this Subject.

[]{#_Toc161928121 .anchor}R. 2d Contracts § 13 – Persons Affected by Guardianship

A person has no capacity to incur contractual duties if his property is under guardianship by reason of an adjudication of mental illness or defect.

a. Rationale.

The reason for appointing a guardian of property is to preserve the property from being squandered or improvidently used. The guardianship proceedings are treated as giving public notice of the ward’s incapacity and establish his status with respect to transactions during guardianship even though the other party to a particular transaction may have no knowledge or reason to know of the guardianship: the guardian is not required to give personal notice to all persons who may deal with the ward. The control of the ward’s property is vested in the guardian, subject to court supervision; that control and supervision are not to be impaired or avoided by proof that the ward has regained his reason or has had a lucid interval, unless the guardianship is terminated or abandoned.

The rules governing contracts made by a guardian are beyond the scope of the Restatement of this Subject. A contract purporting not to bind the guardian personally but to bind the ward’s estate raises problems much like those raised by a similar contract made by a trustee. But the powers of guardians are usually defined by statute, and are ordinarily much narrower than those of trustees.

b. Non-contractual obligations.

Property under guardianship may be reached in some circumstances to redress the torts of the ward or to satisfy his quasi-contractual obligations. The guardian is not required, in order to defend the ward against contractual liability arising out of a transaction during guardianship, to restore the other party to his original position, since such a requirement might force the guardian to use other property to replace property dissipated by the ward. But the other party may be able to reclaim the consideration received by the ward if it can be found. In some cases, as where necessaries have been furnished, the other party, to avoid unjust enrichment, may recover the fair value of the consideration received by the ward.

1. A, under guardianship by reason of mental illness, buys an old car from B for $ 300, giving a promissory note for that amount. A subsequently abandons the car. A is not liable on the note. B may reclaim the car or, if the car is found to be a necessary, has a claim for having furnished it to A.

c. Types of guardianship.

The rule of this Section had its origin in cases of insanity. It does not apply to cases where a person is committed or voluntarily admitted to an asylum or hospital without the appointment of a guardian, or where a guardian of the person only is appointed. In such cases the adjudication may have evidentiary value under § 15, but there may be a voidable contract notwithstanding mental illness or defect. Nor does the rule apply to infants: parents are natural guardians of the person but not the property of an infant, and the appointment of a guardian of the infant’s property does not prevent the infant from affirming his contract when he becomes of age.

Unless a statute provides otherwise, the rule governing insane persons applies also to persons under guardianship by reason of mental illness or defect or as habitual drunkards, narcotics addicts, spendthrifts, aged persons or convicts. In some states it makes no difference that the guardian is known as a committee, conservator, or curator, or by some other title, but in others, conservatorship is a less drastic procedure not conclusive and sometimes not even probative on the issue of incompetency. Where a statute authorizes the appointment of a guardian on the voluntary application of the ward-to-be without any adjudication of disability, the ward may retain some capacity to contract, subject to subsequent judicial approval, either where the guardian consents or where the guardian’s control of the property is not impaired.

2. Shortly after commitment to a hospital for the insane and while still confined, A conveys land to B, taking back a purchase-money mortgage. Subsequently C is appointed guardian of A’s property. On A’s behalf, C ratifies the conveyance and sues to enforce the mortgage by foreclosure. B has no defense: since A was not under guardianship, the conveyance and mortgage were voidable, not void.

d. Termination of guardianship.

When the reason for guardianship ceases, the guardianship should ordinarily be terminated by judicial decree. But when the ward recovers from mental illness, for example, the guardianship is sometimes abandoned without any formality. In such cases, if the guardian dies or is removed and no successor is appointed, the guardianship is no longer conclusive of contractual incapacity, and the same may be true in other cases if the ward resumes full control of his property without interference over a substantial period of time.

[]{#_Toc161928122 .anchor}R. 2d Contracts § 14 – Infants

Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person’s eighteenth birthday.

a. Who are infants.

The common law fixed the age of twenty-one as the age at which both men and women achieve full capacity to contract, and the rule that the critical moment is the beginning of the preceding day was established on the ground that the law disregards fractions of a day. In almost every State these rules have been changed by statute. It appears that 49 States have lowered the age of majority, either generally or for contract capacity, to less than twenty-one; usually, the age is eighteen. The birthday rather than the preceding day is the date of majority in some States; in some both men and women have full capacity upon marriage.

b. Obligations which are not voidable.

Infants’ contracts were at one time classified as void, voidable or valid, but the modern rule in the absence of statute is that they are voidable by the infant. An infant may be bound by obligations imposed by law independently of contract, such as tort and quasi-contractual obligations. In addition, certain contracts are held binding, ordinarily by statute, such as recognizances for appearance in court or contracts made with judicial approval. Modern statutes also sometimes deny the power of disaffirmance as to such transactions as withdrawal of bank deposits or payment of life insurance premiums.

c. Restoration of consideration.

An infant need not take any action to disaffirm his contracts until he comes of age. If sued upon the contract, he may defend on the ground of infancy without returning the consideration received. His disaffirmance revests in the other party the title to any property received by the infant under the contract. If the consideration received by the infant has been dissipated by him, the other party is without remedy unless the infant ratifies the contract after coming of age or is under some non-contractual obligation. But some states, by statute or decision, have restricted the power of disaffirmance, either generally or under particular circumstances, by requiring restoration of the consideration received. Where the infant seeks to enforce the contract, the conditions of the other party’s promise must be fulfilled. The problems arising when an infant seeks to disaffirm a conveyance or executed contract are beyond the scope of the Restatement of this Subject, whether the disaffirmance is attempted before or after he comes of age. As to what constitutes ratification, see § 85.

[]{#_Toc161928123 .anchor}R. 2d Contracts § 15 – Mental Illness or Defect

(1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect

(a) he is unable to understand in a reasonable manner the nature and consequences of 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 of his condition.

(2) Where the contract is made on fair terms and the other party is without knowledge of the mental illness or defect, the power of avoidance under Subsection (1) terminates to the extent that the contract has been so performed in whole or in part or the circumstances have so changed that avoidance would be unjust. In such a case a court may grant relief as justice requires.

a. Rationale.

A contract made by a person who is mentally incompetent requires the reconciliation of two conflicting policies: the protection of justifiable expectations and of the security of transactions, and the protection of 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 of mental phenomena and to the doctrine that contractual obligation depends on manifestation of assent rather than on mental assent. At the other extreme, it has been asserted that mental incompetency has no effect on a contract unless other grounds of avoidance are present, such as fraud, undue influence, or gross inadequacy of consideration; it is now widely believed that such a rule gives inadequate protection to the incompetent and his family, particularly where the contract is entirely executory.

b. The standard of competency.

It is now recognized that there is a wide variety of types and degrees of mental incompetency. Among them are congenital deficiencies in intelligence, the mental deterioration of old age, the effects of brain damage caused by accident or organic disease, and mental illnesses evidenced by such symptoms as delusions, hallucinations, delirium, confusion and depression. Where no guardian has been appointed, there is full contractual capacity in any case unless the mental illness or defect has affected 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 of 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 if the other party has reason to know of his condition. Where a person has some understanding of a particular transaction which is affected by mental illness or defect, the controlling consideration is whether the transaction in its result is one which a reasonably competent person might have made.

1. A, a school teacher, is a member of a retirement plan and has elected a lower monthly benefit in order to provide a benefit to her husband if she dies first. At age 60 she suffers a “nervous breakdown,” takes a leave of absence, and is treated for cerebral arteriosclerosis. When the leave expires she applies for retirement, revokes her previous election, and elects a larger annuity with no death benefit. In view of her reduced life expectancy, the change is foolhardy, and there are no other circumstances to explain the change. She fully understands the plan, but by reason of mental illness is unable to make a decision based on the prospect of her dying before her husband. The officers of the plan have reason to know of her condition. Two months after the changed election she dies. The change of election is voidable.

c. Proof of incompetency.

Where there has been no previous adjudication of incompetency, the burden of proof is on the party asserting incompetency. Proof of irrational or unintelligent behavior is essential; almost any conduct of the person may be relevant, as may lay and expert opinions and prior and subsequent adjudications of incompetency. Age, bodily infirmity or disease, use of alcohol or drugs, and illiteracy may bolster other evidence of incompetency. Other facts have significance when there is mental illness or defect but some understanding: absence of independent advice, confidential or fiduciary relationship, undue influence, fraud, or secrecy; in such cases the critical fact often is departure from the normal pattern of similar transactions, and particularly inadequacy of consideration.

d. Operative effect of incompetency.

Where no guardian has been appointed, the effect on executory contracts of incompetency by reason of mental illness or defect is very much like that of infancy. Regardless of the other party’s knowledge or good faith and regardless of the fairness of the terms, the incompetent person on regaining full capacity may affirm or disaffirm the contract, or the power to affirm or disaffirm may be exercised on his behalf by his guardian or after his death by his personal representative. There may, however, be related obligations imposed by law independently of contract which cannot be disaffirmed. And if the other party did not know of the incompetency at the time of contracting he cannot be compelled to perform unless the contract is effectively affirmed.

2. A, an incompetent not under guardianship, contracts to sell land to B, who does not know of the incompetency. A continues to be incompetent. On discovering the incompetency, B may refuse to perform until a guardian is appointed, and if none is appointed within a reasonable time may obtain a decree canceling the contract.

e. Effect of performance.

Where the contract has been performed in whole or in part, avoidance is permitted only on equitable terms. In the traditional action at law, the doing of equity by or on behalf of the incompetent was accomplished by a tender before suit, but in equity or under modern merged procedure it is provided for in the decree. Any benefits still retained by the incompetent must be restored or paid for, and restitution must be made for any necessaries furnished under the contract. If the other party knew of the incompetency at the time of contracting, or if he took unfair advantage of the incompetent, consideration not received by the incompetent or dissipated without benefit to him need not be restored.

3. A, an incompetent not under guardianship, contracts to buy land for a fair price from B, who does not know of the incompetency. Shortly after transfer of title to A and part payment by A, A dies. A’s personal representative may recover A’s part payment on reconveying the land to B.

4. The facts being otherwise as stated in Illustration 3, C, with knowledge of A’s incompetency, renders legal services to A in the transaction; after learning of A’s incompetency, B pays $ 500 to C pursuant to the contract. A’s personal representative need not reimburse B for the payment.

f. When avoidance is inequitable.

If the contract is made on fair terms and the other party has no reason to know of the incompetency, performance in whole or in part may so change the situation that the parties cannot be restored to their previous positions or may otherwise render avoidance inequitable. The contract then ceases to be voidable. Where the other party, though acting in good faith, had reason to know of the incompetency at the time of contracting or performance, or where the equities can be partially adjusted by the decree, the court may grant or deny relief as the situation requires. Factors to be taken into account in such cases include not only benefits conferred and received on both sides but also the extent to which avoidance will benefit the incompetent and the extent to which others who will benefit from avoidance had opportunities to prevent the situation from arising.

5. A, an incompetent spouse not under guardianship, mortgages land on fair terms to B, a bank which has no knowledge or reason to know of the incompetency, for a loan of $ 2,000. At A’s request the money is paid to the other spouse, C, who absconds with it. The contract is not voidable.

6. A, a congenital imbecile not under guardianship, has an interest in unimproved land which is contingent on his surviving his father B. A joins B and C, a cousin, in leasing the land on fair terms for 25 years to D, who has no reason to know of the incompetency. Subsequently A assigns his interest in the rent to C in return for C’s agreement to support A for life, which C duly performs. Five years later A joins B and C in an outright sale of the land to D. On B’s death avoidance of the sale of A’s interest may be equitable if D can be assured ofrepayment of the price and of retaining improvements made by him after the sale; avoidance of the lease would be inequitable.

7. A, an incompetent not under guardianship, lives on a homestead with his mother B and brother C. A also holds a mortgage on a second tract of land owned by C. To prevent foreclosure of a mortgage on the homestead, A, B and C join in borrowing money from D on a mortgage of both tracts on fair terms. D acts in good faith but has reason to know of A’s incompetency. A dies, leaving B his sole heir. The mortgage to D is not voidable for the benefit of B.

[]{#_Toc161928124 .anchor}R. 2d Contracts § 16 – Intoxicated Persons

A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication

(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or

(b) he is unable to act in a reasonable manner in relation to the transaction.

a. Rationale.

Compulsive alcoholism may be a form of mental illness; and when a guardian is appointed for the property of a habitual drunkard, his transactions are treated like those of a person under guardianship by reason of mental illness. If drunkenness is so extreme as to prevent any manifestation of assent, there is no capacity to contract. It would be possible to treat voluntary intoxication as a temporary mental disorder in all cases, but voluntary intoxication not accompanied by any other disability has been thought less excusable than mental illness. Hence a contract made by an intoxicated person is enforceable by the other party even though entirely executory, unless the other person has reason to know that the intoxicated person lacks capacity. Elements of overreaching or other unfair advantage may be relevant on the issues of competency, of the other party’s reason to know, and of the appropriate remedy. Use of drugs may raise similar problems.

b. What contracts are voidable.

The standard of competency in intoxication cases is the same as that in cases of mental illness. If the intoxication is so extreme as to prevent any manifestation of assent, there is no contract. Otherwise the other party is affected only by intoxication of which he has reason to know. A contract made by a person who is so drunk he does not know what he is doing is voidable if the other party has reason to know of the intoxication. Where there is some understanding of the transaction despite intoxication, avoidance depends on a showing that the other party induced the drunkenness or that the consideration was inadequate or that the transaction departed from the normal pattern of similar transactions; if the particular transaction in its result is one which a reasonably competent person might have made, it cannot be avoided even though entirely executory.

1. A, while in a state of extreme intoxication, signs and mails a written offer on fair terms to B, who has no reason to know of the intoxication. B accepts the offer. A has no right to avoid the contract.

2. A is ill and confined to his bed. B, knowing that the illness is incurable, plies A with intoxicating liquor for a week and then purports to treat him by rubbing him with oil. While intoxicated, A executes by mark a contract to sell land to B for a grossly inadequate consideration. Six days later A dies. A’s heirs may avoid the contract.

3. A has been drinking heavily. B, who has also been drinking, meets A, offers to buy A’s farm for $ 50,000, a fair price, and offers A a drink which A accepts. In drunken exhilaration A, as a joke, writes out and signs a memorandum of agreement to sell, gets his wife to sign it, and delivers it to B, who understands the transaction as a serious one. A’s intoxication is no defense to B’s suit for specific performance.

c. Ratification and avoidance.

Where a contract is voidable on the ground of intoxication, the rules as to ratification and avoidance are much the same as in cases of misrepresentation. On becoming sober, the intoxicated person must act promptly to disaffirm and must offer to restore consideration received. Such an offer may be excused, however, if the consideration has been dissipated during the period of drunkenness.

4. A buys a barber shop from B for $ 650. Shortly afterward, A, helplessly drunk and evidently not aware of what he is doing, sells the shop back to B for $ 200. On recovering his senses, A cannot remember the transaction and cannot find out what happened to the $ 200. On prompt disaffirmance, A may recover the shop without repaying the $ 200.

Chapter 3 | Bargains

[]{#_Toc161928126 .anchor}R. 2d Contracts § 17 – Requirement of a Bargain

(1) Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

(2) Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts or under the rules stated in §§ 82-94.

a. Formal contracts.

The types of contracts listed in § 6 are not necessarily subject to the requirements of manifestation of assent and consideration. Where contracts under seal still have their common-law effect, neither manifestation of assent by the promisee nor consideration is essential.

b. Bargains.

Contracts of types enumerated in § 6 can be used in many of the transactions essential to civilized life: e.g., sale or lease of land, goods, or intangible property; the rendering of services for hire; the lending of money. But in modern times less formal contracts are far more important. The typical contract is a bargain, and is binding without regard to form. The governing principle in the typical case is that bargains are enforceable unless some other principle conflicts. This chapter and the next deal with the two essential elements of a bargain: agreement and exchange.

c. “Meeting of the minds.”

The element of agreement is sometimes referred to as a “meeting of the minds.” The parties to most contracts give actual as well as apparent assent, but it is clear that a mental reservation of a party to a bargain does not impair the obligation he purports to undertake. The phrase used here, therefore, is “manifestation of mutual assent,” as in the definition of “agreement” in § 3.

d. “Sufficient consideration.”

The element of exchange is embodied in the concept of consideration. In some cases a promise is not binding for want of consideration, despite the presence of an element of exchange. “Consideration” has sometimes been used to refer to the element of exchange, without regard to whether it is sufficient to make an informal promise legally binding; the consideration which satisfies the legal requirement has then been called “sufficient consideration.” As the term “consideration” is used here, however, it refers to an element of exchange which is legally sufficient, and the word “sufficient” would therefore be redundant. The requirement of consideration is the subject of §§ 71-81.

1. A owes B $ 50. In exchange for A’s payment of the debt B makes a promise. Under the rule stated in § 73, B’s promise is without consideration.

e. Informal contract without bargain.

There are numerous atypical cases where informal promises are binding though not made as part of a bargain. In such cases it is often said that there is consideration by virtue of reliance on the promise or by virtue of some circumstance, such as a “past consideration,” which does not involve the element of exchange. In this Restatement, however, “consideration” is used only to refer to the element of exchange, and contracts not involving that element are described as promises binding without consideration. There is no requirement of agreement for such contracts. They are the subject of §§ 82-94.

[]{#_Toc161928127 .anchor}R. 2d Contracts § 18 – Manifestation of Mutual Assent

Manifestation of mutual assent to an exchange requires that each party either make a promise or begin or render a performance.

a. Manifestation of assent.

Assent to the formation of an informal contract is operative only to the extent that it is manifested. Rules for cases where one party could reasonably draw more than one inference as to the intention of another are stated in the following sections, in connection with the scope of contractual obligations (see §§ 201, 219), and in connection with mistake (see § 151-58).

b. Assent by promise or performance.

Where a bargain has been fully performed on one side, there is commonly no need to determine the moment of making of the contract or whether the performing party made a promise before he performed. Those issues ordinarily become important only when a dispute arises at an earlier stage. In the typical case such a dispute involves an exchange of promises before any performance takes place; there is an offer containing a promise and made binding by an acceptance containing a return promise. Section 50. The beginning or tender of performance may operate as such a return promise under § 63. In less common cases, acceptance may be made by a performance under § 54, and the beginning of performance may have an intermediate effect of making the offer irrevocable under § 45.

c. Sham or jest.

Where all the parties to what would otherwise be a bargain manifest an intention that the transaction is not to be taken seriously, there is no such manifestation of assent to the exchange as is required by this Section. In some cases the setting makes it clear that there is no contract, as where a business transaction is simulated on a stage during a dramatic performance. In other cases, there may be doubt as to whether there is a joke, or one of the parties may take the joke seriously. If one party is deceived and has no reason to know of the joke the law takes the joker at his word. Even if the deceived party had reason to know of the joke, there may be a claim for fraud or unjust enrichment by virtue of the promise made. Where the parties to a sham transaction intend to deceive third parties, considerations of public policy may sometimes preclude a defense of sham.

[]{#_Toc161928128 .anchor}R. 2d Contracts § 19 – Conduct as Manifestation of Assent

(1) The manifestation of assent may be made wholly or partly by written or spoken words or by other acts or by failure to act.

(2) The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.

(3) The conduct of a party may manifest assent even though he does not in fact assent. In such cases a resulting contract may be voidable because of fraud, duress, mistake, or other invalidating cause.

a. Conduct other than words.

Words are not the only medium of expression. Conduct may often convey as clearly as words a promise or an assent to a proposed promise. Where no particular requirement of form is made by the law a condition of the validity or enforceability of a contract, there is no distinction in the effect of the promise whether it is expressed in writing, or orally, or in acts, or partly in one of these ways and partly in others. Purely negative conduct is sometimes, though not usually, a sufficient manifestation of assent.

Like words, non-verbal conduct often has different meanings to different people. Indeed, the meaning of conduct not used as a conventional symbol is more uncertain and more dependent on its setting than are words. A wide variety of elements of the total situation may be relevant to the interpretation of such conduct. The problem is illustrated in cases of claims against a decedent’s estate for services rendered. In such cases the line between a contractual claim based on agreement and a quasi-contractual claim based on unjust enrichment is often indistinct; on either basis a major question may be whether the services were rendered gratuitously, and the circumstances are often critical.

1. A lives in B’s home and renders services to B over a period of years, and after B’s death claims the value of the services. By statute A is incompetent to testify to transactions with B, and there is no evidence of a verbal promise. Among the factors relevant to a determination whether the services were gratuitous are the following: a request by B that A render the services, the relation between A and B, the value of the services to B, the alternatives foregone and hardship suffered by A, the financial circumstances of the parties, the relation between B and his legatees or distributees, and their connection with A’s services.

b. “Reason to know.”

A person has reason to know a fact, present or future, if he has information from which a person of ordinary intelligence would infer that the fact in question does or will exist. A person of superior intelligence has reason to know a fact if he has information from which a person of his intelligence would draw the inference. There is also reason to know if the inference would be that there is such a substantial chance of the existence of the fact that, if exercising reasonable care with reference to the matter in question, the person would predicate his action upon the assumption of its possible existence.

Reason to know is to be distinguished from knowledge and from “should know.” Knowledge means conscious belief in the truth of a fact; reason to know need not be conscious. “Should know” imports a duty to others to ascertain facts; the words “ reason to know” are used both where the actor has a duty to another and where he would not be acting adequately in the protection of his own interests were he not acting with reference to the facts which he has reason to know.

c. Responsibility for unintended appearance of assent.

A “manifestation” of assent is not a mere appearance; the party must in some way be responsible for the appearance. There must be conduct and a conscious will to engage in that conduct. Thus, when a party is used as a mere mechanical instrument, his apparent assent does not affect his contractual relations. See the rules on duress in §§ 174-77. This is true even though the other party reasonably believes that the assent is genuine.

Similarly, even though the intentional conduct of a party creates an appearance of assent on his part, he is not responsible for that appearance unless he knows or has reason to know that his conduct may cause the other party to understand that he assents. In effect there must be either intentional or negligent creation of an appearance of assent. Compare § 20 and the rules on mistake, misrepresentation, duress and undue influence in Chapters 6 and 7. The other party must also manifest assent, but no further change of position on his part is necessary to the formation of a bargain. Change of position may of course be relevant to the existence of a power of avoidance, but the law must take account of the fact that in a society largely founded on credit bargains will be relied on in subtle ways, difficult or incapable of proof.

2. A offers to sell B his library at a stated price, forgetting that his favorite Shakespeare, which he did not intend to sell, is in the library. B accepts the offer. There is a contract including the Shakespeare, unless B knows or has reason to know of A’s temporary forgetfulness. Whether the contract is voidable for mistake depends on the rules stated in Chapter 6.

3. A writes an offer to B, which he encloses in an envelope, addresses and stamps. Shortly afterwards, he decides not to send the offer, but by mistake he deposits it in the mail. It is delivered to B, who accepts the offer. There is a contract unless B knows or has reason to know of A’s error. Whether the contract is voidable for mistake is governed by the rules stated in Chapter 6.

d. Voidable manifestations distinguished.

Actual mental assent is not essential to the formation of an informal contract enforceable as a bargain. This is made clear by the definitions of “bargain” (§ 3) and “agreement” (§ 3) in terms of “manifestation” of mutual assent (§§ 17, 18). But the fact that apparent assent is not genuine may have legal significance in rendering the contract voidable or unenforceable for mistake, misrepresentation, duress, or undue influence. In such cases it is often necessary to inquire whether the power of avoidance has been exercised with sufficient promptness, or whether the other party has so changed his position that avoidance would be inequitable.

Where there is no manifestation of mutual assent, on the other hand, the contractual relations of the parties are not affected, and such inquiries are unnecessary.

[]{#_Toc161928129 .anchor}R. 2d Contracts § 20 – Effect of Misunderstanding

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

(a) neither party knows or has reason to know the meaning attached by the other; or

(b) each party knows or each party has reason to know the meaning attached by the other.

(2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if

(a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or

(b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

a. Scope.

Subsection (1) states the implications of the rule of § 19(2) as to the meaning of “manifestation of mutual assent” in cases of mistake in the expression of assent. The subject-matter of this Section is more fully treated in Chapter 9 on the scope of contractual obligations. Rules are stated here only for two-party transactions; multi-party transactions are more complex, but are governed by the same principles. As to the meaning of “reason to know,” see Comment b to § 19.

b. The need for interpretation.

The meaning given to words or other conduct depends to a varying extent on the context and on the prior experience of the parties. Almost never are all the connotations of a bargain exactly identical for both parties; it is enough that there is a core of common meaning sufficient to determine their performances with reasonable certainty or to give a reasonably certain basis for an appropriate legal remedy. But material differences of meaning are a standard cause of contract disputes, and the decision of such disputes necessarily requires interpretation of the language and other conduct of the parties in the light of the circumstances.

c. Interpretation and agreement.

There is a problem of interpretation in determining whether a contract has been made as well as in determining what obligations a contract imposes. Where one party makes a precise and detailed offer and the other accepts it, or where both parties sign the same written agreement, there may be an “integrated” agreement (see § 209) and the problem is then one of interpreting the offer or written agreement. In other cases agreement may be found in a jumble of letters, telegrams, acts and spoken words. In either type of case, the parties may have different understandings, intentions and meanings. Even though the parties manifest mutual assent to the same words of agreement, there may be no contract because of a material difference of understanding as to the terms of the exchange. Where there is no integration, the parties may also differ as to whether there was an offer of any kind, or whether there was an acceptance. Rules of interpretation governing various situations are stated in Chapter 9 on the scope of contractual obligations; those rules are applicable in the determination of what each party “knows or has reason to know.”

d. Error in expression.

The basic principle governing material misunderstanding is stated in Subsection (1): no contract is formed if neither party is at fault or if both parties are equally at fault. Subsection (2) deals with cases where both parties are not equally at fault. If one party knows the other’s meaning and manifests assent intending to insist on a different meaning, he may be guilty of misrepresentation. Whether or not there is such misrepresentation as would give the other party a power of avoidance, there is a contract under Subsection (2) (a), and the mere negligence of the other party is immaterial. Under Subsection (2) (b) a party may be bound by a merely negligent manifestation of assent, if the other party is not negligent. The question whether such a contract is voidable for mistake is dealt with in §§ 151-58.

1. A offers to sell B goods shipped from Bombay ex steamer “Peerless”. B accepts. There are two steamers of the name “Peerless”, sailing from Bombay at materially different times. If both parties intend the same Peerless, there is a contract, and it is immaterial whether they know or have reason to know that two ships are named Peerless.

2. The facts being otherwise as stated in Illustration 1, A means Peerless No. 1 and B means Peerless No. 2. If neither A nor B knows or has reason to know that they mean different ships, or if they both know or if they both have reason to know, there is no contract.

3. The facts being otherwise as stated in Illustration 1, A knows that B means Peerless No. 2 and B does not know that there are two ships named Peerless. There is a contract for the sale of the goods from Peerless No. 2, and it is immaterial whether B has reason to know that A means Peerless No. 1. If A makes the contract with the undisclosed intention of not performing it, it is voidable by B for misrepresentation (see §§ 159-64). Conversely, if B knows that A means Peerless No. 1 and A does not know that there are two ships named Peerless, there is a contract for the sale of the goods from Peerless No. 1, and it is immaterial whether A has reason to know that B means Peerless No. 2,but the contract may be voidable by A for misrepresentation.

4. The facts being otherwise as stated in Illustration 1, neither party knows that there are two ships Peerless. A has reason to know that B means Peerless No. 2 and B has no reason to know that A means Peerless No. 1. There is a contract for the sale of goods from Peerless No. 2. In the converse case, where B has reason to know and A does not, there is a contract for sale from Peerless No. 1. In either case the question whether the contract is voidable for mistake is governed by the rules stated in §§ 151-58.

5. A says to B, “I offer to sell you my horse for $ 100.” B, knowing that A intends to offer to sell his cow for that price, not his horse, and that the word “horse” is a slip of the tongue, replies, “I accept.” The price is a fair one for either the horse or the cow. There is a contract for the sale of the cow and not of the horse. If B makes the contract with the undisclosed intention of not performing it, it is voidable by A for misrepresentation.

[]{#_Toc161928130 .anchor}R. 2d Contracts § 22(1) – Mode of Assent: Offer and Acceptance

The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or proposal by one party followed by an acceptance by the other party or parties.

a. The usual practice.

Subsection (1) states the usual practice in the making of bargains. One party ordinarily first announces what he will do and what he requires in exchange, and the other then agrees. Where there are more than two parties, the second party to agree may be regarded as accepting the offer made by the first party and as making a similar offer to subsequent parties, and so on. It is theoretically possible for a third person to state a suggested contract to the parties and for them to say simultaneously that they assent. Or two parties may sign separate duplicates of the same agreement, each manifesting assent whether the other signs before or after him.

Chapter 4 | Offers

[]{#_Toc161928132 .anchor}R. 2d Contracts § 24 – Offer Defined

An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

a. Offer as promise.

An offer may propose an executed sale or barter rather than a contract, or it may propose the exchange of a promise for a performance or an exchange of promises, or it may propose two or more such transactions in combination or in the alternative. In the normal case of an offer of an exchange of promises, or in the case of an offer of a promise for an act, the offer itself is a promise, revocable until accepted. There may also be an offer of a performance, to be exchanged either for a return promise (§ 55) or for a return performance; in such cases the offer is not necessarily a promise, but there are often warranties or other incidental promises.

1. A says to B, “That book you are holding is yours if you promise to pay me $ 5 for it.” This is an offer empowering B, by making the requested promise, to make himself owner of the book and thus complete A’s performance. In that event there is also an implied warranty of title made by A.

b. Proposal of contingent gift.

A proposal of a gift is not an offer within the present definition; there must be an element of exchange. Whether or not a proposal is a promise, it is not an offer unless it specifies a promise or performance by the offeree as the price or consideration to be given by him. It is not enough that there is a promise performable on a certain contingency.

2. A promises B $ 100 if B goes to college. If the circumstances give B reason to know that A is not undertaking to pay B to go to college but is promising a gratuity, there is no offer.

c. Offer as contract.

A promise made by the offeror as part of his offer may itself be a contract. Such a contract is commonly called an “option”.

[]{#_Toc161928133 .anchor}R. 2d Contracts § 25 – Option Contracts

An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.

a. “Option.”

A promise which constitutes an option contract may be contained in the offer itself, or it may be made separately in a collateral offer to keep the main offer open. Such promises are commonly called “options.” But the word “option” is also often used for any continuing offer, even though revocable, and indeed is sometimes used to refer to any power to make a choice. To avoid ambiguity the phrase “option contract” is used in this Restatement.

1. A promises B under seal or in return for $ 100 paid or promised by B that A will sell B 100 shares of stock in a specified corporation for $ 5,000 at any time within thirty days that B selects. There is an option contract under which B has an option.

2. A offers to sell B Blackacre for $ 5,000 at any time within thirty days. Subsequently A promises under seal or in return for $ 100 paid or promised by B that the offer will not be revoked. There is an option contract under which B has an option.

b. The need for irrevocable offers.

To provide the offeree with a dependable basis for decision whether or not to accept, the rule in many legal systems is that an offer is irrevocable unless it provides otherwise. The common-law rule, on the other hand, resting on the requirement of consideration, permits the revocation of offers even though stated to be firm. The offeree’s need for a dependable basis for decision is met in part by the common-law rule that mailed acceptance prevents revocation. Where more is needed, the option contract is available.

c. Types of option contracts.

The traditional common-law devices for making an offer irrevocable are the giving of consideration and the affixing of a seal. The requirement of consideration may be met in any of the ways permitted by the rules stated in §§ 71-81: payment of money or some other performance by the offeree is effective, as is a promise of such performance; one option may furnish consideration for another, and a single consideration may support both a present contract and a future option. See § 45 as to the beginning or tender of performance.

The option under seal is the traditional mode of making an offer irrevocable without consideration. Cf. § 95. In some cases a negotiable instrument or a letter of credit may operate as an offer binding without consideration. Offers may also be irrevocable by statute or by virtue of reliance by the offeree or other circumstances bringing into play one of the rules stated in §§ 82-94. See, especially, § 87.

d. Effect of option contract.

The principal legal consequence of an option contract is that stated in this Section: it limits the promisor’s power to revoke an offer. The termination of the offeree’s power of acceptance is subject to the requirements for discharge of a contractual duty. A revocation by the offeror is not of itself effective, and the offer is properly referred to as an irrevocable offer.

[]{#_Toc161928134 .anchor}N.H.R.S.A. 382-A § 2-205 – Firm Offers.

An offer 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, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

Editor’s note: Firms offers are a type of option contract that does not require consideration. As a substitute for consideration, the firm offer is made binding by statutory law by meeting the requirement in this section. Note that only merchants can make firm offers in this way.

[]{#_Toc161928135 .anchor}R. 2d Contracts § 26 – Preliminary Negotiations

A manifestation of willingness to enter into a bargain is not an offer if 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 further manifestation of assent.

a. Interpretation of proposals for exchange.

The rule stated in this Section is a special application of the definition in § 24 and of the principles governing the interpretation of manifestations of assent. Conduct which resembles an offer may not be so intended either because there is an intent not to affect legal relations (see § 18), or because the actor does not intend to engage in the conduct (see § 19), or because the proposal is not addressed to the recipient or is not received by the addressee (see § 23), or because the proposal contemplates a gift rather than a bargain (see Comment b to § 24). This Section deals rather with the case where the actor intends to make a bargain in the future, but only if he makes some further manifestation of assent. If the addressee of a proposal has reason to know that no offer is intended, there is no offer even though he understands it to be an offer. “Reason to know” depends not only on the words or other conduct, but also on the circumstances, including previous communications of the parties and the usages of their community or line of business.

b. Advertising.

Business enterprises commonly secure general publicity for the goods or services they supply or purchase. Advertisements of goods by display, sign, handbill, newspaper, radio or television are not ordinarily intended or understood as offers to sell. The same is true of catalogues, price lists and circulars, even though the terms of suggested bargains may be stated in some detail. It is of course possible to make an offer by an advertisement directed to the general public (see § 29), but there must ordinarily be some language of commitment or some invitation to take action without further communication.

1. A, a clothing merchant, advertises overcoats of a certain kind for sale at $ 50. This is not an offer, but an invitation to the public to come and purchase. The addition of the words “Out they go Saturday; First Come First Served” might make the advertisement an offer.

2. A advertises that he will pay $ 5 for every copy of a certain book that may be sent to him. This is an offer, and A is bound to pay $ 5 for every copy sent while the offer is unrevoked.

c. Quotation of price.

A “quotation” of price is usually a statement of price per unit of quantity; it may omit the quantity to be sold, time and place of delivery, terms of payment, and other terms. It is sometimes associated with a price list or circular, but the word “quote” is commonly understood as inviting an offer rather than as making one, even when directed to a particular customer. But just as the word “offer” does not necessarily mean that an offer is intended, so the word “quote” may be used in an offer. In determining whether an offer is made relevant factors include the terms of any previous inquiry, the completeness of the terms of the suggested bargain, and the number of persons to whom a communication is addressed.

3. A writes to B, “I can quote you flour at $ 5 a barrel in carload lots.” This is not an offer, in view of the word “quote” and incompleteness of the terms. The same words, in response to an inquiry specifying detailed terms, would probably be an offer; and if A added “for immediate acceptance” the intent to make an offer would be unmistakable.

d. Invitation of bids or other offers.

Even though terms are specified in detail, it is common for one party to request the other to make an offer. The words “Make me an offer” would normally indicate that no offer is being made, and other conduct such as the announcement of an auction may have similar effect. A request for bids on a construction project is similar, even though the practice may be to accept the lowest bid conforming to specifications and other requirements. And forms used or statements made by a traveling salesman may make it clear that the customer is making an offer to be accepted at the salesman’s home office.

4. A writes B, “I am eager to sell my house. I would consider $ 20,000 for it.” B promptly answers, “I will buy your house for $ 20,000 cash.” There is no contract. A’s letter is a request or suggestion that an offer be made to him. B has made an offer.

e. Written contract documents.

A standard method of making an offer is to submit to the offeree a written agreement signed by the offeror and to invite the offeree to sign on a line provided for that purpose. But the signature even in such a case is not conclusive if the other party has reason to know that no offer is intended. More common is the use of promissory expressions or words of assent in unsigned documents or letters where the document is intended not as an offer but only as a step in the preliminary negotiation of terms, or as a specimen for use in other transactions, or as something to be shown to a third person to influence his action. Reason to know that such is the intention may exist even though the document on its face seems to be clear and unambiguous.

f. Preliminary manifestations as terms of later offer.

Even though a communication is not an offer, it may contain promises or representations which are incorporated in a subsequent offer and hence become part of the contract made when the offer is accepted. Indeed, the preliminary communication may thus form part of a written contract, or of a memorandum satisfying the Statute of Frauds, or of an integrated contract.

[]{#_Toc161928136 .anchor}R. 2d Contracts § 33 – Certainty

(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.

(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

a. Certainty of terms.

It is sometimes said that the agreement must be capable of being given an exact meaning and that all the performances to be rendered must be certain. Such statements may be appropriate in determining whether a manifestation of intention is intended to be understood as an offer. But the actions of the parties may show conclusively that they have intended to conclude a binding agreement, even though one or more terms are missing or are left to be agreed upon. In such cases courts endeavor, if possible, to attach a sufficiently definite meaning to the bargain.

An offer which appears to be indefinite may be given precision by usage of trade or by course of dealing between the parties. Terms may be supplied by factual implication, and in recurring situations the law often supplies a term in the absence of agreement to the contrary. See § 5, defining “term.” Where the parties have intended to conclude a bargain, uncertainty as to incidental or collateral matters is seldom fatal to the existence of the contract. If the essential terms are so uncertain that there is no basis for deciding whether the agreement has been kept or broken, there is no contract. But even in such cases partial performance or other action in reliance on the agreement may reinforce it under § 34.

b. Certainty in basis for remedy.

The rule stated in Subsection (2) reflects the fundamental policy that contracts should be made by the parties, not by the courts, and hence that remedies for breach of contract must have a basis in the agreement of the parties. Where the parties have intended to make a contract and there is a reasonably certain basis for granting a remedy, the same policy supports the granting of the remedy. The test is not certainty as to what the parties were to do nor as to the exact amount of damages due to the plaintiff; uncertainty may preclude one remedy without affecting another.

Thus the degree of certainty required may be affected by the dispute which arises and by the remedy sought. Courts decide the disputes before them, not other hypothetical disputes which might have arisen. It is less likely that a reasonably certain term will be supplied by construction as to a matter which has been the subject of controversy between the parties than as to one which is raised only as an afterthought. In some cases greater definiteness may be required for specific performance than for an award of damages; in others the impossibility of accurate assessment of damages may furnish a reason for specific relief. Partial relief may sometimes be granted when uncertainty prevents full-scale enforcement through normal remedies. See §§ 357-62.

1. A agrees to sell and B to buy goods for $ 2,000, $ 1,000 in cash and the “balance on installment terms over a period of two years,” with a provision for liquidated damages. If it is found that both parties manifested an intent to conclude a binding agreement, the indefiniteness of the quoted language does not prevent the award of the liquidated damages.

2. A agrees to sell and B to buy a specific tract of land for $ 10,000, $ 4,000 in cash and $ 6,000 on mortgage. A agrees to obtain the mortgage loan for B or, if unable to do so, to lend B the amount, but the terms of loan are not stated, although both parties manifest an intent to conclude a binding agreement. The contract is too indefinite to support a decree of specific performance against B, but B may obtain such a decree if he offers to pay the full price in cash.

c. Preliminary negotiations.

The rule stated in Subsection (3) is a particular application of the rule stated in § 26 on preliminary negotiations. Incompleteness of terms is one of the principal reasons why advertisements and price quotations are ordinarily not interpreted as offers. Similarly, if the parties to negotiations for sale manifest an intention not to be bound until the price is fixed or agreed, the law gives effect to that intention. The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement.

d. Uncertain time of performance.

Valid contracts are often made which do not specify the time for performance. Where the contract calls for a single performance such as the rendering of a service or the delivery of goods, the time for performance is a “reasonable time.” Payment is due when the service is completed or the goods received. When the contract calls for successive performances but is indefinite in duration, it is commonly terminable by either party, with or without a requirement of reasonable notice.

3. A and B promise that certain performances shall be mutually rendered by them “immediately” or “at once,” or “promptly,” or “as soon as possible,” or “in about one month.” All these promises are sufficiently definite to form contracts.

4. A promises B to sell certain goods to him, and B promises to pay a specified price therefor. No time of performance is fixed. The time for delivery and payment is a reasonable time. U.C.C. §§ 2-309(1), 2-310(a). What is a reasonable time depends on the nature, purpose and circumstances of the action to be taken. U.C.C. § 1-204(2).

5. A offers to employ B for a stated compensation as long as B is able to do specified work, or as long as a specified business is carried on, and B accepts the terms offered. The length of the engagement is sufficiently definite for the formation of a contract.

6. A promises B to serve B as chauffeur, and B promises to pay him $ 100 a month. Nothing further is stated as to the duration of the employment. There is at once a contract for one month’s service. At the end of the first month, in the absence of revocation, there is a contract for a second month. But circumstances may show that such an agreement merely specifies the rate of compensation for an employment at will.

e. Indefinite price.

Where the parties manifest an intention not to be bound unless the amount of money to be paid by one of them is fixed or agreed and it is not fixed or agreed there is no contract. U.C.C. § 2-305(4). Where they intend to conclude a contract for the sale of goods, however, and the price is not settled, the price is a reasonable price at the time of delivery if (a) nothing is said as to price, or (b) the price is left to be agreed by the parties and they fail to agree, or (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded. U.C.C. § 2-305(1). Or one party may be given power to fix the price within limits set by agreement or custom or good faith. Similar principles apply to contracts for the rendition of service. But substantial damages cannot be recovered unless they can be estimated with reasonable certainty (§ 352), and if the contract is entirely executory and specific performance is not an appropriate remedy, relief may be limited to the recovery of benefits conferred and specific expense incurred in reliance on the contract.

7. A promises to sell and B to buy goods “at cost plus a nice profit.” The quoted words strongly indicate that the parties have not yet concluded a bargain.

8. A promises to do a specified piece of work and B promises to pay a price to be thereafter mutually agreed. The provision for future agreement as to price strongly indicates that the parties do not intend to be bound. If they manifest an intent to be bound, the price is a reasonable price at the time for doing the work.

f. Other indefinite terms.

Promises may be indefinite in other aspects than time and price. The more important the uncertainty, the stronger the indication is that the parties do not intend to be bound; minor items are more likely to be left to the option of one of the parties or to what is customary or reasonable. Even when the parties intend to enter into a contract, uncertainty may be so great as to frustrate their intention. Thus a promise by A to give B employment, even though consideration is paid for it, does not provide a basis for any remedy if neither the character of the employment nor the compensation therefor is stated. In such cases the consideration paid, or its value, can be recovered.

9. A promises B to execute a conveyance in fee or a lease for a year of specified land and B promises to make specified payments therefor. Although the terms of leases and conveyances vary, the promises are interpreted as providing for documents in the form in common local use, and are sufficiently definite to form contracts.

10. A promises to sell and B to buy all goods of a certain character which B shall need in his business during the ensuing year. The quantity to be sold is sufficiently definite to provide a basis for remedy, since the promises are interpreted to refer to B’s actual good-faith requirements. U.C.C. § 2-306.

11. A promises B to construct a building according to stated plans and specifications, and B promises A to pay $ 30,000 therefor. It is also provided that the character of the window fastenings shall be subject to further agreement of the parties. Unless a contrary intention is manifested, the indefiniteness of the agreement with reference to this matter will not prevent the formation of a contract.

12. A and B have a settlement of accounts, and A promises to pay B a stated balance, “errors and omissions excepted.” A’s promise is reasonably certain in the absence of a showing of error or omission, but it may be corrected on such a showing.

Chapter 5 | Termination of the Offer

[]{#_Toc161928138 .anchor}R. 2d Contracts § 35 – The Offeree’s Power of Acceptance

(1) An offer gives to the offeree a continuing power to complete the manifestation of mutual assent by acceptance of the offer.

(2) A contract cannot be created by acceptance of an offer after the power of acceptance has been terminated in one of the ways listed in § 36.

a. “Duration of an offer.”

It is common to speak of the duration “of an offer.” But “offer” is defined in § 24 as a manifestation of assent, and the reference here is not to the time occupied by the offeror’s conduct but to the duration of its legal operation. Hence this topic speaks of the duration and termination of the offeree’s power rather than the duration and termination of the offer.

b. Continuing power.

Under Subsection (1) the offeree’s power arises when the offeror’s manifestation of assent is complete. Since the acceptance must have reference to the offer it is ordinarily necessary that the offeree have knowledge of the offer. Once the power arises it continues until terminated. Methods of termination are listed in § 36 and explained in the following sections. There is no requirement that the offer be accompanied by the mental assent of the offeror, or that mental assent which exists at the time of the offer continue until the time of acceptance.

c. Creation of contract.

Exercise of the power of acceptance concludes an agreement and a bargain, and thus satisfies one of the requirements for formation of an informal contract enforceable as a bargain. See §§ 17, 18. But a contract is not created unless the other requirements are met. Thus there may be no consideration; or impossibility or illegality may prevent any duty of performance from arising.

[]{#_Toc161928139 .anchor}R. 2d Contracts § 36 – Methods of Termination of the Power of Acceptance

(1) An offeree’s power of acceptance may be terminated by

(a) rejection or counter-offer by the offeree, or

(b) lapse of time, or

(d) death or incapacity of the offeror or offeree.

(2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any condition of acceptance under the terms of the offer.

a. Scope.

This Section merely lists the methods of termination which are possible. The circumstances under which each method operates are stated in §§ 36-49.

b. Conditions of acceptance.

Subsection (2) provides for any condition of acceptance arising under the terms of the offer itself. Compare the definition of “condition” in § 224. A condition of acceptance, like a condition, may be express or implied in fact or constructive. Thus by common understanding a reward offer can ordinarily be accepted only once; the first acceptance terminates the power of acceptance of other offerees.

c. Impossibility and illegality.

The power of acceptance may be terminated by the death or destruction of a person or thing essential for performance or by supervening legal prohibition. The extent to which such events have the effect of a failure of a condition of acceptance depends on the terms of the offer and on the circumstances. Such events may also prevent a duty of performance from arising from an acceptance if they occur before the offer is made, or may discharge a duty of performance if they occur after acceptance. The effects of such events are therefore stated in Chapters 6-12, which deal with Mistake (Chapter 6), Misrepresentation, Duress and Undue Influence (Chapter 7), Unenforceability on Grounds of Public Policy (Chapter 8), The Scope of Contractual Obligations (including conditions and similar events) (Chapter 9), Performance and Non-performance (Chapter 10), Impracticability of Performance and Frustration of Purpose (Chapter 11) and Discharge by Assent or Alteration (Chapter 12).

[]{#_Toc161928140 .anchor}R. 2d Contracts § 38 – Rejection

(1) An offeree’s power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention.

(2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.

a. The probability of reliance.

The legal consequences of a rejection rest on its probable effect on the offeror. An offeror commonly takes steps to prepare for performance in the event that the offer is accepted. If the offeree states in effect that he declines to accept the offer, it is highly probable that the offeror will change his plans in reliance on the statement. The reliance is likely to take such negative forms as failure to prepare or failure to send a notice of revocation, and hence is likely to be difficult or impossible to prove. To protect the offeror in such reliance, the power of acceptance is terminated without proof of reliance. This rule also protects the offeree in accordance with his manifested intention that his subsequent conduct is not to be understood as an acceptance.

1. A makes an offer to B and adds: “This offer will remain open for a week.” B rejects the offer the following day, but later in the week purports to accept it. There is no contract unless the offer was itself a contract. B’s purported acceptance is itself a new offer.

2. A makes an offer to sell water rights to B, and states, “You may accept this offer by applying to the appropriate authority for a permit to use the water.” B rejects the offer, obtains water rights elsewhere, and later applies for the permit contemplated by the offer. There is no contract. Even if A’s offer was a binding option, B has not exercised it.

b. Contrary statement of offeror or offeree.

The rule of this Section is designed to give effect to the intentions of the parties, and a manifestation of intention on the part of either that the offeree’s power of acceptance is to continue is effective. Thus if the offeree states that he rejects the offer for the present but will reconsider it at a future time, there is no basis for a change of position by the offeror in reliance on a rejection, and under Subsection (2) there is no rejection. Similarly a statement in the offer that it will continue in effect despite a rejection is effective, and a similar statement after a rejection makes a new offer.

Where the manifestation of intention of either party is misunderstood by the other, the principles underlying § 20 apply. If the offeror is justified in inferring from the words or conduct of the offeree, interpreted in the light of the offeror’s prior words or conduct, that the offeree intends not to accept the offer and not to take it under further advisement, the power of acceptance is terminated.

[]{#_Toc161928141 .anchor}R. 2d Contracts § 39 – Counter-Offers

(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.

(2) An offeree’s power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.

a. Counter-offer as rejection.

It is often said that a counter-offer is a rejection, and it does have the same effect in terminating the offeree’s power of acceptance. But in other respects a counter-offer differs from a rejection. A counter-offer must be capable of being accepted; it carries negotiations on rather than breaking them off. The termination of the power of acceptance by a counter-offer merely carries out the usual understanding of bargainers that one proposal is dropped when another is taken under consideration; if alternative proposals are to be under consideration at the same time, warning is expected.

1. A offers B to sell him a parcel of land for $ 5,000, stating that the offer will remain open for thirty days. B replies, “I will pay $ 4,800 for the parcel,” and on A’s declining that, B writes, within the thirty day period, “I accept your offer to sell for $ 5,000.” There is no contract unless A’s offer was itself a contract (see § 37), or unless A’s reply to the counter-offer manifested an intention to renew his original offer.

b. Qualified acceptance, inquiry or separate offer.

A common type of counter-offer is the qualified or conditional acceptance, which purports to accept the original offer but makes acceptance expressly conditional on assent to additional or different terms. Such a counter-offer must be distinguished from an unqualified acceptance which is accompanied by a proposal for modification of the agreement or for a separate agreement. A mere inquiry regarding the possibility of different terms, a request for a better offer, or a comment upon the terms of the offer, is ordinarily not a counter-offer. Such responses to an offer may be too tentative or indefinite to be offers of any kind; or they may deal with new matters rather than a substitution for the original offer; or their language may manifest an intention to keep the original offer under consideration.

2. A makes the same offer to B as that stated in Illustration 1, and B replies, “Won’t you take less?” A answers, “No.” An acceptance thereafter by B within the thirty-day period is effective. B’s inquiry was not a counter-offer, and A’s original offer stands.

c. Contrary statement of offeror or offeree.

An offeror may state in his offer that it shall continue for a stated time in any event and that in the meanwhile he will be glad to receive counter-offers. Likewise an offeree may state that he is holding the offer under advisement, but that if the offeror desires to close a bargain at once the offeree makes a specific counter-offer. Such an answer will not extend the time that the original offer remains open, but will not cut that time short. Compare § 38.

3. A makes the same offer to B as that stated in Illustration 1. B replies, “I am keeping your offer under advisement, but if you wish to close the matter at once I will give you $ 4,800.” A does not reply, and within the thirty-day period B accepts the original offer. B’s acceptance is effective.

[]{#_Toc161928142 .anchor}R. 2d Contracts § 41 – Lapse of Time

(1) An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time is specified, at the end of a reasonable time.

(2) What is a reasonable time is a question of fact, depending on all the circumstances existing when the offer and attempted acceptance are made.

(3) Unless otherwise indicated by the language or the circumstances, and subject to the rule stated in § 49, an offer sent by mail is seasonably accepted if an acceptance is mailed at any time before midnight on the day on which the offer is received.

a. Specified time.

Just as the offer may prescribe the identity of the offeree (§ 29) or the form of acceptance (§ 30), so it may prescribe a time limit for acceptance. Such a limitation must be complied with. In cases of misunderstanding, see Chapter 9.

b. Reasonable time.

In the absence of a contrary indication, just as acceptance may be made in any manner and by any medium which is reasonable in the circumstances (§ 30), so it may be made at any time which is reasonable in the circumstances. The circumstances to be considered have a wide range: they include the nature of the proposed contract, the purposes of the parties, the course of dealing between them, and any relevant usages of trade. In general, the question is what time would be thought satisfactory to the offeror by a reasonable man in the position of the offeree; but circumstances not known to the offeree may be relevant to show that the time actually taken by the offeree was satisfactory to the offeror.

c. Time for acceptance by act; rewards.

Where the offeree is invited to accept by performing or refraining from performing an act, a reasonable time for so doing is ordinarily a reasonable time for accepting. But the purposes of the offeror, if the offeree knows or has reason to know of them, must also be taken into account. Thus an offer of reward for the capture of the person guilty of a specific crime cannot ordinarily be accepted after the statute of limitations has barred prosecution.

1. A publishes an offer of reward for information leading to the arrest and conviction of the person guilty of a specified murder. B, intending to obtain the reward, gives the requested information a year after the publication of the offer. The acceptance is timely.

2. After a series of incendiary attempts, a city publishes each day for a week an offer of reward for information leading to the arrest and conviction of any person who shall set fire to any building within the city. The responsible city officials serve for one year terms. A fire set three years after the last publication is not within the terms of the offer.

3. A bank posts in its office an offer of reward for information leading to the arrest and conviction of any person who robs any bank which is a member of an association of banks in the same county. After several years the poster is removed. A robbery three years after the removal may be found to be within the terms of the offer.

d. Direct negotiations.

Where the parties bargain face to face or over the telephone, the time for acceptance does not ordinarily extend beyond the end of the conversation unless a contrary intention is indicated. A contrary intention may be indicated either by express words or by the circumstances. For example, the delivery of a written offer to the offeree, or an expectation that some action will be taken before acceptance, may indicate that a delayed acceptance is invited.

4. While A and B are engaged in conversation, A makes B an offer to which B then makes no reply, out on meeting A again a few hours later B states that he accepts the offer. There is no contract unless the offer or the circumstances indicate that the offer is intended to continue beyond the immediate conversation.

e. Offers made by mail or telegram.

Where the parties are at a distance from each other, the normal understanding is that the time for acceptance is extended at least by the normal time for transmission of the offer and for the sending of the offeree’s reply. Subsection (3) reflects the normal understanding that mail is promptly answered if a reply is mailed at any time on the day of receipt. But in the absence of a significant speculative element in the situation, a considerably longer time may be reasonable. The fact that an offer is made by telegram or mailgram may or may not indicate that the time for reply is shorter than it would be if the mail were used.

5. A makes B an offer by mail to sell goods. B receives the offer at the close of business hours and accepts it by letter promptly the next morning. The acceptance is timely.

f. Speculative transactions.

The rule that an offer becomes irrevocable when an acceptance is mailed (§§ 42, 63) in effect imposes a risk of commitment on the offeror during the period required for communication of the acceptance, although during that period the offeror has no assurance that the bargain has been concluded. The rule that the power of acceptance is terminated by the lapse of a reasonable time serves to limit this risk. The more significant the risk, the greater is the need for limitation, and hence the shorter is the time which is reasonable.

These considerations have their principal application in the sale of property which may be subject to rapid fluctuation in value, such as commodities, securities or land. The value of such property, however, may be stable for substantial periods of time, particularly in the case of land. Absence of actual fluctuation during the period before acceptance is a factor tending to indicate that acceptance occurred within a reasonable time. Similarly, delay in acceptance of an offer to insure may not be unreasonable if there is no change in the risk or in the applicable insurance rates.

The reasonable time for acceptance in a speculative transaction is brief not only because the offeror does not ordinarily intend to assume an extended risk without compensation but also because he does not intend to give the offeree an extended opportunity for speculation at the offeror’s expense. If the offeree makes use for speculative purposes of time allowed for communication, there may be a lack of good faith, and an acceptance may not be timely even though it arrives within the time contemplated by the offeror.

6. A sends B an offer by mail to sell a piece of farm land. B does not reply for three days and then mails an acceptance. It is a question of fact under the circumstances of the particular case whether the delay is unreasonable.

7. A sends B a telegraphic offer to sell oil which at the time is subject to rapid fluctuations in price. The offer is received near the close of business hours, and a telegraphic acceptance is sent the next day, after the offeree has learned of a sharp price rise. The acceptance is too late if a fixed price was offered, but may be timely if the price is market price at time of delivery.

8. A sends B an offer by mail to sell at a fixed price corporate stock not listed on an exchange. B waits two days after receiving the offer and then sends a telegraphic acceptance after learning of a sharp rise in the price bid over-the-counter. The acceptance may be too late even though it arrives before a prompt acceptance by mail would have arrived.

[]{#_Toc161928143 .anchor}R. 2d Contracts § 42 – Revocation by Communication From Offeror Received by Offeree

An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.

a. Revocability of offers.

Most offers are revocable. Revocability may rest on the express or implied terms of the offer, as in the case of bids at an auction. But the ordinary offer is revocable even though it expressly states the contrary, because of the doctrine that an informal agreement is binding as a bargain only if supported by consideration. Inroads have been made on that doctrine by statute and by rules giving effect to nominal consideration and to action in reliance on a promise. Where such rules are applicable, or where the offer is itself a formal contract or an agreement binding as a bargain, the case is governed by § 37 rather than by this Section.

1. A makes a written offer to B to sell him a piece of land. The offer states that it will remain open for thirty days and is not subject to countermand. The next day A orally informs B that the offer is terminated. B’s power of acceptance is terminated unless the offer is a contract under § 25.

b. Necessity that communication be received.

An offeror may reserve the power to revoke the offer without notice, and such a reservation will be given effect whether contained in the offer or in a later communication received by the offeree before a contract is created. But such a reservation is unusual; it deprives the offeree of a dependable basis for decision whether to accept and greatly impairs the usefulness of the offer. In the absence of such a reservation, the offeree is justified in relying on the offeror’s manifested intention regardless of any undisclosed change in the offeror’s state of mind. As to when a revocation is received by the offeree, see § 68.

c. Purported revocation after acceptance.

Once the offeree has exercised his power to create a contract by accepting the offer, a purported revocation is ineffective as such. Where an acceptance by mail is effective on dispatch, for example, it is not deprived of effect by a revocation subsequently received by the offeree. But the revocation may have effect, depending on its terms, as a failure of condition discharging the offeree’s duty of performance, as a breach by anticipatory repudiation, or as an offer to modify or rescind the contract.

2. A sends B an offer by mail to buy a piece of land for $ 5000. The next day A sends B a letter stating that unless B has already accepted A revokes the offer and makes a new offer to buy the same land for $ 4800. B receives A’s second letter after he has duly mailed a letter of acceptance, but promptly sells the land to C without further communication with A. The sale is a breach of contract by B.

3. A sends B an offer by mail to buy a piece of land. The next day A sends B a letter stating that A has changed his mind and will not buy the land even if B has already accepted the offer. B receives A’s second letter after he has duly mailed a letter of acceptance, but promptly sells the land to C. B’s duty of performance is discharged.

d. What constitutes revocation.

The word “revoke” is not essential to a revocation. Any clear manifestation of unwillingness to enter into the proposed bargain is sufficient. Thus a statement that property offered for sale has been otherwise disposed of is a revocation. But equivocal language may not be sufficient.

4. A makes an offer to buy goods from B, and later requests B not to deliver the goods until A is in a better condition to handle them. The request does not revoke the offer.

5. A makes an offer to B, and later says to B, “Well, I don’t know if we are ready. We have not decided, we might not want to go through with it.” The offer is revoked.

[]{#_Toc161928144 .anchor}R. 2d Contracts § 43 – Indirect Communication of Revocation

An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect.

a. Direct and indirect communication.

This Section extends the principle giving effect to a revocation communicated directly by the offeror to the offeree, and is subject to the same qualifications. Thus a revocation is ineffective, whether communication is direct or indirect, if the offer is itself a contract, or after the power of acceptance has been duly exercised. On the other hand, no communication at all is necessary for revocation if the offer so provides. Where a revocation is communicated through a person or persons having power to act for the offeror or offeree, the case is governed by § 42, supplemented by the law of agency.

b. Sale of land.

The rule of this Section has been applied most frequently to offers for the sale of an interest in land. If the offeror, after making such an offer, sells or contracts to sell the interest to another person than the offeree, his act manifests an intention not to perform in accordance with the offer and creates a probable inability to perform. Compare the rules on vendor’s prospective inability in §§ 250-52. Moreover, the other person has title to the land or a right to specific performance prior to any right of the offeree, and interference by the offeree with the rights of the other person may be tortious. An agreement in derogation of those rights may be unenforceable as against public policy.

1. A offers a parcel of land to B at a stated price, and gives B a week in which to consider the proposal. Within the week A contracts to sell the parcel to C, and B is informed of that fact by a tenant of the premises. B nevertheless sends a formal acceptance which is received by A within the week. There is no contract between A and B.

c. Other transactions.

The considerations applicable to offers to sell land are equally applicable to offers to sell other specific property, if the offeror enters into a transaction which confers on a third person rights prior to those of the offeree. But the rule stated is not limited to such cases. Nor is this Section an exhaustive statement of the circumstances under which indirect communication may result in termination of the offeree’s power of acceptance.

2. A offers to employ B to replace C, an employee of A who has given A a month’s notice of intention to quit. A gives B a week to consider the proposal. C changes his mind and makes a contract with A for continued employment for a year. B asks C about his duties, and C informs B of the new contract. B immediately mails a letter of acceptance to A, which arrives within the week allowed for acceptance. There is no contract between A and B.

d. Definite action; reliable information.

This Section does not apply to cases where the offeror takes no action or takes equivocal action. Thus mere negotiations with a third person, or even a definite offer to a second offeree, may be consistent with an intention on the part of the offeror to honor an acceptance by the original offeree. Even a binding contract with a third person may be expressly subject to any rights arising under the outstanding offer. Moreover, a mere rumor does not terminate the power of acceptance, if the offeree disbelieves it and is reasonable in doing so, even though the rumor is later verified. The basic standard to which the offeree is held is that of a reasonable person acting in good faith.

3. A offers to sell B a hundred shares of stock at a fixed price, and states that the offer will not be revoked for a week. Within the week C offers A a higher price for the same stock, and B learns of the higher offer. B’s power of acceptance is not terminated, since he is entitled to assume that A will honor his commitment regardless of its legal effect.

[]{#_Toc161928145 .anchor}R. 2d Contracts § 45 – Option Contract Created by Part Performance or Tender

(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.

(2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

a. Offer limited to acceptance by performance only.

This Section is limited to cases where the offer does not invite a promissory acceptance. Such an offer has often been referred to as an “offer for a unilateral contract.” Typical illustrations are found in offers of rewards or prizes and in non-commercial arrangements among relatives and friends. As to analogous cases arising under offers which give the offeree power to accept either by performing or by promising to perform, as he chooses, see §§ 32, 62.

b. Manifestation of contrary intention.

The rule of this Section is designed to protect the offeree in justifiable reliance on the offeror’s promise, and the rule yields to a manifestation of intention which makes reliance unjustified. A reservation of power to revoke after performance has begun means that as yet there is no promise and no offer. See §§ 2, 24. In particular, if the performance is one which requires the cooperation of both parties, such as the payment of money or the manual delivery of goods, a person who reserves the right to refuse to receive the performance has not made an offer.

1. B owes A $ 5000 payable in installments over a five-year period. A proposes that B discharge the debt by paying $ 4,500 cash within one month, but reserves the right to refuse any such payment. A has not made an offer. A tender by B in accordance with the proposal is an offer by B.

2. A, an insurance company, issues a bulletin to its agents, entitled “Extra Earnings Agreement,” providing for annual bonus payments to the agents varying according to “monthly premiums in force” and “lapse ratio,” but reserving the right to change or discontinue the bonus, individually or collectively, with or without notice, at any time before payment. There is no offer or promise.

c. Tender of performance.

A proposal to receive a payment of money or a delivery of goods is an offer only if acceptance can be completed without further cooperation by the offeror. If there is an offer, it follows that acceptance must be complete at the latest when performance is tendered. A tender of performance, so bargained for and given in exchange for the offer, ordinarily furnishes consideration and creates a contract.

This is so whether or not the tender carries with it any incidental promises. If no commitment is made by the offeree, the contract is an option contract.

3. A promises B to sell him a specified chattel for $ 5, stating that B is not to be bound until he pays the money. B tenders $ 5 within a reasonable time, but A refuses to accept the tender. There is a breach of contract.

d. Beginning to perform.

If the invited performance takes time, the invitation to perform necessarily includes an invitation to begin performance. In most such cases the beginning of performance carries with it an express or implied promise to complete performance. In the less common case where the offer does not contemplate or invite a promise by the offeree, the beginning of performance nevertheless completes the manifestation of mutual assent and furnishes consideration for an option contract. If the beginning of performance requires the cooperation of the offeror, tender of part performance has the same effect. Part performance or tender may also create an option contract in a situation where the offeree is invited to take up the option by making a promise, if the offer invites a preliminary performance before the time for the offeree’s final commitment.

4. A offers a reward for the return of lost property. In response to the offer, B searches for the property and finds it. A then notifies B that the offer is revoked. B makes a tender of the property to A conditional on payment of the reward, and A refuses. There is a breach of contract by A.

5. A, a magazine, offers prizes in a subscription contest. At a time when B has submitted the largest number of subscriptions, A cancels the contest. A has broken its contract with B.

6. A writes to her daughter B, living in another state, an offer to leave A’s farm to B if B gives up her home and cares for A during A’s life, B remaining free to terminate the arrangement at any time. B gives up her home, moves to A’s farm, and begins caring for A. A is bound by an option contract.

7. A offers to sell a piece of land to B, and promises that if B incurs expense in employing experts to appraise the property the offer will be irrevocable for 30 days. B hires experts and pays for their transportation to the land. A is bound by an option contract.

8. In January A, an employer, publishes a notice to his employees, promising a stated Christmas bonus to any employee who is continuously in A’s employ from January to Christmas. B, an employee hired by the week, reads the notice and continues at work beyond the expiration of the current week. A is bound by an option contract, and if B is continuously in A’s employ until Christmas a notice of revocation of the bonus is ineffective.

e. Completion of performance.

Where part performance or tender by the offeree creates an option contract, the offeree is not bound to complete performance. The offeror alone is bound, but his duty of performance is conditional on completion of the offeree’s performance. If the offeree abandons performance, the offeror’s duty to perform never arises. See § 224, defining “condition.” But the condition may be excused, for example, if the offeror prevents performance, waives it, or repudiates.

f. Preparations for performance.

What is begun or tendered must be part of the actual performance invited in order to preclude revocation under this Section. Beginning preparations, though they may be essential to carrying out the contract or to accepting the offer, is not enough. Preparations to perform may, however, constitute justifiable reliance sufficient to make the offeror’s promise binding under § 87(2).

In many cases what is invited depends on what is a reasonable mode of acceptance. The distinction between preparing for performance and beginning performance in such cases may turn on many factors: the extent to which the offeree’s conduct is clearly referable to the offer, the definite and substantial character of that conduct, and the extent to which it is of actual or prospective benefit to the offeror rather than the offeree, as well as the terms of the communications between the parties, their prior course of dealing, and any relevant usages of trade.

9. A makes a written promise to pay $ 5000 to B, a hospital, “to aid B in its humanitarian work.” Relying upon this and other like promises, B proceeds in its humanitarian work, expending large sums of money and incurring large liabilities. Performance by B has begun, and A’s offer is irrevocable.

g. Agency contracts.

This Section frequently applies to agency arrangements, particularly offers made to real estate brokers. Sometimes there is a return promise by the agent, particularly if there is an agreement for exclusive dealing, since such an agreement normally imposes an obligation on the agent to use best efforts. In other cases the agent does not promise to act, but the principal must compensate him if he does act.

[]{#_Toc161928146 .anchor}R. 2d Contracts § 46 – Revocation of General Offer

Where an offer is made by advertisement in a newspaper or other general notification to the public or to a number of persons whose identity is unknown to the offeror, the offeree’s power of acceptance is terminated when a notice of termination is given publicity by advertisement or other general notification equal to that given to the offer and no better means of notification is reasonably available.

a. Revocability.

This Section is an extension of the principle giving effect to a communicated revocation, and is subject to the same limitations. See § 42; compare § 43. Theoretically, a general offer may be made irrevocable under §§ 25 and 37 in the same ways as any other offer, but irrevocable offers to a number of unidentified persons are rare except where such documents as letters of credit are issued. An irrevocable offer, or a revocable offer which has been duly accepted, cannot of course be revoked under this Section. On the other hand, this Section does not exclude revocation under § 42 or § 43 or under a power to revoke expressly reserved in the offer; a published notice of revocation which does not comply with this Section is nonetheless effective as to an offeree who actually learns of it.

b. Available means of notice.

The rule of this Section reconciles the principle that an offer is ordinarily revocable with the fact that general publication is not a reliable means of informing offerees of the revocation of an offer. Revocation by a notification not actually received is given effect only where such revocation is provided for in the offer or where the alternative is that the offer is as a practical matter irrevocable. Where a feasible and customary substitute is available which is better calculated to produce actual receipt of notice, newspaper publication is not enough. Even where publication is the only or the best available means of giving notice, it may not be effective immediately. There must be publicity equivalent to that given the offer, including in appropriate cases a reasonable time for equivalent indirect circulation.

1. A, a newspaper, publishes an offer of prizes to the persons who procure the largest number of subscriptions as evidenced by cash or checks received by a specified time. B completes and mails an entry blank giving his name and address, which is received by A. Thereafter, during the contest, A publishes a notice that personal checks will not be counted; B does not see the notice. Unless the original offer provided otherwise, B is not bound by the later notice, since A could have given B personal notice.

2. The United States Government publishes an offer of reward for the arrest of a named fugitive. Seven months later the President publishes a proclamation revoking the offer, which is given the same publicity as the offer. Five months after the proclamation, A, who has been in Italy continuously and who learned indirectly of the offer but not of the revocation, arrests the fugitive in Italy. There is no contract.

[]{#_Toc161928147 .anchor}R. 2d Contracts § 48 – Death or Incapacity of Offeror or Offeree

An offeree’s power of acceptance is terminated when the offeree or offeror dies or is deprived of legal capacity to enter into the proposed contract.

a. Death of offeror.

The offeror’s death terminates the power of the offeree without notice to him. This rule seems to be a relic of the obsolete view that a contract requires a “meeting of minds,” and it is out of harmony with the modern doctrine that a manifestation of assent is effective without regard to actual mental assent. Some inroads have been made on the rule by statutes and decisions with respect to bank deposits and collections, and by legislation with respect to powers of attorney given by servicemen. In the absence of legislation, the rule remains in effect.

b. Incapacity of offeror.

The common types of incapacity and their effects are indicated in the Comment to § 12. The offeror’s permanent lack of capacity to enter into a contract terminates the offeree’s power of acceptance in the same manner as the offeror’s death. But persons under a disability often have power to enter into voidable contracts. See §§ 7, 12-16.

c. Death or incapacity of offeree.

Only the offeree can accept an offer which is not also a contract. When the offeree dies or lacks capacity, therefore, acceptance is impossible. By the terms of the offer, however, the personal representative or distributee of the offeree may be made an additional offeree.

d. Option contracts.

The rule stated in this Section does not affect option contracts. But the death or incapacity of one of the parties may discharge any contractual duty by reason of failure of consideration, frustration, impossibility or failure of condition.

Chapter 6 | Acceptance

[]{#_Toc161928149 .anchor}R. 2d Contracts § 50 – Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise

(1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.

(2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise.

(3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise.

a. Mode of acceptance.

The acceptance must manifest assent to the same bargain proposed by the offer, and must also comply with the terms of the offer as to the identity of the offeree and the mode of manifesting acceptance. Offers commonly invite acceptance in any reasonable manner, but a particular mode of acceptance may be required. In case of doubt, the offeree may choose to accept either by promising or by rendering the requested performance.

b. Acceptance by performance.

Where the offer requires acceptance by performance and does not invite a return promise, as in the ordinary case of an offer of a reward, a contract can be created only by the offeree’s performance. In such cases the act requested and performed as consideration for the offeror’s promise ordinarily also constitutes acceptance; under § 45 the beginning of performance or the tender of part performance of what is requested may both indicate assent and furnish consideration for an option contract. In some other cases the offeree may choose to create a contract either by making a promise or by rendering or tendering performance; in most such cases the beginning of performance or a tender of part performance operates as a promise to render complete performance. Mere preparation to perform, however, is not acceptance, although in some cases preparation may make the offeror’s promise binding under § 87(2).

1. A, who is about to leave on a month’s vacation, tells B that A will pay B $ 50 if B will paint A’s porch while A is away. B says he may not have time, and A says B may decide after A leaves. If B begins the painting, there is an acceptance by performance which operates as a promise to complete the job.

2. In Illustration 1, B also expresses doubt whether he will be able to finish the job, and it is agreed that B may quit at any time but will be paid only if he finishes the job during A’s vacation. If B begins the painting, there is an acceptance by performance creating an option contract.

c. Acceptance by promise.

The typical contract consists of mutual promises and is formed by an acceptance constituting a return promise by the offeree. A promissory acceptance may be explicitly required by the offer, or may be the only type of acceptance which is reasonable under the circumstances, or the offeree may choose to accept by promise an offer which invites acceptance either by promise or by performance. The promise may be made in words or other symbols of assent, or it may be implied from conduct, other than acts of performance, provided only that it is in a form invited or required by the offer. An act of performance may also operate as a return promise, but the acceptance in such a case is treated as an acceptance by performance rather than an acceptance by promise; thus the requirement of notification is governed by § 54 rather than by § 56. As appears from § 63, acceptance by promise may be effective when a written promise is started on its way, but the offeree must complete the acts necessary on his part to constitute a promise by him. Similarly, in cases where communication to the offeror is unnecessary under § 69, the acts constituting the promise must be complete.

3. A sends to B plans for a summer cottage to be built on A’s land in a remote wilderness area, and writes, “If you will undertake to build a cottage in accordance with the enclosed plans, I will pay you $ 5,000.” B cannot accept by beginning or completing performance, since A’s letter calls for acceptance by promise.

4. A mails a written order to B, offering to buy on specified terms a machine of a type which B regularly sells from stock. The order provides, “Ship at once.” B immediately mails a letter of acceptance. This is an acceptance by promise, even though under § 32 B might have accepted by performance.

5. A gives an order to B Company’s traveling salesman which provides, “This proposal becomes a contract without further notification when approval by an executive officer of B Company is noted hereon at its home office.” The notation of approval is an acceptance by promise.

[]{#_Toc161928150 .anchor}R. 2d Contracts § 51 – Effect of Part Performance Without Knowledge of Offer

Unless the offeror manifests a contrary intention, an offeree who learns of an offer after he has rendered part of the performance requested by the offer may accept by completing the requested performance.

a. Performance without knowledge.

Where an offer invites a return promise, the offeree may manifest assent and thereby make a return promise even though he does not have actual knowledge of the offer. But when an offer contemplates no commitment, as in cases of offers of reward, it is ordinarily essential to the acceptance of the offer that the offeree know of the proposal made. In general, performance completed before the offer comes to the offeree's knowledge does not have reference to the offer, and the terms of the offer are not satisfied by such action.

b. Completion of performance with knowledge.

Where part performance has been rendered by a person ignorant of the existence of an offer, the offer can no longer serve the purpose of inducing that performance. But it can induce the completion of performance. It is commonly intended by the offeror to have that effect and so understood by the offeree. The inference that the offeror so intends is strengthened when the part performance is valueless to him unless completed, or when the offeror knows of the offeree's continuing performance and fails to revoke. In the absence of contrary indications, the law gives effect to the common understanding. But there may be no consideration if the offeree is under a legal duty to the offeror to complete the performance.

1. A offers a reward for the apprehension and delivery into police custody of a criminal. Before learning of the reward, B arrests the criminal. After learning of the reward, B delivers the criminal into police custody. B is entitled to the reward.

2. A posts a notice on his bulletin board offering a specified bonus to any employee who remains in A's employment for four months. B, one of the employees, continues to work for one month before learning of the offer. Thereafter, B completes the four-month period of employment. B is entitled to the bonus.

[]{#_Toc161928151 .anchor}R. 2d Contracts § 58 – Necessity of Acceptance Complying with Terms of Offer

An acceptance must comply with the requirements of the offer as to the promise to be made or the performance to be rendered.

a. Scope.

This rule applies to the substance of the bargain the basic principle that the offeror is the master of his offer. That principle rests on the concept of private autonomy underlying contract law. It is mitigated by the interpretation of offers, in accordance with common understanding, as inviting acceptance in any reasonable manner unless there is contrary indication. Usage of trade or course of dealing may permit inconsequential variations; or a variation clearly to the offeror’s advantage, such as a reduction in the price of ordered goods, may be within the scope of theoffer. But even in such cases the offeror is entitled, if he makes his meaning clear, to insist on a prescribed type of acceptance.

1. A offers to sell a book to B for $ 5 and states that no other acceptance will be honored but the mailing of B’s personal check for exactly $ 5. B personally tenders $ 5 in legal tender, or mails a personal check for $ 10. There is no contract.

2. A offers to pay B $ 100 for plowing Flodden field, and states that acceptance is to be made only by posting a letter before beginning work and before the next Monday noon. Before Monday noon B completes the requested plowing and mails to A a letter stating that the work is complete. There is no contract.

[]{#_Toc161928152 .anchor}R. 2d Contracts § 59 – Purported Acceptance Which Adds Qualifications

A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.

a. Qualified acceptance.

A qualified or conditional acceptance proposes an exchange different from that proposed by the original offeror. Such a proposal is a counter-offer and ordinarily terminates the power of acceptance of the original offeree. The effect of the qualification or condition is to deprive the purported acceptance of effect. But a definite and seasonable expression of acceptance is operative despite the statement of additional or different terms if the acceptance is not made to depend on assent to the additional or different terms. The additional or different terms are then to be construed as proposals for modification of the contract. Such proposals may sometimes be accepted by the silence of the original offeror.

1. A makes an offer to B, and B in terms accepts but adds, “This acceptance is not effective unless prompt acknowledgement is made of receipt of this letter.” There is no contract, but a counter-offer.

b. Statement of conditions implied in offer.

To accept, the offeree must assent unconditionally to the offer as made, but the fact that the offeree makes a conditional promise is not sufficient to show that his acceptance is conditional. The offer itself may either expressly or by implication propose that the offeree make a conditional promise as his part of the exchange. By assenting to such a proposal the offeree makes a conditional promise, but his acceptance is unconditional. The offeror’s promise may also be conditional on the same or a different fact or event.

2. A makes a written offer to sell B a patent in exchange for B’s promise to pay $ 10,000 if B’s adviser X approves the purchase. B signs the writing in a space labelled “Accepted:” and returns the writing to A. B has made a conditional promise and an unconditional acceptance. There is a contract, but B’s duty to pay the price is conditional on X’s approval.

3. A makes a written offer to B to sell him Blackacre. By usage the offer is understood as promising a marketable title. B replies, “I accept your offer if you can convey me a marketable title.” There is a contract.

[]{#_Toc161928153 .anchor}R. 2d Contracts § 61 – Acceptance Which Requests Change of Terms

An acceptance which requests a change or addition to the terms of the offer is not thereby invalidated unless the acceptance is made to depend on an assent to the changed or added terms.

a. Interpretation of acceptance.

An acceptance must be unequivocal. But the mere inclusion of words requesting a modification of the proposed terms does not prevent a purported acceptance from closing the contract unless, if fairly interpreted, the offeree’s assent depends on the offeror’s further acquiescence in the modification.

1. A offers to sell B 100 tons of steel at a certain price. B replies, “I accept your offer. I hope that if you can arrange to deliver the steel in weekly installments of 25 tons you will do so.” There is a contract, but A is not bound to deliver in installments.

2. A offers to sell specified hardware to B on stated terms. B replies: “I accept your offer; ship in accordance with your statement. Please send me also one No. 5 hand saw at your list price.” The request for the saw is a separate offer, not a counter-offer.

[]{#_Toc161928154 .anchor}R. 2d Contracts § 63 – Time When Acceptance Takes Effect

Unless the offer provides otherwise,

(a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror; but

(b) an acceptance under an option contract is not operative until received by the offeror.

a. Rationale.

It is often said that an offeror who makes an offer by mail makes the post office his agent to receive the acceptance, or that the mailing of a letter of acceptance puts it irrevocably out of the offeree’s control. Under United States postal regulations, however, the sender of a letter has long had the power to stop delivery and reclaim the letter. A better explanation of the rule that the acceptance takes effect on dispatch is that the offeree needs a dependable basis for his decision whether to accept. In many legal systems such a basis is provided by a general rule that an offer is irrevocable unless it provides otherwise. The common law provides such a basis through the rule that a revocation of an offer is ineffective if received after an acceptance has been properly dispatched. Acceptance by telegram is governed in this respect by the same considerations as acceptance by mail.

1. A makes B an offer, inviting acceptance by telegram, and B duly telegraphs an acceptance. A purports to revoke the offer in person or by telephone or telegraph, but the attempted revocation is received by B after the telegram of acceptance is dispatched. There is no effective revocation.

b. Loss or delay in transit.

In the interest of simplicity and clarity, the rule has been extended to cases where an acceptance is lost or delayed in the course of transmission. The convenience of the rule is less clear in such cases than in cases of attempted revocation of the offer, however, and the language of the offer is often properly interpreted as making the offeror’s duty of performance conditional upon receipt of the acceptance. Indeed, where the receipt of notice is essential to enable the offeror to perform, such a condition is normally implied.

2. A offers to buy cotton from B, the operator of a cotton gin, B to accept by specifying the number of bales in a telegram sent before 8 p.m. thesame day. B duly sends a telegram of acceptance and ships the cotton, but the telegram is not delivered. There is a contract, and A is bound to take and pay for the cotton.

3. A mails to B an offer to lease land, stating, “Telegraph me Yes or No. If I do not hear from you by noon on Friday, I shall conclude No.” B duly telegraphs “Yes,” but the telegram is not delivered until after noon on Friday. Any contract formed by the telegraphic acceptance is discharged.

4. A offers to buy cattle for B, on an understanding that if B telegraphs “Yes” A will notify B of the amount of money needed and B will supply it. B’s “Yes” telegram is duly dispatched but does not arrive within a reasonable time. Any contract formed by the dispatch of the telegram is discharged.

c. Revocation of acceptance.

The fact that the offeree has power to reclaim his acceptance from the post office or telegraph company does not prevent the acceptance from taking effect on dispatch. Nor, in the absence of additional circumstances, does the actual recapture of the acceptance deprive it of legal effect, though as a practical matter the offeror cannot assert his rights unless he learns of them. An attempt to revoke the acceptance by an overtaking communication is similarly ineffective, even though the revocation is received before the acceptance is received. After mailing an acceptance of a revocable offer, the offeree is not permitted to speculate at the offeror’s expense during the time required for the letter to arrive.

A purported revocation of acceptance may, however, affect the rights of the parties. It may amount to an offer to rescind the contract or to a repudiation of it, or it may bar the offeree by estoppel from enforcing it. In some cases it may be justified as an exercise of a right of stoppage in transit or a demand for assurance of performance. Or the contract may be voidable for mistake or misrepresentation, §§ 151-54, 164. See particularly the provisions of § 153 on unilateral mistake.

5. A mails to B a note payable by C with instructions to collect the amount of the note and remit by mailing B’s own check. At C’s request B mails his own check as instructed. Subsequently, at C’s request, B recovers his letter and check from the post office. The recovery does not discharge the contract formed by the mailing of B’s check.

6. The facts being otherwise as stated in Illustration 5, B recovers his letter and check from the post office because he has learned that C is insolvent and cannot reimburse B. B is entitled to rescind the contract for mistake.

7. A mails an offer to B to appoint B A’s exclusive distributor in a specified area. B duly mails an acceptance. Thereafter B mails a letter which is received by A before the acceptance is received and which rejects the offer and makes a counter-offer. On receiving the rejection and before receiving the acceptance, A executes a contract appointing C as exclusive distributor instead of B. B is estopped to enforce the contract.

8. The Government mails to A an offer to pay the amount quoted by him for the manufacture of two sets of ship propellers, and A mails an acceptance. A then discovers that by mistake he has quoted the price for a single set, and so informs the Government by a telegram which arrives before the acceptance. A’s mailing the acceptance created a contract. The question whether the contract is voidable for mistake is governed by the rules stated in §§ 153-54.

d. Other types of cases.

The question when and where an acceptance takes effect may arise in determining the application of tax and regulatory laws, choice of governing law, venue of litigation, and other issues. Such cases often turn on policies beyond the scope of the Restatement of this Subject. To the extent that the issue is referred to the rule governing private contract disputes, the rules stated in this Section are applicable. Where the issue is what obligation is imposed by a contract, whether those rules apply is ordinarily a matter of interpretation.

9. A mails to B an offer to buy goods, and B mails an acceptance. The application of a new tax statute depends on when title to the goods passes to A, and under U.C.C. § 2-401(3) (b) title passes at the time of contracting. The time of contracting is the time when B’s acceptance is mailed.

10. A offers to insure B’s house against fire, the insurance to take effect upon actual payment of the premium, and invites B to reply by mailing his check for a specified amount. B duly mails the check. While B’s letter is in transit, the house burns. The loss is within the period of insurance coverage.

e. The offeree’s possession.

The rule of Subsection (1) gives effect to an acceptance when “put out of the offeree’s possession.” Its principal application is to the use of mail and telegraph, but it would apply equally to any other similar public service instrumentality, even though the instrumentality may for some purposes be the offeree’s agent. It may also apply to a private messenger service which is independent of the offeree and can be relied on to keep accurate records. But, except where the Government or a telegraph company can make use of its own postal or telegraph facilities, communication by means of the offeree’s employee is excluded; the employee’s possession is treated as that of the employer.

11. A makes B an offer by mail, or messenger, and B promptly sends an acceptance by his own employee. There is no contract until the acceptance is received by the offeror. As to receipt, see § 68.

f. Option contracts.

An option contract provides a dependable basis for decision whether to exercise the option, and removes the primary reason for the rule of Subsection (1). Moreover, there is no objection to speculation at the expense of a party who has irrevocably assumed that risk. Option contracts are commonly subject to a definite time limit, and the usual understanding is that the notification that the option has been exercised must be received by the offeror before that time. Whether or not there is such a time limit, in the absence of a contrary provision in the option contract, the offeree takes the risk of loss or delay in the transmission of the acceptance and remains free to revoke the acceptance until it arrives. Similarly, if there is such a mistake on the part of the offeror as justifies the rescission of his unilateral obligation, the right to rescind is not lost merely because a letter of acceptance is posted.

12. A, for consideration, gives B an option to buy property, written notice to be given on or before a specified date. Notice dispatched before but not received until after that date is not effective to exercise the option.

13. A submits a bid to supply goods to the Government, which becomes irrevocable when bids are opened. Within a reasonable time the Government mails a notice of award of the contract to A. Until A receives the notice, there is no contract binding on the Government.

[]{#_Toc161928155 .anchor}N.H.R.S.A. 382-A § 2-207 – Additional Terms in Acceptance or Confirmation.

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

Editor’s note: This is the so-called “battle of the forms” provision. While the common law requires that an acceptance be a “mirror image” of the offer, Article 2 does not. Article 2 allows a broader range of words and actions to constitute an acceptance. It is important to recognize that “battle of the forms” only applies to sales contract (not to contracts for services, real estate, intellectual property, investment securities, etc.), and the “battle of the forms” has special rules for sales contracts between merchants.

Chapter 7 | Consideration

[]{#_Toc161928157 .anchor}R. 2d Contracts § 71 – Requirement of Exchange; Types of Exchange

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

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

(3) The performance may consist of

(a) an act other than a promise, or

(b) a forbearance, or

(4) The performance 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.

a. Other meanings of “consideration.”

The word “consideration” has often been used with meanings different from that given here. It is often used merely to express the legal conclusion that a promise is enforceable. Historically, its primary meaning may have been that the conditions were met under which an action of assumpsit would lie. It was also used as the equivalent of the quid pro quo required in an action of debt. A seal, it has been said, “imports a consideration,” although the law was clear that no element of bargain was necessary to enforcement of a promise under seal. On the other hand, consideration has sometimes been used to refer to almost any reason asserted for enforcing a promise, even though the reason was insufficient. In this sense we find references to promises “in consideration of love and affection,” to “illegal consideration,” to “past consideration,” and to consideration furnished by reliance on a gratuitous promise.

Consideration has also been used to refer to the element of exchange without regard to legal consequences. Consistent with that usage has been the use of the phrase “sufficient consideration” to express the legal conclusion that one requirement for an enforceable bargain is met. Here § 17 states the element of exchange required for a contract enforceable as a bargain as “a consideration.” Thus “consideration” refers to an element of exchange which is sufficient to satisfy the legal requirement; the word “sufficient” would be redundant and is not used.

b. “Bargained for.”

In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration. Here, as in the matter of mutual assent, the law is concerned with the external manifestation rather than the undisclosed mental state: it is enough that one party manifests an intention to induce the other’s response and to be induced by it and that the other responds in accordance with the inducement. See § 81; compare §§ 19, 20. But it is not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making of the promise; both elements must be present, or there is no bargain. Moreover, a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal. In such cases there is no consideration and the promise is enforced, if at all, as a promise binding without consideration under §§ 82-94.

1. A offers to buy a book owned by B and to pay B $ 10 in exchange therefor. B accepts the offer and delivers the book to A. The transfer and delivery of the book constitute a performance and are consideration for A’s promise. This is so even though A at the time he makes the offer secretly intends to pay B $ 10 whether or not he gets the book, or even though B at the time he accepts secretly intends not to collect the $ 10.

2. A receives a gift from B of a book worth $ 10. Subsequently A promises to pay B the value of the book. There is no consideration for A’s promise. This is so even though B at the time he makes the gift secretly hopes that A will pay him for it. As to the enforcement of such promises, see § 86.

3. A promises to make a gift of $ 10 to B. In reliance on the promise B buys a book from C and promises to pay C $ 10 for it. There is no consideration for A’s promise. As to the enforcement of such promises, see § 90.

4. A desires to make a binding promise to give $ 1000 to his son B. Being advised that a gratuitous promise is not binding, A writes out and signs a false recital that B has sold him a car for $ 1000 and a promise to pay that amount. There is no consideration for A’s promise.

5. A desires to make a binding promise to give $ 1000 to his son B. Being advised that a gratuitous promise is not binding, A offers to buy from B for $ 1000 a book worth less than $ 1. B accepts the offer knowing that the purchase of the book is a mere pretense. There is no consideration for A’s promise to pay $ 1000.

c. Mixture of bargain and gift.

In most commercial bargains there is a rough equivalence between the value promised and the value received as consideration. But the social functions of bargains include the provision of opportunity for free individual action and exercise of judgment and the fixing of values by private action, either generally or for purposes of the particular transaction. Those functions would be impaired by judicial review of the values so fixed. Ordinarily, therefore, courts do not inquire into the adequacy of consideration, particularly where one or both of the values exchanged are difficult to measure. Even where both parties know that a transaction is in part a bargain and in part a gift, the element of bargain may nevertheless furnish consideration for the entire transaction.

On the other hand, a gift is not ordinarily treated as a bargain, and a promise to make a gift is not made a bargain by the promise of the prospective donee to accept the gift, or by his acceptance of part of it. This may be true even though the terms of gift impose a burden on the donee as well as the donor. In such cases the distinction between bargain and gift may be a fine one, depending on the motives manifested by the parties. In some cases there may be no bargain so long as the agreement is entirely executory, but performance may furnish consideration or the agreement may become fully or partly enforceable by virtue of the reliance of one party or the unjust enrichment of the other.

6. A offers to buy a book owned by B and to pay B $ 10 in exchange therefor. B’s transfer and delivery of the book are consideration for A’s promise even though both parties know that such books regularly sell for $ 5 and that part of A’s motive in making the offer is to make a gift to B. See §§ 79, 81.

7. A owns land worth $ 10,000 which is subject to a mortgage to secure a debt of $ 5,000. A promises to make a gift of the land to his son B and to pay off the mortgage, and later gives B a deed subject to the mortgage. B’s acceptance of the deed is not consideration for A’s promise to pay the mortgage debt.

8. A and B agree that A will advance $ 1000 to B as a gratuitous loan. B’s promise to accept the loan is not consideration for A’s promise to make it. But the loan when made is consideration for B’s promise to repay.

d. Types of consideration.

Consideration may consist of a performance or of a return promise. Consideration by way of performance may be a specified act of forbearance, or any one of several specified acts or forbearances of which the offeree is given the choice, or such conduct as will produce a specified result. Or either the offeror or the offeree may request as consideration the creation, modification or destruction of a purely intangible legal relation. Not infrequently the consideration bargained for is an act with the added requirement that a certain legal result shall be produced. Consideration by way of return promise requires a promise as defined in § 2. Consideration may consist partly of promise and partly of other acts or forbearances, and the consideration invited may be a performance or a return promise in the alternative. Though a promise is itself an act, it is treated separately from other acts.

9. A promises B, his nephew aged 16, that A will pay B $ 1000 when B becomes 21 if B does not smoke before then. B’s forbearance to smoke is a performance and if bargained for is consideration for A’s promise.

10. A says to B, the owner of a garage, “I will pay you $ 100 if you will make my car run properly.” The production of this result is consideration for A’s promise.

11. A has B’s horse in his possession. B writes to A, “If you will promise me $ 100 for the horse, he is yours.” A promptly replies making the requested promise. The property in the horse at once passes to A. The change in ownership is consideration for A’s promise.

12. A promises to pay B $ 1,000 if B will make an offer to C to sell C certain land for $ 25,000 and will leave the offer open for 24 hours. B makes the requested offer and forbears to revoke it for 24 hours, but C does not accept. The creation of a power of acceptance in C is consideration for A’s promise.

13. A mails a written order to B, offering to buy specified machinery on specified terms. The order provides “Ship at once.” B’s prompt shipment or promise to ship is consideration for A’s promise to pay the price.

e. Consideration moving from or to a third person.

It matters not from whom the consideration moves or to whom it goes. If it is bargained for and given in exchange for the promise, the promise is not gratuitous.

14. A promises B to guarantee payment of a bill of goods if B sells the goods to C. Selling the goods to C is consideration for A’s promise.

15. A makes a promissory note payable to B in return for a payment by B to C. The payment is consideration for the note.

16. A, at C’s request and in exchange for $ 1 paid by C, promises B to give him a book. The payment is consideration for A’s promise.

17. A promises B to pay B $ 1, in exchange for C’s promise to A to give A a book. The promises are consideration for one another.

18. A promises to pay $ 1,000 to B, a bank, in exchange for the delivery of a car by C to A’s son D. The delivery of the car is consideration for A’s promise.

[]{#_Toc161928158 .anchor}R. 2d Contracts § 73 – Performance of Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.

a. Rationale.

A claim that the performance of a legal duty furnished consideration for a promise often raises a suspicion that the transaction was gratuitous or mistaken or unconscionable. If the performance was not in fact bargained for and given in exchange for the promise, the case is not within this Section: in such cases there is no consideration under the rule stated in § 71(1). Mistake, misrepresentation, duress, undue influence, or public policy may invalidate the transaction even though there is consideration.

But the rule of this Section renders unnecessary any inquiry into the existence of such an invalidating cause, and denies enforcement to some promises which would otherwise be valid. Because of the likelihood that the promise was obtained by an express or implied threat to withhold performance of a legal duty, the promise does not have the presumptive social utility normally found in a bargain. Enforcement must therefore rest on some substantive or formal basis other than the mere fact of bargain.

b. Public duties; torts and crimes.

A legal duty may be owed to the promisor as a member of the public, as when the promisee is a public official. In such cases there is often no direct sanction available to a member of the public to compel performance of the duty, and the danger of express or implied threats to withhold performance affects public as well as private interests. A bargain by a public official to obtain private advantage for performing his duty is therefore unenforceable as against public policy. And under this Section performance of the duty is not consideration for a promise.

Similar reasoning may apply to duties of public utilities, duties of fiduciaries, and in some cases to duties of citizens generally. Thus a bargain to pay a witness for testimony may be unenforceable as against public policy. A bargain induced by an improper threat may be voidable for duress. If the only thing bargained for is forbearance to commit a crime or tort, the bargain may be unenforceable as against public policy. The performance of legal duty is not consideration for a promise in any such case if the duty is owed to the promisor. If the legal duty is not owed to the promisor, there is consideration but the violation of public policy or other invalidating cause may remain.

In applying this Section it is first necessary to define the legal duty. The requirement of consideration is satisfied if the duty is doubtful or is the subject of honest dispute, or if the consideration includes a performance in addition to or materially different from the performance of the duty. Whether such facts eliminate duress or violation of public policy or other invalidating cause depends on the circumstances. Ordinarily a mere formality such as the affixing of a seal, though sufficient to render consideration unnecessary, does not cure such defects. In some situations, however, where there is no other invalidating cause but lack of consideration, the bargain may be enforceable by virtue of reliance or unjust enrichment or formality.

1. A offers a reward to whoever produces evidence leading to the arrest and conviction of the murderer of B. C produces such evidence in the performance of his duty as a police officer. C’s performance is not consideration for A’s promise.

2. In Illustration 1, C’s duties as a police officer are limited to crimes committed in a particular State, and while on vacation he gathers evidence as to a crime committed elsewhere. C’s performance is consideration for the promise.

3. In a State where contracts between husband and wife are enforced and spouses are under a duty not to leave without just cause, A’s wife, B, leaves him without just cause. A promises to pay B $ 1,000 if she will return. Induced thereby, B returns. Her return is not consideration. Compare §§ 175-77, 190.

c. Contractual duty to the promisor.

Legal remedies for breach of contract ordinarily involve delay and expense and rarely put the promisee in fully as good a position as voluntary performance. It is therefore often to a promisee’s advantage to offer a bonus to a recalcitrant promisor to induce performance without legal proceedings, and an unscrupulous promisor may threaten breach in order to obtain such a bonus. In extreme cases, a bargain for additional compensation under such circumstances may be voidable for duress. And the lack of social utility in such bargains provides what modern justification there is for the rule that performance of a contractual duty is not consideration for a new promise.

But the rule has not been limited to cases where there was a possibility of unfair pressure, and it has been much criticized as resting on scholastic logic. Slight variations of circumstance are commonly held to take a case out of the rule, particularly where the parties have made an equitable adjustment in the course of performance of a continuing contract, or where an impecunious debtor has paid part of his debt in satisfaction of the whole. And in some states the rule has simply been repudiated.

4. A, an architect, agrees with B to superintend a construction project for a fixed fee. During the course of the project, without excuse, A takes away his plans and refuses to continue, and B promises him an extra fee if A will resume work. A’s resumption of work is not consideration for B’s promise of an extra fee.

5. A files a claim for total disability under an accident insurance policy written by B. Without investigation, discussion or dispute, B pays A the lesser amount which would be payable for partial disability, and A signs a receipt for “full payment” of the claim. The payment is not consideration for A’s promise to accept it in full satisfaction of his claim for total disability.

6. A, being insolvent and contemplating bankruptcy, offers B $ 30 in full settlement of a debt of $ 100. B dissuades A from going into bankruptcy, accepts the offer, receives the money, and closes the account. A’s forbearance to seek a discharge in bankruptcy is consideration for B’s promise not to seek further payment.

7. A owes B a liquidated sum. Any payment by A at an earlier time, or in a different medium from that required by the duty, is consideration for B’s promise to accept it in full satisfaction if the difference in performance is part of what is requested and given in exchange for the promise.

8. A owes B a matured liquidated debt bearing interest. Mutual promises to extend the debt for a year even at a lower rate of interest are binding. By such an agreement A gives up the right to terminate the running of interest by paying the debt.

d. Contractual duty to third person.

The rule that performance of legal duty is not consideration for a promise has often been applied in cases involving a contractual duty owed to a person other than the promisor. In such cases, however, there is less likelihood of economic coercion or other unfair pressure than there is if the duty is owed to the promisee. In some cases consideration can be found in the fact that the promisee gives up his right to propose to the third person the rescission or modification of the contractual duty. But the tendency of the law has been simply to hold that performance of contractual duty can be consideration if the duty is not owed to the promisor. Relief may still be given to the promisor in appropriate cases under the rules governing duress and other invalidating causes.

9. A and B are engaged to be married. In an antenuptial agreement C, A’s father, promises B that C will pay an annuity to A, and A and B marry in reliance on the promise. The marriage is consideration for C’s promise.

10. A and her husband B are employed as domestic servants of C. B having become ill, C employs A to care for B in the home of A and B. A’s care for B is consideration for C’s promise to pay wages to A.

11. A contracts with B to install heating units in houses being built by B for C. B becomes insolvent and discontinues work, and C promises to pay A if A completes the installation in accordance with the contract between A and B. A’s performance is consideration for C’s promise.

12. A is employed to drive B’s horse in a race. C owns the dam of B’s horse and is entitled to a prize if B’s horse wins the race. C promises A a bonus if he wins the race. A’s driving in the race is consideration for C’s promise, but B may be entitled to the bonus.

e. Voidable and unenforceable duties.

The duty referred to in the Section is confined to a duty for which any remedy ordinarily allowed by the law for that kind of duty is still available. One who may at will avoid a legal relation or refrain from any performance without legal consequences, or against whom all remedies appropriate to the enforcement of his duty have become barred, is not under a duty within the meaning of the Section.

13. A, an infant, promises B to pay B $ 50 for a set of books which A does not need. B delivers the books. A becomes of age and threatens to rescind the bargain, as the law permits him to do. B promises A that if A will pay the $ 50 as originally agreed, B will give A another book. A, induced thereby, pays the $ 50. The payment is consideration.

14. A sells goods to B, who becomes indebted therefor in the sum of $ 100. The Statute of Limitations bars any remedy of A to recover the debt. A promises B that if B will pay the debt, A will give B a specified book. B pays the debt. The payment is consideration.

f. Doubtful, disputed and unliquidated duties.

Such duties are not within this Section. They are the subject of § 74.

[]{#_Toc161928159 .anchor}R. 2d Contracts § 74 – Settlement of Claims

(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless

(a) the claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or

(b) the forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid.

(2) The execution of a written instrument surrendering a claim or defense by one who is under no duty to execute it is consideration if the execution of the written instrument is bargained for even though he is not asserting the claim or defense and believes that no valid claim or defense exists.

a. Relation to legal-duty rule.

Subsection (1) elaborates a limitation on the scope of the legal-duty rule stated in § 73. That limitation is based on the traditional policy of favoring compromises of disputed claims in order to reduce the volume of litigation. Surrender of an invalid defense commonly means that a legal duty is performed, but in cases of invalid claims Subsection (1) may go beyond the legal-duty rule, since in many situations any legal duty not to litigate unfounded claims is likely to be unenforceable. In any event, the subject of compromise agreements is of sufficient importance to deserve separate treatment. Subsection (2) is clearly beyond the scope of the legal-duty rule, and merely states for greater clarity an application of § 72.

b. Requirement of good faith.

The policy favoring compromise of disputed claims is clearest, perhaps, where a claim is surrendered at a time when it is uncertain whether it is valid or not. Even though the invalidity later becomes clear, the bargain is to be judged as it appeared to the parties at the time; if the claim was then doubtful, no inquiry is necessary as to their good faith. Even though the invalidity should have been clear at the time, the settlement of an honest dispute is upheld. But a mere assertion or denial of liability does not make a claim doubtful, and the fact that invalidity is obvious may indicate that it was known. In such cases Subsection (1) (b) requires a showing of good faith.

1. A, a shipowner, has a legal duty to provide maintenance and cure for B, a seaman. B honestly but unreasonably claims that adequate care is not available in a free public hospital and that he is entitled to treatment by a private physician. B’s forbearance to press this claim is consideration for A’s promise to be responsible for the consequences of any improper treatment in the public hospital.

2. A, knowing that he has no legal basis for complaint, frequently complains to B, his father, that B has made more gifts to B’s other children than to A. B promises that if A will cease complaining, B will forgive a debt owed by A to B. A’s forbearance to assert his claim of discrimination is not consideration for B’s promise.

3. A, knowing that B is a married man, cohabits with him for several years. During that time B promises to marry A as soon as he is divorced. After the cohabitation ceases, A surrenders all her claims on account of the promise to marry in consideration of B’s promise to pay her $ 1000 a month during her life. Under applicable state law A has no valid claim. If it is found that A knew there was no valid claim, there is no consideration for B’s promise of payment. Compare §§ 189-90.

c. Unliquidated obligations.

An undisputed obligation may be unliquidated, that is uncertain or disputed in amount. The settlement of such a claim is governed by the same principles as settlement of a claim the existence of which is doubtful or disputed. The payment of any definite sum of money on account of a single claim which is entirely unliquidated is consideration for a return promise. An admission by the obligor that a minimum amount is due does not liquidate the claim even partially unless he is contractually bound to the admission. But payment of less than is admittedly due may in some circumstances tend to show that a partial defense or offset was not asserted in good faith.

Payment of an obligation which is liquidated and undisputed is not consideration for a promise to surrender an unliquidated claim which is wholly distinct. Whether in a particular case there is a single unliquidated claim or a combination of separate claims, some liquidated and some not, depends on the circumstances and the agreements of the parties. If there are no circumstances of unfair pressure or economic coercion and a disputed item is closely related to an undisputed item, the two are treated as making up a single unliquidated claim; and payment of the amount admittedly due can be consideration for a promise to surrender the entire claim.

4. A, a real estate broker, is entitled to a commission for selling B’s land, amounting to five per cent or $ 1,500. B claims in good faith that he owes only one per cent or $ 300, and offers to pay that amount in full settlement of the claim for commission. A accepts the offer. The payment is consideration for B’s promise to surrender his entire claim.

5. A owes B at least $ 4,280 on a logging contract. Additional items in the account are unliquidated, and some of them are the subject of honest dispute. A disputes B’s right to all above $ 4,280 on grounds he knows to be untrue, and offers $ 4,000 in full settlement. A’s payment of $ 4,000 is not consideration for B’s promise to surrender his entire claim.

6. A contracts to sell and deliver a lot of goods to B. On delivery B accepts a commercial unit priced at $ 30 and rejects the rest, priced at $ 50. B claims in good faith but erroneously that the rejected goods are defective. A promises to surrender any claim based on the rejection if B pays the $ 30. B’s payment is consideration for A’s promise.

7. A stops payment on a check for $ 200 drawn on his account in the B bank, but the bank pays the check and charges his account, leaving a balance of $ 800. There is an honest dispute as to the propriety of the charge, and the bank refuses to pay any part of the $ 800 until the dispute is settled. To obtain the money, A promises to make no further claim. Payment of the $ 800 by the bank is not consideration for the promise.

d. Forbearance without surrender.

Forbearance to assert a valid claim or a doubtful or honestly-asserted claim may be consideration for a promise, just as surrender of the claim would be. Where the forbearance is temporary and it is contemplated that the claim will be asserted later, there is sometimes a question whether the forbearance is bargained for and given in exchange for the promise. If an offer specifies a return promise to forbear as the requested consideration, forbearance without promise is not an acceptance. Compare § 53. But a promise to forbear may be implied. Compare §§ 32, 62. Whether a promise is consideration depends on the rules stated in §§ 75-78. Forbearance which is not bargained for may in some cases be reliance sufficient to bring § 90 into play.

8. A owes B $ 120. Without requesting B to forbear suit, C promises B in April that if A does not pay by October 1 C will pay $ 100. B’s forbearance to sue until October is not consideration for C’s promise.

9. A owes B a debt secured by mortgage, and B begins foreclosure proceedings. C requests B to forbear and promises to pay the debt. B’s forbearance for a reasonable time is consideration for C’s promise.

e. Execution of release or quit-claim deed.

Subsection (2) provides for the situation where the party who would be subject to a claim or defense, if one existed, wants assurance of its non-existence. Such assurance may be useful, for example, to enable him to obtain credit or to sell property. Although surrender of a non-existent claim by one who knows he has no claim is not consideration for a promise, the execution of an instrument of surrender may be consideration if there is no improper pressure or deception. But there is no consideration if the surrendering party is under a duty to execute the instrument, as under U.C.C. §§ 3-505(1)(d), 9-208, 9-404.

10. A owns land and desires to mortgage it. He is informed that his title may be defective by reason of a possible interest in B. B says that he has no claim and has previously given a deed to the land to A’s grantor. A promises to pay $ 50 for a new quit-claim deed. B’s execution and delivery of such a deed is consideration for A’s promise.

[]{#_Toc161928160 .anchor}R. 2d Contracts § 77 – Illusory and Alternative Promises

A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless

(a) each of the alternative performances would have been consideration if it alone had been bargained for; or

(b) one of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.

a. Illusory promises.

Words of promise which by their terms make performance entirely optional with the “promisor” do not constitute a promise. In such cases there might theoretically be a bargain to pay for the utterance of the words, but in practice it is performance which is bargained for. Where the apparent assurance of performance is illusory, it is not consideration for a return promise. A different rule applies, however, where performance is optional, not by the terms of the agreement, but by virtue of a rule of law. See § 5 (defining “term”).

1. A offers to deliver to B at $ 2 a bushel as many bushels of wheat, not exceeding 5,000, as B may choose to order within the next 30 days. B accepts, agreeing to buy at that price as much as he shall order from A within that time. B’s acceptance involves no promise by him, and is not consideration. Compare §§ 31, 34.

2. A promises B to act as B’s agent for three years from a future date on certain terms; B agrees that A may so act, but reserves the power to terminate the agreement at any time. B’s agreement is not consideration, since it involves no promise by him.

b. Alternative promises.

A promise in the alternative may be made because each of the alternative performances is the object of desire to the promisee. Or the promisee may desire one performance only, but the promisor may reserve an alternative which he may deem advantageous. In either type of case the promise is consideration if it cannot be kept without some action or forbearance which would be consideration if it alone were bargained for. But if the promisor has an unfettered choice of alternatives, and one alternative would not have been consideration if separately bargained for, the promise in the alternative is not consideration.

3. A offers to deliver to B at $ 2 a bushel as many bushels of wheat, not exceeding 5,000, as B may choose to order within the next 30 days, if B will promise to order at least 1,000 bushels within that time. B accepts. B’s promise is consideration since it reserves only a limited option and cannot be performed without doing something which would be consideration if it alone were bargained for.

4. A agrees to sell and B to buy between 400 and 600 tons of fertilizer in installments as ordered by B, A reserving the right to terminate the agreement at any time without notice. B’s promise is without consideration.

5. A promises B to act as B’s agent for three years on certain terms, starting immediately; B agrees that A may so act, but reserves the power to terminate the agreement on 30 days notice. B’s agreement is consideration, since he promises to continue the agency for at least 30 days.

6. A owes B an undisputed debt of $ 5,000 payable in five years. A makes a subsequent promise that he will either pay $ 4,000 at the end of the first year or pay the debt at maturity; in return B promises to accept the $ 4,000, if paid at the end of the first year, in full satisfaction of the debt. A’s subsequent promise is not consideration for B’s return promise, since the alternative of performing his legal duty is not consideration. See §§ 73, 75.

c. Alternatives not dependent on promisor’s free choice.

A promise may give the promisee a right to choose one of several stated performances. Or the selection among alternative performances may be left to events not within the control of either party. In such cases the promise, if bargained for, is consideration if any one of the alternatives would have been, unless the promisor knows that all such alternatives are subject to conditions which cannot exist or occur. Similarly, the promise may be consideration even though a conditional power of choice is left to the promisor. For example, the promisor may reserve an option to terminate only after he has rendered performance which would be consideration, or only in a contingency which may never occur, or only on a condition of forbearance by him which would have been consideration. Compare Comment d to § 76.

7. A orders goods from B for shipment within three months, reserving the right to cancel the order before shipment. B has the goods in stock and accepts the order. A’s promise to pay for the goods is consideration for B’s promise to ship, since B can prevent cancellation by shipping immediately.

d. Implied limitations on promisor’s choice.

A limitation on the promisor’s freedom of choice need not be stated in words. It may be an implicit term of the promise, or it may be supplied by law. Thus a power to terminate a contract for the sale of goods may be subject to a statutory requirement of reasonable notification, and an agreement dispensing with notification may be unconscionable and invalid. Again, an alternative promise may cease to be alternative when performance of one alternative becomes impossible or unenforceable on grounds of public policy. If such a contingency is within the contemplation of the parties so that it is part of what is bargained for, the promise is consideration.

8. A promises to sell his output or buy his requirements of a specified type of goods from B on specified terms. A’s promise is consideration for a return promise by B. A must operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his output or requirements will approximate a reasonably foreseeable figure.

9. A promises to pay B half of any profits he derives from the sale of goods manufactured by B; in return B promises that A shall have the exclusive right to market such goods. The promises are consideration for each other, since the agreement for exclusive dealing imposes an obligation on A to use best efforts to promote sale of the goods and on B to use best efforts to supply them.

10. A owes B a matured liquidated debt bearing interest. In an agreement to extend the debt for a year at a lower rate of interest, B reserves the right to accelerate payment “at will,” but under U.C.C. § 1-208, B may accelerate payment only if he in good faith believes that the prospect of payment is impaired. B’s surrender of the unconditional right to demand immediate payment is consideration.

11. A is under a contractual duty to deliver to B a described automobile. Because it is doubtful whether such a car will be available at the agreed time, A promises that if he cannot obtain it he will deliver a described substitute; B agrees to accept the substitute if delivered. A’s promise is consideration.

[]{#_Toc161928161 .anchor}R. 2d Contracts § 79 – Adequacy of Consideration; Mutuality of Obligation

If the requirement of consideration is met, there is no additional requirement of

(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or

(b) equivalence in the values exchanged; or

a. Rationale.

In such typical bargains as the ordinary sale of goods each party gives up something of economic value, and the values exchanged are often roughly or exactly equivalent by standards independent of the particular bargain. Quite often promise is exchanged for promise, and the promised performances are sometimes divisible into matching parts. Hence it has sometimes been said that consideration must consist of a “benefit to the promisor” or a “detriment to the promisee”; it has frequently been claimed that there was no consideration because the economic value given in exchange was much less than that of the promise or the promised performance; “mutuality of obligation” has been said to be essential to a contract. But experience has shown that these are not essential elements of a bargain or of an enforceable contract, and they are negated as requirements by the rules stated in §§ 71-78. This Section makes that negation explicit.

b. Benefit and detriment.

Historically, the common law action of debt was said to require a quid pro quo, and that requirement may have led to statements that consideration must be a benefit to the promisor. But contracts were enforced in the common-law action of assumpsit without any such requirement; in actions of assumpsit the emphasis was rather on the harm to the promisee, and detrimental reliance on a promise may still be the basis of contractual relief. But reliance is not essential to the formation of a bargain, and remedies for breach have longbeen given in cases of exchange of promise for promise where neither party has begun to perform. Today when it is said that consideration must involve a detriment to the promisee, the supposed requirement is often qualified by a statement that a “legal detriment” is sufficient even though there is no economic detriment or other actual loss. It is more realistic to say simply that there is no requirement of detriment.

1. A contracts to sell property to B. As a favor to B, who is C’s friend, and in consideration of A’s performance of the contract, C guarantees that B will pay the agreed price. A’s performance is consideration for C’s promise.

2. A has executed a document in the form of a guaranty which imposes no obligation on A and has no value. B’s surrender of the document to A, if bargained for, is consideration for a promise by A to pay $ 10,000. Compare § 74.

c. Exchange of unequal values.

To the extent that the apportionment of productive energy and product in the economy are left to private action, the parties to transactions are free to fix their own valuations. The resolution of disputes often requires a determination of value in the more general sense of market value, and such values are commonly fixed as an approximation based on a multitude of private valuations. But in many situations there is no reliable external standard of value, or the general standard is inappropriate to the precise circumstances of the parties. Valuation is left to private action in part because the parties are thought to be better able than others to evaluate the circumstances of particular transactions. In any event, they are not ordinarily bound to follow the valuations of others.

Ordinarily, therefore, courts do not inquire into the adequacy of consideration. This is particularly so when one or both of the values exchanged are uncertain or difficult to measure. But it is also applied even when it is clear that the transaction is a mixture of bargain and gift. Gross inadequacy of consideration may be relevant to issues of capacity, fraud and the like, but the requirement of consideration is not a safeguard against imprudent and improvident contracts except in cases where it appears that there is no bargain in fact.

3. A borrows $ 300 from B to enable A to begin litigation to recover a gold mine through litigation, and promises to repay $ 10,000 when he recovers the mine. The loan is consideration for the promise.

4. A is pregnant with the illegitimate child of B, a wealthy man. A promises to give the child A’s surname and B’s given name, and B promises to provide for the support and education of the child and to set up a trust of securities to provide the child with a minimum net income of $ 100 per week until he reaches the age of 21. The naming of the child is consideration for B’s promise.

d. Pretended exchange.

Disparity in value, with or without other circumstances, sometimes indicates that the purported consideration was not in fact bargained for but was a mere formality or pretense. Such a sham or “nominal” consideration does not satisfy the requirement of § 71. Promises are enforced in such cases, if at all, either as promises binding without consideration under §§ 82-94 or as promises binding by virtue of their formal characteristics under § 6.

5. In consideration of one cent received, A promises to pay $ 600 in three yearly installments of $ 200 each. The one cent is merely nominal and is not consideration for A’s promise.

6. A dies leaving no assets and owing $ 4000 to the B bank. C, A’s widow, promises to pay the debt, and B promises to make no claim against A’s estate. Without some further showing, B’s promise is a mere formality and is not consideration for C’s promise.

e. Effects of gross inadequacy.

Although the requirement of consideration may be met despite a great difference in the values exchanged, gross inadequacy of consideration may be relevant in the application of other rules. Inadequacy “such as shocks the conscience” is often said to be a “badge of fraud,” justifying a denial of specific performance. Inadequacy may also help to justify rescission or cancellation on the ground of lack of capacity, mistake, misrepresentation, duress or undue influence. Unequal bargains are also limited by the statutory law of usury, by regulation of the rates of public utilities and some other enterprises, and by special rules developed for the sale of an expectation of inheritance, for contractual penalties and forfeitures, and for agreements between secured lender and borrower.

f. Mutuality.

The word “mutuality,” though often used in connection with the law of Contracts, has no definite meaning. “Mutual assent” as one element of a bargain is the subject of Topic 2 of this Chapter. Clause (c) of this Section negates any supposed requirement of “mutuality of obligation.” Such a requirement has sometimes been asserted in the form, “Both parties must be bound or neither is bound.” That statement is obviously erroneous as applied to an exchange of promise for performance; it is equally inapplicable to contracts governed by §§ 82-94 and to contracts enforceable by virtue of their formal characteristics under § 6. Even in the ordinary case of the exchange of promise for promise, § 78 makes it clear that voidable and unenforceable promises may be consideration. The only requirement of “mutuality of obligation” even in cases of mutual promises is that stated in §§ 76-77.

Chapter 8 | Promissory Estoppel

[]{#_Toc161928163 .anchor}R. 2d Contracts § 90 – Promise Reasonably Inducing Action or Forbearance

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

(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.

a. Relation to other rules.

Obligations and remedies based on reliance are not peculiar to the law of contracts. This Section is often referred to in terms of “promissory estoppel,” a phrase suggesting an extension of the doctrine of estoppel. Estoppel prevents a person from showing the truth contrary to a representation of fact made by him after another has relied on the representation. Reliance is also a significant feature of numerous rules in the law of negligence, deceit and restitution. In some cases those rules and this Section overlap; in others they provide analogies useful in determining the extent to which enforcement is necessary to avoid injustice.

It is fairly arguable that the enforcement of informal contracts in the action of assumpsit rested historically on justifiable reliance on a promise. Certainly reliance is one of the main bases for enforcement of the half-completed exchange, and the probability of reliance lends support to the enforcement of the executory exchange. This Section thus states a basic principle which often renders inquiry unnecessary as to the precise scope of the policy of enforcing bargains. Sections 87-89 state particular applications of the same principle to promises ancillary to bargains, and it also applies in a wide variety of non-commercial situations.

1. A, knowing that B is going to college, promises B that A will give him $ 5,000 on completion of his course. B goes to college, and borrows and spends more than $ 5,000 for college expenses. When he has nearly completed his course, A notifies him of an intention to revoke the promise. A’s promise is binding and B is entitled to payment on completion of the course without regard to whether his performance was “bargained for” under § 71.

b. Character of reliance protected.

The principle of this Section is flexible. The promisor is affected only by reliance which he does or should foresee, and enforcement must be necessary to avoid injustice. Satisfaction of the latter requirement may depend on the reasonableness of the promisee’s reliance, on its definite and substantial character in relation to the remedy sought, on the formality with which the promise is made, on the extent to which the evidentiary, cautionary, deterrent and channeling functions of form are met by the commercial setting or otherwise, and on the extent to which such other policies as the enforcement of bargains and the prevention of unjust enrichment are relevant. The force of particular factors varies in different types of cases: thus reliance need not be of substantial character in charitable subscription cases, but must in cases of firm offers and guaranties.

2. A promises B not to foreclose, for a specified time, a mortgage which A holds on B’s land. B thereafter makes improvements on the land. A’s promise is binding and may be enforced by denial of foreclosure before the time has elapsed.

3. A sues B in a municipal cout for damages for personal injuries caused by B’s negligence. After the one year statute of limitations has run, B requests A to discontinue the action and start again in the superior cout where the action can be consolidated with other actions against B arising out of the same accident. A does so. B’s implied promise that no harm to A will result bars B from asserting the statute of limitations as a defense.

4. A has been employed by B for 40 years. B promises to pay A a pension of $ 200 per month when A retires. A retires and forbears to work elsewhere for several years while B pays the pension. B’s promise is binding.

c. Reliance by third persons.

If a promise is made to one party for the benefit of another, it is often foreseeable that the beneficiary will rely on the promise. Enforcement of the promise in such cases rests on the same basis and depends on the same factors as in cases of reliance by the promisee. Justifiable reliance by third persons who are not beneficiaries is less likely, but may sometimes reinforce the claim of the promisee or beneficiary.

5. A holds a mortgage on B’s land. To enable B to obtain a loan, A promises B in writing to release part of the land from the mortgage upon payment of a stated sum. As A contemplated, C lends money to B on a second mortgage, relying on A’s promise. The promise is binding and may be enforced by C.

6. A executes and delivers a promissory note to B, a bank, to give B a false appearance of assets, deceive the banking authorities, and enable the bank to continue to operate. After several years B fails and is taken over by C, a representative of B’s creditors. A’s note is enforceable by C.

7. A and B, husband and wife, are tenants by the entirety of a tract of land. They make an oral promise to B’s niece C to give her the tract. B, C and C’s husband expend money in building a house on the tract and C and her husband take possession and live there for several years until B dies. The expenditures by B and by C’s husband are treated like those by C in determining whether justice requires enforcement of the promise against A.

d. Partial enforcement.

A promise binding under this section is a contract, and full-scale enforcement by normal remedies is often appropriate. But the same factors which bear on whether any relief should be granted also bear on the character and extent of the remedy. In particular, relief may sometimes be limited to restitution or to damages or specific relief measured by the extent of the promisee’s reliance rather than by the terms of the promise. Unless there is unjust enrichment of the promisor, damages should not put the promisee in a better position than performance of the promise would have put himIn the case of a promise to make a gift it would rarely be proper to award consequential damages which would place a greater burden on the promisor than performance would have imposed.

8. A applies to B, a distributor of radios manufactured by C, for a “dealer franchise” to sell C’s products. Such franchises are revocable at will. B erroneously informs A that C has accepted the application and will soon award the franchise, that A can proceed to employ salesmen and solicit orders, and that A will receive an initial delivery of at least 30 radios. A expends $ 1,150 in preparing to do business, but does not receive the franchise or any radios. B is liable to A for the $ 1,150 but not for the lost profit on 30 radios. Compare Restatement, Second, Agency § 329.

9. The facts being otherwise as stated in Illustration 8, B gives A the erroneous information deliberately and with C’s approval and requires A to buy the assets of a deceased former dealer and thus discharge C’s “moral obligation” to the widow. C is liable to A not only for A’s expenses but also for the lost profit on 30 radios.

10. A, who owns and operates a bakery, desires to go into the grocery business. He approaches B, a franchisor of supermarkets. B states to A that for $ 18,000 B will establish A in a store. B also advises A to move to another town and buy a small grocery to gain experience. A does so. Later B advises A to sell the grocery, which A does, taking a capital loss and foregoing expected profits from the summer tourist trade. B also advises A to sell his bakery to raise capital for the supermarket franchise, saying “Everything is ready to go. Get your money together and we are set.” A sells the bakery taking a capital loss on this sale as well.Still later, B tells A that cconsiderably more than an $ 18,000 investment will be needed, and the negotiations between the parties collapse. At the point of collapse many details of the proposed agreement between the parties are unresolved. The assurances from B to A are promises on which B reasonably should have expected A to rely, and A is entitled to his actual losses on the sales of the bakery and grocery and for his moving and temporary living expenses. Since the proposed agreement was never made, however, A is not entitled to lost profits from the sale of the grocery or to his expectation interest in the proposed franchise from B.

11. A is about to buy a house on ahill. Before buying he obtains a promise from B, who owns adjoining land, that B will not build on a particular portion of his lot, where a building would obstruct the view from the house. A then buys the house in reliance on the promise. B’s promise is binding, but will be specifically enforced only so long as A and his successors do not permanently terminate the use of the view.

12. A promises to make a gift of a tract of land to B, his son-in-law. B takes possession and lives on the land for 17 years, making valuable improvements. A then dispossesses B, and specific performance is denied because the proof of the terms of the promise is not sufficiently clear and definite. B is entitled to a lien on the land for the value of the improvements, not exceeding their cost.

e. Gratuitous promises to procure insurance.

This Section is to be applied with caution to promises to procure insurance. The appropriate remedy for breach of such a promise makes the promisor an insurer, and thus may result in a liability which is very large in relation to the value of the promised service. Often the promise is properly to be construed merely as a promise to use reasonable efforts to procure the insurance, and reliance by the promisee may be unjustified or may be justified only for a short time. Or it may be doubtful whether he did in fact rely. Such difficulties may be removed if the proof of the promise and the reliance are clear, or if the promise is made with some formality, or if part performance or a commercial setting or a potential benefit to the promisor provide a substitute for formality.

13. A, a bank, lends money to B on the security of a mortgage on B’s new home. The mortgage requires B to insure the property. At the closing of the transaction A promises to arrange for the required insurance, and in reliance on the promise B fails to insure. Six months later the property, still uninsured, is destroyed by fire. The promise is binding.

14. A sells an airplane to B, retaining title to secure payment of the price. After the closing A promises to keep the airplane covered by insurance until B can obtain insurance. B could obtain insurance in three days but makes no effort to do so, and the airplane is destroyed after six days. A is not subject to liability by virtue of the promise.

f. Charitable subscriptions, marriage settlements, and other gifts.

One of the functions of the doctrine of consideration is to deny enforcement to a promise to make a gift. Such a promise is ordinarily enforced by virtue of the promisee’s reliance only if his conduct is foreseeable and reasonable and involves a definite and substantial change of position which would not have occurred if the promise had not been made. In some cases, however, other policies reinforce the promisee’s claim. Thus the promisor might be unjustly enriched if he could reclaim the subject of the promised gift after the promisee has improved it.

Subsection (2) identifies two other classes of cases in which the promisee’s claim is similarly reinforced. American couts have traditionally favored charitable subscriptions and marriage settlements, and have found consideration in many cases where the element of exchange was doubtful or nonexistent. Where recovery is rested on reliance in such cases, a probability of reliance is enough, and no effort is made to sort out mixed motives or to cconsider whether partial enforcement would be appropriate.

15. A promises B $ 5000, knowing that B desires thatsum for the purchase of a parcel of land. Induced thereby, B secures without any payment an option to buy the parcel. A then tells B that he withdraws his promise. A’s promise is not binding.

16. A orally promises to give her son B a tract of land to live on. As A intended, B gives up a homestead elsewhere, takes possession of the land, lives there for a year and makes substantial improvements. A’s promise is binding.

17. A orally promises to pay B, a university, $ 100,000 in five annual installments for the purposes of its fund-raising campaign then in progress. The promise is confirmed in writing by A’s agent, and two annual installments are paid before A dies. The continuance of the fund-raising campaign by B is sufficient reliance to make the promise binding on A and his estate.

18. A and B are engaged to be married. In anticipation of the marriage A and his father C enter into a formal written agreement by which C promises to leave certain property to A by will. A’s subsequent marriage to B is sufficient reliance to make the promise binding on C and his estate.

Chapter 9 | Promissory Restitution

[]{#_Toc161928165 .anchor}R. 2d Contracts § 86 – Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.

(2) A promise is not binding under Subsection (1)

(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or

(b) to the extent that its value is disproportionate to the benefit.

a. “Past consideration”; “moral obligation.”

Enforcement of promises to pay for benefit received has sometimes been said to rest on “past consideration” or on the “moral obligation” of the promisor, and there are statutes in such terms in a few states. Those terms are not used here: “past consideration” is inconsistent with the meaning of consideration stated in § 71, and there seems to be no consensus as to what constitutes a “moral obligation.” The mere fact of promise has been thought to create a moral obligation, but it is clear that not all promises are enforced. Nor are moral obligations based solely on gratitude or sentiment sufficient of themselves to support a subsequent promise.

1. A gives emergency care to B’s adult son while the son is sick and without funds far from home. B subsequently promises to reimburse A for his expenses. The promise is not binding under this Section.

2. A lends money to B, who later dies. B’s widow promises to pay the debt. The promise is not binding under this Section.

3. A has immoral relations with B, a woman not his wife, to her injury. A’s subsequent promise to reimburse B for her loss is not binding under this Section.

b. Rationale.

Although in general a person who has been unjustly enriched at the expense of another is required to make restitution, restitution is denied in many cases in order to protect persons who have had benefits thrust upon them. In other cases restitution is denied by virtue of rules designed to guard against false claims, stale claims, claims already litigated, and the like. In many such cases a subsequent promise to make restitution removes the reason for the denial of relief, and the policy against unjust enrichment then prevails. Enforcement of the subsequent promise sometimes makes it unnecessary to decide a difficult question as to the limits on quasi-contractual relief.

Many of the cases governed by the rules stated in §§ 82-85 are within the broader principle stated in this Section. But the broader principle is not so firmly established as those rules, and it may not be applied if there is doubt whether the objections to restitution are fully met by the subsequent promise. Facts such as the definite and substantial character of the benefit received, formality in the making of the promise, part performance of the promise, reliance on the promise or the probability of such reliance may be relevant to show that no imposition results from enforcement.

c. Promise to correct a mistake.

One who makes a mistake in the conferring of a benefit is commonly entitled to restitution regardless of any promise. But restitution is often denied to avoid prejudice to the recipient of the benefit. Thus restitution of the value of services or of improvements to land or chattels may require a payment which the recipient cannot afford. Where a subsequent promise shows that the usual protection is not needed in the particular case, restitution is granted to the extent promised.

4. A is employed by B to repair a vacant house. By mistake A repairs the house next door, which belongs to C. A subsequent promise by C to pay A the value of the repairs is binding.

5. A pays B a debt and gets a signed receipt. Later B obtains a default judgment against A for the amount of the debt, and A pays again. B’s subsequent promise to refund the second payment if A has a receipt is binding.

d. Emergency services and necessaries.

The law of restitution in the absence of promise severely limits recovery for necessaries furnished to a person under disability and for emergency services. A subsequent promise in such a case may remove doubt as to the reality of the benefit and as to its value, and may negate any danger of imposition or false claim. A positive showing that payment was expected is not then required; an intention to make a gift must be shown to defeat restitution.

6. A finds B’s escaped bull and feeds and cares for it. B’s subsequent promise to pay reasonable compensation to A is binding.

7. A saves B’s life in an emergency and is totally and permanently disabled in so doing. One month later B promises to pay A $ 15 every two weeks for the rest of A’s life, and B makes the payments for 8 years until he dies. The promise is binding.

e. Benefit conferred as a gift.

In the absence of mistake or the like, there is no element of unjust enrichment in the receipt of a gift, and the rule of this Section has no application to a promise to pay for a past gift. Similarly, when a debt is discharged by a binding agreement, the transaction is closed even though full payment is not made. But marginal cases arise in which both parties understand that what is in form a gift is intended to be reimbursed indirectly, or in which a subsequent promise to pay is expressly contemplated. Enforcement of the subsequent promise is proper in some such cases.

8. A submits to B at B’s request a plan for advertising products manufactured by B, expecting payment only if the plan is adopted. Because of a change in B’s selling arrangements, B rejects the plan without giving it fair consideration. B’s subsequent promise to reimburse A’s expenses in preparing the plan is binding.

9. A contributes capital to B, an insurance company, on the understanding that B is not liable to reimburse A but that A will be reimbursed through salary and commissions. Later A withdraws from the company and B promises to pay him ten percent of premiums received until he is reimbursed. The promise is binding.

f. Benefit conferred pursuant to contract.

By virtue of the policy of enforcing bargains, the enrichment of one party as a result of an unequal exchange is not regarded as unjust, and this Section has no application to a promise to pay or perform more or to accept less than is called for by a pre-existing bargain between the same parties. Similarly, if a third person receives a benefit as a result of the performance of a bargain, this Section does not make binding the subsequent promise of the third person to pay extra compensation to the performing party. But a promise to pay in substitution for the return performance called for by the bargain may be binding under this Section.

10. A digs a well on B’s land in performance of a bargain with B’s tenant C. C is unable to pay as agreed, and B promises to pay A the reasonable value of the well. The promise is binding.

g. Obligation unenforceable under the Statute of Frauds.

A promise to pay a debt unenforceable under the Statute of Frauds is very similar to the promises governed by §§ 82-85. But the problem seldom arises. Part performance often renders the Statute inapplicable; if it does not, the contract can be made enforceable by a subsequent memorandum. In any event, the Statute does not ordinarily foreclose the remedy of restitution. Where the question does arise, the new promise is binding if the policy of the Statute is satisfied.

11. By statute an agreement authorizing a real estate broker to sell land for compensation is void unless the agreement or a memorandum thereof is in writing. A, a real estate broker, procures a purchaser for B’s land without any written agreement. In the written sale agreement, signed by B, B promises to pay A $ 200, the usual commission, “for services rendered.” The promise is binding.

h. Obligation unenforceable because usurious.

If a promise is unenforceable because it is usurious, an agreement in renewal or substitution for it that provides for a payment including the usurious interest is also unenforceable, even though the interest from the date of renewal or substitution is not usurious. However, a promise to pay the original debt with interest that is not usurious in substitution for the usurious interest is enforceable.

i. Partial enforcement.

The rules stated in §§ 82-85 refer to promises to perform all or part of an antecedent duty, and do not make enforceable a promise to do more. Similarly, where a benefit received is a liquidated sum of money, a promise is not enforceable under this Section beyond the amount of the benefit. Where the value of the benefit is uncertain, a promise to pay the value is binding and a promise to pay a liquidated sum may serve to fix the amount due if in all the circumstances it is not disproportionate to the benefit. See Illustration 7. A promise which is excessive may sometimes be enforced to the extent of the value of the benefit, and the remedy may be thought of as quasi-contractual rather than contractual. In other cases a promise of disproportionate value may tend to show unfair pressure or other conduct by the promisee such that justice does not require any enforcement of the promise. Compare Comment c to § 72.

12. A, a married woman of sixty, has rendered household services without compensation over a period of years for B, a man of eighty living alone and having no close relatives. B has a net worth of three million dollars and has often assured A that she will be well paid for her services, whose reasonable value is not in excess of $ 6,000. B executes and delivers to A a written promise to pay A $ 25,000 “to be taken from my estate.” The promise is binding.

13. The facts being otherwise as stated in Illustration 12, B’s promise is made orally and is to leave A his entire estate. A cannot recover more than the reasonable value of her services.

Chapter 10 | The Statute of Frauds

[]{#_Toc161928167 .anchor}R. 2d Contracts § 110 – Classes of Contracts Covered

(1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds, forbidding enforcement unless there is a written memorandum or an applicable exception:

(a) a contract of an executor or administrator to answer for a duty of his decedent (the executor-administrator provision);

(b) a contract to answer for the duty of another (the suretyship provision);

(d) a contract for the sale of an interest in land (the land contract provision);

(e) a contract that is not to be performed within one year from the making thereof (the one-year provision).

(2) The following classes of contracts, which were traditionally subject to the Statute of Frauds, are now governed by Statute of Frauds provisions of the Uniform Commercial Code:

(a) a contract for the sale of goods for the price of $ 500 or more (U.C.C. § 2-201);

…

(5) In many states other classes of contracts are subject to a requirement of a writing.

a. Classes of contracts.

The five classes of contracts listed in Subsection (1) were included in different language in § 4 of the English Statute of Frauds, enacted in 1677. The English Statute was repealed in 1954 except for the suretyship and land contract provisions. Subsections (2) and (3) refer to four separate Statute of Frauds sections found in the Uniform Commercial Code, which displace § 4 of the Uniform Sales Act and § 17 of the English statute. The Code sections are not elaborated in this Restatement. Subsection (4) is a statement of a provision of Lord Tenterden’s Act, 1828, which has been widely copied in the United States. As to the extent of enactment of these and other similar statutes, see the Statutory Note preceding this Section. The formal contracts referred to in § 6 of this Restatement are not affected by the Statute of Frauds, but in some cases are subject to separate statutes containing formal requirements.

b. Overlap of classes.

The clauses of the English statute apply separately; one contract may be within more than one clause of the statute, and facts which except it from one class may not except it from another. Thus contracts in consideration of marriage or for the sale of land or goods may also be contracts not to be performed within a year, and the statutory requirements in one clause may be satisfiedand those of another clause unsatisfied.

1. A and B orally agree to marry three years later. The contract is unenforceable because not to be performed within a year, even though it is excepted from the provision for contracts in consideration of marriage.

c. Variations in the statutes.

The English Statute of Frauds and many American statutes take the form, “No action shall be brought whereby to charge . . . unless . . . . “ In some states non-complying contracts are said to be “void” or “invalid” or “not binding,” but in spite of such differences there is much similarity in the interpretation given. Lord Tenterden’s Act and statutes modeled on it, however, are generally construed to require the acknowledgment or promise itself to be in writing; under such statutes a subsequent memorandum does not render enforceable a prior oral promise.

d. Consequences of non-compliance.

The consequences of non-compliance are the subject of Topic 7, §§ 138-47. In general a contract subject to the Statute of Frauds is unenforceable if the requirements of the statute are not satisfied. The Statute does not in general bar the remedy of restitution; indeed, recovery of benefits conferred pursuant to an unenforceable contract is a standard remedy. See § 375; Restatement of Restitution § 108. Where there has been part performance or other action in reliance on an unenforceable contract, the effect is in some situations to make the contract fully enforceable, in others to make particular remedies available. Even though no such rule is applicable, the circumstances may be such that justice requires enforcement of the promise. To the extent that justice so requires, the promise is then enforced by virtue of the doctrine of estoppel or by virtue of reliance on a promise notwithstanding the Statute.

[]{#_Toc161928168 .anchor}R. 2d Contracts § 111 – Contract of Executor or Administrator

A contract of an executor or administrator to answer personally for a duty of his decedent is within the Statute of Frauds if a similar contract to answer for the duty of a living person would be within the Statute as a contract to answer for the duty of another.

a. Analogy to suretyship. The first clause of § 4 of the English Statute of Frauds is treated as a special application of the suretyship provision of the second clause. Where the principal obligor dies before the promise in question is made, the case may not fall precisely within the usual definition of suretyship. But the situation is similar, and similar rules are applied. If there was no obligation before the death of the decedent, the promise is not within this clause. Where the executor or administrator makes a contract on behalf of the estate, the creditor’s right against the estate ordinarily depends on the right of the executor or administrator to exoneration.

1. S, executor of D, promises C, a creditor of D at the time of D’s death, in consideration of C’s promise to forego part of the debt, to guarantee payment of the balance by the estate. S’s promise is within the executor provision.

2. S, executor of D, contracts with C for funeral services, or for work and material necessary in closing D’s business, promising orally “I guarantee that D’s estate will pay you.” S’s promise is not within the executor provision.

b. Exceptions.

The executor provision is subject to the same exceptions as the suretyship provision. Thus the rule relating to novations stated in § 115 and the “main purpose” rule stated in § 116 are similarly applied to promises of executors or administrators.

3. S, executor of D, promises C, a creditor of D at the time of D’s death, in consideration of C’s promise never to prove his claim against D’s estate, to pay the debt. S’s promise is not within the executor provision.

4. S and C enter into a contract in which S promises that if C will assent to S’s appointment as administrator of D’s estate, S will pay a debt owing by D’s estate to C. S’s promise is not within the administrator provision.

[]{#_Toc161928169 .anchor}R. 2d Contracts § 112 – Requirement of Suretyship

A contract is not within the Statute of Frauds as a contract to answer for the duty of another unless the promisee is an obligee of the other’s duty, the promisor is a surety for the other, and the promisee knows or has reason to know of the suretyship relation.

a. The statutory purpose.

In general the primary purpose of the Statute of Frauds is assumed to be evidentiary. In the case of suretyship contracts, however, the Statute also serves the cautionary function of guarding the promisor against ill-considered action. The suretyship provision is not limited to important or complex contracts, but is limited to suretyship and to promises made to an obligee of the principal obligation. Such promises serve a useful purpose, and the requirement of consideration is commonly met by the same promise or performance which is consideration for the principal obligation. But the motivation of the surety is often essentially gratuitous, his obligation depends on a contingency which may seem remote at the time of contracting, and natural formalities which often attend an extension of credit are likely not to provide reliable evidence of the existence and terms of the surety’s undertaking. Hence the requirement of a writing. Reliance of the kinds usual in suretyship situations -- extension of credit or forbearance to pursue the principal obligor -- does not render the requirement inapplicable.

b. “Debt, default or miscarriages.”

The word “duty” is used here as a substitute for the words “debt, default or miscarriages” used in the English statute to describe the principal obligation. Those words and corresponding words in American statutes include all kinds of duties recognized by law, whether or not contractual and whether already incurred or to be incurred in the future. The person owing the duty is called the principal debtor or obligor. The duty may be conditional, voidable or unenforceable; but if there is no duty at all, the Statute does not apply.

1. D commits a tort against C. S promises C orally for consideration to pay C the damages which C has suffered from the tort if D fails to do so. S’s promise is within the Statute of Frauds, since D is under a direct duty to C, and S’s promise is to perform D’s duty if D fails to do so.

2. S promises C orally to guarantee the performance of any duty that D may incur to C within the ensuing year. Relying on this promise, C enters into contracts with D, by which D undertakes within the year to sell materials for a house and to act as supervising architect during its construction. D, without excuse, fails to perform his contract. S’s promise is within the Statute of Frauds.

3. D, an infant, obtains goods on credit from C, who is induced to part with them by S’s oral guaranty that D will pay the price as agreed. The goods are not necessaries but D is subject to a duty, though it is voidable. S’s promise is within the Statute of Frauds.

4. D, an insane person under guardianship, obtains goods on credit from C, who is induced to part with them by S’s oral guaranty that D will keep his promise to pay the price. D’s promise is void. S’s promise is not within the Statute of Frauds.

c. Promisor must be surety.

The suretyship provision applies only if there is a principal obligation “of another” than the promisor. The promisor must promise as a surety for the principal obligor. Whether the promisor and the other are surety and principal depends on their contract or relation to each other. The essential elements of the relation are that they are bound for the same performance and that as between them the other rather than the promisor should perform. A promise to be surety for part of the principal obligation is within the Statute, but a promise of a distinct performance is not, even though its purpose is to render more certain the performance of the principal obligation.

5. S obtains goods from C on this oral promise: “Charge them to D, and, if he does not pay for them, I will.” S has no authority to charge the goods to D, and D makes no promise to pay for them. S’s promise is not within the suretyship provision of the Statute of Frauds, since D is under no duty, and hence is not a principal obligor.

6. In consideration of the delivery of goods by C to D at S’s request, S orally promises to pay the price of them. S’s promise is not within the Statute of Frauds, since D is under no duty.

7. S induces C to sell goods to D and take D’s note for the price by warranting orally or in an unsigned writing that D’s note is not voidable on account of infancy. S’s warranty is not within the Statute of Frauds, whether D’s promise is or is not voidable, since S does not bind himself for the performance which D has undertaken. S will become liable for such damages as C may suffer if D is an infant and whether D’s note is or is not voidable it will not be discharged by S’s performance.

8. D contracts with S to build a house for S. C contracts with D to furnish materials for the purpose. D in violation of his contract with C fails to pay C for some of the materials furnished, and C justifiably cancels his contract with D. S orally promises C that if C will continue to furnish D with materials that C had previously agreed to furnish, S will pay the price therefor. C does so. S’s promise is not within the Statute of Frauds because D is not bound to pay C for the materials supplied in consideration of S’s promise.

d. Promisee must be obligee; “reason to know.”

The suretyship provision does not apply to a promise unless the promisee is the person to whom the principal obligation is owed, or who is entitled to damages for the default or miscarriage. Moreover, the obligee-promisee must know or have reason to know of the suretyship relation, either from the terms of his contract with the principal or with the surety or from extrinsic facts. As to what constitutes “reason to know,” see Comment b to § 19.

9. S, for consideration, orally promises E to pay a debt of E’s son D to C, if D fails to pay it at maturity. S’s promise is not within the Statute of Frauds because it was made to E, not to the creditor C.

10. D and S severally and unconditionally in an unsigned writing promise C, for consideration inuring to the benefit of both D and S, that C shall be paid the sum of $ 100 a month for the next six months. D has induced S to make this promise by promising to hold S harmless. If C knows or has reason to know of this contract between D and S, when S makes his promise to C, S’s promise is unenforceable. Otherwise S’s promise is not within the Statute of Frauds.

11. D induces S to purchase goods from C. Though the purchase is for D’s benefit, the goods are delivered by C to S, who afterwards turns them over to D. S orally promises C to pay for them. D, as part of the transaction, guarantees C that S will pay. C neither knows nor has reason to know that S is a surety. Though S is a surety as between himself and D, his promise is not within the Statute of Frauds. D’s promise also is not within the Statute, since the duty to pay is in truth his.

[]{#_Toc161928170 .anchor}R. 2d Contracts § 124 – Contract Made Upon Consideration of Marriage

A promise for which all or part of the consideration is either marriage or a promise to marry is within the Statute of Frauds, except in the case of an agreement which consists only of mutual promises of two persons to marry each other.

a. Engagement to marry.

Mutual promises to marry were within the words of the English statute, but were not within the statutory purpose and were soon excluded by judicial interpretation. A number of American statutes explicitly except such promises from the marriage provision. They may, however, fall within the one-year provision. Statutes in many states bar actions for breach of a promise to marry.

b. Marriage settlements.

A promise to transfer property to a husband or wife or to a third person or a promise regulating the property interests of husband and wife is within the Statute of Frauds if the consideration includes marriage or a promise to marry, whether or not mutual promises to marry are part of the agreement. Such a promise may be made by one of the parties to the contemplated marriage or by a third person.

1. In consideration of A’s promise to marry B, B orally promises to marry A and to settle Blackacre upon A. B’s promise is within the Statute of Frauds.

2. B offers to marry A. To induce A to accept the offer, B orally promises to settle property upon A. A accepts the offer. Both promises to marry and B’s promise to make a settlement are within the Statute of Frauds.

3. In consideration of A’s promise to marry B, B orally promises to marry A and to forego the rights which the law allows B with reference to A’s property. B’s promise is within the Statute of Frauds.

4. In consideration of A’s marrying B, C orally promises A a settlement. C’s promise is within the Statute of Frauds.

c. Promise in contemplation of marriage.

A promise is not within the Statute merely because it is conditional on marriage, or because marriage is contemplated by the promisor or the promisee or both. The marriage or promise to marry must be bargained for and given in exchange for the promise.

5. A and B mutually promise that each will settle $ 5,000 on A’s daughter when she marries B’s son. The promises are not within the Statute of Frauds, since the marriage is a condition rather than consideration.

6. A and B are engaged to marry. In consideration of A’s promise that when married they will live in a house owned by A, B promises to settle $ 10,000 upon her. The promises are not within the marriage provision of the Statute of Frauds.

d. Part performance; subsequent memorandum.

An oral contract between prospective spouses made upon consideration of marriage does not become enforceable merely because the marriage has taken place in reliance on it, nor by virtue of subsequent action incident to the marriage relation, since a contrary rule would deprive the marriage provision of the Statute of any significant effect. But the agreement may be enforced if there has been such additional part performance or action in reliance that justice requires enforcement. A promise of a marriage settlement made by a third person involves less danger of interference in the marriage relation and may be enforced as in other cases of reliance. Particularly in the latter type of case the marriage provision of the Statute performs a cautionary as well as an evidentiary function, and a subsequent writing is not sufficient compliance with the Statute unless made as a memorandum of the agreement. A new agreement not in consideration of the marriage may fail for want of consideration or as a fraud on creditors even though an antenuptial agreement would have been binding and enforceable but for the Statute.

[]{#_Toc161928171 .anchor}R. 2d Contracts § 125 – Contract to Transfer, Buy, or Pay for an Interest in Land

(1) A promise to transfer to any person any interest in land is within the Statute of Frauds.

(2) A promise to buy any interest in land is within the Statute of Frauds, irrespective of the person to whom the transfer is to be made.

(3) When a transfer of an interest in land has been made, a promise to pay the price, if originally within the Statute of Frauds, ceases to be within it unless the promised price is itself in whole or in part an interest in land.

(4) Statutes in most states except from the land contract and one-year provisions of the Statute of Frauds short-term leases and contracts to lease, usually for a term not longer than one year.

a. Conveyance of land.

The English Statute of Frauds in §§ 1 and 3 required a writing for the creation, transfer or surrender of an interest in land. The words “contract or sale” in § 4, therefore, have been read as “contract for sale” and not applied to present conveyances. American statutes modeled on § 4 commonly use such phrases as “any agreement for the sale of real estate or any interest in or concerning it,” and are similarly read to exclude present conveyances. The formal requisites of a conveyance of land are beyond the scope of this Restatement. What is an interest in land is the subject of § 127.

b. Short-term leases.

A lease is both a conveyance and a contract. As conveyances, leases “not exceeding the term of three years from the making thereof” were excepted by § 2 from § 1 of the English statute, providing that interests in land created without a writing had the effect of estates at will. Leases thus exempted as conveyances were also held not within either the land contract provision or the one-year provision of § 4. In most states statutes reduce to one year the term of a valid oral lease and eliminate the words “from the making thereof.” The usual result is to validate an oral lease or contract to lease for a one-year term even though made before the term begins. In some states the statute modeled on § 4 of the English statute applies expressly to “an agreement for the leasing for a longer period than one year” of real property and thus applies neither to a lease nor to a contract to make a lease for a year or less, even though made before the term begins. An agreement related to a lease, however, if it is not itself a lease or contract to lease, is not within the exception.

1. A leases land to B under a written lease terminable at the end of any year by written notice given by either party. During the third year of the lease, in consideration of a loan by B, A orally promises not to terminate the lease before the end of the fourth year. The oral agreement is not a lease or contract to lease but is a contract not to be performed within a year, and is within the one-year provision of a Statute of Frauds enacted in the original English form.

c. Contract to sell.

The land contract provision applies to any executory promise to transfer an interest in land, whether the consideration is money, chattels, services, other land, or something else, and whether the land is to be transferred to the promisee or to someone else. “Transfer” for this purpose includes the creation or extinguishing of an interest with the effect of giving another an interest he did not previously have, and “promise to transfer” includes an option contract. But the provision does not apply to a promise to refrain from making a transfer, or to a promise to divide profits if land is sold. In some cases, despite a failure to satisfy the Statute, a resulting or constructive trust is imposed on one who has acquired land or other property under the contract.

2. A promises B to transfer Blackacre to B or to C for a price to be paid by B. A’s promise is within the Statute of Frauds, whether or not B is committed to buy.

3. A owes B $ 1,000. In consideration of B’s promise to extend the time of payment three months, A promises orally that he will sell his land and apply the proceeds as far as necessary to pay the debt. A’s promise to sell the land is within the Statute of Frauds.

4. A and B orally promise C a share in a partnership of which A and B are partners. C orally promises to contribute his services to the firm business. A and B own land as part of the partnership assets. The promises are within the Statute.

5. For consideration, A promises B to devise Blackacre to B. A’s promise is within the Statute.

6. A promises B, his daughter, that he will die intestate so that B will inherit a share in a parcel of land. A’s promise is not within the land contract provision of the Statute of Frauds. The contemplated transfer to B is a transfer by operation of law, not a transfer by virtue of the contract.

7. A orally promises B to share with him whatever proceeds A obtains from the sale of Blackacre. A’s promise is not within the land contract provision of the Statute of Frauds.

d. Contract to buy.

The land contract provision applies to a contract to buy as well as to a contract to sell. It covers a promise to pay for a conveyance of an interest in land, so long as the conveyance has not been made, whether the price is to be paid in money, in goods, services or other land, or otherwise, and whether the conveyance is to be made to the promisor or to a third person. But the Statute does not prevent enforcement of a negotiable instrument given in part payment under an oral land contract.

8. A promises to pay $ 5,000 to B for a conveyance of Blackacre either to A or to a third person. A’s promise is within the Statute of Frauds.

9. A promises to support B during B’s life in consideration of B’s promise to convey Blackacre to A. A’s promise is within the Statute of Frauds.

10. A and B make an oral contract for the sale of Blackacre by B for $ 10,000, and A gives B a check for $ 1,000 as a down payment. B is ready and willing to perform, but A stops payment of the check. The Statute of Frauds does not prevent enforcement of A’s obligation on the check.

e. Effect of conveyance.

Payment of the price for land does not of itself take a land contract out of the Statute of Frauds. But once the transfer has been made, the promise to pay the price becomes enforceable, unless the price is land.

11. A promises B to transfer Blackacre to B, in consideration of B’s promise to pay A $ 5,000. A tenders a deed of Blackacre to B and B accepts the deed. B’s promise is no longer within the land contract provision of the Statute of Frauds.

12. A owes B $ 10,000. A promises to convey Blackacre to B in full settlement of the debt, and B promises to accept the conveyance in full settlement. A tenders to B a deed to Blackacre and B accepts the deed. The Statute of Frauds does not prevent enforcement of B’s promise.

13. A owes B $ 1,000. In consideration of B’s promise to extend the time of payment three months, A promises orally that he will sell a parcel of land and apply the proceeds as far as necessary to pay the debt. A sells the parcel. A’s promise is no longer within the land contract provision of the Statute of Frauds.

[]{#_Toc161928172 .anchor}R. 2d Contracts § 129 – Action in Reliance; Specific Performance

A contract for the transfer of an interest in land may be specifically enforced notwithstanding failure to comply with the Statute of Frauds if it is established that the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific enforcement.

a. Historical note and modern justifications.

This Section restates what is widely known as the “part performance doctrine.” Part performance is not an accurate designation of such acts as taking possession and making improvements when the contract does not provide for such acts, but such acts regularly bring the doctrine into play. The doctrine is contrary to the words of the Statute of Frauds, but it was established by English courts of equity soon after the enactment of the Statute. Payment of purchase-money, without more, was once thought sufficient to justify specific enforcement, but a contrary view now prevails, since in such cases restitution is an adequate remedy. English decisions treated a transfer of possession of the land as sufficient, if unequivocally referable to the oral agreement, apparently on the ground that the promise to transfer had been executed by a common-law conveyance. Such decisions are not generally followed in the United States. Enforcement has instead been justified on the ground that repudiation after “part performance” amounts to a “virtual fraud.” A more accurate statement is that courts with equitable powers are vested by tradition with what in substance is a dispensing power based on the promisee’s reliance, a discretion to be exercised with caution in the light of all the circumstances.

b. Rationale. Two distinct elements enter into the application of the rule of this Section: first, the extent to which the evidentiary function of the statutory formalities is fulfilled by the conduct of the parties; second, the reliance of the promisee, providing a compelling substantive basis for relief in addition to the expectations created by the promise. The evidentiary element can be satisfied by painstaking examination of the evidence and realistic appraisal of the probabilities on the part of the trier of fact; this is commonly summarized in a standard that calls upon the trier of the facts to be satisfied by “clear and convincing evidence.” The substantive element requires consideration of the adequacy of the remedy of restitution.

1. A and B agree by an unsigned writing that A will sell Blackacre to B for $ 5,000. B pays the price to A as agreed, and A accepts the payment but refuses to transfer the land as agreed. B is not entitled to specific performance, but can recover the amount of the payment.

2. A orally leases A’s farm to B for five years, agreeing that B will repair the premises at prevailing wages to be credited on the rent. B takes possession of the farm and does $ 1,000 worth of repair work, using material furnished by A. A then seeks to evict B. B is entitled to $ 1,000 less the fair rental of the farm for the period of his occupancy, but is not entitled to specific performance or damages.

3. A and B make an oral agreement for the sale of Blackacre by A to B. With A’s consent B takes possession of the land, pays part of the price, builds a dwelling house on the land and occupies it. Two years later, as a result of a dispute over the amount still to be paid, A repudiates the agreement. B may obtain a decree of specific performance.

4. A orally promises to make a gift of Blackacre to his son B and puts B in possession. With A’s consent B builds a dwelling house on the land and lives in it for twenty years until A dies, paying all taxes on the land. B may obtain a decree of specific performance against A’s heir or personal representative.

c. Monetary relief.

Unlike the rule of § 125(3), under which a contract ceases to be subject to the Statute of Frauds when the land is conveyed, the present rule is limited to equitable relief, and does not make available an ordinary action for damages for breach of contract. The remedy of restitution is not ordinarily affected by the Statute of Frauds. Where a contract is specifically enforceable under the rule of this Section, damages or other relief may be awarded if specific performance is prevented by the intervention of an innocent purchase for value, by condemnation of the land, or by other circumstances. Or monetary relief may be granted on the basis of fraud, estoppel, or other doctrines. Even in jurisdictions where the rule of this Section is repudiated, an equitable lien may be imposed on the land as security for restitution of the value of benefits conferred.

d. Transfer of possession and reasonable reliance.

Where specific enforcement is rested on a transfer of possession plus either part payment of the price or the making of improvements, it is commonly said that the action taken by the purchaser must be unequivocally referable to the oral agreement. But this requirement is not insisted on if the making of the promise is admitted or is clearly proved. The promisee must act in reasonable reliance on the promise, before the promisor has repudiated it, and the action must be such that the remedy of restitution is inadequate. If these requirements are met, neither taking of possession nor payment of money nor the making of improvements is essential. Thus, the rendering of peculiar services not readily compensable in money may justify specific performance, particularly if the promisee has also taken other action in reliance on the promise.

5. A owns an unsightly vacant lot adjoining B’s home in a residential suburb. A’s agent and B orally agree that A will sell the lot to B for $ 1,500. B, a lawyer aware of the doctrine of part performance, expends $ 1,000 in grading and planting on the lot, but makes no payments and does not communicate with A for two years. A observes the grading and planting, but later denies concluding a contract or knowing that B claimed under a contract. B is not entitled to specific performance, since his actions are not unequivocally referable to a contract for sale and recovery of the value of the improvements is an adequate remedy.

6. A leases a residence to B for $ 9 per month. After four months A and B agree to a written contract for sale of the premises for $ 1,000 in monthly installments of $ 12.89, but the contract is not signed. B pays $ 12.89 each month for thirteen months and pays for taxes and insurance. Then the land increases in value because an air base is located nearby, and A repudiates the contract. B is entitled to specific performance.

7. A orally agrees to lease shop space in a new hotel to B for five years and to give B an option to renew the lease for another five years. At A’s request B moves in before formal execution of a lease, deposits $ 5,000 with A, and expends $ 50,000 on fixtures and improvements. Later A and B agree on pencil corrections to a written lease and return it to A’s attorney for redrafting, but no redrafted lease is submitted or executed. B occupies the premises and pays rent for five years, and notifies A of B’s election to renew, but A denies the existence of an option to renew. B is entitled to specific performance.

8. A leaves 1,000 acres of land to his cousin B by will. A’s heirs contest the will, and B retains his uncle C, an attorney, agreeing orally that C is to receive as his fee, contingent upon success, a specific 180 acres of the land. C successfully defends the will, but B refuses to convey the land as agreed. In C’s suit for specific performance, B admits the making of the contract, but defends under the Statute of Frauds. Specific performance may be granted.

9. A promises to give C, an adjoining landowner, first refusal in the event that A sells a tract of land. Later B and C agree orally that C will consent to a sale by A to B and that B will then convey to C a fifteen-foot strip adjoining C’s land, C paying a proportionate part of the price. C notifies A that C consents, and A conveys the tract to B, but B repudiates his promise to convey the strip to C. C is entitled to a decree of specific performance against B.

10. A, aged 55, orally promises B, his adopted daughter, that if B will quit school, live with A and his sick wife and refrain from marrying until B is 25, help A run his farm, and take care of the wife until the wife dies, A will leave B all his property by will. B performs as requested until the wife dies 12 years later, except for an eight-month trip with A’s consent. After the wife’s death, B at age 28 marries a man of whom A disapproves; A thereafter refuses to have anything to do with B, revokes a will carrying out his promise, and makes a new will leaving his property to others. Four years after the marriage A dies. B is entitled to specific performance.

e. Action by landowner.

Specific performance may be granted to a seller or lessor of land under the rule of this Section. But it must be justified by his own part performance or other action in reliance on the contract rather than by the avoidance of injustice to the buyer or lessee.

11. A and B orally agree that A will sell a house and lot to B for $ 10,000. A signs a memorandum of the contract but B does not; B pays $ 1,000 on account of the price. A prepares a conveyance and delivers it in escrow to await payment, delivers possession of the land to B, and sells him the furniture in the house. B lives in the house for six months and plants a substantial garden, but refuses to pay the balance of the price because of defects in A’s title, and finally repudiates the contract shortly after the defects are cured. Whether or not B would have been entitled to specific performance, A is not.

12. A orally leases a storeroom to B for six years at a rental of $ 400 per month. In accordance with the agreement A builds a balcony at a cost of $ 1500 which does not add to the value of the premises. B takes possession and pays rent for three years, and then repudiates the lease at a time when tenants have become scarce. A is entitled to specific performance.

f. Other clauses of the Statute.

Ordinarily the various clauses of the Statute of Frauds apply separately. Thus a contract for the sale of land may also be a contract in consideration of marriage, a contract not to be performed within a year, and a contract for the sale of goods. When the contract is specifically enforceable under the rule of this Section, however, the other clauses of the Statute do not prevent enforcement.

[]{#_Toc161928173 .anchor}R. 2d Contracts § 130 – Contract Not to Be Performed Within a Year

(1) Where any promise in a contract cannot be fully performed within a year from the time the contract is made, all promises in the contract are within the Statute of Frauds until one party to the contract completes his performance.

(2) When one party to a contract has completed his performance, the one-year provision of the Statute does not prevent enforcement of the promises of other parties.

a. Possibility of performance within one year.

The English Statute of Frauds applied to an action “upon any agreement that is not to be performed within the space of one year from the making thereof.” The design was said to be not to trust to the memory of witnesses for a longer time than one year, but the statutory language was not appropriate to carry out that purpose. The result has been a tendency to construction narrowing the application of the statute. Under the prevailing interpretation, the enforceability of a contract under the one-year provision does not turn on the actual course of subsequent events, nor on the expectations of the parties as to the probabilities. Contracts of uncertain duration are simply excluded; the provision covers only those contracts whose performance cannot possibly be completed within a year.

1. A, an insurance company, orally promises to insure B’s house against fire for five years, B promising to pay the premium therefor within the week. The contract is not within the Statute of Frauds, since if the house burns and the insurer pays within a year the contract will be fully performed.

2. A orally promises to work for B, and B promises to employ A during A’s life at a stated salary. The promises are not within the one-year provision of the Statute, since A’s life may terminate within a year.

3. A and B, a railway, agree that A will provide grading and ties and B will construct a switch and maintain it as long as A needs it for shipping purposes. A plans to use it for shipping lumber from adjoining land which contains enough lumber to run a mill for 30 years, and uses the switch for 15 years. The contract is not within the one-year provision of the Statute.

4. A orally promises B to sell him five crops of potatoes to be grown on a specified farm in Minnesota, and B promises to pay a stated price on delivery. The contract is within the Statute of Frauds. It is impossible in Minnesota for five crops of potatoes to mature in one year.

b. Discharge within a year.

Any contract may be discharged by a subsequent agreement of the parties, and performance of many contracts may be excused by supervening events or by the exercise of a power to cancel granted by the contract. The possibility that such a discharge or excuse may occur within a year is not a possibility that the contract will be “performed” within a year. This is so even though the excuse is articulated in the agreement. This distinction between performance and excuse for nonperformance is sometimes tenuous; it depends on the terms and the circumstances, particularly on whether the essential purposes of the parties will be attained. Discharge by death of the promisor may be the equivalent of performance in the case of a promise to forbear, such as a contract not to compete.

5. A orally promises to work for B, and B promises to employ A for five years at a stated salary. The promises are within the Statute of Frauds. Though the duties of both parties will be discharged if A dies within a year, the duties cannot be “performed” within a year. This conclusion is not affected by a term in the oral agreement that the employment shall terminate on A’s death.

6. The facts being otherwise as stated in Illustration 5, the agreement provides that either party may terminate the contract by giving 30 days notice at any time. The agreement is one of uncertain duration and is not within the one-year provision of the Statute.

7. The facts being otherwise as stated in Illustration 5, the agreement provides that A may quit at any time. The agreement is within the Statute.

8. A, the maternal grandmother of a new-born illegitimate child, agrees with B, the father, that A will care for the child and B will make support payments until the child becomes 21 years old. The agreement is not within the one-year provision of the Statute. If the child dies within a year, the primary object of furnishing necessaries to the child will be fully “performed”.

9. A sells his grocery business to B, who pays part of the price and promises to pay the balance in a month, A agreeing orally not to engage in the grocery business in the same town for five years. The contract is not within the one-year provision of the Statute, since A’s death within one year will give B the equivalent of full performance.

c. The one-year period.

The period of a year begins when agreement is complete, ordinarily when the offer is accepted. Compare §§ 63, 64. But a subsequent restatement of the terms starts the period again if the manifestation of mutual assent is such that it would be sufficient in the absence of prior agreement. The one-year period ends at midnight of the anniversary of the day on which the contract is made, on the theory that fractions of a day are disregarded in the way most favorable to the enforceability of the contract. If complete performance is possible before that time, the contract is not within the one-year provision, regardless of what hour of the day the contract is entered into.

10. Without consideration A promises B that, so long as B buys through A B’s requirements for gasoline and A accepts B’s orders, A will pay B an amount equal to the discount other distributors would allow B. For several years A accepts orders from B. A’s promise is not within the one-year provision, since a separate contract is made each time A accepts an order.

11. On December 1, 1966, A and B contract orally for A’s employment by B at a stated salary for a year beginning the following day. The contract is not within the one-year provision, since the promised performance will be fully rendered before midnight of December 1, 1967.

12. On December 1, 1966, A and B enter into an oral contract for the employment of A at a stated salary for the calendar year 1967. On the first working day in 1967, A presents himself for work, says “I understand these are the terms on which I am to be employed,” and restates the terms. B replies, “That is right.” Though the original contract was within the Statute of Frauds, the subsequent restatement makes a new contract performable within a year.

d. Full performance on one side.

If either party promises a performance that cannot be completed within a year, the Statute applies to all promises in the contract, including those which can or even must be performed within a year. But unlike other provisions of the Statute, the one-year provision does not apply to a contract which is performed on one side at the time it is made, such as a loan of money, nor to any contract which has been fully performed on one side, whether the performance is completed within a year or not. This rule, by permitting an action for the agreed price, avoids the problem of valuation which would otherwise arise in an action for the value of benefits conferred; but the rule goes further and makes available the usual contract remedies.

13. A sells and delivers goods to B in return for B’s promise to pay $ 1,000 in six months, $ 1,000 in a year and $ 1,000 in eighteen months. B’s promises are not within the one-year provision of the Statute.

14. A promises to pay B $ 5,000 in two years in return for B’s promise to render a stated performance for five years. A pays the $ 5,000 as agreed. B then refuses further performance. The contract is withdrawn from the operation of the Statute.

e. Part performance.

Part performance not amounting to full performance on one side does not in general take a contract out of the one-year provision. Restitution is available in such cases, and doctrines of estoppel and fraud may be applicable. Where the contract provides the price or rate to be paid for the part performance, the performing party will normally recover according to the contract; in other cases, the contract terms are evidence of reasonable value.

15. A and B contract orally for A’s employment by B at a stated salary for the ensuing two years. A works under the contract for 15 months when B discharges him without cause. The contract is not withdrawn from the operation of the Statute, and A may not recover damages for wrongful discharge. But A may recover any unpaid salary.

16. A and B agree on the sale of the output of A’s creamery to B for five years at stated prices. After four years B refuses further deliveries. The contract is not withdrawn from the operation of the Statute, but A may recover the contract price of goods delivered and accepted.

f. Other clauses of the Statute.

Ordinarily the one-year provision of the Statute applies independently of the other provisions. But statutes in most states have the effect of excepting leases of land for one year even though they begin at a future date. And the one-year provision does not prevent specific enforcement of a land contract under the rule stated in § 129.

[]{#_Toc161928174 .anchor}R. 2d Contracts § 131 – General Requisites of a Memorandum

Unless additional requirements are prescribed by the particular statute, a contract within the Statute of Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the party to be charged, which

(a) reasonably identifies the subject matter of the contract,

(b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and

a. The statutory language.

This Section restates the law developed by judicial interpretation of the requirement of § 4 of the English Statute of Frauds that “the agreement . . . or some memorandum or note thereof” be in writing and signed. Despite slight variations in wording in § 17 of the English Statute and in American statutes, they have generally been read to establish the same requisites. Where the statute requires that “the contract” be in writing, however, a mere memorandum is not sufficient; and statutory provisions sometimes explicitly require a statement of the consideration or explicitly negate such a requirement, either with respect to contracts of suretyship or in all cases.

b. The Uniform Commercial Code.

Paragraphs (a) and (b) follow the phrasing of U.C.C. §§ 1-206 and 2-201. Compare §§ 8-319, 9-203. Section 1-206 requires in addition an indication that the contract has been made “at a defined or stated price.” Section 2-201 omits this requirement and also any reference to identification of subject matter, and adds “A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.” Section 8-319 refers to “a stated quantity of described securities at a defined or stated price.” Section 9-203 requires “a security agreement which contains a description of the collateral” and in certain cases “a description of the land concerned.” The description is sufficient “if it reasonably identifies what is described.” See § 9-110.

c. Rationale.

The primary purpose of the Statute is evidentiary, to require reliable evidence of the existence and terms of the contract and to prevent enforcement through fraud or perjury of contracts never in fact made. The contents of the writing must be such as to make successful fraud unlikely, but the possibility need not be excluded that some other subject matter or person than those intended will also fall within the words of the writing. Where only an evidentiary purpose is served, the requirement of a memorandum is read in the light of the dispute which arises and the admissions of the party to be charged; there is no need for evidence on points not in dispute.

The suretyship and marriage provisions of the Statute perform a cautionary as well as an evidentiary function. The land contract provision performs a channeling function. Even where these provisions are involved, however, there is no evidence of a statutory purpose to facilitate repudiation of firm oral agreements fairly made, to protect a promisor from temptation to perjure himself by false denial of the promise, or to reward a candid contract-breaker by denying enforcement.

d. Types of documents.

The statutory memorandum may be a written contract, but under the traditional statutory language any writing, formal or informal, may be sufficient, including a will, a notation on a check, a receipt, a pleading, or an informal letter. Neither delivery nor communication is essential. Writing for this purpose includes any intentional reduction to tangible form.

1. A makes an oral contract with B to devise Blackacre to B, and executes a will containing the devise and a recital of the contract. The will is revoked by a later will. The revoked will is a sufficient memorandum to charge A’s estate.

2. A publishes in a newspaper an offer to buy certain goods, stating the terms of his proposal, and his name is printed under the advertisement. B accepts the offer. The advertisement is a sufficient memorandum to charge A.

3. A writes and signs in pencil a receipt for $ 1,000 which recites that the money is received from B as part payment of the price of $ 5,000 for a parcel of land. The receipt is a sufficient memorandum to charge A on the agreement recited.

e. Subject matter.

A memorandum, like a contract, must be read in its context and need not be comprehensible to persons not familiar with the particular type of transaction. Without reference to executory oral promises, the memorandum in context must indicate with reasonable certainty the nature of the transaction and must provide a basis for identifying the land, goods or other subject matter.

4. A Company executes a written contract with B by which B purchases certain accounts owned by A Company. As part of the same transaction, C, the president of A Company, signs a contract of guaranty printed at the foot of the same paper: “In order to induce B to enter into an agreement dated with (hereinafter referred to as the client), the undersigned agrees to be liable for due performance of all the client’s agreements with B.” The blanks are not filled in. The quoted words are sufficient to identify the obligation guaranteed.

5. A and B make an oral contract for the sale of goods and sign the following memorandum:

“Sept. 19th B, 12 mos.

300 bales S. F. drills 7 1/4

100 cases blue do 8 3/4

Credit to commence when ship sails; not after December

1 -- delivered free of charge for truckage.

(Signed) A, B”

If persons acquainted with the usages of the business would understand its meaning, the memorandum is sufficient.

6. A and B enter into an oral contract by which A promises to sell and B to buy such of A’s iron in his millyard as he may decide to sell. A memorandum describes the subject matter of the contract as “all A’s iron which he may decide to sell.” The description is sufficient.

7. A and B enter into a contract by which A promises to sell and B to buy a certain lot of hops belonging to A. A telegram from B refers to the subject matter as “number 13.” This refers to a sample submitted by A to B by mail with a numbered tag attached and referring by trade usage to a specific lot. The description is sufficient.

8. A and B enter into an oral contract for the sale and purchase of Blackacre. An otherwise sufficient memorandum, signed by A and B, describes the subject matter as “the land on the corner of X and Y Streets,” omitting any statement as to the city or state. A owns only one of the four lots at the intersection. The description is sufficient.

9. A and B enter into a written contract for the employment of B as A’s sales manager for a term of two years. At the end of the two years, A and B orally agree to extend the employment for three more years at an increased salary. A year later A signs the following memorandum: “It is understood that the arrangements made for employment of B in our business on January 1, 1977, for a period of three years from that date at a salary of $ 30,000 per year, continues in force until January 1, 1980.” The memorandum sufficiently identifies the nature of B’s employment.

f. Contract between the parties.

A memorandum must be sufficient to indicate that a contract has been made between the parties with respect to an identified subject matter or that the signer has offered such a contract to the other party. The parties must be reasonably identified; the identification may consist of a name or initials, even though there may be others with the same name or initials, or of any other reasonably accurate mode of description. Identification of the agent of a party in the memorandum sufficiently refers to the party, whether or not the agent is himself a party. Where there is no dispute as to the parties, a party may be sufficiently identified by possession of a memorandum signed by the other party. A signed written offer to the public may be sufficient even though the offeree is not identified.

10. A and B are negotiating for the sale of A’s restaurant to B. B gives A a check for $ 500 bearing the notation “Tentative deposit on tentative purchase of 1415 City Line Ave., Phila. Restaurant, Fixtures, Equipment, Good Will.” Later A and B orally agree on terms of sale. The quoted memorandum is not sufficient to indicate that a contract for sale has been made.

11. C and D make an oral contract for the sale of Blackacre and sign the following memorandum: “C agrees to sell and D agrees to buy Blackacre for $ 10,000.” C is agent for A, D is agent for B, and each is acting on behalf of his principal. The memorandum is sufficient to charge A and B.

12. An otherwise sufficient memorandum of an oral contract for the sale of Blackacre states that “the owner of Blackacre” promises to sell it. The memorandum is signed by B, and B is the agent of A, the owner of Blackacre, acting on A’s behalf. The memorandum is sufficient to charge A.

13. A, president and principal stockholder of A Company, gives B his personal check for $ 10,000 and a written offer to buy Blackacre from B on stated terms. The offer, signed by A, states that “the offer to purchase is from a company owned by A.” B accepts the offer by a signed writing. Neither the offer nor the acceptance identifies the purchaser except by the quoted language. The identification is sufficient.

14. A and B make an oral agreement for the sale of a parcel of land by A to B. B pays A $ 50 and A signs and delivers to B a receipt which identifies the parcel and accurately states the terms of payment but does not name or describe B or his agent. In B’s suit for specific performance, A defends on the ground of B’s inequitable conduct in the negotiations. B is sufficiently identified by his possession of the memorandum.

g. Terms; accuracy.

The degree of particularity with which the terms of the contract must be set out cannot be reduced to a formula. The writing must be the agreement or a memorandum “thereof”; a memorandum of a different agreement will not suffice. The “essential” terms of unperformed promises must be stated; “details or particulars” need not. What is essential depends on the agreement and its context and also on the subsequent conduct of the parties, including the dispute which arises and the remedy sought. Omission or erroneous statement of an agreed term makes no difference if the same term is supplied by implication or by rule of law. Erroneous statement of a term can sometimes be corrected by reformation. Otherwise omission or misstatement of an essential term means that the memorandum is insufficient. U.C.C. § 2-201, however, states a different rule for sale of goods.

15. A and B enter into an oral contract for the sale of Blackacre by A to B. A memorandum is made and signed which states sufficiently the parties, subject matter and terms of the oral bargain except that, though the parties in fact orally agreed that the price should be payable on delivery of a deed, the memorandum contains no statement as to when the price is payable. The memorandum is sufficient.

16. A and B enter into an oral contract for the sale of Blackacre by A to B, and both sign a memorandum providing for a “purchase money mortgage in the amount of $ 18,000 payable for 15 years at 5%.” B claims a right to pay $ 142.35 per month; A claims a payment of $ 100 a month plus monthly interest at 5%. No usage is shown. The memorandum is not sufficient to support an action by B for specific performance on his terms.

h. Statement of consideration.

In Wain v. Warlters, 5 East 10 (K.B. 1804), a promise in writing to pay the debt of another was held unenforceable because the writing failed to state the consideration, which had been fully executed. Where that view is followed, the words “for value received” or an implication of consideration may validate the memorandum. But the decision has not been generally followed in the United States, and the English law was changed by statute in 1856. U.C.C. § 3-408 eliminates the requirement of consideration for a negotiable instrument or obligation thereon given in payment of or as security for an antecedent obligation, and § 3-416 exempts from the Statute of Frauds any guaranty written on a negotiable instrument. Aside from explicit statutory provisions, the prevailing view is that error or omission in the recital of past events does not affect the sufficiency of a memorandum.

Where, on the other hand, the consideration for a promise consists of a return promise not yet performed, performance of the return promise is commonly a condition of the promisor’s duty, and an adequate memorandum will ordinarily reveal the consideration. A memorandum of a contract for the sale of land for an agreed price is not sufficient unless it discloses the price. Compare U.C.C. §§ 1-206 and 3-319, referring to “a defined or stated price” for intangible personal property or for investment securities. But § 2-201 dispenses with statement of the price of goods sold.

17. A lends $ 1,000 to B, and as part of the transaction C orally agrees to guarantee repayment. To evidence the guaranty, C signs a written promise to pay A $ 1,000. The written promise is a sufficient memorandum without any statement of consideration.

18. A agrees not to sue B Company on a debt for goods sold and delivered, in consideration of C’s guaranty of payment for past and future deliveries to B up to $ 3,000. C signs the following guaranty: “I, C, do hereby guarantee to A the payment of any sums due or that may become due up to the sum of $ 3,000 on such goods as B may have bought or shall buy from A. [Signed] C.” A makes no further deliveries. The memorandum is not sufficient to charge C, since it omits any mention of A’s return promise.

19. A and B orally agree on the sale of a farm by A to B for $ 155 an acre. A dates and signs the following memorandum: “Received from B $ 100 as payment on 84 acres farm, [at $ 155 an acre] balance to be paid when deed and abstract are presented.” The memorandum is sufficient to charge A if the bracketed words are included but not if they are omitted.

[]{#_Toc161928175 .anchor}R. 2d Contracts § 132 – Several Writings

The memorandum may consist of several writings if one of the writings is signed and the writings in the circumstances clearly indicate that they relate to the same transaction.

a. Rationale.

The requirements of the Statute of Frauds, designed primarily to serve an evidentiary purpose, are less rigorous than those of the Statute of Wills, which is designed to serve cautionary and channeling purposes as well. A will may refer to facts which have independent significance, and in some States a will may incorporate by reference an unattested existing document. A memorandum of a contract need only give assurance that the contract enforced was in fact made and provide evidence of its terms. It may consist of several separate documents, even though not all of them are signed and even though no one of them is itself a sufficient memorandum. At least one must be signed by the party to be charged, and the documents and circumstances must be such that the documents can be read together as “some memorandum or note” of the agreement. Explicit incorporation by reference is unnecessary, but if the connection depends on evidence outside the writings, the evidence of connection must be clear and convincing.

b. Several signed writings.

Where two or more documents are signed by the party to be charged, they may be read together even though neither contains any reference to the other. The question whether they constitute a sufficient memorandum is substantially the same as if they had been incorporated in a single document.

1. A signs and sends to B a letter stating that he is interested in leasing aparcel of land from B. After six months of negotiations A and B orally agree on an eight-year lease of the parcel with an option to purchase, and both sign a memorandum which is sufficient except that it does not identify the land. The two documents together constitute a sufficient memorandum to charge A.

c. Reference to unsigned writing: physical connection.

Where the signature of the party to be charged is made or adopted with reference to an unsigned writing, the signed and unsigned writings together may constitute a memorandum. It is sufficient that the signed writing refers to the unsigned writing explicitly or by implication, or that the party to be charged physically attaches one document to the other or encloses them in the same envelope. Even if there is no internal reference or physical connection, the documents may be read together if in the circumstances they clearly relate to the same transaction and the party to be charged has acquiesced in the contents of the unsigned writing.

2. A and B make an oral contract within the Statute. A writes and signs a letter to B which is a sufficient memorandum except that it does not identify B. The deficiency may be supplied by the name and address on the envelope in which the letter arrives.

3. A and B make an oral contract within the Statute. A memorandum of the contract is made on two sheets of paper which are not connected physically, and A signs one of the sheets. The two sheets may be read together as a memorandum to charge A if an incomplete sentence on one is completed on the other, if the contract partially disclosed by one is clearly the same contract partially disclosed by the other, or if the fact that one is a continuation of the other is otherwise shown by clear and convincing evidence.

4. A and B enter into an oral contract within the Statute. A memorandum of the contract is made on two sheets of paper. The contents of the sheets do not show that they belong together, but A signs one and then fastens the sheets together with a clip. Even though the clip is later removed, the fastening is a sufficient adoption of A’s signature with reference to both sheets to charge A, but only if the evidence of the fastening is clear and convincing.

5. A agrees orally to employ B for two years. An unsigned memorandum of the contract, stating its terms, is prepared at A’s direction. Later B begins work and payroll cards are made and initialed by A which state some of the terms but not the duration of the employment. If it is clear that the unsigned memorandum and the payroll cards refer to the same agreement, they may be read together as a sufficient memorandum to charge A.

d. Reference to future writings.

Ordinarily a signature does not authenticate a document not in existence at the time the signature is made. But when several documents are executed by different parties in a single transaction, the signature of one may have reference to a subsequent signature of another. In some such cases the earlier signature may be adopted with reference to a document prepared later, whether signed by anyone or not. In other cases the reference is to an event of independent significance, or to the exercise of a power granted by the signer. Thus a signed offer authenticates the acceptance invited by it.

6. A and B enter into a contract within the Statute and sign a memorandum, otherwise sufficient, stating that the price to be paid shall be the same as the price agreed upon by C and D in a similar contract expected to be made on the following day. The memorandum is sufficient if it accurately states the entire agreement between A and B. The contract made between C and D is an event of independent significance, and may be referred to for the price whether or not there is a memorandum signed by C or D.

7. A and B enter into an oral contract for the purchase and sale of a tract of land and sign a memorandum, otherwise sufficient, stating that the contract is “contingent upon A’s ability to arrange $ 7,000 purchase money mortgage.” A subsequently applies in writing to a financial institution for such a mortgage loan on specific terms as to duration, interest rate and payment. The mortgage loan application may be read with the memorandum to satisfy the Statute against either party.

[]{#_Toc161928176 .anchor}R. 2d Contracts § 133 – Memorandum Not Made as Such

Except in the case of a writing evidencing a contract upon consideration of marriage, the Statute may be satisfied by a signed writing not made as a memorandum of a contract.

a. Rationale.

The rule of this Section reflects the general assumption that the primary purpose of the Statute is evidentiary, that it was not intended to facilitate repudiation of oral contracts. The marriage provision, however, performs a cautionary function as well, and a subsequent writing does not satisfy the Statute unless made as a memorandum of the agreement. More than a merely evidentiary writing is also required to satisfy a statutory provision that “the contract” be in writing.

b. Communication; delivery.

There is no requirement that a memorandum be communicated or delivered to the other party to the contract, or even that it be known to him or to anyone but the signer. A memorandum may consist of an entry in a diary or in the minutes of a meeting, of a communication to or from an agent of the party, of a public record, or of an informal letter to a third person. Where a written offer serves as a memorandum to charge the offeror, however, communication of the offer is essential; written instructions to an agent to make an offer do not suffice. And where the statute requires only the vendor’s signature the memorandum is not effective to charge the vendee until he manifests assent to it.

1. A and B enter into an oral contract for the sale of Blackacre. A writes and signs a letter to his friend C containing an accurate statement of the contract. The letter is a sufficient memorandum to charge A even though it is never mailed.

2. A writes to B the following letter:

“Dear B: I will employ you as superintendent of my mill for a term of three years from date, at a salary of $ 28,000 a year. Let me know if you wish to accept this offer. [Signed] A.”

B accepts the offer orally. The letter is a sufficient memorandum to charge A.

3. A writes and signs a letter to his agent C authorizing C to make the offer stated in Illustration 2. C orally makes the offer, and B orally accepts it. A’s letter is not a sufficient memorandum to charge him.

c. Repudiating memorandum.

A signed writing which is otherwise a sufficient memorandum of a contract is not rendered insufficient by the fact that it also repudiates or cancels the contract, or asserts that it is not binding because not in writing. But a writing denying the making of the contract is not a memorandum of it.

4. A and B enter into an oral contract by which A promises to sell and B promises to buy Blackacre for $ 5,000. A writes and signs a letter to B in which he states accurately the terms of the bargain, but adds “our agreement was oral. It, therefore, is not binding upon me, and I shall not carry it out.” The letter is a sufficient memorandum to charge A.

d. Pleadings and testimony.

A written pleading, stipulation or deposition may serve as a memorandum if otherwise sufficient as to contents and signature. An oral statement before the court is treated in some states as the equivalent of a signed writing. Where the writing or oral statement is made under legal compulsion, it is nonetheless effective unless there is a contrary procedural policy in the state. But a motion to dismiss a complaint or a failure to deny an allegation, though given the procedural effect of an admission, is not the equivalent of a signed writing for the purposes of the Statute of Frauds.

[]{#_Toc161928177 .anchor}R. 2d Contracts § 134 – Signature

The signature to a memorandum may be any symbol made or adopted with an intention, actual or apparent, to authenticate the writing as that of the signer.

a. Types of symbol.

The traditional form of signature is of course the name of the signer, handwritten in ink. But initials, thumbprint or an arbitrary code sign may also be used; and the signature may be written in pencil, typed, printed, made with a rubber stamp, or impressed into the paper. Signed copies may be made with carbon paper or by photographic process.

b. Place of signature; “subscribed.”

Under a statute in the traditional English form, the signature need not appear on any particular part of the writing. Although it is usual to sign at the end of a document, a printed letterhead or billhead may be adopted as a signature. Even where the statute uses the word “subscribe,” there is an ambiguity: the word “subscribe” is sometimes read as a synonym for “sign,” sometimes as requiring signing at the end or foot. Wherever the signature appears, it must be made or adopted with the requisite intention, but in the absence of contrary evidence the intention may be inferred from the conventional form of the writing.

1. A and B make an oral contract within the Statute. A sends to B a written acceptance, stating the terms, on a form bearing A’s name as a printed heading. At the foot of the form is the word “Accepted” followed by a blank space for signature, which is not filled in. In the absence of other evidence of intention, the form is not signed by A.

2. A and B make an oral contract within the Statute. A writes a memorandum stating the terms which begins, “I, A, make the following contract with B.” A then delivers the memorandum to B. This is A’s signature if the trier of fact infers A’s intent to authenticate the writing.

3. A and B make an oral contract within the Statute. A clerk makes a written statement of the contract, and A writes at the top thereof -- “O.K.” followed by A’s initials. This is a signature by A.

c. Time of signing; blanks and alterations.

Commonly a document is signed after it is completed, but blanks may be left to be filled in later. If the signer fills a blank or adds a postscript or if another does so with his authority, the prior signature is effectively adopted with reference to the added portion. Alterations are often separately initialed, but re-adoption of the prior signature is equally effective for the purposes of the Statute of Frauds. Compare U.C.C. §§ 3-115, 3-407.

4. A has a number of forms of letters printed ending with the words, “Yours very truly, A.” With A’s authority a clerk fills in one of the forms with the terms of an offer to B and sends it to B. B accepts orally. A’s printed name is his signature.

[]{#_Toc161928178 .anchor}R. 2d Contracts § 137 – Loss or Destruction of a Memorandum

The loss or destruction of a memorandum does not deprive it of effect under the Statute.

a. Not a rule of evidence.

Although the Statute of Frauds was designed to serve an evidentiary purpose, it is not a rule of evidence. In cases of loss or destruction, the contents of a memorandum may be shown by an unsigned copy or by oral evidence.

[]{#_Toc161928179 .anchor}R. 2d Contracts § 139 – Enforcement by Virtue of Action in Reliance

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.

(2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant:

(a) the availability and adequacy of other remedies, particularly cancellation and restitution;

(b) the definite and substantial character of the action or forbearance in relation to the remedy sought;

(c) the extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence;

(d) the reasonableness of the action or forbearance;

(e) the extent to which the action or forbearance was foreseeable by the promisor.

a. Relation to other rules.

This Section is complementary to § 90, which dispenses with the requirement of consideration if the same conditions are met, but it also applies to promises supported by consideration. Like § 90, this Section overlaps in some cases with rules based on estoppel or fraud; it states a basic principle which sometimes renders inquiry unnecessary as to the precise scope of other policies. Sections 128 and 129 state particular applications of the same principle to land contracts; §§ 125(3) and 130(2) also rest on it in part. Where a promise is made without intention to perform, remedies under this Section may be alternative to remedies for fraud.

b. Avoidance of injustice.

Like § 90 this Section states a flexible principle, but the requirement of consideration is more easily displaced than the requirement of a writing. The reliance must be foreseeable by the promisor, and enforcement must be necessary to avoid injustice. Subsection (2) lists some of the relevant factors in applying the latter requirement. Each factor relates either to the extent to which reliance furnishes a compelling substantive basis for relief in addition to the expectations created by the promise or to the extent to which the circumstances satisfy the evidentiary purpose of the Statute and fulfill any cautionary, deterrent and channeling functions it may serve.

1. A is lessee of a building for five years at $ 75 per month and has sublet it for three years at $ 100 per month. A seeks to induce B to purchase the building, and to that end orally promises to assign to B the lease and sublease and to execute a written assignment as soon as B obtains a deed. B purchases the building in reliance on the promise. B is entitled to the rentals from the sublease.

2. A is a pilot with an established airline having rights to continued employment, and could take up to six months leave without prejudice to those rights. He takes such leave to become general manager of B, a small airline which hopes to expand if a certificate to operate over an important route is granted. When his six months leave is about to expire, A demands definite employment because of that fact, and B orally agrees to employ A for two years and on the granting of the certificate to give A an increase in salary and a written contract. In reliance on this agreement A lets his right to return to his prior employer expire. The certificate is soon granted, but A is discharged in breach of the agreement. The Statute of Frauds does not prevent recovery of damages by A.

c. Particular factors.

The force of the factors listed varies in different types of cases, and additional factors may affect particular types of contracts. Thus reliance of the kinds usual in suretyship transactions is not sufficient to justify enforcement of an oral guaranty, where the evidentiary and cautionary functions performed by the statutory formalities are not fulfilled. In the case of a contract between prospective spouses made upon consideration of marriage, the policy of the Statute is reinforced by a policy against legal interference in the marriage relation, and reliance incident to the marriage relation does not make the contract enforceable. Where restitution is an unavailable remedy because to grant it would nullify the statutory purpose, a remedy based on reliance will ordinarily also be denied.

3. A orally promises to pay B a commission for services in negotiating the sale of a business opportunity, and B finds a purchaser to whom A sells the business opportunity. A statute extends the Statute of Frauds to such promises, and is interpreted to preclude recovery of the reasonable value of such services. The promise is not made enforceable by B’s reliance on it.

d. Partial enforcement; particular remedies.

The same factors which bear on whether any relief should be granted also bear on the character and extent of the remedy. In particular, the remedy of restitution is not ordinarily affected by the Statute of Frauds (see § 375); where restitution is an adequate remedy, other remedies are not made available by the rule stated in this Section. Again, when specific enforcement is available under the rule stated in § 129, an ordinary action for damages is commonly less satisfactory, and justice then does not require enforcement in such an action. In some cases it may be appropriate to measure relief by the extent of the promisee’s reliance rather than by the terms of the promise.

4. A renders services to B under an oral contract within the Statute by which B promises to pay for the services. On discharge without cause in breach of the contract, A is entitled to the reasonable value of the services, but in the absence of additional circumstances is not entitled to damages for wrongful discharge.

[]{#_Toc161928180 .anchor}R. 2d Contracts § 138 – Unenforceability

Where a contract within the Statute of Frauds is not enforceable against the party to be charged by an action against him, it is not enforceable by a set-off or counterclaim in an action brought by him, or as a defense to a claim by him.

a. Contracts within the Statute.

Section 110 lists the classes of contracts which are subject to the Statute of Frauds, and Topics 1-5, §§ 111-30 elaborate the descriptions of some of those classes and the circumstances in which certain contracts originally within the Statute may cease to be within it.

b. Unenforceability.

Despite variations in wording, the American statutes based on the English Statute of Frauds are read to make contracts unenforceable by action or defense unless the Statute is satisfied by a signed memorandum. See § 8, defining “unenforceable contract.” Satisfaction by a memorandum is the subject of Topic 6, §§ 131-37. Under the rule stated in § 135, the Statute may be satisfied as against one party and not as against another; in that event the Statute does not prevent enforcement by action, set-off, counterclaim or defense against the former party.

c. Exceptions.

In many situations a contract within the Statute becomes enforceable even though the Statute is not satisfied by a memorandum. Of particular importance are cases where denial of enforcement would be unjust because of part or full performance or other reliance by the aggrieved party. Some such cases are dealt with by rules withdrawing the case from the class of contracts within the statute, others by a rule making particular remedies available. Exceptions relating to particular classes of contracts are stated in appropriate sections in the Topics relating to those classes.

[]{#_Toc161928181 .anchor}9A V.S.A. § 2-201 – Formal Requirements; Statute of Frauds (pre-2022 Amendments).

(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

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

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

(a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or

(b) if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or

(c) with respect to goods for which payment has been made and accepted or which have been received and accepted ([Sec. 2-606]{.underline}).

[]{#_Toc161928182 .anchor}N.H.R.S.A. 382-A § 2-201 – Formal Requirements; Statute of Frauds (post-2022 Amendments).

(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some record sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by the party's authorized agent or broker. A record is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such record.

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

[]{#_Toc161928183 .anchor}Compare 9A V.S.A. §2-201 with N.H.R.S.A. 382-A § 2-201.

Editor’s note: Language added by the 2022 amendmenet is indiciated with [underline]{.underline}. Language deleted by the 2022 amendmenet is indiciated with ~~strikethrough~~.

(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some ~~writing~~ [record]{.underline} sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by ~~his~~ [the party’s]{.underline} authorized agent or broker. A ~~writing~~ [record]{.underline} is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such ~~writing~~ [record]{.underline}.

(2) Between merchants if within a reasonable time a ~~writing~~ [record]{.underline} in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless ~~writing~~ [a record containing]{.underline} notice of objection to its contents is given within 10 days after it is received.

~~(3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable~~

~~(c) with respect to goods for which payment has been made and accepted or which have been received and accepted (Sec. 2-606).~~

15 U.S.C. 96(101) – Electronic Signatures in Global and National Commerce Act, General Rule of Validity.

(a) In General.--Notwithstanding any statute, regulation, or other rule of law (other than this title and title II), with respect to any transaction in or affecting interstate or foreign commerce--

(1) a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and

(2) a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.

Editor’s Note: The 2022 revisions to the U.C.C. require a “record” instead of a “writing.” The revisions thus seem to obviate the need for the eSign act in commercial transactions in jurisdictions that adopted the revisions.

Chapter 11 | Mistake

[]{#_Toc161928186 .anchor}R. 2d Contracts § 151 – Mistake Defined

A mistake is a belief that is not in accord with the facts.

a. Belief as to facts.

In this Restatement the word “mistake” is used to refer to an erroneous belief. A party’s erroneous belief is therefore said to be a “mistake” of that party. The belief need not be an articulated one, and a party may have a belief as to a fact when he merely makes an assumption with respect to it, without being aware of alternatives. The word “mistake” is not used here, as it is sometimes used in common speech, to refer to an improvident act, including the making of a contract, that is the result of such an erroneous belief. This usage is avoided here for the sake of clarity and consistency. Furthermore, the erroneous belief must relate to the facts as they exist at the time of the making of the contract. A party’s prediction or judgment as to events to occur in the future, even if erroneous, is not a “mistake” as that word is defined here. An erroneous belief as to the contents or effect of a writing that expresses the agreement is, however, a mistake. Mistake alone, in the sense in which the word is used here, has no legal consequences. The legal consequences of mistake in connection with the creation of contractual liability are determined by the rules stated in the rest of this Chapter.

1. A contracts with B to raise and float B’s boat which has run aground on a reef. At the time of making the contract, A believes that the sea will remain calm until the work is completed. Several days later, during a sudden storm, the boat slips into deep water and fills with mud, making it more difficult for A to raise it. Although A may have shown poor judgment in making the contract, there was no mistake of either A or B, and the rules stated in this Chapter do not apply. Whether A is discharged by supervening impracticability is governed by the rules stated in Chapter 11. If, however, the boat had already slipped into deep water at the time the contract was made, although they both believed that it was still on the reef, there would have been a mistake of both A and B. Its legal consequences, if any, would be governed by the rule stated in § 152.

2. A contracts to sell and B to buy stock amounting to a controlling interest in C Corporation. At the time of making the contract, both A and B believe that C Corporation will have earnings of $ 1,000,000 during the following fiscal year. Because of a subsequent economic recession, C Corporation earns less than $ 500,000 during that year. Although B may have shown poor judgment in making the contract, there was no mistake of either A or B, and the rules stated in this Chapter do not apply.

b. Facts include law.

The rules stated in this Chapter do not draw the distinction that is sometimes made between “fact” and “law.” They treat the law in existence at the time of the making of the contract as part of the total state of facts at that time. A party’s erroneous belief with respect to the law, as found in statute, regulation, judicial decision, or elsewhere, or with respect to the legal consequences of his acts, may, therefore, come within these rules.

3. A contracts to sell a tract of land to B. Both parties understand that B plans to erect an office building on the land and believe that he can lawfully do so. Unknown to them, two days earlier a municipal ordinance was enacted requiring a permit for lawful erection of such a building. There is a mistake of both A and B. Its legal consequences, if any, are governed by the rule stated in § 152.

[]{#_Toc161928187 .anchor}R. 2d Contracts § 152 – When Mistake of Both Parties Makes a Contract Voidable

(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.

(2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

a. Rationale.

Before making a contract, a party ordinarily evaluates the proposed exchange of performances on the basis of a variety of assumptions with respect to existing facts. Many of these assumptions are shared by the other party, in the sense that the other party is aware that they are made. The mere fact that both parties are mistaken with respect to such an assumption does not, of itself, afford a reason for avoidance of the contract by the adversely affected party. Relief is only appropriate in situations where a mistake of both parties has such a material effect on the agreed exchange of performances as to upset the very basis for the contract.

This Section applies to such situations. Under it, the contract is voidable by the adversely affected party if three conditions are met. First, the mistake must relate to a “basic assumption on which the contract was made.” Second, the party seeking avoidance must show that the mistake has a material effect on the agreed exchange of performances. Third, the mistake must not be one as to which the party seeking relief bears the risk. The parol evidence rule does not preclude the use of prior or contemporaneous agreements or negotiations to establish that the parties were mistaken. However, since mistakes are the exception rather than the rule, the trier of the facts should examine the evidence with particular care when a party attempts to avoid liability by proving mistake. The rule stated in this Section is subject to that in § 157 on fault of the party seeking relief. It is also subject to the rules on exercise of the power of avoidance stated in §§ 378-85.

b. Basic assumption.

A mistake of both parties does not make the contract voidable unless it is one as to a basic assumption on which both parties made the contract. The term “basic assumption” has the same meaning here as it does in Chapter 11 in connection with impracticability (§§ 261, 266(1)) and frustration (§§ 265, 266(2)). For example, market conditions and the financial situation of the parties are ordinarily not such assumptions, and, generally, just as shifts in market conditions or financial ability do not effect discharge under the rules governing impracticability, mistakes as to market conditions or financial ability do not justify avoidance under the rules governing mistake. The parties may have had such a “basic assumption,” even though they were not conscious of alternatives. Where, for example, a party purchases an annuity on the life of another person, it can be said that it was a basic assumption that the other person was alive at the time, even though the parties never consciously addressed themselves to the possibility that he was dead. See Illustration 6.

1. A contracts to sell and B to buy a tract of land, the value of which has depended mainly on the timber on it. Both A and B believe that the timber is still there, but in fact it has been destroyed by fire. The contract is voidable by B.

2. A contracts to sell and B to buy a tract of land, on the basis of the report of a surveyor whom A has employed to determine the acreage. The price is, however, a lump sum not calculated from the acreage. Because of an error in computation by the surveyor, the tract contains ten per cent more acreage than he reports. The contract is voidable by A. Compare Illustrations 8 and 11 to this Section and Illustration 2 to § 158.

3. A contracts to sell and B to buy a tract of land. B agrees to pay A $ 100,000 in cash and to assume a mortgage that C holds on the tract. Both A and B believe that the amount of the mortgage is $ 50,000, but in fact it is only $ 10,000. The contract is voidable by A, unless the court supplies a term under which B is entitled to enforce the contract if he agrees to pay an appropriate additional sum, and B does so.

4. A contracts to sell and B to buy a debt owed by C to A, and secured by a mortgage. Both A and B believe that there is a building on the mortgaged land so that the value of the mortgaged property exceeds that of the debt, but in fact there is none so that its value is less than half that of the debt. The contract is voidable by B.

5. A contracts to assign to B for $ 100 a $ 10,000 debt owed to A by C, who is insolvent. Both A and B believe that the debt is unsecured and is therefore, virtually worthless, but in fact it is secured by stock worth approximately $ 5,000. The contract is voidable by A.

6. A pays B, an insurance company, $ 100,000 for an annuity contract under which B agrees to make quarterly payments to C, who is 50 years old, in a fixed amount for the rest of C’s life. A and B believe that C is in good health and has a normal life expectancy, but in fact C is dead. The contract is voidable by A.

c. Material effect on agreed exchange.

A party cannot avoid a contract merely because both parties were mistaken as to a basic assumption on which it was made. He must, in addition, show that the mistake has a material effect on the agreed exchange of performances. It is not enough for him to prove that he would not have made the contract had it not been for the mistake. He must show that the resulting imbalance in the agreed exchange is so severe that he can not fairly be required to carry it out. Ordinarily he will be able to do this by showing that the exchange is not only less desirable to him but is also more advantageous to the other party. Sometimes this is so because the adversely affected party will give, and the other party will receive, something more than they supposed. Sometimes it is so because the other party will give, and the adversely affected party will receive, something less than they supposed. In such cases the materiality of the effect on the agreed exchange will be determined by the overall impact on both parties. In exceptional cases the adversely affected party may be able to show that the effect on the agreed exchange has been material simply on the ground that the exchange has become less desirable for him, even though there has been no effect on the other party. Cases of hardship that result in no advantage to the other party are, however, ordinarily appropriately left to the rules on impracticability and frustration. See Illustration 9 and § 266. The standard of materiality here, as elsewhere in this Restatement (e.g., § 237), is a flexible one to be applied in the light of all the circumstances.

7. The facts being as stated in Illustration 3 to § 151, in determining whether the effect on the agreed exchange is material, and the contract therefore voidable by B, the court will consider not only the decrease in its desirability to B but also any advantage to A through his receiving a higher price than the land would have brought on the market had the facts been known.

8. A contracts to sell and B to buy a tract of land, which they believe contains 100 acres, at a price of $ 1,000 an acre. In fact the tract contains 110 acres. The contract is not voidable by either A or B, unless additional facts show that the effect on the agreed exchange of performances is material.

9. A contracts to sell and B to buy a dredge which B tells A he intends to use for a special and unusual purpose, but B does not rely on A’s skill and judgment. A and B believe that the dredge is fit for B’s purpose, but in fact it is not, although it is merchantable. The contract is not voidable by B because the effect on the agreed exchange of performances is not material. If B’s purpose is substantially frustrated, he may have relief under § 266(2).

d. Significance of other relief.

Under the rule stated in Subsection (2), before determining the effect on the agreed exchange, the court will first take account of any relief that may be available to him or granted to the other party under the rules stated in §§ 155 (see Illustration 10) and 158 (see Illustration 11). A party may choose to seek relief by means of reformation even though it makes his own performance more onerous when, absent reformation, the contract would be voidable by the other party.

10. A and B agree that A will sell and B will buy a tract of land for $ 100,000, payable by $ 50,000 in cash and the assumption of an existing mortgage of $ 50,000. In reducing the agreement to writing, B’s lawyer erroneously omits the provision for assumption of the mortgage, and neither A nor B notices the omission. Under the rule stated in § 155, at the request of either party, the court will decree that the writing be reformed to add the provision for assumption of the mortgage. The contract is, therefore, not voidable by A because, when account is taken of the availability to him of reformation, the effect on the agreed exchange of performances is not material.

11. A contracts to sell and B to buy a tract of land, described in the contract as containing 100 acres, at a price of $ 100,000, calculated from the acreage at $ 1,000 an acre. In fact the tract contains only 90 acres. If B is entitled to a reduction in price of $ 10,000, under the rule stated in § 158(2), the contract is not voidable by B because when account is taken of the availability to him of a reduction in price, the effect on the agreed exchange of performances is not material.

As to the possibility of an argument based on frustration of purpose, see § 266(2).

e. Allocation of risk.

A party may be considered to have undertaken to perform in spite of a mistake that has a material effect on the agreed exchange of performances. He then bears the risk of the mistake. Because of the significance of the allocation of risk in the law of mistake, the scope of this exception is spelled out in detail in § 154. (It is assumed in the illustrations to the present Section that the adversely affected party does not bear the risk of the mistake under the rule stated in § 154. See, e.g., Illustration 14.)

f. Releases.

Releases of claims have afforded particularly fertile ground for the invocation of the rule stated in this Section. It is, of course, a traditional policy of the law to favor compromises as a means of settling claims without resort to litigation. Nevertheless, a claimant who has executed such a release may later wish to attack it. The situation may arise with respect to any claim, but a particularly common example involves claims for personal injury, where the claimant may have executed the release without full knowledge of the extent or, perhaps, even of the nature of his injuries. Such a claimant has a variety of possible grounds for attacking the release on discovering that his injuries are more serious than he had initially supposed. He may seek to have the release interpreted against the draftsman so as to be inapplicable to the newly discovered injuries (§ 206). He may seek to have the release reformed on the ground that it does not correctly express the prior agreement of the parties (§ 155). He may seek to avoid the release on the ground that it was unfairly obtained through misrepresentation, duress or undue influence (Chapter 7). He may seek to have the release, or at least that part purporting to cover the newly discovered injuries, held unenforceable as unconscionable (§ 208). Or he may seek to avoid the release on the ground that both he and the other party were mistaken as to the nature or extent of his injuries. Assuming that the release is properly interpreted to cover unknown injuries and that it was not unfairly obtained or unconscionable, his case will turn on the application of the rule stated in this Section to his claim of mistake. In dealing with such attacks on releases, a court should be particularly sensitive to obscure or misleading language and especially alert to the possibility of unfairness or unconscionability. However, the same rules relating to mistake apply to such releases as apply to other contracts, and if the results sometimes seem at variance with those rules, the variance can usually be attributed to the presence of one of the alternative grounds listed above.

A claimant’s attempt at avoidance based on mistake of both parties, therefore, will frequently turn on a determination, in the light of all the circumstances, of the basic assumptions of the parties at the time of the release. These circumstances may include the fair amount that would be required to compensate the claimant for his known injuries, the probability that the other party would be held liable on that claim, the amount received by the claimant in settlement of his claim, and the relationship between the known injuries and the newly discovered injuries. If, for example, the amount received by the claimant is reasonable in comparison with the fair amount required to compensate him for his known injuries and the probability of the other party being held liable on that claim, this suggests that the parties assumed that his injuries were only those known. Furthermore, even if the parties do not assume that his injuries are only those known, they may assume that any unknown injuries are of the same general nature as the known ones, while differing in extent. Although the parties may fix the assumptions on which the contract is based by an express provision, fairly bargained for, the common recital that the release covers all injuries, known or unknown and of whatever nature or extent, may be disregarded as unconscionable if, in view of the circumstances of the parties, their legal representation, and the setting of the negotiations, it flies in the face of what would otherwise be regarded as a basic assumption of the parties. What has been said here with respect to releases of claims for personal injury is generally true for releases executed in other contexts.

12. A has a claim against B for B’s admitted negligence, which appears to have caused damage to A’s automobile in an amount fairly valued at $ 600. In consideration of B’s payment of $ 600, A executes a release of “all claims for injury to person or property” that he may have against B. BothA and B believe that A has suffered damage to property only, but A later discovers that he has also suffered personal injuries in the extent of $ 20,000. The release is voidable by A.

13. A has a claim against B for B’s admitted negligence, which appears to have caused personal injuries to A’s back in an amount fairly valued at $ 10,000, although the parties are aware that A may require further treatment. In consideration of B’s payment of $ 15,000, A executes a release of “all claims for injury to person or property” that he may have against B. A later incurs additional expenses of $ 20,000 in connection with his back, which was injured more seriously than he had believed. The release is not voidable by A.

g. Relation to breach of warranty.

The rule stated in this Section has a close relationship to the rules governing warranties sale by a seller of goods or of other kinds of property. A buyer usually finds it more advantageous to rely on the law of warranty than on the law of mistake. Because of the broad scope of a seller’s warranties, a buyer is more often entitled to relief based on a claim of breach of warranty than on a claim based on mistake. Furthermore, because relief for breach of warranty is generally based on the value that the property would have had if it had been as warranted (see U.C.C. § 2-714(2)), it is ordinarily more extensive than that afforded if he merely seeks to avoid the contract on the ground of mistake. Nevertheless, the warranties are not necessarily exclusive and, even absent a warranty, a buyer may be able to avoid on the ground of mistake if he brings himself within the rule stated in this Section. The effect, on a buyer’s claim of mistake, of language purporting to disclaim the seller’s responsibility for the goods is governed by the rules on interpretation stated in Chapter 9.

14. A, a violinist, contracts to sell and B, another violinist, to buy a violin. Both A and B believe that the violin is a Stradivarius, but in fact it is a clever imitation. A makes no express warranty and, because he is not a merchant with respect to violins, makes no implied warranty of merchantibility under U.C.C. § 2-314. The contract is voidable by B.

h. Mistakes as to different assumptions.

The rule stated in this Section applies only where both parties are mistaken as to the same basic assumption. Their mistakes need not be, and often they will not be, identical. If, however, the parties are mistaken as to different assumptions, the rule stated in § 153, rather than that stated in this Section, applies.

[]{#_Toc161928188 .anchor}R. 2d Contracts § 153 – When Mistake of One Party Makes a Contract Voidable

Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and

(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or

(b) the other party had reason to know of the mistake or his fault caused the mistake.

a. Rationale.

Courts have traditionally been reluctant to allow a party to avoid a contract on the ground of mistake, even as to a basic assumption, if the mistake was not shared by the other party. Nevertheless, relief has been granted where the other party actually knew (see §§ 160, 161) or had reason to know of the mistake at the time the contract was made or where his fault caused the mistake. There has, in addition, been a growing willingness to allow avoidance where the consequences of the mistake are so grave that enforcement of the contract would be unconscionable. This Section states a rule that permits avoidance on this latter basis, as well as on the more traditional grounds. The rules stated in this Section also apply to option contracts, under which a party’s offer is irrevocable either under a statute, such as one applying to bids for public works, or on other grounds. The parol evidence rule does not preclude the use of prior or contemporaneous agreements or negotiations to establish that a party was mistaken. See § 214(d). Nevertheless, because mistakes are the exception rather than the rule, the trier of the facts should examine the evidence with particular care when a party attempts to avoid liability by proving mistake. The rule stated in this Section is subject to that stated in § 157 on fault of the party seeking relief. It is also subject to the rules on exercise of the power of avoidance stated in §§ 380-85.

b. Similarity to rule where both are mistaken.

In order for a party to have the power to avoid a contract for a mistake that he alone made, he must at least meet the same requirements that he would have had to meet had both parties been mistaken (§ 152). The mistake must be one as to a basic assumption on which the contract was made; it must have a material effect on the agreed exchange of performances; and the mistaken party must not bear the risk of the mistake. The most common sorts of such mistakes occur in bids on construction contracts and result from clerical errors in the computation of the price or in the omission of component items. See Illustration 1. The rule stated in this Section is not, however, limited to such cases. It also applies, for example, to a misreading of specifications (see Illustration 4) or such misunderstanding as does not prevent a manifestation of mutual assent (see Illustrations 5 and 6). Where only one party is mistaken, however, he must meet either the additional requirement stated in Subparagraph (a) or one of the additional requirements stated in Subparagraph (b).

c. Additional requirement of unconscionability.

Under Subparagraph (a), the mistaken party must in addition show that enforcement of the contract would be unconscionable. The reason for this additional requirement is that, if only one party was mistaken, avoidance of the contract will more clearly disappoint the expectations of the other party than if he too was mistaken. Although § 208, Unconscionable Contract or Term, is not itself applicable to such cases since the unconscionability does not appear at the time the contract is made, the standards of unconscionability in such cases are similar to those under § 208 (see Comment c to § 208). The mistaken party bears the substantial burden of establishing unconscionability and must ordinarily show not only the position he would have been in had the facts been as he believed them to be but also the position in which he finds himself as a result of his mistake. For example, in the typical case of a mistake as to the price in a bid, the builder must show the profit or loss that will result if he is required to perform, as well as the profit that he would have made had there been no mistake.

1. In response to B’s invitation for bids on the construction of a building according to stated specifications, A submits an offer to do the work for $ 150,000. A believes that this is the total of a column of figures, but he has made an error by inadvertently omitting a $ 50,000 item, and in fact the total is $ 200,000. B, having no reason to know of A’s mistake, accepts A’s bid. If A performs for $ 150,000, he will sustain a loss of $ 20,000 instead of making an expected profit of $ 30,000. If the court determines that enforcement of the contract would be unconscionable, it is voidable by A.

2. The facts being otherwise as stated in Illustration 1, the item that A inadvertently omits is a $ 35,000 item which would have made the total $ 185,000, so that if he does the work for $ 150,000 he will sustain a loss of $ 5,000 rather than make a profit of $ 30,000. The court may reach a result contrary to that in Illustration 1, on the ground that enforcement of the contract would not be unconscionable, and hold that it is not voidable by A.

3. The facts being otherwise as stated in Illustration 1, B has not accepted A’s bid before notification of the mistake, but by statute A’s bid is an irrevocable option contract because B is a state agency. In addition, A has posted a $ 10,000 bidder’s bond with S as surety. If the court determines that enforcement of the option contract would be unconscionable, it is voidable by A and, on avoidance by A, S is not liable on the bond.

4. The facts being otherwise as stated in Illustration 1, the $ 50,000 error in A’s bid is the result of A’s mistake in interpreting B’s specifications. If the court determines that enforcement of the contract would be unconscionable, it is voidable by A.

5. A writes B offering to sell for $ 100,000 a tract of land that A owns known as “201 Lincoln Street.” B, who mistakenly believes that this description includes an additional tract of land worth $ 30,000, accepts A’s offer. If the court determines that enforcement of the contract would be unconscionable, it is voidable by B.

6. A offers to sell B goods shipped from Bombay exsteamer “Peerless.” B accepts. There are two steamers of the name “Peerless” sailing from Bombay at materially different times. B means Peerless No. 2, and A has reason to know this. A means Peerless No. 1, but B has no reason to know this. Under the rule stated in § 20 there is a contract for the sale of goods from Peerless No. 2, but, under the rule stated in this Section, if the court determines that its enforcement would be unconscionable, it is voidable by A.

d. Effect of reliance on unconscionability.

Reliance by the other party may make enforcement of a contract proper although enforcement would otherwise be unconscionable. If the mistake is discovered and the other party notified before he has relied on the contract, avoidance by the mistaken party deprives the other party only of his expectation, the “benefit of the bargain,” (see § 344). If, however, the other party has relied on the contract in some substantial way, avoidance may leave that reliance uncompensated. In such a case, enforcement of the contract would not be unconscionable, even if it otherwise would be. If, however, the court can adequately protect the other party by compensating him for his reliance under the rules stated in § 158, avoidance is not then precluded on this ground.

7. In response to an invitation from B, a general contractor, for bids from subcontractors, A submits an offer to B to do paving work for $ 10,000, to be used by B as a partial basis for B’s bid on a large building. As A knows, B is required to name his subcontractors in his general bid. Because of the short time in which A has to prepare his bid, A inadvertently totals his bid as $ 10,000 rather than $ 15,000. B uses A’s bid in arriving at his offer of $ 100,000, making A’s offer irrevocable as an option contract (§ 87). B’s offer is accepted, but A discovers his mistake before B accepts his bid. The option contract is not voidable by A because of B’s reliance by using A’s offer in making up his own offer.

8. The facts being otherwise as stated in Illustration 1, on A’s refusal to perform for $ 150,000, B is no longer able to accept the next lowest bid and has to re-advertise for bids at a cost of $ 1,000 before getting a bid that he accepts. If the court determines that enforcement of the contract would be unconscionable, the contract is voidable by A in spite of B’s reliance, because B can be adequately protected by holding A liable for the $ 1,000 cost of re-advertising (see § 158(1) and Comment b to that Section).

e. Had reason to know of or caused the mistake.

If the other party had reason to know of the mistake, the mistaken party can avoid the contract regardless of whether its enforcement would be unconscionable. (The terminology “reason to know” is used instead of “should know” on the ground explained in Comment b to § 19. The situation in which the other party actually knows of the mistake is covered in § 161.) Similar results follow where the other party’s fault caused the mistake. (If the mistake was the fault of both parties, it was not caused by the other party within the meaning of this Section and the court may exercise its discretion under the rule stated in § 158(2).) In attempting to unscramble a partially or completely executed transaction, the court may allow the mistaken party recovery under the rules stated in § 158(1).

9. The facts being otherwise as stated in Illustration 1, A does not prove what his profit or loss will be if he performs, but B had estimated the expected cost as $ 180,000 before advertising for bids and the ten other bids were all in the range between $ 180,000 and $ 200,000. If it is determined, because of the discrepancy between A’s bid on the one hand and B’s estimate and the ten other bids on the other, that B had reason to know of A’s mistake, the contract is voidable by A.

10. The facts being otherwise as stated in Illustration 7, if it is determined that B had reason to know of A’s mistake, the contract is voidable by A.

f. Allocation of risk.

Here, as under § 152, a party may undertake to perform in spite of a mistake that would otherwise allow him to avoid the contract. It is, of course, unusual for a party to bear the risk of a mistake that the other party had reason to know of or that was caused by his fault within Subparagraph (b). Because of the significance of allocation of risk in the law of mistake, the scope of this exception is spelled out in detail in § 154. (It is assumed in the illustrations to the present Section that the adversely affected party does not bear the risk under the rule stated in § 154.)

g. Mistake as to identity.

Mistakes as to the identity of a party have sometimes been treated as distinct from other mistakes, but the modern trend is to apply the rules applicable to other mistakes. Cf. U.C.C. § 2-403(1)(a). Such a mistake is therefore subject generally to the rules stated in this Chapter and, since it is by its nature a mistake of only one of the parties, particularly to the rule stated in this Section. The identity of the other party, as distinguished, for example, from his financial standing, is usually a basic assumption on which a contract is made. If the other party knows that he is not the intended offeree, he cannot accept an offer. That case is governed by § 52. If, however, he accepts without knowing that he is not the intended offeree, a contract may result. Whether that contract is voidable by the offeror on the ground of mistake is governed by the rule stated in this Section. The contract is voidable by the mistaken party, under the rule stated in Subparagraph (b), if the other party has caused a mistake as to his identity or if he had reason to know of the mistake, as long as it has a material effect on the agreed exchange of performances. Otherwise it is not voidable unless enforcement of the contract would be unconscionable, under the rule stated in Subparagraph (a). In some transactions the identity of the other party is of sufficient importance that he will be able to show unconscionability, but often he will not.

The situation in which a party deals with an agent acting secretly for an undisclosed principal is governed by the Restatement, Second, of Agency and not by the Restatement of this Subject. The basic principles there applied are not, however, inconsistent with the rule stated in this Section. The party who deals with such an agent gets that which he expects, the liability of the agent on the contract. Indeed, he gets more, for on disclosure of the agent’s principal he can also hold the principal. Although it is also true that he may himself be liable to the principal, as well as to the agent, on the contract, this additional burden has not been regarded by the law of agency as sufficiently important to make enforcement of the contract against him unconscionable, since it does not change the terms of the contract.

11. In answer to an inquiry from “J. B. Smith Company,” A offers to sell goods for cash on delivery. A mistakenly believes that the offeree is John B. Smith, who has an established business of good repute, but in fact it is a business run by his son, whose business is new and near insolvency. The son accepts, not knowing of A’s mistake. If the court concludes that, because payment is to be cash on delivery, enforcement of the contract would not be unconscionable, the contract is not voidable by A.

12. The facts being otherwise as stated in Illustration 11, A’s offer is to sell goods on 90 days credit. If the court determines that, because payment is to be on 90 days credit, enforcement of the contract would be unconscionable, the contract is voidable by A.

13. The facts being otherwise as stated in Illustration 11, A’s offer contains references to “your long established business” from which the son had reason to know of A’s mistake. The contract is voidable by A.

[]{#_Toc161928189 .anchor}R. 2d Contracts § 154 – When a Party Bears the Risk of a Mistake

A party bears the risk of a mistake when

(a) the risk is allocated to him by agreement of the parties, or

(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

a. Rationale.

Absent provision to the contrary, a contracting party takes the risk of most supervening changes in circumstances, even though they upset basic assumptions and unexpectedly affect the agreed exchange of performances, unless there is such extreme hardship as will justify relief on the ground of impracticability of performance or frustration of purpose. A party also bears the risk of many mistakes as to existing circumstances even though they upset basic assumptions and unexpectedly affect the agreed exchange of performances. For example, it is commonly understood that the seller of farm land generally cannot avoid the contract of sale upon later discovery by both parties that the land contains valuable mineral deposits, even though the price was negotiated on the basic assumption that the land was suitable only for farming and the effect on the agreed exchange of performances is material. In such a case a court will ordinarily allocate the risk of the mistake to the seller, so that he is under a duty to perform regardless of the mistake. The rule stated in this Section determines whether a party bears the risk of a mistake for the purposes of both §§ 152 and 153. Stating these rules in terms of the allocation of risk avoids such artificial and specious distinctions as are sometimes drawn between “intrinsic” and “extrinsic” mistakes or between mistakes that go to the “identity” or “existence” of thesubject matter and those that go merely to its “attributes,” “quality” or “value.” Even though a mistaken party does not bear the risk of a mistake, he may be barred from avoidance if the mistake was the result of his failure to act in good faith and in accordance with reasonable standards of fair dealing.

b. Allocation by agreement.

The most obvious case of allocation of the risk of a mistake is one in which the parties themselves provide for it by their agreement. Just as a party may agree to perform in spite of impracticability or frustration that would otherwise justify his non-performance, he may also agree, by appropriate language or other manifestations, to perform in spite of mistake that would otherwise justify his avoidance. An insurer, for example, may expressly undertake the risk of loss of property covered as of a date already past. Whether the agreement places the risk on the mistaken party is a question to be answered under the rules generally applicable to the scope of contractual obligations, including those on interpretation, usage and unconscionability.

1. A contracts to sell and B to buy a tract of land. A and B both believe that A has good title, but neither has made a title search. The contract provides that A will convey only such title as he has, and A makes no representation with respect to title. In fact, A’s title is defective. The contract is not voidable by B, because the risk of the mistake is allocated to B by agreement of the parties.

c. Conscious ignorance.

Even though the mistaken party did not agree to bear the risk, he may have been aware when he made the contract that his knowledge with respect to the facts to which the mistake relates was limited. If he was not only so aware that his knowledge was limited but undertook to perform in the face of that awareness, he bears the risk of the mistake. It is sometimes said in such a situation that, in a sense, there was not mistake but “conscious ignorance.”

2. The facts being otherwise as stated in Illustration 2 to § 152, A proposes to B during the negotiations the inclusion of a provision under which the adversely affected party can cancel the contract in the event of a material error in the surveyor’s report, but B refuses to agree to such a provision. The contract is not voidable by A, because A bears the risk of the mistake.

d. Risk allocated by the court.

In some instances it is reasonably clear that a party should bear the risk of a mistake for reasons other than those stated in Subparagraphs (a) and (b). In such instances, under the rule stated in Subparagraph (c), the court will allocate the risk to that party on the ground that it is reasonable to do so. A court will generally do this, for example, where the seller of farm land seeks to avoid the contract of sale on the ground that valuable mineral rights have newly been found. In dealing with such issues, the court will consider the purposes of the parties and will have recourse to its own general knowledge of human behavior in bargain transactions, as it will in the analogous situation in which it is asked to supply a term under the rule stated in § 204. The rule stated in Subsection (c) is subject to contrary agreement and to usage (§ 221).

3. The facts being otherwise as stated in Illustration 6 to § 152, C is not dead but is afflicted with an incurable fatal disease and cannot live more than a year. The contract is not voidable by A, because the court will allocate to A the risk of the mistake.

4. A, an owner of land, and B, a builder, make a contract under which B is to take from A’s land, at a stated rate per cubic yard, all the gravel and earth necessary for the construction of a bridge, an amount estimated to be 114,000 cubic yards. A and B believe that all of the gravel and earth is above water level and can be removed by ordinary means, but in fact about one quarter of it is below water level, so that removal will require special equipment at an additional cost of about twenty percent. The contract is not voidable by B, because the court will allocate to B the risk of the mistake. Compare Illustration 5 to § 266.

5. A contracts with B to build a house on B’s land. A and B believe that subsoil conditions are normal, but in fact some of the land must be drained at an expense that will leave A no profit under the contract. The contract is not voidable by A, because the court will allocate to A the risk of the mistake. Compare Illustration 8 to § 266.

6. The facts being otherwise as stated in Illustration 1 to § 153, the $ 50,000 error in A’s bid is the result of A’s mistaken estimate as to the amount of labor required to do the work. A cannot avoid the contract, because the court will allocate to A the risk of the mistake.

Chapter 12 | Misrepresentation, Duress, and Undue Influence

[]{#_Toc161928191 .anchor}R. 2d Contracts § 159 – Misrepresentation Defined

A misrepresentation is an assertion that is not in accord with the facts.

a. Nature of the assertion.

A misrepresentation, being a false assertion of fact, commonly takes the form of spoken or written words. Whether a statement is false depends on the meaning of the words in all the circumstances, including what may fairly be inferred from them. An assertion may also be inferred from conduct other than words. Concealment or even non-disclosure may have the effect of a misrepresentation under the rules stated in §§ 160 and 161. Whether a misrepresentation is fraudulent is determined by the rule stated in § 162(1). However, an assertion need not be fraudulent to be a misrepresentation. Thus a statement intended to be truthful may be a misrepresentation because of ignorance or carelessness, as when the word “not” is inadvertently omitted or when inaccurate language is used. But a misrepresentation that is not fraudulent has no consequences under this Chapter unless it is material. Whether an assertion is material is determined by the rule stated in § 162(2). The consequences of a misrepresentation are dealt with in §§ 163, 164 and 166.

1. A, seeking to induce B to make a contract to buy a used car, turns the odometer back from 60,000 to 18,000 miles. B makes the contract. A’s conduct in setting the odometer is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

2. A, seeking to induce B to make a contract to lease a particular generator, writes B a letter with the intention of describing its output correctly as “1200 kilowatts.” Because of an error of A’s typist, unnoticed by A, the letter states that the output of the generator is “2100 kilowatts.” B makes the contract. A’s statement is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

b. Half-truths.

A statement may be true with respect to the facts stated, but may fail to include qualifying matter necessary to prevent the implication of an assertion that is false with respect to other facts. For example, a true statement that an event has recently occurred may carry the false implication that the situation has not changed since its occurrence. Such a half-truth may be as misleading as an assertion that is wholly false.

3. A, seeking to induce B to make a contract to buy land, tells B that his title to the land has been upheld in a court decision. A knows that the decision has been appealed but does not tell this to B. B makes the contract. A’s statement omits matter necessary to prevent the implied assertion that A’s title is clearly established, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

4. A, seeking to induce B to make a contract to buy an apartment house, tells B that the apartments are all rented to tenants at $ 200 a month. A knows that the rent of $ 200 has not been approved by the local rent control authorities and that without this approval it is illegal but does not tell this to B. B makes the contract. A’s statement omits matter needed to prevent the implied assertion that the rent is legal, and this assertion is a misrepresentation (see § 170). Whether the contract is voidable by B is determined by the rules stated in § 164.

c. Meaning of “fact.”

An assertion must relate to something that is a fact at the time the assertion is made in order to be a misrepresentation. Such facts include past events as well as present circumstances but do not include future events. An assertion limited to future events (see § 2), may be a basis of liability for breach of contract, but not of relief for misrepresentation. However, a promise or a prediction of future events may by implication involve an assertion that facts exist from which the promised or predicted consequences will follow, which may be a misrepresentation as to those facts. Thus, from a statement that a particular machine will attain a specified level of performance when it is used, it may be inferred that its present design and condition make it capable of such a level. Such an inference may be drawn even if the statement is not legally binding as a promise.

5. A, seeking to induce B to make a contract to buy land, promises B to build an expensive house on an adjoining tract. A knows that he neither owns nor has such an interest in the tract that he can perform the promise, although he hopes to perform it. B makes the contract. A’s promise implies an assertion that he owns the tract or has such an interest in the adjoining tract that he can perform his promise, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

6. A, seeking to induce B to buy a furnace, tells B that it will give a stated amount of heat while consuming only a stated amount of fuel. A knows that the furnace is not capable of such efficiency. B makes the contract. A’s statement implies an assertion that the furnace has an existing capability of such efficiency, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

d. State of mind as a fact.

A person’s state of mind is a fact, and an assertion as to one’s opinion or intention, including an intention to perform a promise, is a misrepresentation if the state of mind is other than as asserted. The extent to which the recipient is justified in relying on an assertion of opinion or intention is dealt with in §§ 168, 169 and 171.

[]{#_Toc161928192 .anchor}R. 2d Contracts § 160 – When Action Is Equivalent to an Assertion (Concealment)

Action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.

a. Scope.

Concealment is an affirmative act intended or known to be likely to keep another from learning of a fact of which he would otherwise have learned. Such affirmative action is always equivalent to a misrepresentation and has any effect that a misrepresentation would have under the rules stated in §§ 163, 164 and 166. The rule stated in the following section applies to non-disclosure, where one person simply fails to inform another of a fact relating to the transaction. Non-disclosure is equivalent to a misrepresentation only in the circumstances enumerated in that section.

b. Common situations.

The rule stated in this Section is commonly applied in two situations, although it is not limited to them. In the first, a party actively hides something from the other, as when the seller of a building paints over a defect. See Illustration 1. In such a case his conduct has the same effect as an assertion that the defect does not exist, and it is therefore a misrepresentation. Similarly, if the offeror reads a written offer to the offeree and omits a portion of it, his conduct has the same effect as an assertion that the omitted portion is not contained in the writing and is therefore a misrepresentation. In the second situation, a party prevents the other from making an investigation that would have disclosed a defect. An analogous situation arises where a party frustrates an investigation made by the other, for example by sending him in search of information where it cannot be found. Even a false denial of knowledge by a party who has possession of the facts may amount to a misrepresentation as to the facts that he knows, just as if he had actually misstated them, if its effect on the other is to lead him to believe that the facts do not exist or cannot be discovered. Action may be considered as likely to prevent another from learning of a fact even though it does not make it impossible to learn of it.

1. A, seeking to induce B to make a contract to buy his house, paints the basement floor in order to prevent B from discovering that the foundation is cracked. B is prevented from discovering the defect and makes the contract. The concealment is equivalent to an assertion that the foundation is not cracked, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

2. A, seeking to induce B to make a contract to buy his house, convinces C, who, as A knows, is about to tell B that the foundation is cracked, to say nothing to B about the foundation. B is prevented from discovering the defect and makes the contract. A’s conduct is equivalent to an assertion that the foundation is not cracked, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

[]{#_Toc161928193 .anchor}R. 2d Contracts § 161 – When Non-Disclosure Is Equivalent to an Assertion

A person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist in the following cases only:

(a) where he knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation or from being fraudulent or material.

(b) where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

(c) where he knows that disclosure of the fact would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.

(d) where the other person is entitled to know the fact because of a relation of trust and confidence between them.

a. Concealment distinguished.

Like concealment, non-disclosure of a fact may be equivalent to a misrepresentation. Concealment necessarily involves an element of non-disclosure, but it is the act of preventing another from learning of a fact that is significant and this act is always equivalent to a misrepresentation (§ 160). Non-disclosure without concealment is equivalent to a misrepresentation only in special situations. A party making a contract is not expected to tell all that he knows to the other party, even if he knows that the other party lacks knowledge on some aspects of the transaction. His nondisclosure, as such, has no legal effect except in the situations enumerated in this Section. He may not, of course, tell half-truths and his assertion of only some of the facts without the inclusion of such additional matters as he knows or believes to be necessary to prevent it from being misleading is itself a misrepresentation. In contrast to the rule applicable to liability in tort for misrepresentation, it is not enough, where disclosure is expected, merely to make reasonable efforts to disclose the relevant facts. Actual disclosure is required. Compare Restatement, Second, Torts § 551, Comment d.

b. Fraudulent or material.

In order to make the contract voidable under the rule stated in § 164(1), the non-disclosure must be either fraudulent or material. The notion of disclosure necessarily implies that the fact in question is known to the person expected to disclose it. But the failure to disclose the fact may be unintentional, as when one forgets to disclose a known fact, and it is then equivalent to an innocent misrepresentation. Furthermore, one is expected to disclose only such facts as he knows or has reason to know will influence the other in determining his course of action. Therefore, he need not disclose facts that the ordinary person would regard as unimportant unless he knows of some peculiarity of the other person that is likely to lead him to attach importance to them. There is, however, no such requirement of materiality if it can be shown that the non-disclosure was actually fraudulent. If a fact is intentionally withheld for the purpose of inducing action, this is equivalent to a fraudulent misrepresentation.

c. Failure to correct.

One who has made an assertion that is neither a fraudulent nor a material misrepresentation may subsequently acquire knowledge that bears significantly on his earlier assertion. He is expected to speak up and correct the earlier assertion in three cases. First, if his assertion was not a misrepresentation because it was true, he may later learn that it is no longer true. See Illustration 1. Second, his assertion may have been a misrepresentation but may not have been fraudulent. If this was because he believed that it was true, he may later learn that it was not true. See Illustration 2. If this was because he did not intend that it be relied upon, he may later learn that the other is about to rely on it. See Illustration 3. Third, if his assertion was a misrepresentation but was not material because he had no reason to know of the other’s special characteristics that made reliance likely, he may later learn of such characteristics. If a person fails to correct his earlier assertion in these situations, the result is the same as it would have been had he had his newly acquired knowledge at the time he made the assertion. The rule stated in Clause (a), like that stated in Clause (d), extends to non-disclosure by persons who are not parties to the transaction.

1. A makes to B, a credit rating company, a true statement of his financial condition, intending that its substance be published to B’s subscribers. B summarizes the information and transmits the summary to C, a subscriber. Shortly thereafter, A’s financial condition becomes seriously impaired, but he does not disclose this to B. C makes a contract to lend money to A. A’s non-disclosure is equivalent to an assertion that his financial condition is not seriously impaired, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

2. A, seeking to induce B to make a contract to buy a thoroughbred mare, tells B that the mare is in foal to a well-known stallion. Unknown to A, the mare has miscarried. A learns of the miscarriage but does not disclose it to B. B makes the contract. A’s non-disclosure is equivalent to an assertion that the mare has not miscarried, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

3. A, in casual conversation with B, tells B that a tract of land owned by A contains thirty acres. A knows that it contains only twenty-nine acres but misstates its area because he does not regard the figure as important. A’s statement is not fraudulent because it is not made with the intention of inducing B to buy the land (§ 162(1)). B later offers to buy the tract from A. A does not disclose its true area to B, for fear that B will not buy it, and accepts B’s offer. A’s non-disclosure is equivalent to a new assertion that the tract contains thirty acres, and this assertion is a fraudulent misrepresentation (§ 162(1)). Whether the contract is voidable by B is determined by the rule stated in § 164.

d. Known mistake as to a basic assumption.

In many situations, if one party knows that the other is mistaken as to a basic assumption, he is expected to disclose the fact that would correct the mistake. A seller of real or personal property is, for example, ordinarily expected to disclose a known latent defect of quality or title that is of such a character as would probably prevent the buyer from buying at the contract price. An owner is ordinarily expected to disclose a known error in a bid that he has received from a contractor. The mistake must be as to a basic assumption, as is also required by the rules on mistake stated in § 152 (see Illustrations 4, 5 and 6) and § 153 (see Illustrations 8 and 9). The rule stated in Clause (b), is, however, broader than these rules for mistake because it does not require a showing of a material effect on the agreed exchange and is not affected by the fact that the party seeking relief bears the risk of the mistake (§ 154). Nevertheless, a party need not correct all mistakes of the other and is expected only to act in good faith and in accordance with reasonable standards of fair dealing, as reflected in prevailing business ethics. A party may, therefore, reasonably expect the other to take normal steps to inform himself and to draw his own conclusions. If the other is indolent, inexperienced or ignorant, or if his judgment is bad or he lacks access to adequate information, his adversary is not generally expected to compensate for these deficiencies. A buyer of property, for example, is not ordinarily expected to disclose circumstances that make the property more valuable than the seller supposes. Compare Illustrations 10 and 11. In contrast to the rules stated in Clauses (a) and (d), that stated in Clause (b) is limited to non-disclosure by a party to the transaction. Actual knowledge is required for the application of the rule stated in Clause (b). The case of a party who does not know but has reason to know of a mistake is governed by the rule stated in § 153(b).

4. A, seeking to induce B to make a contract to buy land, knows that B does not know that the land has been filled with debris and covered but does not disclose this to B. B makes the contract. A’s non-disclosure is equivalent to an assertion that the land has not been filled with debris and covered, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

5. A, seeking to induce B to make a contract to buy A’s house, knows that B does not know that the house is riddled with termites but does not disclose this to B. B makes the contract. A’s non-disclosure is equivalent to an assertion that the house is not riddled with termites, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

6. A, seeking to induce B to make a contract to buy a food-processing business, knows that B does not know that the health department has given repeated warnings that a necessary license will not be renewed unless expensive improvements are made but does not disclose this to B. B makes the contract. A’s non-disclosure is equivalent to an assertion that no warnings have been given by the health department, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

7. A, seeking to induce B to make a contract to sell land, knows that B does not know that the land has appreciably increased in value because of a proposed shopping center but does not disclose this to B. B makes the contract. Since B’s mistake is not one as to a basic assumption (see Comment b to § 152 and Comment b to § 261), A’s non-disclosure is not equivalent to an assertion that the value of the land has not appreciably increased, and this assertion is not a misrepresentation. The contract is not voidable by B. See Illustration 13.

8. In response to B’s invitation for bids on the construction of a building according to stated specifications, A submits an offer to do the work for $ 150,000. A believes that this is the total of a column of figures, but he has made an error by inadvertently omitting a $ 5,000 item, and in fact the total is $ 155,000. B knows this but accepts A’s bid without disclosing it. B’s non-disclosure is equivalent to an assertion that no error has been made in the total, and this assertion is a misrepresentation. Whether the contract is voidable by A is determined by the rule stated in § 164. See Illustrations 1 and 2 to § 153.

9. In answer to an inquiry from “J. B. Smith Company,” A offers to sell goods for cash on delivery. A mistakenly believes that the offeree is John B. Smith, who has an established business of good repute, but in fact it is a business run by his son, with whom A has refused to deal because of previous disputes. The son learns of A’s mistake but accepts A’s offer without disclosing his identity. The son’s non-disclosure is equivalent to an assertion that the business is run by the father, and this assertion is a misrepresentation. Whether the contract is voidable by A is determined by the rule stated in § 164. See Illustration 11 to § 153.

10. A, seeking to induce B to make a contract to sell A land, learns from government surveys that the land contains valuable mineral deposits and knows that B does not know this, but does not disclose this to B. B makes the contract. A’s non-disclosure does not amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing and is therefore not equivalent to an assertion that the land does not contain valuable mineral deposits. The contract is not voidable by B.

11. The facts being otherwise as stated in Illustration 10, A learns of the valuable mineral deposits from trespassing on B’s land and not from government surveys. A’s non-disclosure is equivalent to an assertion that the land does not contain valuable mineral deposits, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164.

e. Known mistake as to a writing.

One party cannot hold the other to a writing if he knew that the other was mistaken as to its contents or as to its legal effect. He is expected to correct such mistakes of the other party and his failure to do so is equivalent to a misrepresentation, which may be grounds either for avoidance under § 164 or for reformation under § 166. (Compare the rule on reformation for mistake of both parties as to their written expression stated in § 155. See Comment a to § 155.) The failure of a party to use care in reading the writing so as to discover the mistake may not preclude such relief (§ 172). In the case of standardized agreements, these rules supplement that of § 211(3), which applies, regardless of actual knowledge, if there is reason to believe that the other party would not manifest assent if he knew that the writing contained a particular term. Like the rule stated in Clause (b), that stated in Clause (c) requires actual knowledge and is limited to non-disclosure by a party to the transaction. See Comment d.

12. A, seeking to induce B to make a contract to sell a tract of land to A for § 100,000, makes a written offer to B. A knows that B mistakenly thinks that the offer contains a provision under which A assumes an existing mortgage, and he knows that it does not contain such a provision but does not disclose this to B. B signs the writing, which is an integrated agreement. A’s non-disclosure is equivalent to an assertion that the writing contains such a provision, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164. Whether, at the request of B, the court will decree that the writing be reformed to add the provision for assumption is determined by the rule stated in § 166. See Illustration 4 to § 166.

f. Relation of trust and confidence.

The rule stated in Clause (d) supplements that stated in § 173 with respect to contracts between parties in a fiduciary relation. Where the latter rule applies, as in the case of a trustee, an agent, a guardian, or an executor or administrator, its more stringent requirements govern. Even where a party is not, strictly speaking, a fiduciary, he may stand in such a relation of trust and confidence to the other as to give the other the right to expect disclosure. Such a relationship normally exists between members of the same family and may arise, in other situations as, for example, between physician and patient. In addition, some types of contracts, such as those of suretyship or guaranty, marine insurance and joint adventure, are recognized as creating in themselves confidential relations and hence as requiring the utmost good faith and full and fair disclosure. As to contracts of suretyship, see Restatement of Security § 124.

The rule stated in Clause (d) is not limited to cases in which the non-disclosure is by a party to the transaction. In contrast, the rule stated in § 173 applies only to non-disclosure by a fiduciary who is a party. Therefore the rule stated in Clause (d) covers the residual case of a fiduciary who is not a party. As to the duty of a trustee to disclose to his beneficiary matters important for him to know in dealing with others, see Restatement, Second, Trusts § 173, Comment d. As to the duty of an agent to disclose to his principal matters important for him to know in dealing with others, see Restatement, Second, Agency § 381.

13. A, who is experienced in business, has raised B, a young man, in his household, and B has habitually followed his advice, although A is neither his parent nor his guardian. A, seeking to induce B to make a contract to sell land to A, knows that the land has appreciably increased in value because of a planned shopping center but does not disclose this to B. B makes the contract. A’s non-disclosure is equivalent to an assertion that the value of the land has not appreciably increased, and this assertion is a misrepresentation. Whether the contract is voidable by B is determined by the rule stated in § 164. See Illustration 7.

[]{#_Toc161928194 .anchor}R. 2d Contracts § 162 – When a Misrepresentation Is Fraudulent or Material

(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker

(a) knows or believes that the assertion is not in accord with the facts, or

(b) does not have the confidence that he states or implies in the truth of the assertion, or

(2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so.

a. Meaning of “fraudulent.”

The word “fraudulent” is used in various senses in the law. In order that a misrepresentation be fraudulent within the meaning of this Section, it must not only be consciously false but must also be intended to mislead another. Consequences are intended if a person either acts with the desire to cause them or acts believing that they are substantially certain to result. Thus one who believes that another is substantially certain to be misled as a result of a misrepresentation intends to mislead even though he may not desire to do so. If the maker knows that his statement is misleading because it is subject to two interpretations, it is fraudulent if he makes it with the intention that it be understood in the false sense. If the recipient continues to rely on a misrepresentation made in an earlier transaction, the misrepresentation is fraudulent if the maker knows that the recipient is still relying. Furthermore, the maker need not have a particular person in mind as the recipient at the time the misrepresentation is made. He may merely have reason to expect that it will reach any of a class of persons, of which the recipient is a member, as in the case of the merchant who furnishes information to a credit agency. See Illustration 1. In order that a fraudulent representation have legal effect within this Chapter, it need not be material. It is, however, essential that it actually induce assent.

1. A makes to B, a credit rating company, a statement of his financial condition that he knows is untrue, intending that its substance be published to B’s subscribers. B summarizes the information and transmits the summary to C, a subscriber. C is thereby induced to make a contract to lend money to A. A’s statement is a fraudulent misrepresentation and the contract is voidable by C under the rule stated in § 164.

b. “Scienter.”

The word “scienter” is often used by courts to refer to the requirement that the maker know of the untrue character of his assertion. Subsection (1) states three ways in which this requirement can be met. First, it is clearly met if the maker knows the fact to be otherwise than as stated. However, knowledge of falsity is not essential, and it is sufficient under the rule stated in Clause (a) if he believes the assertion to be false. It will not suffice merely to show that the misrepresentation is one that a person of ordinary care and intelligence would have recognized as false, although this is evidence from which his belief in its falsity may be inferred. Second, the requirement is met under the rule stated in Clause (b), if the maker, lacking confidence in the truth of his assertion that he states or implies, nevertheless chooses to make it as one of his own knowledge rather than one merely of his opinion. This is so when he is conscious that he has only a belief in its truth and recognizes that there is some chance that it may not be true. This conclusion is often expressed by saying that the misrepresentation has been made without belief in its truth or that it has been made recklessly, without regard to whether it is true or false. Third, the requirement is met under the rule stated in Clause (c), if the maker has said or implied that the assertion is made on some particular basis, such as his personal knowledge or his personal investigation, when it is not so made. This is so even though the maker is honestly convinced of its truth from hearsay or other source that he believes is reliable.

2. A, seeking to induce B to make a contract to buy his house, tells B that the plumbing is of pipe of a specified quality. A does not know the quality of the pipe, and it is not of the specified quality. B is induced by A’s statement to make the contract. The statement is a fraudulent misrepresentation, both because A does not have the confidence that he implies in its truth, and because he knows that he does not have the basis for it that he implies. The contract is voidable by B under the rule stated in § 164.

c. Meaning of “material.”

Although a fraudulent misrepresentation need not be material in order to entitle the recipient to relief under the rule stated in § 164, a non-fraudulent misrepresentation will not entitle him to relief unless it is material. The materiality of a misrepresentation is determined from the viewpoint of the maker, while the justification of reliance is determined from the viewpoint of the recipient. (Contrast also the concept of a “material” failure to perform.) The requirement of materiality may be met in either of two ways. First, a misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent. Second, it is material if the maker knows that for some special reason it is likely to induce the particular recipient to manifest his assent. There may be personal considerations that the recipient regards as important even though they would not be expected to affect others in his situation, and if the maker is aware of this the misrepresentation may be material even though it would not be expected to induce a reasonable person to make the proposed contract. One who preys upon another’s known idiosyncrasies cannot complain if the contract is held voidable when he succeeds in what he is endeavoring to accomplish. Cf. Restatement, Second, Torts § 538. Although a nonfraudulent misrepresentation that is not material does not make the contract voidable under the rules stated in this Chapter, the recipient may have a claim to relief under other rules, such as those relating to breach of warranty.

3. A, while negotiating with B for the sale of A’s race horse, tells him that the horse has run a mile in a specified time. A is honestly mistaken, and, unknown to him, the horse has never come close to that time. B is induced by A’s assertion to make a contract to buy the horse. A’s statement, although not fraudulent, is a material misrepresentation, and the contract is voidable by B under the rule stated in § 164.

4. A, while negotiating with B for the sale of A’s race horse, tells him that the horse was bred in a specified stable. A is honestly mistaken, and, unknown to him, it was bred in another stable of better reputation. The specified stable was, unknown to A, founded by B’s grandfather, and B is therefore induced by A’s assertion to make a contract to buy the horse. A’s misrepresentation is neither fraudulent nor material, and the contract is not voidable by B.

5. The facts being otherwise as in Illustration 4, A knows that the named stable was founded by B’s grandfather and that B would like to own a horse bred there. A’s misrepresentation, although not fraudulent, is material, and the contract is voidable by B under the rule stated in § 164.

[]{#_Toc161928195 .anchor}R. 2d Contracts § 164 – When a Misrepresentation Makes a Contract Voidable

(1) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.

(2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient, unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction.

a. Requirements.

A misrepresentation may make a contract voidable under the rule stated in this Section, even though it does not prevent the formation of a contract under the rule stated in the previous section. Three requirements must be met in addition to the requirement that there must have been a misrepresentation. First, the misrepresentation must have been either fraudulent or material. See Comment b. Second, the misrepresentation must have induced the recipient to make the contract. See Comment c. Third, the recipient must have been justified in relying on the misrepresentation. See Comment d. Even if the contract is voidable, exercise of the power of avoidance is subject to the limitations stated in Chapter 16 on remedies.

b. Fraudulent and non-fraudulent misrepresentation.

A representation need not be fraudulent in order to make a contract voidable under the rule stated in this Section. However, a non-fraudulent misrepresentation does not make the contract voidable unless it is material, while materiality is not essential in the case of a fraudulent misrepresentation. One who makes a non-fraudulent misrepresentation of a seemingly unimportant fact has no reason to suppose that his assertion will induce assent. But a fraudulent misrepresentation is directed to attaining that very end, and the maker cannot insist on his bargain if it is attained, however unexpectedly, as long as the additional requirements of inducement and justifiable reliance are met. See Illustration 1. Compare Restatement, Second, Torts § 538, which limits liability for fraudulent misrepresentation to cases in which the matter misrepresented is material.

1. A, seeking to induce B to make a contract to buy a tract of land at a price of $ 1,000 an acre, tells B that the tract contains 100 acres. A knows that it contains only 90 acres. B is induced by the statement to make the contract. Because the statement is a fraudulent misrepresentation (§ 162(1)), the contract is voidable by B, regardless of whether the misrepresentation is material.

2. The facts being otherwise as stated in Illustration 1, A is mistaken and does not know that the tract contains only 90 acres. Because the statement is not a fraudulent misrepresentation, the contract is voidable by B only if the misrepresentation is material (§ 162(2)).

3. A and B agree that A will buy a tract of land from B for $ 100,000 and will assume an existing mortgage of $ 50,000. In reducing the agreement to writing, A intentionally omits the provision for assumption but tells B that the writing correctly expresses their agreement. B does not notice the omission and is induced by A’s statement to sign the writing. The misrepresentation is both fraudulent and material, and the contract is voidable by B. Compare Illustration 1 to § 166 and see Illustration 10 to § 161.

c. Inducement.

No legal effect flows from either a non-fraudulent or a fraudulent misrepresentation unless it induces action by the recipient, that is, unless he manifests his assent to the contract in reliance on it. Whether a misrepresentation is an inducement is a question of fact governed by the rule stated in § 167. In general, the recipient of a misrepresentation need not show that he has actually been harmed by relying on it in order to avoid the contract. But see § 165.

d. Justification.

A misrepresentation, even if relied upon, has no legal effect unless the recipient’s reliance on it is justified. The most significant and troublesome applications of this principle occur in connection with assertions of opinion (§§ 168, 169), assertions as to matters of law (§ 170), assertions of intention (§ 171), and fault (§ 172). In other situations the requirement of justification is usually met unless, for example, the fact to which the misrepresentation relates is of only peripheral importance to the transaction or is one as to which the maker’s assertion would not be expected to be taken seriously.

e. Misrepresentation by a third party.

The rule stated in Subsection (2) makes a contract voidable for a misrepresentation by a third party, subject to the general principle of law that if an innocent person has in good faith and without notice given value or changed his position in reliance on the contract, it is not voidable on that ground. This is the same principle that protects an innocent person who purchases goods or commercial paper in good faith, without notice and for value from one who has obtained them from the original owner by a misrepresentation.

In the cases that fall within Subsection (2), however, the innocent person deals directly with the recipient of the misrepresentation, which is made by one not a party to their contract. The contract is not voidable by the recipient if the innocent person gives value or relies materially on the transaction before learning or acquiring reason to know of the misrepresentation. The term “value” has the same meaning here as it does under U.C.C. § 1-201(44), and therefore the consideration given by the innocent party is value for this purpose. The rule does not protect a person who is responsible under the law of agency for the maker’s misrepresentation. Assignees and intended beneficiaries, who derive their rights from a contract that is voidable for misrepresentation, take subject to the right of avoidance under §§ 309, 336. The rule stated in Subsection (2) does not preclude avoidance for mistake under the rules stated in Chapter 6.

4. A, who is not C’s agent, induces B by a fraudulent misrepresentation to make a contract with C to sell land to C. C promises to pay the agreed price, not knowing or having reason to know of the fraudulent misrepresentation. Since C’s promise to pay is value, the contract is not voidable by B. The contract would be voidable by B if C learned or acquired reason to know of the fraudulent misrepresentation before promising to pay the price.

5. A, who is not C’s agent, induces B by a fraudulent misrepresentation to sign a pledge by which B promises C, a charitable corporation, to contribute a sum of money. C does not know or have reason to know of the fraudulent representation. B’s promise, although binding under § 90(2), is voidable by B. B’s promise would not be voidable if C materially changed its position in reliance on B’s promise before learning or acquiring reason to know of the fraudulent misrepresentation.

[]{#_Toc161928196 .anchor}R. 2d Contracts § 174 – When Duress by Physical Compulsion Prevents Formation of a Contract

If conduct that appears to be a manifestation of assent by a party who does not intend to engage in that conduct is physically compelled by duress, the conduct is not effective as a manifestation of assent.

a. Rationale.

Under the general principle stated in § 21(2), a party’s conduct is not effective as a manifestation of his assent if he does not intend to engage in it. This Section involves an application of that principle to those relatively rare situations in which actual physical force has been used to compel a party to appear to assent to a contract. The essence of this type of duress is that a party is compelled by physical force to do an act that he has no intention of doing. He is, it is sometimes said, “a mere mechanical instrument.” The result is that there is no contract at all, or a “void contract” as distinguished from a voidable one. Cases, such as those involving hypnosis, in which conduct is compelled without physical force, are left to be governed by the general rule stated in § 19(2).

1. A presents to B, who is physically weaker than A, a written contract prepared for B’s signature and demands that B sign it. B refuses. A grasps B’s hand and compels B by physical force to write his name. B’s signature is not effective as a manifestation of his assent, and there is no contract.

b. “Void” rather than voidable.

The distinction between “void contract” and a voidable contract has important consequences. For example, a victim of duress may be held to have ratified the contract if it is voidable, but not if it is “void.” Furthermore, a good faith purchaser may acquire good title to property if he takes it from one who obtained voidable title by duress but not if he takes it from one who obtained “void title” by duress. It is immaterial under the rule stated in this Section whether the duress is exercised by a party to the transaction or by a third person.

[]{#_Toc161928197 .anchor}R. 2d Contracts § 175 – When Duress by Threat Makes a Contract Voidable

(1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.

(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction.

a. Improper threat.

The essence of the type of duress dealt with in this Section is inducement by an improper threat. The threat may be expressed in words or it may be inferred from words or other conduct. Past events often import a threat. Thus, if one person strikes or imprisons another, the conduct may amount to duress because of the threat of further blows or continued imprisonment that is implied. Courts originally restricted duress to threats involving loss of life, mayhem or imprisonment, but these restrictions have been greatly relaxed and, in order to constitute duress, the threat need only be improper within the rule stated in § 176.

b. No reasonable alternative.

A threat, even if improper, does not amount to duress if the victim has a reasonable alternative to succumbing and fails to take advantage of it. It is sometimes said that the threat must arouse such fear as precludes a party from exercising free will and judgment or that it must be such as would induce assent on the part of a brave man or a man of ordinary firmness. The rule stated in this Section omits any such requirement because of its vagueness and impracticability. It is enough if the threat actually induces assent (see Comment c) on the part of one who has no reasonable alternative.

The alternative may take the form of a legal remedy. For example, the threat of commencing an ordinary civil action to enforce a claim to money may be improper. However, it does not usually amount to duress because the victim can assert his rights in the threatened action, and this is ordinarily a reasonable alternative to succumbing to the threat, making the proposed contract, and then asserting his rights in a later civil action. See Illustration 1; cf. Restatement of Restitution § 71.

This alternative may not, however, be reasonable if the threat involves, for instance, the seizure of property, the use of oppressive tactics, or the possibility of emotional consequences. See Illustration 2. The standard is a practical one under which account must be taken of the exigencies in which the victim finds himself, and the mere availability of a legal remedy is not controlling if it will not afford effective relief to one in the victim’s circumstances. See Illustrations 3 and 4.

The alternative to succumbing to the threat need not, however, involve a legal remedy at all. In the case of a threatened denial of needed goods or services, the availability on the market of similar goods or services may afford a reasonable means of avoiding the threat. Compare Illustrations 5 and 6. Since alternative sources of funds are ordinarily available, a refusal to pay money is not duress, absent a showing of peculiar necessity. See Illustration 7.

Where the threat is one of minor vexation only, toleration of the inconvenience involved may be a reasonable alternative. Whether the victim has a reasonable alternative is a mixed question of law and fact, to be answered in clear cases by the court.

1. A makes an improper threat to commence civil proceedings against B unless B agrees to discharge a claim that B has against A. In order to avoid defending the threatened suit, B is induced to make the contract. Defense of the threatened suit is a reasonable alternative, the threat does not amount to duress, and the contract is not voidable by B.

2. A makes an improper threat to commence a civil action and to file a lis pendens against a tract of land owned by B, unless B agrees to discharge a claim that B has against A. Because B is about to make a contract with C for the sale of the land and C refuses to make the contract if the levy is made, B agrees to discharge the claim. B has no reasonable alternative, A’s threat is duress, and the contract is voidable by B.

3. A, with whom B has left a machine for repairs, makes an improper threat to refuse to deliver the machine to B, although B has paid for the repairs, unless B agrees to make a contract to have additional repair work done. B can replevy the machine, but because he is in urgent need of it and delay would cause him heavy financial loss, he is induced by A’s threat to make the contract. B has no reasonable alternative, A’s threat amounts to duress, and the contract is voidable by B.

4. A, who has promised B to vacate leased premises in return for $ 10,000 in order to permit B to demolish the building and construct another, refuses to do so unless B agrees to purchase his worthless furniture for $ 5,000. B can resort to regular eviction proceedings, but because this will materially delay his construction schedule and cause him heavy financial loss, he is induced by A’s threat to make the contract. B has no reasonable alternative, A’s threat amounts to duress, and the contract is voidable by B.

5. A, who has contracted to sell goods to B, makes an improper threat to refuse to deliver the goods to B unless B modifies the contract to increase the price. B attempts to buy substitute goods elsewhere but is unable to do so. Being in urgent need of the goods, he makes the modification. B has no reasonable alternative, A’s threat amounts to duress, and the modification is voidable by B.

6. The facts being otherwise as stated in Illustration 5, B could buy substitute goods elsewhere but does not attempt to do so. The purchase of substitute goods and a claim for any damages is a reasonable alternative, the threat does not amount to duress, and the contract is not voidable by B.

7. A, who has contracted to pay for goods delivered by B, makes an improper threat to refuse to pay B unless B modifies the contract to reduce the price. B attempts to borrow money elsewhere but is unable to do so. Being in urgent need of cash to avoid foreclosure of a mortgage, he makes the modification. B has no reasonable alternative, A’s threat amounts to duress, and the modification is voidable by B.

c. Subjective test of inducement.

In order to constitute duress, the improper threat must induce the making of the contract. The rule for causation in cases of misrepresentation stated in § 167 is also applied to analogous cases of duress. No special rule for causation in cases of duress is stated here because of the infrequency with which the problem arises. A party’s manifestation of assent is induced by duress if the duress substantially contributes to his decision to manifest his assent. Compare § 167.

The test is subjective and the question is, did the threat actually induce assent on the part of the person claiming to be the victim of duress. Threats that would suffice to induce assent by one person may not suffice to induce assent by another. All attendant circumstances must be considered, including such matters as the age, background and relationship of the parties. Persons of a weak or cowardly nature are the very ones that need protection; the courageous can usually protect themselves. Timid and inexperienced persons are particularly subject to threats, and it does not lie in the mouths of the unscrupulous to excuse their imposition on such persons on the ground of their victims’ infirmities.

However, here as under § 167 circumstantial evidence may be useful in determining whether a threat did in fact induce assent. For example, although it is not essential that a reasonable person would have believed that the maker of the threat had the ability to execute it, this may be relevant in determining whether the threat actually induced assent. Similarly, such factors as the availability of disinterested advice and the length of time that elapses between the making of the threat and the assent may also be relevant in determining whether the threat actually induced the assent.

8. A, seeking to induce B to make a contract to sell land to A, threatens to poison B unless B makes the contract. The threat would not be taken seriously by a reasonable person, but B is easily frightened and attaches importance to the threat in deciding to make the contract. The contract is voidable by B.

9. A seeks to induce B, A’s wife, who has a history of severe emotional disturbances, to sign a separation agreement on unfavorable terms. B has no lawyer, while A does. A tells B that if she does not sign the agreement he will charge her with desertion, she will never see her children again and she will get back none of her personal property, which is in A’s possession. B signs the separation agreement. The agreement is voidable by B.

d. Voidable.

Duress by threat results in a contract voidable by the victim. It differs in this important respect from duress by physical compulsion, which results in there being no contract at all. See Comment b to § 174. The power of avoidance for duress is subject to limitations that are similar to those applicable to avoidance on other grounds, such as mistake and misrepresentation. These limitations are stated in §§ 378-84. The person making the threat may, of course, pursue any civil claim that he has against the victim independently of the contract induced by the threat. Furthermore, to the extent that such a claim is valid, the maker of the threat may be entitled to retain what he has actually received through performance of such a contract. These matters are not dealt with in this Section.

e. Duress by a third person.

If a party’s assent has been induced by the duress of a third person, rather than that of the other party to the contract, the contract is nevertheless voidable by the victim. There is, however, an important exception if the other party has, in good faith and without reason to know of the duress, given value or changed his position materially in reliance on the transaction. “Value” includes a performance or a return promise that is consideration under the definition stated in § 71, so that the other party is protected if he has made the contract in good faith before learning of the duress.

The rule stated in this Section does not, however, protect a party to whom the duress is attributable under the law of agency. The rule is similar to that for misrepresentation (§ 163) and is analogous to the rule that protects against the original owner the good faith purchaser of property from another who obtained it by duress.

10. A, who is not C’s agent, induces B by duress to contract with C to sell land to C. C, in good faith, promises B to pay the agreed price. The contract is not voidable by B.

11. The facts being otherwise as stated in Illustration 10, C learns of the duress before he promises to pay the agreed price. The contract is voidable by B.

[]{#_Toc161928198 .anchor}R. 2d Contracts § 176 – When a Threat Is Improper

(1) A threat is improper if

(a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property,

(b) what is threatened is a criminal prosecution,

(d) the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient.

(2) A threat is improper if the resulting exchange is not on fair terms, and

(a) the threatened act would harm the recipient and would not significantly benefit the party making the threat,

(b) the effectiveness of the threat in inducing the manifestation of assent is significantly increased by prior unfair dealing by the party making the threat, or

a. Rationale.

An ordinary offer to make a contract commonly involves an implied threat by one party, the offeror, not to make the contract unless his terms are accepted by the other party, the offeree. Such threats are an accepted part of the bargaining process. A threat does not amount to duress unless it is so improper as to amount to an abuse of that process.

Courts first recognized as improper threats of physical violence and later included wrongful seizure or detention of goods. Modern decisions have recognized as improper a much broader range of threats, notably those to cause economic harm. The rules stated in this Section recognize as improper both the older categories and their modern extensions under developing notions of “economic duress” or “business compulsion.”

The fairness of the resulting exchange is often a critical factor in cases involving threats. The categories within Subsection (1) involve threats that are either so shocking that the court will not inquire into the fairness of the resulting exchange (see Clauses (a) and (b)) or that in themselves necessarily involve some element of unfairness (see Clauses (c) and (d)).

Those within Subsection (2) involve threats in which the impropriety consists of the threat in combination with resulting unfairness. Such a threat is not improper if it can be shown that the exchange is one on fair terms. Of course a threat may be improper for more than one reason. Any threat that comes within Subsection (1) as well as Subsection (2) is improper without an inquiry, under the rule stated in Subsection (2), into the fairness of the resulting exchange.

b. Crime or tort.

A threat is improper if the threatened act is a crime or a tort, as in the traditional examples of threats of physical violence and of wrongful seizure or retention of goods. See Comment a. Where physical violence is threatened, it need not be to the recipient of the threat, nor even to a person related to him, if the threat in fact induces the recipient to manifest his assent. See Illustration 2.

The threatened act need not involve harm to person or goods but may, for example, involve a tortious interference with another’s contractual rights.

Where the crime or tort is a minor one, however, the claim of duress may fail, even though the threat is improper, on the ground that the victim had a reasonable alternative (see Comment b to § 175) or that the threat was not an inducing cause (see Comment c to § 175).

The threatened act need not be a crime or tort if the threat itself would have been one had it resulted in the obtaining of property. Therefore, in jurisdictions where a broad modern extortion statute has been enacted, many of the threats that come within Subsection (2) are elements of the crime of extortion and therefore also fall within Clause (1)(a). See Model Penal Code § 223.4, “Theft by Extortion.” The fairness of the exchange is immaterial in such cases.

1. A is a good faith purchaser for value of a valuable painting stolen from B. When B demands the return of the painting, A threatens to poison B unless he releases all rights to the painting for $ 1,000. B, having no reasonable alternative, is induced by A’s threat to sign the release, and A pays him $ 1,000. The threatened act is both a crime and a tort, and the release is voidable by B.

2. A threatens B that he will kill C, an employee of B, unless B makes a contract to sell A a tract of land that B owns. B, having no reasonable alternative, is induced by A’s threat to make the contract. The threatened act is both a crime and a tort, and the contract is voidable by B.

3. A, a pawnbroker, has possession of a valuable heirloom pledged by B. B offers to redeem the pledge, but A threatens not to surrender it unless B signs a promissory note in compromise of another claim, the validity of which is in dispute. B, having no reasonable alternative, is induced by A’s threat to sign the note. The threatened act is a tort, and the note is voidable by B.

c. Threat of prosecution.

Under the rule stated in Clause (1)(b), a threat of criminal prosecution is improper as a means of inducing the recipient to make a contract. An explanation in good faith of the criminal consequences of another’s conduct may not involve a threat. But if a threat is made, the fact that the one who makes it honestly believes that the recipient is guilty is not material. The threat involves a misuse, for personal gain, of power given for other legitimate ends. See Comment f. The threat may be to instigate prosecution against the recipient or some third person, who is commonly although not necessarily a relative of the recipient. The guilt or innocence of the person whose prosecution is threatened is immaterial in determining whether the threat is improper, although it may be easier to show that the threat actually induced assent in the case of guilt. A bargain to suppress prosecution may be unenforceable on grounds of public policy.

4. A, who believes that B, his employee, has embezzled money from him, threatens B that a criminal complaint will be filed and he will be prosecuted immediately unless he executes a promissory note for $ 5,000 in satisfaction of A’s claim. B, having no reasonable alternative, is induced by A’s threat to sign the note. The note is voidable by B. A may, however, have a claim against B for restitution of any money embezzled. See Comment d to § 175.

5. A is the payee of a valid $ 5,000 promissory note executed by B for the repayment of money embezzled by B. A makes a threat to C, a friend of B, that a criminal complaint will be filed and B will be prosecuted immediately unless C becomes a surety on the note in consideration of an extension of time for its payment. C is induced by A’s threat to become a surety. The suretyship contract is voidable by C.

d. Threat of civil process.

The policy in favor of free access to the judicial system militates against the characterization as improper of threats to commence civil process, even if the claim on which the process is based eventually proves to be without foundation. Nevertheless, if the threat is shown to have been made in bad faith, it is improper. Bad faith may be shown by proving that the person making the threat did not believe there was a reasonable basis for the threatened process, that he knew the threat would involve a misuse of the process or that he realized the demand he made was exorbitant. See Comment f. However, a threat to commence civil process, even if improper, may not amount to duress since defense of the threatened action is often a reasonable alternative. See Comment b to § 175.

6. A threatens to commence a civil action and file a lis pendens against a tract of land owned by B, unless B makes a contract to discharge a disputed claim that B has against A. A knows that the threatened action is without foundation. B, having no reasonable alternative, is induced by A’s threat to make the contract. Since A does not believe that there is a reasonable basis for the threatened process, his threat is made in bad faith. A’s threat is improper, and the contract is voidable by B. If, however, A believes that there is a reasonable basis for the threatened process and if the proposed contract is not exorbitant, the threat is not improper, and the contract is not voidable by B.

7. A, who has a valid claim for damages against B, threatens to attach a shipment of perishable goods unless B makes a contract to sell a machine to A. As A knows, other non-perishable goods are available for attachment. B, having no reasonable alternative, is induced by A’s threat to make the contract. Since A knows that the threatened attachment would involve a misuse of that process to force a settlement rather than to preserve assets, his threat is made in bad faith. A’s threat is improper and the contract is voidable by B.

e. Breach of contract.

A threat by a party to a contract not to perform his contractual duty is not, of itself, improper. Indeed, a modification induced by such a threat may be binding, even in the absence of consideration, if it is fair and equitable in view of unanticipated circumstances. The mere fact that the modification induced by the threat fails to meet this test does not mean that the threat is necessarily improper. However, the threat is improper if it amounts to a breach of the duty of good faith and fair dealing imposed by the contract.

As under the Uniform Commercial Code, the “extortion of a ‘modification’ without legitimate commercial reason is ineffective as a violation of the duty of good faith. . . . The test of ‘good faith’ between merchants or as against merchants includes ‘observance of reasonable commercial standards of fair dealing in the trade’ (Section 2-103), and may in some situations require an objectively demonstrable reason for seeking a modification. But such matters as a market shift which makes performance come to involve a loss may provide such a reason even though there is no such unforeseen difficulty as would make out a legal excuse from performance under Sections 2-615 and 2-616.” Comment 2 to U.C.C. § 2-209.

However, a threat of non-performance made for some purpose unrelated to the contract, such as to induce the recipient to make an entirely separate contract, is ordinarily improper. See Illustration 9. Furthermore, a threat may be a breach of the duty of good faith and fair dealing under the contract even though the threatened act is not itself a breach of the contract. See Illustrations 10 and 11. This is particularly likely to be the case if the threat is effective because of power not derived from the contract itself. See Comment f.

8. A contracts to excavate a cellar for B at a stated price. A unexpectedly encounters solid rock and threatens not to finish the excavation unless B modifies the contract to state a new price that is reasonable but is nine times the original price. B, having no reasonable alternative, is induced by A’s threat to make the modification by a signed writing that is enforceable by statute without consideration. A’s threat is not a breach of his duty of good faith and fair dealing, and the modification is not voidable by B. See Illustration 1 to § 89.

9. A contracts to excavate a cellar for B at a stated price. A begins the excavation and then threatens not to finish it unless B makes a separate contract to excavate the cellar of another building. B, having no reasonable alternative, is induced by A’s threat to make the contract. A’s threat is a breach of his duty of good faith and fair dealing, and the proposed contract is voidable by B. See Illustration 5 to § 175.

10. A contracts to sell part of a tract of land to B. B, solely to induce A to discharge him from his contract duty on favorable terms, threatens to resell the land to a purchaser whose industrial use will have an undesirable effect on A’s remaining land, unless A releases B in return for a stated sum. A, having no reasonable alternative, signs the release. B’s threat is a breach of his duty of good faith and fair dealing, and the modification is voidable by A.

11. A makes a threat to discharge B, his employee, unless B releases a claim that he has against A. The employment agreement is terminable at the will of either party, so that the discharge would not be a breach by A. B, having no reasonable alternative, releases the claim. A’s threat is a breach of his duty of good faith and fair dealing, and the release is voidable by B.

f. Other improper threats.

The proper limits of bargaining are difficult to define with precision. Hard bargaining between experienced adversaries of relatively equal power ought not to be discouraged. Parties are generally held to the resulting agreement, even though one has taken advantage of the other’s adversity, as long as the contract has been dictated by general economic forces. See Illustration 14. Where, however, a party has been induced to make a contract by some power exercised by the other for illegitimate ends, the transaction is suspect. For example, absent statute, a threat of refusal to deal with another party is ordinarily not duress, but if other factors are present an agreement that results from such a threat may be called into question.

Subsection (2) deals with threats that are improper if the resulting exchange is not on fair terms. Clause (a) is concerned with cases in which a party threatens to do an act that would not significantly benefit him but would harm the other party. If, on the recipient’s refusal to contract, the maker of the threat were to do the threatened act, it would therefore be done maliciously and unconscionably, out of pure vindictiveness. A typical example is a threat to make public embarrassing information concerning the recipient unless he makes a proposed contract. See Illustration 12 and Model Penal Code § 223.4, “Theft by Extortion.”

Clause (b) is concerned with cases in which the party making the threat has by unfair dealing achieved an advantage over the recipient that makes his threat unusually effective. Typical examples involve manipulative conduct during the bargaining stage that leaves one person at the mercy of the other. See Illustration 13.

Clause (c) is concerned with other cases in which the threatened act involves the use of power for illegitimate ends. Many of the situations encompassed by clauses (1)(b), (1)(c), (2)(a) and (2)(b) involve extreme applications of this general rule, but it is more broadly applicable to analogous cases. See Illustrations 15 and 16. If, in any of these cases, the threat comes within Subsection (1), as where the threatened act or the threat itself is criminal or tortious (Clause (1)(a)), it is improper without an inquiry into the fairness of the resulting exchange under Subsection 2. See Comment a.

12. A makes a threat to B, his former employee, that he will try to prevent B’s employment elsewhere unless B agrees to release a claim that he has against A. B, having no reasonable alternative, is thereby induced to make the contract. If the court concludes that the attempt to prevent B’s employment elsewhere would harm B and would not significantly benefit A, A’s threat is improper and the contract is voidable by B.

13. A, who has sold goods to B on several previous occasions, intentionally misleads B into thinking that he will supply the goods at the usual price and thereby causes B to delay in attempting to buy them elsewhere until it is too late to do so. A then threatens not to sell the goods to B unless he agrees to pay a price greatly in excess of that charged previously. B, being in urgent need of the goods, makes the contract. If the court concludes that the effectiveness of A’s threat in inducing B to make the contract was significantly increased by A’s prior unfair dealing, A’s threat is improper and the contract is voidable by B.

14. The facts being otherwise as stated in Illustration 13, A merely discovers that B is in great need of the goods and that they are in short supply but does not mislead B into thinking that he will supply them. A’s threat is not improper, and the contract is not voidable by B.

15. A operates a fur storage concession for customers of B’s store. A becomes bankrupt and fails to pay C $ 1,000 for charges for storing furs of B’s customers. C makes a threat to B not to deliver the furs to B’s customers unless B makes a contract to pay C the $ 1,000 plus $ 2,000 that A owes C for storage of other furs. B, afraid of offending its customers and having no reasonable alternative, makes the contract. If the court concludes that C’s threat to B is a use for illegitimate ends of its power as against B to retain the furs for the $ 1,000 owed for the storage of furs for B’s customers, C’s threat is improper and the contract is voidable by B.

16. A, a municipal water company, seeking to induce B, a developer, to make a contract for the extension of water mains to his development at a price greatly in excess of that charged to those similarly situated, threatens to refuse to supply to B unless B makes the contract. B, having no reasonable alternative, makes the contract. Because the threat amounts to a use for illegitimate ends of A’s power not to supply water, the contract is voidable by B.

[]{#_Toc161928199 .anchor}R. 2d Contracts § 177 – When Undue Influence Makes a Contract Voidable

(1) Undue influence is unfair persuasion of a party who is under the domination of the person exercising the persuasion or who by virtue of the relation between them is justified in assuming that that person will not act in a manner inconsistent with his welfare.

(2) If a party’s manifestation of assent is induced by undue influence by the other party, the contract is voidable by the victim.

(3) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the undue influence either gives value or relies materially on the transaction.

a. Required domination or relation.

The rule stated in this Section protects a person only if he is under the domination of another or is justified, by virtue of his relation with another in assuming that the other will not act inconsistently with his welfare. Relations that often fall within the rule include those of parent and child, husband and wife, clergyman and parishioner, and physician and patient. In each case it is a question of fact whether the relation is such as to give undue weight to the other’s attempts at persuasion. The required relation may be found in situations other than those enumerated. However, the mere fact that a party is weak, infirm or aged does not of itself suffice, although it may be a factor in determining whether the required relation existed.

b. Unfair persuasion.

Where the required domination or relation is present, the contract is voidable if it was induced by any unfair persuasion on the part of the stronger party. The law of undue influence therefore affords protection in situations where the rules on duress and misrepresentation give no relief. The degree of persuasion that is unfair depends on a variety of circumstances. The ultimate question is whether the result was produced by means that seriously impaired the free and competent exercise of judgment. Such factors as the unfairness of the resulting bargain, the unavailability of independent advice, and the susceptibility of the person persuaded are circumstances to be taken into account in determining whether there was unfair persuasion, but they are not in themselves controlling.

1. A, who is not experienced in business, has for years been accustomed to rely in business matters on the advice of his friend, B, who is experienced in business. B constantly urges A to make a contract to sell to C, B’s confederate, a tract of land at a price that is well below its fair value. A is thereby induced to make the contract. Even though B’s conduct does not amount to misrepresentation, it amounts to undue influence because A is justified in assuming that B will not act in a manner inconsistent with his welfare, and the contract is voidable.

2. A, an elderly and illiterate man, lives with and depends for his support on B, his nephew. B tells A that he will no longer support him unless A makes a contract to sell B a tract of land. A is thereby induced to make the proposed contract. Even though B’s conduct does not amount to duress, it amounts to undue influence because A is under the domination of B, and the contract is voidable by A.

c. Undue influence by a third person.

If a party’s assent has been induced by the undue influence of a third person rather than that of the other party to the contract, the contract is nevertheless voidable by the victim, unless the other party has in good faith either given value or changed his position materially in reliance on the transaction. The rule is similar to that for misrepresentation (see Comment c to § 164) and duress (see Comment b to § 175). Compare Illustration 1.

[]{#_Toc161928200 .anchor}R. 2d Contracts § 178 – When a Term Is Unenforceable on Grounds of Public Policy

(1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.

(2) In weighing the interest in the enforcement of a term, account is taken of

(a) the parties’ justified expectations,

(b) any forfeiture that would result if enforcement were denied, and

(3) In weighing a public policy against enforcement of a term, account is taken of

(a) the strength of that policy as manifested by legislation or judicial decisions,

(b) the likelihood that a refusal to enforce the term will further that policy,

(d) the directness of the connection between that misconduct and the term.

a. Legislation providing for unenforceability.

Occasionally, on grounds of public policy, legislation provides that specified kinds of promises or other terms are unenforceable. Whether such legislation is valid and applicable to the particular term in dispute is beyond the scope of this Restatement. Assuming that it is, the court is bound to carry out the legislative mandate with respect to the enforceability of the term. But with respect to such other matters as the enforceability of the rest of the agreement (§§ 183, 184) and the possibility of restitution (Topic 5), a court will be guided by the same rules that apply to other terms unenforceable on grounds of public policy (see Illustration 1), absent contrary provision in the legislation itself (see Illustration 3).

The term “legislation” is used here in the broadest sense to include any fixed text enacted by a body with authority to promulgate rules, including not only statutes, but constitutions and local ordinances, as well as administrative regulations issued pursuant to them. It also encompasses foreign laws to the extent that they are applicable under conflict of laws rules.

1. A promises to pay B $ 1,000 if the Buckets win their basketball game with the Hoops, and B promises to pay A $ 2,000 if the Hoops win. A state statute makes wagering a crime and provides that a promise such as A’s or B’s is “void.” A’s and B’s promises are unenforceable on grounds of public policy. Any claims of A or B to restitution for money paid under the agreement are governed by the rules stated in Topic 5.

2. A and B make an agreement by which A agrees to sell and B to buy, at a fixed price per bushel, one thousand bushels of wheat fromA at any time that A shall choose during the following month. The state statute that makes wagering a crime does not apply to such an agreement and it does not offend any judicially declared public policy. Enforcement of A’s and B’s promises is not precluded on grounds of public policy.

3. A borrows $ 10,000 from the B Bank, promising to repay it with interest at the rate of twelve per cent. A state statute that fixes the maximum legal rate of interest on such loans at ten per cent provides that a promise to pay a greater sum is “void” as usurious as to all the promised interest but not as to the principal. A’s promise to pay the interest is unenforceable on grounds of public policy. The rule stated in § 184(2) does not make A’s promise to pay interest enforceable up to ten per cent because the legislation provides otherwise. Compare Illustration 5 to § 184.

b. Balancing of interests.

Only infrequently does legislation, on grounds of public policy, provide that a term is unenforceable. When a court reaches that conclusion, it usually does so on the basis of a public policy derived either from its own perception of the need to protect some aspect of the public welfare or from legislation that is relevant to that policy although it says nothing explicitly about unenforceability. In some cases the contravention of public policy is so grave, as when an agreement involves a serious crime or tort, that unenforceability is plain. In other cases the contravention is so trivial as that it plainly does not preclude enforcement. In doubtful cases, however, a decision as to enforceability is reached only after a careful balancing, in the light of all the circumstances, of the interest in the enforcement of the particular promise against the policy against the enforcement of such terms. The most common factors in the balancing process are set out in Subsections (2) and (3). Enforcement will be denied only if the factors that argue against enforcement clearly outweigh the law’s traditional interest in protecting the expectations of the parties, its abhorrence of any unjust enrichment, and any public interest in the enforcement of the particular term.

c. Strength of policy.

The strength of the public policy involved is a critical factor in the balancing process. Even when the policy is one manifested by legislation, it may be too insubstantial to outweigh the interest in the enforcement of the term in question. See Illustrations 4 and 5. A court should be particularly alert to this possibility in the case of minor administrative regulations or local ordinances that may not be indicative of the general welfare. A disparity between a relatively modest criminal sanction provided by the legislature and a much larger forfeiture that will result if enforcement of the promise is refused may suggest that the policy is not substantial enough to justify the refusal. See Illustration 4.

4. A and B make an agreement for the sale of goods for $ 10,000, in which A promises to deliver the goods in his own truck at a designated time and place. A municipal parking ordinance makes unloading of a truck at that time and place an offense punishable by a fine of up to $ 50. A delivers the goods to B as provided. Because the public policy manifested by the ordinance is not sufficiently substantial to outweigh the interest in the enforcement of B’s promise, enforcement of his promise is not precluded on grounds of public policy.

5. A promises to employ B and B promises to work for A, all work to be done on weekdays. The agreement is made on Sunday in violation of a statute that makes the doing of business on Sunday a misdemeanor. If the court decides that the public policy manifested by the statute is not sufficiently substantial to outweigh the interests in enforcement of A’s and B’s promises, it will hold that enforcement of their promises is not precluded on grounds of public policy.

d. Connection with term.

The extent to which a refusal to enforce a promise or other term on grounds of public policy will further that policy depends not only on the strength of the policy but also on the relation of the term to that policy and to any misconduct involved. In most cases there is a promise that involves conduct offensive to the policy. The promise may be one to engage in such conduct. See Illustration 6. Or it may be one that tends to induce the other party to engage in such conduct. This tendency may result from the fact that the promise is made in return for the promisee’s engaging in the conduct (see Illustration 7) or in return for the promisee’s return promise to engage in the conduct (see Illustration 8). Or it may result from the fact that the duty to perform the promise is conditional on the promisee’s engaging in the conduct (see Illustration 9). In such cases, it is the tendency itself that makes the promise unenforceable, even though the promise does not actually induce the conduct.

There are other situations in which the conduct is not itself against public policy, but it is against public policy to promise to engage in such conduct or to attempt to induce it. It is sometimes objectionable to make a commitment to engage in conduct that is not in itself objectionable. This is the case, for example, for a promise to vote in a particular way. See Illustration 10. It is sometimes objectionable to attempt to induce conduct that is not in itself objectionable. This is the case, for example, for a promise made in consideration of the promisee’s voting in a particular way. See Illustration 11.

This list does not exhaust all of the possible relations between the conduct and the promise that may justify a decision that the promise is unenforceable. But as the relation between the conduct and the promise becomes tenuous, it becomes difficult to justify unenforceability unless serious misconduct is involved. A party will not be barred from enforcing a promise because of misconduct that is so remote or collateral that refusal to enforce the promise will not deter such conduct and enforcement will not amount to an inappropriate use of the judicial process. See Illustrations 15 and 16. However, a new promise to perform an earlier promise that was unenforceable on grounds of public policy is also unenforceable on those grounds unless the circumstances that made the first promise unenforceable no longer exist. The rules stated in §§ 183 and 184 involve special applications of these general principles concerning the relation between the conduct and the promise.

6. A, the owner of a newspaper, promises B that he will publish a statement about C known by A and B to be false and defamatory if B pays him $ 10,000. B pays A $ 10,000. A’s promise is one to commit a tort (§ 192) and is unenforceable on grounds of public policy.

7. B promises to pay A, the owner of a newspaper, $ 10,000 if he will publish a statement about C known by A and B to be false and defamatory. A publishes the libel. B’s promise is one tending to induce A to commit a tort (§ 192) and is unenforceable on grounds of public policy.

8. A, the owner of a newspaper, promises B that he will publish a statement about C known by A and B to be false and defamatory if B will promise to pay him $ 10,000. B makes the promise. A’s promise is one tending to induce A to commit a tort (§ 192). Both promises are unenforceable on grounds of public policy.

9. B promises to convey a tract of land worth $ 11,000 to A, the owner of a newspaper, if A pays B $ 1,000, B’s duty to be conditional on A’s publishing a statement about C known by A and B to be false and defamatory. A pays B $ 1,000 and publishes the libel. B’s promise is one tending to induce A to commit a tort (§ 192) and is unenforceable on grounds of public policy. Compare § 185.

10. A pays B, a competitor, $ 10,000 for B’s promise not to compete with A for a year. Although B’s refraining from competition with A would not in itself be improper, B’s promise not to compete with A unreasonably restrains B from competition (§ 186) and is unenforceable on grounds of public policy.

11. A promises to pay B, a competitor, $ 10,000 if he will refrain from competing with A for a year. Although B’s refraining from competing with A would not in itself be improper, A’s promise unreasonably tends to induce B to refrain from competition (§ 186) and is unenforceable on grounds of public policy.

12. A induces B to make an agreement to buy goods on credit from A by bribing B’s purchasing agent. A delivers the goods to B. A’s bribe tends to induce the agent to violate his fiduciary duty. B’s promise to pay the price is unenforceable on grounds of public policy.

13. A, who wants to induce B to buy goods from him, promises to pay C $ 1,000 if he will bribe B’s purchasing agent to arrange the sale. C does so. C’s bribe tends to induce the agent to violate his fiduciary duty. A’s promise is unenforceable on grounds of public policy.

14. A, who wants to induce B to buy goods from him, promises to pay C $ 1,000 if he arranges the sale. C arranges the sale by bribing B’s purchasing agent. C’s bribe tends to induce the agent to violate his fiduciary duty. A’s promise is unenforceable on grounds of public policy.

15. A and B make an agreement for exclusive dealing that is unenforceable because unreasonably in restraint of trade (§ 186). A sells and delivers goods pursuant to the unenforceable agreement to C, who promises to pay the price. Because the relation between C’s promise to pay the price and the unreasonable restraint is too remote, enforcement of C’s promise is not precluded on grounds of public policy.

16. A and B make a wagering agreement in violation of a statute that makes such agreements “void.” When A loses, C pays B at A’s request, and A promises C to pay him that amount. Because the relation between A’s promise to pay C and the improper wager is too remote, enforcement of A’s promise is not precluded on grounds of public policy.

e. Other factors.

A court will be reluctant to frustrate a party’s legitimate expectations unless there is a corresponding benefit to be gained in deterring misconduct or avoiding an inappropriate use of the judicial process. See Illustration 17. The promisee’s ignorance or inadvertence, even if it does not bring him within the rule stated in § 180, is one factor in determining the weight to be attached to his expectations. See Illustration 4 to § 181. To the extent, however, that he engaged in misconduct that was serious or deliberate, his claim to protection of his expectations fails.

The interest in favor of enforcement becomes much stronger after the promisee has relied substantially on those expectations as by preparation or performance. The court will then take into account any enrichment of the promisor and any forfeiture by the promisee if he should lose his right to the agreed exchange after he has relied substantially on those expectations. See Comment b to § 227.

The possibility of restitution may be significant in this connection. In addition to the interest of the promisee, the court will also weigh any interest that the public or third parties may have in the enforcement of the term in question. Such an interest may be particularly evident where the policy involved is designed to protect third parties. See Illustrations 18 and 19.

17. A agrees to reimburse B for any legal expenses incurred if B will go on C’s land in order to test a right of way that is disputed by A and C. B goes on C’s land. Enforcement of A’s promise is not precluded on grounds of public policy, even if it is later determined that B has committed a trespass. Compare § 192.

18. A, a trustee under a will, makes an agreement with B in violation of A’s fiduciary duty. If enforcement of A’s and B’s promises is desirable for the protection of the beneficiaries, it is not precluded on grounds of public policy. Compare § 193.

19. A, B, and C, directors of a bank, make notes payable to the bank in order to deceive the bank examiner. They agree that the notes shall be returned and cancelled after they have served their purpose. Enforcement of the promises of A, B and C embodied in the notes is not precluded on grounds of public policy.

f. Effect on rest of agreement.

The rules stated in this Section determine only whether a particular promise or other term is unenforceable. The question of the effect of such a determination on the rest of the agreement is sometimes a complex one. If there is only one promise in the transaction and it is unenforceable, then the question will not arise. (As to the divisibility of such a promise, however, see §§ 184, 185).

This is the case for offers that have been accepted by a performance rather than by a promise (§ 53), for promises enforceable because of reliance by the promisee (§ 90), and for promises under seal (§ 95). Furthermore, even when there is another promise, it too is often unenforceable under the rules stated in this Section. This is the case, for example, where one party’s promise is unenforceable because the promised conduct offends public policy and the other party’s return promise is unenforceable because it tends to induce that conduct. See Illustration 8.

There are, however, situations in which only one party’s promise is unenforceable while the other party’s return promise is enforceable, as is the case where the promisee of the return promise belongs to the class sought to be protected by the policy in question. See Illustrations 3, 4 and 5 to § 179 and Illustration 5 to § 181. (That an unenforceable promise may be consideration for a return promise, see § 78.)

Finally, there are circumstances in which the unenforceability of one part of an agreement does not entail the unenforceability of the rest of the agreement, and these are dealt with in §§ 183 and 184. As to the effect of public policy on conditions, see § 185.

Chapter 13 | Classifying Contractual Evidence

[]{#_Toc161928202 .anchor}R. 2d Contracts § 200 – Interpretation of Promise or Agreement

Interpretation of a promise or agreement or a term thereof is the ascertainment of its meaning.

a. Formation of contract.

Questions of interpretation arise in determining whether there is a contract as well as in determining rights and duties under a contract. Chapter 3 states rules applicable in determining whether the parties have manifested the mutual assent necessary to a contract enforceable as a bargain. The rules stated in the present Topic overlap with those rules, but also apply where the making of a contract is not disputed.

b. Manifestation of intention.

As is made clear in Chapter 3, particularly §§ 17-20, the intention of a party that is relevant to formation of a contract is the intention manifested by him rather than any different undisclosed intention. The definitions of “promise,” “agreement,” and “term” in §§ 2, 3 and 5 also refer to “manifestation of intention.” It follows that the meaning of the words or other conduct of a party is not necessarily the meaning he expects or understands. He is not bound by a meaning unless he has reason to know of it, but the expectation and understanding of the other party must also be taken into account.

c. Interpretation and legal operation.

Interpretation is not a determination of the legal effect of words or other conduct. Properly interpreted, an agreement may not be enforceable as a contract, or a term such as a promise to pay a penalty may be denied legal effect, or it may have a legal effect different from that agreed upon, as in a case of employment at less than a statutory minimum wage.

[]{#_Toc161928203 .anchor}R. 2d Contracts § 201 – Whose Meaning Prevails

(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.

(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.

(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

a. The meaning of words.

Words are used as conventional symbols of mental states, with standardized meanings based on habitual or customary practice. Unless a different intention is shown, language is interpreted in accordance with its generally prevailing meaning.

Usages of varying degrees of generality are recorded in dictionaries, but there are substantial differences between English and American usages and between usages in different parts of the United States. Differences of usage also exist in various localities and in different social, economic, religious and ethnic groups. All these usages change over time, and persons engaged in transactions with each other often develop temporary usages peculiar to themselves. Moreover, most words are commonly used in more than one sense.

b. The problem of context.

Uncertainties in the meaning of words are ordinarily greatly reduced by the context in which they are used. The same is true of other conventional symbols, and the meaning of conduct not used as a conventional symbol is even more dependent on its setting. But the context of words and other conduct is seldom exactly the same for two different people, since connotations depend on the entire past experience and the attitudes and expectations of the person whose understanding is in question. In general, the context relevant to interpretation of a bargain is the context common to both parties. More precisely, the question of meaning in cases of misunderstanding depends on an inquiry into what each party knew or had reason to know, as stated in Subsections (2) and (3). Ordinarily a party has reason to know of meanings in general usage.

c. Mutual understanding.

Subsection (1) makes it clear that the primary search is for a common meaning of the parties, not a meaning imposed on them by the law. To the extent that a mutual understanding is displaced by government regulation, the resulting obligation does not rest on “interpretation” in the sense used here. The objective of interpretation in the general law of contracts is to carry out the understanding of the parties rather than to impose obligations on them contrary to their understanding: “the courts do not make a contract for the parties.” Ordinarily, therefore, the mutual understanding of the parties prevails even where the contractual term has been defined differently by statute or administrative regulation. But parties who used a standardized term in an unusual sense obviously run the risk that their agreement will be misinterpreted in litigation.

1. A and B agree that A will sell goods to B “f.o.b.” the place of destination. Prior correspondence shows that the price has been adjusted on the assumption that B’s insurance policies will cover the goods during shipment. Notwithstanding the normal meaning of the “f.o.b.” term declared in U.C.C. § 2-319, it may be found that the parties have “otherwise agreed” under that section and that B bears the risk in transit.

2. A signs a negotiable promissory note payable to B’s order, and C signs his name on the back without more. Under U.C.C. § 3-402, C’s signature is an indorsement, and evidence of a contrary understanding is not admissible except for the purpose of reformation of the instrument. This conclusion does not rest on interpretation of the writing.

3. A agrees to sell beer to B at a specified price per barrel. At the time of the agreement both parties and others in their trade use as standard barrels wooden barrels which originally hold 31 gallons and hold less as they continue in use. A statute defines a barrel as 31 1/2 gallons. The statute does not prevent interpretation of the agreement as referring to the barrels in use.

d. Misunderstanding.

Subsection (2) follows the terminology of § 20, referring to the understanding of each party as the meaning “attached” by him to a term of a promise or agreement. Where the rules stated in Subsections (1) and (2) do not apply, neither party is bound by the understanding of the other. The result may be an entire failure of agreement or a failure to agree as to a term. There may be a binding contract despite failure to agree as to a term, if the term is not essential or if it can be supplied. In some cases a party can waive the misunderstanding and enforce the contract in accordance with the understanding of the other party.

4. A agrees to sell and B to buy a quantity of eviscerated “chicken.” A tenders “stewing chicken” or “fowl”; B rejects on the ground that the contract calls for “broilers” or “fryers.” Each party makes a claim for damages against the other. It is found that each acted in good faith and that neither had reason to know of the difference in meaning. Both claims fail.

5. A orders goods from B, using A’s standard form. B acknowledges the order, using his own standard form. Each form provides that no terms are agreed to except those on the form and that the other party agrees to the form. One form contains an arbitration clause; the other does not. The goods are delivered and paid for. Later a dispute arises as to their quality. There is no agreement to arbitrate the dispute.

[]{#_Toc161928204 .anchor}R. 2d Contracts § 202 – Rules in Aid of Interpretation

(1) Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight.

(2) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.

(3) Unless a different intention is manifested,

(a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning;

(b) technical terms and words of art are given their technical meaning when used in a transaction within their technical field.

(4) Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement.

(5) Wherever reasonable, the manifestations of intention of the parties to a promise or agreement are interpreted as consistent with each other and with any relevant course of performance, course of dealing, or usage of trade.

a. Scope of special rules.

The rules in this Section are applicable to all manifestations of intention and all transactions. The rules are general in character, and serve merely as guides in the process of interpretation. They do not depend upon any determination that there is an ambiguity, but are used in determining what meanings are reasonably possible as well as in choosing among possible meanings.

b. Circumstances.

The meaning of words and other symbols commonly depends on their context; the meaning of other conduct is even more dependent on the circumstances. In interpreting the words and conduct of the parties to a contract, a court seeks to put itself in the position they occupied at the time the contract was made. When the parties have adopted a writing as a final expression of their agreement, interpretation is directed to the meaning of that writing in the light of the circumstances. The circumstances for this purpose include the entire situation, as it appeared to the parties, and in appropriate cases may include facts known to one party of which the other had reason to know.

1. A contracts with B to do concrete work on a bridge, to be paid for according to “the number of square yards of concrete surface included in the bridge deck.” An estimate included in the proposal for bids and an estimate submitted by A to B after award are shown to have been based on the top surface only, not including the side and bottom surfaces. On a finding that this was the mutual understanding, the contract is to be so interpreted.

2. In a written agreement between A and B it is stated that B owns half of the stock of C Company, that “A has rendered valuable services to C Company for which B desires to compensate A in the sum of $ 25,000 payable in the manner hereinafter set forth,” and that B will pay A “one-half of all money received from C Company, such as dividends, or profits until A has been paid the said amount of $ 25,000.” It is shown that the written agreement was executed after the services were rendered, that there was no prior explicit understanding that A would be compensated, and that before signing the written agreement A and B orally agreed that the $ 25,000 was to be a “bonus out of B’s profit,” “double or nothing,” “a gamble.” The written agreement is to be interpreted in accordance with the oral agreement.

c. Principal purpose.

The purposes of the parties to a contract are not always identical; particularly in business transactions, the parties often have divergent or even conflicting interests. But up to a point they commonly join in a common purpose of attaining a specific factual or legal result which each regards as necessary to the attainment of his ultimate purposes. Moreover, one party may know or have reason to know the purpose of the other and thus that his meaning is one consistent with that purpose. Determination that the parties have a principal purpose in common requires interpretation, but if such a purpose is disclosed further interpretation is guided by it. Even language which is otherwise explicit may be read with a modification needed to make it consistent with such a purpose.

3. A promises B as follows: “In consideration of your supplying my nephew C with china and earthenware during the coming year, I guarantee the payment of any bills you may draw on him on account thereof to the amount of $ 200.” C is engaged in the business of selling such goods. B sells C $ 2,000 of china during the year and draws bills for their price in varying amounts. C pays $ 1,000 and then defaults. A’s promise is to be interpreted as a continuing undertaking, not limited to the first $ 200 of purchases.

4. A agrees with his divorced wife B and C, trustee, to pay to C $ 1,200 each year for the benefit of D, the 10-year-old son of A and B, until D enters college, and to pay $ 2,200 each year for the period of D’s higher education but not more than four years. At age 19 D completes high school and is inducted into the army. Upon a finding that the main purpose of the agreement is to provide for D’s maintenance and education, the agreement is to be interpreted as not requiring payments during D’s military service.

d. Interpretation of the whole.

Meaning is inevitably dependent on context. A word changes meaning when it becomes part of a sentence, the sentence when it becomes part of a paragraph. A longer writing similarly affects the paragraph, other related writings affect the particular writing, and the circumstances affect the whole. Where the whole can be read to give significance to each part, that reading is preferred; if such a reading would be unreasonable, a choice must be made. To fit the immediate verbal context or the more remote total context particular words or punctuation may be disregarded or supplied; clerical or grammatical errors may be corrected; singular may be treated as plural or plural as singular.

5. A written agreement between A and B for the exchange of real estate provides that A and B will each pay a $ 200 commission to C, a broker, “upon the signing of this agreement by both parties hereto.” The last sentence of the agreement states, “The commission being due and payable upon the transfer of the properties.” It is shown that A refused to sign the agreement until the last sentence was added. The agreement is to be interpreted to make the commission due only when both the signing and the transfer take place.

6. A agrees to appoint B exclusive distributor in a specified area for a new product to be manufactured by A, and B agrees to use his best efforts to promote sale of the product. The written agreement includes an initial retail price list and a provision that A will sell to B at the lowest price and highest discount it gives to any distributor. Whether the parties intend to be bound before any other distributor is appointed or any price fixed is a question of the meaning of the entire agreement in its context. If they do, the agreement has the effect of an agreement to sell at a reasonable price at the time for delivery.

7. A contracts in writing to build a house for B according to specifications, and C, a surety company, guarantees A’s performance. After completion and acceptance the house and its contents are damaged by hot water because of defective work by the plumbing and heating subcontractor. In determining the responsibility of A and C, the contract, specifications and surety bond are to be read together.

e. General usage.

In the United States the English language is used far more often in a sense which would be generally understood throughout the country than in a sense peculiar to some locality or group. In the absence of some contrary indication, therefore, English words are read as having the meaning given them by general usage, if there is one. This rule is a rule of interpretation in the absence of contrary evidence, not a rule excluding contrary evidence. It may also yield to internal indications such as inconsistency, absurdity, or departure from normal grammar, punctuation, or word order.

8. A issues to B a fire insurance policy covering lumber stored in “sheds.” In the absence of contrary indication, lumber in the basement of a two-story warehouse is not covered.

9. A leases restaurant premises to B. The lease provides that A will pay for electricity and that B will “pay for gas or fuel used in the preparation of food.” In the absence of contrary indication, “fuel” should be read not to include electricity.

f. Technical terms.

Parties to an agreement often use the vocabulary of a particular place, vocation or trade, in which new words are coined and common words are assigned new meanings. But technical terms are often misused, and it may be shown that a technical word or phrase was used in a non-technical sense. Moreover, the same word may have a variety of technical and other meanings. “Mules” may mean animals, shoes or machines; a “ram” may mean an animal or a hydraulic ram; “zebra” may refer to a mammal, a butterfly, a lizard, a fish, a type of plant, tree or wood, or merely to the letter “Z”.

10. The facts being otherwise as stated in Illustration 9, there is a local usage in the restaurant trade that “fuel” includes electricity used in cooking. In the absence of contrary indication, “fuel” may be read in accordance with the usage. But a provision in the lease that if B installs a new electric range he will also install a special meter and pay for electricity used by the range would show that the parties did not adopt the local usage.

11. A contract for the sale of horsemeat scraps calls for “minimum 50% protein.” As both parties know, by a usage of the business in which they are engaged, 49.5 per cent is treated as the equivalent of 50 per cent. The contract is to be interpreted in accordance with the usage.

g. Course of performance.

The parties to an agreement know best what they meant, and their action under it is often the strongest evidence of their meaning. But such “practical construction” is not conclusive of meaning. Conduct must be weighed in the light of the terms of the agreement and their possible meanings. Where it is unreasonable to interpret the contract in accordance with the course of performance, the conduct of the parties may be evidence of an agreed modification or of a waiver by one party. Or there may be simply a mistake which should be corrected. The rule of Subsection (4) does not apply to action on a single occasion or to action of one party only; in such cases the conduct of a party may be evidence against him that he had knowledge or reason to know of the other party’s meaning, but self-serving conduct is not entitled to weight.

12. A discloses to B a secret formula for an antiseptic liquid and B agrees to pay monthly royalties based on amounts sold. Fifty years later the formula has been published in medical journals. After continuing to pay for 25 years more, B contends that the duty to pay royalties ended when the formula ceased to be secret. B’s conduct strongly negates the contention.

13. Several railroads agree in writing to share working expenses and taxes of X, another railroad, on a “wheelage basis.” For several years they pay shares in proportion to their stock ownership in the other railroad. Then all but one agree that they have been mistaken and that future payments will be made on a basis of use of X’s physical properties. Stock ownership is so plainly unrelated to any possible meaning of “wheelage” that the course of performance does not support an interpretation of “wheelage basis” as requiring payments in proportion to stock ownership.

h. Preference for consistency.

Subsection (5) states a rule fairly implied in Subsections (1) and (2); words and conduct are interpreted in the light of the circumstances, and writings are interpreted as a whole. A meaning consistent with all the circumstances is preferred to a meaning which requires that part of the context be disregarded. But the parties may have agreed to displace normal meanings, may have modified a prior understanding, or may have agreed to confusing or self-contradictory terms. They may even have entirely failed to agree, though each thought there was an agreement.

[]{#_Toc161928205 .anchor}R. 2d Contracts § 203 – Standards of Preference in Interpretation

In the interpretation of a promise or agreement or a term thereof, the following standards of preference are generally applicable:

(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect;

(b) express terms are given greater weight than course of performance, course of dealing, and usage of trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given greater weight than usage of trade;

(d) separately negotiated or added terms are given greater weight than standardized terms or other terms not separately negotiated.

a. Scope.

The rules of this Section are applicable to all manifestations of intention and all transactions. They apply only in choosing among reasonable interpretations. They do not override evidence of the meaning of the parties, but aid in determining meaning or prescribe legal effect when meaning is in doubt.

b. Superfluous terms.

Since an agreement is interpreted as a whole, it is assumed in the first instance that no part of it is superfluous. The parties may of course agree to supersede prior manifestations of intention; indeed, this is the normal effect of an integrated agreement. But, particularly in cases of integrated agreements, terms are rarely agreed to without reason. Where an integrated agreement has been negotiated with care and in detail and has been expertly drafted for the particular transaction, an interpretation is very strongly negated if it would render some provisions superfluous. On the other hand, a standard form may include provisions appropriate only to some of the transactions in which the form is to be used; or the form may be used for an inappropriate transaction. Even agreements tailored to particular transactions sometimes include overlapping or redundant or meaningless provisions.

The preference for an interpretation which gives meaning to every part of an agreement does not mean that every part is assumed to have legal consequences. Parties commonly direct their attention to performance rather than breach, and it is enough that each provision has meaning to them as a guide to performance. Stipulations against particular legal consequences are not uncommon. Thus it is not unusual to define the intended performance with precision and then to provide for tolerances within which variation is permitted.

c. Unreasonable and unlawful terms.

In the absence of contrary indication, it is assumed that each term of an agreement has a reasonable rather than an unreasonable meaning, and that the agreement is intended to be lawful rather than unconscionable, fraudulent or otherwise illegal. But parties are free to make agreements which seem unreasonable to others, and circumstances may show that even an agreement innocent on its face has an illegal purpose. The search is for the manifested intention of the parties. If a term or a contract is unconscionable or otherwise against public policy, it should be dealt with directly rather than by spurious interpretation.

1. A licenses B to manufacture pipes under A’s patents, and B agrees to pay “a royalty of 50 cents per 1,000 feet for an output of 5,000,000 or less feet per year, and for an output of over 5,000,000 feet per year at the rate of 30 cents per thousand feet.” The 50 cent rate is payable on the first 5,000,000 feet, the 30 cent rate only on the excess. The more literal reading is unreasonable, since it would involve a smaller payment for 6,000,000 feet than for 4,000,000 feet.

d. Priority of express terms.

Just as parties to agreements often depart from general usage as to the meaning of words or other conduct, so they may depart from a usage of trade. Similarly, they may change a pattern established by their own prior course of dealing. Their meaning in such cases is ordinarily to be ascertained as a fact; no penalty is attached by the law of contracts to their failure to conform to the usages of others or to their own prior usage. Course of performance may establish meaning, or it may show mistake or oversight or modification or waiver. The priorities stated in Subsection (b) are those stated in U.C.C. §§ 1-205 and 2-208, rephrased to fit the different context of the Restatement.

e. General and specific terms.

People commonly use general language without a clear consciousness of its full scope and without awareness that an exception should be made. Attention and understanding are likely to be in better focus when language is specific or exact, and in case of conflict the specific or exact term is more likely to express the meaning of the parties with respect to the situation than the general language. If the specific or exact can be read as an exception or qualification of the general, both are given some effect, in accordance with the rule stated in Subsection (a). Compare U.C.C. § 2-317. But the rule yields to manifestation of a contrary intention.

f. Superseded standard terms.

The rule stated in Subsection (d) has frequent application in cases of standardized documents. Printed forms are often misused, and there may be a question whether the parties manifested assent to a printed term on a writing. A printed provision that is clearly part of an integrated contract is normally to be interpreted as consistent with other terms, but in cases of inconsistency a handwritten or typewritten term inserted in connection with the particular transaction ordinarily prevails. Similarly, a typewritten term may be superseded by drawing a line through it, modified by interlineation, or controlled by an inconsistent handwritten insertion in another part of the agreement. It is sometimes said generally that handwritten terms control typewritten and printed terms, and typewritten control printed. But the rule yields to manifestation of a contrary intention.

2. A, an agent of C, authorized to make contracts for C, writes a letter to B beginning “We offer,” and stating a proposal in detailed and clear language, signed “C by A, Agent.” At the bottom of the office stationery which A uses for the offer there is printed “All contracts and orders taken are subject to the approval of the executive office.” A portion of the letter is typed over a portion of this printing. A jury’s finding that the printed words were not part of the letter and that it is therefore an offer will not be set aside.

3. A charter party contains the printed provision “vessel to have turn in loading.” There is written below this, “vessel to be loaded promptly.” The printed and written provisions are given the consistent meaning that the vessel shall take its turn in loading, though this involves considerable delay, but when its turn arrives, the vessel shall be loaded promptly.

4. A’s agent B draws checks on the C bank, imprinting the amounts with perforations made by a checkwriting machine. The amounts are also handwritten in figures. In case of conflict, since the perforated amounts are more difficult to alter, they control the handwritten figures.

Chapter 14 | Evaluating Intrinsic Contractual Evidence

[]{#_Toc161928207 .anchor}R. 2d Contracts § 204 – Supplying an Omitted Essential Term

When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.

a. Scope; relation to other rules.

This Section states a principle governing the legal effect of a binding agreement. The supplying of an omitted term is not technically interpretation, but the two are closely related; courts often speak of an “implied” term.

In many common situations the principle has been elaborated in more detailed rules, applicable unless otherwise agreed. See the rules on the effect of failure of performance stated in §§ 231-49 and the rules on impossibility and frustration stated in Chapter 11, and compare §§ 158 and 272, regarding the supplying of terms in cases of mistake and impracticability or frustration.

A similar principle is often applicable in determining whether the terms of an agreement are sufficiently certain to constitute a contract. See §§ 33, 34. In both situations the supplying of an omitted term may resemble or overlap interpretation (see § 200) or the effect given to usage (see §§ 219-23).

b. How omission occurs.

The parties to an agreement may entirely fail to foresee the situation which later arises and gives rise to a dispute; they then have no expectations with respect to that situation, and a search for their meaning with respect to it is fruitless. Or they may have expectations but fail to manifest them, either because the expectation rests on an assumption which is unconscious or only partly conscious, or because the situation seems to be unimportant or unlikely, or because discussion of it might be unpleasant or might produce delay or impasse.

c. Interpretation and omission.

Interpretation may be necessary to determine that the parties have not agreed with respect to a particular term, but the supplying of an omitted term is not within the definition of interpretation in § 200. Where there is tacit agreement or a common tacit assumption or where a term can be supplied by logical deduction from agreed terms and the circumstances, interpretation may be enough. But interpretation may result in the conclusion that there was in fact no agreement on a particular point, and that conclusion should be accepted even though the omitted term could be supplied by giving agreed language a meaning different from the meaning or meanings given it by the parties.

d. Supplying a term.

The process of supplying an omitted term has sometimes been disguised as a literal or a purposive reading of contract language directed to a situation other than the situation that arises. Sometimes it is said that the search is for the term the parties would have agreed to if the question had been brought to their attention. Both the meaning of the words used and the probability that a particular term would have been used if the question had been raised may be factors in determining what term is reasonable in the circumstances. But where there is in fact no agreement, the court should supply a term which comports with community standards of fairness and policy rather than analyze a hypothetical model of the bargaining process.

Thus where a contract calls for a single performance such as the rendering of a service or the delivery of goods, the parties are most unlikely to agree explicitly that performance will be rendered within a “reasonable time;” but if no time is specified, a term calling for performance within a reasonable time is supplied. Similarly, where there is a contract for the sale of goods but nothing is said as to price the price is a reasonable price at the time for delivery.

e. Effect of the parol evidence rule.

The fact that an essential term is omitted may indicate that the agreement is not integrated or that there is partial rather than complete integration. In such cases the omitted term may be supplied by prior negotiations or a prior agreement. But omission of a term does not show conclusively that integration was not complete and a completely integrated agreement, if binding, discharges prior agreements within its scope. Where there is complete integration and interpretation of the writing discloses a failure to agree on an essential term, evidence of prior negotiations or agreements is not admissible to supply the omitted term, but such evidence may be admissible, if relevant, on the question of what is reasonable in the circumstances.

1. A and his wife convey their ranch to A’s sister and her husband, reserving an option to repurchase. The parties agree orally that the property will be kept in the family, but the deed says nothing as to assignment of the option. If the deed is found to be a partial integration, the oral agreement is effective to show that the option is not assignable. If the deed is found to be a complete integration, the oral agreement is discharged and the option is assignable.

[]{#_Toc161928208 .anchor}R. 2d Contracts § 205 – Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

a. Meanings of “good faith.”

Good faith is defined in U.C.C. § 1-201(19) as “honesty in fact in the conduct or transaction concerned.” “In the case of a merchant” U.C.C. § 2-103(1)(b) provides that good faith means “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” The phrase “good faith” is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving “bad faith” because they violate community standards of decency, fairness or reasonableness. The appropriate remedy for a breach of the duty of good faith also varies with the circumstances.

b. Good faith purchase.

In many situations a good faith purchaser of property for value can acquire better rights in the property than his transferor had. In this context “good faith” focuses on the honesty of the purchaser, as distinguished from his care or negligence. Particularly in the law of negotiable instruments inquiry may be limited to “good faith” under what has been called “the rule of the pure heart and the empty head.” When diligence or inquiry is a condition of the purchaser’s right, it is said that good faith is not enough. This focus on honesty is appropriate to cases of good faith purchase; it is less so in cases of good faith performance.

c. Good faith in negotiation.

This Section, like U.C.C. § 1-203, does not deal with good faith in the formation of a contract. Bad faith in negotiation, although not within the scope of this Section, may be subject to sanctions. Particular forms of bad faith in bargaining are the subjects of rules as to capacity to contract, mutual assent and consideration and of rules as to invalidating causes such as fraud and duress.

Moreover, remedies for bad faith in the absence of agreement are found in the law of torts or restitution. For examples of a statutory duty to bargain in good faith, see, e.g., National Labor Relations Act § 8(d) and the federal Truth in Lending Act. In cases of negotiation for modification of an existing contractual relationship, the rule stated in this Section may overlap with more specific rules requiring negotiation in good faith.

d. Good faith performance.

Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty. A complete catalogue of types of bad faith is impossible, butthe following types are among those which have been recognized in judicial decisions: evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance.

1. A, an oil dealer, borrows $ 100,000 from B, a supplier, and agrees to buy all his requirements of certain oil products from B on stated terms until the debt is repaid. Before the debt is repaid, A makes a new arrangement with C, a competitor of B. Under the new arrangement A’s business is conducted by a corporation formed and owned by A and C and managed by A, and the corporation buys all its oil products from C. The new arrangement may be found to be a subterfuge or evasion and a breach of contract by A.

2. A, owner of a shopping center, leases part of it to B, giving B the exclusive right to conduct a supermarket, the rent to be a percentage of B’s gross receipts. During the term of the lease A acquires adjoining land, expands the shopping center, and leases part of the adjoining land to C for a competing supermarket. Unless such action was contemplated or is otherwise justified, there is a breach of contract by A.

3. A Insurance Company insures B against legal liability for certain bodily injuries to third persons, with a limit of liability of $ 10,000 for an accident to any one person. The policy provides that A will defend any suit covered by it but may settle. C sues B on a claim covered by the policy and offers to settle for $ 9,500. A refuses to settle on the ground that the amount is excessive, and judgment is rendered against B for $ 20,000 after a trial defended by A. A then refuses to appeal, and offers to pay $ 10,000 only if B satisfies the judgment, impairing B’s opportunity to negotiate for settlement. B prosecutes an appeal, reasonably expending $ 7,500, and obtains dismissal of the claim. A has failed to deal fairly and in good faith with B and is liable for B’s appeal expense.

4. A and B contract that A will perform certain demolition work for B and pay B a specified sum for materials salvaged, the contract not to “become effective until” certain insurance policies “are in full force and effect.” A makes a good faith effort to obtain the insurance, but financial difficulty arising from injury to an employee of A on another job prevents A from obtaining them. A’s duty to perform is discharged.

5. B submits and A accepts a bid to supply approximately 4000 tons of trap rock for an airport at a unit price. The parties execute a standard form of “Invitation, Bid, and Acceptance (Short Form Contract)” supplied by A, including typed terms “to be delivered to project as required,” “delivery to start immediately,” “cancellation by A may be effected at any time.” Good faith requires that A order and accept the rock within a reasonable time unless A has given B notice of intent to cancel.

6. A contracts to perform services for B for such compensation “as you, in your sole judgment, may decide is reasonable.” After A has performed the services, B refuses to make any determination of the value of the services. A is entitled to their value as determined by a court.

7. A suffers a loss of property covered by an insurance policy issued by B, and submits to B notice and proof of loss. The notice and proof fail to comply with requirements of the policy as to form and detail. B does not point out the defects, but remains silent and evasive, telling A broadly toperfect his claim. The defects do not bar recovery on the policy.

e. Good faith in enforcement.

The obligation of good faith and fair dealing extends to the assertion, settlement and litigation of contract claims and defenses. See, e.g., §§ 73, 89. The obligation is violated by dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary to one’s own understanding, or falsification of facts. It also extends to dealing which is candid but unfair, such as taking advantage of the necessitous circumstances of the other party to extort a modification of a contract for the sale of goods without legitimate commercial reason. See U.C.C. § 2-209, Comment 2. Other types of violation have been recognized in judicial decisions: harassing demands for assurances of performance, rejection of performance for unstated reasons, willful failure to mitigate damages, and abuse of a power to determine compliance or to terminate the contract. For a statutory duty of good faith in termination, see the federal Automobile Dealer’s Day in Court Act, [15 U.S.C. §§ 1221]{.underline}-25 (1976).

8. A contracts to sell and ship goods to B on credit. The contract provides that, if B’s credit or financial responsibility becomes impaired or unsatisfactory to A, A may demand cash or security before making shipment and may cancel if the demand is not met. A may properly demand cash or security only if he honestly believes, with reason, that the prospect of payment is impaired.

9. A contracts to sell and ship goods to B. On arrival B rejects the goods on the erroneous ground that delivery was late. B is thereafter precluded from asserting other unstated grounds then known to him which A could have cured if stated seasonably.

[]{#_Toc161928209 .anchor}R. 2d Contracts § 206 – Interpretation Against the Draftsman

In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.

a. Rationale.

Where one party chooses the terms of a contract, he is likely to provide more carefully for the protection of his own interests than for those of the other party. He is also more likely than the other party to have reason to know of uncertainties of meaning. Indeed, he may leave meaning deliberately obscure, intending to decide at a later date what meaning to assert. In cases of doubt, therefore, so long as other factors are not decisive, there is substantial reason for preferring the meaning of the other party. The rule is often invoked in cases of standardized contracts and in cases where the drafting party has the stronger bargaining position, but it is not limited to such cases. It is in strictness a rule of legal effect, sometimes called construction, as well as interpretation: its operation depends on the positions of the parties as they appear in litigation, and sometimes the result is hard to distinguish from a denial of effect to an unconscionable clause.

b. Compulsory contract or term.

The rule that language is interpreted against the party who chose it has no direct application to cases where the language is prescribed by law, as is sometimes true with respect to insurance policies, bills of lading and other standardized documents. In some cases, however, the statute or regulation adopts language which was previously used without compulsion and was interpreted against the drafting party, and there is normally no intention to change the established meaning. Moreover, insurers are more likely than insureds to participate in drafting prescribed forms and to review them carefully before putting them into use.

[]{#_Toc161928210 .anchor}R. 2d Contracts § 207 – Interpretation Favoring the Public

In choosing among the reasonable meanings of a promise or agreement or a term thereof, a meaning that serves the public interest is generally preferred.

a. Scope.

The rule preferring an interpretation which favors an interest of the public applies only to agreements which affect a public interest. It is a rule of legal effect as well as interpretation, and rests more on considerations of public policy than on the probable intention of the parties. It has often been relied on to justify narrow construction of a grant of a public franchise or an agreement for a tax exemption. In general, it does not prefer the interest of a governmental agency as a party to a contract; government contracts are likely to be construed against the government as the drafting party.

1. A is employed by B as an inventor. In an agreement settling their disputes on termination of the employment, A promises to assign to B all A’s rights in a pending patent application and all improvements on the invention covered. Thereafter A makes an invention and applies for a patent, and B claims it as an improvement. The public interest in encouraging invention supports an interpretation of the agreement excluding future improvements unless future improvements were specifically included.

[]{#_Toc161928211 .anchor}R. 2d Contracts § 208 – Unconscionable Contract or Term

If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

a. Scope.

Like the obligation of good faith and fair dealing (§ 205), the policy against unconscionable contracts or terms applies to a wide variety of types of conduct. The determination that a contract or term is or is not unconscionable is made in the light of its setting, purpose and effect. Relevant factors include weaknesses in the contracting process like those involved in more specific rules as to contractual capacity, fraud, and other invalidating causes; the policy also overlaps with rules which render particular bargains or terms unenforceable on grounds of public policy. Policing against unconscionable contracts or terms has sometimes been accomplished “by adverse construction of language, by manipulation of the rules of offer and acceptance or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract.” U.C.C. § 2-302 Comment 1. Particularly in the case of standardized agreements, the rule of this Section permits the court to pass directly on the unconscionability of the contract or clause rather than to avoid unconscionable results by interpretation. Compare § 211.

b. Historic standards.

Traditionally, a bargain was said to be unconscionable in an action at law if it was “such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other;” damages were then limited to those to which the aggrieved party was “equitably” entitled. [Hume v. United States, 132 U.S. 406 (1889)]{.underline}, quoting Earl of Chesterfield v. Janssen, 2 Ves. Sen. 125, 155, 28 Eng. Rep. 82, 100 (Ch. 1750). Even though a contract was fully enforceable in an action for damages, equitable remedies such as specific performance were refused where “the sum total of its provisions drives too hard a bargain for a court of conscience to assist.” [Campbell Soup Co. v. Wentz, 172 F.2d 80, 84 (3d Cir. 1948)]{.underline}. Modern procedural reforms have blurred the distinction between remedies at law and in equity. For contracts for the sale of goods, U.C.C. § 2-302 states the rule of this Section without distinction between law and equity. Comment 1 to that section adds, “The principle is one of the prevention of oppression and unfair surprise (Cf. Campbell Soup Co. v. Wentz, . . .) and not of disturbance of allocation of risks because of superior bargaining power.”

c. Overall imbalance.

Inadequacy of consideration does not of itself invalidate a bargain, but gross disparity in the values exchanged may be an important factor in a determination that a contract is unconscionable and may be sufficient ground, without more, for denying specific performance. See §§ 79, 364. Such a disparity may also corroborate indications of defects in the bargaining process, or may affect the remedy to be granted when there is a violation of a more specific rule. Theoretically it is possible for a contract to be oppressive taken as a whole, even though there is no weakness in the bargaining process and no single term which is in itself unconscionable. Ordinarily, however, an unconscionable contract involves other factors as well as overall imbalance.

1. A, an individual, contracts in June to sell at a fixed price per ton to B, a large soup manufacturer, the carrots to be grown on A’s farm. The contract, written on B’s standard printed form, is obviously drawn to protect B’s interests and not A’s; it contains numerous provisions to protect B against various contingencies and none giving analogous protection to A. Each of the clauses can be read restrictively so that it is not unconscionable, but several can be read literally to give unrestricted discretion to B. In January, when the market price has risen above the contract price, A repudiates the contract, and B seeks specific performance. In the absence of justification by evidence of commercial setting, purpose, or effect, the court may determine that the contract as a whole was unconscionable when made, and may then deny specific performance.

2. A, a homeowner, executes a standard printed form used by B, a merchant, agreeing to pay $ 1,700 for specified home improvements. A also executes a credit application asking for payment in 60 monthly installments but specifying no rate. Four days later A is informed that the credit application has been approved and is given a payment schedule calling for finance and insurance charges amounting to $ 800 in addition to the $ 1,700. Before B does any of the work, A repudiates the agreement, and B sues A for $ 800 damages, claiming that a commission of $ 800 was paid to B’s salesman in reliance on the agreement. The court may determine that the agreement was unconscionable when made, and may then dismiss the claim.

d. Weakness in the bargaining process.

A bargain is not unconscionable merely because the parties to it are unequal in bargaining position, nor even because the inequality results in an allocation of risks to the weaker party. But gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms. Factors which may contribute to a finding of unconscionability in the bargaining process include the following: belief by the stronger party that there is no reasonable probability that the weaker party will fully perform the contract; knowledge of the stronger party that the weaker party will be unable to receive substantial benefits from the contract; knowledge of the stronger party that the weaker party is unable reasonably to protect his interests by reason of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement, or similar factors.

3. A, literate only in Spanish, is visited in his home by a salesman of refrigerator-freezers for B. They negotiate in Spanish; A tells the salesman he cannot afford to buy the appliance because his job will end in one week, and the salesman tells A that A will be paid numerous $ 25 commissions on sales to his friends. A signs a complex installment contract printed in English. The contract provides for a cash price of $ 900 plus a finance charge of $ 250. A defaults after paying $ 32, and B sues for the balance plus late charges and a 20% attorney’s fee authorized by the contract. The appliance cost B $ 350. The court may determine that the contract was unconscionable when made, and may then limit B’s recovery to a reasonable sum.

e. Unconscionable terms.

Particular terms may be unconscionable whether or not the contract as a whole is unconscionable. Some types of terms are not enforced, regardless of context; examples are provisions for unreasonably large liquidated damages, or limitations on a debtor’s right to redeem collateral. Other terms may be unconscionable in some contexts but not in others. Overall imbalance and weaknesses in the bargaining process are then important.

4. A, a packer, sells and ships 300 cases of canned catsup to B, a wholesale grocer. The contract provides, “All claims other than swells must be made within ten days from receipt of goods.” Six months later a government inspector, upon microscopic examination of samples, finds excessive mold in the cans and obtains a court order for destruction of the 270 remaining cases in B’s warehouse. In the absence of justifying evidence, the court may determine that the quoted clause is unconscionable as applied to latent defects and does not bar a claim for damages for breach of warranty by B against A.

5. A, a retail furniture store, sells furniture on installment credit to B, retaining a security interest. As A knows, B is a woman of limited education, separated from her husband, maintaining herself and seven children by means of $ 218 per month public assistance. After 13 purchases over a period of five years for a total of $ 1,200, B owes A $ 164. B then buys a stereo set for $ 514. Each contract contains a paragraph of some 800 words in extremely fine print, in the middle of which are the words “all payments . . . shall be credited pro rata on all outstanding . . . accounts.” The effect of this language is to keep a balance due on each item until all are paid for. On B’s default, A sues for possession of all the items sold. It may be determined that either the quoted clause or the contract as a whole was unconscionable when made.

6. A, a corporation with its principal office in State X, contracts with B, a resident of State X, to make improvements on B’s home in State X. The contract is made on A’s standard printed form, which contains a clause by which the parties submit to the jurisdiction of a court in State Y, 200 miles away. No reason for the clause appears except to make litigation inconvenient and expensive for B. The clause is unconscionable.

f. Law and fact.

A determination that a contract or term is unconscionable is made by the court in the light of all the material facts. Under U.C.C. § 2-302, the determination is made “as a matter of law,” but the parties are to be afforded an opportunity to present evidence as to commercial setting, purpose and effect to aid the court in its determination. Incidental findings of fact are made by the court rather than by a jury, but are accorded the usual weight given to such findings of fact in appellate review. An appellate court will also consider whether proper standards were applied.

7. A, a finance company, lends money to B, a manufacturing company, on the security of an assignment by B of its accounts receivable. The agreement provides for loans of 75% of the value of assigned accounts acceptable to A, and forbids B to dispose of or hypothecate any assets without A’s written consent. The agreed interest rate of 18% would be usurious but for a statute precluding a corporation from raising the defense of usury. Substantial advances are made, and the balance owed is $ 14,000 when B becomes bankrupt, three months after the first advance. A determination that the agreement is unconscionable on its face, without regard to context, is error. The agreement is unconscionable only if it is not a reasonable commercial device in the light of all the circumstances when it was made.

g. Remedies.

Perhaps the simplest application of the policy against unconscionable agreements is the denial of specific performance where the contract as a whole was unconscionable when made. If such a contract is entirely executory, denial of money damages may also be appropriate. But the policy is not penal: unless the parties can be restored to their pre-contract positions, the offending party will ordinarily be awarded at least the reasonable value of performance rendered by him. Where a term rather than the entire contract is unconscionable, the appropriate remedy is ordinarily todeny effect to the unconscionable term. In such cases as that of an exculpatory term, the effect may be to enlarge the liability of the offending party.

Chapter 15 | The Parol Evidence Rule

[]{#_Toc161928213 .anchor}R. 2d Contracts § 209 – Integrated Agreements

(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.

(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.

(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression.

a. Significance of integration.

Where the parties to an agreement have reduced a term of the agreement to specific words or other symbols, interpretation of that term relates to the meaning of the words and symbols used. An integrated agreement supersedes contrary prior statements, and a completely integrated agreement supersedes even consistent additional terms. See §§ 213-16. But both integrated and unintegrated agreements are to be read in the light of the circumstances and may be explained or supplemented by operative usages of trade, by the course of dealing between the parties, and by the course of performance of the agreement.

b. Form of integrated agreement.

No particular form is required for an integrated agreement. Written contracts, signed by both parties, may include an explicit declaration that there are no other agreements between the parties, but such a declaration may not be conclusive. The intention of the parties may also be manifested without explicit statement and without signature. A letter, telegram or other informal document written by one party may be orally assented to by the other as a final expression of some or all of the terms of their agreement. Indeed, the parties to an oral agreement may choose their words with such explicit precision and completeness that the same legal consequences follow as where there is a completely integrated agreement.

1. A and B enter into an oral contract, and prepare and sign a writing to incorporate its terms. Though the writing contains substantially all the orally agreed terms, they are not fully satisfied with it, and they agree to have it redrafted. There is no integrated agreement.

2. A orally agrees to employ B on certain terms. B immediately writes and A receives a letter beginning, “Confirming our oral arrangement this morning,” and fully stating the contract as he understands it. A makes no reply but with knowledge of B’s understanding accepts services from B under the contract. The letter is a completely integrated agreement. Even though the letter is not in all respects accurate, it operates as an offer of substituted terms, and A’s acquiescence manifests assent to those terms.

c. Proof of integration.

Whether a writing has been adopted as an integrated agreement is a question of fact to be determined in accordance with all relevant evidence. The issue is distinct from the issues whether an agreement was made and whether the document is genuine, and also from the issue whether it was intended as a complete and exclusive statement of the agreement. See § 210; compare U.C.C. § 2-202. Ordinarily the issue whether there is an integrated agreement is determined by the trial judge in the first instance as a question preliminary to an interpretative ruling or to the application of the parol evidence rule. See §§ 212, 213. After the preliminary determination, such questions as whether the agreement was in fact made may remain to be decided by the trier of fact. Subsection (3) states the rule that a written agreement complete on its face is taken to be an integrated agreement in the absence of contrary evidence.

3. A sells and delivers a hotel to B. Later A takes possession of the hotel furniture, and B sues to recover it. B claims the furniture under an oral agreement; A proves an apparently complete written agreement for the sale of the real property, and objects to consideration of the oral agreement. In the absence of contrary evidence, the writing is taken to be an integration; whether it is a complete integration is decided on the basis of all relevant evidence. If the oral agreement contradicts the writing, or if the writing is a complete integration, evidence of the oral agreement is excluded; otherwise the trier of fact is to decide whether the oral agreement was made.

[]{#_Toc161928214 .anchor}R. 2d Contracts § 210 – Completely and Partially Integrated Agreements

(1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of 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 determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.

a. Complete integration.

The definition in Subsection (1) is to be read with the definition of integrated agreement in § 209, to reject the assumption sometimes made that because a writing has been worked out which is final on some matters, it is to be taken as including all the matters agreed upon. Even though there is an integrated agreement, consistent additional terms not reduced to writing may be shown, unless the court finds that the writing was assented to by both parties as a complete and exclusive statement of all the terms. Upon such a finding, however, evidence of the alleged making of consistent additional terms must be kept from the trier of fact.

b. Proof of complete integration.

That a writing was or was not adopted as a completely integrated agreement may be proved by any relevant evidence. A document in the form of a written contract, signed by both parties and apparently complete on its face, may be decisive of the issue in the absence of credible contrary evidence. But a writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties.

1. A, a college, owns premises which have no toilet or plumbing facilities or heating equipment. In negotiating a lease to B for use of the premises as a radio station, A orally agrees to permit the use of facilities in an adjacent building and to provide heat. The parties subsequently execute a written lease agreement which makes no mention of facilities or heat. The question whether the written lease was adopted as a completely integrated agreement is to be decided on the basis of all relevant evidence of the prior and contemporaneous conduct and language of the parties.

c. Partial integration.

It is often clear from the face of a writing that it is incomplete and cannot be more than a partially integrated agreement. Incompleteness may also be shown by other writings, which may or may not become part of a completely or partially integrated agreement. Or it may be shown by any relevant evidence, oral or written, that an apparently complete writing never became fully effective, or that it was modified after initial adoption.

2. A writes to B a letter offer containing four provisions. B replies by letter that three of the provisions are satisfactory, but makes a counter proposal as to the fourth. After further discussion of the fourth provision, the parties come to oral agreement on a revision of it, but make no further statements as to the other three terms. A’s letter is a partially integrated agreement with respect to the first three provisions.

[]{#_Toc161928215 .anchor}R. 2d Contracts § 213 – Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)

(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.

(2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope.

(3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior agreement. But an integrated agreement, even though not binding, may be effective to render inoperative a term which would have been part of the agreement if it had not been integrated.

a. Parol evidence rule.

This Section states what is commonly known as the parol evidence rule. It is not a rule of evidence but a rule of substantive law. Nor is it a rule of interpretation; it defines the subject matter of interpretation. It renders inoperative prior written agreements as well as prior oral agreements. Where writings relating to the same subject matter are assented to as parts of one transaction, both form part of the integrated agreement. Where an agreement is partly oral and partly written, the writing is at most a partially integrated agreement.

b. Inconsistent terms.

Whether a binding agreement is completely integrated or partially integrated, it supersedes inconsistent terms of prior agreements. To apply this rule, the court must make preliminary determinations that there is an integrated agreement and that it is inconsistent with the term in question. Those determinations are made in accordance with all relevant evidence, and require interpretation both of the integrated agreement and of the prior agreement. The existence of the prior agreement may be a circumstance which sheds light on the meaning of the integrated agreement, but the integrated agreement must be given a meaning to which its language is reasonably susceptible when read in the light of all the circumstances.

1. D Corporation regularly borrows money from C Bank. S, the principal stockholder in D, offers to guarantee payment if C will increase the amounts lent. There is a bank custom to make such loans only on adequate collateral supplied by the borrower, and C promises S to follow the custom. S then executes a written agreement with C guaranteeing payment of future loans to D “with or without security.” If the written agreement is a binding integrated agreement, C’s prior promise is discharged.

2. A orally agrees to sell a city lot to B. The city is installing a sidewalk in front of the lot, and A orally agrees to pay the cost to be assessed by the city in an amount not exceeding $ 45. B then retains a lawyer to draw up a written agreement, and A and B execute it, A without reading it. The agreement provides that A will pay all costs of the installation of the sidewalk, but does not mention any dollar limit. If the written agreement is a binding integrated agreement, any agreement for a $ 45 limit is discharged.

c. Scope of a completely integrated agreement.

Where the parties have adopted a writing as a complete and exclusive statement of the terms of the agreement, even consistent additional terms are superseded. But there may still be a separate agreement between the same parties which is not affected. To apply the rule of Subsection (2) the court in addition to determining that there is an integrated agreement and that it is completely integrated, must determine that the asserted prior agreement is within the scope of the integrated agreement. Those determinations are made in accordance with all relevant evidence, and require interpretation both of the integrated agreement and of the prior agreement.

3. In May A and B exchange properties and agree orally that A will make certain repairs on the property to be conveyed by A to B, the repairs to be finished by October 1. A and B then draw up and sign a memorandum of the repair agreement, specifying all the terms except that the memorandum is silent as to time of performance. If the memorandum is a binding completely integrated agreement, the agreement to finish by October 1 is discharged, and the repairs are to be finished within a reasonable time. The oral agreement as to October 1 may be relevant evidence as to what is a reasonable time.

4. A and B make an oral agreement for the sale of land and a hotel thereon, together with the hotel furniture. They employ a lawyer to prepare a written contract. He does so, and they sign it. It contains no mention of personal property. The agreement as to furniture is discharged if there is a binding completely integrated agreement covering the entire transaction, but not if only the part of the agreement relating to real property is integrated.

d. Effect of non-binding integration.

An integrated agreement does not supersede prior agreements if it is not binding, for example, by reason of lack of consideration, or if it is voidable and avoided. The circumstances may, however, show an agreement to discharge a prior agreement without regard to whether the integrated agreement is binding, and such an agreement may be effective. Moreover, an integrated agreement may be effective to render inoperative an oral term which would have been part of the agreement if it had not been integrated. The integrated agreement may then be without consideration, even though the inoperative oral term would have furnished consideration.

5. A and B enter into a contract that B will build a house on A’s land for a price. Later they enter into an oral contract by which B promises to add a porch and A promises to pay an extra $ 2,000. Still later they enter into an integrated agreement in which B promises to build according to the original plans and A promises to pay the extra $ 2,000. The integrated agreement is not binding for lack of consideration, and the oral intermediate agreement is not discharged.

6. A and B enter into a contract that B will build a house on A’s land for a price. Later B offers to add a porch if A will sign a new contract. They then enter into an integrated agreement in which B promises to build according to the original plans and A promises to pay an extra $ 2,000. If the integrated agreement is inconsistent with the porch offer, or if it is a completely integrated agreement and the matter of the porch is within its scope, the integrated agreement is effective to discharge the porch offer but is not binding for lack of consideration.

[]{#_Toc161928216 .anchor}R. 2d Contracts § 216 – Consistent Additional Terms

(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.

(2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is

(a) agreed to for separate consideration, or

(b) such a term as in the circumstances might naturally be omitted from the writing.

a. Relation to other rules.

Like § 215, this Section states an evidentiary consequence of § 213. It also limits the concept of a completely integrated agreement set forth in § 210. Compare U.C.C. § 2-202(b). Where the limitation is not applicable, the court must decide whether the agreement is completely integrated on the basis of all relevant evidence, including the evidence of consistent additional terms.

b. Consistency.

Terms of prior agreements are superseded to the extent that they are inconsistent with an integrated agreement, and evidence of them is not admissible to contradict a term of the integration. The determination whether an alleged additional term is consistent or inconsistent with the integrated agreement requires interpretation of the writing in the light of all the circumstances, including the evidence of the additional term. For this purpose, the meaning of the writing includes not only the terms explicitly stated but also those fairly implied as part of the bargain of the parties in fact. It does not include a term supplied by a rule of law designed to fill gaps where the parties have not agreed otherwise, unless it can be inferred that the parties contracted with reference to the rule of law. There is no clear line between implications of fact and rules of law filling gaps; although fairly clear examples of each can be given, other cases will involve almost imperceptible shadings.

1. A check states no date of payment, but it is orally agreed that the check will be paid only after six months. The oral agreement contradicts the check. Under U.C.C. § 3-108 the check is payable on demand, and most competent adults in the United States have reason to know the rule.

2. A owes B two debts, and sends a check for an amount less than the amount of either. In the absence of any contrary manifestation of intention by either party, the rule of law would be that the check is applied to the debt which first matured. An agreement that the other debt is to be paid is not inconsistent with the check.

c. Separate consideration.

Where there is a binding completely integrated agreement, even consistent additional terms are superseded if they are within the scope of the agreement. A separate contract, not covered by the integrated agreement, is not superseded. The rule of Subsection (2)(a) goes further; it limits the scope of the integrated agreement by excluding a consistent additional term made for separate consideration even though the additional term and its consideration are part of the same contract. This rule may be regarded as a particular application of the rule of Subsection (2)(b).

3. A and B in an integrated writing promise to sell and buy a specific automobile. As part of the transaction they orally agree that B may keep the automobile in A’s garage for one year, paying $ 15 a month. The oral agreement is not within the scope of the integration and is not superseded.

d. Terms omitted naturally.

If it is claimed that a consistent additional term was omitted from an integrated agreement and the omission seems natural in the circumstances, it is not necessary to consider further the questions whether the agreement is completely integrated and whether the omitted term is within its scope, although factual questions may remain. This situation is especially likely to arise when the writing is in a standardized form which does not lend itself to the insertion of additional terms. Thus agreements collateral to a negotiable instrument if written on the instrument might destroy its negotiability or otherwise make it less acceptable to third parties; the instrument may not have space for the additional term. Leases and conveyances are also often in a standard form which leads naturally to the omission of terms which are not standard. These examples are not exclusive. Moreover, there is no rule or policy penalizing a party merely because his mode of agreement does not seem natural to others. Even though the omission does not seem natural, evidence of the consistent additional terms is admissible unless the court finds that the writing was intended as a complete and exclusive statement of the terms of the agreement.

4. A owes B $ 1,000. They agree orally that A will sell B Blackacre for $ 3,000 and that the $ 1,000 will be credited against the price, and then sign a written agreement, complete on its face, which does not mention the $ 1,000 debt or the credit. The written agreement is not completely integrated, and the oral agreement for a credit is admissible in evidence to supplement the written agreement.

5. A and B sign a written agreement, complete on its face, that A will sell B Blackacre for $ 3,000, conveyance and payment to be made within 60 days. It is claimed that B was about to render services for A and that the written agreement was signed on the oral understanding that B would be permitted to pay the price by rendering the services at $ 50 an hour. The oral understanding is admissible in evidence unless it is found that the written agreement was completely integrated.

6. A and B sign a standard form of written agreement for the sale of goods, complete on its face except that a blank for time and place of delivery is not filled in. It is claimed that the writing was signed on the oral understanding that delivery would be made within 30 days at the buyer’s place of business. Under U.C.C. §§ 2-308 and 2-309, the goods would be deliverable, unless otherwise agreed, within a reasonable time at the seller’s place of business. The written agreement is not completely integrated, and the oral understanding is admissible in evidence to supplement its terms.

7. A and B sign a written agreement complete on its face, for the sale of goods to be shipped by A from Chicago to New York. It is claimed that the written agreement was signed on the oral understanding that the shipment would be made by a specified route. Under U.C.C. §§ 2-311 and 2-504, unless otherwise agreed, A could properly ship by any reasonable route. The written agreement is not completely integrated, and the oral understanding is admissible in evidence to supplement its terms.

8. A and B orally agree that A shall work for B in specified employment for $ 3,000. B delivers to A an absolute written promise to pay $ 3,000 in six months. The terms of the oral agreement are admissible in evidence to supplement the written promise and to qualify B’s duty to pay $ 3,000.

9. A and B sign a written agreement, complete on its face, for the sale of a specific machine by A to B. The writing describes the machine and warrants that it is new, but contains no other terms relevant to warranty. Warranties of title, conformity to the description, merchantability, or fitness for a particular purpose, arising under U.C.C. §§ 2-312 through 2-315, are not excluded. Whether an additional oral warranty of quality is superseded depends on whether the agreement is completely integrated.

e. Written term excluding oral terms (“merger” clause).

Written agreements often contain clauses stating that there are no representations, promises or agreements between the parties except those found in the writing. Such a clause may negate the apparent authority of an agent to vary orally the written terms, and if agreed to is likely to conclude the issue whether the agreement is completely integrated. Consistent additional terms may then be excluded even though their omission would have been natural in the absence of such a clause. But such a clause does not control the question whether the writing was assented to as an integrated agreement, the scope of the writing if completely integrated, or the interpretation of the written terms.

[]{#_Toc161928217 .anchor}N.H.R.S.A. 382-A § 2-202 – Final Written Expression: Parol or Extrinsic Evidence.

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

(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.

Editor’s Note: The so-called parol-evidence rule (or “PER”) is one instance where the U.C.C. and the common law are substantively similar, but they use different terms to mean effectively the same thing. A common but perhaps unhelpful oft-cited phrases is that the PER is not a rule of evidence. The well-meaning intention behind this aphorism is that the PER creates evidence in the form of writings. But it has the effect of limiting what evidence can be brought in courts of law because it specifically limits the evidence from which courts can draw inferences about contractual meaning to written sources.

Chapter 16 | Evaluating Extrinsic Evidence

[]{#_Toc161928219 .anchor}R. 2d Contracts § 219 – Usage

Usage is habitual or customary practice.

a. Scope of usage.

Although rules of law are often founded on usage, usage is not in itself a legal rule but merely habit or practice in fact. A particular usage may be more or less widespread. It may prevail throughout an area, and the area may be small or large -- a city, a state or a larger region. A usage may prevail among all people in the area, or only in a special trade or other group. Usages change over time, and persons in close association often develop temporary usages peculiar to themselves.

b. Usage of words.

A word usage exists when few or many people use a word or phrase to convey a standard meaning or several standard meanings and develop a common understanding of the meaning or meanings. Dictionaries record word usages which have achieved some generality, with varying degrees of completeness and accuracy.

[]{#_Toc161928220 .anchor}R. 2d Contracts § 220 – Usage Relevant to Interpretation

(1) An agreement is interpreted in accordance with a relevant usage if each party knew or had reason to know of the usage and neither party knew or had reason to know that the meaning attached by the other was inconsistent with the usage.

(2) When the meaning attached by one party accorded with a relevant usage and the other knew or had reason to know of the usage, the other is treated as having known or had reason to know the meaning attached by the first party.

a. Relation to other rules.

Usage may “give particular meaning to” an agreement, or may “supplement or qualify” it. U.C.C. § 1-205. This Section deals with usage as an element in interpretation and states rules consistent with the general rules on agreement and interpretation stated in §§ 20 and 201. Usage supplementing or qualifying an agreement is the subject of the following section, and §§ 222 and 223 apply the general rules of this Section and § 221 to the particular cases of usage of trade and course of dealing. Where there are conflicting usages of words and no different intention is shown, § 202 provides guides for the process of interpretation; where there is conflict between usage of trade and express terms, course of performance or course of dealing, § 203 states standards of preference.

b. Interpretation of language.

An agreement may have a legal effect not intended by either party, but interpretation is limited to meanings intended by at least one party. Neither party is bound by a meaning unless he knows orhas reason to know of it. Usage is subject to the same rule: a party is not bound by a usage unless he knows or has reason to know of it. Hence a party who asserts a meaning based on usage must show either that the other party knew of the usage or that the other party had reason to know of it. Analytically, the meaning of language is a question of fact, but in the absence of extrinsic evidence the meaning of language in an integrated writing is to be determined as a question of law. Where a usage of words is sufficiently well known, a court will take judicial cognizance of it without proof; otherwise the burden of establishing a usage is on the party asserting it. Ordinarily there is no requirement that a usage relevant to the interpretation of language be pleaded, but a party against whom evidence of usage is offered may be entitled to a continuance or to notice sufficient to prevent unfair surprise.

1. A contracts to sell and B to buy ten bushels of oats. By very general usage 32 pounds constitutes a bushel of oats. In the absence of contrary evidence, ten bushels in the contract means 320 pounds.

2. A contracts with B to “sponsor” a bowling team and to pay B “the usual sponsoring fees.” In an action against A for repudiating the contract in a dispute over the fees, B cannot recover without proving a usage as to “usual sponsoring fees.”

3. A employs B as exclusive broker to sell business premises subject to a one-year lease back to A. B submits an agreement for sale to C subject to a one-year lease, with a provision for termination of the lease on six months notice. A rejects the agreement. In an action for the agreed commission B claims that by local usage all business leases contain such a provision. B has the burden of establishing the usage and A’s knowledge or reason to know of it.

c. Agreed but unstated terms.

An agreement or term thereof need not be stated in words if the parties manifest assent to it by other conduct, and such assent is often manifested by conduct in accordance with usage. Where there is an integrated agreement, an agreed but unstated term may be annexed by usage on the same principle which controls consistent additional terms generally. But it is so common to contract with reference to usage, leaving the usage unstated, that no inquiry is necessary as to whether it is natural in the particular circumstances to omit the term from the writing. Where it is claimed that the usage contradicts the express terms, the issue is resolved as a question of interpretation. Whether a usage is reasonable may bear on the issue whether the parties contracted with reference to it, but if they did they are not in general forbidden to make agreements which seem unreasonable to others.

4. A and B contract for a year’s employment of B by A. As both parties know, there is a usage that such a contract may be terminated by a month’s notice. Unless a contrary intention is manifested, the usage is part of the contract.

5. A sends goods to B by C, a private carrier, receiving a bill of lading from C. B rejects the shipment. The usage of such carriers, known to A and C, is to notify the shipper of such a rejection. Unless a contrary intention is manifested, the requirement of notification is added to the terms of the bill of lading.

6. A contracts to sell and B to buy 100 barrels of flour at$ 8 a barrel. By a usage of the trade known to A and B payment under such contracts is due ten days after delivery unless otherwise agreed. The usage is part of the contract.

7. A contracts to sell and B to buy 100 barrels of mackerel. By a usage of trade known to A and B, sellers of mackerel, unless they agree otherwise, warrant that the fish are not below a certain size. The usage is part of the contract.

d. Ambiguity and contradiction.

Language and conduct are in general given meaning by usage rather than by the law, and ambiguity and contradiction likewise depend upon usage. Hence usage relevant to interpretation is treated as part of the context of an agreement in determining whether there is ambiguity or contradiction as well as in resolving ambiguity or contradiction. There is no requirement that an ambiguity be shown before usage can be shown, and no prohibition against showing that language or conduct have a different meaning in the light of usage from the meaning they might have apart from the usage. The normal effect of a usage on a written contract is to vary its meaning from the meaning it would otherwise have.

8. A leases a rabbit warren to B. The written lease contains a covenant that at the end of the term A will buy and B will sell the rabbits at “60 £ per thousand.” The parties contract with reference to a local usage that 1,000 rabbits means 100 dozen. The usage is part of the contract.

9. In an integrated contract, A promises to sell and B to buy a certain quantity of “white arsenic” for a stated price. The parties contract with reference to a usage of trade that “white arsenic” includes arsenic colored with lamp black. The usage is part of the contract.

10. A, a bank in New York City, issues to B a letter of credit promising a payment on presentation of documents including a “full set of bills of lading.” By a general banking usage in New York City, banks accept less than a full set in such cases if there is a guaranty by a responsible New York bank in lieu of the missing part. Unless otherwise agreed, the usage is part of the contract. U.C.C. § 5-109.

[]{#_Toc161928221 .anchor}R. 2d Contracts § 221 – Usage Supplementing an Agreement

An agreement is supplemented or qualified by a reasonable usage with respect to agreements of the same type if each party knows or has reason to know of the usage and neither party knows or has reason to know that the other party has an intention inconsistent with the usage.

a. Agreed terms and omitted terms.

Where the parties have in fact agreed to incorporate a usage into their agreement, the case is within § 220. This Section extends the same principle to cases where the parties did not advert to the problem with which the usage deals, or where one or each separately foresaw the problem but failed to manifest any intention with respect to it. In such cases, in the absence of usage, the court would supply a reasonable term. But if there is a reasonable usage which supplies an omitted term and the parties know or have reason to know of the usage, it is a surer guide than the court’s own judgment of what is reasonable. Thus a usage may make it unnecessary to inquire into or prove what the actual intentions of the parties were with respect to an unstated term. Compare U.C.C. §§ 1-205(3), 2-202(a).

1. A, a canner, and B, a wholesale grocer, contract for the sale by A to B of canned fruit products, using a standard form of contract approved by canning and wholesale grocer trade associations. By uniform usage among canners, where the standard form is used title to unshipped goods passes on billing dates specified on the form. In the absence of contrary indication, the usage is part of the contract.

2. A, an ordained rabbi, is employed by B, an orthodox Jewish congregation, to officiate as cantor at specified religious services. At the time the contract is made, it is the practice of such congregations to seat men and women separately at services, and a contrary practice would violate A’s religious beliefs. At a time when it is too late for A to obtain substitute employment, B adopts a contrary practice. A refuses to officiate. The practice is part of the contract, and A is entitled to the agreed compensation.

b. Reason to know and reasonableness.

The more general and well-established a usage is, the stronger is the inference that a party knew or had reason to know of it. Similarly, the fact that a usage is reasonable may tend to show that the parties contracted with reference to it or that a particular party knew or had reason to know of it. Where the parties in fact agree to a usage, there is no general requirement that their usage seem reasonable to others; but where there is no agreement only a reasonable usage supplies an omitted term. What is reasonable for this purpose depends on the circumstances; it may be reasonable to hold a nonmerchant to mercantile standards if he is represented by a mercantile agent. See U.C.C. § 2-104, defining “merchant.” Ordinarily an agent is authorized to comply with relevant usages of business if the principal has notice that usages of such a nature may exist.

3. A, in Washington, sends an order to B, a broker in Baltimore, to be executed on the New York Stock Exchange. Unless both A and B give the order a different and identical interpretation or B has reason to know that A has a different intention, the order is interpreted in accordance with the reasonable usages of the New York Stock Exchange.

4. A, a publisher, contracts with B to publish a two-volume work. The contract provides for binding “10,000 copies at .538,” which by usage of the publishing business refers to the number of volumes rather than the number of sets. The usage is part of the contract even though the work is B’s first and he does not know of the usage.

c. Effect of usage on law.

It is often said that usage cannot change a rule of law, but a distinction must be drawn. If the rule of law is one which overrides contrary agreement, it also overrides usage; but if the law merely supplies a term in the absence of contrary agreement, usage can have the same effect as contrary agreement.

5. A and B, both members of a Mercantile Exchange, enter into an oral contract within the Statute of Frauds. By usage of the Exchange oral agreements between members of the Exchange are enforceable. The usage does not make the contract enforceable if it is otherwise unenforceable.

6. A makes B a promise without consideration. By usage such promises are binding without consideration. The usage does not make the promise legally binding.

7. A makes an offer to B by telephone, and B accepts by telephone. By usage known to both parties such an agreement is not binding unless promptly confirmed in writing by the acceptor. Unless a contrary intention is indicated, the usage is part of the agreement, and there is no contract unless B gives prompt written confirmation.

d. Intention inconsistent with usage.

The parties to an agreement are not bound to follow the usages of others or their own prior usages. If either party has reason to know that the other has an intention inconsistent with a particular usage, the usage is not applicable. Such an intention need not be manifested in any particular way; whether the parties contracted with reference to a usage is determined on the basis of all the circumstances, and a usage may be excluded by the same type of proof which would include it.

8. A, a resident of Philadelphia, makes a contract with B, a resident of New York, by which A promises to build a brick wall in Philadelphia. There is a local usage in Philadelphia as to measuring brick which differs from that elsewhere. B is not aware of the Philadelphia usage, as A has reason to know. The usage is not part of the contract.

9. A, a bank, issues a letter of credit promising to honor drafts accompanied by bills of lading covering “Coromandel groundnuts.” Dealers in groundnuts understand “Coromandel groundnuts” to mean “machine-shelled groundnut kernels.” A is not bound to honor drafts accompanied by bills of lading covering “machine-shelled groundnut kernels.” See U.C.C. § 5-109(1)(c).

[]{#_Toc161928222 .anchor}R. 2d Contracts § 222 – Usage of Trade

(1) A usage of trade is a usage having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to a particular agreement. It may include a system of rules regularly observed even though particular rules are changed from time to time.

(2) The existence and scope of a usage of trade are to be determined as questions of fact. If a usage is embodied in a written trade code or similar writing the interpretation of the writing is to be determined by the court as a question of law.

(3) Unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged or a usage of trade of which they know or have reason to know gives meaning to or supplements or qualifies their agreement.

a. Relation to other rules.

This Section follows U.C.C. § 1-205 and states a particular application of the rules stated in §§ 220 and 221. As to conflicting usages of words, see § 202; as to conflict between usage of trade and express terms, course of performance or course of dealing, see § 203.

b. Regularity of observance.

A usage of trade need not be “ancient or immemorial,” “universal,” or the like. Unless agreed to in fact, it must be reasonable, but commercial acceptance by regular observance makes out a prima facie case that a usage of trade is reasonable. There is no requirement that an agreement be ambiguous before evidence of a usage of trade can be shown, nor is it required that the usage of trade be consistent with the meaning the agreement would have apart from the usage. When the usage consists of a system of rules, the parties need not be aware of a particular rule if they know or have reason to know the system and the particular rule is within the scheme of the system. A change within the system may have effect promptly, even though there has been no time for regular observance of the change.

1. A contracts to sell B 10,000 shingles. By usage of the lumber trade, in which both are engaged, two packs of a certain size constitute 1,000, though not containing that exact number. Unless otherwise agreed, 1,000 in the contract means two packs.

2. A contracts to sell B 1,000 feet of San Domingo mahogany. By usage of dealers in mahogany, known to A and B, good figured mahogany of a certain density is known as San Domingo mahogany, though it does not come from San Domingo. Unless otherwise agreed, the usage is part of the contract.

3. A promises to act as B’s agent in a certain business, and B promises to pay a certain commission for each “order.” By a local usage in that business, “order” means only an order on which the purchaser has paid a certain price. Unless otherwise agreed, the usage is part of the contract.

4. A and B enter into a contract for the sawing of logs during the “winter season.” Usage in the logging business may show that “winter season” means the period between the closing of a sawmill in the autumn and the arrival of logs in the spring.

5. A and B enter into a contract of charter party in which A promises to discharge the vessel “in 14 days.” Usage in the shipping business may show this means 14 working days.

6. A and B enter into a contract for the purchase and sale of “No. 1 heavy book paper guaranteed free from ground wood.” Usage in the paper trade may show that this means paper not containing over 3% ground wood.

c. Local usages of trade.

Where usages vary from place to place, there may be a problem in deciding which usage is applicable. Even though local residents regularly contract with reference to a local usage of trade, others are not bound by the usage unless they know or have reason to know of it. If that condition is satisfied and no contrary intention is shown, a usage of trade in a particular place is ordinarily used to interpret the agreement as to that part of the performance which is to occur there.

7. A contracts to employ B for 20 days. In the kind of work to which the employment relates, in the place where both reside and the work is to be performed, a day’s work is eight hours. Unless otherwise agreed, B’s employment is for 20 eight-hour days.

8. A leases to B a portion of a building for “confectionery store purposes.” By local usage at the time and place where the lease is made and the building is located, “confectionery store purposes” include the giving of light lunches. Unless otherwise agreed, the usage is part of the contract.

9. A promises B to keep certain premises “fully insured.” At the time and place where the contract is made and to be performed and where the parties reside, insurance companies will not insure such premises for more than three-fourths of their value, and such premises insured for three-fourths of their value are called “fully insured.” Unless otherwise agreed, the local usage is part of the contract.

10. A of Chicago negotiates and concludes in South Carolina an integrated contract to sell and deliver to B in South Carolina “ground sheep manure.” These words mean a finer grinding in South Carolina than they do in Chicago, and A has reason to know of the South Carolina usage. Unless otherwise agreed, the contract is taken to refer to the South Carolina usage.

[]{#_Toc161928223 .anchor}R. 2d Contracts § 223 – Course of Dealing

(1) A course of dealing is a sequence of previous conduct between the parties to an agreement which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

(2) Unless otherwise agreed, a course of dealing between the parties gives meaning to or supplements or qualifies their agreement.

a. Relation to other rules.

This Section follows U.C.C. § 1-205 and states a particular application of the rules stated in §§ 220 and 221. As to conflict between course of dealing and express terms, course of performance or usage of trade, see § 203.

b. Common basis of understanding.

Course of dealing may become part of an agreement either by explicit provision or by tacit recognition, or it may guide the court in supplying an omitted term. Like usage of trade, it may determine the meaning of language or it may annex an agreed but unstated term. There is no requirement that an agreement be ambiguous before evidence of a course of dealing can be shown, nor is it required that the course of dealing be consistent with the meaning the agreement would have apart from the course of dealing.

1. A, a sugar company, enters into a written agreement with B, a grower of sugar beets, by which B agrees to raise and deliver and A to purchase specified quantities of beets during the coming season. No price is fixed. The agreement is on a standard form used for B and many other growers in prior years. A’s practice is to pay all growers uniformly on a formula based on A’s “net return” according to A’s established accounting system. Unless otherwise agreed, the established pattern of pricing is part of the agreement.

2. A, a manufacturer, sends a price quotation on goods to B, a dealer, together with printed “conditions of sale.” B then sends orders to A; and A fills them. B takes advantage of discount terms of the quotation not referred to in B’s orders. Unless otherwise agreed, the “conditions of sale” are part of each contract.

[]{#_Toc161928224 .anchor}N.H.R.S.A. 382-A § 1-303 – Course of Performance, Course of Dealing, and Usage of Trade

(a) A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:

(1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and

(2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

(b) A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

(c) A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

(d) A course of performance or course of dealing between the parties or usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware is relevant in ascertaining the meaning of the parties’ agreement, may give particular meaning to specific terms of the agreement, and may supplement or qualify the terms of the agreement. A usage of trade applicable in the place in which part of the performance under the agreement is to occur may be so utilized as to that part of the performance.

(e) Except as otherwise provided in subsection (f), the express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable:

(1) express terms prevail over course of performance, course of dealing, and usage of trade;

(2) course of performance prevails over course of dealing and usage of trade; and

(3) course of dealing prevails over usage of trade.

(f) Subject to [Section 2-209]{.underline}, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance.

(g) Evidence of a relevant usage of trade offered by one party is not admissible unless that party has given the other party notice that the court finds sufficient to prevent unfair surprise to the other party.

Editor’s Note: This provision deal with what information courts may consider when interpreting the meaning of a contract. It specifically allows courts to consider extrinisic evidence—which is more expansive than common law—and it articulates the preference to interpret all this evidence consistency whenever that is reasonably possible.

Chapter 17 | Conditions

[]{#_Toc161928226 .anchor}R. 2d Contracts § 224 – Condition Defined

A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

a. “Condition” limited to event.

“Condition” is used in this Restatement to denote an event which qualifies a duty under a contract. See the Introductory Note to this Topic. It is recognized that “condition” is used with a wide variety of other meanings in legal discourse. Sometimes it is used to denote an event that limits or qualifies a transfer of property. In the law of trusts, for example, it is used to denote an event such as the death of the settlor that qualifies his disposition of property in trust. Sometimes it is used to refer to a term (§ 5) in an agreement that makes an event a condition, or more broadly to refer to any term in an agreement (e.g., “standard conditions of sale”). For the sake of precision, “condition” is not used here in these other senses.

1. A contracts to sell and B to buy goods pursuant to a writing which provides, under the heading “Conditions of Sale,” that “the obligations of the parties are conditional on B obtaining from X Bank by June 30 a letter of credit” on stated terms. The quoted language is a term of the agreement (§ 5), not a condition. The event referred to by the term, obtaining the letter of credit by June 30, is a condition.

b. Uncertainty of event.

Whether the reason for making an event a condition is to shift to the obligee the risk of its non-occurrence, or whether it is to induce the obligee to cause the event to occur (see Introductory Note to this Topic), there is inherent in the concept of condition some degree of uncertainty as to the occurrence of the event. Therefore, the mere passage of time, as to which there is no uncertainty, is not a condition and a duty is unconditional if nothing but the passage of time is necessary to give rise to a duty of performance. Moreover, an event is not a condition, even though its occurrence is uncertain, if it is referred to merely to measure the passage of time after which an obligor is to perform. Performance under a contract becomes due when all necessary events, including any conditions and the passage of any required time, have occurred so that a failure of performance will be a breach.

The event need not, in order to be a condition, be one that is to occur after the making of the contract, although that is commonly the case. It may relate to the present or even to the past, as is the case where a marine policy insures against a loss that may already have occurred. Furthermore, a duty may be conditioned upon the failure of something to happen rather than upon its happening, and in that case its failure to happen is the event that is the condition.

2. A tells B, “If you will paint my house, I will pay you $ 1,000 on condition that 30 days have passed after you have finished.” B paints A’s house. Although A is not under a duty to pay B $ 1,000 until 30 days have passed, the passage of that time is not a condition of A’s duty to pay B $ 1,000.

3. A contracts to sell and B to buy goods to be shipped “C.I.F.,” payment to be “on arrival of goods.” Risk of loss of the goods passes from A to B when A, having otherwise complied with the C.I.F. term of the contract, puts the goods in the possession of the carrier (U.C.C. § 2-320(2)). If the goods are lost in transit, B is under a duty to pay the price when the goods should have arrived (U.C.C. §§ 2-709(1)(a), 2-321(3)). The arrival of the goods is not a condition of B’s duty to pay for the goods.

c. Necessity of a contract.

In order for an event to be a condition, it must qualify a duty under an existing contract. Events which are part of the process of formation of a contract, such as offer and acceptance, are therefore excluded under the definition in this section. It is not customary to call such events conditions. But cf. § 36(2) (“condition of acceptance”). For the most part, they are required by law and may not be dispensed with by the parties, while conditions are the result of, or at least subject to, agreement. Where, however, an offer has become an option contract, e.g., by the payment of a dollar (§ 87), the acceptance is a condition under the definition in this section.

4. A tells B, “I promise to pay you $ 1,000 if you paint my house.” B begins to paint A’s house. Since B’s beginning of the invited performance gives rise to an option contract, B’s completion of performance is a condition of A’s duty under that contract to pay B $ 1,000.

d. Relationship of conditions.

A duty may be subject to any number of conditions, which may be related to each other in various ways. They may be cumulative so that performance will not become due unless all of them occur. They may be alternative so that performance may become due if any one of them occurs. Or some may be cumulative and some alternative. Furthermore, a condition may qualify the duties of both parties. Cf. § 217.

5. A, as the result of financial reverses, sells B a valuable painting for $ 1,000,000, but reserves a right to repurchase it by tendering the same price on or before August 18 if he again finds himself in such a financial condition that he can keep it for his personal enjoyment. A’s tender of $ 1,000,000 by August 18 and his being in such financial condition that he can keep the painting for his personal enjoyment are cumulative conditions and redelivery of the painting does not become due unless both of them occur.

6. A purchases land from Mrs. B, who is unable to get Mr. B to join her in signing the deed because they are engaged in divorce proceedings. A takes possession under a deed signed by Mrs. B, pays Mrs. B $ 10,000 and promises to pay an additional $ 5,000 “if, within one year, (1) Mr. and Mrs. B execute a quitclaim deed to A, or (2) Mrs. B furnishes A with a certificate of the death of Mr. B with Mrs. B surviving him, or (3) Mrs. B as a single person executes a quitclaim deed to A after having been awarded the land following the entry of a final decree of divorce from Mr. B.” The three enumerated events are alternative conditions and A’s payment of $ 5,000 to Mrs. B becomes due if any of them occurs.

7. A and B contract to merge their corporate holdings into a single new company. It is agreed that the project is not to be operative unless the parties raise $ 600,000 additional capital. The raising of the additional capital is a condition of the duties of both A and B. If it is not raised, neither A’s nor B’s performance becomes due.

e. Occurrence of event as discharge.

Parties sometimes provide that the occurrence of an event, such as the failure of one of them to commence an action within a prescribed time, will extinguish a duty after performance has become due, along with any claim for breach. Such an event has often been called a “condition subsequent,” while an event of the kind defined in this section has been called a “condition precedent.” This terminology is not followed here. Since a “condition subsequent,” so-called, is subject to the rules on discharge in § 230, and not to the following rules on conditions, it is not called a “condition” in this Restatement. Occasionally, although the language of an agreement says that if an event does not occur a duty is “extinguished,” “discharged,” or “terminated,” it can be seen from the circumstances that the event must ordinarily occur before performance of the duty can be expected. When a court concludes that, for this reason, performance is not to become due unless the event occurs, the event is, in spite of the language, a condition of the duty.

8. A insures B’s property against theft. The policy provides that B’s failure to notify A within 30 days after loss shall “terminate” A’s duty to pay and that suit must be brought within one year after loss. Since it can be seen from the circumstances that notice must ordinarily be given before payment by A can be expected, B’s notification of A within 30 days after loss is a condition of A’s duty. B’s bringing suit against A within a year after loss is not a condition of A’s duty. B’s failure to bring suit within that time will discharge A’s duty after payment has become due, along with any claim for breach.

9. A and B make a contract under which A promises to pay B $ 10,000 in annual installments of $ 1,000 each, beginning the following January 1, with a provision that “no installments whether or not overdue and unpaid shall be payable in case of A’s death within the 10 years.” A’s being alive is a condition of his duty to pay any installment. A’s death within ten years will discharge his duty to pay any installment after payment has become due, along with any claim for breach.

f. Sealed contracts.

The rules governing conditions stated in the Restatement of this Subject are applicable to sealed as well as unsealed contracts. The same rules have traditionally been applied to both types of contract with technical exceptions that are no longer of significance.

[]{#_Toc161928227 .anchor}R. 2d Contracts § 225 – Effects of the Non-Occurrence Of a Condition

(1) Performance of 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 of a condition discharges the duty when the condition can no longer occur.

(3) Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur.

a. Two effects.

The unexcused non-occurrence of a condition has two possible effects on the duty subject to that condition. The first effect always follows and the second often does. The first, stated in Subsection (1), is that of preventing performance of the duty from becoming due. This follows from the definition of “condition” in § 224. Performance of the duty may still become due, however, if the condition occurs later within the time for its occurrence. The non-occurrence of the condition within that time has the additional effect, stated in Subsection (2), of discharging the duty. The time within which the condition can occur in order for the performance of the duty to become due may be fixed by a term of the agreement or, in the absence of such a term, by one supplied by the court (§ 204). Where discharge would produce harsh results, this second effect may be avoided by rules of interpretation (§§ 226, 228) or of excuse of conditions (Comment b and § 229).

A contracts to sell and B to buy A’s business. The contract provides that B is to pay in installments over a five-year period following the conveyance, and that A is to convey on condition that B pledge specified collateral to secure his payment. Conveyance by A does not become due until B pledges the collateral. If the agreement does not provide for the time within which the collateral is to be pledged, A’s duty is discharged if it is not pledged within a reasonable time.

2. B gives A $ 10,000 to use in perfecting an invention, and A promises to repay it only out of royalties received during his lifetime from the sale of the patent rights. In spite of diligent efforts, A is unable to perfect his invention and obtain a patent, and no royalties are received. A dies after six years. B has no claim against A’s estate. Receipt of royalties is a condition of A’s duty to repay the money and A’s duty is discharged by the non-occurrence of that condition during his lifetime.

b. Excuse.

The non-occurrence of a condition of a duty is said to be “excused” when the condition need no longer occur in order for performance of the duty to become due. The non-occurrence of a condition may be excused on a variety of grounds. It may be excused by a subsequent promise, even without consideration, to perform the duty in spite of the non-occurrence of the condition. See the treatment of “waiver” in § 84, and the treatment of discharge in §§ 273-85. It may be excused by acceptance of performance in spite of the non-occurrence of the condition, or by rejection following its non-occurrence accompanied by an inadequate statement of reasons. See §§ 246-48. It may be excused by a repudiation of the conditional duty or by a manifestation of an inability to perform it. See § 255; §§ 250-51. It may be excused by prevention or hindrance of its occurrence through a breach of the duty of good faith and fair dealing (§ 205). And it may be excused by impracticability. These and other grounds for excuse are dealt with in other chapters of this Restatement. This Chapter deals only with one general ground, excuse to avoid forfeiture.

c. Effect of excuse.

When the non-occurrence of a condition of a duty is excused, the damages for breach of the duty will depend on whether or not the occurrence of the condition was also part of the performances to be exchanged under the exchange of promises. If it was not part of the agreed exchange, the obligor is liable for the same damages for which he would have been liable had the duty originally been unconditional. If it was part of the agreed exchange, however, the saving to the obligee resulting from the non-occurrence of the condition must be subtracted in determining the obligor’s liability for damages. Rules for determining damages are set out in § 347; see generally §§ 346-56. If the obligee is under a duty that the condition occur, the ground for the excuse of the non-occurrence of the condition may not be a ground for discharge of that duty. He may therefore be liable for breach of the duty in spite of the excuse of the non-occurrence of the condition. Not only may a party excuse entirely the non-occurrence of a condition of his duty, but he may merely excuse its non-occurrence during the period of time in which it would otherwise have to occur. If he does this, the non-occurrence of the condition during that period will not discharge the duty under Subsection (2), although its non-occurrence will ultimately have that effect.

3. A contracts with B to build a house for $ 50,000, payable on condition that A present a certificate from C, B’s architect, showing that the work has been properly completed. A properly completes the work, but C refuses to give the certificate because of collusion with B, and the non-occurrence of the condition is therefore excused. Since the presentation of the architect’s certificate is not part of the performances to be exchanged under the exchange of promises, A has a claim against B for $ 50,000.

4. Under an option contract, A promises to sell B a painting “on condition that B pay $ 100,000” by a stated date. Before that date, the non-occurrence of the condition is excused by A’s repudiation of the contract. Since the payment of the $ 100,000 is B’s part of the performances to be exchanged under the exchange of promises, B saved that amount when the non-occurrence of the condition was excused, and it should be subtracted in determining damages. B has a claim against A for the value of the painting to B less $ 100,000.

5. A leases property to B for a stated monthly rental. The lease provides that A is under a duty to remove described property from the premises, and that its removal is a condition of B’s duty to pay the rent. After A has removed most of the property from the premises, B says that he will pay the rent even though not all of it has been removed. The non-occurrence of the condition is excused and B is under a duty to pay the rent even though A does not remove the rest of the property. But A’s duty to remove the rest of the property is not discharged and his failure to remove the rest is a breach.

d. Imposition of duty distinguished.

When one party chooses to use the institution of contract to induce the other party to cause an event to occur, he may do so by making the event a condition of his own duty (Introductory Note to this Topic). Or he may do so by having the other party undertake a duty that the event occur. Or he may do both. But, as Subsection (3) makes clear, a term making an event a condition of anobligor’s duty does not of itself impose a duty on the obligee and the non-occurrence of the event is not of itself a breach by the obligee. Unless the obligee is under such a duty, the non-occurrence of the event gives rise to no claim against him. The same term may, however, be interpreted not only to make an event a condition of the obligor’s duty, but also to impose a duty on the obligee that it occur. And even where no term of the agreement imposes a duty that a condition occur, the court may supply such a term.

6. A, a shipowner, promises to carry B’s cargo on his ship to Portsmouth. B promises to pay A the stipulated freight on condition that A’s ship sail directly there on its next sailing. A’s ship carries B’s cargo to Portsmouth, but puts into port on the way. Since carrying B’s cargo directly to Portsmouth is a condition of B’s duty, no duty to pay arises, and, since the condition can no longer occur, B’s duty is discharged. Since A is under no duty to carry B’s cargo directly to Portsmouth, however, his failure to do so is not a breach.

7. The facts being otherwise as stated in Illustration 6, A promises to carry B’s cargo on his ship directly to Portsmouth on its next sailing. Since carrying B’s cargo directly to Portsmouth is a condition of B’s duty, no duty to pay arises and, since the condition can no longer occur, B’s duty is discharged. Since A is under a duty to carry B’s cargo directly to Portsmouth, his failure to do so is also a breach.

8. A contracts to sell and B to buy a house for $ 50,000, with the provision, “This contract is conditional on approval by X Bank of B’s pending mortgage application.” Approval by X Bank is a condition of B’s duty. B is under no duty that the X Bank approve his application, but a court will supply a term imposing on him a duty to make reasonable efforts to obtain approval.

e. Ignorance immaterial.

The rules stated in this Section apply without regard to whether a party knows or does not know of the non-occurrence of a condition of his duty.

9. The facts being otherwise as stated in Illustration 6, B refuses to pay the freight without knowing that A’s ship has put into port on the way. B’s refusal is not a breach since his duty is discharged.

[]{#_Toc161928228 .anchor}R. 2d Contracts § 226 – How an Event May Be Made a Condition

An event may be made a condition either by the agreement of the parties or by a term supplied by the court.

a. By agreement of the parties.

No particular form of language is necessary to make an event a condition, although such words as “on condition that,” “provided that” and “if” are often used for this purpose. An intention to make a duty conditional may be manifested by the general nature of an agreement, as well as by specific language. Whether the parties have, by their agreement, made an event a condition is determined by the process of interpretation. That process is subject to the general rules that are contained in previous topics of this Chapter. For example, as in other instances of interpretation, the purpose of the parties is given great weight (§ 202(1)), and, in choosing between reasonable meanings, that meaning is generally preferred which operates against the draftsman (§ 206). There are also some special standards of preference that are of particular applicability to conditions, and these are set out in § 227.

1. A partnership agreement among physicians provides that A may withdraw from the partnership on three months’ written notice to the partnership’s executive committee, “but in the event that the committee requests him to revoke his notice of withdrawal prior to its effective date, and he refuses to comply, he shall not upon his withdrawal engage in the practice of medicine within a twenty-five mile radius.” A gives notice of his withdrawal. A request by the committee that A revoke his notice is a condition of A’s duty not to practice medicine within a twenty-five mile radius.

2. A, a tenant of B, promises to pay $ 1,000 for “such repairs as an architect appointed by B shall approve.” The appointment by B of an architect and the architect’s approval of repairs are conditions of A’s duty to pay for repairs.

3. A sells an automobile to B, for which B promises to pay $ 5,000 “on demand.” A sues B for the $ 5,000 without first making a demand. A can recover. The quoted language is to be interpreted in the light of the purpose of the parties (§ 202(1)), and the purpose of such language, in connection with a promise that is one to pay money and is otherwise unconditional, is to fix the time after which interest at the legal rate is payable. A’s suit should therefore not be dismissed merely because he did not demand payment, and a demand by A is not a condition of B’s duty. The same interpretation follows by analogy from the rule of U.C.C. § 3-122(1)(b), under which a claim on a demand instrument arises on its date or date of issue.

4. A contracts to sell and B to buy a house for $ 50,000. The contract contains the provision, “This contract is conditional on approval by X Bank of B’s pending mortgage application.” Approval by X Bank is a condition of B’s duty but not of A’s duty. The quoted language is to be interpreted in the light of the purpose of the parties (§ 202(1)), and their purpose in including such a provision is to protect B and not A in the event that the application is not approved. If X Bank does not approve B’s application, performance by B will not become due even if A makes a conditional offer to deliver a deed, but performance by A will become due if, in spite of X Bank’s failure to approve B’s application, B makes a conditional offer to pay the $ 50,000. Cf. Illustration 8 to § 225.

b. Nature of event.

Just as the process of interpretation determines whether the parties have by their agreement made an event a condition, it also determines the nature of that event. Here too the process is subject to the general rules of interpretation stated earlier in the present Chapter, and here too there are some special standards of preference. These standards are set out in §§ 227(1) and 228.

5. A, an insurance company, insures B, a storekeeper, against safe burglary, “provided entry be made by actual force and violence, of which there are visible marks upon the exterior of all of the doors of the safe if entry is made through such doors.” A burglar robs B’s safe by picking the lock of the outer door, leaving no visible marks, and punching out the lock of the inner door. Ifthe requirement of visible marks on both doors is merely evidentiary, the condition occurs when there is as here, adequate evidence of force and violence to prevent fraudulent claims, even though there are no visible marks on the outer door. Since A was the draftsman of the policy, the meaning favorable to B is preferred (§ 206).

6. A contracts to sell and B to buy a house for $ 50,000. The contract recites that financing is to take the form of “$ 30,000 mortgage from X Bank” on stated terms and provides that B’s duty is “conditional upon B’s ability to arrange above described financing.” B is unable to get the mortgage from X Bank but A offers to take a $ 30,000 purchase money mortgage on the stated terms and makes a conditional offer to deliver a deed. B refuses to perform. Although circumstances may show a contrary intention, the quoted language will ordinarily be interpreted so that the condition occurs only if B is able to get the mortgage from X Bank, and not if B is able to get a similar mortgage from A. Under this interpretation, B’s refusal is not a breach.

c. By a term supplied by court.

When the parties have omitted a term that is essential to a determination of their rights and duties, the court may supply a term which is reasonable in the circumstances (§ 204). Where that term makes an event a condition, it is often described as a “constructive” (or “implied in law”) condition. This serves to distinguish it from events which are made conditions by the agreement of the parties, either by their words or by other conduct, and which are described as “express” and as “implied in fact” (inferred from fact) conditions. See Comments a and b to § 4.

It is useful to distinguish “constructive” conditions, even though the distinction is necessarily somewhat arbitrary. For one thing, it is helpful in analysis and description to have terminology that reflects the two distinctive processes, sometimes called “interpretation” and “construction,” that give rise to conditions. See U.C.C. §§ 2-313 to 2-315, in which an analogous distinction is made between express and implied warranties. For another, to the extent that the parties have, by a term of their agreement, clearly made an event a condition, they can be confident that a court will ordinarily feel constrained strictly to apply that term, while the same court may regard itself as having considerable latitude in tailoring a similar term that it has itself supplied.

One example of such a term supplied by the court is the requirement of § 45(2) that the offeree, under an option contract, complete or tender the invited performance as a condition of the offeror’s duty. A more common example occurs where an obligor’s duty cannot be performed without some act by the obligee, and the court supplies a term making that act a condition of the obligor’s duty. In most such situations, the obligee’s own obligation of good faith and fair dealing (§ 205) imposes on him a duty to do the act, so that a material failure to perform that duty would, in any case, have the same effect as the non-occurrence of a condition under the rules relating to performances to be exchanged under an exchange of promises (§ 239). The examples given in the following illustrations involve situations where no duty to do the act is imposed.

7. A promises to make necessary interior repairs on a building that he has leased to B, but reserves no privilege of entering the building. B’s giving reasonable notice to A of any necessary interior repairs of which A would otherwise be unaware is a condition of A’s duty to make those repairs, although B is under no duty to give notice.

8. A, a general contractor, contracts with B, a town, to construct a sewer system, agreeing in addition to defend any action against the town arising out of the work and to pay any damages recovered in such an action. B’s giving reasonable notice to A of the commencement of any action of which A would otherwise be unaware is a condition of A’s duties to defend and pay damages, although B is under no duty to give notice.

[]{#_Toc161928229 .anchor}R. 2d Contracts § 227 – Standards of Preference with Regard to Conditions

(1) In resolving doubts as to whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk.

(2) Unless the contract is of a type under which only one party generally undertakes duties, when it is doubtful whether

(a) a duty is imposed on an obligee that an event occur, or

(b) the event is made a condition of the obligor's duty, or

the first interpretation is preferred if the event is within the obligee's control.

(3) In case of doubt, an interpretation under which an event is a condition of an obligor's duty is preferred over an interpretation under which the non-occurrence of the event is a ground for discharge of that duty after it has become a duty to perform.

a. Scope.

The present Section states three standards of preference used in the process of interpretation with regard to conditions. They supplement the standards of preference in § 203, as well as the other rules set out in Topics 1 through 4 of this Chapter.

b. Condition or not.

The non-occurrence of a condition of an obligor's duty may cause the obligee to lose his right to the agreed exchange after he has relied substantially on the expectation of that exchange, as by preparation or performance. The word “forfeiture” is used in this Restatement to refer to the denial of compensation that results in such a case. The policy favoring freedom of contract requires that, within broad limits (see § 229), the agreement of the parties should be honored even though forfeiture results.

When, however, it is doubtful whether or not the agreement makes an event a condition of an obligor's duty, an interpretation is preferred that will reduce the risk of forfeiture. For example, under a provision that a duty is to be performed “when” an event occurs, it may be doubtful whether it is to be performed only if that event occurs, in which case the event is a condition, or at such time as it would ordinarily occur, in which case the event is referred to merely to measure the passage of time. In the latter case, if the event does not occur some alternative means will be found to measure the passage of time, and the non-occurrence of the event will not prevent the obligor's duty from becoming one of performance.

If the event is a condition, however, the obligee takes the risk that its non-occurrence will discharge the obligor's duty. See § 225(2). When the nature of the condition is such that the uncertainty as to the event will be resolved before either party has relied on its anticipated occurrence, both parties can be entirely relieved of their duties, and the obligee risks only the loss of his expectations. When, however, the nature of the condition is such that the uncertainty is not likely to be resolved until after the obligee has relied by preparing to perform or by performing at least in part, he risks forfeiture. If the event is within his control, he will often assume this risk. If it is not within his control, it is sufficiently unusual for him to assume the risk that, in case of doubt, an interpretation is preferred under which the event is not a condition. The rule is, of course, subject to a showing of a contrary intention, and even without clear language, circumstances may show that he assumed the risk of its non-occurrence.

Although the rule is consistent with a policy of avoiding forfeiture and unjust enrichment, it is not directed at the avoidance of actual forfeiture and unjust enrichment. Since the intentions of the parties must be taken as of the time the contract was made, the test is whether a particular interpretation would have avoided the risk of forfeiture viewed as of that time, not whether it will avoid actual forfeiture in the resolution of a dispute that has arisen later. Excuse of the non-occurrence of a condition because of actual forfeiture is dealt with in § 229, and rules for the avoidance of unjust enrichment as such are dealt with in the Restatement of Restitution and in Chapter 16 of this Restatement, particularly §§ 370-77.

1. A, a general contractor, contracts with B, a sub-contractor, for the plumbing work on a construction project. B is to receive $ 100,000, “no part of which shall be due until five days after Owner shall have paid Contractor therefor.” B does the plumbing work, but the owner becomes insolvent and fails to pay A. A is under a duty to pay B after a reasonable time.

2. A, a mining company, hires B, an engineer, to help reopen one of its mines for “$ 10,000to be payable as soon as the mine is in successful operation.” $ 10,000 is a reasonable compensation for B's service. B performs the required services, but the attempt to reopen the mine is unsuccessful and A abandons it. A is under a duty to pay B $ 10,000 after the passage of a reasonable time.

3. A, a mining company, contracts with B, the owner of an untested experimental patented process, to help reopen one of its mines for $ 5,000 paid in advance and an additional “$ 15,000 to be payable as soon as the mine is in successful operation.” $ 10,000 is a reasonable compensation for B's services. B performs the required services, but because the process proves to be unsuccessful, A abandons the attempt to reopen the mine. A is under no duty to pay B any additional amount. In all the circumstances the risk of failure of the process was, to that extent, assumed by B.

4. A contracts to sell and B to buy land for $ 100,000. At the same time, A contracts to pay C, a real estate broker, as his commission, $ 5,000 “on the closing of title.” B refuses to consummate the sale. Absent a showing of a contrary intention, a court may conclude that C assumed this risk, and that A's duty is conditional on the sale being consummated. A is then under no duty to pay C.

c. Nature of event.

In determining the nature of the event that is made a condition by the agreement, as in determining whether the agreement makes an event a condition in the first place (see Comment b), it will not ordinarily be supposed that a party has assumed the risk of forfeiture. Where the language is doubtful, an interpretation is generally preferred that will avoid this risk. This standard of preference finds an important application in the case of promises to pay for work done if some independent third party, such as an architect, surveyor or engineer, is satisfied with it, where the risk of forfeiture in the case of a judgment that is dishonest or based on a gross mistake as to the facts is substantial. The standard does not, however, help a party if the condition is within his control or if the circumstances otherwise indicate that he assumed that risk.

5. A contracts with B to repair B's building for $ 20,000, payment to be made “on the satisfaction of C, B's architect, and the issuance of his certificate.” A makes the repairs, but C refuses to issue his certificate, and explains why he is not satisfied. Other experts in the field consider A's performance to be satisfactory and disagree with C's explanation. A has no claim against B. The quoted language is sufficiently clear that Subsection (1) does not apply. If C is honestly not satisfied, B is under no duty to pay A, and it makes no difference if his dissatisfaction was not reasonable.

6. The facts being otherwise as stated in Illustration 5, C refuses to issue his certificate although he admits that he is satisfied. A has a claim against B for $ 20,000. The quoted language will be interpreted so that the requirement of the certificate is merely evidentiary and the condition occurs when there is, as here, adequate evidence that C is honestly satisfied.

7. The facts being otherwise as stated in Illustration 5, C does not make a proper inspection of the work and gives no reasons for his dissatisfaction. A has a claim against B for $ 20,000. In using the quoted language, A and B assumed that C would exercise an honest judgment and by failing to make a proper inspection, C did not exercise such a judgment. Since the parties have omitted an essential term to cover this situation, the court will supply a term (see § 204) requiring A to pay B if C ought reasonably to have been satisfied.

8. The facts being otherwise as stated in Illustration 5, C makes a gross mistake with reference to the facts on which his refusal to give a certificate is based. A has a claim against B for $ 20,000. In using the quoted language, A and B assumed that C would exercise his judgment without a gross mistake as to the facts. Since the parties have omitted an essential term to cover this situation, the court will supply a term (see § 204) requiring A to pay B if C ought reasonably to have been satisfied.

d. Condition or duty.

When an obligor wants the obligee to do an act, the obligor may make his own duty conditional on the obligee doing it and may also have the obligee promise to do it. Or he may merely make his own duty conditional on the obligee doing it. Or he may merely have the obligee promise to do it. (See Introductory Note to this Topic and Comment d to § 225). It may not be clear, however, which he has done. The rule in Subsection (2) states a preference for an interpretation that merely imposes a duty on the obligee to do the act and does not make the doing of the act a condition of the obligor's duty. The preferred interpretation avoids the harsh results that might otherwise result from the non-occurrence of a condition and still gives adequate protection to the obligor under the rules of Chapter 10 relating to performances to be exchanged under an exchange of promises. Under those rules, particularly §§ 237-41, the obligee's failure to perform his duty has, if it is material, the effect of the non-occurrence of a condition of the obligor's duty. Unless the agreement makes it clear that the event is required as a condition, it is fairer to apply these more flexible rules. The obligor will, in any case, have a remedy for breach. In many instances the rule in Subsection (1) will also apply and will reinforce the preference stated in Subsection (2).

This standard of preference applies only where the event is within the obligee's control. Where it is within the obligor's control (e.g., his honest satisfaction with the obligee's performance), within a third party's control (e.g., an architect's satisfaction with performance), or within no one's control (e.g., the accidental destruction of the subject matter), the preferential rule does not apply since it is not usual for the obligee to undertake a duty that such an event will occur. Although the obligee can, by appropriate language, undertake a duty that an event that is not within his control will occur, such an undertaking must be derived from the agreement of the parties under the general rules of interpretation stated earlier in the present Chapter without resort to this standard of preference.

Furthermore, this standard of preference does not apply when the contract is of a type under which only the obligor generally undertakes duties. It therefore does not apply to the typical insurance contract under which only the insurer generally undertakes duties, and a term requiring an act to be done by the insured is not subject to this standard of preference. In view of the general understanding that only the insurer undertakes duties, the term will be interpreted as making that event a condition of the insurer's duty rather than as imposing a duty on the insured.

9. On August 1, A contracts to sell and B to buy goods, “selection to be made by buyer before September 1.” B merely has a dutyto make his selection by September 1, and his making it by that date is not a condition of A's duty. A failure by B to make a selection by September 1 is a breach, and if material it operates as the non-occurrence of a condition of A's duty. See §§ 237, 241.

10. A, B, and C make a contract under which A agrees to buy the inventory of B's grocery business, C agrees to finance A's down payment, and B agrees to subordinate A's obligation to him to pay the balance to A's obligation to C to repay the amount of the down payment. The contract provides that “C shall maintain the books of account for A, and shall inventory A's stock of merchandise every two months, rendering statements to B.” C merely has a duty to do these acts and doing them is not a condition of B's duty. A failure by C to do them is a breach, and if material it operates as the non-occurrence of a condition of B's duty. See §§ 237, 241.

11. A insures B's house against fire for $ 50,000 under a policy providing, “other insurance is prohibited.” Because the insured has undertaken no other duties under the contract, Subsection (2) does not apply. Because a policy of fire insurance is a type of contract under which only the insurer generally undertakes duties, the absence of other insurance is merely a condition of A's duty, and B is not under a duty not to procure other insurance.

e. Condition or discharge.

Circumstances may show that the parties intended to make an event a condition of an obligor's duty even though their language appears to make the non-occurrence of the event a ground for discharge of his duty after performance has become due. See Comment e to § 224. An example is the traditional form of bond, which states that the obligor is under a duty to perform, but that the duty will be discharged if something happens. The language, in spite of its form, is interpreted so that the failure of that thing to happen is a condition of the obligor's duty. Unless that condition occurs, no performance is due. Although this form of expression persists in legal documents, only rarely do the parties intend that one of them shall be under a duty to perform which is to cease on the occurrence of something that is still uncertain. The clearest language is therefore necessary to justify such an interpretation, and if the language is doubtful a contrary interpretation is preferred.

12. In return for a fee paid by X, A signs and delivers to B a bond which reads: “I acknowledge myself to be indebted to B in the sum of $ 50,000. The condition of this obligation is such that if X shall faithfully perform his duties as executor of the will of Y, this obligation shall be void, but otherwise of full effect.” X's failure faithfully to perform his duties is a condition of A's duty under the bond.

13. A promises to pay B $ 10,000 for a quantity of oil, and promises to pay B an additional $ 5,000 “but if a greater quantity of oil arrives in vessels during the first quarter of the year than arrived during the same quarter last year, then this obligation to be void.” A's payment of the additional $ 5,000 is not due until the end of the first quarter, and the failure of a greater quantity of oil to arrive by that time is a condition of A's duty to pay the additional $ 5,000.

[]{#_Toc161928230 .anchor}R. 2d Contracts § 228 – Satisfaction of the Obligor as a Condition

When it is a condition of an obligor’s duty that he be satisfied with respect to the obligee’s performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied.

a. Conditions of satisfaction.

This Section sets out a special standard of preference for a type of condition that has long been of particular interest and importance -- the satisfaction of the obligor himself, rather than a third party. Usually it is the obligee’s performance as to which the obligor is to be satisfied, but it may also be something else, such as the propitiousness of circumstances for his enterprise. The agreement will often use language such as “satisfaction” or “complete satisfaction,” without making it clear that the test is merely one of honest satisfaction rather than of reasonable satisfaction. Under any interpretation, the exercise of judgment must be in accordance with the duty of good faith and fair dealing (§ 205), and for this reason, the agreement is not illusory (§ 77). If the agreement leaves no doubt that it is only honest satisfaction that is meant and no more, it will be so interpreted, and the condition does not occur if the obligor is honestly, even though unreasonably, dissatisfied. Even so, the dissatisfaction must be with the circumstance and not with the bargain and the mere statement of the obligor that he is not satisfied is not conclusive on the question of his honest satisfaction.

1. A grants to B an exclusive license in a designated territory to bottle and sell a soft drink on specified terms for a five-year period. The contract describes in detail B’s duty diligently to represent A in the territory and provides that A may terminate the license at any time if in A’s “sole, exclusive and final judgment made in good faith” B does not perform that duty. After a year, A terminates, honestly telling B that in A’s judgment B has not performed his duty under the contract. B has no claim against A since the agreement clearly provides a test of honest satisfaction.

2. A contracts to sell and B to buy 500 barrels of cherries in syrup “quality to be satisfactory in buyer’s honest judgment,” delivery to be in installments. After deliveries of and payments for a total of 100 barrels, B states that he is not satisfied and refuses to take more. Since the agreement clearly provides a test of honest satisfaction, B’s termination is effective if his judgment is in fact made honestly in accordance with his duty of good faith and fair dealing (§ 205). However, A may show that B’s rejection was for other reasons by proving, for example, that B expressed satisfaction at the time of the first deliveries, that B’s demand had dropped sharply, and that A’s cherries are selected and put up with great care and are of the highest quality.

b. Preference for objective standard.

When, however, the agreement does not make it clear that it requires merely honest satisfaction, it will not usually be supposed that the obligee has assumed the risk of the obligor’s unreasonable, even if honest, dissatisfaction. In such a case, to the extent that it is practicable to apply an objective test of reasonable satisfaction, such a test will be applied. The situation differs from that where the satisfaction of a third party such as an architect, surveyor or engineer is concerned. See Comment c to § 227. These professionals, even though employed by the obligor, are assumed to be capable of independent judgment, free from the selfish interests of the obligor. But if the obligor would subject the obligee’s right to compensation to his own idiosyncrasies, he must use clear language. When, as is often the case, the preferred interpretation will reduce the obligee’s risk of forfeiture, so that § 227(1) also applies, there is an additional argument in its favor. This argument is particularly strong where the obligor will be left with a benefit which he cannot return. If, however, the circumstance with respect to which a party is to be satisfied is such that the application of an objective test is impracticable, the rule of this Section is not applicable. A court will then, for practical reasons, apply a subjective test of honest satisfaction, even if the agreement admits of doubt on the point and even if the result will be to increase the obligee’s risk of forfeiture.

3. A contracts with B to install a heating system in B’s factory, for a price of $ 20,000 to be paid “on condition of satisfactory completion.” A installs the heating system, but B states that he is not satisfied with it and refuses to pay the $ 20,000. B gives no reason except that he does not approve of the heating system, and according to experts in the field the system as installed is entirely satisfactory. A has a claim against B for $ 20,000 since it is practicable to apply an objective test to the installation of the heating system. This interpretation is also preferred because it reduces A’s risk of forfeiture.

4. A contracts with B to paint a portrait of B’s daughter, for which B promises to pay $ 5,000 “if entirely satisfied.” A paints the portrait, but B honestly states that he is not satisfied with it and refuses to pay the $ 5,000. B gives no reason except that the portrait does not please him, and according to experts in the field the portrait is an admirable work of art. A has no claim against B since it is not practicable to apply an objective test to the painting.

5. A contracts to have B furnish a four-piece band to play in A’s inn for six months, with a provision, “If band proves unsatisfactory to A contract is subject to two weeks’ notice.” A occasionally objects when B is absent and a guitar is substituted for B’s string bass. After two months, A gives notice of termination, stating that he is dissatisfied for this reason. B has no claim against A since it is not practicable to apply an objective test to the band’s performance.

[]{#_Toc161928231 .anchor}R. 2d Contracts § 229 – Excuse of a Condition to Avoid Forfeiture

To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange.

a. Relation to other rules.

As is pointed out in Comment b to § 227, the non-occurrence of a condition of the obligor’s duty may result in forfeiture by the obligee. Forfeiture may sometimes be avoided by application of the general rules of interpretation stated in the present Chapter, such as the rule on interpretation against the draftsman (§ 206). It may sometimes be avoided by application of the special rules on interpretation stated in the present Topic with regard to conditions (§§ 227(1), 228). But if the term that requires the occurrence of the event as a condition is expressed in unmistakable language, the possibility of forfeiture will not affect the interpretation of that language. See Comment b to § 227. Nevertheless, forfeiture may sometimes still be avoided by application of the rules on excuse of conditions. See Comment b to § 225. Under the present Section a court may, in appropriate circumstances, excuse the non-occurrence of a condition solely on the basis of the forfeiture that would otherwise result. Although both this Section and § 208, on unconscionable contract or term, limit freedom of contract, they are designed to reach different types of situations. While § 208 speaks of unconscionability “at the time the contract is made,” this Section is concerned with forfeiture that would actually result if the condition were not excused. It is intended to deal with a term that does not appear to be unconscionable at the time the contract is made but that would, because of ensuing events, cause forfeiture.

b. Disproportionate forfeiture.

The rule stated in the present Section is, of necessity, a flexible one, and its application is within the sound discretion of the court. Here, as in § 227(1), “forfeiture” is used to refer to the denial of compensation that results when the obligee loses his right to the agreed exchange after he has relied substantially, as by preparation or performance on the expectation of that exchange. See Comment b to § 227. The extent of the forfeiture in any particular case will depend on the extent of that denial of compensation. In determining whether the forfeiture is “disproportionate,” a court must weigh the extent of the forfeiture by the obligee against the importance to the obligor of the risk from which he sought to be protected and the degree to which that protection will be lost if the non-occurrence of the condition is excused to the extent required to prevent forfeiture. The character of the agreement may, as in the case of insurance agreements, affect the rigor with which the requirement is applied.

1. A contracts to build a house for B, using pipe of Reading manufacture. In return, B agrees to pay $ 75,000 in progress payments, each payment to be made “on condition that no pipe other than that of Reading manufacture has been used.” Without A’s knowledge, a subcontractor mistakenly uses pipe of Cohoes manufacture which is identical in quality and is distinguishable only by the name of the manufacturer which is stamped on it. The mistake is not discovered until the house is completed, when replacement of the pipe will require destruction of substantial parts of the house. B refuses to pay the unpaid balance of $ 10,000. A court may conclude that the use of Reading rather than Cohoes pipe is so relatively unimportant to B that the forfeiture that would result from denying A the entire balance would be disproportionate, and may allow recovery by A subject to any claim for damages for A’s breach of his duty to use Reading pipe.

2. A, an ocean carrier, carries B’s goods under a contract providing that it is a condition of A’s liability for damage to cargo that “written notice of claim for loss or damage must be given within 10 days after removal of goods.” B’s cargo is damaged during carriage and A knows of this. On removal of the goods, B notes in writing on the delivery record that the cargo is damaged, and five days later informs A over the telephone of a claim for that damage and invites A to participate in an inspection within the ten day period.A inspects the goods within the period, but B does not give written notice of its claim until 25 days after removal of the goods. Since the purpose of requiring the condition of written notice is to alert the carrier and enable it to make a prompt investigation, and since this purpose had been served by the written notice of damage and the oral notice of claim, the court may excuse the non-occurrence of the condition to the extent required to allow recovery by B.

c. Limitation on scope.

The rule of this Section applies only where occurrence of the condition was not a material part of the agreed exchange. These are situations where, under § 84, the non-occurrence of the condition could have been excused by a promise to perform the duty in spite of its non-occurrence. It is not enough that the actual non-occurrence happened to involve a departure that was not a material part of the agreed exchange, if the occurrence of the condition was a material part of that exchange. A court may, of course, ignore trifling departures.

A court need not excuse entirely the non-occurrence of the condition, but may merely excuse its non-occurrence during the period of time in which it would otherwise have to occur (see Comment c to § 225), if it concludes that the time of its occurrence is not a material part of the agreed exchange. This conclusion is sometimes summed up by the phrase that “time is not of the essence.”

3. A contracts to make repairs on B’s house, in return for which B agrees to pay $ 10,000 “on condition that the repairs are completed by October 1.” The repairs are not completed until October 2. A court may decide that there are two cumulative conditions, repair of the house and completion of the repairs by October 1, and that the non-occurrence of the second condition is excused to the extent of one day.

4. On July 1, A makes an option contract with B, under which B has the right to buy land for $ 200,000, on condition that he exercise it no later than June 30 five years later. B makes an initial payment of $ 10,000 and agrees to make additional $ 10,000 payments on or before June 30 of each of the four succeeding years, unless he has already exercised the option, his right being “conditional on his paying the $ 10,000 on or before the prescribed date.” These payments are not to be applied to the purchase price. After paying for two years and building on adjacent land, substantially increasing the value of the land subject to the option, B mails a $ 10,000 check for the third year on June 30. A receives it on July 1 and returns it to B, stating that the option contract is cancelled. A court may decide that there are two cumulative conditions, payment of $ 10,000 and payment on or before June 30, and that the non-occurrence of the second condition is excused to the extent of one day.

5. The facts being otherwise as in Illustration 4, B makes the payments on June 30 of each of the four succeeding years, but does not exercise the option by tendering the $ 200,000 until July 1, following the June 30 expiration date. Even if a court decides that there are two cumulative conditions, payment of $ 200,000 and payment on or before June 30, it may not decide that the non-occurrence of the second condition is excused to the extent of one day because that would give B a more extensive option than that on which the parties agreed.

[]{#_Toc161928232 .anchor}R. 2d Contracts § 230 – Event That Terminates a Duty

(1) Except as stated in Subsection (2), if under the terms of the contract the occurrence of an event is to terminate an obligor’s duty of immediate performance or one to pay damages for breach, that duty is discharged if the event occurs.

(2) The obligor’s duty is not discharged if occurrence of the event

(a) is the result of a breach by the obligor of his duty of good faith and fair dealing, or

(b) could not have been prevented because of impracticability and continuance of the duty does not subject the obligor to a materially increased burden.

(3) The obligor’s duty is not discharged if, before the event occurs, the obligor promises to perform the duty even if the event occurs and does not revoke his promise before the obligee materially changes his position in reliance on it.

a. Scope.

Parties sometimes provide that an obligor’s matured duty will be extinguished on the occurrence of a specified event, which is sometimes referred to as a “condition subsequent.” See Comment e to § 224. They may, for example, provide that an obligor’s duty to reimburse the obligee for some loss or to compensate him for a breach will be extinguished if the obligee does not take some action, such as bringing suit, within a stated period of time. Under such a provision, the duty is generally discharged if the event occurs. The same result follows if its occurrence becomes inevitable. Subsection (2) states exceptions to this general rule for cases in which the occurrence of the event is due to the obligor’s breach of his duty of good faith and fair dealing (§ 205) or could not have been prevented by the obligee because of impracticability (§ 261). See Subsection (2). The rule stated in this Section applies only to matured duties and to duties to make compensation. If performance under the contract is not to become due until occurrence of an event, that event is a condition of the duty and is governed by the rules stated in §§ 224-29. The difference is one of substance and not merely of the form in which the provision is stated.

1. A, an insurance company, insures the property of B under a policy providing that no recovery can be had if suit is not brought on the policy within two years after a loss. A loss occurs and B lets two years pass before bringing suit. A’s duty to pay B for the loss is discharged and B cannot maintain the action on the policy.

2. The facts being otherwise as stated in Illustration 1, B lives in a foreign country and is prevented by the outbreak of war from bringing suit against A for two years. A’s duty to pay B for the loss is not discharged and B can maintain an action on the policy when the war is ended.

b. Promise to perform in spite of occurrence.

Under the rule stated in Subsection (3), a promise by the obligor to perform the duty regardless of the occurrence of the event is binding if the obligee has materially changed his position in reliance on it. The promise need not be in words and may be inferred from other conduct. The rule, like that stated in § 84, is sometimes thought of in terms of “waiver” or “estoppel.” See Comments a and b to § 84. It supplements the general rules on modification of contracts by agreement of the parties.

3. The facts being otherwise as stated in Illustration 1, after the loss occurs, A tells B that it is not necessary to bring suit within two years, and B relies on the statement in refraining from suing for two years. A’s duty to pay B for the loss is not discharged and B can maintain an action on the policy even after two years have passed.

Chapter 18 | Performance

[]{#_Toc161928234 .anchor}R. 2d Contracts § 231 – Criterion for Determining When Performances Are to Be Exchanged Under an Exchange of Promises

Performances are to be exchanged under an exchange of promises if each promise is at least part of the consideration for the other and the performance of each promise is to be exchanged at least in part for the performance of the other.

a. Expectation of an exchange of performances.

Agreements involving an exchange of promises play a vital role in an economically advanced society. Ordinarily when parties make such an agreement, they not only regard the promises themselves as the subject of an exchange (§ 71(2)), but they also intend that the performances of those promises shall subsequently be exchanged for each other. Even without a showing of such an actual intention, a court will often, out of a sense of fairness, assume that it was their expectation that there would be a subsequent exchange of the performance of each party for that of the other. Cf. § 204. This Chapter consists, in substantial part, of rules designed to secure that expectation of a subsequent exchange of performances.

b. Performances need not be simultaneous.

It is often expected that performances will be exchanged under an exchange of promises even though those performances are not to take place at the same time. Under a contract for the sale of goods, for example, the parties expect an exchange of the delivery of the goods by the seller and the payment of the price by the buyer, regardless of whether the price is payable before, at the same time as, or after delivery of the goods. As long as this is their expectation, the delivery of the goods and the payment of the price are to be exchanged under the exchange of promises, and it is immaterial when the price is payable.

1. A, a shipowner, promises to carry B’s cargo on his ship. B promises to pay A the stipulated freight. They exchange these promises in the expectation that there will be a subsequent exchange of those performances. A fails to carry B’s cargo, and B thereupon refuses to pay the freight. A’s carrying the cargo and B’s paying the freight are to be exchanged under the exchange of promises. Therefore, under the rule stated in § 237, A has no claim against B.

2. In return for A’s promise to deliver a machine, B promises to pay A $ 10,000 within 30 days. They exchange these promises in the expectation that there will be a subsequent exchange of those performances. A fails to deliver the machine, and B thereupon refuses to pay any part of the $ 10,000. A’s delivery of the machine and B’s payment of the $ 10,000 are to be exchanged under the exchange of promises. Therefore, under the rule stated in § 237, A has no claim against B.

c. Consideration need not be exclusively promises.

The parties may expect that their performances will be exchanged under their exchange of promises even though that exchange does not consist exclusively of promises. The consideration given by one or both parties may consist in part of some performance.

3. In return for A’s promise to deliver a machine priced at $ 10,000, B pays A $ 5,000 as a down payment and promises to pay A the $ 5,000 balance within 30 days after delivery of the machine. They exchange these promises in the expectation that delivery of the machine will be exchanged, at least in part, for the $ 5,000 balance and that the $ 5,000 balance will be exchanged for the machine. A fails to deliver the machine, and B thereupon refuses to pay the $ 5,000 balance. A’s delivery of the machine and B’s payment of the $ 5,000 balance within 30 days are to be exchanged under the exchange of promises. Therefore, under the rule stated in § 237, A has no claim against B. B is entitled to restitution of the $ 5,000 he paid (see §§ 370-77) in addition to his claim against A for damages for breach (§ 243).

d. Separate contracts.

The rules that protect parties whose performances are to be exchanged under an exchange of promises apply only when the promises are exchanged as part of a single contract. When each party gives more than one promise, or gives some performance in addition to a promise, it may not be clear whether there is a single exchange of promises resulting in a single contract or separate exchanges resulting in separate contracts. If every promise by one party is at least part of the consideration for every promise by the other party, there is a single exchange in which all of the promises on each side are exchanged for all of those on the other side. This is so, for example, where a buyer and a seller make a single bargain for the sale of several related kinds of goods. But if one or more promises by each party are no part of the consideration for one or more promises by the other party, there are instead separate exchanges. In that case all of the promises on each side cannot be regarded as exchanged for all of those on the other side. This is so, for example, where a buyer and a seller make several bargains at the same time for the sale of several unrelated kinds of goods. In deciding whether there is a single contract rather than separate contracts, the court must look to the actual bargain of the parties, in accordance with § 71(2), to decide whether each promise on one side was sought and given as at least part of the exchange for each promise on the other side. The form of the agreement is not controlling, and the actual bargain of the parties is not to be determined merely by reference to such criteria as whether separate performances are made the subject of a single promise or of separate promises, whether separate promises are contained in a single writing or in separate writings, or whether the understanding of the parties is entirely written or oral or is partly written and partly oral.

4. A promises to sell and B to buy a food freezer priced at $ 1,200 to be paid for in monthly installments over an eighteen-month period. A also promises to sell B frozen food at greatly reduced prices, and B promises to buy an initial quantity, deliverable at the same time as the freezer, for $ 200, with additional quantities to be available in the future at B’s option. Although two separate writings are executed, one entitled “Freezer Contract” and, the other, entitled “Food Contract,” the promises are made as part of the same bargain, and payment for the freezer, for example, is to be exchanged at least in part for the delivery of the food. A tenders the freezer but fails to supply the food although B tenders the $ 200. B thereupon refuses to take the freezer or to pay anything. The performances promised in the two writings, A’s delivery of the freezer and the food and B’s payment for the freezer and the food, are to be exchanged under a single exchange of promises. Therefore, under the rule stated in § 238, A has no claim against B.

5. A, the owner of a small publishing business, makes a written contract with B, a large publishing company, to sell A’s business to B in exchange for 10,000 shares of B’s stock, having a market price equal to the fair value of A’s business. At the same time, A and B execute a separate writing under which A is to work for B for 5 years, subject to renewal at B’s option, at a salary of $ 30,000 a year plus a bonus based on sales. B unjustifiably discharges A after one month, and A thereupon refuses to complete the transfer of his business to B. Whether or not A’s refusal to complete the exchange is a breach depends on whether, under the bargain of the parties, there are two contracts or only one contract. If the court determines that the promise of A to work for B is no part of the consideration for B’s promise to buy A’s business, and that the promise of B to employ A is no part of the consideration for A’s promise to sell his business, there are two separate exchanges of promises. The performance promised in the one writing and the performance promised in the other cannot then be performances to be exchanged under a single exchange of promises. B then has a claim against A for damages for breach of the contract to sell A’s business to B, and A has a claim against B for damages for breach of the contract to employ A (§ 243). If, however, the court determines that each of the promises is at least part of the consideration for the other, there is only one exchange of promises. Under the rule stated in § 232 all of the performances of each party taken collectively are treated as performances to be exchanged under that exchange of promises. Under the rule stated in § 238, B then has no claim against A for damages for A’s refusal to complete the transfer of his business to B, but A has a claim against B for damages because of his unjustifiable discharge of A (§ 243).

e. Leases and other conveyances.

The applicability of the rules stated in this Chapter to covenants in leases and other conveyances of land is not dealt with in this Restatement.

[]{#_Toc161928235 .anchor}R. 2d Contracts § 233 – Performance at One Time or in Installments

(1) Where performances are to be exchanged under an exchange of promises, and the whole of one party’s performance can be rendered at one time, it is due at one time, unless the language or the circumstances indicate the contrary.

(2) Where only a part of one party’s performance is due at one time under Subsection (1), if the other party’s performance can be so apportioned that there is a comparable part that can also be rendered at that time, it is due at that time, unless the language or the circumstances indicate the contrary.

a. Performance at one time.

Subsection (1) states the established rule that a party who can give his whole performance at one time is expected to do so. He is not entitled to perform a part at a time, nor is the other party entitled to demand that he do so. U.C.C. § 2-307 so provides for contracts for the sale of goods. The rule expresses the usual understanding of parties in such cases. A party who asserts a different understanding may establish a contrary intention by an express agreement such as one for delivery in installments, or by usage of trade (§ 221; U.C.C. § 1-205) or by course of dealing (§ 223; U.C.C. § 1-205). Or he may establish it by showing special circumstances, as where under a contract for brick to be used to build a building it is understood that the buyer’s storage space is so limited that it would be impossible for him to receive the entire amount at once. The rule does not apply where performance requires a period of time. The requirement that performance be possible at one time may, however, be met even though the performance, as in the case of delivery of a large quantity of bulky goods, cannot be instantaneous.

1. A contracts to sell and B to buy ten identical carloads of coal for $ 100,000. Delivery by A of all ten carloads is due in a single lot.

2. The facts being otherwise as stated in Illustration 1, it is known by both A and B that only one carload of coal will be available at a time. A may deliver one carload at a time.

b. Right to other party’s performance.

If the language or circumstances indicate that, contrary to the general rule stated in Subsection (1), only a part of one party’s performance is due at one time, a question then arises as to when the other party’s performance is due. Under the rule stated in Subsection (2), if the other party’s performance can be so apportioned that there is a comparable part that can also be given at that time, part performance by both parties is due at that time. In the typical case the other party’s performance will consist of the price and the question is whether the price can be apportioned. This is the way in which the rule is stated for the sale of goods in U.C.C. § 2-307.

3. The facts being as stated in Illustration 2, payment of $ 10,000 by B is due at the same time that A delivers each carload of coal.

[]{#_Toc161928236 .anchor}R. 2d Contracts § 234 – Order of Performances

(1) Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary.

(2) Except to the extent stated in Subsection (1), where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary.

a. Advantages of simultaneous performance.

A requirement that the parties perform simultaneously where their performances are to be exchanged under an exchange of promises is fair for two reasons. First, it offers both parties maximum security against disappointment of their expectations of a subsequent exchange of performances by allowing each party to defer his own performance until he has been assured that the other will perform. This advantage is implemented by the rule stated in § 238, which deals with offers to perform. Second, it avoids placing on either party the burden of financing the other before the latter has performed. Subsection (1) therefore imposes a requirement of simultaneous performance whenever this is feasible under the contract, in the absence of language or circumstances indicating a contrary intention. A notable example of such a requirement is that laid down for contracts for the sale of goods by U.C.C. §§ 2-507 and 2-511. The requirement is subject to the agreement of the parties, as by an express provision extending credit to the buyer, or one requiring him to pay against documents or to furnish a letter of credit. Even absent an express provision, a contrary intention may be shown by circumstances including usage of trade and course of dealing (§§ 221, 223; U.C.C. § 1-205).

b. When simultaneous performance possible under agreement.

In the absence of language or circumstances showing a contrary intention, the requirement of simultaneous performance stated in Subsection (1) applies whenever such performance is possible, consistent with the terms of the contract. A major instance where simultaneous performance is not possible occurs when one party’s performance is continuous over some substantial period of time, a situation that is dealt with in Subsection (2). However, as is the case for the requirement of the preceding section that the whole performance be possible at one time, the requirement of simultaneous performance is not to be applied so literally as to exclude instances in which the objectives of the requirement can be fulfilled although performance cannot be instantaneous. See Comment a to § 233. A less important instance where simultaneous performance is not possible occurs when distance and lack of adequate communications make it impossible to assure the parties that performance is taking place at the same time, so that although the performance of each party can be instantaneous, the two performances cannot be simultaneous within the meaning of Subsection (1). Cases in which simultaneous performance is possible under the terms of the contract can be grouped into five categories: (1) where the same time is fixed for the performance of each party; (2) where a time is fixed for the performance of one of the parties and no time is fixed for the other; (3) where no time is fixed for the performance of either party; (4) where the same period is fixed within which each party is to perform; (5) where different periods are fixed within which each party is to perform. The requirement of simultaneous performance applies to the first four categories. The requirement does not apply to the fifth category, even if simultaneous performance is possible, because in fixing different periods for performance the parties must have contemplated the possibility of performance at different times under their agreement. Therefore in cases in the fifth category the circumstances show an intention contrary to the rule stated in Subsection (1).

1. A promises to sell land to B, delivery of the deed to be on July 1. B promises to pay A $ 50,000, payment to be made on July 1. Delivery of the deed and payment of the price are due simultaneously.

2. A promises to sell land to B, the deed to be delivered on July 1. B promises to pay A $ 50,000, no provision being made for the time of payment. Delivery of the deed and payment of the price are due simultaneously.

3. A promises to sell land to B and B promises to pay A $ 50,000, no provision being made for the time either of delivery of the deed or of payment. Delivery of the deed and payment of the price are due simultaneously.

4. A promises to sell land to B, delivery of the deed to be on or before July 1. B promises to pay A $ 50,000, payment to be on or before July 1. Delivery of the deed and payment of the price are due simultaneously.

5. A promises to sell land to B, delivery of the deed to be on or before July 1. B promises to pay A $ 50,000, payment to be on or before August 1. Delivery of the deed and payment of the prices are not due simultaneously.

c. When simultaneous performance possible in part.

The requirement of simultaneous performance stated in Subsection (1) also applies where only part rather than all of the performance of one party can be performed simultaneously with either part or all of the performance of the other party. It therefore applies to the situations discussed in Comment b to § 233 and exemplified by Illustration 3 to that section. But it is broader than this and also applies, for example, to instances where some part performance of one party can be rendered simultaneously with the entire performance of the other party. See Comment f and Illustration 12.

6. A promises to sell land to B, delivery of the deed to be four years from the following July 1. B promises to pay A $ 50,000 in installments of $ 10,000 on each July 1 for five years. Delivery of the deed and payment of the last installment are due simultaneously.

7. A promises to sell land to B, delivery of the deed to be one year from July 1. B promises to pay A $ 50,000 in installments of $ 10,000 on each July 1 for five years. Delivery of the deed and payment of the second installment are due simultaneously.

d. When simultaneous performance later becomes possible.

Although different times or periods were originally fixed for the performance of each party, performance by the party who is to perform first may sometimes be delayed until the time for performance by the other party has arrived. If the latter party is entitled to and does assert that his remaining duties of performance are discharged because of the delay, under the rule stated in § 237, no question of the order of performance remains. Unless the delay is justified, he will also have a claim for damages for total breach based on all of his remaining rights to performance. (§§ 236(1), 243(1)). If, however, he is not entitled to assert that his remaining duties of performance are discharged, or if he does not assert this even though he is entitled to do so, a question of the order of performances remains. Unless the delay is justified he will, of course, have a claim for damages for partial breach because of the delay. Whether or not the delay is justified, he can at least insist on simultaneous performance. (As to judicial supervision of the requirement of simultaneous performance where the injured party has brought an action before the time when his own performance is due and that time then arrives before he has obtained and enforced a judgment, see Comment c and Illustration 5 to § 238.) There may be circumstances, however, in which it is appropriate for him to require the other party to perform first, as where the parties to a sale of goods contemplate that the buyer will need the time specified between delivery and payment to resell the goods in order to pay the price. In such a case the right of the party in delay to receive payment may be subject to postponement.

8. The facts being otherwise as stated in Illustration 6, B duly pays the first three installments, but unjustifiably does not pay the fourth until the fifth is due. If B’s failure to pay the fourth installment discharges A’s remaining duties of performance under the rule stated in § 237, A has a claim for damages for total breach (§ 243(1)), and no further performance is due from either party. Otherwise B’s failure to pay the fourth installment gives rise to only a claim for damages for partial breach because of the delay, and, unless circumstances make it appropriate for A to require B to pay the fourth installment first, delivery of the deed and payment of the fourth and fifth installments are then due simultaneously.

e. Where performance requires a period of time.

Where the performance of one party requires a period of time and the performance of the other party does not, their performance can not be simultaneous. Since one of the parties must perform first, he must forego the security that a requirement of simultaneous performance affords against disappointment of his expectation of an exchange of performances, and he must bear the burden of financing the other party before the latter has performed. See Comment a. Of course the parties can by express provision mitigate the harshness of a rule that requires that one completely perform before the other perform at all. They often do this, for example, in construction contracts by stating a formula under which payment is to be made at stated intervals as work progresses. But it is not feasible for courts to devise such formulas for the wide variety of such cases that come before them in which the parties have made no provision. Centuries ago, the principle became settled that where work is to be done by one party and payment is to be made by the other, the performance of the work must precede payment, in the absence of a showing of a contrary intention. It is sometimes supposed, that this principle grew out of employment contracts, and reflects a conviction that employers as a class are more likely to be responsible than are workmen paid in advance. Whether or not the explanation is correct, most parties today contract with reference to the principle, and unless they have evidenced a contrary intention it is at least as fair as the opposite rule would be.

f. Applicability of rule.

The rule stated in Subsection (2) usually finds its application to contracts involving services, such as construction and employment contracts. The common practice of making express provision for progress payments has diminished its importance with regard to the former, and the widespread enactment of state wage statutes giving the employee a right to the frequent periodic payment of wages has lessened its significance with regard to the latter. Nevertheless, it is a helpful rule for residual cases not otherwise provided for. It applies not only to contracts under which the performance of one party is more or less continuous, but also to contracts where performance consists of a series of acts with an interval of time between them. See Comment c. Under a contract of the latter type, simultaneity may be possible in part and, to the extent that it is possible, the rule stated in Subsection (2) is subject to that stated in Subsection (1). See Illustrations 6 and 12.

9. A contracts to do the concrete work on a building being constructed by B for $ 10 a cubic yard. In the absence of language or circumstances indicating the contrary, payment by B is not due until A has finished the concrete work.

10. The facts being otherwise as stated in Illustration 9, B promises to furnish a bond to secure his payment. No provision is made as to the time for furnishing the bond. No performance by A is due until B has furnished the bond. Although the doing of the concrete work by A requires a period of time and the furnishing of the bond by B does not, the circumstance that the bond is required to secure payment by B indicates that B must furnish the bond first.

11. A contracts to make alterations in B’s home for $ 5,000. $ 500 is to be paid on the signing of the contract, $ 1,500 on the starting of work, $ 2,000 on the completion of rough carpentry and rough plumbing, and $ 1,000 on the completion of the job. Payment by B is due as the work progresses according to the terms of the contract.

12. A promises to sell land to B, in return for which B promises to pay A $ 10,000 a year for five years on July 1 of each year. No provision is made as to the time for delivery of a deed. Delivery of a deed is not due until July 1 of the fifth year, at which time delivery of the deed and payment of the last installment are due simultaneously. See Illustration 6.

[]{#_Toc161928237 .anchor}R. 2d Contracts § 232 – When It Is Presumed That Performances Are to Be Exchanged Under an Exchange of Promises

Where the consideration given by each party to a contract consists in whole or in part of promises, all the performances to be rendered by each party taken collectively are treated as performances to be exchanged under an exchange of promises, unless a contrary intention is clearly manifested.

a. Reason for presumption.

The rules applicable to performances to be exchanged under an exchange of promises are designed to give the parties maximum protection, consistent with freedom of contract, against disappointment of their expectation of a subsequent exchange of those performances. When the parties have exchanged promises, there is ordinarily every reason to suppose that they contracted on the basis of such an expectation since the exchange of promises would otherwise have little purpose. Even absent a showing of their actual intentions, fairness dictates that such an expectation be assumed. This Section therefore states a presumption in favor of the conclusion that, in such a case, the performances are to be exchanged under the exchange of promises. For one of the parties to show that the expectation was otherwise, the contrary intention must be clearly manifested. The presumption applies regardless of whether the promises are written or oral or both, and even where a negotiable instrument is involved. It also applies even though the consideration given by a party consists partly of some performance and only partly of a promise (see Comment c to § 231), although it is possible that in such a case the promise may be so minor and incidental that its non-performance would not be a material failure of performance. See Comment b to § 241.

1. A, a wholesaler, promises to sell and B, a retailer, promises to buy goods together with related advertising material, payment to be made within 30 days of delivery. A also promises not to sell similar advertising material to any other retailer in B’s city. A sells similar advertising material to another retailer in B’s city, and B thereupon refuses to take or pay for the goods. A’s selling B goods together with advertising material and not selling others similar advertising material, taken collectively, and B’s payment are to be exchanged under the exchange of promises. Therefore, under the rule stated in § 237, if A’s failure of performance is material, A has no claim against B.

2. A promises to sell to B a lot in a subdivision for $ 8,000. B promises to pay in four annual installments of $ 2,000 each, beginning one year after execution of the contract. A promises to begin to make improvements and pave the streets within 60 days and to complete work within a reasonable time and promises to deliver a deed at the time of the final payment. A fails to pave the streets, and B thereupon refuses to pay any installments. A’s making improvements, paving streets, and delivering a deed, taken collectively, and B’s paying installments are to be exchanged under the exchange of promises. Therefore, under the rule stated in § 237, if A’s failure of performance is material, A has no claim against B.

3. A employs B under a five-year employment contract, which contains a valid covenant under which B promises not to engage in the same business in a designated area for two years after the termination of the employment. It expressly provides that “this covenant is independent of any other provision in this agreement.” After B has begun work, A unjustifiably discharges him, and B thereupon engages in business in violation of the covenant. A’s employing B and B’s working for A are to be exchanged under the exchange of promises. The quoted words indicate an intention that A’s employing B is not to be exchanged for B’s refraining from engaging in the same business. If the court concludes that this intention is clearly manifested, A has a claim against B for damages for breach of his promise not to compete.

4. A contracts to sell and B to buy a machine, to be delivered immediately, for $ 10,000. As part of the same bargain, B gives A his negotiable promissory note for $ 10,000 to A’s order, payable in 90 days, but the note makes no reference to the transaction out of which it arises. A fails to deliver the machine. A’s delivering the machine and B’s paying the note are to be exchanged under the exchange of promises. Therefore, under the rule stated in § 237, A has no claim on the note or the contract against B.

b. Promises taken collectively.

When the rule stated in this Section applies, all of the performances to be rendered by each party taken collectively are to be exchanged under the exchange of promises. A court need not determine whether separate performances on either side are the subject of a single promise or of separate promises. Nor need a court concern itself with the relationship among separate promises viewed as of the time of their making. Instead the court is to focus on the relative importance of the failure of performance in the light of the situation of the parties at the time of that failure. See §§ 237, 238, 241.

c. Performances need not be treated as equivalent.

When an exchange consists exclusively of promises, the values of the performances to be subsequently exchanged are usually regarded by the parties as equivalent. This is not always so since a party may make what is often called an “aleatory” promise, under which his duty to perform is conditional on the occurrence of a fortuitous event. Or it may be understood that the value of one party’s performance will be affected by chance, as where he promises to deliver his output or to pay during another’s lifetime. Even when one or both of the parties makes such a promise, however, they contemplate a subsequent exchange of performances, subject of course to the occurrence of the required conditions. Such cases are therefore subject to the rules stated in this Chapter (see § 239), along with some special rules relating to the election of remedies which are stated in §§ 378-80.

5. A, an insurance company, issues to B a group health insurance policy covering B’s employees for one year beginning January 1 in return for B’s promise to pay the premium on February 1. During the month of January A unjustifiably rejects proper claims filed by B’s employees under the policy. B refuses to pay the premium on February 1. A’s paying proper claims of B’s employees and B’s paying the premium are to be exchanged under the exchange of promises. Therefore, under the rule stated in § 237, if A’s breach is material, A has no claim against B.

[]{#_Toc161928238 .anchor}R. 2d Contracts § 241 – Circumstances Significant in Determining Whether a Failure Is Material

In determining whether a failure to render or to offer performance is material, the following circumstances are significant:

(a) the extent to which the injured party will be deprived of the benefit which he reasonably expected;

(b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;

(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;

(e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

a. Nature of significant circumstances.

The application of the rules stated in §§ 237 and 238 turns on a standard of materiality that is necessarily imprecise and flexible. (Contrast the situation where the parties have, by their agreement, made an event a condition. See § 226 and Comments a and c thereto and § 229.) The standard of materiality applies to contracts of all types and without regard to whether the whole performance of either party is to be rendered at one time or part performances are to be rendered at different times. See U.C.C. § 2-612. It also applies to pairs of agreed equivalents under § 240. See Illustration 2. It is to be applied in the light of the facts of each case in such a way as to further the purpose of securing for each party his expectation of an exchange of performances. This Section therefore states circumstances, not rules, which are to be considered in determining whether a particular failure is material. A determination that a failure is not material means only that it does not have the effect of the non-occurrence of a condition under §§ 237 and 238. Even if not material, the failure may be a breach and give rise to a claim for damages for partial breach (§§ 236, 243).

1. A, a subcontractor, contracts to do excavation and earth moving on a housing subdivision project for B, the owner and general contractor, and to do all work “in a workmanlike manner.” B is to make monthly progress payments for the work performed during the preceding month less a retainer of ten percent. A negligently damages a building with his bulldozer causing serious damage and denies any liability for B’s loss. When B refuses to make further progress payments until A repairs the damage or admits liability, A notifies B that he cancels the contract. If the court determines that A’s breach is material, A has no claim against B. B has a claim against A for damages for breach of contract.

2. The facts being otherwise as stated in Illustration 6 to § 240, A completes the part concerned with the excavation and grading of lots and streets but fails in a minor respect to comply with the specifications. If a court determines that the failure is not material, A has a claim against B for $ 75,000 under the contract for the excavation and grading. B has a claim for damages against A for his failure fully to perform as to excavation and grading and also for his unjustified refusal to make street improvements.

b. Loss of benefit to injured party.

Since the purpose of the rules stated in §§ 237 and 238 is to secure the parties’ expectation of an exchange of performances, an important circumstance in determining whether a failure is material is the extent to which the injured party will be deprived of the benefit which he reasonably expected from the exchange (Subsection (a)). If the consideration given by either party consists partly of some performance and only partly of a promise (see Comment a to § 232), regard must be had to the entire exchange, including that performance, in applying this criterion. Although the relationship between the monetary loss to the injured party as a result of the failure and the contract price may be significant, no simple rule based on the ratio of the one to the other can be laid down, and here, as elsewhere under this Section, all relevant circumstances must be considered. In construction contracts, for example, defects affecting structural soundness are ordinarily regarded as particularly significant. In the sale of goods a particularly exacting standard has evolved. There it has long been established that, in the absence of a showing of a contrary intention, a buyer is entitled to expect strict performance of the contract, and U.C.C. § 2-601 carries forward this expectation by allowing the buyer to reject “if the goods or the tender of delivery fail in any respect to conform to the contract.” The Code, however, compensates to some extent for the severity of this standard by extending the seller’s right to cure beyond the point when the time for performance has expired in some instances (§ 2-508(2)), by allowing revocation of acceptance only if a nonconformity “substantially impairs” the value of the goods to the buyer (§ 2-608(1)), and by allowing the injured party to treat a nonconformity or default as to one installment under an installment contract as a breach of the whole only if it “substantially impairs” the value of the whole (§ 2-612(3)).

c. Adequacy of compensation for loss.

The second circumstance, the extent to which the injured party can be adequately compensated for his loss of benefit (Subsection (b)), is a corollary of the first. Difficulty that he may have in proving with sufficient certainty the amount of that loss will affect the adequacy of compensation. If the failure is a breach, the injured party always has a claim for damages, and the question becomes one of the adequacy of that claim to compensate him for the lost benefit. Where the failure is not a breach, the question becomes one of the adequacy of any claim, such as one in restitution, to which the injured party may be entitled. This is a particularly important circumstance when the party in breach seeks specific performance. Such relief may be granted if damages can adequately compensate the injured party for the defect in performance. See Comment c to § 242.

d. Forfeiture by party who fails.

Because a material failure acts as the non-occurrence of a condition, the same risk of forfeiture obtains as in the case of conditions generally if the party who fails to perform or tender has relied substantially on the expectation of the exchange, as through preparation or performance. Therefore a third circumstance is the extent to which the party failing to perform or to make an offer to perform will suffer forfeiture if the failure is treated as material. For this reason a failure is less likely to be regarded as material if it occurs late, after substantial preparation or performance, and more likely to be regarded as material if it occurs early, before such reliance. For the same reason the failure is more likely to be regarded as material if such preparation or performance as has taken place can be returned to and salvaged by the party failing to perform or tender, and less likely to be regarded as material if it cannot. These factors argue against a finding of material failure and in favor of one of substantial performance where a builder has completed performance under a construction contract and, because the building is on the owner’s land, can salvage nothing if he is denied recovery of the balance of the price. Even in such a case, however, the potential forfeiture may be mitigated if the builder has a claim in restitution (§§ 370-77, especially § 374) or if he has already received progress payments under a provision of the contract. The same factors argue for a finding of material failure where a seller tenders goods and can salvage them by resale to others if they are rejected and he is denied recovery of the price. This helps to explain the severity of the rule as applied to the sale of goods. See Comment b. Even in such a case, however, the potential forfeiture may be aggravated if the seller has manufactured the goods specially for the buyer or has spent substantial sums in shipment.

3. A contracts to sell and B to buy 300 crates of Australian onions, shipment to be from Australia in March. A has 300 crates ready for shipment in March, but government requisitions prevent him from loading more than 240 crates on the only ship available in March. B refuses to accept or pay for the onions when they are tendered. Under the circumstances stated in Subsections (a) and (c), A’s failure is material and A has no claim against B. If A’s failure is unjustified, B has a claim against A for damages for partial breach because of the delay even if A cures his failure, and has a claim against A for damages for total breach if A does not cure his failure (§ 243).

4. The facts being otherwise as stated in Illustration 2 to § 232, B can have the part of the street in front of his own lot paved for $ 500, but this will not give him the expected access to his lot because the rest of the street is not paved. Under the circumstances stated in Subsections (a), (b), and (c), the failure of performance is material and A has no claim against B. If A’s failure is unjustified, B has a claim against A for damages for partial breach because of the delay even if A cures his failure, and has a claim against A for damages for total breach if A does not cure his failure (§ 243).

e. Uncertainty.

A material failure by one party gives the other party the right to withhold further performance as a means of securing his expectation of an exchange of performances. To the extent that that expectation is already reasonably secure, in spite of the failure, there is less reason to conclude that the failure is material. The likelihood that the failure will be cured is therefore a significant circumstance in determining whether it is material (Subsection (d)). The fact that the injured party already has some security for the other party’s performance argues against a determination that the failure is material. So do reasonable assurances of performance given by the other party after his failure. So does a shift in the market that makes performance of the contract more favorable to the other party. On the other hand, defaults by the other party under other contracts or as to other installments under the same contract argue for a determination of materiality. So does such financial weakness of the other party as suggests an inability to cure. This circumstance differs from the notion of reasonable grounds for insecurity (§ 251), in that the former can become relevant only after there has been an actual failure to perform or to tender. On discharge by repudiation, see § 253(2).

5. A contracts to sell and B to buy land for $ 25,000. B is to make a $ 5,000 down payment and pay the balance in four annual installments of $ 5,000 each. A is to proceed immediately to have abstracts of title prepared showing a marketable title and to deliver them prior to the time for payment of the first annual installment. Without explanation, A fails to have abstracts prepared for delivery prior to the time for payment of the first annual installment. B refuses to pay that installment. Under the circumstances stated in Subsections (a)-(d), the failure of performance is material and A has no claim against B. B has a claim against A for damages for partial breach based on the delay if A cures his failure and a claim for damages for total breach if he does not (§ 243).

f. Absence of good faith or fair dealing.

A party’s adherence to standards of good faith and fair dealing (§ 205) will not prevent his failure to perform a duty from amounting to a breach (§ 236(2)). Nor will his adherence to such standards necessarily prevent his failure from having the effect of the non-occurrence of a condition (§ 237; cf. § 238). The extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing is, however, a significant circumstance in determining whether the failure is material (Subsection (e)). In giving weight to this factor courts have often used such less precise terms as “wilful.” Adherence to the standards stated in Subsection (e) is not conclusive, since other circumstances may cause a failure to be material in spite of such adherence. Nor is non-adherence conclusive, and other circumstances may cause a failure not to be material in spite of such non-adherence.

6. A contracts to build a house for B, using pipe of Reading manufacture. In return, B agrees to pay $ 75,000, with provision for progress payments. Without B’s knowledge, a subcontractor mistakenly uses pipe of Cohoes manufacture which is identical in quality and is distinguishable only by the name of the manufacturer which is stamped on it. The substitution is not discovered until the house is completed, when replacement of the pipe will require destruction of substantial parts of the house. B refuses to pay the unpaid balance of $ 10,000. Under the circumstances stated in Subsections (a), (c), and (e), the failure of performance is not material and A has a claim against B for the unpaid balance of $ 10,000, subject to a claim by B against A for damages for A’s breach of his duty to use Reading pipe. See Illustration 1 to § 229.

7. A contracts to build a supermarket for B. In return B agrees to pay $ 250,000, with provision for progress payments. A completes performance except that, angered by a dispute over an unrelated transaction, he refuses to build a cover over a compressor. B can have the cover built by another builder for $ 300. B refuses to pay the unpaid balance of $ 40,000. In spite of the circumstances stated in Subsection (e), under the circumstances stated in Subsections (a), (b), and (c), the failure of performance is not material and A has a claim against B for the unpaid balance of $ 40,000, subject to a claim by B against A for damages for A’s breach of his duty to build a cover over the compressor.

[]{#_Toc161928239 .anchor}R. 2d Contracts § 242 – Circumstances Significant in Determining When Remaining Duties Are Discharged

In determining the time after which a party’s uncured material failure to render or to offer performance discharges the other party’s remaining duties to render performance under the rules stated in §§ 237 and 238, the following circumstances are significant:

(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 for performance without delay, but a material failure to perform or to offer to perform on a stated day does not of itself discharge the other party’s remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.

a. Cure.

Under §§ 237 and 238, a party’s uncured material failure to perform or to offer to perform not only has the effect of suspending the other party’s duties (§ 225(1)) but, when it is too late for the performance or the offer to perform to occur, the failure also has the effect of discharging those duties (§ 225(2)). Ordinarily there is some period of time between suspension and discharge, and during this period a party may cure his failure. Even then, since any breach gives rise to a claim, a party who has cured a material breach has still committed a breach, by his delay, for which he is liable in damages. Furthermore, in some instances timely performance is so essential that any delay immediately results in discharge and there is no period of time during which the injured party’s duties are merely suspended and the other party can cure his failure.

b. Significant circumstances.

This Section states circumstances which are to be considered in determining whether there is still time to cure a particular failure, or whether the period of time for discharge has expired. They are similar to the circumstances stated in the preceding section. The importance of delay to the injured party will depend on the extent to which it will deprive him of the benefit which he reasonably expected (§ 241(a)) and on the extent to which he can be adequately compensated (§ 241(b)). The extent of the forfeiture by the party failing to perform or to offer to perform (§ 241(c)) is also significant in determining the importance of delay. The likelihood that the injured party’s withholding of performance will induce the other party to cure his failure is particularly important (§ 241(d)), because the very reason for suspending rather than immediately discharging the injured party’s duties is that this will induce cure. The reasonableness of the injured party’s conduct in communicating his grievances and in seeking satisfaction is a factor to be considered in this connection. Where performance is to extend over a period of time, as where delivery of goods is to be in installments, so that a continuing relationship between the parties is contemplated, the injured party may be expected to give more opportunity for cure than in the case of an isolated exchange. On discharge by repudiation, see § 253(2). Finally, the nature of the behavior of the party failing to perform or to offer to perform may be considered here as under the preceding section (§ 241(e)).

1. The facts being otherwise as stated in Illustration 1 to § 237, B tenders the progress payment after a two-day delay along with damages for the delay. A refuses to accept the payment and resume work and notifies B that he cancels the contract. B’s tender cured his breach before A’s remaining duties to render performance were discharged, and B has a claim against A for total breach of contract, subject to a claim by A against B for damages for partial breach because of the delay.

c. Substitute arrangements.

It is often said that in commercial transactions, notably those for the sale of goods, prompt performance by a party is essential if he is to be allowed to require the other to perform or, as it is sometimes put, “time is of the essence.” The importance of prompt delivery by a seller of goods generally derives from the circumstance that goods, as contrasted for example with land, are particularly likely to be subject to rapid fluctuations in market price. Therefore, even a relatively short delay in a rising market may adversely affect the buyer by causing a sharp increase in the cost of “cover.” See U.C.C. §§ 2-712, 2-713. A less rigid standard applies to contracts for the sale of goods to be delivered in installments or to be specially manufactured for the buyer. On the other hand, considerable delay does not preclude enforcement of a contract for the sale of land if damages are adequate to compensate for the delay and there are no special circumstances indicating that prompt performance was essential and no express provision requiring such performance. But these are all merely particular applications of a more general principle. Subsection (b) states that principle. Under any contract, the extent to which it reasonably appears to the injured party that delay may prevent or hinder him from making reasonable substitute arrangements is a consideration in determining the effect of delay. Cf. § 241(a), (b). As in the case of § 241 (see Comment c), a party in breach who seeks specific performance may be granted relief with compensation for the delay, in circumstances where he would have no claim for damages.

2. A, a theater manager, contracts with B, an actress, for her performance for six months in a play that A is about to present. B becomes ill during the second month of the performance, and A immediately engages another actress to fill B’s place during the remainder of the six months. B recovers at the end of ten days and offers to perform the remainder of the contract, but A refuses. Whether B’s failure to render performance due to illness immediately discharges A’s remaining duties of performance, instead of merely suspending them, depends on the circumstances stated in Subsection (b) and in § 241(b) and (d), and in particular on the possibility as it reasonably appears to A when B becomes ill of the illness being only temporary and of A’s obtaining an adequate temporary substitute.

3. A contracts to sell and B to buy 1,000 shares of stock traded on a national securities exchange, delivery and payment to be on February 1. B offers to pay the price on February 1, but A unjustifiably and without explanation fails to offer to deliver the stock until February 2. B then refuses to accept the stock or pay the price. Under the circumstances stated in Subsection (b) and in § 241(a) and (c), the period of time has passed after which B’s remaining duties to render performance are discharged because of A’s material breach and A therefore has no claim against B. B has a claim against A for breach.

4. A contracts to sell and B to buy land, the transfer to be on February 1. B tenders the price on February 1, but A does not tender a deed until February 2. B then refuses to accept the deed or pay the price. Under the circumstances stated in Subsections (b) and (c) and in § 241(a), in the absence of special circumstances, the period of time has not passed after which B’s remaining duties to render performance are discharged. Although A’s breach is material, it has been cured. A has a claim against B for damages for total breach of contract, subject to a claim by B against A for damages for partial breach because of the delay.

5. A agrees to sell and B to buy land, the transfer to be on February 1. A tenders a sufficient deed on February 1, but B explains that although he wants to carry out the contract he would like to have a few weeks more to raise the amount of the price. A replies that unless B tenders the price immediately he will not deliver the deed. On February 15, B sues for specific performance, offering in his pleading to pay the agreed price with interest to compensate A for the delay. In the circumstances stated in Subsection (b) and in § 241(a), (b), and (d), the period of time has not passed after which A’s remaining duties to render performance are discharged. Although B’s breach is material, the court may decree specific performance subject to B’s tender of the price and payment by B of damages for partial breach to compensate A for the delay.

6. A contracts to sell and B to buy 5,000 tons of iron at a stated price, delivery to be in five monthly installments of 1,000 tons each on the first of each month and payment for each installment to be made on the tenth of that month. A makes the first three deliveries on the first of the month but, although the market price for iron is falling, he delays twelve days in making the fourth delivery, explaining to B that temporary labor troubles have caused the delay. B notifies A that he refuses to take or pay for the fourth delivery and that he cancels the contract. Whether the period of time has passed after which B’s remaining duties to render performance are discharged, so that B’s notification is not a repudiation, depends on the circumstances stated in Subsection (b) and in § 241(a), (b), (d), and (e). See U.C.C. § 2-612.

7. A contracts to sell and B to buy 5,000 tons of iron at a stated price, delivery to be in five monthly installments of 1,000 tons each on the first of each month and payment for each installment to be made on the tenth of that month. A makes the first four deliveries on the first of the month, and B makes the first three payments by the tenth but does not make the fourth payment. The market price for iron is falling and B gives no assurances or explanation for the delay. On the twentieth of the month A notifies B that he will make no further deliveries and that he cancels the contract. Whether the period of time has passed after which A’s remaining duties to render performance are discharged, so that A’s notification is not a repudiation, depends on the circumstances stated in Subsection (b) and in § 241(a), (b), (d), and (e). See U.C.C. § 2-612.

d. Effect of agreement.

The agreement of the parties often contains a provision for the time of performance or tender. It may simply provide for performance on a stated date. In that event, a material breach on that date entitles the injured party to withhold his performance and gives him a claim for damages for delay, but it does not of itself discharge the other party’s remaining duties. Only if the circumstances, viewed as of the time of the breach, indicate that performance or tender on that day is of genuine importance are the injured party’s remaining duties discharged immediately, with no period of time during which they are merely suspended. It is, of course, open to the parties to make performance or tender by a stated date a condition by their agreement, in which event, absent excuse (see Comment b to § 225 and Comment c to § 229), delay beyond that date results in discharge (§ 225(2)). Such stock phrases as “time is of the essence” do not necessarily have this effect, although under Subsection (c) they are to be considered along with other circumstances in determining the effect of delay.

8. A contracts to charter a vessel belonging to B and to pay stipulated freight “on condition that the vessel arrive in New York ready for loading by March 1.” B promises that the vessel will arrive by that date and carry A’s cargo. B unjustifiably fails to have the vessel in New York to be loaded until March 2. A refuses to load the vessel. Whether or not the period of time has passed after which B’s uncured material failure would discharge A’s remaining duties to render performance, A’s duties are discharged under § 225(2) by the non-occurrence of an event that is made a condition by the agreement of the parties. B has no claim against A. A has a claim against B for damages for total breach.

9. The facts being otherwise as stated in Illustration 4, the parties use a printed form contract that provides that “time is of the essence.” Absent other circumstances indicating that performance by February 1 is of genuine importance, A has a claim against B for damages for total breach of contract.

10. The facts being otherwise as stated in Illustration 4, the contract provides that A’s rights are “conditional on his tendering a deed on or before February 1.” A has no claim against B. But cf. Illustration 4 to § 229.

e. Excuse and reinstatement.

Just as a party may under § 84 promise to perform in spite of the complete non-occurrence of a condition, he may under that section promise to perform in spite of a delay in its occurrence. If he places no limit on the delay, his power to impose a time limit by later notification of the other party is subject to the rules on reinstatement stated in § 84(2).

Chapter 19 | Anticipatory Repudiation

[]{#_Toc161928241 .anchor}R. 2d Contracts § 251 – When a Failure to Give Assurance May Be Treated as a Repudiation

(1) Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach under § 243, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.

(2) The obligee may treat as a repudiation the obligor’s failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.

a. Rationale.

Ordinarily an obligee has no right to demand reassurance by the obligor that the latter will perform when his performance is due. However, a contract “imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired.” U.C.C. § 2-609(1). When, therefore, an obligee reasonably believes that the obligor will commit a breach by non-performance that would of itself give him a claim for damages for total breach (§ 243), he may, under the rule stated in this Section, be entitled to demand assurance of performance. The rule is a generalization, applicable without regard to the subject matter of the contract, from that of U.C.C. § 2-609. The latter applies only to contracts for the sale of goods and gives a party a right to adequate assurance of performance where “reasonable grounds for insecurity arise with respect to the performance” of the other party. Both rules rest on the principle that the parties to a contract look to actual performance “and that a continuing sense of reliance and security that the promised performance will be forthcoming when due, is an important feature of the bargain.” Comment 1 to U.C.C. § 2-609. This principle is closely related to the duty of good faith and fair dealing in the performance of the contract (§ 205). The rule stated in this Section may be modified by agreement of the parties, and where they have done so their rights depend on the application of the rules on interpretation stated in Chapter 9, The Scope of Contractual Obligations.

b. Relation to other rules.

An obligee who believes, for whatever reason, that the obligor will not or cannot perform without a breach, is always free to act on that belief. If he is not himself under a duty to perform before the obligor, he may simply await the obligor’s performance and, if his belief is confirmed, he will have a claim for damages for breach by non-performance. If he can prove that his belief would have been confirmed, he is at least shielded from liability even if he has failed to give a performance that is due before that of the obligor or has, by making alternative arrangements, done an act that amounts to a repudiation. For example, under § 254, the obligee’s duty to pay damages for total breach by repudiation is discharged if the obligor himself would not or could not have performed when his performance was due. If, however, the obligee’s belief is incorrect, his own failure to perform or his making of alternate arrangements may subject him to a claim for damages for total breach. This Section affords him an opportunity, in appropriate cases, to demand assurance of due performance and thereby avoid the uncertainties that would otherwise inhere in acting on his belief. If it is then reasonable for the obligee to suspend his own performance while he awaits assurance by the obligor, he may do so under Subsection (1). Under the special rule stated in § 252, the obligee may always suspend his own performance where his belief that the obligor will commit a breach is based on the obligor’s insolvency. If the obligee does not, within a reasonable time, obtain adequate assurance of due performance, he may under Subsection (2) treat the obligor’s failure to provide such an assurance as a repudiation. His right to do so is, however, subject to the rule stated in § 256 under which the manifestation of doubt or the apparent inability, on which the obligee bases his belief that the obligor will commit a breach, may be nullified. In contrast to the situation where the obligor has actually repudiated under § 250, the obligee may choose not to treat the failure to provide assurances as a repudiation and may continue to perform without affecting his right to recover damages for subsequent loss that he could have avoided by so treating it.

If he chooses to treat the obligor’s failure as a repudiation, it may have any of the three effects that any other repudiation may have: it may give him a claim for damages for total breach (§ 253(1)), it may discharge his own remaining duties of performance (§ 253(2)), and it may excuse the non-occurrence of a condition of the other party’s duty (§ 255). The effect on the obligee’s remaining duties of performance of prospective non-performance by the obligor that would not be a breach because it would be justified on the ground of impracticability of performance is dealt with in § 268.

1. A contracts to let B use his concert hall on the evening of May 7 for a performance by B’s string quartet, in return for B’s promise to perform and to pay A a percentage of the receipts. The contract provides that B is not discharged even if he is unable to transport his quartet to A’s hall. On May 6, because of an unexpected airline strike, A reasonably believes that B’s quartet will be unable to come the 3,000 miles necessary to perform in his hall as scheduled. Without demanding adequate assurance of due performance under the rule stated in this Section, A then contracts with C to let C hold a meeting in the hall on the evening of May 7. A’s contract with C is a repudiation of his contract with B (§ 250), which gives rise to a claim by B against A for damages for total breach (§ 253). If, however, B is in fact unable to bring his quartet to A’s hall on May 7, B’s claim against A is discharged (§ 254).

2. The facts being otherwise as stated in Illustration 1, B succeeds in chartering a plane and flies the 3,000 miles with his quartet in his private plane. He arrives in time to perform, but is unable to do so because C is using the hall. B has a claim against A for damages for total breach (§ 243).

c. Reasonable grounds for belief.

Whether “reasonable grounds” have arisen for an obligee’s belief that there will be a breach must be determined in the light of all the circumstances of the particular case. The grounds for his belief must have arisen after the time when the contract was made and cannot be based on facts known to him at that time. Nor, since the grounds must be reasonable, can they be based on events that occurred after that time but as to which he took the risk when he made the contract. But minor breaches may give reasonable grounds for a belief that there will be more serious breaches, and the mere failure of the obligee to press a claim for damages for those minor breaches will not preclude him from basing a demand for assurances on them. Compare § 241(d), Comment e to that section, and Comment b to § 242. Even circumstances that do not relate to the particular contract, such as defaults under other contracts, may give reasonable grounds for such a belief.

Conduct by a party that indicates his doubt as to his willingness or ability to perform but that is not sufficiently positive to amount to a repudiation (see Comment b to § 250), may give reasonable grounds for such a belief. And events that indicate a party’s apparent inability, but do not amount to a repudiation because they are not voluntary acts, may also give reasonable grounds for such a belief. One important application of the rule stated in this Section occurs when a party who has contracted to buy specific property, land or goods, discovers that the seller has neither present ownership of the property nor a right to become or at least a reasonable expectation of becoming the owner in time to perform. Another important application of the rule occurs when an obligor who is allowed a period of time within which to perform makes an offer of defective performance. It may still be possible for him, if the offer is refused, to make an offer of conforming performance within the period allowed. Nevertheless, the offer of defective performance may give the obligee reasonable grounds to believe that the obligor will commit a breach under this Section. A third important application of the rule occurs when a party becomes insolvent. The effect of insolvency will vary according to the nature of the obligor’s duty. If, for example, it is merely to perform personal services, the fact of insolvency alone may not give reasonable grounds to believe that the obligor will commit a breach, but if it is to pay for goods on credit it will. See U.C.C. § 2-702(1). A special rule on insolvency is stated in § 252. In any case, in order for this Section to apply, the breach that the obligee believes the obligor will commit must be a breach by non-performance that would so substantially impair the value of the contract to the obligee that it would of itself, unaccompanied by a repudiation, give him a claim for damages for total breach under § 243.

3. On May 1, A contracts to sell and B to buy a parcel of land for $ 50,000, delivery of the deed and payment of the price to be on July 30. Unknown to both A and B, C has a dower interest in the land. On May 15, B discovers this and demands that A give him adequate assurance of due performance. A fails to do so, and B commences an action against A on July 1. B had reasonable grounds to believe that A would commit a breach by non-performance that would of itself have given B a claim for damages for total breach. If the court concludes that a reasonable time for A to give assurances had passed on July 1, B properly treated A’s failure to give assurances as a repudiation. B then has a claim for damages against A for total breach.

4. The facts being otherwise as stated in Illustration 3, C’s interest in the land is that of mortgagee under a mortgage that A can discharge at any time by payment of the mortgage debt. B had no reasonable grounds to believe that A would commit a breach, B could not treat A’s failure to give assurances as a repudiation, and B has no claim for damages against A. Compare Illustration 6 to § 250.

5. A contracts to sell and B to buy A’s house, delivery of the deed and payment of the price to be made during September. On September 1, A offers to deliver a deed to B which is defective in that a fence projects beyond the front line of the house and the swimming pool lacks a certificate of occupancy. Both defects can be cured by A within the month, but A fails to reply to a demand by B that A assure B that A will cure them within that time. On September 20, B notifies A that he cancels the contract. On September 30, A, having cured the defects, offers to deliver a conforming deed to B. A court may conclude that, as a result of A’s apparent inability to perform, B had reasonable grounds to believe that A would commit a breach by non-performance that would of itself have given B a claim for damages for total breach, that A failed upon demand by B to give adequate assurance of due performance within a reasonable time, and therefore that B properly treated A’s failure as a repudiation. B then has a claim against A for damages for total breach.

d. Nature of demand.

A party who demands assurances must do so in accordance with his duty of good faith and fair dealing in the enforcement of the contract (§ 205). Whether a particular demand for assurance conforms to that duty will depend on the circumstances. The demand need not be in writing. Although a written demand is usually preferable to an oral one, if time is of particular importance the additional time required for a written demand might necessitate an oral one. Compare U.C.C. § 2-609(1), which controls in the case of a sale of goods and which requires a demand “in writing.” Harrassment by means of frequent unjustified demands may amount to a violation of the duty of good faith and fair dealing.

6. The facts being otherwise as stated in Illustration 1, before contracting with C, A telephones B on May 6 and asks B to assure him that he will be there on May 7. B says only “We will do our best to get there.” B succeeds in chartering a plane and flies the 3,000 miles with his quartet. He arrives in time to perform, but is unable to do so because C is using the hall. In the absence of countervailing circumstances, a court should conclude that, as a result of B’s apparent inability to perform, A had reasonable grounds to believe that B would commit a breach by non-performance that would of itself have given A a claim for damages for total breach, that because of the shortness of time a demand by telephone conformed to the duty of good faith and fair dealing (§ 205), that B failed upon such a demand to give adequate assurance of due performance, and therefore that A properly treated B’s failure as a repudiation. A then has a claim against B for damages for total breach.

e. Nature and time of assurance.

Whether an assurance of due performance is “adequate” depends on what it is reasonable to require in a particular case taking account of the circumstances of that case. The relationship between the parties, any prior dealings that they have had, the reputation of the party whose performance has been called into question, the nature of the grounds for insecurity, and the time within which the assurance must be furnished are all relevant factors. (If the obligor’s insolvency constitutes the grounds for the obligee’s insecurity, the special rule stated in § 252 empowers him to suspend performance until he receives assurance in the form of actual performance, an offer of performance, or reasonable security.) What is a “reasonable time” within which to give assurance under Subsection (2) will also depend on the particular circumstances. Like the demand, the assurance is subject to the general requirement of good faith and fair dealing in the enforcement of the contract (§ 205; see Comment d).

7. The facts being otherwise as stated in Illustration 1, before contracting with C, A telephones B on May 6 and asks B to assure him that he will be there on May 7. B explains over the telephone that he has been able to charter a plane and expects to come as planned. B then flies the 3,000 miles with his quartet. He arrives in time to perform, but is unable to do so because C is using the hall. The assurance given by B was adequate in view of what it was reasonable to require, and therefore A could not treat B’s failure to do more as a repudiation. B then has a claim against A for damages for total breach.

8. The facts being otherwise as stated in Illustration 1, before contracting with C, A telephones B on May 6 and asks B to assure him that he will be there on May 7. B replies that he hopes to be able to charter a plane and that he will telephone A to let him know. A tells B that he must know by noon on May 7 in order to make alternative arrangements with C. B succeeds in chartering a plane and flies the 3,000 miles with his quartet. After he has arrived on the afternoon of May 7, he telephones A to assure him that he will perform. A court may conclude that, as a result of B’s apparent inability to perform, A had reasonable grounds to believe that B would commit a breach by non-performance that would of itself have given A a claim for damages for total breach, that the assurances given by B were not within a reasonable time, and therefore that B properly treated B’s delay in giving them as a repudiation. A then has a claim against B for damages for total breach.

[]{#_Toc161928242 .anchor}R. 2d Contracts § 250 – When a Statement or an Act Is a Repudiation

A repudiation is

(a) a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under § 243, or

(b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

a. Consequences of repudiation.

A statement by a party to the other that he will not or cannot perform without a breach, or a voluntary affirmative act that renders him unable or apparently unable to perform without a breach may impair the value of the contract to the other party. It may have several consequences under this Restatement. If it accompanies a breach by non-performance that would otherwise give rise to only a claim for damages for partial breach, it may give rise to a claim for damages for total breach instead (§ 243). Even if it occurs before any breach by non-performance, it may give rise to a claim for damages for total breach (§ 253(1)), discharge the other party’s duties (§ 253(2)), or excuse the non-occurrence of a condition (§ 255).

b. Nature of statement.

In order to constitute a repudiation, a party’s language must be sufficiently positive to be reasonably interpreted to mean that the party will not or cannot perform. Mere expression of doubt as to his willingness or ability to perform is not enough to constitute a repudiation, although such an expression may give an obligee reasonable grounds to believe that the obligor will commit a serious breach and may ultimately result in a repudiation under the rule stated in § 251. However, language that under a fair reading “amounts to a statement of intention not to perform except on conditions which go beyond the contract” constitutes a repudiation. Comment 2 to U.C.C. § 2-610. Language that is accompanied by a breach by non-performance may amount to a repudiation even though, standing alone, it would not be sufficiently positive. See § 243(2). The statement must be made to an obligee under the contract, including a third party beneficiary or an assignee.

1. On April 1, A contracts to sell and B to buy land, delivery of the deed and payment of the price to be on July 30. On May 1, A tells B that he will not perform. A’s statement is a repudiation.

2. A contracts to build a house for B for $ 50,000, progress payments to be made monthly in an amount equal to 85% of the price of the work performed during the preceding month, the balance to be paid on the architect’s certificate of satisfactory completion of the house. Without justification B fails to make a $ 5,000 progress payment and tells A that because of financial difficulties he will be unable to pay him anything for at least another month. If, after a month, it would be too late for B to cure his material failure of performance by making the delayed payment, B’s statement is a repudiation. See Illustration 2 to § 237.

3. The facts being otherwise as stated in Illustration 1, A does not tell B that he will not perform but says, “I am not sure that I can perform, and I do not intend to do so unless I am legally bound to.” A’s statement is not a repudiation.

4. The facts being otherwise as in Illustration 1, A tells C, a third person having no right under the contract, and not B, that he will not perform. C informs B of this conversation, although not requested by A to do so. A’s statement is not a repudiation. But see Comments b and c to § 251.

c. Nature of act.

In order to constitute a repudiation, a party’s act must be both voluntary and affirmative, and must make it actually or apparently impossible for him to perform. An act that falls short of these requirements may, however, give reasonable grounds to believe that the obligor will commit a serious breach for the purposes of the rule stated in § 251. The effect of bankruptcy is governed in large part by federal law. In liquidation cases, for example, Bankruptcy Reform Act § 365(a), (d) and (e) gives the trustee the power to assume or reject an executory contract within a statutory period, and the obligee must give him the time to exercise this power. A contract not assumed during this period is deemed to be rejected. Under Bankruptcy Reform Act § 365(g)(1), notwithstanding state law, the trustee’s rejection of a contract “constitutes a breach of such contract . . . immediately before the date of the filing of the petition . . . .” The rules stated in this Restatement apply to the extent that they are consistent with federal bankruptcy law.

5. The facts being otherwise as stated in Illustration 1, A says nothing to B on May 1, but on that date he contracts to sell the land to C. A’s making of the contract with C is a repudiation.

6. The facts being otherwise as stated in Illustration 1, A says nothing to B on May 1, but on that date he mortgages the land to C as security for a $ 40,000 loan which is not payable until one year later. A’s mortgaging the land is a repudiation. Compare Illustration 4 to § 251.

7. A contracts to employ B, and B to work for A, the employment to last a year beginning in ten days. Three days after making the contract B embarks on a ship for a voyage around the world. B’s embarking for the voyage is a repudiation.

d. Gravity of threatened breach.

In order for a statement or an act to be a repudiation, the threatened breach must be of sufficient gravity that, if the breach actually occurred, it would of itself give the obligee a claim for damages for total breach under § 243(1). Generally, a party acts at his peril if, insisting on what he mistakenly believes to be his rights, he refuses to perform his duty. His statement is a repudiation if the threatened breach would, without more, have given the injured party a claim for damages for total breach. Modern procedural devices, such as the declaratory judgment, may be used to mitigate the harsh results that might otherwise result from this rule. Furthermore, if the threatened breach would not itself have given the injured party a claim for damages for total breach, the statement or voluntary act that threatens it is not a repudiation. But where a party wrongfully states that he will not perform at all unless the other party consents to a modification of his contract rights, the statement is a repudiation even though the concession that he seeks is a minor one, because the breach that he threatens in order to exact it is a complete refusal of performance.

8. On April 1, A contracts to sell and B to buy land for $ 50,000, delivery of the deed and payment of the price to be on August 1. On May 1, the parties make an enforceable modification under which delivery of the deed and payment of the price are to be on July 30 instead of August 1. On June 1, A tells B that he will not deliver a deed until August 1. A’s statement is not a repudiation unless the one-day delay would, in the absence of a repudiation, have given B a claim for damages for total breach. See Illustration 4 to § 242.

9. The facts being otherwise as stated in Illustration 8, A tells B that he will not deliver a deed at all unless B agrees to accept it on August 1. A’s statement is a repudiation. The result is the same even though A acts in the erroneous belief that the modification has no legal effect.

[]{#_Toc161928243 .anchor}N.H.R.S.A. 382-A § 2-609 – Right to Adequate Assurance of Performance.

(1) A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.

(3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party’s right to demand adequate assurance of future performance.

(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

Editor’s note: This provision allows a party (either buyer or seller) to a contract for the sale of goods to demand adequate assurance of performance when reasonable grounds for insecurity arise with respect to the performance of the other party. Insecurity may arises when one party to a contract has reasonable grounds to doubt whether the other party will fulfill their contractual obligations. Such insecurity could be due to indications of financial problems (e.g., insolvency, bankruptcy, or non-payment of other bills) or other circumstances that create a reasonable doubt that performance will occur (e.g., procuring the goods from some other source).

Reasonable insecurity may arise from actions or inactions that do not themselves rise to the level of an anticipatory repudiation. For example, insolvency alone is not a repudiation of the contract, but it does provide reasonable grounds for insecurity

Once again, we see special rules for merchants here. Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered is determined according to commercial standards, which is relatively objective. Between non-merchants, however, the standard seems to be more subjective.

[]{#_Toc161928244 .anchor}N.H.R.S.A. 382-A § 2-610 – Anticipatory Repudiation.

When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

(a) for a commercially reasonable time await performance by the repudiating party; or

(b) resort to any remedy for breach ([Section 2-703]{.underline} or [Section 2-711]{.underline}), even though he has notified the repudiating party that he would await the latter’s performance and has urged retraction; and

(c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods ([Section 2-704]{.underline}).

[]{#_Toc161928245 .anchor}N.H.R.S.A. 382-A § 2-611 – Retraction of Anticipatory Repudiation.

(1) Until the repudiating party’s next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.

(2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article ([Section 2-609]{.underline}).

(3) Retraction reinstates the repudiating party’s rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.

Chapter 20 | Excuse

[]{#_Toc161928247 .anchor}R. 2d Contracts § 261 – Discharge by Supervening Impracticability

Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

a. Scope.

Even though a party, in assuming a duty, has not qualified the language of his undertaking, a court may relieve him of that duty if performance has unexpectedly become impracticable as a result of a supervening event (see Introductory Note to this Chapter). This Section states the general principle under which a party’s duty may be so discharged. The following three sections deal with the three categories of cases where this general principle has traditionally been applied: supervening death or incapacity of a person necessary for performance (§ 262), supervening destruction of a specific thing necessary for performance (§ 263), and supervening prohibition or prevention by law (§ 264). But, like U.C.C. § 2-615(a), this Section states a principle broadly applicable to all types of impracticability and it “deliberately refrains from any effort at an exhaustive expression of contingencies” (Comment 2 to U.C.C. § 2-615). The principle, like others in this Chapter, yields to a contrary agreement by which a party may assume a greater as well as a lesser obligation. By such an agreement, for example, a party may undertake to achieve a result irrespective of supervening events that may render its achievement impossible, and if he does so his non-performance is a breach even if it is caused by such an event. See Comment c. The rule stated in this Section applies only to discharge a duty to render a performance and does not affect a claim for breach that has already arisen. The effect of events subsequent to a breach on the amount of damages recoverable is governed by the rules on remedies stated in Chapter 16. See Comment e to § 347. Their effect on a claim for breach by anticipatory repudiation is governed by the rules on discharge stated in Chapter 12. Cases of existing, as opposed to supervening, impracticability are governed by § 266 rather than this Section.

b. Basic assumption.

In order for a supervening event to discharge a duty under this Section, the non-occurrence of that event must have been a “basic assumption” on which both parties made the contract (see Introductory Note to this Chapter). This is the criterion used by U.C.C. § 2-615(a). Its application is simple enough in the cases of the death of a person or destruction of a specific thing necessary for performance. The continued existence of the person or thing (the non-occurrence of the death of destruction) is ordinarily a basic assumption on which the contract was made, so that death or destruction effects a discharge. Its application is also simple enough in the cases of market shifts or the financial inability of one of the parties. The continuation of existing market conditions and of the financial situation of the parties are ordinarily not such assumptions, so that mere market shifts or financial inability do not usually effect discharge under the rule stated in this Section. In borderline cases this criterion is sufficiently flexible to take account of factors that bear on a just allocation of risk. The fact that the event was foreseeable, or even foreseen, does not necessarily compel a conclusion that its non-occurrence was not a basic assumption. See Comment c to this Section and Comment a to § 265.

1. On June 1, A agrees to sell and B to buy goods to be delivered in October at a designated port. The port is subsequently closed by quarantine regulations during the entire month of October, no commercially reasonable substitute performance is available (see U.C.C. § 2-614(1)), and A fails to deliver the goods. A’s duty to deliver the goods is discharged, and A is not liable to B for breach of contract.

2. A contracts to produce a movie for B. As B knows, A’s only source of funds is a $ 100,000 deposit in C bank. C bank fails, and A does not produce the movie. A’s duty to produce the movie is not discharged, and A is liable to B for breach of contract.

3. A and B make a contract under which B is to work for A for two years at a salary of $ 50,000 a year. At the end of one year, A discontinues his business because governmental regulations have made it unprofitable and fires B. A’s duty to employ B is not discharged, and A is liable to B for breach of contract.

4. A contracts to sell and B to buy a specific machine owned by A to be delivered on July 30. On July 29, as a result of a creditor’s suit against A, a receiver is appointed and takes charge of all of A’s assets, and A does not deliver the goods on July 30. A’s duty to deliver the goods is not discharged, and A is liable to B for breach of contract.

c. Contrary indication.

A party may, by appropriate language, agree to perform in spite of impracticability that would otherwise justify his non-performance under the rule stated in this Section. He can then be held liable for damages although he cannot perform. Even absent an express agreement, a court may decide, after considering all the circumstances, that a party impliedly assumed such a greater obligation. In this respect the rule stated in this Section parallels that of U.C.C. § 2-615, which applies “Except so far as a seller may have assumed a greater obligation . . . .” Circumstances relevant in deciding whether a party has assumed a greater obligation include his ability to have inserted a provision in the contract expressly shifting the risk of impracticability to the other party. This will depend on the extent to which the agreement was standardized (cf. § 211), the degree to which the other party supplied the terms (cf. § 206), and, in the case of a particular trade or other group, the frequency with which language so allocating the risk is used in that trade or group (cf. § 219). The fact that a supplier has not taken advantage of his opportunity expressly to shift therisk of a shortage in his supply by means of contract language may be regarded as more significant where he is middleman, with a variety of sources of supply and an opportunity to spread the risk among many customers on many transactions by slight adjustment of his prices, than where he is a producer with a limited source of supply, few outlets, and no comparable opportunity. A commercial practice under which a party might be expected to insure or otherwise secure himself against a risk also militates against shifting it to the other party. If the supervening event was not reasonably foreseeable when the contract was made, the party claiming discharge can hardly be expected to have provided against its occurrence. However, if it was reasonably foreseeable, or even foreseen, the opposite conclusion does not necessarily follow. Factors such as the practical difficulty of reaching agreement on the myriad of conceivable terms of a complex agreement may excuse a failure to deal with improbable contingencies. See Comment b to this Section and Comment a to § 265.

5. A, who has had many years of experience in the field of salvage, contracts to raise and float B’s boat, which has run aground. The contract, prepared by A, contains no clause limiting A’s duty in the case of unfavorable weather, unforeseen circumstances, or otherwise. The boat then slips into deep water and fills with mud, making it impracticable for A to raise it. If the court concludes, on the basis of such circumstances as A’s experience and the absence of any limitation in the contract that A prepared, that A assumed an absolute duty, it will decide that A’s duty to raise and float the boat is not discharged and that A is liable to B for breach of contract.

d. Impracticability.

Events that come within the rule stated in this Section are generally due either to “acts of God” or to acts of third parties. If the event that prevents the obligor’s performance is caused by the obligee, it will ordinarily amount to a breach by the latter and the situation will be governed by the rules stated in Chapter 10, without regard to this Section.

If the event is due to the fault of the obligor himself, this Section does not apply. As used here “fault” may include not only “willful” wrongs, but such other types of conduct as that amounting to breach of contract or to negligence.

Although the rule stated in this Section is sometimes phrased in terms of “impossibility,” it has long been recognized that it may operate to discharge a party’s duty even though the event has not made performance absolutely impossible. This Section, therefore, uses “impracticable,” the term employed by U.C.C. § 2-615(a), to describe the required extent of the impediment to performance.

Performance may be impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved. A severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or prevents performance altogether may bring the case within the rule stated in this Section. Performance may also be impracticable because it will involve a risk of injury to person or to property, of one of the parties or of others, that is disproportionate to the ends to be attained by performance.

However, “impracticability” means more than “impracticality.” A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover. Furthermore, a party is expected to use reasonable efforts to surmount obstacles to performance (see § 205), and a performance is impracticable only if it is so in spite of such efforts.

6. A contracts to repair B’s grain elevator. While A is engaged in making repairs, a fire destroys the elevator without A’s fault, and A does not finish the repairs. A’s duty to repair the elevator is discharged, and A is not liable to B for breach of contract. See Illustration 3 to § 263.

7. A contracts with B to carry B’s goods on his ship to a designated foreign port. A civil war then unexpectedly breaks out in that country and the rebels announce that they will try to sink all vessels bound for that port. A refuses to perform. Although A did not contract to sail on the vessel, the risk of injury to others is sufficient to make A’s performance impracticable. A’s duty to carry the goods to the designated port is discharged, and A is not liable to B for breach of contract. Compare Illustration 5 to § 262.

8. The facts being otherwise as stated in Illustration 7, the rebels announce merely that they will confiscate all vessels found in the designated port. The goods can be bought and sold on markets throughout the world. A refuses to perform. Although there is no risk of injury to persons, the court may conclude that the risk of injury to property is disproportionate to the ends to be attained. A’s duty to carry the goods to the designated port is then discharged, and A is not liable to B for breach of contract. If, however, B is a health organization and the goods are scarce medical supplies vital to the health of the population of the designated port, the court may conclude that the risk is not disproportionate to the ends to be attained and may reach a contrary decision.

9. Several months after the nationalization of the Suez Canal, during the international crisis resulting from its seizure, A contracts to carry a cargo of B’s wheat on A’s ship from Galveston, Texas to Bandar Shapur, Iran for a flat rate. The contract does not specify the route, but the voyage would normally be through the Straits of Gibraltar and the Suez Canal, a distance of 10,000 miles. A month later, and several days after the ship has left Galveston, the Suez Canal is closed by an outbreak of hostilities, so that the only route to Bandar Shapur is the longer 13,000 mile voyage around the Cape of Good Hope. A refuses to complete the voyage unless B pays additional compensation. A’s duty to carry B’s cargo is not discharged, and A is liable to B for breach of contract.

10. The facts being otherwise as in Illustration 9, the Suez Canal is closed while A’s ship is in the Canal, preventing the completion of the voyage. A’s duty to carry B’s cargo is discharged, and A is not liable to B for breach of contract.

11. A contracts to construct and lease to B a gasoline service station. A valid zoning ordinance is subsequently enacted forbidding the construction of such a station but permitting variances in appropriate cases. A, in breach of his duty of good faith and fair dealing (§ 205), makes no effort to obtain a variance, although variances have been granted in similar cases, and fails to construct the station. A’s performance has not been made impracticable. A’s duty to construct is not discharged, and A is liable to B for breach of contract.

e. “Subjective” and “objective” impracticability.

It is sometimes said that the rule stated in this Section applies only when the performance itself is made impracticable, without regard to the particular party who is to perform. The difference has been described as that between “the thing cannot be done” and “I cannot do it,” and the former has been characterized as “objective” and the latter as “subjective.” This Section recognizes that if the performance remains practicable and it is merely beyond the party’s capacity to render it, he is ordinarily not discharged, but it does not use the terms “objective” and “subjective” to express this. Instead, the rationale is that a party generally assumes the risk of his own inability to perform his duty. Even if a party contracts to render a performance that depends on some act by a third party, he is not ordinarily discharged because of a failure by that party because this is also a risk that is commonly understood to be on the obligor. See Comment c. But see Comment a to § 262.

12. A, a milkman, and B, a dairy farmer, make a contract under which B is to sell and A to buy all of A’s requirements of milk, but not less than 200 quarts a day, for one year. B may deliver milk from any source but expects to deliver milk from his own herd. B’s herd is destroyed because of hoof and mouth disease and he fails to deliver any milk. B’s duty to deliver milk is not discharged, and B is liable to A for breach of contract. See Illustration 1 to § 263; compare Illustration 7 to § 263.

13. A contracts to sell and B to buy on credit 1,500,000 gallons of molasses “of the usual run from the C sugar refinery.” C delivers molasses to others but fails to deliver any to A, and A fails to deliver any to B. A’s duty to deliver molasses is not discharged, and A is liable to B for breach of contract. If A has a contract with C, C may be liable to A for breach of contract.

14. A, a general contractor, is bidding on a construction contract with B which gives B the right to disapprove the choice of subcontractors. A makes a contract with C, a subcontractor, under which, if B awards A the contract, A will obtain B’s approval of C and C will do the excavation for A. A is awarded the contract by B, but B disapproves A’s choice of C, and A has the excavation work done by another subcontractor. A’s duty to have C do the excavation is not discharged, and A is liable to C for breach of contract.

f. Alternative performances.

A contract may permit a party to choose to perform in one of several different ways, any of which will discharge his duty. Where the duty is to render such an alternative performance, the fact that one or more of the alternatives has become impracticable will not discharge the party’s duty to perform if at least one of them remains practicable. The form of the promise is not controlling, however, and not every promise that is expressed in alternative form gives rise to a duty to render an alternative performance. For example, a surety’s undertaking that either the principal will perform or the surety will compensate the creditor does not ordinarily impose such a duty.

Nor does a promise either to render a performance or pay liquidated damages impose such a duty. Furthermore, a duty that is originally one to render alternative performances ceases tobe such a duty if all but one means of performance have been foreclosed, as by the lapse of time or the occurrence of a condition including election by the obligor, or on the grounds of public policy (Chapter 8) or unconscionability (§ 208).

15. On June 1, A contracts to sell and B to buy whichever of three specified machines A chooses to deliver on October 1. Two of the machines are destroyed by fire on July 1, and A fails to deliver the third on October 1. A’s duty to deliver a machine is not discharged, and A is liable to B for breach of contract. If all three machines had been destroyed, A’s duty to deliver a machine would have been discharged, and A would not have been liable to B for breach of contract. See U.C.C. § 2-613.

16. A contracts to repair B’s building. The contract contains a valid provision requiring A to pay liquidated damages if he fails to make any of the repairs. S is surety for A’s performance. Before A is able to begin, B’s building is destroyed by fire. Neither A’s nor S’s duty is one to render an alternative performance. A’s duty to repair the building is discharged, and A is not liable to B for liquidated damages or otherwise for breach of contract. S’s duty as surety for A is also discharged, and S is not liable to B for breach of contract.

[]{#_Toc161928248 .anchor}R. 2d Contracts § 262 – Death or Incapacity of Person Necessary for Performance

If the existence of a particular person is necessary for the performance of a duty, his death or such incapacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made.

a. Rationale.

This Section states a common specific instance for the application of the rule stated in § 261. If, as both parties understand, the existence of a particular person is necessary for the performance of a duty, it is a “basic assumption on which the contract was made” that he will neither die nor be deprived of the necessary capacity before the time for performance. Therefore, the death of that person or his loss of capacity discharges the obligor’s duty to render the performance, subject to the qualifications stated in § 261. Usually, the person in question will be the obligor, but he may also be the obligee or a third person. Where the obligor is personally to perform the duty, his death or incapacity results in “objective,” not merely in “subjective,” impracticability (Comment e to § 261), since it is no longer practicable for anyone to perform the duty. The result is, of course, different if the language or the circumstances indicate the contrary (Comment c to § 261), but it is sufficiently rare for a party to undertake a duty to render personal service in spite of his death or incapacity that an intention to do so must be clearly manifested. Although the obligor’s fault will prevent his disability from discharging that duty, it is often so difficult to foresee the effect of conduct on health that fault in bringing about disability must be clear in order to prevent the disability from resulting in discharge. The rule applies not only to the disability of a natural person but also, by analogy, to the dissolution of a legal person such as a corporation. However, it is seldom applicable to such cases in practice because the dissolution ordinarily must not be due to its financial inability (see Comment b to § 261) and, since it must not be due to its own fault, it must not be within its control. If the disability exists at the time the contract is made, the rule stated in § 266(1) rather than that stated in § 261 controls, and this Section applies for the purpose of that rule as well.

1. A contracts to employ B as his confidential secretary for a year. B dies before the end of the year. B’s duty to work for A is discharged, and B’s estate is not liable to A for breach of contract.

2. The facts being otherwise as stated in Illustration 1, A rather than B dies before the end of the year, and B takes other employment. B’s duty to work for A is discharged, and B is not liable to A’s estate for breach of contract.

3. A, a corporation, contracts to employ B as itssecretary for five years. Within that time the state legislature enacts a law requiring the dissolution of corporations engaged in A’s business. On dissolution, A’s duty to employ B is discharged, and A is not liable to B for breach of contract. See also § 264. B may have a claim against A under the rule stated in § 272(1).

4. The facts being otherwise as in Illustration 3, A’s dissolution is voluntary or the result of insolvency. A’s duty to employ B is not discharged, and A is liable to B for breach of contract. See Comment b and Illustration 3 to § 261. Cf. Illustration 5 to § 319.

5. A contracts with B to produce a play starring C, a famous actor, in B’s theater on December 16. Early in December, while the play is being performed elsewhere, C experiences a worsening throat condition and, although it does not prevent his performing, he is advised by his doctor to cancel his further performances and have a minor operation. On December 12, A notifies B that the December 16 performance of the play is cancelled for this reason. A’s duty to produce the play is discharged, and A is not liable to B for breach of contract. Compare Illustration 7 to § 261.

b. Where particular person is necessary.

The parties may effectively provide that a particular person is or is not necessary for performance. The agreement may, for example, require the obligor’s personal service. Where, as is often the case, the agreement is silent on the subject, all the circumstances will be considered to determine whether the duty, as understood by the parties, sufficiently involves elements of personal service or discretion to require performance by a particular person. In this connection, resort may be had to the rules laid down in Chapter 9, The Scope of Contractual Obligations, including those on usage and course of dealing (§§ 219-23). The question whether a duty requires performance by a particular person is essentially the same question that arises where a party seeks to delegate performance of his duty to another and is to be determined by the same criteria. If an obligor can discharge his duty by the performance of another, his own disability will not discharge him.

6. A contracts with B to cut a tract of standing timber. A dies, and his estate refuses to complete performance. In the absence of special circumstances showing that A’s personal service or supervision is necessary to performance of his duty, A’s duty to cut the timber is not discharged, and A’s estate is liable to B for breach of contract.

7. A and B make a contract under which A is to devote full time to prospecting for coal on B’s land, and, if he is successful, B personally is to finance and manage a corporation for the exploitation of the coal. B is to pay A a salary and convey to him a one-quarter interest in any resulting corporation. A locates coal and is paid his salary, but B dies before he is able to finance and manage a corporation to exploit it, and no such corporation is formed. Whether performance of B’s duty to finance and manage a corporation became impracticable on B’s death depends on whether that duty, as understood by the parties, could only be performed by B himself. If the court concludes that it could, B’s duty to convey an interest in any resulting corporation is discharged, and B’s estate is not liable to A for breach of contract. A may have a claim against B under the rule stated in § 272(1).

8. A and B, a firm of architects, contract with C to design a building for C. It is understood by the parties that both A and B shall render services under the contract. A dies and B fails to complete performance. Both A’s and B’s duties to design the building are discharged, and neither A’s estate nor B is liable to C for breach of contract.

9. A and B, a firm of contractors doing an extensive business in many localities, contract with C to fill a tract of low land. A dies and B fails to complete performance. Neither A’s nor B’s duty to fill the land is discharged, and both A’s estate and B are liable to C for breach of contract.

[]{#_Toc161928249 .anchor}R. 2d Contracts § 263 – Destruction, Deterioration or Failure to Come Into Existence of Thing Necessary for Performance

If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made.

a. Rationale.

This Section, like the preceding one, states a common specific instance for the application of the rule stated in § 261. If, as both parties understand, the existence of a specific thing is necessary for the performance of a duty it is “a basic assumption on which the contract was made” that that thing will come into existence if it does not already exist and will remain in existence until the time for performance. Therefore, if its failure to come into existence or its destruction or deterioration makes performance impracticable, the obligor’s duty to render that performance is discharged, subject to the qualifications stated in § 261. Each party bears some of the risk that the transaction will not be carried out for such a reason. The rule does not apply, however, where an obligor merely happens to have at his disposal only one means of performance, which is destroyed, since the parties do not then make the contract on the basis of such an assumption. See Comment b to § 261. Nor does it apply if the language or the circumstances indicate the contrary. See Comment c to § 261. If the parties contract on an erroneous assumption that a specific thing necessary for performance is then in existence, the rule stated in § 266(1) rather than that stated in § 261 controls, and this Section applies for the purpose of that rule as well.

1. A contracts to sell and B to buy cloth. A expects to manufacture the cloth in his factory, but before he begins manufacture the factory is destroyed by fire without his fault. Although cloth meeting the contract description is available on the market, A refuses to buy and deliver it to B. A’s duty to deliver the cloth is not discharged, and A is liable to B for breach of contract. See Illustration 12 to § 261; compare Illustration 7 to this Section.

2. The facts being otherwise as stated in Illustration 1, A contracts to sell cloth to be manufactured in the factory that is later destroyed. A’s duty to deliver the cloth is discharged, and A is not liable to B for breach of contract. Cf. Illustration 13 to § 261.

3. A contracts with B to shingle the roof of B’s house. When A has done part of the work, much of the house including the roof is destroyed by fire without his fault, so that he is unable to complete the work. A’s duty to shingle the roof is discharged, and A is not liable to B for breach of contract. Compare Illustration 6 to § 261.

4. A contracts with B to build a house for B. When A has done part of the work, much of the structure is destroyed by fire without his fault. A refuses to finish building the house. A’s duty to build the house is not discharged, and A is liable to B for breach of contract.

5. A contracts to sell a specified machine to B for $ 10,000. Before A tenders the machine to B, a fire destroys it without A’s fault. A’s duty to deliver the machine is discharged (U.C.C. § 2-613), and A is not liable for breach of contract. Compare Illustration 4 to § 267.

b. When specific thing is necessary.

The rule stated in this Section applies not only when the terms of the contract make the specific thing necessary, but also when, although the contract is silent, the parties understand that it is necessary. In proving such an understanding, prior negotiations may be used to show the meaning of a writing, even though it takes the form of a completely integrated agreement. See § 214(c).

6. A contracts with B to drive logs to B’s mill during the following spring. Although the contract does not specify a particular stream, the parties know that there is only one stream down which the logs can be driven. An extraordinary drought dries that stream up during the time for performance. A’s duty to drive the logs is discharged, and A is not liable to B for breach of contract.

7. A, a farmer, contracts with B in the spring to sell a large quantity of beans to B during the following season. Although the contract does not state where the beans are to be grown, A owns but one tract of land, on which he has in the past raised beans, and both parties understand that the beans will be raised on this tract. A properly plants and cultivates beans on the tract in sufficient quantity to perform the contract, but an extraordinary flood destroys the crop. A delivers no beans to B. A’s duty to deliver beans is discharged, and A is not liable to B for breach of contract. Compare Illustration 1 to this Section; Illustration 12 to § 261.

8. The facts being otherwise as stated in Illustration 7, A and B have no common understanding as to where the beans will be grown. A’s duty to deliver beans is not discharged, and A is liable to B for breach of contract. Cf. Comment f to § 261.

[]{#_Toc161928250 .anchor}R. 2d Contracts § 264 – Prevention by Governmental Regulation or Order

If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.

a. Rationale.

This Section, like the two that precede it, states a specific instance for the application of the rule stated in § 261. It is “a basic assumption on which the contract was made” that the law will not directly intervene to make performance impracticable when it is due. Therefore, if supervening governmental action prohibits a performance or imposes requirements that make it impracticable, the duty to render that performance is discharged, subject to the qualifications stated in § 261. The fact that it is still possible for a party to perform if he is willing to break the law and risk the consequences does not bar him from claiming discharge. The rule stated in this Section does not apply if the language or the circumstances indicate the contrary. With the trend toward greater governmental regulation, however, parties are increasingly aware of such risks, and a party may undertake a duty that is not discharged by such supervening governmental actions, as where governmental approval is required for his performance and he assumes the risk that approval will be denied (Illustration 3). Such an agreement is usually interpreted as one to pay damages if performance is prevented rather than one to render a performance in violation of law.

1. A sells land to B, who, as part of the contract, promises that the land shall not be built upon. The land is taken by eminent domain under statutory authority and a building is built on it. B’s duty not to build on the land is discharged, and B is not liable to A for breach of contract.

2. A, a railroad, promises to give B annual passes for life, in consideration for a conveyance of land by B to A. After thirteen years, a statute is enacted forbidding railroads to grant such passes, and A refuses to give further passes to B. A’s duty to give passes is discharged, and A is not liable to B for breach of contract. B may have a claim against A under the rule stated in § 272(1).

3. A, a manufacturer of sewage treatment equipment, contracts to design and install a central sewage treatment plant, for which B, a developer of a residential subdivision, contracts to pay. The parties understand that A must obtain the approval of the state Department of Health before installation. A is unable to install the plant because the Department of Health disapproves the plans. If the court concludes, on the basis of A’s experience and the absence of any limitation in the contract, that A assumed the risk that approval would be denied, it will decide that A’s duty to install the plant is not discharged and that A is liable to B for breach of contract.

4. A contracts with B to sell him a specific machine on a stated day, time being of the essence. C, by false allegations of ownership of the machine, induces a court to enjoin A from delivering the machine. In spite of diligent efforts, A is unable to have the injunction dissolved in time to fulfill his contract with B. A’s duty to deliver the machine is discharged, and A is not liable to B for breach of contract. The result would be different if due to A’s fault C had just grounds for obtaining the injunction, or if A, in breach of his duty of good faith and fair dealing (§ 205), failed to use diligent efforts which could have secured its dissolution. See Comment d to § 261 and Illustration 11 to that section.

5. A and B make a contract under which A is to employ B for a year. B is unable to complete his performance because he is arrested and imprisoned for a burglary that he has committed. Because his inability was due to his own fault, B’s duty to work for a year is not discharged, and B is liable to A for breach of contract. See Comment d to § 261.

b. Nature of regulation or order.

Under the rule stated in this Section, the regulation or order may be domestic or foreign. It may emanate from any level of government and may be, for example, a municipal ordinance or an order of an administrative agency. Any governmental action is included and technical distinctions between “law,” “regulation,” “order” and the like are disregarded. It is not necessary that the regulation or order be valid, but a party who seeks to justify his non-performance under this Section must have observed the duty of good faith and fair dealing imposed by § 205 in attempting, where appropriate, to avoid its application. The requirement is like that of U.C.C. § 2-615, under which compliance in good faith is sufficient regardless of the validity of the regulation or order. The regulation or order must directly affect a party’s performance in such a way that it is impracticable for him both to comply with the regulation or order and to perform. Governmental action that has the indirect effect of making performance more burdensome by, for example, contributing to a scarcity of supply, is governed by the general rule stated in § 261 and not by the specific rule stated in this Section.

6. A, a citizen of a foreign country, contracts with B to sell him the output of A’s mill for one year. War breaks out, and A’s government orders him to sell the output of his mill to it instead. A complies with the order in good faith and fails to deliver to B. A’s duty to deliver his output to B is discharged, and A is not liable for breach of contract. The result does not depend on the legal validity of the order.

[]{#_Toc161928251 .anchor}R. 2d Contracts § 265 – Discharge by Supervening Frustration

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

a. Rationale.

This Section deals with the problem that arises when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract. It is distinct from the problem of impracticability dealt with in the four preceding sections because there is no impediment to performance by either party. Although there has been no true failure of performance in the sense required for the application of the rule stated in § 237, the impact on the party adversely affected will be similar. The rule stated in this Section sets out the requirements for the discharge of that party’s duty. First, the purpose that is frustrated must have been a principal purpose of that party in making the contract. It is not enough that he had in mind some specific object without which he would not have made the contract. The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. Second, the frustration must be substantial. It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract. Third, the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. This involves essentially the same sorts of determinations that are involved under the general rule on impracticability. See Comments b and c to § 261. The foreseeability of the event is here, as it is there, a factor in that determination, but the mere fact that the event was foreseeable does not compel the conclusion that its non-occurrence was not such a basic assumption.

1. A and B make a contract under which B is to pay A $ 1,000 and is to have the use of A’s window on January 10 to view a parade that has been scheduled for that day. Because of the illness of an important official, the parade is cancelled. B refuses to use the window or pay the $ 1,000. B’s duty to pay $ 1,000 is discharged, and B is not liable to A for breach of contract.

2. A contracts with B to print an advertisement in a souvenir program of an international yacht race, which has been scheduled by a yacht club, for a price of $ 10,000. The yacht club cancels the race because of the outbreak of war. A has already printed the programs, but B refuses to pay the $ 10,000. B’s duty to pay $ 10,000 is discharged, and B is not liable to A for breach of contract. A may have a claim under the rule stated in § 272(1).

3. A, who owns a hotel, and B, who owns a country club, make a contract under which A is to pay $ 1,000 a month and B is to make the club’s membership privileges available to the guests in A’s hotel free of charge to them. A’s building is destroyed by fire without his fault, and A is unable to remain in the hotel business. A refuses to make further monthly payments. A’s duty to make monthly payments is discharged, and A is not liable to B for breach of contract.

4. A leases neon sign installations to B for three years to advertise and illuminate B’s place of business. After one year, a government regulation prohibits the lighting of such signs. B refuses to make further payments of rent. B’s duty to pay rent is discharged, and B is not liable to A for breach of contract. See Illustration 7.

5. A contracts to sell and B to buy a machine, to be delivered to B in the United States. B, as A knows, intends to export the machine to a particular country for resale. Before delivery to B, a government regulation prohibits export of the machine to that country. B refuses to take or pay for the machine. If B can reasonably make other disposition of the machine, even though at some loss, his principal purpose of putting the machine to commercial use is not substantially frustrated. B’s duty to take and pay for the machine is not discharged, and B is liable to A for breach of contract.

6. A leases a gasoline station to B. A change in traffic regulations so reduces B’s business that he is unable to operate the station except at a substantial loss. B refuses to make further payments of rent. If B can still operate the station, even though at such a loss, his principal purpose of operating a gasoline station is not substantially frustrated. B’s duty to pay rent is not discharged, and B is liable to A for breach of contract. The result would be the same if substantial loss were caused instead by a government regulation rationing gasoline or a termination of the franchise under which B obtained gasoline.

b. Limitations on scope.

The rule stated in this Section is subject to limitations similar to those stated in § 261 with respect to impracticability. It applies only when the frustration is without the fault of the party who seeks to take advantage of the rule, and it does not apply if the language or circumstances indicate the contrary. Frustration by circumstances existing at the time of the making of the contract rather than by supervening circumstances is governed by the similar rule stated in § 266(2).

7. The facts being otherwise as in Illustration 4, the government regulation provides for a procedure under which B can apply for an exemption, but B, in breach of his duty of good faith and fair dealing (§ 205), fails to make such an application. Unless it is found that such an application would have been unsuccessful, B’s duty to pay rent is not discharged, and B is liable to A for breach of contract. Cf. Illustration 11 to § 261; Illustration 3 to § 264.

[]{#_Toc161928252 .anchor}N.H.R.S.A. 382-A § 2-615 – Excuse by Failure of Presupposed Conditions.

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

Editor’s Note: U.C.C. § 2-615, which was drafted before the Restatement (Second) of Contracts, replaced the common law requirement of impossibility of performance with a less stringent standard of commercial impracticability. Under the old common law doctrine, performance was excused only if it was physically or objectively impossible. However, U.C.C. § 2-615 justifies a seller's nonperformance if it is “commercially impracticable.”

Since the U.C.C. was originally adopted, however, many common law jurisdiction followed this approach and likewise expanded the impossibility doctrine to include impractability. The Restatement (Second) of Contracts, which was drafted after the this U.C.C. provision was adopted by nearly all jurisdictions, permits excuse on the ground of reasonable impracticability, which is something less than impossibility.

Chapter 21 | Assent

[]{#_Toc161928254 .anchor}R. 2d Contracts § 278 – Substituted Performance

(1) If an obligee accepts in satisfaction of the obligor’s duty a performance offered by the obligor that differs from what is due, the duty is discharged.

(2) If an obligee accepts in satisfaction of the obligor’s duty a performance offered by a third person, the duty is discharged, but an obligor who has not previously assented to the performance for his benefit may in a reasonable time after learning of it render the discharge inoperative from the beginning by disclaimer.

a. Substituted performance by the obligor.

If the obligor offers a performance that differs from what is due in full or partial satisfaction of his duty, the obligee need not accept it. If he chooses to accept it, however, the obligor is discharged in accordance with the terms of the offer. The obligee generally cannot avoid the consequences of such an exercise of dominion by a declaration that he does not assent to the condition attached by the debtor. U.C.C. § 1-207, providing for acceptance of performance under reservation of rights, need not be read as changing this well-established rule. See Comment d to § 281.

1. A owes B $ 1,000. A offers B a machine in full satisfaction of his debt, and B accepts it. A’s debt is discharged. The result is the same if, before accepting the machine, B writes A that he does not accept it in full satisfaction of the debt.

b. Substituted performance by third person.

The obligee need not accept a performance that is offered in full or partial satisfaction of the obligor’s duty by a third person who does not do so on behalf of the obligor. If he chooses to accept it, however, the obligor is discharged in accordance with the terms of the third person’s offer. The performance may be the same as or different from that originally due from the obligor. The transaction is regarded as one for the benefit of the obligor, who, like any intended beneficiary, has the power to disclaim the benefit of the third person’s performance and deprive it of its effect as a discharge.

2. A owes B $ 1,000. C offers B a machine in full satisfaction of A’s debt, and B accepts it. A’s debt is discharged.

c. Consideration for discharge.

Under the rule stated in § 273, although the discharge is an immediate change in the legal relations between the obligor and the obligee and involves no promise by the obligee, it is not effective unless it is supported by consideration or some substitute for consideration.Under the rules on performance of a legal duty and settlement of claims stated in §§ 73 and 74, part performance by an obligor of a duty that is liquidated and undisputed is not consideration for a discharge of that duty in full, even if the obligee so accepts it. This result has been much criticized and slight variations of circumstance are often held to take a case out of the rule. See Comment c to § 73. Thus part performance of such a duty by a third party is regarded as different in this respect and may be consideration for a discharge in full. This does not, however, extend to the situation where the third party acts as the obligor’s agent or to the one where he purports to do so and the obligor later ratifies his act. Nor does it extend to the case where a debtor simply offers payment by means of a third person’s check.

3. A owes B a liquidated and undisputed matured debt of $ 1,000. A offers B $ 500 in full satisfaction of the debt, and B accepts the $ 500. A’s debt is discharged only to the extent of $ 500.

4. The facts being otherwise as stated in Illustration 3, the $ 500 is offered by C, a third person, instead of A. A’s debt is discharged in full.

[]{#_Toc161928255 .anchor}R. 2d Contracts § 279 – Substituted Contract

(1) A substituted contract is a contract that is itself accepted by the obligee in satisfaction of the obligor’s existing duty.

(2) The substituted contract discharges the original duty and breach of the substituted contract by the obligor does not give the obligee a right to enforce the original duty.

a. Nature and effect of a substituted contract.

A substituted contract is one that is itself accepted by the obligee in satisfaction of the original duty and thereby discharges it. A common type of substituted contract is one that contains a term that is inconsistent with a term of an earlier contract between the parties. If the parties intend the new contract to replace all of the provisions of the earlier contract, the contract is a substituted contract. If a substituted contract brings in a new party it is called a “novation” (§ 280).

1. A is under a duty to deliver a tractor to B on July 1. On June 1, A offers to deliver a bulldozer to B on July 1 if B will accept his promise in satisfaction of A’s duty to deliver the tractor, and B accepts. The contract is a substituted contract. A’s duty to deliver the tractor is discharged. If A does not deliver the bulldozer, B can enforce the duty to deliver it but not the original duty to deliver the tractor.

2. A and B make a contract under which A promises to build on a designated spot a building, for which B promises to pay $ 100,000. Later, before this contract is performed, A and B make a new contract under which A is to build on the same spot a different building, for which B is to pay $ 200,000. The new contract is a substituted contract and the duties of A and B under the original contract are discharged.

b. Validity of substituted contract.

Under the rule stated in § 273, although the discharge that results from a substituted contract is an immediate change in the legal relations between the obligor and the obligee and involves no promise by the obligee, it is not effective unless it is supported by consideration or some substitute for consideration. See Comment c to § 278. Furthermore, to the extent that the substituted contract is vulnerable on such grounds as mistake, misrepresentation, duress or unconscionability, recourse may be had on the original duty. Thus, if the substituted contract is voidable, it discharges the original duty until avoidance, but on avoidance of the substituted contract the original duty is again enforceable. If the substituted contract is unenforceable because of the Statute of Frauds, it does not bar enforcement of the original duty. Cf. § 149.

3. A owes B a liquidated and undisputed matured debt of $ 1,000. A offers to pay B $ 500 in 30 days if B will accept his promise in full satisfaction of the debt, and B accepts. A’s debt is not discharged. See Illustration 3 to § 278.

4. The facts being otherwise as stated in Illustration 1, A by fraudulent misrepresentations induces B to make the contract for delivery of the bulldozer. B may avoid the substituted contract and enforce the original contract, or he may enforce the substituted contract.

c. Accord distinguished.

Because the original duty is discharged regardless of whether the substituted contract is performed, a substituted contract differs from an accord, under which the original duty is discharged only if the accord is performed. Whether a contract is a substituted contract or an accord is a question of interpretation, subject to the general rules stated in Chapter 9. In resolving doubts in this regard, a court is less likely to conclude that an obligee was willing to accept a mere promise in satisfaction of an original duty that was clear than in satisfaction of one that was doubtful. It will therefore be less likely to find a substituted contract and more likely to find an accord if the original duty was one to pay money, if it was undisputed, if it was liquidated and if it was matured. Compare Illustration 1 with Illustration 1 to § 281.

[]{#_Toc161928256 .anchor}R. 2d Contracts § 280 – Novation

A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty.

a. Definition of novation.

The word “novation” is used in this Restatement to refer to a type of substituted contract that has the effect of adding a party, either as obligor or obligee, who was not a party to the original duty. See Comment a to § 279. A novation may involve more than three parties. The performance to be rendered under the new duty may be the same as or different from that to be rendered under the original duty. It is also possible to have an accord that adds a new party, but that is less often the case and such an accord is not termed a novation. See Illustration 1.

b. Effect of novation.

A novation discharges the original duty, just as any other substituted contract does, so that breach of the new duty gives no right of action on the old duty. Most novations simply substitute a new obligor for an old obligor or, less commonly, a new obligee for an old obligee. Sometimes these are termed simple novations, to distinguish them from more complex transactions that are termed compound novations.

c. Consideration.

A novation is subject to the same requirements as any other contract, including that of consideration. However, since consideration need not be given to the promisor and need not be given by the promisee (§ 71 (4)), consideration to support the discharge of the original duty can usually be found in the promise to undertake a new duty. It is not necessary for this purpose that all of the parties to the novation manifest their assent simultaneously nor that they all be in the same place, but their manifestations of assent must have reference to one another (§ 23). Although all parties usually assent to a novation, a novation is possible without the assent of the obligor of the original duty or of the obligee of the new duty if that party is an intended beneficiary and does not disclaim (§ 306). See Illustrations 2 and 5. Assent of the obligee of the original duty and of the obligor of the new duty is always necessary.

d. Substitution of obligor.

A simple novation involving a substitution of obligors results when an obligee promises the obligor that he will discharge the obligor’s duty in consideration for a third person’s promise to pay the obligee. See Illustration 1.

As to the analogous situation of an obligee who takes in payment from the obligor a negotiable instrument on which a third person is liable, see U.C.C. § 3-802. A substitution of obligors may also result when an obligee promises a third person that he will discharge the obligor’s duty in consideration for the third person’s promise to render either the performance that was due from the obligor or some other performance. Even a promise to render part performance is consideration in that situation. See Comment c to § 278.

If the obligor is an intended beneficiary (§ 302), there is a novation. The assent of the obligor is not required. However, his rights are governed by the rules stated in Chapter 14, Contract Beneficiaries, and if he has not assented he can by disclaimer render the transaction inoperative from the beginning (§ 306). See Illustration 2. Such a novation also results when a third person promises an obligor to assume, immediately and in substitution for the obligor’s duty, a duty to the obligee to render the performance that was due from the obligor or some other performance, and the obligee agrees with the obligor or with the third person to that substitution. The third person then comes under a new duty to the obligee, who is an intended beneficiary of his promise to assume (§ 302), and this is consideration for the obligee’s agreement to discharge the original obligor. The obligee, having already assented to the discharge of the duty in this way, has no power to disclaim it. See Illustration 3.

However, a mere promise by a third party to assume the obligor’s duty, not offered in substitution for that duty, does not result in a novation, and the new duty that the third party may owe to the obligee as an intended beneficiary is in addition to and not in substitution for the obligor’s original duty. For a novation to take place, the obligee must assent to the discharge of the obligor’s duty in consideration for the promise of the third party to undertake that duty. As to the effect of an obligee’s acceptance of performance from an assignee after a repudiation by the obligor, see § 329(2).

1. A owes B $ 1,000. B promises A that he will discharge the debt immediately if C will promise B to pay B $ 1,000. C so promises. There is a novation under which B’s and C’s promises are consideration for each other and A is discharged.

2. A owes B $ 1,000. B promises C that he will discharge the debt immediately if C will promise him to pay him $ 1,000. Intending to benefit A, C so promises. There is a novation under which B’s and C’s promises are consideration for each other, and A’s duty to pay B is discharged. A is an intended beneficiary of B’s promise (§ 302) and can by disclaimer render the transaction, including the discharge, inoperative from the beginning (§ 306). The result is the same if B’s promise is made in return for C’s promise to pay $ 500. See Illustration 4 to § 278.

3. A owes B a duty to service B’s machine for a year. A sells part of his business to C, who promises A that he will assume A’s duty to B if B promises to accept it immediately and in substitution for A’s duty. B so promises A. There is a novation under which B’s and C’s promises are consideration for each other, and A’s duty to service B’s machine is discharged. B is an intended beneficiary of C’s promise (§ 302), but cannot disclaim because he has assented. The result is the same if B’s promise is made to C.

e. Substitution of obligee.

A simple novation involving a substitution of obligees results when an obligee promises his obligor to discharge the obligor’s duty in consideration for the obligor’s promise to a third person to render either the performance that was due from the obligor or some other performance. See Illustration 4.

A substitution of obligees may also result when the obligor’s promise is one made directly to the obligee but is one to render the performance to a third person as beneficiary. If the third person is an intended beneficiary (§ 302), there is a novation. Illustration 5.

The assent of the third person is not required. However, his rights are subject to the rules stated in Chapter 14, Contract Beneficiaries, and if he has not assented he can by disclaimer render the transaction, including the discharge, inoperative from the beginning. Obligees may also be substituted by assignment of a right, which differs from novation in that assignment requires neither the knowledge nor the assent of the obligor and cannot change the performance to be rendered by him. For other differences, see Chapter 15, Assignment and Delegation.

4. A owes B $ 1,000. B promises A that he will discharge the debt immediately if A will promise C to perform stated services to C. A so promises C. There is a novation under which A’s and B’s promises are consideration for each other and A’s duty to pay B is discharged. If B’s promise were to discharge A when A performed the services, there would be an accord rather than a novation.

5. A owes B $ 1,000. Intending to benefit C, B promises A that he will discharge the debt immediately if A will promise him to perform stated services to C. A so promises B. There is a novation under which A’s and B’s promises are consideration for each other and A’s duty to pay B is discharged. C is an intended beneficiary of A’s promise (§ 302) and can by disclaimer render the transaction, including the discharge, inoperative from the beginning.

f. Compound novations.

The novations already described involve a simple substitution of one obligor or obligee for another. More complex transactions, sometimes called compound novations, are possible. If, for example, there are two duties and the obligee of the first is the obligor of the second, the three parties may agree that one party shall drop out altogether. See Illustration 6.

Furthermore, if each of two parties has a right against the other, they may agree with a third party that the third party shall immediately acquire a right against and be subject to a duty to one of them in substitution for the original right of and duty due the other. The new right and duty may be for performances that are the same as or different from the original ones. See Illustration 7.

6. A owes B $ 1,000 and B owes C $ 1,000. A promises B and C that he will assume B’s debt to C if B promises to discharge A’s debt to B and if C promises to discharge B’s debt to C and accept A as his debtor. B and C so promise. There is a novation under which A’s promise and B’s and C’s promises are consideration for each other, and A’s debt to B and B’s debt to C are discharged.

7. A and B make a contract under which A promises to deliver a tractor to B and B promises to pay A $ 1,000. A promises to deliver a bulldozer to C and to discharge B’s duty if B promises to discharge A’s duty and C promises to pay A $ 2,000. B and C so promise. There is a novation and A’s duty to deliver a tractor to B and B’s duty to pay $ 1,000 are discharged.

[]{#_Toc161928257 .anchor}R. 2d Contracts § 281 – Accord and Satisfaction

(1) An accord is a contract under which an obligee promises to accept a stated performance in satisfaction of the obligor’s existing duty. Performance of the accord discharges the original duty.

(2) Until performance of the accord, the original duty is suspended unless there is such a breach of the accord by the obligor as discharges the new duty of the obligee to accept the performance in satisfaction. If there is such a breach, the obligee may enforce either the original duty or any duty under the accord.

(3) Breach of the accord by the obligee does not discharge the original duty, but the obligor may maintain a suit for specific performance of the accord, in addition to any claim for damages for partial breach.

a. Nature of an accord.

An accord is a contract under which an obligee promises to accept a substituted performance in future satisfaction of the obligor’s duty. Because an accord is a contract, it differs from a mere revocable offer by the obligee to accept a substituted performance in satisfaction of the duty (§ 278). The typical accord involves an exchange of promises (Illustration 1), although an accord may also take the form of an option contract (Illustration 2). It is the essence of an accord that the original duty is not satisfied until the accord is performed, a result that is sometimes suggested by use of the term “executory accord.” See Comment e.

b. Suspensory effect.

The accord entitles the obligor to a chance to render the substituted performance in satisfaction of the original duty. Under the rule stated in Subsection (2), the obligee’s right to enforce that duty is suspended subject to the terms of the accord until the obligor has had that chance. If the obligor is under a duty to perform the accord, his performance discharges both his original duty and his duty under the accord (§ 235). If, however, there is such a breach of the accord by the obligor as discharges the obligee’s duty under the accord to accept the stated performance in satisfaction, he is no longer bound by the accord. He may then choose between enforcement of the original duty and any duty under the accord. Whether a breach by the obligor discharges the obligee’s duty under the accord is governed by the rules stated in Chapter 10, Performance and Non-Performance.

1. A owes B $ 10,000. They make a contract under which A promises to deliver to B a specific machine within 30 days and B promises to accept it in satisfaction of the debt. The contract is an accord. A’s debt is suspended and is discharged if A delivers the machine within 30 days.

2. A owes B $ 10,000. In consideration of $ 10 paid by A, not as part of the debt, B promises to accept in satisfaction of the debt a specific machine from A within 30 days. The contract is an accord. A’s debt is suspended for 30 days and is discharged if A delivers the machine within 30 days, although A is under no duty to deliver the machine.

3. A, B and C, who are creditors of D, enter into a voluntary composition with D under which D promises to pay and A, B and C promise to accept 50% of their debts in full satisfaction. The composition is an accord. D’s debts are suspended and are discharged if D pays the 50%.

4. The facts being otherwise as stated in Illustration 1, A fails to deliver the machine within 30 days and tells B that he will not deliver it. B can enforce either the original $ 10,000 debt or the duty to deliver the machine.

c. Effect of obligee’s breach.

If a breach of the accord by the obligee prevents the obligor from performing the accord, the original duty is not discharged, but the obligor has a claim for damages for total breach of the accord. However, the obligor’s damages cannot be measured simply by his original duty, but must take account of what he has saved by not performing. To avoid imposing on the innocent obligor the burden of proving these damages, specific performance of the accord will be granted unless for some reason that remedy is inappropriate. In addition, the obligor may have a claim for damages for partial breach.

5. The facts being otherwise as stated in Illustration 1, A tenders the machine within 30 days, but B refuses to receive it. If B then sues on the original $ 10,000 debt, A can obtain a decree of specific performance providing for the concurrent delivery of the machine and the discharge of the debt.

d. Validity of accord.

The enforceability of an accord is governed by the rules applicable to the enforceability of contracts in general. The obligee’s promise to accept the substituted performance in satisfaction of the original duty may be supported by consideration because that performance differs significantly from that required by the original duty (§ 73) or because the original duty is in fact doubtful or is believed by the obligor to be so (§ 74). It may also be supported by the obligor’s reliance even in the absence of consideration (§ 90). A recurring situation involves the creditor who indorses and cashes a check sent by the debtor and marked “payment in full.” The debtor then argues that the creditor, by exercising dominion over the check, has made an accord under which he has promised to accept payment of the check in satisfaction of the debt. Assuming that the transaction is not subject to objections such as those based on the absence of consideration (§§ 73, 74), on lack of good faith and fair dealing (§ 205) and on unconscionability (§ 208), such a notation by the debtor, if prominent enough to meet the requirements of § 19(2), may form the basis of an enforceable accord pursuant to the general rule stated in § 69(2). The creditor cannot generally avoid the consequences of his exercise of dominion by a declaration that he does not assent to the condition attached by the debtor. U.C.C. § 1-207, providing for acceptance of performance under reservation of rights, need not be read as changing this well-established rule. See Comment a to § 278.

6. A contracts with B to have repairs made on A’s house, no price being fixed. B sends A a bill for $ 1,000. A honestly disputes this amount and sends a letter explaining that he thinks the amount excessive and is enclosing a check for $ 800 as payment in full. B, after reading the letter, indorses the check and deposits it in his bank for collection. B is bound by an accord under which he promises to accept payment of the check as satisfaction of A’s debt for repairs. The result is the same if, before indorsing the check, B adds the words “Accepted under protest as part payment.” The result would be different, however, if B’s claim were liquidated, undisputed and matured.

e. Substituted contract distinguished.

Because the obligor’s original duty is not satisfied until the accord is performed, an accord differs from a substituted contract, under which a promise of substituted performance is accepted in satisfaction of the original duty. Whether a contract is an accord or a substituted contract is a question of interpretation, subject to the general rules stated in Chapter 9. In resolving doubts in this regard, a court is less likely to conclude that an obligee was willing to accept a mere promise in satisfaction of an original duty that was clear than in satisfaction of one that was doubtful. It is therefore less likely to find a substituted contract and more likely to find an accord if the original duty was one to pay money, if it was undisputed, if it was liquidated and if it was matured. Compare Illustration 1 with Illustration 1 to § 279.

[]{#_Toc161928258 .anchor}R. 2d Contracts § 282 – Account Stated

(1) An account stated is a manifestation of assent by debtor and creditor to a stated sum as an accurate computation of an amount due the creditor. A party’s retention without objection for an unreasonably long time of a statement of account rendered by the other party is a manifestation of assent.

(2) The account stated does not itself discharge any duty but is an admission by each party of the facts asserted and a promise by the debtor to pay according to its terms.

a. Computation not compromise or liquidation.

If a debtor and a creditor make an agreement in the nature of a compromise or liquidation of a disputed or unliquidated debt, the agreement may be either a substituted contract or an accord resulting in discharge under the rules stated in §§ 279 and 280. If, however, they make an agreement in the nature of a computation rather than of compromise of the debt, the agreement is called an “account stated.” An account stated must be founded on previous transactions that have given rise to the relation of debtor and creditor and is usually based on a number of items. If each party is indebted to the other an account stated may be founded on the difference between their indebtedness.

b. Manifestation of assent.

Usually it is the creditor who submits the statement, but it may be the debtor who does so. In either case, the recipient’s assent may be inferred from his conduct. Under the rule stated in Subsection (1), his retention of the statement for an unreasonably long time is a manifestation of his assent. How long a time is unreasonable is a question of fact to be answered in the light of all the circumstances. The parties, subject to rules such as that on unconscionability (§ 208), may fix by agreement a time after which the recipient will be considered to have assented to a statement of account. However, the party sending the statement cannot impose such a time limit on the recipient merely by a clause on the statement. For federal legislation on credit billing, see [15 U.S.C. § 1666]{.underline} (1975).

c. Effect of account stated.

An account stated does not itself result in discharge, but operates as an admission of its contents for evidentiary purposes. It also operates as a promise to pay. It may therefore become binding as the result of reliance under the rule stated in § 90.

It may also be effective as a promise to pay an antecedent indebtedness under the rule stated in § 82, although statutes in many states require that it be in writing and signed if it is to have this effect. See Comment a to § 82. If it is in writing it may also satisfy the Statute of Frauds. In the absence of a requirement of a writing, however, an account stated may be oral. The effect of an account stated as a promise is subject to the rules on mistake (Chapter 6).

1. A regularly sells goods to B. From time to time B returns some of the goods for credit and makes payments for the rest. At the end of each month, A sends B itemized statements of B’s outstanding balance. One of the statements incorrectly gives an outstanding balance of $ 5,500 because of A’s oversight in failing to debit B with a $ 1,000 delivery and to credit B with a $ 500 payment both made during the preceding month. Before either mistake is discovered, B writes A that the statement is “correct.” There is an account stated, but it does not prevent A from proving the $ 1,000 delivery or B from proving the $ 500 payment. B owes A $ 6,000.

2. A regularly sells goods to B. From time to time B returns some of the goods for credit and makes payments for the rest. At the end of each month, A sends B itemized statements of B’s outstanding balance. One of the statements incorrectly gives an outstanding balance of $ 5,500 because of A’s failure to credit B with a $ 1,000 payment that was stolen by one of A’s employees. B writes A that the statement is “correct” without verifying it, and the resulting delay in discovering the mistake prevents A from obtaining restitution from the employee. B is precluded from showing the mistake. B owes A $ 5,500.

3. The facts being otherwise as stated in Illustration 2, B does not write A that the statement is “correct.” B’s retention of the statement for an unreasonable time is a manifestation of assent to it. B owes A $ 5,500.

[]{#_Toc161928259 .anchor}R. 2d Contracts § 283 – Agreement of Rescission

(1) An agreement of rescission is an agreement under which each party agrees to discharge all of the other party’s remaining duties of performance under an existing contract.

(2) An agreement of rescission discharges all remaining duties of performance of both parties. It is a question of interpretation whether the parties also agree to make restitution with respect to performance that has been rendered.

a. Nature of agreement of rescission.

Sometimes the parties to a contract that is at least partly executory on each side make an agreement under which each party agrees to discharge all of the other party’s duties of performance. Such an agreement is called an “agreement of rescission” in this Restatement. Consideration is provided by each party’s discharge of the duties of the other. This is so even though one or both parties have partly performed their duties or one or both have a claim for damages for partial breach. The surrender of a doubtful claim may be enough under the rule stated in § 74. The agreement need not be expressed in words. Other conduct may show an intent by both parties to abandon their contract. If one party, even wrongfully, expresses a wish or an intention to cease performance and the other party fails to object, circumstances may justify the inference that there has been an agreement of rescission. Sometimes mere inaction on both sides, such as the failure to take any steps looking toward performance or enforcement, may indicate an intent to abandon the contract. Mere failure to object to a repudiation, however, is not a manifestation of assent to an agreement of rescission. The term “agreement of rescission” is used in this Restatement to avoid confusion with the word “rescission,” which courts sometimes use to refer to the exercise by one party of a power of avoidance (§ 7). An agreement of “partial rescission” that would discharge less than all the parties’ remaining duties of performance is treated as a modification. See Comment b. An agreement of rescission differs from a “termination,” which “occurs when either party pursuant to a power created by agreement or law puts an end to the contract otherwise than for its breach” and from a “cancellation,” which “occurs when either party puts an end to the contract for breach by the other.” U.C.C. § 2-106.

1. A and B make a contract under which A promises to paint B’s house and B promises to pay A $ 1,000. A finds, after beginning the work, that he will lose more money by finishing than by giving up at once and makes B an offer to rescind the contract. B accepts. There is an agreement of rescission and the duties of both A and B are discharged.

2. A and B make a contract under which A promises to paint B’s house and B promises to pay A $ 1,000. After A has finished the work, B’s financial condition has become impaired, and A tells B, “You need never pay me the $ 1,000 that you owe me.” There is no agreement of rescission and B’s duty to pay A $ 1,000 is not discharged. The result is the same if the original contract results from B’s offer to pay A $ 1,000 if A paints B’s house and A’s acceptance by doing the work.

b. The Statute of Frauds and oral agreement of rescission.

Under the rule stated in § 148, the Statute of Frauds does not affect the enforceability of an oral agreement of rescission unless rescission of a transfer of property is involved. An attempt to make an agreement of “partial rescission” that would discharge less than all of their remaining duties under the existing contract is considered a modification, subject to the rule stated in § 149, and not an agreement of rescission. Even a provision of the earlier contract to the effect that it can be rescinded only in writing does not impair the effectiveness of an oral agreement of rescission. In the absence of statute, such a self-imposed limitation does not limit the power of the parties subsequently to contract. A different rule is laid down in U.C.C. § 2-209(2) for contracts for the sale of goods.

c. Whether promise of restitution is included.

If the original contract has been partly performed on one or both sides at the time of the agreement of rescission, a question arises as to whether a party is entitled to restitution for such performance as he has rendered. There is no rule of law establishing a presumption to answer this question. It is a question of interpretation of the agreement of rescission that is to be determined on the facts of each case.

3. A and B make a contract under which A promises to sell B land for $ 100,000, payable in five installments of $ 20,000 each. B pays the first installment and takes possession under the contract. A and B then make an agreement of rescission. Whether A has a duty to return the $ 20,000 payment, either in full or less the fair rental value of the land for the time that B was in possession, is a question of interpretation of the agreement of rescission.

[]{#_Toc161928260 .anchor}R. 2d Contracts § 284 – Release

(1) A release is a writing providing that a duty owed to the maker of the release is discharged immediately or on the occurrence of a condition.

(2) The release takes effect on delivery as stated in §§ 101-03 and, subject to the occurrence of any condition, discharges the duty.

a. Nature of release.

Although no particular form is required for an agreement to discharge a duty, the term “release” has traditionally been reserved for a formal written statement by an obligee that the obligor’s duty is discharged. That usage is preserved in this Section. No special words are required and the writing may state, for example, that it releases the obligor, that it releases the obligor’s duties or that it releases the obligee’s rights. It must, however, take effect immediately or on the occurrence of a condition. A promise to discharge in the future an existing duty merely creates a new duty that can itself be discharged by the parties. Such a promise is not a release. The duty that is released need not be matured. A purported release of a duty that does not yet exist, however, is not a release but a promise to discharge a duty in the future. See Illustration 3. A purported release of a duty that is revived on the occurrence of a condition is not a release but a contract not to sue.

b. Effectiveness of release.

A release was traditionally made under seal and this may still be done in jurisdictions where the seal has not been deprived of its effect in this respect. A release may also be supported by consideration or the obligor’s reliance. Furthermore, statutes in some states give an unsealed release the same effect that a sealed release had at common law. As a formal instrument, a release is subject to the same requirements of delivery as is a contract under seal. Delivery may be to the obligor conditionally or unconditionally or in escrow. See §§ 101-03. A release is usually authenticated by the obligee’s signature.

1. A owes B $ 1,000. B delivers to A, in a state where the seal retains its effect, a sealed writing stating that B releases A from the debt. The writing is a release. A’s duty to pay B is discharged whether it was due when the release was given or not. The result is the same if the release is not under seal but is supported by consideration.

2. The facts being otherwise as stated in Illustration 1, the writing states that B releases A from the debt if B dies before it is due. The writing is a conditional release. The debt is discharged if B dies before it is due.

3. A, who is engaged in business transactions with B, receives from B a writing supported by consideration stating that B releases A from all debts that A owes or may in the future owe to B. One month later B sells goods to A, for which A promises to pay $ 10,000. With respect to debts not yet in existence, the writing is not a release but a contract to discharge A. The subsequent inconsistent contract operates as a modification of this earlier contract and A is under a duty to pay B $ 10,000.

c. Interpretation.

The rules of interpretation that apply to contracts generally apply also to writings that purport to be releases. The principal purpose of the obligee is given great weight if it can be ascertained (§ 202(1)).If a literal interpretation of a writing that purports to be a release would frustrate that purpose, the writing may be interpreted as a contract not to sue. This is particularly likely in the case of a purported release of one joint debtor that states that all rights against another joint debtor are reserved. If the effect of a literal interpretation of the writing as a release would be to release the other joint debtor (§ 294) and frustrate the obligee’s purpose as indicated by his attempted reservation of rights, the writing will be interpreted as a contract not to sue.

4. A and B are bound jointly to pay C $ 1,000. C delivers to A a writing supported by consideration stating that C releases A from the debt but that C reserves his rights against B. If a release of A would discharge B under the rules stated in § 294, the writing will be interpreted as a contract not to sue and not as a release.

[]{#_Toc161928261 .anchor}R. 2d Contracts § 89 – Modification of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or

(b) to the extent provided by statute; or

a. Rationale.

This Section relates primarily to adjustments in on-going transactions. Like offers and guaranties, such adjustments are ancillary to exchanges and have some of the same presumptive utility. See §§ 72, 87, 88. Indeed, paragraph (a) deals with bargains which are without consideration only because of the rule that performance of a legal duty to the promisor is not consideration. This Section is also related to § 84 on waiver of conditions: it may apply to cases in which § 84 is inapplicable because a condition is material to the exchange or risk. As in cases governed by § 84, relation to a bargain tends to satisfy the cautionary and channeling functions of legal formalities. See Comment c to § 72. The Statute of Frauds may prevent enforcement in the absence of reliance. See §§ 149-50. Otherwise formal requirements are at a minimum.

b. Performance of legal duty.

The rule of § 73 finds its modern justification in cases of promises made by mistake or induced by unfair pressure. Its application to cases where those elements are absent has been much criticized and is avoided if paragraph (a) of this Section is applicable. The limitation to a modification which is “fair and equitable” goes beyond absence of coercion and requires an objectively demonstrable reason for seeking a modification. Compare U.C.C. § 2-209 Comment. The reason for modification must rest in circumstances not “anticipated” as part of the context in which the contract was made, but a frustrating event may be unanticipated for this purpose if it was not adequately covered, even though it was foreseen as a remote possibility. When such a reason is present, the relative financial strength of the parties, the formality with which the modification is made, the extent to which it is performed or relied on and other circumstances may be relevant to show or negate imposition or unfair surprise.

The same result called for by paragraph (a) is sometimes reached on the ground that the original contract was “rescinded” by mutual agreement and that new promises were then made which furnished consideration for each other. That theory is rejected here because it is fictitious when the “rescission” and new agreement are simultaneous, and because if logically carried out it might uphold unfair and inequitable modifications.

1. By a written contract A agrees to excavate a cellar for B for a stated price. Solid rock is unexpectedly encountered and A so notifies B. A and B then orally agree that A will remove the rock at a unit price which is reasonable but nine times that used in computing the original price, and A completes the job. B is bound to pay the increased amount.

2. A contracts with B to supply for $ 300 a laundry chute for a building B has contracted to build for the Government for $ 150,000. Later A discovers that he made an error as to the type of material to be used and should have bid $ 1,200. A offers to supply the chute for $ 1000, eliminating overhead and profit. After ascertaining that other suppliers would charge more, B agrees. The new agreement is binding.

3. A is employed by B as a designer of coats at $ 90 a week for a year beginning November 1 under a written contract executed September 1. A is offered $ 115 a week by another employer and so informs B. A and B then agree that A will be paid $ 100 a week and in October execute a new written contract to that effect, simultaneously tearing up the prior contract. The new contract is binding.

4. A contracts to manufacture and sell to B 2,000 steel roofs for corn cribs at $ 60. Before A begins manufacture a threat of a nationwide steel strike raises the cost of steel about $ 10 per roof, and A and B agree orally to increase the price to $ 70 per roof. A thereafter manufactures and delivers 1700 of the roofs, and B pays for 1,500 of them at the increased price without protest, increasing the selling price of the corn cribs by $ 10. The new agreement is binding.

5. A contracts to manufacture and sell to B 100,000 castings for lawn mowers at 50 cents each. After partial delivery and after B has contracted to sell a substantial number of lawn mowers at a fixed price, A notifies B that increased metal costs require that the price be increased to 75 cents. Substitute castings are available at 55 cents, but only after several months delay. B protests but is forced to agree to the new price to keep its plant in operation. The modification is not binding.

c. Statutes.

U.C.C. § 2-209 dispenses with the requirement of consideration for an agreement modifying a contract for the sale of goods. Under that section the original contract can provide against oral modification, and the requirements of the Statute of Frauds must be met if the contract as modified is within its provisions; but an ineffective modification can operate as a waiver. The Comment indicates that extortion of a modification without legitimate commercial reason is ineffective as a violation of the duty of good faith imposed by the Code. A similar limitation may be applicable under statutes which give effect to a signed writing as a substitute for the seal, or under statutes which give effect to acceptance by the promisee of the modified performance. In some States statutes or constitutional provisions flatly forbid the payment of extra compensation to Government contractors.

d. Reliance.

Paragraph (c) states the application of § 90 to modification of an executory contract in language adapted from U.C.C. § 2-209. Even though the promise is not binding when made, it may become binding in whole or in part by reason of action or forbearance by the promisee or third persons in reliance on it. In some cases the result can be viewed as based either on estoppel to contradict a representation of fact or on reliance on a promise. Ordinarily reliance by the promisee is reasonably foreseeable and makes the modification binding with respect to performance by the promisee under it and any return performance owed by the promisor. But as under § 84 the original terms can be reinstated for the future by reasonable notification received by the promisee unless reinstatement would be unjust in view of a change of position on his part. Compare U.C.C. § 2-209(5).

6. A defaults in payment of a premium on a life insurance policy issued by B, an insurance company. Pursuant to the terms of the policy, B notifies A of the lapse of the policy and undertakes to continue the insurance until a specified future date, but by mistake specifies a date two months later than the insured would be entitled to under the policy. On inquiry by A two years later, B repeats the mistake, offering A an option to take a cash payment. A fails to do so, and dies one month before the specified date. B is bound to pay the insurance.

7. A is the lessee of an apartment house under a 99-year lease from B at a rent of $ 10,000 per year. Because of war conditions many of the apartments become vacant, and in order to enable A to stay in business B agrees to reduce the rent to $ 5,000. The reduced rent is paid for five years. The war being over, the apartments are then fully rented, and B notifies A that the full rent called for by the lease must be paid. A is bound to pay the full rent only from a reasonable time after the receipt of the notification.

8. A contracts with B to carry a shipment of fish under refrigeration. During the short first leg of the voyage the refrigeration equipment on the ship breaks down, and A offers either to continue under ventilation or to hold the cargo at the first port for later shipment. B agrees to shipment under ventilation but later changes his mind. A receives notification of the change before he has changed his position. A is bound to ship under refrigeration.

[]{#_Toc161928262 .anchor}N.H.R.S.A. 382-A § 2-209 – Modification, Rescission and Waiver.

(1) An agreement modifying a contract within this Article needs no consideration to be binding.

(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.

(3) The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provisions.

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.

(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

Editor’s Note: U.C.C. § 2-209 departs from the common-law rule requiring that contract modifications must be supported by consideration. U.C.C. § 2-209 provides that an agreement modifying a contract for the sale of goods needs no consideration to be binding, so long as this modification was made in good faith under commercial reasonable standards. (The good faith requirement is not articulated specifically in this section, but it applies to all contracts for sales of good.) This change makes it easier to modify contracts for sales of good that are subject to the statutory law of the U.C.C. when compared to contracts that are governed by the common law.

Some states, however, have likewise permitted “fair and reasonable” modifications, with consideration, to contracts governed by the common law. The trend away from formal requirements and toward reasonable understanding is thus reflected in both the statutotry law and in some jurisdiction’s application of the common law.

Chapter 22 | Expectation Damages

[]{#_Toc161928264 .anchor}R. 2d Contracts § 344 – Purposes of Remedies

Judicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promisee:

(a) his “expectation interest,” which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed,

(b) his “reliance interest,” which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or

(c) his “restitution interest,” which is his interest in having restored to him any benefit that he has conferred on the other party.

a. Three interests.

The law of contract remedies implements the policy in favor of allowing individuals to order their own affairs by making legally enforceable promises. Ordinarily, when a court concludes that there has been a breach of contract, it enforces the broken promise by protecting the expectation that the injured party had when he made the contract. It does this by attempting to put him in as good a position as he would have been in had the contract been performed, that is, had there been no breach. The interest protected in this way is called the “expectation interest.” It is sometimes said to give the injured party the “benefit of the bargain.” This is not, however, the only interest that may be protected.

The promisee may have changed his position in reliance on the contract by, for example, incurring expenses in preparing to perform, in performing, or in foregoing opportunities to make other contracts. In that case, the court may recognize a claim based on his reliance rather than on his expectation. It does this by attempting to put him back in the position in which he would have been had the contract not been made. The interest protected in this way is called “reliance interest.” Although it may be equal to the expectation interest, it is ordinarily smaller because it does not include the injured party’s lost profit.

In some situations a court will recognize yet a third interest and grant relief to prevent unjust enrichment. This may be done if a party has not only changed his own position in reliance on the contract but has also conferred a benefit on the other party by, for example, making a part payment or furnishing services under the contract. The court may then require the other party to disgorge the benefit that he has received by returning it to the party who conferred it. The interest of the claimant protected in this way is called the “restitution interest.” Although it may be equal to the expectation or reliance interest, it is ordinarily smaller because it includes neither the injured party’s lost profit nor that part of his expenditures in reliance that resulted in no benefit to the other party.

The interests described in this Section are not inflexible limits on relief and in situations in which a court grants such relief as justice requires, the relief may not correspond precisely to any of these interests. See §§ 15, 87, 89, 90, 139, 158 and 272.

1. A contracts to building for B on B’s land for $ 100,000. B repudiates the contract before either party has done anything in reliance on it. It would have cost A $ 90,000 to build the building. A has an expectation interest of $ 10,000, the difference between the $ 100,000 price and his savings of $ 90,000 in not having to do the work. Since A has done nothing in reliance, A’s reliance interest is zero. Since A has conferred no benefit on B, A’s restitution interest is zero.

2. The facts being otherwise as stated in Illustration 1, B does not repudiate until A has spent $ 60,000 of the $ 90,000. A has been paid nothing and can salvage nothing from the $ 60,000 that he has spent. A now has an expectation interest of $ 70,000, the difference between the $ 100,000 price and his saving of $ 30,000 in not having to do the work. A also has a reliance interest of $ 60,000, the amount that he has spent. If the benefit to B of the partly finished building is $ 40,000, A has a restitution interest of $ 40,000.

b. Expectation interest.

In principle, at least, a party’s expectation interest represents the actual worth of the contract to him rather than to some reasonable third person. Damages based on the expectation interest therefore take account of any special circumstances that are peculiar to the situation of the injured party, including his personal values and even his idiosyncracies, as well as his own needs and opportunities. See Illustration 3.

In practice, however, the injured party is often held to a more objective valuation of his expectation interest because he may be barred from recovering for loss resulting from such special circumstances on the ground that it was not foreseeable or cannot be shown with sufficient certainty. See §§ 351 and 352.

Furthermore, since he cannot recover for loss that he could have avoided by arranging a substitute transaction on the market (§ 350), his recovery is often limited by the objective standard of market price. See Illustration 4.

The expectation interest is not based on the injured party’s hopes when he made the contract but on the actual value that the contract would have had to him had it been performed. See Illustration 5. It is therefore based on the circumstances at the time for performance and not those at the time of the making of the contract.

3. A, who is about to produce a play, makes a contract with B, an actor, under which B is to play the lead in the play at a stated salary for the season. A breaks the contract and has the part played by another actor. B’s expectation interest includes the extent to which B’s reputation would have been enhanced if he had been allowed to play the lead in A’s play, as well as B’s loss in salary, both subject to the limitations stated in Topic 2.

4. A contracts to construct a monument in B’s yard for $ 10,000 but abandons the work after the foundation has been laid. It will cost B $ 6,000 to have another contractor complete the work. The monument planned is so ugly that it would decrease the market price of the house. Nevertheless, B’s expectation interest is the value of the monument to him, which, under the rule stated in § 348(2)(b), would be measured by the cost of completion, $ 6,000.

5. A makes a contract with B under which A is to pay B for drilling an oil well on B’s land, adjacent to that of A, for development and exploration purposes. Both A and B believe that the well will be productive and will substantially enhance the value of A’s land in an amount that they estimate to be $ 1,000,000. Before A has paid anything, B breaks the contract by refusing to drill the well. Other exploration then proves that there is no oil in the region. A’s expectation interest is zero.

c. Reliance interest.

If it is reliance that is the basis for the enforcement of a promise, a court may enforce the promise but limit the promisee to recovery of his reliance interest. See §§ 87, 89, 90, 139. There are also situations in which a court may grant recovery based on the reliance interest even though it is consideration that is the basis for the enforcement of the promise. These situations are dealt with in §§ 349 and 353.

d. Restitution interest.

Since restitution is the subject of a separate Restatement, this Chapter is concerned with problems of restitution only to the extent that they arise in connection with contracts. Such problems arise when a party, instead of seeking to enforce an agreement, claims relief on the ground that the other party has been unjustly enriched as a result of some benefit conferred under the agreement. In some cases a party’s choice of the restitution interest is dictated by the fact that the agreement is not enforceable, perhaps because of his own breach (§ 374), as a result of impracticability of performance or frustration of purpose (§ 377(1)), under the Statute of Frauds (§ 375), or in consequence of the other party’s avoidance for some reason as misrepresentation, duress, mistake or incapacity (§ 376). Occasionally a party chooses the restitution interest even though the contract is enforceable because it will give a larger recovery than will enforcement based on either the expectation or reliance interest. These rare instances are dealt with in § 373. Sometimes the restitution interest can be protected by requiring restoration of the specific thing, such as goods or land, that has resulted in the benefit. Where restitution in kind is not appropriate, however, a sum of money will generally be allowed based on the restitution interest.

[]{#_Toc161928265 .anchor}R. 2d Contracts § 345 – Judicial Remedies Available

The judicial remedies available for the protection of the interests stated in § 344 include a judgment or order

(a) awarding a sum of money due under the contract or as damages,

(b) requiring specific performance of a contract or enjoining its non-performance,

(d) awarding a sum of money to prevent unjust enrichment,

(e) declaring the rights of the parties, and

(f) enforcing an arbitration award.

a. Nature of remedies.

This Section enumerates the principal judicial remedies available for the protection of the interests defined in the preceding section. It is not intended to be exhaustive, since other remedies such as replevin of a chattel or reformation or cancellation of a writing supplement those listed here. As to reformation, see §§ 155, 166. Nor are the remedies listed mutually exclusive, since a court may in the same action, for example, both require specific performance of a promise and award a sum of money as damages for delay in its performance. The details of the procedure by which such remedies are obtained and enforced vary from one jurisdiction to another and are beyond the scope of this Restatement. In some circumstances a party to a contract is empowered to protect himself or to obtain satisfaction by methods not involving recourse to a court, such as retaking goods or foreclosing on security. The exercise of such a power, whether under a term of the contract or otherwise, is not a judicial remedy and is not dealt with in this Section. But see Topic 5 as to election and avoidance.

b. Enforcement.

In most contract cases, what is sought is enforcement of a contract. Enforcement usually takes the form of an award of a sum of money due under the contract or as damages. Damages may be based on either the expectation or reliance interest of the injured party. They are subject to the rules stated in Topic 2. A court may also enforce a promise by ordering that it be specifically performed or, in the alternative, by enjoining its nonperformance. In doing so, it protects the promisee’s expectation interest. The rules governing the granting of such relief are stated in Topic 3.

c. Restitution.

Sometimes a party, instead of seeking to enforce a contract under the rules stated in Topics 2 and 3, seeks protection of his restitution interest. If this can be accomplished by requiring the other party to restore a specific thing that is in his hands, a court may order restoration or make restoration a condition of granting relief to the other party. If restoration of the specific thing is not appropriate, the restitution interestmay be protected by requiring the other party to pay a sum of money equivalent to the benefit that he has derived from that thing. The rules relating to the prevention of unjust enrichment by restitution, in either kind or money, are stated in Topic 4.

d. Declaratory judgments.

Declaratory judgments play an important and growing role in the resolution of disputes arising out of contracts. Courts may render declaratory judgments under statutes adopted in nearly all states, and, in some instances, without the aid of statute. Such a judgment declares the legal relations between the parties but does not award damages or order other relief and may be rendered even though no breach of contract has occurred. In most states, including those that have adopted the Uniform Declaratory Judgment Act, courts may also render declaratory judgments in conjunction with other relief. In all states, and in the federal courts under the Federal Declaratory Judgment Act, the decision whether to render a declaratory judgment is discretionary. Because questions relating to declaratory judgments depend largely on statute and are not confined to contract cases, they are not considered in detail in this Restatement.

e. Enforcement of arbitration awards.

Arbitration also plays an important and growing role in the resolution of contract disputes. Although arbitration is not in itself a judicial remedy, enforcement by a court of an award of an arbitral tribunal is. Statutes relating to the enforcement of such awards, based on either an agreement to arbitrate a future dispute or a submission of an existing dispute, have been enacted in many states. These statutes provide for the transformation of an award into a judgment by means of a summary procedure, without the necessity of bringing an action on the award as was required at common law. This transformation permits the use of the regular judicial process to enforce the arbitration award. The passage of these statutes reflects the increasing use of arbitration to settle private disputes and a decline in the judicial hostility to arbitration that had limited its effectiveness. Because questions concerning the enforcement of arbitration awards depend largely on statute, they are not considered in detail in this Restatement. But see Comment a Illustration 2 to § 366.

[]{#_Toc161928266 .anchor}R. 2d Contracts § 346 – Availability of Damages

(1) The injured party has a right to damages for any breach by a party against whom the contract is enforceable unless the claim for damages has been suspended or discharged.

(2) If the breach caused no loss or if the amount of the loss is not proved under the rules stated in this Chapter, a small sum fixed without regard to the amount of loss will be awarded as nominal damages.

a. Right to damages.

Every breach of contract gives the injured party a right to damages against the party in breach, unless the contract is not enforceable against that party, as where he is not bound because of the Statute of Frauds. The resulting claim may be one for damages for total breach or one for damages for only partial breach. Although a judgment awarding a sum of money as damages is the most common judicial remedy for breach of contract, other remedies, including equitable relief in the form of specific performance or an injunction, may be also available, depending on the circumstances. See Topic 3.

In the exceptional situation of a contract for transfer of an interest in land that is unenforceable under the Statute of Frauds, action in reliance makes the contract enforceable by specific performance even though it gives rise to no claim for damages for breach. See Comment c to § 129.

A duty to pay damages may be suspended or discharged by agreement or otherwise, and if it is discharged the claim for damages is extinguished. See Introductory Note to Chapter 12. When this happens, the right to enforcement by other means such as specific performance or an injunction is also extinguished. If the duty of performance, as distinguished from the duty to pay damages, has been suspended or discharged, as by impracticability of performance or frustration of purpose, there is then no breach and this Section is not applicable.

The parties can by agreement vary the rules stated in this Section, as long as the agreement is not invalid for unconscionability (§ 208) or on other grounds. The agreement may provide for a remedy such as repair or replacement in substitution for damages. See U.C.C. § 2-719.

b. Nominal damages.

Although a breach of contract by a party against whom it is enforceable always gives rise to a claim for damages, there are instances in which the breach causes no loss. See Illustration 1. There are also instances in which loss is caused but recovery for that loss is precluded because it cannot be proved with reasonable certainty or because of one of the other limitations stated in this Chapter. See §§ 350-53.

In all these instances the injured party will nevertheless get judgment for nominal damages, a small sum usually fixed by judicial practice in the jurisdiction in which the action is brought. Such a judgment may, in the discretion of the court, carry with it an award of court costs. Costs are generally awarded if a significant right was involved or the claimant made a good faith effort to prove damages, but not if the maintenance of the action was frivolous or in bad faith. Unless a significant right is involved, a court will not reverse and remand a case for a new trial if only nominal damages could result.

1. A contracts to sell to B 1,000 shares of stock in X Corporation for $ 10 a share to be delivered on June 1, but breaks the contract by refusing on that date to deliver the stock. B sues A for damages, but at trial it is proved that B could have purchased 1,000 shares of stock in X Corporation on the market on June 1 for $ 10 a share and therefore has suffered no loss. In an action by B against A, B will be awarded nominal damages.

c. Beneficiaries of gift promises.

If a promisee makes a contract, intending to give a third party the benefit of the promised performance, the third party may be an intended beneficiary who is entitled to enforce the contract. See § 302(1)(b). Such a gift promise creates overlapping duties, one to the beneficiary and the other to the promisee. If the performance is not forthcoming, both the beneficiary and the promisee have claims for damages for breach. If the promisee seeks damages, however, he will usually be limited to nominal damages: although the loss to the beneficiary may be substantial, the promisee cannot recover for that loss and he will ordinarily have suffered no loss himself. In such a case the remedy of specific performance will often be an appropriate one for the promisee.

2. As part of a separation agreement B promises his wife A not to change the provision in B’s will for C, their son. A dies and B changes his will to C’s detriment, adding also a provision that C will forfeit any bequest if he questions the change before any tribunal. In an action by A’s personal representative against B, the representative can get a judgment for nominal damages. As to the representative’s right to specific performance, see Illustration 2 to § 307.

[]{#_Toc161928267 .anchor}R. 2d Contracts § 347 – Measure of Damages in General

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 of the other party’s performance caused by its failure or deficiency, plus

(b) any other loss, including incidental or consequential loss, caused by the breach, less

a. Expectation interest.

Contract damages are ordinarily based on the injured party’s expectation interest and are intended to give him the benefit of his bargain by awarding him a sum of money that will, to the extent possible, put him in as good a position as he would have been in had the contract been performed. See § 344(1)(a). In some situations the sum awarded will do this adequately as, for example, where the injured party has simply had to pay an additional amount to arrange a substitute transaction and can be adequately compensated by damages based on that amount. In other situations the sum awarded cannot adequately compensate the injured party for his disappointed expectation as, for example, where a delay in performance has caused him to miss an invaluable opportunity. The measure of damages stated in this Section is subject to the agreement of the parties, as where they provide for liquidated damages (§ 356) or exclude liability for consequential damages.

b. Loss in value.

The first element that must be estimated in attempting to fix a sum that will fairly represent the expectation interest is the loss in the value to the injured party of the other party’s performance that is caused by the failure of, or deficiency in, that performance. If no performance is rendered, the loss in value caused by the breach is equal to the value that the performance would have had to the injured party. See Illustrations 1 and 2.

If defective or partial performance is rendered, the loss in value caused by the breach is equal to the difference between the value that the performance would have had if there had been no breach and the value of such performance as was actually rendered. In principle, this requires a determination of the values of those performances to the injured party himself and not their values to some hypothetical reasonable person or on some market.

They therefore depend on his own particular circumstances or those of his enterprise, unless consideration of these circumstances is precluded by the limitation of foreseeability (§ 351). Where the injured party’s expected advantage consists largely or exclusively of the realization of profit, it may be possible to express this loss in value in terms of money with some assurance. In other situations, however, this is not possible and compensation for lost value may be precluded by the limitation of certainty. In order to facilitate the estimation of loss with sufficient certainty to award damages, the injured party is sometimes given a choice between alternative bases of calculating his loss in value. The most important of these are stated in § 348. See also §§ 349 and 373.

1. A contracts to publish a novel that B has written. A repudiates the contract and B is unable to get his novel published elsewhere. Subject to the limitations stated in §§ 350-53, B’s damages include the loss of royalties that he would have received had the novel been published together with the value to him of the resulting enhancement of his reputation. But see Illustration 1 to § 352.

2. A, a manufacturer, contracts to sell B, a dealer in used machinery, a used machine that B plans to resell. A repudiates and B is unable to obtain a similar machine elsewhere. Subject to the limitations stated in §§ 350-53, B’s damages include the net profit that he would have made on resale of the machine.

c. Other loss.

Subject to the limitations stated in §§ 350-53, the injured party is entitled to recover for all loss actually suffered. Items of loss other than loss in value of the other party’s performance are often characterized as incidental or consequential. Incidental losses include costs incurred in a reasonable effort, whether successful or not, to avoid loss, as where a party pays brokerage fees in arranging or attempting to arrange a substitute transaction. See Illustration 3. Consequential losses include such items as injury to person or property resulting from defective performance. See Illustration 4. The terms used to describe the type of loss are not, however, controlling, and the general principle is that all losses, however described, are recoverable.

3. A contracts to employ B for $ 10,000 to supervise the production of A’s crop, but breaks his contract by firing B at the beginning of the season. B reasonably spends $ 200 in feesattempting to find other suitable employment through appropriate agencies. B can recover the $ 200 incidental loss in addition to any other loss suffered, whether or not he succeeds in finding other employment.

4. A leases a machine to B for a year, warranting its suitability for B’s purpose. The machine is not suitable for B’s purpose and causes $ 10,000 in damage to B’s property and $ 15,000 in personal injuries. B can recover the $ 25,000 consequential loss in addition to any other loss suffered. See U.C.C. § 2-715(2)(b).

d. Cost or other loss avoided.

Sometimes the breach itself results in a saving of some cost that the injured party would have incurred if he had had to perform. See Illustration 5.

Furthermore, the injured party is expected to take reasonable steps to avoid further loss. Where he does this by discontinuing his own performance, he avoids incurring additional costs of performance. See Illustrations 6 and 8.

This cost avoided is subtracted from the loss in value caused by the breach in calculating his damages. If the injured party avoids further loss by making substitute arrangements for the use of his resources that are no longer needed to perform the contract, the net profit from such arrangements is also subtracted. See Illustration 9.

The value to him of any salvageable materials that he has acquired for performance is also subtracted. See Illustration 7.

Loss avoided is subtracted only if the saving results from the injured party not having to perform rather than from some unrelated event. See Illustration 10.

If no cost or other loss has been avoided, however, the injured party’s damages include the full amount of the loss in value with no subtraction, subject to the limitations stated in §§ 350-53. See Illustration 11.

The intended “donee” beneficiary of a gift promise usually suffers loss to the full extent of the value of the promised performance, since he is ordinarily not required to do anything, and so avoids no cost on breach. See § 302(1)(b).

5. A contracts to build a hotel for B for $ 500,000 and to have it ready for occupancy by May 1. B’s occupancy of the hotel is delayed for a month because of a breach by A. The cost avoided by B as a result of not having to operate the hotel during May is subtracted from the May rent lost in determining B’s damages.

6. A contracts to build a house for B for $ 100,000. When it is partly built, B repudiates the contract and A stops work. A would have to spend $ 60,000 more to finish the house. The $ 60,000 cost avoided by A as a result of not having to finish the house is subtracted from the $ 100,000 price lost in determining A’s damages. A has a right to $ 40,000 in damages from B, less any progress payments that he has already received. See Illustration 2 to § 344.

7. The facts being otherwise as stated in Illustration 6, A has bought materials that are left over and that he can use for other purposes, saving him $ 5,000. The $ 5,000 cost avoided is subtracted in determining A’s damages, resulting in damages of only $ 35,000 rather than $ 40,000.

8. A contracts to convey land to B in return for B’s working for a year. B repudiates the contract before A has conveyed the land. The value to A of the land is subtracted from the value to A of B’s services in determining A’s damages.

9. A contracts to employ B for $ 10,000 to supervise the production of A’s crop, but breaks his contract by firing B at the beginning of the season. B instead takes another job as a supervisor at $ 9,500. The $ 9,500 is subtracted from the $ 10,000 loss of earnings in determining B’s damages. See Illustration 8 to § 350.

10. A contracts to build a machine for B and deliver it to be installed in his factory by June 30. A breaks the contract and does not deliver the machine. B’s factory is destroyed by fire on December 31 and the machine, if it had been installed there, would also have been destroyed. The fact that the factory was burned is not considered in determining B’s damages.

11. A contracts to send his daughter to B’s school for $ 5,000 tuition. After the academic year has begun, A withdraws her and refuses to pay anything. A’s breach does not reduce B’s instructional or other costs and B is unable to find another student to take the place of A’s daughter. B has a right to damages equal to the full $ 5,000.

e. Actual loss caused by breach.

The injured party is limited to damages based on his actual loss caused by the breach. If he makes an especially favorable substitute transaction, so that he sustains a smaller loss than might have been expected, his damages are reduced by the loss avoided as a result of that transaction. See Illustration 12.

If he arranges a substitute transaction that he would not have been expected to do under the rules on avoidability (§ 350), his damages are similarly limited by the loss so avoided. See Illustration 13.

Recovery can be had only for loss that would not have occurred but for the breach. If, after the breach, an event occurs that would have discharged the party in breach on grounds of impracticability of performance or frustration of purpose, damages are limited to the loss sustained prior to that event. See Illustration 15.

Compare § 254(2). The principle that a party’s liability is not reduced by payments or other benefits received by the injured party from collateral sources is less compelling in the case of a breach of contract than in the case of a tort. See Restatement, Second, Torts § 920A. The effect of the receipt of unemployment benefits by a discharged employee will turn on the court’s perception of legislative policy rather than on the rule stated in this Section. See Illustration 14.

12. A contracts to build a house for B for $ 100,000, but repudiates the contract after doing part of the work and having been paid $ 40,000. Other builders would charge B $ 80,000 to finish the house, but B finds a builder in need of work who does it for $ 70,000. B’s damages are limited to the $ 70,000 that he actually had to pay to finish the work less the $ 60,000 cost avoided or $ 10,000, together with damages for any loss caused by the delay. See Illustration 2 to § 348.

13. A contracts to employ B for $ 10,000 to supervise the production of A’s crop. A breaks the contract by firing B at the beginning of the season, and B, unable to find another job, instead takes a job as a farm laborer for the entire season at $ 6,000. The $ 6,000 that he made as a farm laborer is subtracted from the $ 10,000 loss of earnings in determining B’s damages. See Illustration 8 to § 350.

14. A contracts to employ B for $ 10,000 to supervise the production of A’s crop, but breaks his contract by firing B at the beginning of the season. B is unable to find another similar job but receives $ 3,000 in state unemployment benefits. Whether the $ 3,000 will be subtracted from the $ 10,000 loss of earnings depends on the state legislation under which it was paid and the policy behind it.

15. On April1, A and B make a personal service contract under which A is to employ B for six months beginning July 1 and B is to work for A during that period. On May 1, B repudiates the contract. On August 1, B falls ill and is unable to perform the contract for the remainder of the period. A can only recover damages based on his loss during the month of July since his loss during subsequent months was not caused by B’s breach. Compare Illustration 2 to § 254.

f. Lost volume.

Whether a subsequent transaction is a substitute for the broken contract sometimes raises difficult questions of fact. If the injured party could and would have entered into the subsequent contract, even if the contract had not been broken, and could have had the benefit of both, he can be said to have “lost volume” and the subsequent transaction is not a substitute for the broken contract. The injured party’s damages are then based on the net profit that he has lost as a result of the broken contract. Since entrepreneurs try to operate at optimum capacity, however, it is possible that an additional transaction would not have been profitable and that the injured party would not have chosen to expand his business by undertaking it had there been no breach. It is sometimes assumed that he would have done so, but the question is one of fact to be resolved according to the circumstances of each case. See Illustration 16.

16. A contracts to pave B’s parking lot for $ 10,000. B repudiates the contract and A subsequently makes a contract to pave a similar parking lot for $ 10,000. A’s business could have been expanded to do both jobs. Unless it is proved that he would not have undertaken both, A’s damages are based on the net profit he would have made on the contract with B, without regard to the subsequent transaction.

Chapter 23 | Alternative Money Damages

[]{#_Toc161928269 .anchor}R. 2d Contracts § 348 – Alternatives to Loss in Value of Performance

(1) If a breach delays the use of property and the loss in value to the injured party is not proved with reasonable certainty, he may recover damages based on the rental value of the property or on interest on the value of the property.

(2) If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on

(a) the diminution in the market price of the property caused by the breach, or

(b) the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him.

(3) If a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of breach.

a. Reason for alternative bases.

Although in principle the injured party is entitled to recover based on the loss in value to him caused by the breach, in practice he may be precluded from recovery on this basis because he cannot show the loss in value to him with sufficient certainty. In such a case, if there is a reasonable alternative to loss in value, he may claim damages based on that alternative. This Section states the rules that have been developed for three such cases.

b. Breach that delays the use of property.

If the breach is one that prevents for a period of time the use of property from which profits would have been made, the loss in value to the injured party is based on the profits that he would have made during that period. If those profits cannot be proved with reasonable certainty (§ 352), two other bases for recovery are possible. One is the fair rental value of the property during the period of delay. Damages based on fair rental value include an element of profit since the fair rental value of property depends on what it would command on the market and this turns on the profit that would be derived from its use. For this reason, uncertainty as to profits may result in uncertainty in fair rental value. Another possible basis for recovery, as a last resort, is the interest on the value of the property that has been made unproductive by the breach, if that value can be shown with reasonable certainty. Although these two other bases will ordinarily give a smaller recovery than loss in value, it is always open to the party in breach to show that this is not so and to hold the injured party to a smaller recovery based on loss in value to him.

1. A contracts with B to construct an outdoor drive-in theatre, to be completed by June 1. A does not complete the work until September 1. If B cannot prove his lost profits with reasonable certainty, he can recover damages based on the rental value of the theatre property or based on the interest on the value of the theatre property itself if he can prove either of these values with reasonable certainty. See Illustration 2 to § 352.

c. Incomplete or defective performance.

If the contract is one for construction, including repair or similar performance affecting the condition of property, and the work is not finished, the injured party will usually find it easier to prove what it would cost to have the work completed by another contractor than to prove the difference between the values to him of the finished and the unfinished performance. Since the cost to complete is usually less than the loss in value to him, he is limited by the rule on avoidability to damages based on cost to complete. See § 350(1). If he has actually had the work completed, damages will be based on his expenditures if he comes within the rule stated in § 350(2).

Sometimes, especially if the performance is defective as distinguished from incomplete, it may not be possible to prove the loss in value to the injured party with reasonable certainty. In that case he can usually recover damages based on the cost to remedy the defects. Even if this gives him a recovery somewhat in excess of the loss in value to him, it is better that he receive a small windfall than that he be undercompensated by being limited to the resulting diminution in the market price of his property.

Sometimes, however, such a large part of the cost to remedy the defects consists of the cost to undo what has been improperly done that the cost to remedy the defects will be clearly disproportionate to the probable loss in value to the injured party. Damages based on the cost to remedy the defects would then give the injured party a recovery greatly in excess of the loss in value to him and result in a substantial windfall. Such an award will not be made. It is sometimes said that the award would involve “economic waste,” but this is a misleading expression since an injured party will not, even if awarded an excessive amount of damages, usually pay to have the defects remedied if to do so will cost him more than the resulting increase in value to him. If an award based on the cost to remedy the defects would clearly be excessive and the injured party does not prove the actual loss in value to him, damages will be based instead on the difference between the market price that the property would have had without the defects and the market price of the property with the defects. This diminution in market price is the least possible loss in value to the injured party, since he could always sell the property on the market even if it had no special value to him.

2. A contracts to build a house for B for $ 100,000 but repudiates the contract after doing part of the work and having been paid $ 40,000. Other builders will charge B $ 80,000 to finish the house. B’s damages include the $ 80,000 cost to complete the work less the $ 60,000 cost avoided or $ 20,000, together with damages for any loss caused by delay. See Illustration 12 to § 347.

3. A contracts to build a house for B for $ 100,000. When it is completed, the foundations crack, leaving part of the building in a dangerous condition. To make it safe would require tearing down some of the walls and strengthening the foundation at a cost of $ 30,000 and would increase the market value of the house by $ 20,000. B’s damages include the $ 30,000 cost to remedy the defects.

4. A contracts to build a house for B for $ 100,000 according to specifications that include the use of Reading pipe. After completion, B discovers that A has used Cohoes pipe, an equally good brand. To replace the Cohoes pipe with Reading pipe would require tearing down part of the walls at a cost of over $ 20,000 and would not affect the market price of the house. In an action by B against A, A gives no proof of any special value that Reading pipe would have to him. B’s damages do not include the $ 20,000 cost to remedy the defects because that cost is clearly disproportionate to the loss in value to B. B can recover only nominal damages.

d. Fortuitous event as condition.

In the case of a promise conditioned on a fortuitous event (see Comment a to § 379), a breach that occurs before the happening of the fortuitous event may make it impossible to determine whether the event would have occurred had there been no breach. It would be unfair to the party in breach to award damages on the assumption that the event would have occurred, but equally unfair to the injured party to deny recovery of damages on the ground of uncertainty. The injured party has, in any case, the remedy of restitution (see § 373). Under the rule stated in Subsection (3) he also has the alternative remedy of damages based on the value of his conditional contract right at the time of breach, or what may be described as the value of his “chance of winning.” The value of that right must itself be proved with reasonable certainty, as it may be if there is a market for such rights or if there is a suitable basis for determining the probability of the occurrence of the event.

The rule stated in this Subsection is limited to aleatory promises and does not apply if the promise is conditioned on some event, such as return performance by the injured party, that is not fortuitous. If, for example, an owner repudiates a contract to pay for repairs to be done by a contractor and then maintains that the contractor could not or would not have done the work had he not repudiated, the contractor must prove that he could and would have performed. If he fails to do this, he has no remedy in damages. He is not entitled to claim damages under the rule stated in Subsection (3).

5. A offers a $ 100,000 prize to the owner whose horse wins a race at A’s track. B accepts by entering his horse and paying the registration fee. When the race is run, A wrongfully prevents B’s horse from taking part. Although B cannot prove that his horse would have won the race, he can prove that it was considered to have one chance in four of winning because one fourth of the money bet on the race was bet on his horse. B has a right to damages of $ 25,000 based on the value of the conditional right to the prize.

[]{#_Toc161928270 .anchor}R. 2d Contracts § 349 – Damages Based on Reliance Interest

As an alternative to the measure of damages stated in § 347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

a. Reliance interest where profit uncertain.

Loss in value and cost or other loss avoided are key components of contract damages. If the injured party was to supply services such as erecting a building, for example, the difference between loss in value of the other party’s performance and the cost or other loss avoided by the injured party will be equal to the cost of the injured party’s expenditures in reliance, up to the time of breach, plus the profit that would have been made had the contract been fully performed. To the extent that “overhead” costs are fixed costs, they are not included in the cost of expenditures in reliance for this purpose. See Illustration 6 to § 347.

Under the rule stated in this Section, the injured party may, if he chooses, ignore the element of profit and recover as damages his expenditures in reliance. He may choose to do this if he cannot prove his profit with reasonable certainty. He may also choose to do this in the case of a losing contract, one under which he would have had a loss rather than a profit. In that case, however, it is open to the party in breach to prove the amount of the loss, to the extent that he can do so with reasonable certainty under the standard stated in § 352, and have it subtracted from the injured party’s damages. The resulting damages will then be the same as those under the rule stated in § 347. If the injured party’s expenditures exceed the contract price, it is clear that at least to the extent of the excess, there would have been a loss. For this reason, recovery for expenditures under the rule stated in this section may not exceed the full contract price. As to the possibility of restitution in such a case, see § 373. Often the reliance consists of preparation for performance or actual performance of the contract, and this is sometimes called “essential reliance.” See, for example, Illustration 3. It may, however, also consist of preparation for collateral transactions that a party plans to carry out when the contract in question is performed, and this is sometimes called “incidental” reliance. See Illustration 4.

1. A gives B a “dealer franchise” to sell A’s products in a stated area for one year. In preparation for performance, B spends money on advertising, hiring sales personnel, and acquiring premises that cannot be used for other purposes. A then repudiates before performance begins. If neither party proves with reasonable certainty what profit or loss B would have made if the contract had been performed, B can recover as damages his expenditures in preparation for performance. See Illustration 8 to § 90.

2. A contracts with B to stage a series of performances in B’s theater, each to have 50 per cent of the gross receipts. After A has spent $ 20,000 in getting ready for the performances, B rents the theater to others and repudiates the contract, and A stages the performance at another theater. A’s expenditures in preparation for performance of the contract with B are worth $ 8,000 to him in connection with staging the performances at the other theater. If neither party proves with reasonable certainty what profit or loss A would have made if the contract had been performed, A can recover as damages the $ 12,000 balance of his expenditures in preparation for performance.

3. A contracts to build for B a factory of experimental design for $ 1,000,000. After A has spent $ 250,000 and been paid $ 150,000 in progress payments, B repudiates the contract and A stops work. A’s expenditures include materials worth $ 10,000 that he can use on other jobs. If neither party proves with reasonable certainty what profit or loss A would have made if the contract had been performed, A can recover as damages the $ 90,000 balance of his expenditures in preparation for performance.

4. A contracts to sell his retail store to B. After B has spent $ 100,000 for inventory, A repudiates the contract and B sells the inventory for $ 60,000. If neither party proves with reasonable certainty what profit or loss B would have made if the contract had been performed, B can recover as damages the $ 40,000 loss that he sustained on the sale of the inventory.

b. Reliance interest in other cases.

There are other instances in which damages may be based on the reliance interest. Under the rules stated in §§ 87, 89, 90 and 139, if a promise is enforceable because it has induced action or forbearance, the remedy granted for breach may be limited as justice requires. Under these rules, relief may be limited to damages measured by the extent of the promisee’s reliance rather than by the terms of the promise. See Comment e to § 87, Comment d to § 89, Comment d to § 90 and Comment d to § 139. Furthermore, even when the contract is enforceable because of consideration, a court may, under the rule stated in § 353, conclude that the circumstances require that damages be limited to losses incurred in reliance. See Comment a to § 353.

[]{#_Toc161928271 .anchor}R. 2d Contracts § 350 – Avoidability as a Limitation on Damages

(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.

(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

a. Rationale.

The rules stated in this Section reflect the policy of encouraging the injured party to attempt to avoid loss. The rule stated in Subsection (1) encourages him to make such efforts as he can to avoid loss by barring him from recovery for loss that he could have avoided if he had done so. See Comment b. The exception stated in Subsection (2) protects him if he has made actual efforts by allowing him to recover, regardless of the rule stated in Subsection (1), if his efforts prove to be unsuccessful. See Comment h. See also Comment c to § 347.

b. Effect of failure to make efforts to mitigate damages.

As a general rule, a party cannot recover damages for loss that he could have avoided by reasonable efforts. Once a party has reason to know that performance by the other party will not be forthcoming, he is ordinarily expected to stop his own performance to avoid further expenditure. See Illustrations 1, 2, 3 and 4. Furthermore, he is expected to take such affirmative steps as are appropriate in the circumstances to avoid loss by making substitute arrangements or otherwise. It is sometimes said that it is the “duty” of the aggrieved party to mitigate damages, but this is misleading because he incurs no liability for his failure to act. The amount of loss that he could reasonably have avoided by stopping performance, making substitute arrangements or otherwise is simply subtracted from the amount that would otherwise have been recoverable as damages.

1. A contracts to build a bridge for B for $ 100,000. B repudiates the contract shortly after A has begun work on the bridge, telling A that he no longer has need for it. A nevertheless spends an additional $ 10,000 in continuing to perform. A’s damages for breach of contract do not include the $ 10,000.

2. A contracts to lease a machine to B and to deliver it at B’s factory. B repudiates the contract, but A nevertheless ships the machine to B, who refuses to receive it. A’s damages for breach of contract do not include the cost of shipment of the machine.

3. A sells oil to B in barrels. B discovers that some of the barrels are leaky, in breach of warranty, but does not transfer the oil to good barrels that he has available. B’s damages for breach of contract do not include the loss of the oil that could have been saved by transferring the oil to the available barrels.

4. A contracts to sell flour to B. The flour is defective, in breach of warranty, as B discovers after delivery. B nevertheless uses it to bake bread to supply his customers. B’s damages for breach of contract do not include his loss of business caused by delivering inferior bread made from the flour.

c. Substitute transactions.

When a party’s breach consists of a failure to deliver goods or furnish services, for example, it is often possible for the injured party to secure similar goods or services on the market. If a seller of goods repudiates, the buyer can often buy similar goods elsewhere. See Illustration 5. If an employee quits his job, the employer can often find a suitable substitute. See Illustration 6. Similarly, when a party’s breach consists of a failure to receive goods or services, for example, it is often possible for the aggrieved party to dispose of the goods or services on the market. If a buyer of goods repudiates, the seller can often sell the goods elsewhere. See Illustration 7. If an employer fires his employee, the employee can often find a suitable job elsewhere. See Illustration 8.

In such cases as these, the injured party is expected to make appropriate efforts to avoid loss by arranging a substitute transaction. If he does not do so, the amount of loss that he could have avoided by doing so is subtracted in calculating his damages. In the case of the sale of goods, this principle has inspired the standard formulas under which a buyer’s or seller’s damages are based on the difference between the contract price and themarket price on that market where the injured party could have arranged a substitute transaction for the purchase or sale of similar goods. See U.C.C. §§ 2-708, 2-713. Similar rules are applied to other contracts, such as contracts for the sale of securities, where there is a well-established market for the type of performance involved, but the principle extends to other situations in which a substitute transaction can be arranged, even if there is no well-established market for the type of performance. However, in those other situations, the burden is generally put on the party in breach to show that a substitute transaction was available, as is done in the case in which an employee has been fired by his employer.

5. A contracts to sell to B a used machine to be delivered at B’s factory by June 1 for $ 10,000. A breaks the contract by repudiating it on May 1. By appropriate efforts B could buy a similar machine from another seller for $ 11,000 in time to be delivered at his factory by June 1, but he does not do so and loses a profit of $ 25,000 that he would have made from use of the machine. B’s damages do not include the loss of the $ 25,000 profit, but he can recover $ 1,000 from A.

6. A contracts to supervise the production of B’s crop for $ 10,000, but breaks his contract and leaves at the beginning of the season. By appropriate efforts, B could obtain an equally good supervisor for $ 11,000, but he does not do so and the crop is lost. B’s damages for A’s breach of contract do not include the loss of his crop, but he can recover $ 1,000 from A.

7. A contracts to buy from B a used machine from B’s factory for $ 10,000. A breaks the contract by refusing to receive or pay for the machine. By appropriate efforts, B could sell the machine to another buyer for $ 9,000, but he does not do so. B’s damages for A’s breach of contract do not include the loss of the $ 10,000 price, but he can recover $ 1,000 from A.

8. A contracts to employ B for $ 10,000 to supervise the production of A’s crop, but breaks his contract by firing B at the beginning of the season. By appropriate efforts, B could obtain an equally good job as a supervisor at $ 100 less than A had contracted to pay him, but he does not do so and remains unemployed. B’s damages for A’s breach of contract do not include his $ 10,000 loss of earnings, but he can recover $ 100 from A.

d. “Lost volume.”

The mere fact that an injured party can make arrangements for the disposition of the goods or services that he was to supply under the contract does not necessarily mean that by doing so he will avoid loss. If he would have entered into both transactions but for the breach, he has “lost volume” as a result of the breach. See Comment f to § 347. In that case the second transaction is not a “substitute” for the first one. See Illustrations 9 and 10.

9. A contracts to buy grain from B for $ 100,000, which would give B a net profit of $ 10,000. A breaks the contract by refusing to receive or pay for the grain. If B would have made the sale to A in addition to other sales, B’s efforts to make other sales do not affect his damages. B’s damages for A’s breach of contract include his $ 10,000 loss of profit.

10. A contracts to pay B $ 20,000 for paving A’s parking lot, which would give B a net profit of $ 3,000. A breaks the contract by repudiating it before B begins work. If B would have made the contract with A in addition to other contracts, B’s efforts to obtain other contracts do not affect his damages. B’s damages for A’s breach of contract include his $ 3,000 loss of profit.

e. What is a “substitute.”

Whether an available alternative transaction is a suitable substitute depends on all the circumstances, including the similarity of the performance and the times and places that they would be rendered. See Illustration 11. If discrepancies between the transactions can be adequately compensated for in damages, the alternative transaction is regarded as a substitute and such damages are awarded. See Illustrations 12 and 13. If the party in breach offers to perform the contract for a different price, this may amount to a suitable alternative. See Illustration 14. But this is not the case if the offer is conditioned on surrender by the injured party of his claim for breach. See Illustration 15.

11. The facts being otherwise as stated in Illustration 8, by appropriate efforts B could only obtain a job as a farm laborer at $ 6,000, but he does not do so and remains unemployed. B’s damages for breach of contract include his $ 10,000 loss of earnings.

12. The facts being otherwise as stated in Illustration 5, the other seller will not deliver the similar machine to B’s factory, and insists that B take possession of it two weeks earlier than he can install it in his factory, but B can arrange to have it stored for two weeks and shipped to his factory for $ 1,500. B’s damages do not include the loss of the $ 25,000 profit, but he can recover the $ 1,500 as well as the $ 1,000 from A.

13. A contracts to bale hay on B’s farm so that B can use it later to feed his livestock. A does the work so defectively that the hay is worthless. B can buy similar hay in bales in Central City, 100 miles from his farm, for $ 10,000. The cost to ship the bales between Central City and his farm is $ 1,000. B’s damages include the $ 10,000 market price and the $ 1,000 cost of shipment. If B had intended to ship his bales of hay to Central City for sale there, rather than to feed it to his livestock, the $ 1,000 cost of shipment would be subtracted from the $ 10,000 market price as cost avoided under § 347(c).

14. A contracts to sell to B a used machine from A’s factory for $ 10,000. A breaks the contract by refusing to deliver the machine at that price, but offers to sell it to B for $ 11,000 without prejudice to B’s right to damages. B refuses to buy it at that price and, since he cannot find a similar machine elsewhere, loses a profit of $ 25,000 that he would have made from use of the machine. B’s damages do not include the loss of the $ 25,000 profit, but he can recover $ 1,000 from A.

15. The facts being otherwise as stated in Illustration 14, A’s offer to sell the machine at $ 11,000 is conditioned on B’s surrendering any claim that he may have against A for breach of contract. B’s damages may include the loss of the $ 25,000 profit.

f. Time for arranging substitute transaction.

The injured party is expected to arrange a substitute transaction within a reasonable time after he learns of the breach. He is expected to do this even if the breach takes the form of an anticipatory repudiation, since under the rule stated in Subsection (2) he is then protected against the possibility of a change in the market before the time for performance. See Comment g. The injured party may, however, make appropriate efforts to urge therepudiating party to perform in spite of his repudiation or to retract his repudiation, and these efforts will be taken into account in determining what is a reasonable time. Although the injured party is expected to arrange a substitute transaction without unreasonable delay following the anticipatory repudiation, the time for performance under the substitute transaction will ordinarily be the same time as it would have been under the original contract.

16. On May 1, A contracts to sell to B a stated quantity of grain for $ 100,000, delivery and payment to be made on July 1. On July 1, A breaks the contract by refusing to deliver the grain, but B does not buy substitute grain on the market on that date although he could do so for $ 110,000. On July 10, B buys substitute grain on the market for $ 120,000. B’s damages for A’s breach of contract do not include the $ 20,000 above the contract price that he paid on July 10, but he can recover $ 10,000 from A.

17. The facts being otherwise as stated in Illustration 16, A breaks the contract by repudiating it on June 1 and on the same day B tells A that he considers the repudiation final. B does not buy substitute grain on the market on that date although he could do so for $ 105,000 for delivery and payment on July 1. B’s damages for A’s breach of contract do not include the $ 20,000 above the contract price that he paid on July 10, but he can recover $ 5,000 from A.

g. Efforts expected.

In some situations, it is reasonable for the injured party to rely on performance by the other party even after breach. This may be true, for example, if the breach is accompanied by assurances that performance will be forthcoming. In such a situation the injured party is not expected to arrange a substitute transaction although he may be expected to take some steps to avoid loss due to a delay in performance. Nor is it reasonable to expect him to take steps to avoid loss if those steps may cause other serious loss. He need not, for example, make other risky contracts, incur unreasonable expense or inconvenience or disrupt his business. In rare instances the appropriate course may be to complete performance instead of stopping. Finally the aggrieved party is not expected to put himself in a position that will involve humiliation, including embarrassment or loss of honor and respect.

18. A contracts to build a building for B for $ 100,000. B repudiates the contract shortly before A has finished work. Because A has duties to subcontractors and will have difficulty in calculating his damages, A spends an additional $ 10,000 and completes the building. If stopping work would not have been reasonable in the circumstances, A can recover the full $ 100,000, including the $ 10,000 that he spent after B’s repudiation. Compare Illustration 1.

19. A contracts to supervise the production of B’s crop for $ 10,000, but commits a material breach of the contract by failing to begin on time. By appropriate efforts, B could obtain an equally good supervisor for $ 1,000 more than he had contracted to pay A, but he does not do so because A assures him that the delay is only temporary. By the time that B discovers that A will be unavailable for the entire season, it is too late to hire another supervisor and the crop is lost. If B’s delay in hiring another supervisor was reasonable in the circumstances, B’s damages for A’s breach of contract may include the loss of his crop.

20. A, a motion picture company, contracts to have B star in a musical comedy for $ 100,000. A breaks the contract and engages C, a rival of B, to star in the musical comedy, but offers B an equally good role under an identical contract as a star in another musical comedy for $ 100,000. Because B would be humiliated to work for A after A hired a rival in B’s place, B refuses to accept the offer. If rejection of the offer was reasonable in the circumstances, B can recover the full $ 100,000. Compare Illustration 8.

h. Actual efforts to mitigate damages.

Sometimes the injured party makes efforts to avoid loss but fails to do so. The rule stated in Subsection (2) protects the injured party in that situation if the efforts were reasonable. If, for example, a seller who is to manufacture goods for a buyer decides, on repudiation by the buyer, “in the exercise of reasonable commercial judgment for the purpose of avoiding loss” to complete manufacture of the goods, he is protected under U.C.C. § 2-704(2) even if it later appears that he could have better avoided loss by stopping manufacture. Similarly, if a buyer of goods who decides, on repudiation by the seller, to “‘cover’ by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller,” he is protected under U.C.C. § 2-712. See also U.C.C. § 2-706 for the seller’s comparable right of resale.

The rule stated in Subsection (2) reflects the policy underlying these Code provisions, one encouraging the injured party to make reasonable efforts to avoid loss by protecting him even when his efforts fail. To this extent, his failure to avoid loss does not have the effect stated in Subsection (1). Under the rule stated in § 347, costs incurred in a reasonable but unsuccessful effort to avoid loss are recoverable as incidental losses. See Comment c to § 347.

21. A contracts to sell to B a used machine to be delivered at A’s factory by June 1 for $ 10,000. A breaks the contract by repudiating it on May 1. B makes a reasonable purchase of a similar machine for $ 12,000 in time to be delivered at his factory by June 1. It later appears that, unknown to B, a similar machine could have been found for only $ 11,000. Nevertheless, B can recover $ 2,000 from A. Compare Illustration 5.

22. A contracts to supervise the production of B’s crop for $ 10,000, but breaks his contract and leaves at the beginning of the season. B makes a reasonable substitute contract with another supervisor for $ 12,000 in time to save his crop. It later appears that, unknown to B, a suitable supervisor could have been found for only $ 11,000. Nevertheless, B can recover $ 2,000 from A. Compare Illustration 6.

23. A pays a premium to B, an insurance company, for a policy of fire insurance on his house for a period of five years. B later repudiates the policy and A reasonably gets a similar policy from another insurer for the balance of the period. A has a right to damages against B based on the cost of the new policy.

(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.

(2) Loss may be foreseeable as a probable result of a breach because it follows from the breach

(a) in the ordinary course of events, or

(b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.

(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

a. Requirement of foreseeability.

A contracting party is generally expected to take account of those risks that are foreseeable at the time he makes the contract. He is not, however, liable in the event of breach for loss that he did not at the time of contracting have reason to foresee as a probable result of such a breach. The mere circumstance that some loss was foreseeable, or even that some loss of the same general kind was foreseeable, will not suffice if the loss that actually occurred was not foreseeable. It is enough, however, that the loss was foreseeable as a probable, as distinguished from a necessary, result of his breach. Furthermore, the party in breach need not have made a “tacit agreement” to be liable for the loss. Nor must he have had the loss in mind when making the contract, for the test is an objective one based on what he had reason to foresee. There is no requirement of foreseeability with respect to the injured party. In spite of these qualifications, the requirement of foreseeability is a more severe limitation of liability than is the requirement of substantial or “proximate” cause in the case of an action in tort or for breach of warranty. Compare Restatement, Second, Torts § 431; U.C.C. § 2-715(2)(b). Although the recovery that is precluded by the limitation of foreseeability is usually based on the expectation interest and takes the form of lost profits (see Illustration 1), the limitation may also preclude recovery based on the reliance interest (see Illustration 2).

1. A, a carrier, contracts with B, a miller, to carry B’s broken crankshaft to its manufacturer for repair. B tells A when they make the contract that the crankshaft is part of B’s milling machine and that it must be sent at once, but not that the mill is stopped because B has no replacement. Because A delays in carrying the crankshaft, B loses profit during an additional period while the mill is stopped because of the delay. A is not liable for B’s loss of profit. That loss was not foreseeable by A as a probable result of the breach at the time the contract was made because A did not know that the broken crankshaft was necessary for the operation of the mill.

2. A contracts to sell land to B and to give B possession on a stated date. Because A delays a short time in giving B possession, B incurs unusual expenses in providing for cattle that he had already purchased to stock the land as a ranch. A had no reason to know when they made the contract that B had planned to purchase cattle for this purpose. A is not liable for B’s expenses in providing for the cattle because that loss was not foreseeable by A as a probable result of the breach at the time the contract was made.

b. “General” and “special” damages.

Loss that results from a breach in the ordinary course of events is foreseeable as the probable result of the breach. See U.C.C. § 2-714(1). Such loss is sometimes said to be the “natural” result of the breach, in the sense that its occurrence accords with the common experience of ordinary persons. For example, a seller of a commodity to a wholesaler usually has reason to foresee that his failure to deliver the commodity as agreed will probably cause the wholesaler to lose a reasonable profit on it. See Illustrations 3 and 4. Similarly, a seller of a machine to a manufacturer usually has reason to foresee that his delay in delivering the machine as agreed will probably cause the manufacturer to lose a reasonable profit from its use, although courts have been somewhat more cautious in allowing the manufacturer recovery for loss of such profits than in allowing a middleman recovery for loss of profits on an intended resale. See Illustration 5. The damages recoverable for such loss that results in the ordinary course of events are sometimes called “general” damages.

If loss results other than in the ordinary course of events, there can be no recovery for it unless it was foreseeable by the party in breach because of special circumstances that he had reason to know when he made the contract. See U.C.C. § 2-715(2)(a). For example, a seller who fails to deliver a commodity to a wholesaler is not liable for the wholesaler’s loss of profit to the extent that it is extraordinary nor for his loss due to unusual terms in his resale contracts unless the seller had reason to know of these special circumstances. See Illustration 6. Similarly, a seller who delays in delivering a machine to a manufacturer is not liable for the manufacturer’s loss of profit to the extent that it results from an intended use that was abnormal unless the seller had reason to know of this special circumstance. See Illustration 7. In the case of a written agreement, foreseeability is sometimes established by the use of recitals in the agreement itself. The parol evidence rule (§ 213) does not, however, preclude the use of negotiations prior to the making of the contract to show for this purpose circumstances that were then known to a party. The damages recoverable for loss that results other than in the ordinary course of events are sometimes called “special” or “consequential” damages. These terms are often misleading, however, and it is not necessary to distinguish between “general” and “special” or “consequential” damages for the purpose of the rule stated in this Section.

3. A and B make a written contract under which A is to recondition by a stated date a used machine owned by B so that it will be suitable for sale by B to C. A knows when they make the contract that B has contracted to sell the machine to C but knows nothing of the terms of B’s contract with C. Because A delays in returning the machine to B, B is unable to sell it to C and loses the profit that he would have made on that sale. B’s loss of reasonable profit was foreseeable by A as a probable result of the breach at the time the contract was made.

4. A, a manufacturer of machines, contracts to make B his exclusive selling agent in a specified area for the period of a year. Because A fails to deliver any machines, B loses the profit on contracts that he would have made for their resale. B’s loss of reasonable profit was foreseeable by A as a probable result of the breach at the time the contract was made.

5. A and B make a contract under which A is to recondition by a stated date a used machine owned by B so that it will be suitable for use in B’s canning factory. A knows that the machine must be reconditioned by that date if B’s factory is to operate at full capacity during the canning season, but nothing is said of this in the written contract. Because A delays in returning the machine to B, B loses its use for the entire canning season and loses the profit that he would have made had his factory operated at full capacity. B’s loss of reasonable profit was foreseeable by A as a probable result of the breach at the time the contract was made.

6. The facts being otherwise as stated in Illustration 3, the profit that B would have made under his contract with A was extraordinarily large because C promised to pay an exceptionally high price as a result of a special need for the machine of which A was unaware. A is not liable for B’s loss of profit to the extent that it exceeds what would ordinarily result from such a contract. To that extent the loss was not foreseeable by A as a probable result of the breach at the time the contract was made.

7. The facts being otherwise as stated in Illustration 5, the profit that B would have made from the use of the machine was unusually large because of an abnormal use to which he planned to put it of which A was unaware. A is not liable for B’s loss of profit to the extent that it exceeds what would ordinarily result from the use of such a machine. To that extent the loss was not foreseeable by A at the time the contract was made as a probable result of the breach.

c. Litigation or settlement caused by breach.

Sometimes a breach of contract results in claims by third persons against the injured party. The party in breach is liable for the amount of any judgment against the injured party together with his reasonable expenditures in the litigation, if the party in breach had reason to foresee such expenditures as the probable result of his breach at the time he made the contract. See Illustrations 8, 10, 11 and 12. This is so even if the judgment in the litigation is based on a liquidated damage clause in the injured party’s contract with the third party. See Illustration 8.

A failure to notify the party in breach in advance of the litigation may prevent the result of the litigation from being conclusive as to him. But to the extent that the injured party’s loss resulting from litigation is reasonable, thefact that the party in breach was not notified does not prevent the inclusion of that loss in the damages assessed against him. In furtherance of the policy favoring private settlement of disputes, the injured party is also allowed to recover the reasonable amount of any settlement made to avoid litigation, together with the costs of settlement. See Illustration 9.

8. The facts being otherwise as stated in Illustration 3, B not only loses the profit that he would have made on sale of the machine to C, but is held liable for damages in an action brought by C for breach of contract. The damages paid to C and B’s reasonable expenses in defending the action were also foreseeable by A as a probable result of the breach at the time he made the contract with B. The result is the same even though they were based on a liquidated damage clause in the contract between B and C if A knew of the clause or if the use of such a clause in the contract between B and C was foreseeable by A at the time he made the contract with B.

9. The facts being otherwise as stated in Illustration 3, B not only loses the profit that he would have made on sale of the machine to C, but settles with C by paying C a reasonable sum of money to avoid litigation. The amount of the settlement paid to C and B’s reasonable expenses in settling were also foreseeable by A at the time he made the contract with B as a probable result of the breach.

10. A contracts to supply B with machinery for unloading cargo. A, in breach of contract, furnishes defective machinery, and C, an employee of B, is injured. C sues B and gets a judgment, which B pays. The amount of the judgment and B’s reasonable expenditures in defending the action were foreseeable by A at the time the contract was made as a probable result of the breach.

11. A contracts to procure a right of way for B, for a railroad. Because A, in breach of contract, fails to do this, B has to acquire the right of way by condemnation proceedings. B’s reasonable expenditures in those proceedings were foreseeable by A at the time the contract was made as a probable result of the breach.

12. A leases land to B with a covenant for quiet enjoyment. C brings an action of ejectment against B and gets judgment. B’s reasonable expenditures in defending the action were foreseeable by A as the probable result of the breach at the time the contract was made.

d. Unavailability of substitute.

If several circumstances have contributed to cause a loss, the party in breach is not liable for it unless he had reason to foresee all of them. Sometimes a loss would not have occurred if the injured party had been able to make substitute arrangements after breach, as, for example, by “cover” through purchase of substitute goods in the case of a buyer of goods (see U.C.C. § 2-712). If the inability of the injured party to make such arrangements was foreseeable by the party in breach at the time he made the contract, the resulting loss was foreseeable. See Illustration 13. On the impact of this principle on contracts to lend money, see Comment e.

13. A contracts with B, a farmer, to lease B a machine to be used harvesting B’s crop, delivery to be made on July 30. A knows when he makes the contract that B’s crop will be ready on that date and that B cannot obtain another machine elsewhere. Because A delays delivery until August 10, B’s crop is damaged and he loses profit. B’s loss of profit was foreseeable by A at the time the contract was made as aprobable result of the breach.

e. Breach of contract to lend money.

The limitation of foreseeability is often applied in actions for damages for breach of contracts to lend money. Because credit is so widely available, a lender often has no reason to foresee at the time the contract is made that the borrower will be unable to make substitute arrangements in the event of breach. See Comment d. In most cases, then, the lender’s liability will be limited to the relatively small additional amount that it would ordinarily cost to get a similar loan from another lender. However, in the less common situation in which the lender has reason to foresee that the borrower will be unable to borrow elsewhere or will be delayed in borrowing elsewhere, the lender may be liable for much heavier damages based on the borrower’s inability to take advantage of a specific opportunity (see Illustration 14), his having to postpone or abandon a profitable project (see Illustration 15), or his forfeiture of security for failure to make prompt payment (see Illustration 16).

14. A contracts to lend B $ 100,000 for one year at eight percent interest for the stated purpose of buying a specific lot of goods for resale. B can resell the goods at a $ 20,000 profit. A delays in making the loan, and although B can borrow money on the market at ten percent interest, he is unable to do so in time and loses the opportunity to buy the goods. Unless A had reason to foresee at the time that he made the contract that such a delay in making the loan would probably cause B to lose the opportunity, B can only recover damages based on two percent of the amount of the loan.

15. A contracts to lend $ 1,000,000 to B for the stated purpose of enabling B to build a building and takes property of B as security. After construction is begun, A refuses to make the loan or release the security. Because B lacks further security, he is unable to complete the building, which becomes a total loss. B’s loss incurred in partial construction of the building was foreseeable by A at the time of the contract as a probable result of the breach.

16. A, who holds B’s land as security for a loan, contracts to lend B a sum of money sufficient to pay off other liens on the land at the current rate of interest. A repudiates and informs B in time to obtain money elsewhere on the market, but B is unable to do so. The liens are foreclosed and the land sold at a loss. Unless A knew when he made the contract that B would probably be unable to borrow the money elsewhere, B’s loss on the foreclosure sale was not foreseeable as a probable result of A’s breach.

f. Other limitations on damages.

It is not always in the interest of justice to require the party in breach to pay damages for all of the foreseeable loss that he has caused. There are unusual instances in which it appears from the circumstances either that the parties assumed that one of them would not bear the risk of a particular loss or that, although there was no such assumption, it would be unjust to put the risk on that party. One such circumstance is an extreme disproportion between the loss and the price charged by the party whose liability for that loss is in question. The fact that the price is relatively small suggests that it was not intended to cover the risk of such liability. Another such circumstance is an informality of dealing, including the absence of a detailed written contract, which indicates that there was no careful attempt to allocate all of the risks. The fact that the parties did not attempt to delineate with precision all of the risks justifies a court in attempting to allocate them fairly. The limitations dealt with in this Section are more likely to be imposed in connection with contracts that do not arise in a commercial setting. Typical examples of limitations imposed on damages under this discretionary power involve the denial of recovery for loss of profits and the restriction of damages to loss incurred in reliance on the contract. Sometimes these limits are covertly imposed, by means of an especially demanding requirement of foreseeability or of certainty. The rule stated in this Section recognizes that what is done in such cases is the imposition of a limitation in the interests of justice.

17. A, a private trucker, contracts with B to deliver to B’s factory a machine that has just been repaired and without which B’s factory, as A knows, cannot reopen. Delivery is delayed because A’s truck breaks down. In an action by B against A for breach of contract the court may, after taking into consideration such factors as the absence of an elaborate written contract and the extreme disproportion between B’s loss of profits during the delay and the price of the trucker’s services, exclude recovery for loss of profits.

18. A, a retail hardware dealer, contracts to sell B an inexpensive lighting attachment, which, as A knows, B needs in order to use his tractor at night on his farm. A is delayed in obtaining the attachment and, since no substitute is available, B is unable to use the tractor at night during the delay. In an action by B against A for breach of contract, the court may, after taking into consideration such factors as the absence of an elaborate written contract and the extreme disproportion between B’s loss of profits during the delay and the price of the attachment, exclude recovery for loss of profits.

19. A, a plastic surgeon, makes a contract with B, a professional entertainer, to perform plastic surgery on her face in order to improve her appearance. The result of the surgery is, however, to disfigure her face and to require a second operation. In an action by B against A for breach of contract, the court may limit damages by allowing recovery only for loss incurred by B in reliance on the contract, including the fees paid by B and expenses for hospitalization, nursing care and medicine for both operations, together with any damages for the worsening of B’s appearance if these can be proved with reasonable certainty, but not including any loss resulting from the failure to improve her appearance.

[]{#_Toc161928273 .anchor}R. 2d Contracts § 352 – Uncertainty as a Limitation on Damages

Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.

a. Requirement of certainty.

A party cannot recover damages for breach of a contract for loss beyond the amount that the evidence permits to be established with reasonable certainty. See Illustration 1. Courts have traditionally required greater certainty in the proof of damages for breach of a contract than in the proof of damages for a tort. The requirement does not mean, however, that the injured party is barred from recovery unless he establishes the total amount of his loss. It merely excludes those elements of loss that cannot be proved with reasonable certainty. The main impact of the requirement of certainty comes in connection with recovery for lost profits. Although the requirement of certainty is distinct from that of foreseeability (§ 351), its impact is similar in this respect. Although the requirement applies to damages based on the reliance as well as the expectation interest, there is usually little difficulty in proving the amount that the injured party has actually spent in reliance on the contract, even if it is impossible to prove the amount of profit that he would have made. In such a case, he can recover his loss based on his reliance interest instead of on his expectation interest. See § 349 and Illustrations 1, 2 and 3.

Doubts are generally resolved against the party in breach. A party who has, by his breach, forced the injured party to seek compensation in damages should not be allowed to profit from his breach where it is established that a significant loss has occurred. A court may take into account all the circumstances of the breach, including willfulness, in deciding whether to require a lesser degree of certainty, giving greater discretion to the trier of the facts. Damages need not be calculable with mathematical accuracy and are often at best approximate. This is especially true for items such as loss of good will as to which great precision cannot be expected. See Illustration 4. Furthermore, increasing receptiveness on the part of courts to proof by sophisticated economic and financial data and by expert opinion has made it easier to meet the requirement of certainty.

1. A contracts to publish a novel that B has written. A repudiates the contract and B is unable to get his novel published elsewhere. If the evidence does not permit B’s loss of royalties and of reputation to be estimated with reasonable certainty, he cannot recover damages for that loss, although he can recover nominal damages. See Illustration 1 to § 347.

2. A contracts to sell B a tract of land on which B plans to build an outdoor drive-in theatre. A breaks the contract by selling the land to C, and B is unable to build the theatre. If, because of the speculative nature of the new enterprise the evidence does not permit B’s loss of profits to be estimated with reasonable certainty, his recovery will be limited to expenses incurred in reliance or, if none can be proved with reasonable certainty, to nominal damages.

3. A and B make a contract under which A is to construct a building of radical new design for B for $ 5,000,000. After A has spent $ 3,000,000 in reliance, B repudiates the contract and orders A off the site. If the evidence does not permit A’s lost profits to be estimated with reasonable certainty, he can recover the $ 3,000,000 that he has spent in reliance. He must, however, then prove that amount with reasonable certainty.

4. A, a manufacturer, makes a contract with B, a wholesaler, to sell B a quantity of plastic. B resells the plastic to dealers. The plastic is discovered to be defective and B has many complaints from dealers, some of which refuse to place further orders with him. B can recover the loss of good will if his loss can be estimated with reasonable certainty by such evidence as his business records before and after the transaction and the testimony of his salespersons and that of dealers.

b. Proof of profits.

The difficulty of proving lost profits varies greatly with the nature of the transaction. If, for example, it is the seller who claims lost profit on the ground that the buyer’s breach has caused him to lose a sale, proof of lost profit will ordinarily not be difficult. If, however, it is the buyer who claims lost profit on the ground that the seller’s breach has caused him loss in other transactions, the task of proof is harder. Furthermore, if the transaction is more complex and extends into the future, as where the seller agrees to furnish all of the buyer’s requirements over a period of years, proof of the loss of profits caused by the seller’s breach is more difficult. If the breach prevents the injured party from carrying on a well-established business, the resulting loss of profits can often be proved with sufficient certainty. Evidence of past performance will form the basis for a reasonable prediction as to the future. See Illustration 5.

However, if the business is a new one or if it is a speculative one that is subject to great fluctuations in volume, costs or prices, proof will be more difficult. Nevertheless, damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like. See Illustration 6.

Under a contract of exclusive agency for the sale of goods on commission, the agent can often prove with sufficient certainty the profits that he would have made had he not been discharged. Proof of the sales made by the agent in the agreed territory before the breach, or of the sales made there by the principal after the breach, may permit a reasonably accurate estimate of the agent’s loss of commissions. However, if the agency is not an exclusive one, so that the agent’s ability to withstand competition is in question, such a showing will be more difficult, although the agent’s past record may give a sufficient basis for judging this. See Illustration 7.

5. A contracts with B to remodel B’s existing outdoor drive-in theatre, work to be completed on June 1. A does not complete the work until September 1. B can use records of the theatre’s prior and subsequent operation, along with other evidence, to prove his lost profits with reasonable certainty.

6. A contracts with B to construct a new outdoor drive-in theatre, to be completed on June 1. A does not complete the theatre until September 1. Even though the business is a new rather than an established one, B may be able to prove his lost profits with reasonable certainty. B can use records of the theatre’s subsequent operation and of the operation of similar theatres in the same locality, along with other evidence including market surveys and expert testimony, in attempting to do this.

7. A contracts with B to make B his exclusive agent for the sale of machine tools in a specified territory and to supply him with machine tools at stated prices. After B has begun to act as A’s agent, A repudiates the agreement and replaces him with C. B can use evidence as to sales and profits made by him before the repudiation and made by C after the repudiation in attempting to prove his lost profits with reasonable certainty. It would be more difficult, although not necessarily impossible, for B to succeed in this attempt if his agency were not exclusive.

c. Alternative remedies.

The necessity of proving damages can be avoided if another remedy, such as a decree of specific performance or an injunction, is granted instead of damages. Although the availability of such a remedy does not preclude an award of damages as an alternative, it may justify a court in requiring greater certainty of proof if damages are to be awarded. See Illustration 8.

8. A, a steel manufacturer, and B, a dealer in scrap steel, contract for the sale by A to B of all of A’s output of scrap steel for five years at a price fixed in terms of the market price. B’s profit will depend largely on the amount of A’s output and the cost of transporting the scrap to B’s purchasers. A repudiates the contract at the end of one year. Whether B can recover damages based on lost profits over the remaining four years will depend on whether he can prove A’s output and the transportation costs with reasonable certainty. If he can do so for part of the remaining four years, he can recover damages based on lost profits for that period. The availability of the remedy of specific performance is a factor that will influence a court in requiring greater certainty.

[]{#_Toc161928274 .anchor}R. 2d Contracts § 355 – Punitive Damages

Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.

a. Compensation not punishment.

The purposes of awarding contract damages is to compensate the injured party. For this reason, courts in contract cases do not award damages to punish the party in breach or to serve as an example to others unless the conduct constituting the breach is also a tort for which punitive damages are recoverable. Courts are sometimes urged to award punitive damages when, after a particularly aggravated breach, the injured party has difficulty in proving all of the loss that he has suffered. In such cases the willfulness of the breach may be taken into account in applying the requirement that damages be proved with reasonable certainty (Comment a to § 352); but the purpose of awarding damages is still compensation and not punishment, and punitive damages are not appropriate. In exceptional instances, departures have been made from this general policy. A number of states have enacted statutes that vary the rule stated in this Section, notably in situations involving consumer transactions or arising under insurance policies.

1. A is employed as a school teacher by B. In breach of contract and without notice B discharges A by excluding him from the school building and by stating in the presence of the pupils that he is discharged. Regardless of B’s motive in discharging A, A cannot recover punitive damages from B. A can recover compensatory damages under the rule stated in § 347, including any damages for emotional disturbance that are allowable under the rule stated in § 353.

2. A and B, who are neighbors, make a contract under which A promises to supply water to B from A’s well for ten years in return for B’s promise to make monthly payments and share the cost of repairs. After several years, the relationship between A and B deteriorates and A, in breach of contract and to spite B, shuts offthe water periodically. B cannot recover punitive damages from A. B can recover compensation damages under the rule stated in § 347 if he can prove them with reasonable certainty (§ 352), and the court may take into account the willfulness of A’s breach in applying that requirement. See Comment a to § 352.

b. Exception for tort.

In some instances the breach of contract is also a tort, as may be the case for a breach of duty by a public utility. Under modern rules of procedure, the complaint may not show whether the plaintiff intends his case to be regarded as one in contract or one in tort. The rule stated in this Section does not preclude an award of punitive damages in such a case if such an award would be proper under the law of torts. The term “tort” in the rule stated in this Section is elastic, and the effect of the general expansion of tort liability to protect additional interests is to make punitive damages somewhat more widely available for breach of contract as well. Some courts have gone rather far in this direction.

3. A, a telephone company, contracts with B to render uninterrupted service. A, tortiously as well as in breach of contract, fails to maintain service at night and B is unable to telephone a doctor for his sick child. B’s right to recover punitive damages is governed by Restatement, Second, Torts § 908.

4. A borrows money from B, pledging jewelry as security for the loan. B, tortiously as well as in breach of contract, sells the jewelry to a good faith purchaser for value. A’s right to recover punitive damages is governed by Restatement, Second, Torts § 908.

[]{#_Toc161928275 .anchor}R. 2d Contracts § 356 – Liquidated Damages and Penalties

(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

(2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.

a. Liquidated damages or penalty.

The parties to a contract may effectively provide in advance the damages that are to be payable in the event of breach as long as the provision does not disregard the principle of compensation. The enforcement of such provisions for liquidated damages saves the time of courts, juries, parties and witnesses and reduces the expense of litigation. This is especially important if the amount in controversy is small. However, the parties to a contract are not free to provide a penalty for its breach. The central objective behind the system of contract remedies is compensatory, not punitive. Punishment of a promisor for having broken his promise has no justification on either economic or other grounds and a term providing such a penalty is unenforceable on grounds of public policy. See Chapter 8.

The rest of the agreement remains enforceable, however, under the rule stated in § 184(1), and the remedies for breach are determined by the rules stated in this Chapter. See Illustration 1. A term that fixes an unreasonably small amount as damages may be unenforceable as unconscionable. As to the liquidation of damages and modification or limitation of remedies in contracts of sale, see U.C.C. §§ 2-718, 2-719.

b. Test of penalty.

Under the test stated in Subsection (1), two factors combine in determining whether an amount of money fixed as damages is so unreasonably large as to be a penalty. The first factor is the anticipated or actual loss caused by the breach. The amount fixed is reasonable to the extent that it approximates the actual loss that has resulted from the particular breach, even though it may not approximate the loss that might have been anticipated under other possible breaches. See Illustration 2. Furthermore, the amount fixed is reasonable to the extent that it approximates the loss anticipated at the time of the making of the contract, even though it may not approximate the actual loss. See Illustration 3. The second factor is the difficulty of proof of loss. The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty (see § 351), the easier it is to show that the amount fixed is reasonable. To the extent that there is uncertainty as to the harm, the estimate of the court or jury may not accord with the principle of compensation any more than does the advance estimate of the parties. A determination whether the amount fixed is a penalty turns on a combination of these two factors. If the difficulty of proof of loss is great, considerable latitude is allowed in the approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude is allowed in that approximation. If, to take an extreme case, it is clear that no loss at all has occurred, a provision fixing a substantial sum as damages is unenforceable. See Illustration 4.

1. A and B sign a written contract under which A is to act in a play produced by B for a ten week season for $ 4,000. A term provides that “if either party shall fail to perform as agreed in any respect he will pay $ 10,000 as liquidated damages and not as a penalty.” A leaves the play before the last week to take another job. The play is sold out for that week and A is replaced by a suitable understudy. The amount fixed is unreasonable in the light of both the anticipated and the actual loss and, in spite of the use of the words “liquidated damages,” the term provides for a penalty and is unenforceable on grounds of public policy. The rest of the agreement is enforceable (§ 184(1)), and B’s remedies for A’s breach are governed by the rules stated in this Chapter.

2. A, B and C form a partnership to practice veterinary medicine in a town for ten years. In the partnership agreement, each promises that if, on the termination of the partnership, the practice is continued by the other two members, he will not practice veterinary medicine in the same town during its continuance up to a maximum of three years. A term provides that for breach of this duty “he shall forfeit $ 50,000 to be collected by the others as damages.” A leaves the partnership, and the practice is continued by B and C. A immediately begins to practice veterinary medicine in the same town. The loss actually caused to B and C is difficult of proof and $ 50,000 is not an unreasonable estimate of it. Even though $ 50,000 may be unreasonable in relation to the loss that might have resulted in other circumstances, it is not unreasonable in relation to the actual loss. Therefore, the term does not provide for a penalty and its enforcement is not precluded on grounds of public policy.

3. A contracts to build a grandstand for B’s race track for $ 1,000,000 by a specified date and to pay $ 1,000 a day for every day’s delay in completing it. A delays completion for ten days. If $ 1,000 is not unreasonable in the light of the anticipated loss and the actual loss to B is difficult to prove, A’s promise is not a term providing for a penalty and its enforcement is not precluded on grounds of public policy.

4. The facts being otherwise as stated in Illustration 3, B is delayed for a month in obtaining permission to operate his race track so that it is certain that A’s delay of ten days caused him no loss at all. Since the actual loss to B is not difficult to prove, A’s promise is a term providing for a penalty and is unenforceable on grounds of public policy.

c. Disguised penalties.

Under the rule stated in this Section, the validity of a term providing for damages depends on the effect of that term as interpreted according to the rules stated in Chapter 9. Neither the parties’ actual intention as to its validity nor their characterization of the term as one for liquidated damages or a penalty is significant in determining whether the term is valid. Sometimes parties attempt to disguise a provision for a penalty by using language that purports to make payment of the amount an alternative performance under the contract, that purports to offer a discount for prompt performance, or that purports to place a valuation on property to be delivered. Although the parties may in good faith contract for alternative performances and fix discounts or valuations, a court will look to the substance of the agreement to determine whether this is the case or whether the parties have attempted to disguise a provision for a penalty that is unenforceable under this Section. In determining whether a contract is one for alternative performances, the relative value of the alternatives may be decisive.

5. A contracts to build a house for B for $ 50,000 by a specified date or in the alternative to pay B $ 1,000 a week during any period of delay. A delays completion for ten days. If $ 1,000 a week is unreasonable in the light of both the anticipated and actual loss, A’s promise to pay $ 1,000 a week is, in spite of its form, a term providing for a penalty and is unenforceable on grounds of public policy.

This Section does not purport to cover the wide variety of provisions used by parties to control the remedies available to them for breach of contract. A term that fixes as damages an amount that is unreasonably small does not come within the rule stated in this Section, but a court may refuse to enforce it as unconscionable under the rule stated in § 208. A mere recital of the harm that may occur as a result of a breach of contract does not come within the rule stated in this Section, but may increase damages by making that harm foreseeable under the rule stated § 351. As to the effect of a contract provision on the right to equitable relief, see Comment a to § 359. As to the effect of a term requiring the occurrence of a condition where forfeiture would result, see § 229. Although attorneys’ fees are not generally awarded to the winning party, if the parties provide for the award of such fees the court will award a sum that it considers to be reasonable. If, however, the parties specify the amount of such fees, the provision is subject to the test stated in this Section.

e. Penalties in bonds.

Bonds often fix a flat sum as a penalty for non-occurrence of the condition of the bond. A term providing for a penalty is not unenforceable in its entirety but only to the extent that it exceeds the loss caused by the non-occurrence of the condition.

6. A executes a bond obligating himself to pay B $ 10,000, on condition that the bond shall be void, however, if C, who is B’s cashier, shall properly account for all money entrusted to him. C defaults to the extent of $ 500. A’s promise is unenforceable on grounds of public policy to the extent that it exceeds the actual loss, $ 500.

Chapter 24 | Equitable Remedies

[]{#_Toc161928277 .anchor}R. 2d Contracts § 357 – Availability of Specific Performance and Injunction

(1) Subject to the rules stated in §§ 359-69, specific performance of a contract duty will be granted in the discretion of the court against a party who has committed or is threatening to commit a breach of the duty.

(2) Subject to the rules stated in §§ 359-69, an injunction against breach of a contract duty will be granted in the discretion of the court against a party who has committed or is threatening to commit a breach of the duty if

(a) the duty is one of forbearance, or

(b) the duty is one to act and specific performance would be denied only for reasons that are inapplicable to an injunction.

a. Specific performance.

An order of specific performance is intended to produce as nearly as is practicable the same effect that the performance due under a contract would have produced. It usually, therefore, orders a party to render the performance that he promised. (On the form of the order, see § 358.) Such relief is seldom granted unless there has been a breach of contract, either by non-performance or by repudiation. In unusual circumstances, however, it may be granted where there is merely a threatened breach. See Subsection (1).

b. Injunction.

A court may by injunction direct a party to refrain from doing a specified act. This is appropriate in two types of cases.

In the first, the performance due under the contract consists simply of forbearance, and the injunction in effect orders specific performance. See Paragraph (2)(a). Duties of forbearance are often imposed not as a matter of agreement but as a matter of law, as is usually the case for the duty not to interfere with the other party’s performance of the contract. Duties of forbearance are ordinarily accompanied by other duties that require affirmative action by both parties. The presence of such other duties does not, of itself, preclude issuance of an injunction ordering forbearance only, but an injunction will not be issued if the performance of those other duties cannot be secured.

In the second type of case, the performance due under the contract consists of the doing of an act rather than of forbearance, and the injunction is used as an indirect means of enforcing the duty to act. See Paragraph (2)(b). Instead of ordering that the act be done, the court orders forbearance from inconsistent action. This is appropriate in situations where an injunction will afford a measure of relief and the duty to act would have been specifically enforced were it not for some objection that can be avoided by ordering forbearance from inconsistent action. For example, the difficulties involved in supervising compliance with the order may be less in the case of an injunction that in the case of specific performance. An injunction will not be issued, however, if the reason for refusing specific performance is not merely that the practical difficulties of such relief are too great but that compelling performance of the duty is itself undesirable. For example, an injunction is not ordinarily appropriate as an indirect means of enforcing a duty to render personal service. See Comment c to § 367.

1. A contracts with B to give B the “first refusal” of A’s house on stated terms. A later offers to sell the house to others without first offering it to B and B sues A to enjoin him from doing this. An injunction may properly be granted.

2. A, B and C form a partnership to practice veterinary medicine in a town for ten years. In the partnership agreement each makes an enforceable promise that if, on the termination of the partnership, the practice is continued by the other two members, he will not practice veterinary medicine in the same town during its continuance up to a maximum of three years. See Illustration 11 to § 188. A leaves the partnership and the practice is continued by B and C. A immediately threatens to begin the practice of veterinary medicine in the same town, and B and C sue to enjoin A from doing so. An injunction may properly be granted.

3. A, the owner of a large factory, contracts to take all of his requirements of electricity from B, who promises to build a new electric plant at a place where it would not otherwise be profitable. A repudiates the contract and B sues A to enjoin him from using electricity that is not supplied by B. An injunction may properly be granted.

4. A makes a contract with B under which A promises to sell exclusively B’s dress patterns in A’s stores for a period of five years. The contract provides details as to manner of exhibition and division of profits. On anticipatory repudiation of the contract by A, B sues A for specific performance of his duty to sell B’s patterns and to enjoin him from selling competing dress patterns. Even if the court refuses specific performance on the ground that enforcement and supervision would be too difficult (§ 366), it may properly grant an injunction.

5. A, a fruit growers’ cooperative, contracts to sell to B, a fruit processor, 1,000 tons of loganberries a year for five years. In reliance on the contract, B substantially expands his plant and engages in an extensive advertising campaign. A then repudiates the contract. The loss to B is difficult to estimate but will probably exceed $ 500,000. A’s entire assets do not exceed $ 100,000. B sues A for specific performance and to enjoin A from selling loganberries to anyone other than B. Even if the court refuses specific performance on the ground that enforcement and supervision would be too difficult (§ 366), it may properly grant an injunction.

c. Discretionary nature of relief.

The granting of equitable relief has traditionally been regarded as within judicial discretion. The exercise of that discretion is subject to the rules stated in §§ 359-69. It is also subject to general principles of equity that are not peculiar to contract disputes, such as those that bar relief to one who has been guilty of laches or who has come into court with unclean hands. Furthermore, it is subject to principles of common sense so that, for example, a court will not order a performance that is impossible. In granting relief, as well as in denying it, a court may take into consideration the public interest.

[]{#_Toc161928278 .anchor}R. 2d Contracts § 370 – Requirement That Benefit Be Conferred

A party is entitled to restitution under the rules stated in this Restatement only to the extent that he has conferred a benefit on the other party by way of part performance or reliance.

a. Meaning of requirement.

A party’s restitution interest is his interest in having restored to him any benefit that he has conferred on the other party. See § 344(2). Restitution is, therefore, available to a party only to the extent that he has conferred a benefit on the other party. The benefit may result from the transfer of property or from services, including forbearance. The benefit is ordinarily conferred by performance by the party seeking restitution, and receipt by the other party of performance that he bargained for is regarded as a benefit. However, a benefit may also be conferred if the party seeking restitution relies on the contract in some other way, as where he makes improvements on property that does not ultimately become his.

However, a party’s expenditures in preparation for performance that do not confer a benefit on the other party do not give rise to a restitution interest. See Illustration 1. If, for example, the performance consists of the manufacture and delivery of goods and the buyer wrongfully prevents its completion, the seller is not entitled to restitution because no benefit has been conferred on the buyer. See Illustration 2. The injured party may, however, have an action for damages, including one for recovery based on his reliance interest (§ 349). The requirement of this Section is generally satisfied if a benefit has been conferred, and it is immaterial that it was later lost, destroyed or squandered. See Illustration 3. The benefit must have been conferred by the party claiming restitution. It is not enough that it was simply derived from the breach. See Illustration 4. The other party is considered to have had a benefit conferred on him if a performance was rendered at his request to a third person. See Illustration 5. If the contract is for the benefit of a third person, the promisee is entitled to restitution unless the duty to the beneficiary cannot be varied under the rule stated in § 311.

1. A, who holds a mortgage on B’s house, makes a contract with B under which A promises not to foreclose the mortgage for a year. In reliance on this promise, B invests money that he would have used to pay the mortgage in improving other land that he owns. A repudiates the contract and forecloses. B cannot get restitution based on the improvements since making them conferred no benefit on A. But see Illustration 4 to § 373 and Illustration 11 to § 90.

2. A contracts to sell B a machine for $ 100,000. After A has spent $ 40,000 on the manufacture of the machine but before its completion, B repudiates the contract. A cannot get restitution of the $ 40,000 because no benefit was conferred on B.

3. A promises to deposit $ 100,000 to B’s credit in the X Bank in return for B’s promise to render services. A deposits the $ 100,000, the X Bank fails, and B refuses to perform. A can get restitution of the $ 100,000 because a benefit was to that extent conferred on B even though it was lost by B when the X Bank failed.

4. A contracts to work full time for B as a bookkeeper. In breach of this contract, A uses portions of the time that he should spend working for B in keeping books for C, who pays him an additional salary. B sues A for breach of contract. B cannot recover from A the amount of the salary paid by C because it was not a benefit conferred by B.

5. A, a social worker, promises B to render personal services to C in return for B’s promise to educate A’s children. B repudiates the contract after A has rendered part of the services. A can get restitution from B for the services, even though they were not rendered to B, because they conferred a benefit on B. See Illustration 3 to § 371.

[]{#_Toc161928279 .anchor}R. 2d Contracts § 371 – Measure of Restitution Interest

If a sum of 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 of what he received in terms of what it would have cost him to obtain it from 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.

a. Measurement of benefit.

Under the rules stated in §§ 344 and 370, a party who is liable in restitution for a sum of money must pay an amount equal to the benefit that has been conferred upon him. If the benefit consists simply of a sum of money received by the party from whom restitution is sought, there is no difficulty in determining this amount. If the benefit consists of something else, however, such as services or property, its measurement in terms of money may pose serious problems.

Restitution in money is available in a wide variety of contexts, and the resolution of these problems varies greatly depending on the circumstances. If, for example, the party seeking restitution has himself committed a material breach (§ 374), uncertainties as to the amount of the benefit may properly be resolved against him.

A particularly significant circumstance is whether the benefit has been conferred by way of performance or by way of reliance in some other way. See Comment a to § 370. Recovery is ordinarily more generous for a benefit that has been conferred by performance. To the extent that the benefit may reasonably be measured in different ways, the choice is within the discretion of the court. Thus a court may take into account the value of opportunities for benefit even if they have not been fully realized in the particular case.

An especially important choice is that between the reasonable value to a party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position and the addition to the wealth of that party as measured by the extent to which his property has been increased in value or his other interests advanced. In practice, the first measure is usually based on the market price of such a substitute. Under the rule stated in this Section, the court has considerable discretion in making the choice between these two measures of benefit. Under either choice, the court may properly consider the purposes of the recipient of the benefit when he made the contract, even if those purposes were later frustrated or abandoned.

b. Choice of measure.

The reasonable value to the party against whom restitution is sought (Paragraph (a)) is ordinarily less than the cost to the party seeking restitution, since his expenditures are excluded to the extent that they conferred no benefit. See Comment a to § 344. Nor can the party against whom restitution is sought reduce the amount for which he may himself be liable by subtracting such expenditures from the amount of the benefit that he has received. See Illustration 5 to § 377. The reasonable value to the party from whom restitution is sought (Paragraph (a)), is, however, usually greater than the addition to his wealth (Paragraph (b)). If this is so, a party seeking restitution for part performance is commonly allowed the more generous measure of reasonable value, unless that measure is unduly difficult to apply, except when he is in breach (§ 374). See Illustration 1. In the case of services rendered in an emergency or to save life, however, restitution based on addition to wealth will greatly exceed that based on expense saved and recovery is invariably limited to the smaller amount. See Illustration 2. In the case of services rendered to a third party as the intended beneficiary of a gift promise, restitution from the promisee based on his enrichment is generally not susceptible of measurement and recovery based on reasonable value is appropriate. See Illustration 3.

1. A, a carpenter, contracts to repair B’s roof for $ 3,000. A does part of the work at a cost of $ 2,000, increasing the market price of B’s house by $ 1,200. The market price to have a similar carpenter do the work done by A is $ 1,800. A’s restitution interest is equal to the benefit conferred on B. That benefit may be measured either by the addition to B’s wealth from A’s services in terms of the $ 1,200 increase in the market price of B’s house or the reasonable value to B of A’s services in terms of the $ 1,800 that it would have cost B to engage a similar carpenter to do the same work. If the work was not completed because of a breach by A and restitution is based on the rule stated in § 374, $ 1,200 is appropriate. If the work was not completed because of a breach by B and restitution is based on the rule stated in § 373, $ 1,800 is appropriate.

2. A, a surgeon, contracts to perform a series of emergency operations on B for $ 3,000. A does the first operation, saving B’s life, which can be valued in view of B’s life expectancy at $ 1,000,000. The market price to have an equally competent surgeon do the first operation is $ 1,800. A’s restitution interest is equal to the benefit conferred on B. That benefit is measured by the reasonable value to B of A’s services in terms of the $ 1,800 that it would have cost B to engage a similar surgeon to do the operation regardless of the rule on which restitution is based.

3. A, a social worker, promises B to render personal services to C in return for B’s promise to educate A’s children. A renders only part of the services and B then refuses to educate A’s children. The market price to have a similar social worker do the services rendered by A is $ 1,800. If A recovers in restitution under the rule stated in § 373, an appropriate measure of the benefit conferred on B is the reasonable value to B of A’s services in terms of the $ 1,800 that it would have cost B to engage a similar social worker to do the same work.

[]{#_Toc161928280 .anchor}R. 2d Contracts § 372 – Specific Restitution

(1) Specific restitution will be granted to a party who is entitled to restitution, except that:

(a) specific restitution based on a breach by the other party under the rule stated in § 373 may be refused in the discretion of the court if it would unduly interfere with the certainty of title to land or otherwise cause injustice, and

(b) specific restitution in favor of the party in breach under the rule stated in § 374 will not be granted.

(2) A decree of specific restitution may be made conditional on return of or compensation for anything that the party claiming restitution has received.

(3) If specific restitution, with or without a sum of money, will be substantially as effective as restitution in money in putting the party claiming restitution in the position he was in before rendering any performance, the other party can discharge his duty by tendering such restitution before suit is brought and keeping his tender good.

a. Specific restitution on avoidance or in similar circumstances.

A party who has a right to restitution under the rule stated in § 376 because he has avoided the contract, generally has a choice of either claiming a sum of money in restitution or seeking specific restitution if the benefit is something that can be returned to him. The same is true of a party who has a right to restitution under the rule stated in § 377 on one of the grounds there stated, even though this rule does not, strictly speaking, result in avoidance of the contract. The right to specific restitution may, however, be subject to rights of third parties. Their rights are not dealt with in this Restatement. For special rules governing the right of a seller under a contract for the sale of goods, see U.C.C. §§ 2-507, 2-702.

1. A is induced by B’s misrepresentation to sell a tract of land to B for $ 100,000. On discovery of the misrepresentation, A tenders back the $ 100,000 and sues B for specific restitution of the land. Specific restitution will be granted.

b. Specific restitution on other grounds.

A party whose right to restitution is based on the other party’s breach also has a right to specific restitution, subject to the limitation stated in Paragraph (a). In the case of a contract for the sale of goods, the Uniform Commercial Code limits much more severely the seller’s right to specific restitution, although the seller can protect himself by taking a security interest in the goods. See U.C.C. § 2-703. The most important problems of specific restitution that remain usually arise in connection with contracts to transfer land. If the buyer of land fails or refuses to pay the price after the transfer of the land to him, the seller is limited to his claim for the price, which may be secured by a vendor’s lien as a matter of law or by a security interest that he has reserved. The question of his right to specific restitution does not arise in that situation (§ 373(2)). Specific restitution may, however, be appropriate where there is a right to restitution because the return promise is to do something other than pay money. See Illustrations 2 and 3. In that case, however, a court may refuse specific restitution if it would unduly interfere with the certainty of title to the land. In resolving that question, a court will take into account all the circumstances, including the inadequacy of other relief. A court may also refuse specific restitution if it would otherwise cause injustice as where, for example, it would result in a preference over other creditors in bankruptcy. Specific restitution under the rule stated in this Section is available to the injured party even though enforcement of the contract is barred by the Statute of Frauds. Under the exception stated in Paragraph (b), however, it is never available to a party who is himself in breach.

2. A contracts to transfer a tract of land to B in return for B’s promise to transfer a tract of land to A at the same time. After A has transferred his tract to B and received a deed from B, A learns that B does not have title to the other tract. A sues B for specific restitution. Specific restitution will be granted, together with compensation to A for the value to B of the use of the land, because the right to specific restitution will not unduly interfere with the certainty of title to land. If B’s promise is to transfer his tract to A ten years after A’s transfer of his tract, specific restitution will be denied because a right to specific restitution would unduly interfere with the certainty of title to land during the ten years.

3. A contracts to transfer a tract of land to B in return for B’s promise to support A for life. B repudiates the contract after he has supported A for a time and A has transferred the land to him, and A sues B for specific restitution. Specific restitution will be granted, conditional on compensation by A for any support that he has received less the value to B of the use of the land, because the right to specific restitution will not unduly interfere with the certainty of title to land given the inadequacy of A’s right to damages because of the difficulty of proving damages with sufficient certainty (§ 352).

4. A contracts to transfer a tract of land to B in return for B’s promise to transfer a tract of land to A at a later date. After A has transferred his tract of land to B, B sells both tracts to C, a good faith purchaser for value, taking a mortgage to secure the balance of the price on the tract transferred by A. A sues B and C for specific restitution. Specific restitution will be denied but A can get a decree subrogating him to B’s right to the balance of the price and to his rights under the purchase money mortgage that secures it.

5. A contracts to transfer to B half of his 20,000 shares of stock in the X Corporation in return for B’s promise to pay $ 100,000, to organize a holding company to control X Corporation and to protect A’s remaining interest as a shareholder. After A has transferred the stock and B has paid the $ 100,000, B refuses to organize the holding company. A sues B for specific restitution. Specific restitution may properly be granted conditional on repayment by A of the $ 100,000.

c. Tender off specific restitution.

In some circumstances, a party who is liable for restitution can discharge his duty by tendering specific restitution and keeping his tender good. The tender has this result only if specific restitution will be substantially as effective as restitution in money in putting the party claiming restitution in the position he was in before rendering any performance. If tender of a sum of money in addition to specific restitution will do this, such a tender discharges the other party’s duty. See Illustration 6. The tender must, however, be made before suit has been brought.

6. A makes an oral contract with B under which A transfers 1,000 shares of stock to B in return for B’s promise to convey a tract of land to A. B repudiates the contract before he has conveyed the land and tenders back the stock and the dividends received from it and keeps his tender good. A rejects the tender and sues B for restitution of the value to B of the stock. A cannot recover the value of the stock.

Chapter 25 | UCC Damages

Editor’s note: Under common law, remedies are ostensibly neutral, in the sense they do not favor one type of party over the other. Under statutory law of the U.C.C., however, default remedies favor the buyer. If the contract is silent regarding remedies, the buyer may access any and all the remedies available at law, including:

If breach occurs prior to the buyer accepting the goods:
- Canceling the contract,
- Recovering the purchase price,
- Recovering contract-market damages,
- Purchasing substitute goods,
- Seeking specific performance, or
- Obtaining replevin.
If breach occurs after acceptance:
- Recovering expectation damages:
  - the value of goods as they would have been if conforming, minus
  - the value of the non-conforming goods and.
If there has been a breach of warranty, either:
- Rescinding the contract and recovering as damages:
  - money paid, plus
  - incidental damages; or
- Returning ng the goods and recovering as damages:
  - the value of the goods as if they had been as warranted, minus
  - the value of the goods as accepted at the time and place of acceptance.

Somewhat offsetting the default rules biasing U.C.C. remedies in favor of buyer’s rights is the buyer’s responsibility to mitigate damages. Buyer’s duty to mitigate damages is often fulfilled when the buyer makes a good faith and reasonable purchase of substitute goods, a process known as “covering.” If the buyer covers, then the buyer can then recover from the seller the difference between the cost of cover and the contract price, along with any incidental or consequential damages, but less any expenses saved as a result of the seller's breach.

Seller’s remedies are listed in N.H.R.S.A. 382-A § 2-703. Among these remedies is the seller’s right to resell the good. Some courts find that seller must make reasonable efforts to mitigate damages from buyer’s breach by so attempting to resell goods. This accourts with the U.C.C.’s general approach of encouraging parties to remedy disputes without intervention from courts.

[]{#_Toc161928282 .anchor}N.H.R.S.A. 382-A § 2-601 – Buyer’s Rights on Improper Delivery.

Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

(a) reject the whole; or

(b) accept the whole; or

[]{#_Toc161928283 .anchor}N.H.R.S.A. 382-A § 2-608 – Revocation of Acceptance in Whole or in Part.

(1) The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it

(a) on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or

(b) without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.

(2) Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.

(3) A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.

[]{#_Toc161928284 .anchor}N.H.R.S.A. 382-A § 2-612 – “Installment Contract”; Breach.

(1) An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause “each delivery is a separate contract” or its equivalent.

(2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment.

(3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

[]{#_Toc161928285 .anchor}N.H.R.S.A. 382-A § 2-613 – Casualty to Identified Goods.

Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a “no arrival, no sale” term (Section 2-324) then

(a) if the loss is total the contract is avoided; and

(b) if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.

[]{#_Toc161928286 .anchor}N.H.R.S.A. 382-A § 2-702 – Seller’s Remedies on Discovery of Buyer’s Insolvency.

(1) Where the seller discovers the buyer to be insolvent he may refuse delivery except for cash including payment for all goods theretofore delivered under the contract, and stop delivery under this Article (Section 2-705).

(2) Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.

(3) The seller’s right to reclaim under subsection (2) is subject to the rights of a buyer in ordinary course or other good faith purchaser under this Article (Section 2-403). Successful reclamation of goods excludes all other remedies with respect to them.

[]{#_Toc161928287 .anchor}N.H.R.S.A. 382-A § 2-703 – Seller’s Remedies in General.

Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract ([Section 2-612]{.underline}), then also with respect to the whole undelivered balance, the aggrieved seller may

(a) withhold delivery of such goods;

(b) stop delivery by any bailee as hereafter provided ([Section 2-705]{.underline});

(d) resell and recover damages as hereafter provided ([Section 2-706]{.underline});

(e) recover damages for non-acceptance ([Section 2-708]{.underline}) or in a proper case the price ([Section 2-709]{.underline});

(f) cancel.

[]{#_Toc161928288 .anchor}N.H.R.S.A. 382-A § 2-710 – Seller’s Incidental Damages.

Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.

[]{#_Toc161928289 .anchor}N.H.R.S.A. 382-A § 2-711 – Buyer’s Remedies in General; Buyer’s Security Interest in Rejected Goods.

(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid

(a) “cover” and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or

(b) recover damages for non-delivery as provided in this Article (Section 2-713).

(2) Where the seller fails to deliver or repudiates the buyer may also

(a) if the goods have been identified recover them as provided in this Article (Section 2-502); or

(b) in a proper case obtain specific performance or replevy the goods as provided in this Article (Section 2-716).

(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (Section 2-706).

[]{#_Toc161928290 .anchor}N.H.R.S.A. 382-A § 2-715 – Buyer’s Incidental and Consequential Damages.

(1) Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages resulting from the seller’s breach include

(a) any loss resulting from general or particular requirements and needs of which the seller at the time of 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 from any breach of warranty.

Appendix A | Controllable Electronic Records

Editor’s Note: In 2022, the Uniform Law Commisison modernized the Uniform Commercial Code (U.C.C.) by additing a new Article 12 to account for controllable electronic records (“CER”). This includes digital ledger technologies including blockchains, and thus it allows for integrate of smart contracts into commercial law.

Article 12 modifies the entire U.C.C., including Article 2, although the impact of CER on the law of sales is relatively minor. A notable change is that rules previously referring to writings (such as the statute of frauds) now refers to records, and these records include CER. This clarifies that digital records constitute writings under the U.C.C.

The definitions section from Article 12 are included here as adopted by the State of New Hampshire to illustrate these newly introduced concepts. More states appear eager to adopt these revisions. The revised model law likely will have increasing impact on commercial transactions, so students may find it worthwhile to familiarize themselves with its concepts. Students may note how Article 12 provides the framework for these concepts, while other Articles provide the specific applications.

N.H.R.S.A. 382-A § 12-102– Definitions.

(a) Article 12 definitions. In this article:

(1) “Controllable electronic record” means a record stored in an electronic medium that can be subjected to control under Section 12-105. The term does not include a controllable account, a controllable payment intangible, a deposit account, an electronic copy of a record evidencing chattel paper, an electronic document of title, investment property, a transferable record, or an electronic record that is currently authorized or adopted by a domestic or foreign government and is not a medium of exchange that was recorded and transferable in a system that existed and operated for the medium of exchange before the medium of exchange was authorized or adopted by a government.

(2) “Qualifying purchaser” means a purchaser of a controllable electronic record or an interest in the controllable electronic record that obtains control of the controllable electronic record for value, in good faith, and without notice of a claim of a property right in the controllable electronic record.

(3) “Transferable record” has the meaning provided for that term in:

(A) Section 201(a)(1) of the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001 et seq., as amended; or

(B) “Transferable record” as defined in Uniform Electronic Transactions Act Section 16(a).

(4) “Value” has the meaning provided in Section 3-303(a).

(b) Definitions in Article 9. The definitions in Article 9 of “account debtor”, “controllable account”, “controllable payment intangible”, “chattel paper”, “deposit account”, and “investment property” apply to this article.

* * * * *