I. INTERPRETING THE CONTENT OF OBLIGATIONS

A. THE PAROL EVIDENCE RULE

Definition: Where an agreement has been reduced to writing which the parties intend as the final and complete expression of their agreement, evidence of any prior or contemporaneous oral or written expressions is inadmissible to vary the terms of the writing. If complete integration, parol evidence MAY NEITHER ADD NOR CONTRADICT WRITTEN K. Rule of substantive contract law, not evidence.

Rationale: The law favors written contracts (as being more reliable). The rule works as rule of contract law indicating what constitutes the contract between the parties. Encourages specifying terms in written contracts.

Limitation: The parol evidence rule only applies where the parties intended the writing as a final expression of their agreement. Many courts now hold that any evidence may be admitted to determine whether the parties intended the contract as a final and complete expression of the agreement, i.e., whether the contract is an "integration."

Writings that evidence a purported contract are not necessarily the "final" expression of that contract. Thus, for example, the parties might only have intended such writings to be preliminary to a final draft. If so, the parol evidence rule will not bar introduction of further evidence. One should note that the more complete the agreement appears to be on its face, the more likely it is that it was intended as an integration.

After establishing that the writing was "final," one should determine if the integration was "complete" or only "partial." If the former, it may not be contradicted or supplemented; in the latter it cannot be contradicted, but may be supplemented by proving up consistent additional terms. Once full vs. partial integration issue settled, judge decides whether parol evidence applies to evidence.

Merger Clause. Where the agreement contains a merger clause reciting that it is complete on its face, this clause strengthens the presumption that all negotiations were merged in the written document.

The is not intended to exclude evidence because of the existence of an "integration clause," but to exclude evidence if the alleged parol condition contradicts some other specific term of the written agreement. Luther Williams Inc v. Johnson

Who makes the decision? The majority view is that the question as to whether an agreement is an integration is one of fact. However, this fact question, unlike others, is decided by the judge, not the jury. Should the judge decide that the writing was an integration of all agreements between the parties, he would exclude any offered evidence. Otherwise, he may admit the offered extrinsic evidence. Then, if there is a jury, it will make its own determination as to whether this extrinsic evidence was part of the agreement.

How is this determination made? The prevailing test is the Williston test: would parties situated as were these parties to this contract naturally and normally include the extrinsic matter in the writing? (Examine four corners of the document to determine if fully integrated) If such reasonable parties would have included the matter in the writing, evidence of the extrinsic matter will not be admitted. On the other hand, if the judge determines as a matter of fact that normal parties would not have included such extrinsic matter in the writing, the parol evidence may be introduced. Other tests include the Wigmore "aid," which asks, was the extrinsic matter mentioned or dealt with at all in the writing? If it was mentioned or dealt with in the writing, presumably the writing states all that the parties intended to say as to that matter and the evidence is excluded. Some courts also suggest another test: an examination of the writing itself to determine whether it appears to be complete on its face. Corbin - you can go outside document to determine if fully integrated. (Corbin's test violates purpose of the rule)

B. EXCEPTIONS TO THE RULE - pretty well swallow up the rule.

1. Attacking Validity

A party to a written contract can attack the agreement's validity. The party acknowledges (concedes) that the writing reflects the agreement but asserts, most frequently, that the agreement never came into being because of any of the following:

a. Formation Defects. (e.g., fraud, duress, mistake, and illegality) may be shown by extrinsic evidence.

b. Condition Precedent. Where the party asserts that there was an oral agreement that the written contract would not become effective until a condition occurred, all evidence of the understanding may be offered and received. This would be a condition precedent to effectiveness. The rationale is that you are not altering a written contract by means of parol evidence if the written agreement never came into being. It should be borne in mind that parol evidence of such a condition precedent will not be admitted if it contradicts the express language of the written contract.

Parol evidence is inadmissible as to conditions subsequent, i.e., an oral agreement that the party would not be obliged to perform until the happening of an event. The latter type of condition limits or modifies a duty under an existing or formed contract.

If no K until financing arranged, then no written K to invoke parol evidence rule. Once we have a K, then parol evidence rule applicable. The P.E.R. does not exclude evidence of an oral condition precedent (financing) when express language in the contract states that the K itself embodies the entire agreement. In this case the contract was silent as to financing and therefore parol evidence of the financing condition does not contradict the writing. Luther Williams, Inc. v. Johnson P sued D to recover liquidated damages on a contract to improve D's home; D thought the K he signed was merely an estimate that would take effect only upon approval of bank financing.

2. Show actual consideration - the parol evidence rule will not bar the admission of evidence showing the "true consideration" paid.

3. Interpretation. If there is uncertainty or ambiguity in the written agreement's terms or a dispute as to the meaning of those terms, parol evidence can be received to aid the fact-finder in reaching a correct interpretation of the agreement. If the meaning of the agreement is plain, parol evidence is inadmissible.

Example where parol evidence allowed: does K say anything about covenants pertaining to other future tenants.

a. If the agreement is ambiguous on its face, or becomes ambiguous in performance (D sells "my car" and it turns out he has two cars), parol evidence is admissible to clarify the parties' intent. Of course, if the ambiguity is so fundamental that there is no way that the court could determine what the parties intended, there may be no enforceable contract at all. Court permitted evidence to determine who John Young meant when he left an insurance policy to his "wife": the current wife whom he married under a new identity. In Re Soper's Estate

b. California Liberal trend. PACIFIC GAS the court allowed parol evidence to show the meaning of an indemnity clause in a contract, where the language of the contract is susceptible to the interpretation argued by D that it only applies to damage against third party property, not the P's property. Here the court is interpreting language, rather than adding new terms - less debatable. This ruling requires courts to consider extrinsic evidence to determine whether a contract is ambiguous. Indemnity clause - normally apply to injuries to a third party.

c. Where P finds final "boat charter agreement" to be different from his understanding of the deal because it did not include representations by D that the engines were in good working order or that the freezing system would meet P's needs, and P SIGNS IT ANYWAY, parol evidence will NOT be admitted concerning P's interpretation of the contract terms. KEMP FISHERIES, INC

P cannot claim this is not a fully integrated K, so P can only argue that the words need interpretation.

The paragraphs cited by the trial judge (who was reversed) pertain to two different periods of time: pre-delivery (guaranteed seaworthiness) and post-delivery (unguaranteed freezers). If the boat had sank, P would have cause of action, because denial of warranties cannot affect prior written representation of seaworthiness.

The Charter Agreement is not reasonably susceptible to an interpretation that D warranted the seaworthiness (guaranteed) of the vessel and the performance of the freezing system (not guaranteed). The paragraphs cited by the judge pertain to two different time period; pre-delivery and post-delivery.

d. Examples where plain language interpretation violates standard industry usage of terms:

(1) Bricklayer to be paid "$5.25 a thousand," means payment for wall surface area including windows and door - presumably cost of finishing around edges makes up for the missing bricks.

(2) 49.53% protein horse scraps. Industry standard is to round up. Therefore, if K says $X if 50% protein, and $Y < 50% protein, then must pay $X.

(3) Property bordering lake to be cut in half and given to two different parties. What does half mean? Midpoint along horizontal axis or equal square acres - in which case left side is skinnier rectangle? Equal mining space makes no sense.

(4) FRIGALIMENT IMPORTING - THE CHICKEN CASE. Order for 125,000 pounds of "chicken" to Switzerland found to contain stewing chickens, not frying or broiling chickens; executed by two big league traders in chicken, then buyer should have known he could not get large "fryers" at this price - only large "stewing chickens." Issue: How should "chicken" be interpreted in this particular K with these sophisticated dealers?

Contract calls for "U.S. Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated." The USDA definition includes hens or stewing chickens. Since the specifications related to U.S. government ratings, the gov't definition should control, which is broader than just "broiler or fryer."

4. To show a collateral oral agreement. A party may claim that there were two separate agreements made - the first embodied in the writing, and the second a "collateral" oral agreement supported by the consideration of the first agreement (i.e., the "collateral" oral agreement is alleged to have been reached in consideration for the promises set forth in the written agreement). Parol evidence of a second agreement may be admitted since it does not affect the written agreement at all.

a) Requirements. Parol evidence is admitted to show a "collateral" oral agreement if (1) agreement must in form be collateral, (2) its terms do not conflict with the written agreement (narrowly construed, this element would allow correction of typographical errors), and (3) the collateral agreement covers a subject that would not ordinarily be included in the written agreement.

b) Case where Parol Evidence not Admitted: Mitchell v. Lath. In form, removal of an ice house is collateral. In substance, removal of ice house on another parcel is too closely related to the underlying real estate land sale contract. Hence, evidence of the oral agreement is not admissible, because the subject is too closely related and the terms would likely have been covered in the original contract, and the oral contract can be said to contradict the written contract. Here parties dispute whether oral contract to remove ice house existed.

In certain well-known cases, courts have suggested that extrinsic evidence is admissible to show agreements between the parties that are "collateral" to the transaction otherwise evidenced by an apparently integrated writing. Note that the determination that an agreement is "collateral" is nothing more than a conclusion. If it is "collateral," it obviously must be an agreement that parties situated as are the parties to this contract would naturally and normally not include in the apparently integrated writing. Thus, if under the application of the prevailing Williston test, a court decides that evidence of the extrinsic matter may be introduced, it may characterize that extrinsic agreement as "collateral." It is submitted that this characterization adds nothing to the parol evidence rule analysis.

There are two basic approaches to inconsistency. One is an explicit contradiction of the written terms. The other approach assesses whether there is an absence of reasonable harmony in terms of the language and the respective obligations of the party. The latter, broader approach is better. In this case, the language used in D's letter is not reasonably susceptible to P's interpretation. The written term gave the Alyeska committee an unconditional right to approval. P's parol evidence would limit that right of approval, which is inconsistent with an unconditional right. Thus the parol evidence should be excluded. Alaska Northern Dev. Inc v. Alyeska Pipeline

5. To show the writing was only a "partial" integration. The proponent of the parol evidence may claim that the parties intended the writing as the final expression of their agreement only on the subjects covered therein. In such a case, the integration would be only "partial" and the rule would not bar parol evidence on matters not covered by the writing. The parol evidence may ADD TO THE K, but MAY NOT CONTRADICT the K.

a) Application. Masterson v. Sine. Evidence of a limitation on the assignability of an option, so as to keep land within the Masterson family in the event the Sine's were ever forced to sell the land, should be admitted. The personal nature of the option would not ordinarily have been expected to appear in the option. Therefore, the option contract is NOT FULLY INTEGRATED - exception to the P.E.R. Moreover, both parties agree that it was their intention to keep the property within the Masterson family. (Distinguishes from Mitchell above.) The court does not want witnesses interested in the outcome of the litigation (bankruptcy trustee) to mislead the finder of fact.

Cook does not like saying "We must look to the true intentions of the parties," because that would obliterate the P.E.R.

Distinguish Masterson: personal nature of option has not been included - not fully integrated. Really must be exception to P.E.R. Begins the liberal allowance of parol evidence.

6. Deceptive exclusionary clauses in insurance contracts -- GRAY v. ZURICH Insur. Co. (Cal. 1966). This court is hostile to insurance co. P accused of provoking a fight. His insurance company refuses to defend for an intentional act. He defends himself and loses judgment, then tries to collect from his insurance company. Court refuses to enforce an unclear exclusionary clause in an insurance contract, because it infringes on the reasonable expectations of the insured. Insurance co. was to defend against even "groundless" allegations. Court holds insurance co. liable for failure to defend, then later would permit co. to determine if it can recover from the insured. The question of intent could not have been decided prior to adjudication. ADHESION contracts - courts inclined to interpret against the drafter.

C. OTHERS ASPECTS OF PAROL EVIDENCE

1. Parol Evidence Rule Only Applies to Prior or Contemporaneous Negotiations

Parol evidence can be offered to show subsequent modifications of a written contract, since the parol evidence rule applies only to prior and contemporaneous negotiations. In short, the parties may show that they have altered the integrated writing after its making.

2. U.C.C. Rule

Under the U.C.C., a party cannot contradict the writing but he may add consistent additional terms unless (i) there is a merger clause, or (ii) the courts find from all the circumstances that the writing was intended as a complete and exclusive statement of the terms of the agreement.[U.C.C. § 2-202] This Code section also provides that a written contract's terms may be explained or supplemented by (i) course of dealing or usage in the trade, or (ii) the course of performance to date, even if the terms appear to be unambiguous. If the court finds the additional terms are such that, if agreed upon, would "certainly" have been included in the document, then evidence of their alleged making must be kept from the trier of fact.

II. CONTRACT PERFORMANCE AND RISK ALLOCATION

A. Express Conditions

Problems of performance of a K are ultimately concerned with determining whether a party is in breach of the K. In order to find a party in breach of K, it must always appear that he was under an absolute duty to perform and that he failed to do so. The problem is to determine when the promisor is under such a duty (i.e., when the duty to perform has become absolute). This requires consideration of the type and legal effect of any conditions in the K, because if the duty is only conditional, the promisor is bound to perform only after the contingency occurs (in the event of conditions precedent or concurrent), or only until the contingency occurs (in the event of a condition subsequent).

1. Conditions precedent, concurrent, and subsequent

a. Conditions precedent. A condition precedent is one which must occur in order to create an absolute duty of performance; i.e., there is no enforceable duty owed until the fact or event happens. P must prove all conditions precedent are met to maintain action.

b. Conditions concurrent. Conditions concurrent are mutually dependent performances capable of nearly simultaneous execution. Such conditions exist only when parties to a K are bound to render performance at the same time. Perhaps the most common example is an ordinary sales K, in which payment and delivery are conditions concurrent; i.e., the condition of payment must occur before the duty to deliver arises, and conversely, the condition of delivery must occur before the duty to pay arises. [UCC § 2-511]

Legal Effect. The legal effect of conditions concurrent is much the same as that of a condition precedent. If the condition occurs, the other party's duty to perform arises; if it does not occur, the duty never arises. Hence, in the ordinary sales K there is no breach of contract until the buyer tenders payment of the seller tenders delivery, either act being sufficient to make absolute the other party's duty to perform.

c. Conditions subsequent. A condition subsequent is one in which the occurrence of the condition extinguishes a previously absolute duty to perform. For example, an employment K whereby E agrees to work for R for a specified period unless he is called into military service; E's promise to remain in R's employ is subject to the condition subsequent that he not be called into military service.

Legal Effect. Occurrence of the condition subsequent cuts off and extinguishes a previously absolute duty to perform as contracted. D must prove a condit. subseq. has occurred that removes him from being in breach.

True conditions subsequent vs. conditions subsequent in form only. The above discussion applies only to true conditions subsequent (which are rare and are generally frowned upon by the courts). Some conditions are worded as conditions subsequent but are really conditions precedent in effect. For example, I insures P against loss by fire and the policy provides "any liability of the insurer under this policy is discharged if either (a) proof of loss is not submitted within 30 days after the accident, or (b) suit is not brought against the insurer for the claimed loss within 12 months from the date of accident."

(1) Submitting notice and proof of loss within 30 days is really a condition precedent to the insurer's duty to pay - even though the notice provision seems to be worded as a condition subsequent.

(2) But failure of the insured to sue within the 12-month period after loss is failure of a true condition subsequent, which extinguishes the company's duty of payment. A true condition subsequent has the effect of a "private" statute of limitations, because after the time has passed, no action is available.

2. Conditions and covenants/promises distinguished. As a matter of approach to problems of K performance, each and every provision of the K must be examined to determine whether it is a condition or a covenant. Certain provisions may be both covenants/promises and conditions, but the distinction must nevertheless be drawn.

a. Covenants/Promises. A covenant is an absolute, unconditional promise to perform (or refrain from performing) some act ; i.e., a contractual promise to which no conditions are attached. A failure to perform a covenant is always a breach of contract per se.

b. Conditions. A condition is a fact or event, the happening or non-happening of which creates or extinguishes a duty to perform on the part of the promisor. Failure of that which is merely a condition is not a breach of contract.

Conditions are important primarily in bilateral contracts. The performance of the bargained-for act in a unilateral contract leaves all the executory duties on the promisor (offeror), and those duties are usually absolute because the offeror's promise of performance is usually a covenant.

c. Interpretation of doubtful provisions as conditions or covenants. The determination of whether a particular contractual provision is a condition or a covenant (or both) is of far-reaching importance. It may determine whether the promisor is in breach of contract. It will fix the rights and duties of the parties under the K.

1. Parties' intent controls. Ordinarily, the words used by the parties will indicate their intent on whether a provision is a covenant or a condition. In cases where the contract language is ambiguous, the court must construe the words used to determine whether the parties intended the act or event specified to modify or qualify a promise (a condition) or to be a basic undertaking by the party to whose conduct it relates (a covenant).

2. Where parties' intent unclear. The ultimate test is the intention of the parties. However, the following factors usually determine the parties' intent:

Words Used - words such as "provided," "if," "when," etc., usually indicate that a condition rather than a covenant was intended, while words such as "promises," "agreed," etc., generally indicate a covenant.

Custom. What would the average reasonable business person have thought was intended, a promise or a condition of duty?

Doubtful provisions will ordinarily be construed as promises, rather than conditions. Such construction will generally operate to uphold the contract and preserve the parties' expectations, since failure to perform a promise will entitle the other party to damages.

3. Cook's Examples on 1-20-95

Fire Insurance: 1) absolute promise from insured, 2) promise subject to a condition (fire), 3) If also require notice of claim within 30 days - condition; if insured never files a claim - neither party in breach of contract.

4. Strict Enforcement - DOVE v. ROSE ACRE FARMS Egg farm sets up bonus system that pays people to be on time and work full week. No exceptions or excuses permitted. This is just the bonus program, not the base salary. No one is required to accept the bonus or work for this employer. Employees like the system. Court will not interfere with parties voluntarily forming conditions precedent (to payment of bonus). P here must forfeit his bonus for being sick two days, even though he put in overtime. If clearly understood by all parties, no matter how silly, you can in theory write a contract to turn on a given provision.

5. Relaxed Enforcement - READING PIPE CASE (Jacob & Young v. Kent). P homeowner is not entitled to literal interpretation of K because: 1) would cause economic waste, and 2) Cohoes pipe is indistinguishable in quality. If Reading Pipe is really important, it has to be written into the K at the beginning as a condition precedent.

Due to economic waste, court would not require enforcement of an apparent de minimis term. As a matter of law, we can make Reading Pipe a highly important term. Why go to court over this? Kent was unsatisfied with house and looking for a way out of the K.

6. NOTICE as a condition implied by contract - WAL-NOON CORP. v. HILL Failure to give notice of a need to repair the roof precluded recovery when the notice requirement was implicit in the lease agreement. Lessor wanted right to decide whether to repair roof or put on whole new roof. Perhaps 1) roof under warranty, 2) roof repaired vs. replaced, 3) get roofs of varying durations, 4) landlord in construction business - get discounts. Without giving notice, place landlord in untenable position of having to reconstruct the situation and determine fair reimbursement.

Notice is an indispensable condition precedent to D's duty to perform under the covenant to repair. The parties did not intend to allow the lessee to unilaterally and conclusively determine the burden of responsibility without offering the lessor the opportunity to dispute the liability or exercise any advantage it might have in solving the problem.

The trial court erred in granting equitable relief to P, which in effect deprive D of part of the bargained-for consideration; i.e., the right of control over repairs for which he was responsible.

Distinguish from merely cleaning ice off sidewalk. Notice is irrelevant, since the cost is the same no matter who is selected. Might not be treated as condition precedent. COMMENT: Notice requirement is often treated as an express condition even absent clear language to that effect.

7. Delivery instructions as a condition precedent to performance of a sales contract. INTERNATIO-ROTTERDAM (The Rice Case) The K clearly called for a December delivery date and buyer was obligated to notify seller of the delivery instructions in sufficient time to allow seller to complete the delivery by Dec. 31.

Buyer conceded that it was obligated to give seller notice, but argued that seller could not get out of the contract. If merely a promise, then failure to give notice does not relieve the other party from performing under the contract (like READING PIPE case - installing COHOES pipe was a breach, but other party still obligated to pay for the house.)

Court says that the notice was actually a condition precedent, so that contractual obligation never arose. Why? 1) financing arrangement mentioned - no money to pay if not delivered in December, 2) significant volatility in price - time is of the essence. (Seller wants out because price of rice has risen)

8. Condition distinguished from a warranty (which is a promise). "No change in the aggregate net worth of D company and its subsidiaries" was a condition precedent in a meticulously prepared contract. The warranty dealt with another specific situation -changes in financial condition caused by occurrences outside the ordinary course of business. Therefore, when P elected to go ahead with purchase, when he could have refused to write the check closing the sale, he effectively waived the "condition." P cannot claim damages due to a lower (ordinary business fluctuation) valuation. In re Carter's Claim

9. Factors to consider in determining intent -- NORTH AMER. GRAPHITE v. ALLAN The parties' intent to make payment for P's services contingent upon the plant/mine producing income or otherwise must be determined from the language used, the situation, and the subject matter of the contract. If the parties had intended the payment to be contingent, clearer language would have been used and P's price would have reflected the contingency. The liability was therefore not contingent and became due in a reasonable time after completion.

Contract consists of a series of letters. It has never been integrated. Therefore nothing to which the Parol Evidence Rule can be applied.

Only the time of liability was contingent, not the liability itself.

In Masoioni v. Miller, prime contractor's promise to pay subcontractor conditioned on receiving payment from the owner was upheld, because written as explicit condition precedent.

B. EXCUSE OF CONDITIONS

Where either party's duty to perform is subject to a condition precedent or concurrent, that party cannot be held in "breach of contract" until the conditions occur or are legally excused; i.e., a conditional promise does not become absolute unless and until the conditions have been performed or legally excused. The party seeking to enforce the contract always has the burden of pleading and proving the occurrence or excuse of each condition upon which the other party's duty depended.

1. Much criticized case. Provision that P would give D 20 days' notice of any claim arising out of the contract created a condition precedent to a valid claim by P. Such a provision was not unfair or unreasonable since its purpose (to allow D to investigate the merits of any claim) was disclosed and reasonable. Service of the complaint on D by P did not give the kind of notice required by the contract, even though it was served on D within 30 days of the discharge from employment. (This is an irrational decision. It follows form rather than substance, since filing of the suit really did give sufficient notice). INMAN

2. Excuse of conditions by waiver or estoppel. In various situations, a party by his words or conduct may be held to have "waived" his right to insist on the occurrence of performance of some condition upon which his duty of counterperformance depends. Although the courts usually talk in terms of "waiver," in many of these cases the concept is really one of estoppel.

a) Expression of willingness to excuse condition. If either party represents to the other (by words or conduct) that he will not insist upon literal performance of some condition upon which his duty to perform depends, and the other party relies to his detriment thereon, the first party will be held to have "waived" the condition.

b) Voluntary acceptance of defective performance. Where either party knowingly accepts and retains less than he is entitled to under the contract, and it appears that he intended thereby to forgo insistence upon full performance, he waives his right to insist upon full performance from the other party as a condition to his duty of counterperformance.

c) Voluntary performance as excusing condition on which duty to perform depended. Similarly, where a duty to perform is subject to some condition precedent, and the promisor commences performance knowing that the contingency has not occurred, his doing so may operate as a waiver of the condition provided the condition was not a material part of the agreed exchange.

d) Waiver of prior breaches as excuse for present breach. Where the contract requires a series of performances by one party (e.g., the payment of monthly installments on the purchase price) as a condition precedent to the other's duty, the condition of full performance of each installment may be excused by the other's previous acceptance of something less than full performance.

Applications

(1) Expression of willingness to excuse the condition. PAROL EVID. RULE DOES NOT APPLY TO SUBSEQUENT UTTERANCES. When an owner requests extra work, promises to pay for it, and watches it being performed, it would be manifestly unjust to allow the defense that the change orders were not in writing. (Court effectively crosses out written change order provision to ensure fair result. Hard facts making bad law.) UNIVERSAL BUILDERS v. MOON MOTOR LODGE.

(2) If the homeowner in the READING PIPE case had decided to waive that particular pipe, a court would accept the waiver and not force the contractor to go back and reinstall new pipe. However, if home purchaser said he would waive the entire construction, then court would not countenance that waiver as entitling builder to collect his full fee. If waiver is too extreme, court will not allow it.

(3) It is not a K to write books in order that the P shall keep sober, but a K containing a stipulation that he shall keep sober so that he may write satisfactory books. Although D claims that P's abstinence from liquor was the consideration for paying $6 rather than $2, the writing of the law book was the bargained-for consideration in either instance. Therefore, the condition of P's abstinence could have been waived by D, in which case D would be liable to pay $6 per page. CLARK v. WEST

Materiality of Provision - parties did not so intend to make sobriety a key (marketing) feature of the book. West is just trying to widen its profit margin.

Is there any consideration for West's waiver of right, if not then the waiver is not enforceable based on contract theory. Yet the courts do recognize waiver without consideration arising.

(4) Rebuttable presumption of prejudice arising from noncompliance with condition. AETNA CASUALTY v. MURPHY Murphy failed to notify his insurance carrier, Chubb, for three years after he was sued. Court would not allow Murphy to implead Chubb: Most jurisdictions require the insurer to prove material prejudice; some require the insured to rebut the presumption of prejudice, and still others strictly enforce delayed notice provisions. The best approach is t place the burden of establishing lack of prejudice on the insured. Here, Murphy failed to provide facts to support a claim that Chubb had not been materially prejudiced by his delay, so summary judgment for Chubb was appropriate.

In theory, an insured who delays could prevail in attempt to implead his insurer. GROUNDS: 1) a contract of adhesion, the terms of which (notice to insurer) were not truly bargained for. 2) enforcement of the notice conditions will result in a forfeiture to Murphy. 3) insurer still have fair opportunity to investigate the claim.

COMMENT: Note that a failure to give notice is not a breach of the insurance contract, but merely a defense for the insurer, unless waived.

(5) A party cannot by waiver of a condition precedent to his own liability create obligation in himself where none previously existed.

C. IMPLIED CONDITIONS

1. Implied-in-fact conditions. This terms ordinarily refers to conditions the parties would probably have agreed to, had they thought about the subject. The law will imply whatever conditions are inherent in the promises given and necessary to the performance of the contract; i.e., so-called "necessary conditions" and conditions of "good faith and cooperation."

a. Test for implied-in-fact conditions. Would a reasonable person feel that the parties had contracted with the understanding, even though not expressly stated, that certain facts would exist? If so, the existence of those facts will be an implied condition to the promisor's duty to perform.

b. Examples. A promises to deliver certain goods to the "No. 2 loading dock of B's factory. The existence of such a loading dock, its reasonable accessibility for making a delivery, and B's permitting A to make the delivery there are all implied-in-fact conditions precedent to A's duty to deliver.

Example 2: L leases a building to T and promises to maintain and repair the interior of the building as necessary. L reserves no privilege of entering the leased building for purposes of inspection or repair. L's covenant to repair is subject to implied-in-fact conditions precedent that T will give reasonable notification of the need for repairs an will permit L to enter to make the repairs.

c. Implied condition of good faith. An extremely important "implied-in-fact" condition is that neither party will act in bad faith so as to hinder or prevent the performance of the other party. This condition is fundamental to all contracts and is embodied as a cardinal principle of the UCC, which provides that "every contract or duty within this code imposes an obligation of good faith in its performance or enforcement." [UCC § 1 -203]

2. Implied-in-law conditions ("constructive conditions"). Certain conditions which are not expressly provided by the parties, nor of a type which the parties would have necessarily agreed upon, may nevertheless be implied by the courts in the interest of fairness and justice.

a. Early view. Early courts did not recognize "constructive conditions." In a bilateral contract, neither could plead other's lack of performance as an excuse for his own not performing.

b. Landmark case establishing "constructive conditions" for dependent promises. Before D delivered his business to P, P was to show good security for the payment of the money owed to D. Since P failed to give good security, D had no obligation to perform. (Nothing in contract spoke to the sequence of obligations, court is constructively implying them. Court knows this sale represents D's only retirement income. Security is vital to D). KINGTON v. PRESTON

c. Three types of covenants:

(1) Mutual and independent. Either party may recover damages from the other in the event of breach by the other, and an alleged breach by P is no excuse for D's nonperformance.

(2) Conditional and dependent. Performance by one party depends on the prior performance of the other, and until the prior condition is performed, the other party is not liable on his covenant, e.g., as in Kington v. Preston.

(3) Simultaneous (mutual and concurrent). If one party tenders and the other refuses to perform, the first party has an action for default against the refusing party. Neither party must perform if the other party's ability to perform is in question. Order something to pick up at store; if it does not arrive, you do not have to pay for it.

d. MODERN VIEW. Each party's performance (or tender of performance) is deemed an implied-in-law ("constructive") condition to the other's obligation to perform. Thus, neither party's duty to perform arises until the other has performed or tendered performance.

P contract to sell a piece of land to D. P failed to tender performance before bringing suit to recover liquidated damages. Court held since P never tendered, D's duty to pay never arose and D was not in breach. Otherwise P could have a scam to go collecting liquidated damages from hapless buyers without even possessing land for sale. Goodison v. Nunn

Example: Bilateral contract in which Buyer agrees to make $1,000 monthly payments to Seller. On the eighth month, Seller agrees to tender title to land. Payments are due to seller for the first seven months independent of any obligation by Seller. If buyer misses a payment, seller could bring a cause of action to recover. After the eighth month, Seller cannot bring action to collect past due amounts without showing he has title and is ready to transfer.

e. Legal and procedural effect. The legal and procedural effects of implied-in-law conditions are ordinarily the same as if the conditions had been expressly set forth in the contract. The doctrine of substantial performance is generally held to apply only to constructive conditions, and not to express conditions.

f. Types of conditions implied in law: 1) earlier performance condition precedent to later performance. 2) simultaneous performances conditions concurrent. 3) Protracted performance condition precedent to single act. Wherever one party's performance in a bilateral contract will take some period of time, while the other's may be performed in a moment of time, the performance will take the period of time is an implied-in-law condition precedent to the other.

Example of 2): Case requiring streets be paved in subdivision. It would appear that D's payments and P's improvements were to be made within the 5-year period. P's breach was material since the value of D's investment would be substantially impaired if the street improvements were not made. Palmer v. Fox

g. Avoiding forfeitures. The courts do not favor forfeitures and often construe contracts to avoid a forfeiture if possible. One of the significant circumstances under R₂C § 241 which affects the materiality of a breach is the extent to which the party failing to perform or to offer to perform will suffer forfeiture. In effect, the courts will excuse an agreed express condition if there would otherwise be an extremely harsh forfeiture.

Where a construction contract makes no provision for installment payments, the work must be substantially performed before payment can be demanded. Stewart v. Newbury

Accident on construction project. Knock down wall of house. General contractor wants damage to house + additional costs to complete excavation. Subcontractor wants past due payments + lost profits. Each party says the other breached. General contractor argued the accident shows the work is not being performed in a workman-like fashion. Therefore, general contractor is relieved of its duty to make payments until work is completed in a workman-like fashion. Court holds general contractor is correct. Sub-contractor in breach. KNG Construc v. Harris

3. Excuse of conditions by SUBSTANTIAL PERFORMANCE. Where complete performance by one party is a constructive condition precedent or concurrent to the other party's duty of counterperformance, that condition may be excused if the party has rendered "substantial" performance. The other party's duty of counterperformance then becomes absolute, although he can deduct any damages suffered because the first party's performance was less than complete.

a. Construction Contracts. The doctrine has been applied primarily in cases involving building contracts, where it would be patently unjust to allow an owner to retain the value of the building on his land free of charge just because the builder made some small deviation from the agreed specifications. The risk of forfeiture and unjust enrichment is simply too extreme. Example: in the READING PIPE case, we have an immaterial variance/breach and substantial performance. Homeowner must pay for house.

b. Other contracts. In theory, the doctrine can be applied to any bilateral contract. But as a practical matter, where the risks of forfeiture are less extreme than they are in the building contract cases, courts are less inclined to protect a party whose performance is defective. Rather, they assert that "a contracting party ought not be forced to accept less than he bargained for."

UCC provision. This is particularly true in contracts for the sale of goods. Both at common law and under the UCC, no delay or deviation from specifications in the contract is permitted (so-called rule of "perfect tender"): substantial performance is not sufficient.

4. Material defects going to the essence of the contract. Since P can secure uniform coloring of her roof tiles only by installing a completely new roof and the court cannot say as a matter of law that a patch job essentially serves the same purpose as a roof of uniform color, D has not substantially performed the contract. In this case, the court inserted into the contract the subjective valuation of the homeowner.

In order to constitute substantial performance, the contractor must have in good faith intended to comply with the contract, and must have performed without pervasive defects that go to the essence of the contract. Such defects must be inadvertent and unintentional and must be remediable without doing natural damage to other parts of the building. O.W. GRUN ROOFING

5. Effect of "time of the essence" clause. Although payment of the common area charge by an anchor store in a mall is a material requirement of the lease, even a material provision may be breached in such a trivial manner that enforcement would be unconscionable.

P contends the contract contains a condition (payment of charges on time). Therefore, the failure to make timely payment will justify his termination of the lease contract, and he can kick the store out of the mall. But the court finds the breach too trivial to justify nonperformance and kicking the store out.

It was not the landlord's intent to terminate for singular and trivial breaches when he added that term to the contract. The store broke its promise to pay on time, but that failure is not a condition justifying the landlord to terminate the lease contract.

Most commercial leases included such clauses, and while the words cannot be dismissed, such stock phrases do not add much to the parties' obligations in most situations. When failure of payment at the exact time does not cause injury, it cannot be deemed a material breach merely because the contract contains the provision.

In this case, P was at most deprived of two days' loss of funds. This could be adequately compensated by an award of interest on $3,566 for two days. On the other hand, D would suffer a significant forfeiture, given the amount of its investment. Finally, D's delay may be explained by normal business practices, given its need to send the bill to its headquarters, P's failure to address it to a particular individual, and the normal pattern of 30 days' payment of such charges. Foundation Dev't Corp v. Loehmann's Landlord could give adequate notice and put its foot down.

6. Divisible contracts. P set a price for grading work and requested a separate surety bond for "street improvements." The BILATERAL contract stated no work was to be performed on that portion of the contract until the bond was supplied.

Since the contract is severable, the doctrine of substantial performance applies to the grading work. D had completed 98% of the work and was prevented from completing the balance through the fault of P. Therefore, D may recover damages from P. LOWY Dealing with a BILATERAL CONTRACT.

b. A contract is divisible if a reasonable interpretation indicates that a failure to perform one installment would not constitute a failure of the basic consideration bargained for. Example: buy a 2-piece suit, and the store ships only a coat - not divisible.

c. P contracts to deliver logs. Flood occurs. Not all delivered. Party is entitled to a pro-rata share of payment for the logs delivered. If P delivered all the logs half the distance, then no recovery. Divisibility does not apply along those lines. GILL If pro-rata benefit, then a court would not even have to confront the substantial performance issue.

d. P, defense contractor, research and preparation and acquired equipment, but never achieved readiness. Court did not allow recovery for completion of 3 out of 4 steps. Gov't only pays for end results in this contract. Penn. Exchange Bank v. U.S.

e. Paul agrees to put up 6 signs: Pete's Place in 4 miles, 3 miles, 2 miles, 1 mile, PETE's PLACE, and you missed Pete's Place. P lets some signs fall down. Made K for big sign at $35, the others at $10. Arguments on either side for divisibility. One sign down amount to forfeiture - unfair. Collective impact is greater than the sum of the individual parts. Plausible that the primary sign is condition precedent to pay anything, but if one or two down - not a condition. JOHN v. UNITED ADVERTISING

D. MEASURE OF DAMAGES

If the builder has performed but there are defects in the building, damages are measured by: (a) the cost of repair or replacement to bring the building up to contract specifications, where this can be done without undue expense; or (b) where repair or restoration is not economically feasible (e.g., where all the pipe in a home must be torn out and replaced), then the difference in the value in the as built and originally contracted bldg.

Even if the court concludes that the performing party did not render "substantial performance" or that the doctrine does not apply, there is still the possibility of recovery in quasi-contract for the reasonable value of benefits conferred.

1. An employee who worked only 9.5 months on a 12-month contract before leaving his employer cannot recover under the contract, but may recover under quantum meruit for the net benefit conferred on his employer not exceeding the contract amount. The employer should not receive a windfall to the detriment of the employee. BRITTON v. TURNER

The court here is reluctant to enforce a forfeiture; the employer had no economic loss. This employee did not have a condition precedent in K to expect payment only after 12 months work. Quantum meruit - awarded based on value of labor, not necessarily the K price. Party can never recover more than K price - ceiling. Also, subtract off employer's costs to locate someone new.

Purpose of K law: redress economic harm, but carry out the intentions of the parties. 13th Amendment bars specific performance of an employment contract against employee.

If employer had breached, the employee may have been able to ask for up to $120 depending on the harm he suffers. He cannot collect whole amount if he could have acquired another job.

2. Retention of down payment. A vendor on a real estate contract is entitled to retain the down payment when the purchaser willfully defaults. The modern rule allows the defaulting party to recover for part performance in excess of actual damages. But the modern rule protects defaulting parties who have substantially performed, not those who have merely paid a down payment or first installment. For down payments in the range of 10%, a defaulting buyer would have difficulty proving that the amount retained exceeded the actual damages. Maxton Bldrs v. Lo Galbo

3. Good Faith and Reserved Discretion. In some situations, the parties may be unwilling to specifically define identified risks or desired performance standards. Instead, the parties may adopt a general standard, leaving to one or both parties the opportunity to exercise discretion. Two of the most common examples are "requirements" contracts and contracts in which adequacy of performance depends on one party's "satisfaction." Because every contract imposes a duty to act in good faith, terms reserving discretion are valid, but application of the good faith standard is often difficult.

a. Good faith requirement does not supersede terms of contract. In K for sale of capital assets, where parties agree on the valuation of the majority of assets, and where P claims it is entitled to payment and the other party is just holding up payment in bad faith, the court does not buy it.

P's suit is an attempt to rewrite the contract, which does not provide for partial disbursement of escrow funds. P's claim that the obligation of good faith requires D to agree to an interim distribution is inconsistent with the express terms of the K. If P wanted such an option, it should have bargained for it.

In this case, the contract did not give D authority to deprive P indefinitely of a portion of the agreed consideration. What P claims is D's discretion over the timing of distribution is actually a power either party may exercise, but only if both agree to do so. Hence, D's refusal to agree to release the funds does not violate its obligation of good faith.

D has not acted in bad faith because its refusal to release the funds in escrow until the arbitration is complete does not give D anything it had bargained away; D does not thereby recapture an economic opportunity.

The agreement that escrow funds would not be released until the arbitration was complete had the effect of protecting both parties. P was the one who determined what the adjustment to the purchase price should be. The failure to provide for partial escrow payment could have been intended to give P an incentive to limit the amount of the adjustment potentially subject to arbitration. Centronics v. Genicom

b. Satisfaction clause for feasibility study in OMNI GROUP did not render K illusory due to embedded good faith argument. The feasibility study requirement for purchase can be viewed objectively or subjectively. Usually, "satisfaction clause" implies subjective valuation, subject to a good faith performance. This implied good faith performance argument is true for any contract containing a subjective element, not just satisfaction clauses.

c. Damages for bad faith rejection. The evidence indicated that D's claim of dissatisfaction with the loads of chipping potatoes was made in bad faith. The price of potatoes had fallen from $4.25 to $2.00. As a merchant, D has a duty to act in good faith. Notwithstanding the "satisfaction clause," the rejection of the potatoes is ineffectual and constituted a breach of contract for which P could recover damages. NEUMILLER FARMS Normally, with "satisfaction clause," one would assume some margin of judgement.

d. Portrait painter subject to buyer's satisfaction - still enforceable because consideration is to make a good faith evaluation. If Pablo Picasso is artist and customer rejects - then subjective valuation reigns supreme. Artist can produce evidence to show bad faith, but evidence of other's valuation is immaterial.

e. Lender liability. In a loan K where the lender can call the note due at anytime, courts read in an implied covenant of good faith and fair dealing that precludes arbitrary termination. Language of the note regarding acceleration of payment and termination under various conditions would be meaningless if D had the power to demand immediate payment without cause. The judge properly instructed the jury to decide the issue of good faith under a subjective standard. REID v. KEY BANK. THIS HOLDING LIMITED TO UCC CASES.

Lender liability for terminating a line of credit or refusing to honor a commitment to provide financing has become a significant risk for banks. These cases present difficult questions of how extensive a bank's obligation to act in good faith really is. This may range from a prohibition of intentional dishonesty to a broad compliance with community standards of "fairness and decency."

f. Output contracts. THE BREAD CRUMBS CASE. Contract allows bakery to stop supplying bread crumbs with 6 months notice. Under UCC § 2-306, an output contract is deemed not to be indefinite since it is held to mean actual "good faith" output; nor does it lack mutuality of obligation since the producer is required to operate in good faith and according to commercial standards of fair dealing. Thus, good faith and reasonable diligence in light of commercial background and intent, not economic feasibility, is the standard, and must be read into every output contract if not otherwise expressly stated. Ordinary production assumed the norm.

This imposes an obligation on the seller to use its best efforts to supply the goods unless the parties agree otherwise. Good faith cessation of production terminates any further obligations. A D would be justified, in good faith, in ceasing production of the single item only if its losses from continuance would be more than trivial, which is a question of fact.

g. Requirements contracts. AMERADA HESS CORP. A utility set up a long-term contract with an oil supplier to meet it fuel oil needs, but reserved right to substitute gas. Then oil price doubled. P tried to exploit the K by producing cheap electricity for sale to other utilities due to its cheaper input costs: evidence of bad faith.

Here, the increase in requirements for the first year was very large. The reason for the increase was apparently a large increase in sales of power to the New York Power Pool which did not enter into the calculations behind the contract estimates. Additionally, P released natural gas instead of burning it. The massive increase of sales to other utilities was tantamount to making these utilities silent partners in the contract; the change in gas use was an arbitrary change in conditions, intended to take advantage of market conditions. D was justified in refusing to meet P's demands which were not incurred in good faith.

Any demand by P for more than double its contract estimates was unreasonably disproportionate to those estimates. D could not reasonably anticipate such an increase. The clause allowing P the unlimited right to burn gas indicates that P contemplated a decrease of oil requirements. Because the quantity of oil P used after 1970 was not within the reasonable expectations of the parties when the contract was executed, the requirements were unreasonably disproportionate and D was not required to meet them.

Arguments for P: 1) D failed to include variable P term in K. 2) sophisticated player. 3) Amerada Hess also sells oil to other buildings who can use also natural gas. therefore, other utilities are like other building customers. 4) absolute limit of oil required is capacity of plant to produce electricity.

h. Uranium oxide 50% output purchase hypothetical. It may be only feasible to build a plant for supply if you a party who is willing to buy 50% of the output. Then the court will enforce justifiable reliance by the plant owner.

i. BLOOR v. FALSTAFF BREWING Arguing that "best efforts" should require that brewery produce beer for marketing firm to a level of effort "necessary to maximize the joint net product flowing from the relationship." If "best efforts" are not a part of the contract, then a party can satisfy its contractual duty with good faith < best efforts.

Consider also liquid cooking oil marketing contract. It paid marketing firm royalties. Marketing firm allowed to collect damages from D's introducing a second product that competed with the original oil to be marketed.

4. Impracticable Performance.

a. Uncontemplated existing condition rendering performance impracticable. MINERAL PARK LAND The evidence indicates that D took all the gravel and earth available above the water on P's land. No greater quantity could have been taken by ordinary means, except at an expense at least 10 times the usual cost.

When a party agrees, without qualification, to perform an act, he cannot be excused because performance becomes difficult. But when performance depends on the existence of a given thing, and the thing is assumed as the basis for the contract, performance is excused if the thing is nonexistent. Here, the parties thought all the gravel D would need was available on P's land, but the did not. The gravel under water was not reasonably available. If something is impracticable because it can only be done at excessive and unreasonable cost, it is impossible in legal contemplation, so D was excused from taking the remainder of the gravel from P's land. The situation is not different from that of a total absence of earth and gravel. Court unwilling to hold D ASSUMED the RISK - BOTH PARTIES AGREED TO BASIC ASSUMPTION.

b. US v. WEGEMATIC CORP Seller represented that it could build a computer system for the Federal Reserve. Basic engineering difficulties which prevent timely delivery do not constitute commercial impracticability, thereby excusing performance. The seller is not free to express aspirations and gamble on mere probabilities of fulfillment without any risk of liability. P CLEARLY ACCEPTED THE RISK.

It is conceivable that a company would even assume the risks of the impossible. Example: 30 lb tachometer for DoD. Gov't has various missile component subcontractors under K. Gov't tachometer contractor stands to gain from the K, but it may be held liable for the risk that product is impossible to develop. Court will not allow defense of impossibility. Difficult question: liable for all the other subcontractors?

c. Basic Assumption. It is essential in impracticability cases to determine whether the "nonoccurrence" of the event that rendered performance impracticable was a basic assumption on which the contract was made. Unforeseeability is an important consideration, but it should not be confused with the basic assumption requirement. Even if the event was foreseeable, the parties may have omitted reference to it because they thought it was unlikely to occur, or was not an important risk.

d. Supervening impracticability. Where the subject matter of the contract or the specified means for performance or source of supply is destroyed or becomes nonexistent after the contract is entered into, without fault of the promisor, the promisor's duty may be discharged.

(1) Destruction of subject matter: Example: Concert hall burns down. Neither party responsible for the fire. Both parties to the contract are excused. TAYLOR v. CALDWELL Burned down theater would not relieve Taylor's duty to meet his payroll, costume designer contracts, etc. Begin with the assumption that even if the hall burned down, Caldwell is still obligated to perform. Therefore, if possible to repair before lease date, he must repair. Alternative view: the fire terminated the contract. Therefore, no more contractual duty, even if it can be repaired at onerous burden. Contract void.

Impracticability is a matter of degree. If a fire marshal requires more changes, a small fire, or other minor problems that increase the cost of performance, then Caldwell still obligated to perform.

(2) Death or illness in a personal service contract.

(3) Temporary impossibility. - suspends rather than discharges contractual duty while the impossibility continues. After the impossibility ceases, the duty reattaches, but only if it appears that performance thereafter would not substantially increase the burden on either party or make it different from that which was promised.

(4) Specific source of supply contemplated. It must appear that a particular source of supply or means for performance was contemplated or specified by both parties to the contract. For example, a contract to sell potatoes to be grown on specific land is discharged by failure of the crop. But if no particular land was specified or contemplated by the parties, the promisor's duty to supply potatoes is not discharged even though the promisor subjectively intended to fulfill the contract from the crop which failed.

(a) Risk of nonperformance foreseeable. DUNBAR MOLASSES. P had a contract to supply 1.5 million gallons of molasses from D. D took the chance that the molasses refinery's output would remain the same as in past years. D did not even get a contract with the refinery to secure its position. Therefore, D liable for failure of his supplier. This circumstance does NOT amount to impossibility. Question here whether sugar had to be purchased from Nat'l Sugar Refinery - could be critical or just a measure of quality.

COMMENT: The impossibility doctrine really exists to allocate risk between the parties. Thus, where a court believes that the risk was foreseeable and under the control of one of the parties (here D could have foreseen the risk and gotten a contract with the refinery), then the court will not relieve performance due to impossibility (the theory being that the party with control has contributed to the impossibility). The court also stated that had the refinery been destroyed without D's fault (as by an act of God), then D would have been excused, since it would not have been a risk assumed by D.

e. Futility of act impracticability.

Is P excused from submitting plans for development of an industrial park, an independent covenant, if he cannot get financing? No. (Perhaps financial institution will not loan until plans are drawn up.)

P's inability to obtain financing is not an event, the nonoccurrence of which was a basic assumption on which the contract was made. In fact, the parties expressly provided for such an event, by permitting P to terminate the contract. This termination right was to arise only after preparation of satisfactory construction plans, however. Because P never prepared the plans, he never had a right to terminate. The courts cannot change the allocation of risk agreed to by the parties. DILLS v. TOWN OF ENFIELD

COMMENT: An event may be foreseeable, yet its nonoccurrence may still be a basic assumption on which the contract is made. The less likely a foreseen event is at the time of contracting, the less likely the parties are to allocate the risk of its occurrence.

Problem on P. 943 K to build a house for $300K.

Case 1: Excavator hits rock. No tests prior to construction. $100,000 to remove rock. Risk allocated to builder, who should have expertise. This risk easily foreseeable and detectable.

Case 2: Soft spot on soil. Cost $50,000 to repair. Not as easy to detect soft spot. Outside showing of negligence by contractor, probably would not be liable. Need to know what standards contractors normally apply in this area.

Case 3: Adoption of zoning ordinance may act as a supervening cause to discharge contractual duty. Once the K is void, if the ordinance is removed, the contractor is not obligated to restart construction. Can builder recover for work expended? Questionable. Two innocent parties. Intuitively place risk on homeowner: he chose the sight.

Case 4: Contractor dies. If view as contract for personal services, death excuses performance but estate can recover for work performed consistent with contract and not liable further.

f. Commercial Impracticability.

Transatlantic Financing CASE

Unexpected shutdown of the Suez canal was a foreseeable risk assumed by the operator of the ship. Should have known due to the volatility in the region.

Louisiana Power & Light v. Allegheny Ludlum Indust.

D was to supply P with stainless steel tubing for a nuclear power plant. D is unable to show here that performance was commercially impracticable. It did show that its costs had increased by 38% and that performance would have deprived it of its anticipated profit and resulted in a loss of the contract. This increased cost was not so especially severe and unreasonable that performance was impracticable. Other cases have held that cost increases of 50 to 58% were not great enough to excuse performance.

D was merely mistaken as to a future event -- that it would make a profit on the contract. The contract did not contain an escalation clause for price increases to protect D; therefore D cannot now seek such protection. (means party assumed the risk).

g. Loss of profitability as a force majeure event. THE MINIMUM QUANTITY PURCHASE OF NAT. GAS CASE When the market price for natural gas declined, D refused to take or pay for the minimums. Court holds neither a drop in demand nor a drop in resale price is a force majeure event. A force majeure provision is not a substitute for a price redetermination clause.

COMMENT: The force majeure clause is intended to protect against risks beyond the ordinary contract risks. A fixed-price contract is intended to allocate the risk of a market rise to the seller (the buyer gains) and the risk of a market drop to the buyer (the seller gains).

5. DISCHARGE BY FRUSTRATION OF PURPOSE

Where the bargained-for performance is still possible, but the purpose or value of the contract has been totally destroyed by some supervening event, such frustration of purpose will discharge the contract.

a. Requisite elements. The following four elements must always appear in order to find frustration of purpose sufficient to discharge a contract:

a) Some supervening act or event.

b) The supervening act or event was not reasonably foreseeable at the time the contract was entered into.

c) The avowed purpose or object of the contract was known and recognized by both parties at the time they contracted.

d) The supervening act or event totally or nearly totally destroys the purpose or object of the contract.

b. No discharge of lease. PARADINE v. JANE D defended his failure to pay rent on leased property on the grounds that Prince Rupert's army had invaded and put D out of possession. Since the lessee gained the advantage of casual profits, he must also bear the risk of casual losses.

COMMENT: Although the language in this case deals with frustration of purpose, this case is often cited as an example of subjective impossibility, which does not discharge the promisor of his duty to perform because the promisor assumed the risk of his own inability to perform.

WILLS v. SHOCKLEY

Raise sunken boat in the Atlantic. Boat slips from reef into mud. Salvager now says it is impossible to raise. P brings action for failure to perform. Court holds P wins. D could have written K in such a manner to avoid this liability.

c. Unforeseeable supervening event. Where the purpose of the contract is frustrated by an unforeseeable supervening event, and the purpose was within the contemplation of both parties when the contract was made, then performance is excused. It was clear in this case that the purpose of the high rent for the room was to view the coronation parade. KRELL v. HENRY The attainment of the purpose of the contract becomes an implied condition precedent to performance.

The frustration must be so severe that it was not within the risks assumed under the contract. The purpose that is frustrated must have been a principal purpose of the party making the contract, without which the contract would make little sense.

Distinguish from booking passage on ship to attend parade. (Other people could have ridden in your space)

Distinguish hotel reservation for convention that is canceled: not obvious. Factors: 1) convention hotel? 2) convention rate, 3) recovery possible from convention organizers.

d. Termination of government program that created subject matter of contract. WASHINGTON STATE HOP PRODUCERS In this case, the purpose of the contract was for Ds to purchase hop base that was created by the USDA marketing order. Once the program was terminated, there was no need to purchase hop base; the hop base would not even exist. To the extent the court of appeals relied on the 92% decline in the value of the hop base Ds purchased, it erred, because decline in price alone is not substantial frustration. However, the decline in price may be evidence of the substantiality of the frustration of the purpose of the contract. It is irrelevance of control of hop base after 1985, not the decline in the market value, that supplies the frustration justifying recission of the contract.

COMMENT: Many cases of what might otherwise be considered frustration of purpose are treated by the courts as impossibility of performance due to destruction of the subject matter of the contract.

LLOYD v. MURPHY

Gov't wartime order prevented use of property for sole purpose of lease: the sale of new cars. Although there were restrictions on the lease, the lease was still valuable to the lessee. In the absence of proof that the value of the lease was "totally destroyed," the lease was upheld.

e. Modification to Resolve Performance Disputes.

Under R2C, a promise which modifies a duty under a contract neither side has fully performed is binding if the modification is fair under circumstances not anticipated at the time of contracting. Both parties must assent to a modification.

Modification based on change of conditions. ANGEL v. MURRAY

Man has fixed-price garbage collection contract with City of Newport, which experiences rapid growth. He bargains for an additional $10 K, and the court upholds it. The additional obligation was not enough to meet frustration of purpose. Largely a business risk.

Intent of the party seeking modification. ROTH STEEL PRODUCTS v. SHARON STEEL CORP. Under UCC 2-209(1), a modification does not need to be supported by consideration to be binding. The ability to modify a contract is limited only by the general obligation of good faith. The determination of good faith requires two inquiries: (1) Was the party's conduct consistent with reasonable commercial standards of fair dealing in the trade?; and (2) Were the parties in fact motivated to seek modification by an honest desire to compensate for commercial exigencies?

D's steel costs increased dramatically in 1973. D suffered losses even by performing the contract as modified, so its conduct on first impression was consistent with reasonable commercial standards, at least to the extent that an ordinary merchant would seek a modification in the same circumstances.

The trial court found that D threatened not to sell P any steel if P refused to pay the higher price. This evidence of bad faith was not rebutted by D. D used P's need for steel and its inability to buy elsewhere to force P to agree to the modification. Because D violated the obligation of good faith, the modification is not enforceable. (The court did not reach the issue of whether the modification was voidable due to economic duress on P.)

f. AGREED DISCHARGE - ACCORD AND SATISFACTION

Parties may agree to discharge contractual duties, such as a creditor's agreement to accept less than the full contractual payment to settle a dispute with the debtor. This type of arrangement is known as "accord and satisfaction." Most courts require consideration to support an agreed discharge, but if the parties bargained for the discharge, the consideration requirement is easily met. Some statutes, including UCC 1-107, eliminate the consideration requirement if there is a signed writing. REQUIREMENTS: 1) bonafide dispute over the amount, 2) debtor acting in good faith.

Under the common law, a creditor would have foregone his right to expect full payment when he crosses through "payment in full" on debtor's check and cashes it anyway.

Under the UCC 1-207, a party may explicitly reserve its rights in assenting to performance demanded or offered by the other party, and does not thereby prejudice the rights reserved. Under the minority view, the UCC supersedes the common law. Accordingly, P properly reserved its rights by crossing out D's notation. The rationale for the UCC approach is that the creditor should not be at the mercy of the debtor, who could without justification offer to pay less than what is owed. MUST HAVE A BONAFIDE DISPUTE for accord and satisfaction. AFC INTERIORS v. DICELLO

If a builder completes additional work on house at added expense under protest, he can seek to recover from homeowner.

6. Termination of Contractual Relations

ZAPATHA v. DAIRY MART Dairy Mart terminated the franchise agreement without cause, as per contract. No forfeiture, no unconscionability, and no bad faith. Epstein, Univ. of Chicago: Franchisor is concerned with good will transfer from location to location. Franchisee benefits to the extent he is the most efficient for his location. In aggregate, this policy attracts high quality franchisees.

SEUBERT v. MCKESSON CORP

An employee hired at will may not be terminated without cause if the employer has a written policy that specifies a condition under which employees will be terminated. The presumption that employment is terminable at will may be superseded by a contract, express or implied, that limits the employer's right to terminate. D's personnel policy supports P's position that he could be terminated only for cause.

C. BREACH OF CONTRACT AND ITS REMEDIES

If a promisor is found to be under an absolute duty to perform, and her duty has not been discharged by performance or otherwise, her failure to perform at the time and place provided in the contract constitutes a breach thereof. BREACH = failure to perform that which under absolute duty to perform, without justification or excuse.

1. Criteria: (1) Extent to which the breaching party has already performed; a breach in limine is more likely to be considered a material breach.

(2) Whether the breach was willful, negligent, or the result of purely innocent behavior. A willful breach is much more likely to be held material (which is why a repudiation is always a material breach).

(3) The greater or lesser uncertainty that the party failing to perform will perform the remainder of the contract.

(4) The extent to which the nonbreaching, injured party will obtain (or has obtained) the substantial benefit for which he bargained.

(5) The extent to which the nonbreaching, injured party can be adequately compensated for the defective or incomplete performance through his right to damages.

(6) The degree of hardship imposed on the breaching party by holding the breach to be material and terminating all her rights under the contract.

2. Effect of a "material" breach: Two-fold effect: 1) it excuses any duty of counterperformance and 2) immediately entitles the innocent party to remedies for breach of the entire contract.

3. Effect of a "minor" breach: Even a minor breach entitles the aggrieved party immediately to damages or other remedies, but here the remedies are limited to the damages caused by the breach rather than for breach of the entire contract. A minor breach does not excuse any duty of counterperformance then due from the nonbreaching party; however, it will entitle that party to suspend temporarily any duty which otherwise would have arisen on proper performance of the breached promise. Suspension may continue until the breach is cured, or until it has become material (at which point, the duty of counterperformance is excused).

4. REMEDIES for a material breach: 1) damages, 2) specific performance, 3) rescission and restitution, 4) quasi-contract, 5) tort action. P will have to elect which remedy he desires.

5. ANTICIPATORY REPUDIATION

If either party to an executory bilateral contract, in advance of the time set for performance, repudiates the contract by words manifesting her apparent intent not to render the performance she has promised, the other party may treat such anticipatory repudiation as a present, material breach of contract and bring an immediate action for the entire value of the promised performance.

This doctrine prohibits a repudiatee from continuing with a project; he can only seek recovery for expenditure + profits + incidental expenses to date.

In the face of a repudiation, P's strategies: 1) do nothing and wait, 2) seek retraction, 3) change position (go get another job). P relieved of obligation; D's power of retraction ended with repudiation. D no longer liable, except to extent P obtains less wages. 4) bring suit immediately.

HOCHSTER v. DE LA TOUR

Hochster sued De La Tour for breach of an employment contract; Hochster was to accompany D on a tour. Court ruled Hochster could bring an immediate action for damages when the promisor repudiates the contract before the date set for performance. P has no duty to seek other work; however, to the extent he asks for full damages under the contract, he has a "duty" to mitigate damages in the wake of an anticipated breach.

COMMENT: The court reasoned that P was caught in a conflict: he had to either remain idle waiting for the date of performance and then sue, or obtain another job and thus lose his right of action against D, presumably becuase he would then not be ready and willing to perform, a condition of his performance. The alternative would be simply to hold that repudiation is an excuse of the constructive condition that P be ready, willing, and able, and the cause of action against D is not destroyed.

If Hochster died after the anticipatory repudiation, then his estate could not prove any damages even though a breach of K had occurred. If De La Tour says "you must provide your own horse," then question becomes is this change a material or immaterial breach? If material, then we have K repudiation: sudden change in the rules that radically changes the economies for the journey.

b. Requirement of executory duties on BOTH sides of contract. The doctrine of anticipatory breach applies only where there are executory obligations on both sides of the contract. It is not applicable where one of the parties has already performed his side of the contract, and the other then repudiates her obligation to render some future performance. In such cases, there is no immediate cause of action for breach, and the innocent party must wait until the time set for the other's performance.

c. "Duty" of nonrepudiating party to mitigate damages. Even though the repudiatee has the right to bring an immediate action, there is generally no requirement that he do so. The problem is whether, if he delays, he should be entitled to damages incurred between the date of the repudiation and the date set for performance.

Most courts hold that a Defendant has an equitable defense that the repudiatee did not mitigate the damages arising from the repudiation; and if he failed to do so, he is not entitled to recover such damages as he could have otherwise avoided. The possibility of mitigating damages limits recovery. A plaintiff can never recover more than what his damages would have been with mitigation.

This means that if the repudiatee is in the midst of performance, he has a duty to stop, unless doing so would involve greater damages than completing the tender (as where leaving goods half manufactured would result in total waste).

Alternatively, if the repudiatee is supposed to receive performance, he must - after a reasonable length of time - look elsewhere for the performance which was due under the contract. See UCC 2-610, allowing the repudiatee to wait only a "commercially reasonable period of time" before seeking alternative sources of supply.

d. Legal effect of anticipatory breach.

Excuses dudty of counterperformance. The prospective failure of the promisor's performance excuses the promisee's duty to hold himself ready to perform or to tender performance on the date set.

Retracting repudiation. A repudiator may retract her repudiation at any time prior to the date set for her performance by notifying the other party that she will perform the contract. Such a withdrawal of repudiation will revive the other party's duty of counterperformance, unless in the interim the repudiatee has either accepted the repudiation (in which case the contract is discharged by rescission), or has changed his position in detrimental reliance thereon (in which case the repudiator is estopped to retract).

TAYLOR (P) v. JOHNSTON (D)

Case of the stallion in California sold to new owner in Kentucky. D arranges for breeding in Kentucky, which never actually occurs. P was patient to a fault. P's wrong move - not cutting his losses in Kentucky - letting it play out, and recover for actual breach. P, the injured party, treated the contract as still in force until there is an actual breach. Consequently, he is left to his remedies at the time of performance.

D repudiated the contract by selling the stud. When P opted to treat the contract as still in force and arrangements were made for performance, P was left to his remedies upon actual breach. Since it was possible for P's mares to breed with the original stud when P decided to take them elsewhere, the contract was still capable of being performed and the courts will not imply a repudiation. Court says the modified K was never repudiated.

Distinguish voluntary disablement from anticipatory repudiation: generally governed by the same principles. Voluntary disablement refers to conduct by a contracting party (e.g., conveying land to a third person) which makes it appear that she is unwilling to perform (i.e., from which her repudiation is implied). Anticipatory breach refers to words by a contracting party manifesting her intent not to perform (i.e., an express repudiation of the contract).

Immediate cause of action for breach. The very essence of the doctrine of anticipatory breach is that it gives rise to an immediate cause of action at the time of the repudiation; i.e., the repudiation is treated as a present, major breach of contract.

If you charge the other party with anticipatory repudiation and break off the contract and are wrong, then you have role reversal and you become the repudiator. For example, breeding the mares with another stallion in frustration renders performance impossible by original promisor. More prudent to wait for a month and sue for actual damages.

e. Requirement of unequivocal repudiation. The words used must manifest the promisor's positive, unconditional refusal as promised in the contract. A mere expression by the promissor of "doubt" that she will be able to perform is insufficient to constitute a repudiation. Such experessions may, however, constitute a prospective inability to perform, permitting the other party to suspend counterperformance.

UCC remedy. Under the UCC, (and R2K is the same), either party to a contract for the sale of goods has the right to demand "adequate assurances of performance" from the other party if reasonable grounds exist for believing the other party's performance may not be tendered (e.g., insolvency). Unless such assurances are given, the first party has the right to suspend any performance due by him. Any unjustified failure to comply with a demand for assurances for a period exceeding 30 days constitutes a repudiation of the contract as a matter of law. Sometimes just the other party's words - though unsatisfying - may meet the criteria for adequate assurances under the law.

AMF, INC. v. MCDONALD'S CORP The courts will not enforce a contract where McDonald's has reasonable grounds for believing AMF cannot produce the cash registers ordered, requests assurances, and receives none. The record clearly indidcates that McDonald's had "reasonable grounds for insecurity" as required under UCC 2-609, since the prototype had not performed satisfactorily, P was behind schedule for production to meet even the delayed delivery date, and P had attempted to reduce the order from 23 to five units.

Although UCC 2-609 requires a written demand that assurances be given, the court chooses to interpret the Code liberally. AMF had notice that D had suspended performance until it received adequate assurances, which AMF failed to provide. Therefore, McDonald's repudiation was justified.

Problem p. 1026

Adequate assurances are a function of how high the stakes are. Possible that the repudiation will deal a death blow to a struggling company.

Pittsburgh-Des Moines Steel v. Brookhaven

Builder did not establish reasonable grounds for insecurity, because Brookhaven's financial condition had not changed. The parties agreed to a contract with payment at the end. PDM's actions in saying it would perform only if paid up front amounted to anticipatory repudiation.

f. Requirement of a material breach in order to excuse performance.

Whether or not the aggrieved party (A) can cancel his own peformance to B depends on whether the breach by B of a condition or covenant is a material breach or only a minor breach.

Case of a partially performed installment contract. PLOTNICK v. PENN. SMELTING AND REFINING CO. Failure to pay one installment does not amount to a material breach enabling P to cancel any further performance on his part. Materiality of breach depends on the circumstances. Factors to consider: 1) whether nonpayment makes it difficult for seller to continue to perform, 2) whether failure to pay creates such a large risk in the seller's mind that he should not have to continue to perform. Neither was the case here. Thus, no material breach.

Clincher here is the sight draft: sign off on payment (draft) before delivery can be accepted. Purchaser has offered no consideration without asking for anything in return. This offer should have allayed the seller's fears.

Under UCC When goods are sold on credit, and seller has a bonafide concern that the buyer is insolvent, seller can say it will only perform if seller gets money at the time of delivery. But his concern does not excuse his performance altogether. If the buyer is bankrupt, then seller has no duty to perform.

6. COMPENSATORY AND PUNITIVE DAMAGES

General theory of damages: place injured party in the same position as if the contract had been properly performed. MEASURES: expectation, reliance, and restitution. Because contract damages are primarily compensatory, courts have traditionally been unwilling to award punitive damages for breach of contract. P must prove loss with reasonable certainty. Recovery is limited to what P would have received had the contract been performed. Nominal damages may be awarded without actual loss. Avoidable damages are not recoverable.

BURKHOLDER v. SANDROCK

Punitive damages are normally recoverable in breach of contract actions only when a separate tort accompanies the breach or tort-like conduct mingles in the breach. The evidence in this case proved that D engaged in intentional wrongful acts of fraud, misrepresentation, deceit and gross negligence. Persons in P's position must rely on D's expertise. D should not be permitted to use deceptive practices in building construction or to disclaim responsibility for damages when it knows its work was the cause.

BOISE DODGE INC. v. CLARK

D discovered P had turned the odometer back on a car and that it had been a demonstrator. Punitive damages must not be so disproportionate to actual damages as to be the result of passion or prejudice. No mathematical formula; applied on a case-by-case basis. In this case, there is a need to deter future illicit business.

COMMENT: California recognizes a tort action for an insurer's refusal to settle within the terms of an insurance policy or to pay an insured's undisputed claim. California expanded tort liability for "bad faith" breach of an oil supply contract in Seaman's Direct Buying Service v. Standard Oil. This approach has been criticized as unpredictable and vague. It is difficult to draw a line between a legitimate attempt to rescind a contract, a dispute over contract terms, and a bad faith denial that a contract exists. The Seaman's decision has been limited and may soon be overruled.

a. Building and Construction Contracts.

Owner breaches. If the owner breaches, the builder will always be entitled to at least the profits he would have made on the contract. If the breach occurs at the outset (e.g., the owner never lets the builder come onto the land), the prospective profits are all that the builder will recover. If the breach occurs after part performance (e.g., owner kicks the builder off the job after he has commenced construction or made substantial preparations for same), the builder can recover the profits plus whatever expenditures he made in part performance. If the breach occurs after full performance (e.g., owner refuses to pay the contract price), the builder can sue and recover the full contract price.

Builder breaches. If the builder breaches, the owner basically can recover the cost of completion (i.e., the amount it costs him above the contract price to get the building done) plus reasonable compensation for any delay in performance.

(1) Where the builder breaches after substantial performance, the courts ordinarily apply the cost-of-completion test, except where this would lead to substantial economic waste.

(2) Where the only breach is later performance, the owner can recover damages for loss of use of the property. This is measured by loss of sale value, if the property was built for sale; otherwise, it is the reasonable rental value, and if that is not easily determined, it is the prevailing rate of interest in the capital investment involved.

Compare building vs. repair contracts. In the event the building is destroyed prior to completion of the work, the builder must rebuild if he has a "building" contract. If the building is destroyed and the builder only has a "repair" contract, then his duty is discharged and he can recover in quasi-contract for part performance prior to the destruction.

Alternatives of quantum meruit or actual damages. NEW ERA HOMES CORP. v. FORSTER A contract provision which requires payments at fixed points of progress under a construction contract does not render the contract severable. Since language in the contract suggests that there was one consideration for the total project and payments were based on mutual convenience rather than a desire to create independent contracts, the courts will not rewrite the agreement. The proper measure of damages is either the value of what had been completed (quantum meruit) or the value of P's loss (the contract price less payments made and the cost of completion). Question in this case is the computation of damages. COMMENT: Most courts consider progress payments under construction contracts as intended for the mutual convenience of the parties rather than intended to create divisible contracts.

If profits are negative, then builder is lucky if owner breaches. The builder may be able to recover for the amount expended even though with factoring in profits, he would have had a loss.

Distinguish: signing bonus for a professional football player, which is severable from his actual salary. Player would still get his bonus even if he was injured in pre-season training and never gets to play.

Substantial performance of construction contract, damages measured by cost of completion. AMERICAN STANDARD v. SCHECTMAN Facts: P decided to close down a large pig iron plant. D received the equipment inside plus $275,000 in exchange for tearing down building and take the foundations down to one foot below grade line. D chose to breach contract instead of taking foundations down. Diff. in market value of property was $3,000. The additional work would have cost $90,000: a 30:1 ratio. Court finds for P.

D agreed to bring the foundations down. The fact that fulfillment of D's promise would add little to the sale value of P's property does not excuse D. A person is entitled to performance for which he bargained. Completion of the contract would not involve economic waste; nothing which was done in good faith but improperly need be undone. D's failure was intentional. P may get to pocket the $90,000 - which in a sense he paid for in the $275,000 payment to D.

DISTINGUISH from Reading Pipe case. (1) breach of substance, not trivial breach. (2) contractor can fulfill obligation now at no additional cost over original completion. (3) intentional breach vs. inadvertent breach - cheaper to breach than complete. (cynical)

b. Lease agreements where the lessor has unlimited supply (is a volume-loss dealer)

In situations where the lessor has an unlimited supply of similar property, the difference between the market price (or the price at which lessor was able to re-lease the property) and the contract price may reflect an inaccurate measure of actual damages.

LOCKS v. WADE

An innocent lessor who has an unlimited supply of similar machines (jukeboxes) readily available on the market does NOT have to reduce his recovery by the amount he acquired by re-leasing the same machine. The rationale is that the lessor could have made two lease agreements: the original one with the lessee and a separate one with the new customer. Thus he would have received profit on two leases, not one. The correct measure of damages is the contract price less the cost of performance.

Would the case be different if the lessor only had one jukebox to lease? No, because he could obtain others in ready supply on the market. He is a volume-loss dealer.

COMMENT: Note that in computing actual damages there are some costs to P which were reduced or abated due to D's breach. Such savings to P must be subtracted from P's recovery, in keeping with the policy to mitigate damages and to award damages which do not exceed actual loss.

c. Lost profits for volume-loss seller.

R.E. DAVIS CHEMICAL CORP v. DIASONICS, INC.

When the buyer of special medical equipment breaches his contract, but the seller resells the equipment to a third party for the same price as originally contracted, the buyer is liable for the profits the seller lost on the original contract.

A lost volume seller is one that has a predictable and finite number of customers and has the capacity either to sell to all new buyers or to make the one additional sale represented by the resale after the breach. For such a seller who would have made the post-breach sale anyway, damages measured by the difference between the contract price and the market price do not put the seller in as good a position as it would have been in had the buyer performed, because the breach cost the seller a profit.

Recovery of lost profit by a lost volume seller is predicated not only on the seller's ability to produce the additional units it would have had to produce but for the breach, but also on the profitability of the production of the extra unit. On remand, D must show that it would have been profitable for it to have produced and sold both pieces of equipment. (uniqueness of equipment may be diminished with an additional sale.)

ALTERNATIVE RECOVERY THEORIES UNDER THE UCC:

1) Contract Price - Resell Price = time-value, perishability (truckload of bananas), luxury item tailor-made products, like a yacht in which the owner can specify various details.

2) Contract Price - Market Price = seller chose not to resell good but could have

3) Profits = typical claim by volume-loss dealer

4) Contract price = delivered goods, but other party would not pay; artist paints a portrait.

e. Employment Contracts where employer breaches

The employee is generally entitled to recover the full contract price, subject only to his duty to mitigate damages. This is true whether the employer's breach occurs at the outset of the contract, after part performance by the employee, or even after full performance (i.e., employer refusing to pay).

PARKER v. TWENTIETH CENTURY FOX

D cancels film in which it agreed to pay P to star (musical). D offers alternative movie role (Western), which court rejects as inferior work. Sui generis - no roles at this level are comparable; actors not just in it for the money. General Rule: measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or might have earned with reasonable effort from other employment. The employee's rejection of or failure to seek other available employment of a different or inferior kind may not be resorted to in order to mitigate damages.

f. Consequential Damages

Lost profits of an established business. HADLEY v. BAXENDALE P stopped operation of its mill when a crankshaft broke. D was negligent in not completing delivery (in a highly personalized cart and wagon operation) of the new crankshaft in a reasonable period of time. P seeks to recover lost profits and wages paid while the mill stood idle. Court holds that damages from special circumstances (here lost profits due to the mill shutdown), will be assessed against D only where they were reasonably foreseeable as a consequence of the breach.

D must have been informed of the damages reasonably foreseeable and assumed the risk at the time the K was formed. Nature of modern commerce that risks not assumed by carrier for consequences of delay. Same for cleaner delaying suit cleaning.

How do you compensate for delay, if you can't compensate for lost profits? (1) refund shipping cost; (2) if lose package, pay liquidated damages up to $500; (3) lost rental value of plant.

Herron II. Sugar shipment delayed so price fell. P seeks damages. Court holds price drop was not foreseeable consequence to carrier. Fortuity of events beyond the control of the parties - owner of goods ordinarily assumes risk.

Machine Co. v. Compress Co. (TN 1900). K for machine at start of cotton season. Manufacturer failed to complete on time and then delivered a poor product. P sought lost rental value of plant. Court gives him $.

Newsom v. Western Union. P sent telegram saying he needed whiskey to persuade crew to take timber down the river. P sued Western Union for garbling the message. Delay results in price of timber falling. Court held damages too speculative.

Awareness to be determined as of the time when a date for performance is set. SPANG INDUSTRIES v. AETNA CASUALTY Building contractor and supplier form K for delivery of steel. Later agree delivery to be at end of June. D's firm is late supplying steel until mid-Sept. P has to engage in crash program to use steel during season in which concrete would dry normally.

Knowledge of the consequences of failure to perform will be imputed as of the time when a date for performance is set. When the parties agreed to performance in late June, it was reasonably foreseeable that a substantial delay would postpone the cement work to a time of year when the climate would require extra expenses and precautions. Since P's expenses were reasonably foreseeable at that time, the award of consequential damages was appropriate.

COMMENT: Under UCC 2-715(2), where the seller fails to deliver, the buyer has a right to "cover"; and if he fails to do so, he will be barred from recovering any consequential damages which he could have prevented by covering.

ARMSTRONG RUBBER CO. CASE

A court may place a nonbreaching party in a better situation than he would have been in had the contract been fully performed. Armstrong contracted to purchase four rubber refiners, but when delivery of two of them was late, it refused to accept all four refiners. Armstrong relied on timely delivery in constructing a foundation for the boilers. Due to change in market price for rubber, operations under the contract would have resulted in a loss. Court permits Armstrong to collect $3000 for cost of foundation, but P can offset by losses Armstrong would have incurred by operating under the K. Negative of the Hadley problem. Here, asking if P is entitled to deduct lost losses.

C. DUTY NOT TO HINDER OR PREVENT COUNTERPERFORMANCE

Courts read all contracts as containing an implied condition that the parties will act in good faith and will not hinder or prevent the other party from performing under the contract. Thus, if A has a duty to perform under a contract with B and B in bad faith hinders A from performing, the condition of "good faith" means that A's duty to perform is excused, since the implied condition precedent to A's duty to perform (that B will act in good faith) has not been performed. Thus, A's duty to perform has not become absolute.

Element of Wrongfulness. The other party would not have reasonably anticipated such conduct, whatever its motivation. No need to prove malice or bad faith.

Extent of Hindrance. BLANDFORD v. ANDREWS Andrews was obligated to procure a marriage between Blandford and Palmer, at or before a specified feast. However, Blandford called Palmer a whore and made threats to her. When Blandford sued for 80 pounds, Andrew defended by claiming that Blandford had hindered his performance. The court held that Andrews failed to show he tried to procure the marriage and that the marriage might have occurred despite Blandford's acts.

Interference with seller's only source of supply. PATTERSON v. MEYERHOFER D agreed to purchase four parcels of land from P. D repudiated the contract prior to the foreclosure sale, which she attended. D, bidding against P, purchased the property for $620 less than the contract price. Court held since P could have purchased the property at the same price that D paid for it, P should recover the $620 difference between the contract price and the price D paid. (Implied term that party will not intentionally and purposely prevent the other party from carrying out his performance.)

NOTE: 1) D bidding against P = direct hindrance; 2) D knows this.

Innocent interference which makes performance more difficult. IRON TRADE PRODUCTS v. WILKOFF CO. P contracted to buy rails from D, and D failed to perform. P sued for the added amount which P had to pay to purchase the rails elsewhere. D countered that P bought up rails to a price above which D could not profitably perform the contract. Court sides with P.

Something more must be alleged than that P began buying rails in the market, thus making performance more difficult. D did not show that (1) P had knowledge that the supply was limited and that (2) P intended to prevent, interfere with, or cause D to default. (3) There was no express understanding that P would not buy elsewhere as well as from D. It makes no difference what P intended to do with the rails. Buyer is not obligated to keep the seller informed of his total purchasing activity.

Effort to satisfy condition precedent. BILLMAN v. HENSEL Bilmans put up $1,000 earnest money to buy a home. The contract contained a condition that Bilmans would be able to obtain a conventional mortgage for at least $35,000. All Ds did was ask one bank about a loan. They made no formal loan application, and they did not inquire about a loan for the full amount they needed. That was insufficient. Court awards Ps the $1,000.

A promisor cannot rely upon the existence of a condition precedent to excuse his performance when he prevents performance of the condition. Ds had an implied obligation to make a good faith, substantial effort to satisfy the condition (secure a mortage).

D. EQUITABLE REMEDIES

Specific performance available when damages alone are inadequate remedy. Specific performance for contract for sale of goods: uniqueness, damages are difficult to estimate, substitute performance entails a hardship. (If not unique or hardship, damges are adequate remedy at law)

1. Goods which are necessary and unavailable. CURTIS BROS. v. CATTS P engaged in tomato canning business. P plans year round for six week tomato season then runs plant at or near capacity. D reneged on K to sell P his tomato crop. Court grants specific performance become P will suffer irreparable injury (when his business fails) if the tomatos are not delivered. No adequate supply of tomatos left on the market at any price at this time. Curtis Bros. would also lose shelf space in stores, and customer loyalty if they went out of business for a year - cannot be quantified.

2. Mutuality of Obligation. LACLEDE GAS v. AMOCO OIL P had a requirements contract with Amoco for the supply of propane gas. With propane shortage, D repudiated the contract claiming that it lacked mutality for enforcement. P seeks specific performance. Courts interpret even slight restrictions on the right to cancel as legal detriment adequate as consideration. Cancellation clauses invalidate contracts only if they are unrestricted. In this contract there are several restrictions on cancellation sufficient to support this contract: 1) P could not cancel until one year had passed; 2) cancellation could be effective only as of the anniversary date of the first delivery; 3) P had to give 30 days' notice.

COMMENT: this case reflects the courts' tendency not to deny specific performance to one party because it is unavailable to the other in situations where one party can terminate and the other cannot.

3. Unconscionable contract for unique goods. CAMPBELL SOUP CO. v. WENTZ A court will not grant specific performance where the contract is so one-sided as to render the bargain unconscionable. Campell Soup was not required to take the Chontenay carrots under certain circumstances, but even then D could not sell to someone else without Campbell Soup's permission. Even though Wentz breached by selling his carrots to another party (at $90/ton instead of the K price of $30/ton), Campbell Soup cannot expect equity to enforce so unconscionable a bargain. Pro-farmer bias with court. Hard facts making bad law.

4. Economic rationale for rejecting specific performance. NIPSCO v. CARBON COUNTY COAL CO. NIPSCO contracted to purchase 1.5 million tons of coal every year for 20 years from D. D seeks to specific performance to protect the miners who lost their jobs from the mine closure and the related businesses that shut down. The losses of nonparties to the contract are irrelevant (incidental 3rd-party beneficiaries, not intended beneficiaries). NIPSCO assumed the price risk, and NIPSCO must pay damages. D entitled to K revenue - costs. Specific performance in this case would force continuation of production that has become uneconomical. In this sense, P's breach was an efficient one, because it prevents the waste of resources. Specific performance would cost both parties more than the damages does, and spec. performance would only lead the parties to settle for a higher dollar figure than the damages award: it is not an appropriate remedy.

5. Specific performance of real property conveyances. Land is inherently unique. Damages are presumed to be an inadequate remedy for breach of an agreement to convey real property because of the peculiar locality, soil, advantages, and other conveniences which cannot be replaced by other land of equal value. Therefore, specific performance is available for a seller's breach of his obligation to convey.

a. Application to a lease. CITY SOTRES CO. v. AMMERMAN In order to get the necessary zoning for the Tyson's Corner shopping center, Ammerman offered City Stores Co. a place in Tyson's Corner in return for a favorable letter to the zoning board. Ammerman got the zoning, but refused to let P the space when it got a better offer from Sears. Court HELD: (1) The option contract is specifically enforceable since damages would be difficult to determine and inadequate to compensate P for loss of the right to participate in the shopping center (increased market penetration, economies of scale in advertising). (2) The court can look to D's relationship with other tenants to determine the uncertain material terms (amount of space, the rent, details of design of building, etc.)

6. Covenants not to compete/ Limitation on remedy after employment is terminated. ABC v. WOLF ABC sportscaster negotiates deal with CBS even though his contract required good faith negotiation and right of first refusal for ABC. Court HELD: Historically, courts of equity have not ordered an individual to perform a contract for personal services because of the difficulty in supervising performance. the 13th Amendment's prohibition of involuntary servitude is an additional restriction.

Once a personal service contract terminates, it is no longer possible to decree negative specific performance. If there is an express anticompetitive covenant, it will be strictly construed and enforced only when necessary to protect the former employer. (reasonable length of time, geographic area). Public policy disfavors the loss of a person's livelihood. Thus, specific enforcement of a personal service contract after the term of employment has expired will be ordered in few cases.

Serious quantification problem. Two sportscasters are not fungible. Court would permit ABC to recover monetary damages, but ABC would have a hard time estimating its damages.

7. Stipulated Damages. The courts will not enforce a penalty. Terminology of contract not controlling. VALIDITY Requirements: (1) it must be shown at the time the contract was entered into, the actual damages which would result in event of breach would be impracticable or extremely difficult to ascertain or estimate. (2) the amount agreed upon by the parties must be a reasonable forecast (at the time the contract was entered into) of fair compensation for the harm that would result from breach of the contract. Note logical inconsistency between (1) and (2).

a. Reasonableness of a liquidated damages clause to be determined as of the time the contract was executed. SOUTHWEST ENGINEERING CO. v. UNITED STATES Southwest entered into four contracts with the U.S. gov't to construct radio facilities. P exceeded date of completion on each contract and the gov't withheld liquidated damages. No damages were withheld for excusable delays. The fact that no actual damages were suffered by D does not preclude recovery under a liquidated damages clause if the liquidated damages provision was a reasonable forecast of just compensation as of the time the contract was executed and damages at that time were difficult to accurately estimate. Courts do not look with disfavor upon liquidated damages stipulated, but rather look to the intent of the parties. If the intent of the parties was to compensate rather than to punish, then it is ordinarily the duty of the court to carry out that intent.

MASSMAN CONSTR. v. CITY OF GREENVILLE

K to build bridge across Mississippi River with $250/day liquidated damages. But road on Arkansas side had not been built. Court said liquidated damages not appropriate since no real harm. Maybe court is wrong: Arkansas road builder rely on delayed bridge as an excuse.

COMMENT: Under UCC § 2-718(1), liquidated damage provisions which may not have been reasonable forecasts of actual damages when the contract was made may be enforceable if, after breach, they prove reasonable relative to actual damages.

Large percentage of total contract price justifiable as liquidated damages. UNITED AIRLINES, INC v. AUSTIN TRAVEL Travel agency breaches contract to use Apollo system to place reservations. Court upheld liquidated damages provision calling for 80% of the balance due under the contract. Liquidated damages clauses are upheld unless the sums called for amount to a penalty because they are grossly disproportionate to the probable loss anticipated when the contract was executed. In this case, even though the liquidated damages were large in amount, they were reasonable, because most of P's costs were fixed or determined early on in the relationship. The costs P would save by D's breach were less than 20% of the revenue, so D received an adequate credit for those saved costs.

Retention of 15% deposit as liquidated damages in real estate contract. LEEBER v. DELTONA CORP Court upholds condominium project developer keeping a 15% deposit, even though it was able to sell the same unit at a profit. Retaining the 15% deposit is not unconscionable. Determining the unconscionability of a liquidated damages clause must be based on circumstances existing at the time of breach, not subsequent events. Otherwise, the courts will encourage the very litigation liquidated damages are intended to avoid. At the same time, breaching buyers would have the option, whenever the sellers' actual losses are less than the liquidated damages, of challenging the amount of liquidated damages. Yet such breaching buyers are not liable for excess damages if the liquidated damages prove inadequate.

COMMENT: Liquidated damages clauses are sometimes designed more to limit liability that to estimate actual damages. Such clauses are generally enforceable so long as the limitation is conspicuous and the other party could obtain greater coverage.

8. Agreed remedies.

Under UCC § 2-719, the parties to a contract may provide for remedies other than those otherwise provided by law. One limitation on the agreed remedy is that if circumstances cause the remedy to "fail of its essential purpose," the UCC remedies may apply even if the contract makes the agreed remedy exclusive. Another limitation is unconscionability.

LEWIS REFRIGERATION CO. v. SAWYER FRUIT, VEGETABLE, AND COLD STORAGE

Lewis sold a malfunctioning freezer to vegetable wholesaler. The liquidated damages provision called for NO liquidated damages. In the event the freezer broke down, P would take back the freezer and give D his money back: contract rescinded. No guarantee that product would work, but contract does not seem onerous. Due to commitments, D chose to continue using freezer and supply excess freon. On appeal, P won the balance due on K. D's award of lost profits and excess freon costs in question.

This contract specifically excluded consequential damages. Under UCC 2-719(3), D would have to prove that the exclusion of consequential damages is unconscionable before it could recover such damages.

IV. THIRD PARTY RIGHTS AND OBLIGATIONS

A. Distingush from other three-party concepts

1) Third party beneficiary contract. In a third party beneficiary contract, the original contract contemplates that performance will be made to a third party (although consideration for performance is supplied by the promissee). Assignment or delegation occurs where the original contract did not contemplate performance to a third party, but where one of the parties seeks - by acts subsequent to the original contract - to achieve this result.

2) Novation. A novation involves a three-party agreement whereby the obligee agrees to discharge the original obligor and accept another in his place; i.e., a substitution of parties to the contract. An assignment or delegation does not have this effect; the original contracting parties remain liable for performance.

B. Nature of an assignment. An assignment is the transfer of a contractual right or benefit which operates to extinguish the right in the transferor (assignor), and to set it up exclusively in the transferee (assignee).

1) Effect. The effective assignment of a contractual right operates to give the assignee a direct right against the obligor under the contract.

2) Real party in interest. Although the early common law rule was to the contrary, every jurisdiction today recognizes that an assignee is the real owner of the right transferred to her and that she alone may enforce the contract against the obligor or debtor. In other words, the assignee is the real party in interest insofar as that right is concerned, and may sue directly on the contract in her own name without joining the assignor.

3) Partial assignments. Rights under a contract may be transferred to one assignee or divided up among several. Alternatively, only part of the rights under a contract may be assigned and the balance retained by the assignor.

C. Nature of a delegation. A delegation of contractual duties is really not a transfer of such duties, because the delegating party always remains liable for performance thereof if the party to whom the duties are delegated fails to perform. Rather a delegation is simply an appointment given by the obligor under the contract to another to perform his contractual duties. The delegating party (obligor) is called the "delegant," while the party to whom the duties are delegated is the "delegatee."

D. Impact of the UCC. In many instances these rules have been altered by UCC provisions. The common law rules are important today primarily as a background for the UCC provisions and to govern those few types of assignments which are expressly excluded from the UCC (e.g., assignments of insurance benefits, wages, interests in real estate, and bank accounts; assignments as part of a sale of an entire business).

HYPOTHETICAL: A contracts to paint B's house. A assigns payment right to C, and B delegates payment duty to F. If house is not painted, A can still be sued. C can sue A on K. C can sue B as assignee. C can sue F as third party beneficiary. It is not necessary for A or B to get the other's permission. Delegation of promise to pay $ must be in writing. If a mortgage is delegated over several parties, each is liable for any subsequent party's failure to pay. NOVATION, each party is not liable for subsequent mortgagor's breach.

POLICY ARGUMENTS: efficiency (VISA at debt collection), pursue better opportunities, more convenient, free flow of commerce.

E. What rights are assignable. A right may not be assigned where it would "materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance or materially reduce its value to him." R2K 317, UCC 2-210(2).

1. Motivation of assignor is immaterial. FITZROY v. CAVE The fact that P does not intend to profit directly from the assignment but intends only to drive D into bankruptcy has no bearing on the validity of the assignment. The debts are admitted to be justly due and P is merely asserting a legal right which has been validly assigned to him. If D pays, no bankruptcy will follow.

2. What constitutes an effective assignment. Any manifested intention by the obligee under a contract to a make a present transfer of his rights to another = assignment. Note that the obligee must intend to vest in the assignee a present (rather than a future) right to the thing assigned. The word "assign" need not be used; words such as "sell," "transfer," "convey," "give" etc. will usually suffice.

HYPOTHETICAL: "We will make payments to you as we receive them from B" - not an assignment. Promise to pay a discrete amount of $ out of a fund. Parties here did not intend to give assignment. If A went bankrupt and there was an assignment, C would be home free: he could sue B for the $ A owed him. If not an assignment and C merely has a lien on $10,000 - would add to debts of bakruptcy trustee.

SIMILARLY: If A promises to pay another real estate agent a discrete sum of $ ouf of fund, then C does not have assignment of right to commission paid by B. Intent missing in language to indicate present transfer of interest. A check assignment, not an immediate transfer.

DISTING: "We transfer to C $6,000 from the A-B contract." - assignment. If assignment, B would make checks out directly to C and would not be able to reverse if A said he needed cash. An assignor cannot back out.

3. Rights which if assigned would materially alter the obligor's duty.

a. Personal services contracts. Rights may not be assigned where the effect would be to require the obligor to perform personal services to someone other than the original obligee, e.g., painting C's picture may prove a harder task than painting A's picture. Contracts for the services of an author, painter, lawyer, physician, architect, or the like are usually considered "personal service" contracts, and the right to the services cannot be assigned. Repair or construction contracts are usually not so interpreted.

b. "Requirement" or "output" contracts. If one party to the contract has the right to compel the other to buy "all the goods I can produce" (output) or to provide "all the goods I need in my business" (requirement), such rights are generally not assignable. Since the assignee might have far greater output or requirements, the assignment might materially vary the duty of the other contracting party.

c. Effect of assignment on contract terms. An assignment will not be allowed to alter the price or time of delivery, or some other essential term of the contract.

Personal nature of rights and duties. CRANE ICE CREAM CO. v. TERMINAL FREEZING AND HEATING Contract to provide ice to mom & pop ice cream store cannot be assigned to an ice cream chain. This was a "personal" contract emphasizing Frederick's character and established business requirements. Thus, it cannot be assigned. An assignment to Crane would materially vary D's obligations under the contract. Crane had extensive business connections elsewhere and might not have purchased any ice or might have purchased 250 tons per week. In any event, D's obligation would be different than under the original contract.

Issue: Did Frederick's breach K by going out of business, or is saying no more requirements enough? Compare to City of Memphis providing energy to Ford Plant. If Crane were a mom & pop operation too, then probably would be decided other way.

Cf. Anchorman's resignation when tv station bought by another co. Ct. would recognize delegation of duties (to pay staff by new owners). Ct. held rights to anchorman's contract assignable. However, he may be able to argue change so significant that his reputation is at stake like Parker v. 20th Century Fox.

4. Direct payment authorization not an assignment. ROBERT S. PINZUR LTD v. THE HARTFORD When insured asks her carrier to pay checks directly to hospital, she did so for efficiency and convenience, not as an assignment. The admissions contract included a provision whereby the insured undertook to pay the hospital's account in consideration for services rendered. The insured was directly liable for payment, not the Hartford.

In addition, the direct payment clause did not recite any consideration. The hospital intended to render its services in the future in return for Patka's promise to pay her future bills. In the absence of valuable consideration, the assignment asserted by the Hartford would be only illusory.

5. Revocability of gratuitous assignments. A gratuitous assignment is ordinarily revocable at any time by the assignor through any of the following:

a) The assignor's successive assignment of the same right to another (whether or not consideration was paid for the successive assignment);

b) Death of the assignor;

c) Bankruptcy of the assignor;

d) Notice of revocation given by the assignor to either the assignee or the obligor; or

e) Acceptance by the assignor of payment or performance directly from the obligor.

How made irrevocable: assignment is in writing, either signed or under seal, that is delivered by the assignor; assignments enoforced even without consideration. Alternatively, the assignment is accompanied by delivery of a writing of a type customarily accepted as evidence of the right assigned.

Deliver of check not cashed prior to death of the donor. BURROWS v. BURROWS

Mother gives daughter check for $700, then dies before daughter can cash it. Father moves to recover check amount on the ground that it was not an executed gift or assignment before being cashed and that wife's death revoked the check. HELD: The delivery of a check does not constitute a valid gift, either inter vivos or causa mortis, or a valid equitable assignment, since the bank on which the check is drawn is not liable to the holder unless and until it accepts the check. The death of the donor prior to payment therefore operated as a revocation of the order. However, delivery of promissory notes or other choses in action may operate as gifts or assignments.

By writing a check one does not assign rights to the payee, otherwise could not tear up check or stop payment on check.

An oral gift assignment. COOK v. LUM

Discrete body of money given to Mr. Kase. He gives Ms. Green a manually added list of figures that equal the amount she gave him. Green gives paper to Ms. Cook intended as a gratuitous assignment. HELD: delivery of the piece of paper did not make the gratuitous assignment irrevocable. The test of a valid gift inter vivos is not whether title is perfect but whether the transfer completely stripped the donor of his dominion over the thing given.

Here the donor did not part with dominion and control over the money, and the piece of paper was in no sense a voucher or receipt for the money. Delivery of so insignificant a piece of paper cannot operate to legalize the alleged transfer. actual or constructive delivery to the donee sufficient to transfer title. Slip of paper with the amount inscribed on it was not the type of document customarily accepted as a symbol or evidence of an assigned right.

DISTINGUIGH: give bond (piece of paper) = token chose, valid assignment.

GENERAL RULE: An assignment given for consideration is irrevocable whether oral or in writing.

GARDNER v. HOAG

Hoag assigned his seaman's wages to Coffin in exchange for taking care of his family during his absence. Hoag also got advance for his wages from his employer. Court upheld assignment of wages against counter-argument that people won't work hard if they have assigned their rights. The courts have decided to protect the rights of the assignee who gives good consideration for the assignment and acts without fraudulent intent. Counterargument: people won't work hard if they have assigned their rights.

COOK's opinion: Does assignee get the full amount of wages, or amount less advance? Unless the assignment has been perfected with notice, obligor can raise any defense (such as the advance paid) against assignee as against the assignor. With notice of assignment, any advance given to assignor was at the obligor's peril. Not perfected until notice is given.

6. Future rights in an existing contract are assignable. even though the right is conditional and non-perfected.

Future rights in a future contract cannot be assigned, but a purported assignment of such rights may operate as a promise to assign them when they arise.

TAYLOR v. BARTON-CHILD CO.

An established business cannot assign future accounts receivable, which are not due at the time of conveyance. COMPARE: you can assign salary before it is due on an existing employment contract, but not salary on a nonexisting future employment contract. EXCEPTION: assigned rights to "My Fair Lady" before play and score had been written - anomaly.

7. Effect of contract terms prohibiting assignment: (1) if K contains merely a promise not to assign, then assignment will be upheld and obligee will be in breach. The promise destroys the obligee's right, but not his power, to make an assignment. (2) If the K prohibits assignment as a condition of the assignment, then any purported assignment will be held VOID. Allhusen (prohibiting painting subcontracting) (3) Under the UCC, a term in any contract between an account debtor and an assignor is ineffective if it prohibits assignment of an account or contract right, or requires the debtor's consent. Allhusen would thus be rejected under the UCC.

8. Duty to pay assignee. CONTINENTAL PURCHASING v. VAN RAALTE CO Company continued to pay old lady portion of her salary even after having received notice that she assigned her salary to Continental. HELD: Once the payor of an assignment receives actual notice of assignment, he will be liable for payments subsequently made to assignor which belong to the assignee.

9. Assignee's duty not to interfere with assignee's rights. LONSDALE v. CHESTERFIELD Real estate development company sells lots in Oregon subdivision together with rights to a water system. Company delegates duty to install water system to Sansaria, who never installs a system. A class of investors own mortgage deeds on lots, which are defaulted, and sue Chesterfield for failure to perform installation.

Every contract contains an implied covenant of good faith: assignor warrants that he will not do anything to defeat or impair the value of the assignment. Chesterfield's failure to perform = breach of implied covenant of good faith. D could not avoid its obligation by requiring Sansaria to assume it. Chesterfield remained secondarily liable as surety for performance of the duty. Because D's failure to perform rendered the assigned rights virtually worthless, it is liable to Ps.

If investor group had sued buyers, the buyers could assert any defense against this suit that they would have against the assignor: failure to install water system.

10. Successive assignments of the same right. (1) If 2nd assignee knows of first assignment, then first assignment prevails. (2) assignment for consideration prevails over gift assignment. (3) If first assignee has misled 2nd assignee that the 2nd assignee has a valid assignment, then 2nd will prevail. (4) MAJORITY - the first in point of time prevails. (5) MINORITY, TN - the first to give notice to the obligor prevails.

11. ARNOLD PRODUCTIONS v. FAVORITE FILMS When a contract contains a clause "not to assign," a film distributor could contract with a third party (Nationwide) to carry out the distribution without violating the agreement. Favorite Films retain supervisory responsibility. There was no assignment here as there was no divesting of a complete right of control by Favorite Films. Further, the evidence indicated that P and D contemplated that most of the actual distribution to theaters was to be delegated to various "franchise holders."

COMMENT: Generally, contracting parties are free to assign their rights under a contract notwithstanding a prohibition contained in the contract. However, provisions in a contract limiting either party's right to delegate duties to another are almost always strictly and literally enforced. They evidence the parties' intent that the services involved are personal, so that performance by another would not constitute the bargained-for consideration.

DISTING: subcontract - ok vs. assignment - not ok. DISTING: If nature of services is personal, then different case.

12. Promisee's power to object to delegation of duty to promisee's competitor. SALLY BEAUTY CO. v. NEXXUS PRODUCTS CO. Distribution of hair care products in Texas may otherwise be assigned, but not to a competitor. The duty of performance under an exclusive distributorship may not be delegated (by acquisition of original firm) to a competitor in the market place. D should not be required to accept P's best efforts when those efforts are subject to the control of one of D's competitors.

13. Contrast words "assumes" vs. "takes subject to" mortgage. If C "assumes" mortgage, he pays B $25 K and owes $75K to S&L. B has delegated his duty to pay $75 K. B remains a surety. However, if C takes property "subject to" mortgage, he pays B $100 K and has no relation to S&L; except that if B defaults, then S&L can take C's property.

14. Rights can be assigned with assuming the burden (delegation) of duties. Assignee has not promised to assume assignor's duties. Langel v. Betz

F. THIRD PARTY BENEFICIARY CONTRACTS

1. A third party donee beneficiary (husband on behalf of wife) may enforce a contract to which he is not a party. Dutton v. Poole

2. INTENDED (donee or creditor) beneficiary, and INCIDENTAL beneficiary. Classification depends on promissee's intent. Promissee is the one who bargained for the promise. Did promisee intend to confer a gift or discharge some obligation? An incidental beneficiary cannot sue to enforce it.

3. A creditor beneficiary has a cause of action against the promisor (as third party beneficiary), and against the promisee/debtor (as creditor).

4. A third party beneficiary can be a member of a class. The new car purchase "with full insurance" case P injured in car accident was of the class intended to benefit from insurance.

DISTINGUISH: Avon Motors Leasing dealership coupled with promise to do all financing through a particular bank. HELD: bank is not a 3rd-party beneficiary, not intended. NOTE: if bank was a relative, then donee beneficiary.

5. Subjective intent not necessary LONSDALE v. CHESTERFIELD Lonsdale investor group would not directly benefit from installation of water system; however, objective fact is that Sansaria would automatically confer a benefit upon Lonsdale: 3rd party

beneficiaries, even if it was not the motive, purpose, or desire of the Sansaria.

6. Debtor creditor beneficiary. HOTEL DAMAGED BY FIRE WRECKING CASE Hotel obligated to raize fire-burned building by city ordinance. When it failed to perform its duty, it could not claim that the city's contract to hire a wrecking company made it a third-party beneficiary. A contract to fulfill obligation contract to confer a benefit.

7. Drafting a will is sui generis so explicit an act to confer a gift. Same would not be true of drafting a contract. Therefore, 3rd party beneficiary could sue drafting attorney for malpractice connected with the will. HALE v. GROCE

8. A contractor who depends on another contractor's performance. When performance of a contract with the state depends on proper performance of another contract with the same state, the dependent contractor is a third party beneficiary of the contract. Although the state was not subject to suit by P because of its governmental immunity, the duties were still owed to P, thus making P a creditor beneficiary. VISINTINE & CO. v NY, CHICAGO, & ST. LOUIS RR CO

9. Beneficiaries of government contracts. ZIGAS v. SUPERIOR COURT Tenants may enforce maximum rent schedule provisions contained in a contract between landlord and the federal government. The language of the National Housing Act shows that Ps were members of the class the Act was intended to benefit, and thus Ps are intended beneficiaries who have standing to sue as 3P beneficiaries.

10. Beneficiary takes subject to defenses assertable against promisee. REVELL v. C. H. MORGAN GROCERY CO Setoffs applicable to parties also apply to 3P beneficiaries. It would violate common sense to allow a third party greater rights than the parties had themselves. Since D's obligation to pay P was conditioned on Lidke's performance, and Lidke did not perform, P cannot recover.

11. The rights of an intended beneficiary vest - i.e., power to terminate is eliminated, when the beneficiary, before receive notice of a discharge or modification, either (i) manifests assent to the promise at the request of the promisor or promisee; or (ii) brings suit to enforce the promise; or (iii) materially changes her position in justifiable reliance thereon. Allow enforcement to the extent of promise and not merely to the extent of her reliance.

12. A mortgagor can reconvey a mortgage to another mortgagor only if the creditor is made a party to the contract and agrees to the novation. The former mortgagor would then be relieved of any liability. Ordinarily a creditor would always have a claim against the Browns, unless there was a novation. A creditor cannot be forced to accept a new debtor (withhis own credit risks) by unilateral action of the debtor.

d) ACCEPTANCE UNDER THE UCC.

(1) Additional terms. Section 2-207 of the Code provides that an acceptance operates as such even if it contains additional terms different from those proposed by the offeror (unless the acceptance states that it is conditional on the assent to the additional terms, in which case the offeror would have to make a specific acceptance of the additional terms for a contract to exist).

(a) The additional terms are to be construed as proposals for additions to the contract.

(b) Where the contract is between merchants, these additional terms are part of the contract, unless (1) the offer expressly limits acceptance to the terms of the offer, (2) the additional terms materially alter the agreement, or (3) the offeror gives notification of objection to the new terms within a reasonable time.

LEONARD PEVAR CO. v. EVANS PRODUCT CO., 524 F.Supp. 546 (D. Del. 1981). Building contractor sues one of his suppliers for breach. Marc Pevar of the Leonard Pevar Co. (P), a building contractor, obtained a bid on plywood over the phone from Evans Product Co. (D). P claims the parties then reached an oral contract of sale, which D denies. P subsequently sent a written purchase order. D's written acknowlegement stated that it was expressly contingent on P's acceptance of the terms it contained, including limitation of warranties. P later sued for breach of warranty, and D asserted the acknowledgement as a defense. The parties each moved for summary judgement.

ISSUE: May parties who exchange writings have a contract even though the writings do not agree as to certain points?

DECISION: Yes. Motions dismissed.

RULES: 1) There are disputes between the parties as to material facts; therefore, the court cannot grant summary judgment for either party.

2) If as P claims the parties reached an oral agreement, their contract is governed by UCC 2-207(1), which means the additional terms contained in D's acknowledgement would be treated as proposals and would become part of the contract unless they materially altered it. Whether the terms materially altered the oral agreement is a question of fact to be determined at trial.

3) If the parties did not enter an oral agreement, P's purchase order constituted an offer to purchase. P's acceptance of and payment for the goods after receiving D's acknowledgement would constitute an acceptance of D's counteroffer contained in the acknowledgement under the principle of Roto-Lith, Ltd. v. F. P. Bartlett & Co., 297 F.2d 497 (1st Cir. 1962). Roto-Lith has been criticized for following the common law instead of the principles behind the UCC; it has been rejected by several courts. Roto-Lith is hereby rejected. Instead, a clause that conditions acceptance on assent to additional or different terms leaves the parties without a contract as of the time the writings are changed. There must be express assent to the additional or new terms.

4) Under UCC 2-207(3), the parties may yet have an agreement based on their conduct, even when there is no oral or written contract. In this case, the parties continued dealing, which means they recognized the existence of a contract. The contract would consist of the terms on which the writings agree, plus those terms supplied by the "gap filler" provisions of Article Two of the UCC.

COMMENT: This case illustrates the all too common experience of two parties relying on self-serving forms drafted by attorneys instead of actually working out a mutually satisfactory agreement. The UCC approach to making an agreement in spite of conflicting forms probably implements the parties' true intentions, but a better, if unrealistically idealistic, approach would be for parties to commercial transactions to negotiate sufficient detail to come up with consistent terms.

(3) BATTLE OF THE FORMS

(A) A workable solution for conflicting forms. Section 2-207 represents an attempt to provide a workable solution to the problem created where one party in a sales transaction sends additional or different terms to the other party, either as part of a purported acceptance of an offer or as part of a purported confirmation of a prior agreement. Unfortunately, in industry the parties often seek contracts for the sale of purchase of goods through the exchange of conflicting forms which may include a "request for quotation," "quotation," "purchase order," and "sales acknowledgement." Each of these forms will have typewritten terms on its face and preprinted "boilerplate" terms on both the faces and the reverse sides. These preprinted terms will generally have been carefully prepared by each party's attorney and will inevitably conflict with the terms in the other party's forms. These forms are generally exchanged by purchasing agents and sales agents in blissful innocence of their legal consequences, and usually both buyers and sellers faithfully perform their obligations under the typewritten portions of the forms and ignore the preprinted terms. If a doubt does arise as to the conflicting terms, one party sometimes takes exception to the objectionable term without insisting that the other agree in writing to its deletion or modification.

(b) Which terms apply. Under the UCC, the terms of sale in such a situation involving a battle of the forms are determined by the terms on the various forms and the fortuitous acts of the parties, applying the rule in 2-207.

4) TERMINATION OF THE OFFER. An offer may no longer be effectively accepted if the offeree's power of acceptance has been terminated by an act of the parties or by operation of law.

a) TERMINATION BY ACT OF THE PARTIES.

(1) Termination by non-acceptance in the allotted time period -- Restatement (Second) § 35 provides that an offeree's power of acceptance may be terminated by (1) a rejection or counteroffer by the offeree, or (2) by lapse of time, or (3) revocation by the offeror, or (4) death or incapacity of the offeror or offeree. In addition, an offeree's power of acceptance is terminated by the nonoccurrence of any condition of acceptance under the terms of the offer.

(2) Revocation of the offer by the offeror. Where the offeror communicates a revocation before an acceptance by the offeree, the offer is terminated.

(a) Requirements for effective revocation. Assuming the offer can be revoked, the following are required to make an effective revocation:

1) Words or conduct. The offeror's words or conduct must be sufficient for a reasonable person to interpret them as revocation.

2) Communicated to the offeree. The revocation must be communicated to the offeree (the offeror must at least make reasonable efforts to communicate the revocation).

3) Effective when received. The revocation is generally held to be effective when received. [Restatement (Second) § 41] A few states hold that it is effective when dispatched.

(3) Communication from a third party -- DICKINSON v. DODDS, 2 Ch. Div. 463 (C.A. 1876). Land sale disagreement. FACTS: Dodds (D) offered to sell property to Dickinson (P), indicating that the offer was to remain open until 9:00 A.M. on June 12. On the 11th P made up his mind to buy the property (within the time prescribed by D offer); that afternoon P was informed by a third party that D had offered or agreed to sell the property to another person. In the evening P delivered his acceptance to D's mother-in-law, and D finally received it at 7:00 A.M. on the 12th, but D refused the acceptance since he had already sold the property on June 11. P sued for specific performance or damages; judgment for P. D appeals alleging 3rd party had informed P and nullified contract.

ISSUE: If P learns from a third person that the offer has been given to (or accepted by) another person, can P still accept the offer?

HELD: No. Reversed for D.

RATIONALE: D could revoke the offer prior to acceptance. P learned that D was going to sell to another person. This is a sufficient communication of retraction of the offer by D, even though the communication came via a third party.

COMMENT: This case illustrates that the revocation can come indirectly (rather than directly from the offeror), such as by a third person, or simply from the circumstances that would put a reasonable person on notice that the offeror had revoked the offer.

B) TERMINATION BY OPERATION OF LAW.

(1) By the lapse of time. The offer lapses by operation of law after expiration (and before acceptance) of whatever period of time was specified in the offer.

(a) Computation of time. The period begins to run from the date of actual receipt by the offeree. [Restatement (Second) § 51]

(b) Where no time period specified. Where no specific time period is specified, then the offer lapses after a reasonable period of time. Consideration is given the subject matter involved and all other relevant circumstances in determining what is a reasonable time.

(c) Offers revocable where specified to remain open. Note that just because the offer says it will remain open until some date does not mean that the offeror cannot validly revoke the offer before acceptance.

(2) By death or destruction of the subject matter of the offer.

(3) By death or insanity of the offeror or offeree.

(4) By the intervening illegality of the proposed contract. A offers to loan B $1,000 at 10%; state law is passed that 8% interest is the maximum rate that can be charged.

5) IRREVOCABLE OFFER: NONDESTRUCTIBLE POWER OF ACCEPTANCE

GENERAL RULE: An offer is revocable even if the offeror expressly promises not to revoke or gives a definite period during which the offer is to remain open. There are a number of exceptions to this rule, however.

(1) BOARD OF CONTROL OF EASTERN MICH. UNIV. v. BURGESS, 206 N.W.2d 256 (Mich. App. 1973). FACTS: On February 15, 1966, Burgess (D) signed a document purporting to grant to the Board of Control of Eastern Michigan University (P) a 60-day option to purchase D's home. The document was drafted by P's agent and acknowledged receipt by D of $1 consideration. However, no consideration was actually given. On April 14, 1966, P gave D written notice of its intention to exercise the option. On the "closing date," D rejected P's tender of the purchase price. P then brought this action for specific performance. The trial court held for P. D appealed.

ISSUE: Does the offeror's written acknowledgement of receipt of consideration, although no consideration was actually given, make an option to purchase enforceable by the offeree?

DECISION: No. Reversed and remanded.

RULES: 1. Options to purchase, if based on valid consideration, are contracts which may be specifically enforced (they are in effect irrevocable offers). One dollar is valid consideration for an option, provided the dollar is paid of tendered. Such was not the case here.

2. A written acknowledgement of receipt of the consideration merely creates a rebuttable presumption that consideration has actually passed.

3. Thus, there was no valid option to purchase in existence. However, that which purports to be an option but fails for lack of valid consideration is still a simple offer to sell. An option is a contract collateral to the offer to sell, making the offer irrevocable for a specified time. A failure of consideration therefore affects only the collateral option contract, not the underlying offer.

4. Since a simple offer can be revoked for any or no reason by the offeror prior to acceptance, the question now is whether defendant successfully revoked the underlying offer to sell before acceptance by plaintiff.

5. Neither the Statute of Frauds nor contract law requires the revocation of an offer to be in writing.

6. There is conflicting testimony as to when and if defendant effectively revoked the underlying offer. The case is remanded to determine such.

COMMENT: The Restatement (Second) § 89 takes the position that an option in writing states that consideration has been received is binding even if consideration has not actually been paid.

b) EXCEPTIONS TO THE GENERAL RULE.

(1) Firm offers under the UCC. A signed, written offer to buy or sell goods, which states that it will be kept open for a definite time (or if no time is stated, for a reasonable period of time) may not be revoked for this period (so long as the period is no longer than three months). [UCC 2-205]

(2) Offers for consideration. If the offeree has given any consideration (even nominal consideration) for the offer, the offer then becomes an option and is not revocable for the period stated therein. [Restatement (second) § 24A]

Recitals of consideration. Where there is a recital that consideration has been received for the option, the general rule has been that this recital is not conclusive (the courts reserve the right to see if the consideration was actually paid). But R2K § 89 provides that an offer is binding as an option if it is in writing, signed by the offeror, and recites a purported consideration.

HUMBLE OIL AND REFINING CO. v. WESTSIDE INVESTMENT CORP., 428 S.W.2d 92 (Tex. 1968). Humble Oil (P) entered into a valid option contract with Westside (D) for the purchase of real estate. Within the option period P wrote a letter to D expressly exercising the option and also proposing an amendment to the option contract. In a second letter, also within the option period, P again expressly exercised the option and expressly declared that the proposed amendment of the previous letter was to be disregarded. D argues that P's first letter constituted a repudiation by P of the option agreement. The trial and appellate courts agreed with D and P appeals.

ISSUE: Does a conditional exercise of an option preclude a later unconditional exercise of the option within the option period?

DECISION: No. Reversed for P.

RATIONALE: 1. It is laid down in the law of contracts that a conditional or qualified acceptance is a rejection of the offer and a counterproposal, or new offer.

2. But an option is a completed contract, the negotiations for the marketing of which are concluded by the execution and delivery of the option. The minds of the parties have met in agreement, the distinctive feature of which is that the optionor, for a consideration, binds himself to keep the option open for election by the optionee, for and during the time stipulated or implied-by-law. Under an option, the act necessary to raise a binding promise to sell, is not, therefore, an acceptance of the offer, but rather the performance of the conditions in the option contract. If this is true, then the rule peculiar to offers (to the effect that a conditional acceptance is, in itself, in every case, a rejection of the offer) is not applicable to an option contract, which is supported by a consideration and fixes a time limit for election.

3. Humble's first letter did not terminate the option contract. Humble, for a valuable consideration, purchased the right to keep the option contract open for the time specified, and the right to create a contract of purchase. Although Humble did not have the right to accept or reject the option in the sense that it was free to take the action required to close the transaction, Humble was not foreclosed from negotiating relative to the contract of sale as distinguished from the option. The option, considered as an independently completed agreement, gave the optionee the right to purchase the property within the time specified on certain terms. The option contract bound Humble to do nothing but granted it the right to accept or reject the option in accordance with its terms within the time and in the manner specified in the option. Westside was bound to keep the option open and could not act in derogation of the terms of the option.

(3) Revocation of offer for a unilateral contract after past performance. Ordinarily, a unilateral offer may be revoked at any time prior to the offeree's completing the act of acceptance called for in the offer. But a difficult problem is presented where the act requested will take some time for complete and the offeror attempts to revoke after the offeree has started performance. Under modern rules, where the offeree has rendered substantial past performance, courts will not permit revocation of the unilateral offer by the offeror. There are several theories to support this result.

The old rule -- Petterson v. Pattberg, 161 N.E. 428 (N.Y. 1928).

FACTS: Mrs. Petterson (P) is the executrix of the will of her husband. Mr. Petterson executed a promissory note to Pattberg (D) secured by a third mortgage on property owned by Petterson. D wrote Petterson that D would discount the amount of the mortgage if it was paid on or before a certain date. Petterson went to D;s home to pay but D refused the tender of payment, indicating that he had already sold the note and mortgage to another party. Petterson wanted to pay off the mortgage because he had sold the land to a third party free and clear of the mortgage, and so Petterson had to pay off the full amount of the mortgage to this third party. P sued D for damages. Judgment for P; D appeals.

ISSUE: May an offer of a unilateral contract be revoked at any time prior to performance, even if the offeror knows that the offeree intends to perform?

DECISION: Yes. Judgment reversed for D.

1. The offer of a unilateral contract may be revoked at any time prior to full performance of the act required as acceptance.

2. D revoked the offer prior to performance (payment of the money) by Petterson.

DISSENT: Petterson accepted D's offer by his actions before revocation.

COMMENT: Modern rules do not permit revocation where there has been substantial part performance rendered by the offeree, but even under these rules the result in this case would be the same since the act required for acceptance was payment, and revocation came before payment.

Modern rules. Theory that part performance creates an option -- MARCHIONDO v. SCHECK, 432 P.2d 405 (N.M. 1967). FACTS: Scheck (D), in writing, unilaterally offered to sell certain real estate to specified prospective buyers and agreed to pay a commission to Marchiondo (P), a broker. The offer fixed a six-day time limit for acceptance. D revoked the offer in writing, which was received by P on the morning of the sixth day. Later that same day, P obtained a purchaser's acceptance to the purchase of the property. P sued D for breach of contract. The trial court dismissed the complaint. P appeals.

ISSUE: May part performance by the offeree make the offer an option, subject to complete performance?

DECISION: Yes. Judgment reversed for P.

RATIONALE: 1. When D made his offer to pay a commission upon sale of the property, he offered to enter a unilateral contract, performance by the offeree being the acceptance. The offeror may revoke the offer any time prior to the performance -here, the sale - because no consideration has passed.

2. However, part performance of the consideration may transform the unilateral contract into an option contract, and thus make it irrevocable during the time stated. Where an offer invites an offeree to accept by rendering a performance (unilateral) and not a promissory acceptance (bilateral), an option contract or contract with a condition is created when the offeree begins the invited performance or tenders part of it. The condition is full performance by the offeree. What constitutes part performance will vary from case to case.

3. Thus, until there is action by the offeree - a partial performance pursuant to the offer - the offeror may revoke, even if his offer is an exclusive agency or an exclusive right-to-sell.

4. Remanded in order to determine if P partially performed.

COMMENT: This situation often arises in real estate situations. The seller lists the property with a broker, who advertises the property, tries to find a buyer, etc., and then the seller wishes to cancel the brokerage agreement once the agent has put in substantial effort to find a buyer (or has found one).

2) Implied promise not to revoke. The Restatement position (followed by most courts) is that where an act will take some time to complete, there is a promise implied in the offer that the offeror will not revoke once the offeree has made a substantial beginning of performance, provided that performance is actually completed within the time required by the offer.

3) Equitable estoppel. Some courts have adopted the view that where an offeree renders substantial part performance, it is inequitable to allow the offeror to revoke, and thus the offeror is held to be estopped to do so.

4) Conversion into a bilateral contract. A few courts have adopted the rule that once an offeree undertakes performance of the requested act, the contract becomes a bilateral contract; that is, the offeree's return promise is implied from his past performance. Thus, the counterpromise having been given, an enforceable contract exists and no subsequent revocation is effective.

5) Compromise position. Other courts have held that the offeree's acts should be held to make the offer irrevocable only to the extent necessary to avoid injustice; that is, the remedy is given to the offeree depends on the requirements of justice (whether full enforcement of the contract, restitution of benefits conferred, etc.).

INSUFFICIENT AGREEMENT: INCOMPLETE, INDEFINITE, AND DEFERRED TERMS.

A. INTRODUCTION. In order for an offer to exist, there must be a manifestation of present intention to contract by the offeror, the terms of the proposed contract must be definite and certain, and the offer must be communicated to the offeree. This section will focus on the certainty requirement.

B. REQUIREMENT OF DEFINITENESS AND CERTAINTY OF TERMS. The terms of the offer must be sufficiently clear and complete so that the court can determine what the parties intended and can fix damages in cases of nonperformance. R2K § 32.

C. THE ESSENTIAL TERMS. A contract must cover (explicitly or impliedly) the following four essential terms: 1) Parties to the contract; 2) the subject matter of the contract; 3) time for performance; 4) Price.

D. TRADITIONAL APPROACH--VARNEY v. DITMARS, 111 N.E. 822 (N.Y. 1916). Varney (P), an architect-draftsman, informed his employer, Ditmars (D), that he had a better offer elsewhere, to which D responded that if P would stay on D could make a better future for him than anyone else. Later D told P: "I am going to give you $5 more a week; if you....will go on and continue the way you have been...on January 1, I will close my books and give you a fair share of the profits." Later D denied that he had this agreement with P and fired him. P seeks to recover the increase in salary for the period prior to the termination plus a fair share of D's profits. The trial court dismissed the complaint. P appeals.

ISSUE: Is a promise to give "a fair share" of the profits too vague to be enforceable?

DECISION: Yes. Affirmed for D.

RULES: 1. For a contract to be valid, the agreement or promises of the parties must be certain and explicit; their full intention must be ascertained to a reasonable degree of certainty. Their agreement must be neither vague nor indefinite, and if thus defective, parol proof cannot be resorted to.

2. The statements made by D concerning the "fair share of the profits" are too vague, indefinite, and uncertain to form a binding contract. The intention of the parties is pure conjecture. A fair share may range from a nominal sum to a substantial amount. The courts cannot aid parties in such a case when they are unable or unwilling to agree upon the terms of their own proposed contract. ****

3. Whether the words "fair" and "reasonable" have a definite and enforceable meaning depends upon the intention of the parties in the use of such words and the subject matter to which they refer. Where the use of such words is definite under the circumstances (e.g., is tied in with market price), parol evidence regarding them may be admitted (e.g., what is the market price).

4. However, the above rule does not prevent recovery upon quantum meruit by a party for the reasonable value of services rendered in reliance upon the terms of the agreement.

DISSENT (Cardozo): If a promise, though vague and indefinite, is made with contractual intent, the promise should be enforced. It is more a matter of evidence than of contract. Moreover, such intent might be manifested not only through express words, but also through reasonable implication.

COMMENT: The uncertain term in Varney is price. The majority takes the traditional approach, which is that such terms must not be too indefinite for the court to determine the intent of the parties. The dissent argues that the court (once it determines that contractual intent is present) should be willing to imply the exact terms from all circumstances.

e. Implications of reasonable terms. The essential terms must either be expressly stated in the contract or be capable of reasonable implication from the agreement. The general trend of the courts is now to adopt a policy of liberal construction so as to uphold the reasonable expectation of the parties; thus, the court will usually imply reasonable terms (i.e., implied-in-fact terms from the dealings and relationship of the parties) where none are expressly stated by the parties.

f. Unallocated but specified amount of payment. COMMUNITY DESIGN CORP. v. ANTONELL, 459 So.2d 343 (Fla. 1985). FACTS: Antonell (P) worked for Community Design Corporation (D) as a draftsman on a project that was to be completed by Christmastime. D's president promised a bonus to any employee still working if the project was completed on time. The amount of the bonus was between $20,000 and $35,000, and each employee's amount would be determined by D's vice president. P's supervisor also promised a one-week paid vacation if the drawings were completed on time. The drawings were completed, but P received neither the bonus nor the vacation. P sued. The jury awarded P damages. D appeals.

ISSUE: May a court award an employee a promised bonus where the actual amount of the bonus was never specified?

DECISION: Yes. Judgment for P affirmed.

RULES: 1. Courts prefer to find contracts enforceable, even if uncertain in some respects, where the breaching party receives the benefit of the other's performance.

2. D claims the contract was too indefinite and uncertain to be enforced; the amount, the allocation among employees, and the degree of completion of the project were all unclear. In this case, however, there was sufficient evidence to enable the jury to find the terms of the oral contract. The allocation of the bonus was necessarily unclear, since the participants would not be determined until Christmastime and the amount depended on the vice president's recommendation. The jury could properly resolve this issue.

COMMENT: The UCC and the Restatement (Second) of Contracts follow the same approach; i.e., the omission of one or more essential terms does not render an offer invalid, so long as it appears that the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

g. Agreements to agree and preliminary negotiations.

1) Introduction. For a valid contract to exist, there must be an expression of present contractual intent which is accepted by the offeree (i.e., mutual assent). If the parties have simply negotiated, but have failed to agree in sufficient certainty about essential terms, there is no contract. Or if the parties have agreed to agree on some essential terms in the future, there is as yet no contract.

2) Omission of essential terms -- METRO-GOLDWYN-MAYER, INC. v. SCHEIDER, 360 N.E.2d 930 (N.Y. 1976). Scheider (D) and MGM (P) entered into an oral contract for the production of a pilot film and television series in which D was to be the principal actor. The agreement included all essential terms except a starting date for filming the television series. D did make the pilot film, but refused to perform in the television series. P sued, and the trial court found that the missing term could be supplied based on the established custom and practice in the industry, of which both parties were aware. Appellate court remanded for new trial to consider damages. D appeals.

ISSUE: May a contract be enforced if it omits an essential term, so long as the term can be provided by objective custom and practice in the industry?

DECISION: Yes. Judgment for P affirmed.

RATIONALE: P and D had completed negotiations about the essential elements of an agreement by the time D began acting in the pilot film. The parties had begun performance on the good faith understanding that the unsettled matter would be resolved by agreement. In this situation, the courts may enforce the contract by supplying the omitted term, as long as there is an objective method by which to determine the term.

2. Because the parties were both familiar with the established custom and practice in the industry, the court could properly supply the time for beginning the television series.

3) Limitation on courts' supplying terms -- JOSEPH MARTIN JR. DELI v. SCHUMACHER (N.Y. 1981). FACTS: Schumacher (D) leased a retail store to the Deli (P) for a five-year term, with the rent increasing gradually from $500 to $650 per month. The lease contained a renewal clause for additional five year periods at an annual rent "to be agreed upon." P notified D of his intent to exercise the renewal, and D demanded rent for $900 per month. P had an appraiser estimate that the fair market rental value of the property was $545. P sued for specific performance, but the court dismissed the complain on the ground that the renewal clause was unenforceable for uncertainty as a matter of law. On appeal, the court reversed, holding that if the parties did not intend to terminate if they could not agree about the rent, the court could set a reasonable rent. D appeals.

ISSUE: May a court supply a term to a contract if the parties have not indicated their intent as to that term?

DECISION: No. Judgment reversed for D.

1. Contracts are private agreements; they are not enforceable in court unless the D assented to the obligation sought to be enforced. To be enforceable, provisions must be sufficiently certain and specific that the court can ascertain what was promised. Otherwise, the courts would be in writing contracts.

2. An agreement to agree in unenforceable. (? Wirtz) The contract does nothing more than commit the parties to agree to the rent during the renewal periods, without disclosing how such amounts are to be determined. The contract does not bind the parties to accept fair market rental value, as the lower court tried to impose. This is not a UCC case where the price of goods may be determined. The contract cannot be enforced because it is too uncertain.

Omission of specific price term in long-term contract -- OGLEBAY NORTON CO. v. ARMCO, INC, 556 N.E.2d 515 (ohio 1990) FACTS: ARmco, Inc. (D) and Oglebay Norton Co. (P) entered a long-term contract in 1957 whereby P would reserve shipping capacity and D would use the capacity to ship iron ore from the Lake Superior district to D's steel plants in the lower Great Lakes region. The contract required D to pay the "regular net contract rates" as recognized by leading iron ore shippers, but if there was no such rate, the parties would mutually agree upon a rate. The parties modified the contract four times by 1980, extending the term through 2010 and requiring P to upgrade and expand its fleet through significant capital expenditures. P had a seat on D's board of directors and owned a portion of D's stock. Until 1983, the parties determined the shipping rate by references to a published rate. In 1983, D objected to P's quoted rate and the parties negotiated a lower rate for 1984. the parties were unable to agree to a rate for 1985; P billed $7.66/ton, but D changed the invoice amount to $5/ton and only paid $5/ton. The previous reference rate was no longer published. The parties failed to reach an agreed rate for 1986, and D sought a declaratory judgment as to the proper rate to be charged. P continued to ship ore, for which D paid as little as $3.85/ton. D then sought a declaration that the contract was no longer enforceable because the rate pricing mechanism had broken down. The trial court held that the parties intended to be bound even thought the rates were not fixed, that a reasonable rate should be paid, that the parties should consider rates charged for similar services by other leading iron ore vessel operators, and that the court would mediate any failure to agree to a rate and determine the applicable rate. For 1986, the court found that a reasonable rate was $6/ton. D appeals.

ISSUE: May a party enforce a long-term service contract when the price is not specified and the parties must periodically resort to the court to determine a reasonable price?

DECISION: Yes. Judgment for P affirmed.

RATIONALE: 1. D claims it never consented to be bound by a contract once the specified pricing mechanisms had failed, and that the contract was therefore unenforceable. However, the evidence of a long-standing and close business relationship, including D's participation on P's board and ownership of P's stock, supports the court's finding that the parties intended to be bound, even in the event the pricing mechanisms failed.

2. If the parties intended to conclude a contract, but the price is not settled, the price is a reasonable price at the time of delivery if the contract requires the price to be set by some standard and its is not so set. [R2K § 33 and UCC 2-305(1)]. In this case, the court determined that $6/ton was reasonable, based on the parties' course of dealing and comparisons of market price. The evidence of rates charge by other companies, as well as P's quotation for 1987, supports this determination.

3. A trial court has authority to fill an open price term when the parties intend to be bound by the contract. A term which appears to be indefinite may be supplied by factual implication. This fulfills the intention of the parties.

4. D asserts that the court could not force the parties to negotiate, or mediate any failure to negotiate, each year through 2010. Normally, specific performance is not granted unless the terms of the contract are sufficiently certain to provide a basis for the order. Certainty may be provided by the addition of a term otherwise lacking or incomplete, however. In this case, the trial court properly determined that specific performance was necessary due to the speculative nature of any award of damages based on the length of the contract and the economic uncertainties of this type of shipping.

BORG-WARNER CORP. v. ANCHOR COUPLING CO. (ILL. 1958) FACTS: On Feb. 20, Borg-Warner (P) sent a letter to Anchor Coupling (D) setting forth a detailed agreement giving P a 60-day option to purchase all of D's business assets. On Feb. 29, D responded to P's letter by stating that it would be willing to sell its assets in accordance with certain paragraphs of P's letter, with exception stated by D, and that P would have 50 days to give D a "firm offer." The exceptions included (1) that "suitable assurances are given for the retention of [D's] lower level executive personnel"; and (2) "that mutually satisfactory arrangements are made for the continued employment of Charles L. Conroy." P then inquired of D to determine whether D's letter constituted a firm offer which would not be revoked for the period stated, to which D replied that it was. On April 26, P wrote to D saying that it intended to go ahead with the purchase of D's assets. D refused to perform. P brought this action primarily for specific performance and, in the alternative, for money damages. This trial court dismissed the complaint on D's argument that P had failed to allege a completed contract because of the indefiniteness of the two clauses stated above (i.e., they were left to future agreement). P appealed.

ISSUE: Is a contract enforceable even if it includes provisions requiring "mutually satisfactory arrangements" to be determined at a future time?

HELD: Yes. Reversed for P.

1. P's letter of Feb. 20 was an offer. D's letter of Feb. 29 constituted a counteroffer. P's letter of April 26 was an acceptance of the counteroffer.

2. The acceptance was sufficient to create a contract. The two exceptions (left to future agreement) did not prevent the formation of a contract. What the parties intended is the key. D did not intend the exceptions to be conditions precedent to the formation of a contract, but was merely asking that P, by a general acceptance, gives assurance as to the content of the exceptions. A contract is not rendered void because the parties thereto contract or agree to contract concerning additional matters.

3. A transaction is complete when both parties mean it to be complete, which is a matter of interpreting their expressions to one another. Both parties intended that a general acceptance by P was all that was necessary for a contract to come into existence.

4. Even though one of the parties may believe that the negotiations are complete and all terms are agreed upon, there is still no contract unless the party is reasonable in that belief and the other party ought to have known that the first party would so believe. P was reasonable in its belief and D should have known by P's expenditures of large sums of money and surveys that P would so believe that its acceptance of D's terms would create a contract.

5. Nor was the contract to indefinite for specific performance. The two exceptions simply required reasonable agreement between the parties, which can be specifically enforced. A promise to render performance satisfactorily to a reasonable person is not too indefinite.

MISUNDERSTANDING AND MISTAKE - these problems will often justify rescission of the contract, even though (at least on the objective theory of contracts) it appears that a valid contract has been formed.

A. AMBIGUITY. Terms in the proposed contract may be ambiguous, preventing a meeting of the minds by the parties on essential terms. Obviously this subject is related to that of definiteness of terms and mistake, and the rules are similar to mistake with respect to unilateral misunderstanding or mutual misunderstanding.

Latent ambiguity. RAFFLES v. WICHELHAUS, "The Peerless Case" 159 Eng. Rep. 375 (1864). FACTS: Wichelhaus (D) agreed to buy cotton to be shipped by Raffles (P) to England from India aboard the ship "Peerless." The parties were unaware that there were two ships named "Peerless," one leaving Bombay in October and the other leaving Bombay in December. D thought the contract indicated that former, but P thought it meant the latter. D refused to accept delivery of the later shipment. P sues for breach of K.

ISSUE: Where the contract is subject to two equally possible interpretations and the parties contracted with different interpretations in mind (neither knowing of the other's interpretation, nor having reason to know thereof), is there mutual assent?

DECISION: No. There is no contract; judgment for D.

(1) The contract did not indicate which "Peerless" was intended, each party had a different interpretation, and neither knew of the other's interpretation.

(2) There is no contract because there was no meeting of the minds.

COMMENT: Here both parties gave different meanings to a material term of the K (since payment was to be made upon delivery). Hence, there was no meeting of the minds. Had both parties given the same meaning to an ambiguous term, there would have been a contract; or had either party known of the ambiguity or should reasonably have known of it, the contract would have been construed against that party.

Different understandings of same price term -- KONIC INT'L CORP. v. SPOKANE COMPUTER SERVICES, INC. (Idaho 1985). FACTS: Spokane Computer Services, Inc. (D) sent an employee named Young to purchase a surge protector used with computers. Young found units priced between $50 and $200, but none were suitable. He then contacted Konic Int'l Corp (P), whose salesman told him the price was "fifty-six twenty," which Young believed to be $56.20 but which P meant to be $5,620. Young prepared a purchase order for $56.20 and had it properly approved. he called in the order and purchase order number, and P sent the unit, which D installed. neither party discovered the price discrepancy until some time later. Once the discrepancy was discovered, D's president called P and stated that Young had no authority to order such equipment and that P should pick it up. P responded that the equipment belonged to D and that P would sue if D did not pay. D refused to pay, and P sued. After trial, the magistrate found for D because Young lacked apparent authority. P appeals.

ISSUE: Does a K arise when the parties each have a reasonable but different understanding of a material term of the agreement?

DECISION: No. Judgment for D affirmed.

(1) The lower court's decision was correct, but the agent's authority is not the determinative issue. Instead, this case must be resolved by the basic principle of contract law regarding the failure of communication.

(2) The Peerless case set forth the principle, now included in R2K § 20, that no contract exists when (i) each party attaches a materially different meaning to the parties' manifestations of mutual assent and (ii) neither knows or has reason to know the meaning attached by the other.

(3) The Peerless rule should be applied in limited circumstances. It should not apply where one party's understanding, because of that party's fault, is less reasonable than the other party's understanding. In this case, both P's and D's understandings were equally reasonable. Each gave a different meaning to the phrase "fifty-six twenty." Price was a material term. Hence, there was no meeting of the minds. p.486.

COMMENT: Due to the risk of unreimbursed reliance by one of the parties, the courts prefer to avoid applying the Peerless rule if there is any reasonable means to enforce the K. Courts tend to look well beyond the contract to determine the reasonableness of each party's interpretation, and may construe the K against the drafting party, or whichever party may have had reason to know the other party had a materially different interpretation.

B. MISTAKE. Mistake occurs where one or both parties state clearly what they mean in the contract, but they make a mistake concerning one of the essential terms of the contract. For example, A offers to build B a house for $25,000; but A added up the subcontractors' bids incorrectly (the offer should have been $30,000 instead of $25,000). Typical: errors in computation, mistake in use of words or symbols.

1) Unilateral mistake. One party may use words which are clear but make some unilateral mistake of fact, so that, had he known this mistake, he would not have expressed himself in the same way.

p. 487 BOISE JUNIOR COLLEGE v. MATTEFS CONSTRUC. CO., (Idaho 1969). FACTS: Mattefs Constr. Co. (D) submitted a bid of $141,000 on a construction contract bo be let by Boise Junior College (P), together with the customayr bid bond containing a promise to pay the difference between its bid and the next higher bid if D refused to enter the contract after the bid. D so refused because of a clerical error made in the bid, which affected the bid amount. P had expected to pay $150,000 for the job. The contract was awarded to the next hghest bidder and P brought this action to collect the difference on D's bond. The trial court held for D. P appealed.

ISSUE: Is a bidder entitled to equitable rescission of the contract because it submitted a bid containing a material clerical mistake?

DECISION: Yes. Judgment for D affirmed.

p.487 (1) One who errs in preparing a bid for a public works contract is entitled to the equitable relief of rescissino if he can establish the following conditions: (i) the mistake is material; (ii) enforcement of a contract pursuant to the terms of the erroneous bid would be unconscionable; (iii) the mistake did not result from violation of a positive legal duty or culpable negligence; (iv) the party to whom the bid is submitted will not be prejudiced except by the loss of his bargain with the party that made the mistake; and (v) prompt notice of the error is given.

(2) p.488 The mistake was material. The omission of the item represented 14% of the total bid price which, under the circumstances, is material.

(3) Enforcement of the bid is deemed unconscionable. Here the bidder will incur a substantial pecuniary loss (D would lose $10,000 on a $141,000 bid, which is substantial).

(4) The D was not grossly negligent, nor did he violate a positive legal duty. Gross negligence must be distinguished from clerical or inadvertent error. Here, D used the standard method of the reasonable bidder under standard pressures, which resulted in the error.

(5) P is not prejudiced nor has it suffered a substantial hardship. P expected to pay $150,000; the actual cost was $149,000.

(6) P received prompt notice of the error.

COMMENT: These mistake cases should be compared with the cases concerning irrevocable offers due to reliance, where mistake does not justify the revocation of an offer. Note that the court here also inferred that the offeree had actual notice of the error prior to its acceptance of the offer. Alternatively, the same result would apply where the offeree reasonably should have known that there was a mistake (e.g., one bid is for $2,000 while the others are int he $8,000 - $12,000 range). Finally, note that an alternative theory is that there can be no acceptance (under the objective theory of contract) if the offeree knows or should know that the offeror means something different than appears to be expressed in the offer (i.e., there is no meeting of the minds on the same terms).

? Determinative fact that bid on public project?

GENERAL RULES: (1) If the other party neither knew nor should have known of the mistake, there is binding K (based on the objective theory of Ks). There is some authority for the proposition, however, that if A has not changed its position in reliance before B informs A of B's mistake, then rescission will still be allowed.

(2) However, if A is aware (or should have been) of B's mistake, then there is no K. This conforms also to the objective theory of Ks - A knew what B really meant or did not mean.

MUTUAL MISTAKE. The general rule is that where both parties make a mistake concerning a material fact which is the subject of the K, then the K may be rescinded if neither party knew (or should have known) of the mistake. The R2K § 294 provides: "Where a mistake of both parties at the time a K was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the K is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 296. Section 296 provides that a party bears the risk of a mistake when:

(1) it is allocated to him by agreement of the parties; or

(2) he is aware, at the time of K, that he had only limited knowledge with respect to the facts to which the mistake relates, but treats his limited knowledge as sufficient; or (3) it is allocated to him by a term supplied by the court on the ground that it is reasonable in the circumstances to do so.

No assumption of risk when neither party entertains doubt about material fact -- BEACHCOMBER COINS, INC. v. BOSKETT, (N.J Super. 1979). FACTS: Beachcomber Coins (P), a retail dealer in coins, paid Boskett (D) $500 for a coin which purported to be a rare 1916 Denver dime. D had paid a total of $450 for the coin and two others of minor value. Both parties thought the coin was genuine, but when P tried to resell it, the American Numismatic Society labeled it counterfeit. P sued for rescission of its purchase from D. The trial court found that coin dealers customarily made their own inspection and assumed the risk of faulty inspection. P appeals.

ISSUE: Does one party assume the risk that the item transferred is of greater or lesser value than the amount paid when neither party has doubt about the true value?

DECISION: No. Judgment reversed for P.

(1) This is a classic case of mutual mistake of fact because both parties were under a mistake regarding a fact assumed by them as the basis for the transaction. In such a case, either party may rescind the K if the mistake materially alters his position.

(2) One party may assume the risk of a different value than that supposed by the parties at the time of the sale. For this assumption to be enforceable, however, the parties must know there is doubt and contract on that assumption; the risk becomes one of the elements of the bargain. P and D did not entertain such doubt, however.

(3) The evidence of custom of the trade was insufficient to support the trial court's finding that the parties contracted in reference to it and intended their agreement to be governed by it.

Rescission possible unless bargained away--LENAWEE COUNTY BOARD OF HEALTH v. MESSERLY (Mich. 1982). FACTS: Messerly (D) bought a three-unit apartment building from Bloom. Unknown to D, Bloom had installed an illegal septic tank on the property. Eventually, D transferred the property to the Pickles. The land contract form included a clause by which the buyer agreed to accept the property in its present condition, with no additional written or oral understandings. Later, when the Pickles introduced themselves to the tenants, they found raw sewage seeping out of the ground. The Lenawee County Board of Health (P) condemned the property and obtained a permanent injunction against human habitation of the premises. When the Pickels did not pay on the land contract, D cross-complained for foreclosure and a deficiency judgment. The Pickles counterclaimed for rescission against D. The trial court found for D on the basis of the "as is" clasuse. The court of appeals reversed, concluding that the mutual mistake of fact between the parties justified rescission. D appeals.

ISSUE: May a K be rescinded when there is a mistaken belief relating to a basic assumption of the parties uon which the contract is made, which also materially affects the agreed performances of the parties?

DECISION: Yes. Judgement reversed for P on other grounds.

(1) It is clear that the parties entered the land contract under a mutual mistake of fact; they both thought the property was habitable, while in fact it was not. One prior case held that rescission due to mistake was not allowed if it related only to the value of the property. Another case held that a contract may be rescinded if the mistake goes to the very essence of the contractual consideration. (That case involved the sale of a cow thought to be barren and worth $80, which was later discovered to be with calf, and worth $750.) The distinction between mistakes of value and mistakes of substance is unnecessarily confusing.

(2) The better rule is to permit rescission when the mistaken belief relates to a basic assumption of the parties upon which the contract is made, and which materially affects the agreed performances of the parties. Of course, a party may voluntarily assume the risk of the loss in connection with the case.

(3) Here, rescission would normally have been the proper remedy. However, in the contract, the Pickles assumed the risk of loss by accepting the "as is" clause.

II. CONSIDERATION AND ITS SUBSTITUTES

A. THE BASES OF PROMISSORY LIABILITY

1. A Bargain Contract -- A Promise Plus Consideration

a. Introduction. In order for a valid contract to exist there must be a mutual agreement (an offer and acceptance) and consideration (or some substitute for consideration). there are two essential factors for consideration:

1) The bargain element. In order for there to be sufficient consideration, each party to the contract must have intended to secure something from the other party that he was otherwise not legally entitled to--that is, each must be bargaining for something from the other party (an act, a promise to act, etc.). R2K § 71 defines consideration.

2) The value element. The second requirement for valid consideration is that the bargain-for element be legally sufficient.

b. The bargain element.

1) An executory promise--Kirksey v. Kirksey, 8 Ala 131 (1845). FACTS: P sued her deceased husband's brother (D) for breach of K. D invited P to bring the children and said that he would provide a home for them on his farm until the children had grown up. P moved the 70 miles to the farm; after two years D required them to leave. P won judgment for damages in the trial court; D appealed.

ISSUE: Is a gratuitous promise legally enforceable after P has suffered loss and inconvenience in relieance on the promise?

HELD: No. Judgment for P reversed. D gave a mere gift; there was no consideration for enforcement.

DISSENT: Loss and inconvenience to P is sufficient consideration.

COMMENT: This action came before adoption of the estoppel doctrine. It illustrates that, although there was no consideration given by P, injustice results unless P's action in reliance is treated as consideration (i.e., a substitute for bargained-for consideration). The result in this decision would have been reversed under modern courts. But it illustrates the basic concept that there is no contract where there is no bargained-for consideration (i.e., D was making a gift, not bargaining to get some act or promise from P). Thus, there was no consideration for D's executory promise.

2) Forbearance from acting -- LANGER v. SUPERIOR STEEL CORP., 105 Pa. Super. 579 (1932). FACTS: Superior Steel Corp. (D), by letter, promised Langer (P) a pension of $100/month for the rest of his life "as long as you...preserve your present attitude of loyalty to the company....and are not employed in any competitive occupation." D made the payments for about four years, then stopped. P brought this action of assumpsit to recover damages for breach of contract. The trial court held for D and P appealed.

ISSUE: Does an employee's restraint from seeking alternate employment constitute consideration for the employer's promise to pay a pension?

DECISION: Yes. Judgment reversed for P.

1. Is is often difficult to distinguish between promises creating legal obligations and mere gratuitous promises. A contract must be based on consideration; that is, there must be consideration bargained for in exchange for a promise (here, D's promise to pay the pension).

2. Tests of good consideration ask: whether the promisee, at the insistence of the promisor, has done, forborne, or undertaken to do anything real; whether he has suffered any detriment; or whether in return for the promise he has done something he was not bound to do or has promised to perform some act or has abstained from doing something.

3. Here P, a skilled and experienced employee, refrained from seeking competitive employment at the instance of D, which refraining was very beneficial to D; otherwise, such a provision in the promise would have been unnecessary. By receiving the payments, P impliedly accepted the conditions imposed by D and was thus restrained from doing that which he had a right to do. This was sufficient consideration to support a contract.

4. The contract is also enforceable on the theory of promissory estoppel. A promise which the promisor should reasonably expect to induce action or forebearance of a definite and substantial character on the part of the promisee and which does induce such action or forebearance is binding if injustice can be avoided only be enforcement of the promise. Promissory estoppel differs from equitable estoppel, as it rests upon a promise to do something in the future, while the latter rests upon a statement of present fact.

COMMENT: The difference between this case and Kirksey is that here the court felt that D really wanted what it got from P (i.e., it was valuable to D to have P not seek competitive employment). Thus, there was tangible benefit to D, or something bargained for, not just a gift.

3) Gratuitous promise, no consideraiton -- STONESTREET v. SOUTHERN OIL CO. (N.C. 1946). FACTS: Stonestreet (P) leased a lot to Southern Oil Co. (D) for a filling station, with an option to purchase. The lease stipulated that P would supply the station with water, insofar as its present supply allowed it to do so. If P's well failed to supply ample water, D would be responsible for getting more water. The next year D needed more water. P and D engaged Mr. Fisher to drill a well, each agreeing to pay one-half the cost. D paid its half in case and P credited Fisher's grocery account to the extent of P's one-half obligation. At the time, D orally agreed, it it exercised the option to buy, to pay P its one-helf drilling cost. D later exercised the option but refused to pay the one-half cost. The trial court held for P over D's pleading of no consideration for the promise. D appealed.

ISSUE: Must a promise be supported by consideration to be enforceable?

HELD: Yes. Judgment for P is reversed for D.

1. In order to have an enforceable contract, there must be consideration given for the promises made. It consists of some benefit or advantage to the promisor, or some loss or detriment to the promisee. Also, there is consideration if the promisee, in return for the promise, does anything which he is not legally bound to do, or refrains from doing anything which he has a right to do, whether or not there is any actual loss or detriment to him or actual benefit to the promisor. However, a bare promise, whithout more, lacks consideration and is unenforceable.

2. P did not give anything to D in return for D's promise; D's promise to pay one-helf the drilling cost was no more than a gratuity. The agreement to dig the well was written and complete. D's exercise of its option left both parties exactly where they would have been under the original lease contract.

COMMENT: There was a valid contract, supported by consideration, between P and D for the drilling of the well. But there was no additional benefit to D from his promise to pay one-helf of the drilling expenses incurred by P, and P did not incur any detriment as a result thereof. Hence, there was no consideration to D for the promise.

R2K § 71: (1) To constitute considertion, a performance of a return promise must be bargained for. (2) A peformance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee to exchange for that promise. (3) The performance may consist of (a) an act other than a promise, (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation. (4) The peformance 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.

THOMAS v. THOMAS, 114 Eng. Rep. 330 (1842). FACTS: The husband of Eleanor Thomas (P), in the presence of witnesses, declared shortly before his death that he wished his wife to have their dwelling house during her life or as long as she continued a widow, or 100 pounds. The declaration, however, was not reduced to writing, but the executors, wishing to fulfill the testator's desire, entered into an agreement with the widow whereby she could occupy the dwelling house during her life or so long as she remained a widow, but with the requirement that she pay l pound/year to the executors toward the ground rent and keep the dwelling house and premises in good and tenantable repair. Then D, the surviving executor (one brother died), brought an action of ejectment, and removed P from possession. P appealed and brought an action of assumpsit on the agreement, to require a conveyance to her in accordance with its terms.

ISSUE: May a court assess the adequacy of consideration to determine if a K exists?

HELD: No. Judgment for P.

(1) While the motive of P's deceased husband was insufficient consideration for the agreement between P and the executors, the provision in the subsequent agreement that P pay 1 pound/year toward the ground rent, and the obligation to keep the dwelling house and premises in good and tenantable repair, constituted consideration sufficient to bind the executors to the agreement and to require conveyance of the dwelling house to P in accordance with another provision of the agreement.

COMMENT: As the court points out in Thomas, motive is not the same thing as consideration, and motive or intention alone will not support enforcement of a promise. Here, however, the obligation to pay 1 pound and keep the premises in good and tenantable repair was both a benefit to the promisee (D) and a detriment to the promisor (P). While it might be argued to be inadequate, the courts may not inquire into the amount or adequacy of the consideration, only its sufficiency (i.e., does it constitute a new obligation that did not exist prior to the execution of the agreement). Note, however, that R2K § 71 argues that nominal consideration is not bargained-for consideration and is therefore insufficient to sustain a contract; e.g., A states that he will give B $5,000 for a worthless book. In most instances the apparent bargain is really a gift from A in the form of a contrct. The Thomas case illustrates the RK (first) position that nominal consideration may be sufficient.

p.129 The R2K position refusing to enforce a contract with nominal consideration finds support in some academic circles and in much case law. "The promise for $1 finds case law support in a business transaction. But the business transaction involves a "bargain," other consideration than the dollar, and a necessary reliance on the promise in a fast-moving commercial world. Thus the business transaction is very easily distinguished from the conveyance of Blackacre for $1, which is merely a formal expression for an essentially gratuitous transfer."

HAMER v. SIDWAY & JONES v. Star Credit Corp.

p. 149-150 Commercial value. Normally a court will not inquire into the adequacy of consideration in terms of commercial value since it wants the parties to make their own contract, each party determining what is valuable to him. Exception for equitable relief. Where P seeks specific performance, then equity requires a showing of fairness of the consideration given for the promise before a court will enforce the contract.

Fraud, mistake, duress. It may be a defense to a contract that the contract was induced by one of these three. In the case of fraud or duress (which might result in one party taking grossly disproportionate consideration from the other party), the courts will look into the contract and the adequacy of consideration. Unconscionable contracts. In addition, an "adhesion contract" (one that is unconscionable to enforce) will not be enforced. This is typically a situation where the consideration given by one party is grossly disproportionate to what is given by the other party.

Inadequate consideration. Another exception is where the consideration is totally devoid of value, or nearly so (i.e., nominal). In this regard, a majority of the courts allow a party to prove that in fact no consideration was ever actually received.

(1) Options, etc. An exception to this exception is generally made for options. Here the smallness of consideration for an option will usually not make it insufficient if it was what the party actually bargained for.

p. 150 IN RE GREENE (S.D. N.Y. 1930) FACTS: Claimant, a woman, lived in adultery for several years with a married man, who went bankrupt. During this time, the man bought her a house and put the title in her name. Claimant testifies that bankrupt promised to marry her as soon as he obtained a divorce. This the bankrupt denies. When the parties discontinued their relationship they executed a written instrument under seal by which the bankrupt promised to pay claimant $1,000/month for life, assign her a $100,000 life insurance policy and keep up the premiums, and to pay the rent for four years on an apartment leased by claimant. The instrument also stated that the bankrupt had no interest in or responsibilities for the house he had given claimant. The claimant on her part released all claims she held against the bankrupt. The instrument also recited as consideration the payment of $1 by the claimant "and other good and valuable consideration." The bankrupt kept up payments for a while and then stopped when he filed for bankruptcy. Claimant made this claim for $375,700 based on the alleged K. The trustee in bankruptcy objected to the claim but the referee held the claim valid.

ISSUE: Must a court enforce a promise that has nominal consideration given in exchange? NO. Referee reversed.

1. The $1 will not support an executory promise to pay thousands of dollars.

2. "Other goods and valuable consideration" will not serve as consideration when nothing good or valuable was actually given.

3. As to the release of claims by claimant, release from imaginary claims is not consideration for a promise.

4. The bankrupt's immunity from payment of taxes on the house cannot be consideration because he was never chargeable for them.

5. The fact that the parties intended to make a valid agreement means nothing. "The parties may shout consideration to the housetops, yet unless consideration is actually present, there is not a legally enforceable contract."

6. The presence of a seal simply means consideration is rebuttably presumed. There is adequate rebuttal here.

Promise to forgo lawsuit -- FIEGE v. BOEHM (Md. App. 1956) FACTS. Boehm (P), who had had sexual relations with Fiege (D), got pregnant and claimed that D was the father. D agreed to pay the expenses of birth plus make regular payments to raise the child. In return for the promise, P agreed not to bring bastardy proceedings against D. After the child's birth, blood tests revealed that D could not have been the father. D stopped making the agreed-upon payments. D was acquitted of criminal charges arising from P's complaint, but a civil jury awarded P damages based on D's promise to pay P. D appeals.

ISSUE: Does a promise to make support payments, given in return for a promise not to sue for bastardy where both parties believe that a cause of action exists, constitute a binding contract?

DECISION: Yes. Judgment for P affirmed.

1. It is not sufficient consideration to forbear to bring an action which the party knows or reasonably should know is not a valid claim. p.157 "A release from mere annoyance and unfounded litigation does not furnish valuable consideration."

2. Here P believed in good faith that the claim against D was valid. Although bastardy prosecutions are treated as criminal, they are civil in nature; thus, the parties did not contract to avoid a criminal prosecution, which would violate public policy.

p. 157 forebearance to sue for a lawful claim or demand is sufficient consideration.

COMMENT: The rationale for this decision, where nothing of value is really given up as consideration for D's promise, is public policy. The policy is to encourage settlement of lawsuits on an amicable basis; this promotes agreement between the parties and saves the public the time and expense of lawsuits.

Preexisting Duty Rule: modification and discharge. Where A offers B $500 to perform some act, and B is already under a preexisting duty to perform that act for the benefit of A, B's performance is not sufficient consideration to support A's promise. This is true since B's performance imposed no new legal detriment on B -- he is already under the duty to perform the act. There are, however, a number of exceptions to the general rule.

MUTUALITY OF OBLIGATION

1) Requirement of consideration on each side of the contract. For a contract to be enforceable, it must appear that both parties to a contract have given legally sufficient consideration (so that both parties are bound; if both are not bound, neither is bound).

a) Unilateral contracts. In a unilateral contract the act that the offeror (A) bargains for from the offeree (B) must be sufficient consideration for the promise that he (A) makes. That is, the bargained-for act must (in the majority view) impose a legal detriment on the offeree (B) or (in the minority view) it must confer a legal benefit on the offeror (A). And, of course, the offeror's (A's) promise is the legal benefit on the offeror (A). And, of course, the offeror's (A's) promise is the consideration for the offeree's act and must impose a legal detriment on the offeror or (in the minority view) confer a legal benefit on the offeree.

b) Bilateral contracts: mutuality of obligation.

In a bilateral contract, A makes a promise conditioned on a return promise from B. The return promise is the consideration for A's promise and vice versa. Both promises must be binding promises of the contract is void for lack of consideration. This is the "mutuality of obligation" doctrine.

Sometimes B can promise something without sustaining a legal detriment, e.g., A promises a gift to B and B promises to accept it. Courts look to whether the performance promised by B is sufficient consideration.

c) Illusory promises: promises reserving to the promisor the power to determine performance. If the promisor (A) reserves expressly or by implication an alternative by which he can escape performance altogether, he has really not promised anything at all. Thus, the promisor's promise is "illusory" and such a promise is not sufficient consideration for the return promise by the promisee. Therefore, there is no mutuality, and no valid contract exists.

REHM-ZEIHER CO. v. F.G. WALKER CO. (KY 1913). FACTS: Rehm-Zeiher (P), a whiskey retailer, entered a contract with Walker (D), a distiller, by which D would supply P with designated quantities of whiskey over corresponding consecutive years. The contract also provided: "If for any unforeseen reason Ps find that they cannot use the full amount ... D agrees to release them from the contract for the amount desired by Ps." During the first two years Ps only asked for a fraction of the contractually designated amounts. Then in the third year Ps demanded the full quantity, which D refused to deliver because of increased price. Ps then brought this action for breach of contract. The trial court directed a verdict for D, declaring that the contract was lacking in mutuality of obligation. P appealed.

ISSUE: Does a contract which allows one party to act with unbridled discretion lack mutuality of obligation?

HELD: Yes. Judgment for D affirmed.

1. A requirements contract, where A agrees to furnish all of B's needs in a certain item, is not lacking in mutuality, as B may require A to furnish all of the item B needs, and A may require B to take from A all of the item B needs.

2. However, if the contract allows B to take only so much as B desires, there is no such mutuality of obligation. Such is the case in the present contract, where P qualified their obligation to take with the completely unqualified "unforeseen reason." This qualification left the amount Ps would take entirely to their absolute discretion.

3. If D had brought suit in any one year to compel Ps to take the full amount specified in the contract, it is clear that Ps could have avoided liability. In short, D was not obligated to furnish any whiskey, nor were Ps obligated to take any. There was no mutuality of obligation.

COMMENT: In a contract that requires A to buy all I "need" from B, there is mutuality and the promise is not illusory, since if A does buy he must buy from B. However, in this case the promise was essentially "I will buy all that I want to buy."

3) Requirements contracts. A promise by A to "buy all that I require" from B is good consideration, since A has incurred some detriment (a limitation on his freedom of action; if he has requirements, he must but them from B).

MCMICHAEL v. PRICE (OK 1936). FACTS: Price (P) was just entering the business of selling sand. McMichael (D) agreed to furnish all the sand of specified quality that P could sell for 10 years for 60% of the prevailing market price. D then refused to provide the sand. P sued for breach.

ISSUE: Where P is just entering business and has no requirements as yet but D agrees to sell to P all of P's requirements, is there mutuality of obligation?

HELD: Yes. Judgement for P affirmed.

1. P had no business and might have escaped liability to buy from D by not engaging in the sand business. But the contract was drafted on the assumption that P was in business and would have requirements and would but these requirements from D.

2. This is sufficient consideration to support D's promise; there is mutuality and a valid consideration.

4) Implied promises. Even where a bilateral contract apparently contains no promise at all on one side (i.e., there is a complete lack of mutuality), the contract may still be upheld if the surrounding facts and the nature of the agreement fairly imply a promise of performance by that party.

a) Uniform Commercial Code. UCC 2-306(2) indicates that in an exclusive sales contract, the manufacturer impliedly agrees to use his best efforts to supply the goods and the distributor impliedly agrees to use his best efforts to promote their sale.

Exclusive contract: reasonable efforts implied -- WOOD v. LUCY, LADY DUFF-GORDON (NY 1917) FACTS: Wood (P) was given an exclusive contract to place Lucy's (D's) endorsement on the designs of other clothiers, and to place D's own designs on sale and to license others to sell them. D was to receive one-half of P's profits. The contract indicated that P had an organization capable of performing the contract, but it did not expressly indicate that P would perform. P sued D here for breach of the contract on the basis that D put her endorsement on clothes of a competitor without P's knowledge and with no share of the profits to P. The intermediate appellate court reversed the trial court's denial of D's motion for judgment on the pleadings. From a dismissal of the complaint, P appeals.

ISSUE: Where P did not specifically promise to use reasonable efforts to promote D's goods, and all compensation to D under the contract is to come from such efforts, is there a valid promise by P?

HELD: Yes. Reversed for P.

1. A promise that P will use reasonable efforts to promote D's goods is fairly implied here. The circumstances of the contract make such an implication reasonable: it was an exclusive dealing contract D gave to P; any return to D was to come from P's profits. This meant that if D was to get anything at all, P had to perform.

COMMENT: Here the court construed the contract to give effect to the reasonable commercial expectations of the parties.

"Satisfaction" as a condition precedent--OMNI GROUP, INC. v. SEATTLE-FIRST NATIONAL BANK. (Wash. App. 1982). FACTS: Omni Group, Inc. (P) contracted to purchase property from the Clarks. The earnest money agreement specified that the sale was subject to P's receiving a feasibility report. If the report was satisfactory to P, P had to notify the Clarks of P's acceptance. Otherwise, the transaction was null and void. After some negotiation about terms and price, P agreed to certain additional terms proposed by the Clarks. Later, however, the Clarks refused to proceed with the sale. P sued to enforce the earnest money agreement. The trial court held that P's promise was illusory and entered judgment for the Clarks. P appeals.

ISSUE: Does a condition precedent to a promisor's duty that the promisor be "satisfied" with some aspect of the deal render the promise illusory?

HELD: No. Judgment reversed for P.

1. An illusory promise cannot constitute consideration for a contract, but a promise given in exchange for a promise is not illusory merely because it is dependent on a condition precedent. The language in the condition precedent here required P to obtain a feasibility report, and then to be satisfied by it before acceptance was required. This condition is governed by a duty of good faith; it is not illusory.

2. The satisfaction requirement may be objective or subjective. In either case, satisfaction is a question of fact, so the promise is not illusory. There may be numerous factors to assess in evaluating such a report for satisfaction, but the promisor's duty to exercise judgment in good is an adequate consideration to support the contract. P does not have unfettered discretion to avoid the contract, it can only cancel by failing to give notice if the report is not satisfactory.

Illusory promise -- SPOONER v. RESERVE LIFE INSUR. CO. (Wa. 1955). FACTS: Reserve Life Insur. Co. (D) sent a bulletin to all its agents stating that it was granting a bonus commission based on sales production, the bonus to be a "voluntary contribution by the company which could be discontinued at any time without notice." Spooner (P), an agent, met the requirements but D refused to pay. P sued for breach of contract on the basis that it relied on D's promise. Judgment for P. D appeals.

ISSUE: If a promise to pay is accompanied by a reservation of the right to withhold payment, is the promise enforceable?

HELD: No. Judgment reversed for D.

a) A (gratuitous) promise which the promisor should reasonably expect to induce action or forbearance (inaction) of a definite and substantial character on the part of the promisee, and which in fact does induce such action or forbearance, may be binding if injustice can be avoided only by enforcement of the promise. This is known as promissory estoppel.

b) However, there must be a real, not illusory, promise to enforce. Action in reliance upon a supposed promise creates no obligation. A promise may be illusory because of indefiniteness or because provisions therein make it entirely optional or discretionary on the part of the promisor. That was the case here. D's promise was wholly illusory. P's reliance on it was not reasonable because D stated that it retained the right to discontinue it at any time.

Improvement of another's land--DUNCAN v. AKERS (Ind. App. 1970). FACTS: The Duncans (Ds) owned a lot adjacent to one owned by the Akerses (Ps). The two lots looked identical. Ds hired a contractor to build a home on their lot. The surveyor mistakenly places stakes on Ps' lot, and the house was partially constructed before Ps notified the contractor. Ps filed an ejectment suit, and Ds counterclaimed for imposition of an equitable lien for the value of the improvement. The trial court granted summary judgment for Ps and Ds appeal.

ISSUE: May an innocent improver of another's real estate who acts under a mistake obtain an equitable lien on the true owner's property?

HELD: Yes. Judgment reversed for Ds and case remanded.

1. The Occupying Claimant's Act allows for reimbursement when improvements have been made under situations which would not permit application of longstanding equitable principles. The statute is not an exclusive remedy (as Ps argue).

2. Early Indiana cases would not have allowed Ds to recover anything, but the modern trend in other states has been toward liberalizing the common law rules in order to allow some recovery for innocent improvement of another's land. A court of equity has the flexibility to deal appropriately with such situations. Assuming Ds can prove they are entitled to equity by showing their innocence in placing the house on Ps' premises, they are entitled to a trial on their claims for equitable relief. An equitable lien is a permissible remedy.

2. Formal Contracts -- A Promise Plus a Seal or Other Form.

At common law, a promise under seal was enforceable at law without further consideration (in an action for damages); however, equity courts would not grant specific enforcement of the contract unless there was sufficient consideration in addition to the seal. Most states today have statutes which abolish the effect of a seal; however, in some states a seal still raises a presumption of valid consideration, and some state still recognize the common law effect of a seal.

As a substitute for consideration. Since a seal on a contract does not constitute anything of real legal value, many commentators on contract law treat promises under a seal under the topic of "substitutes for consideration" (i.e., things which may make consideration unnecessary for an enforceable contract).

3. Moral Obligation -- A Promise Plus Previous Conferral of a Benefit

FARNSWORTH, CONTRACTS 54 - 61 (2ED. 1990)

General Principle: past consideration consideration.

Exception: "moral obligation" - debtor's promise to pay a debt barred by the statute of limitations.

Today scope of exception extends to a promise to pay any antecedent contractual or quasi-contractual debt.

Exception for (1) debt discharged in bankruptcy proceedings, (2) voidable promises (minor's promise).

Example: Mills v. Wyman. Someone takes care of ill adult child. Father in gratitude says he will pay the bills, then he reneges on offer. Ct. held legally unenforceable.

Arguments for and against moral obligation: 1) must be clearly defined class of promises, not ones that vary with each individual's view of moral obligation.

Example in favor: Webb v. McGowin. Webb saved McGowin's life. McGowin offered to pay $15/2 weeks. Continued payment for 8 years until his death. His executors refused to continue. Alabama Ct. of Appeals enforced saying McGowin "having received a material benefit from the promisee, [was] morally bound to compensate him for the services rendered."

Estate of Hatten Promise to pay woman who furnished meals and transportation held enforceable on ground that "a receipt by promisor of actual benefit will support an executory promise,...where promisor originally received from the promisee something of value sufficient to arouse a moral as distinguished from a legal obligation."

R2K § 86: (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.

New York statute: "A written and signed promise shall not be denied effect as a valid contractual obligation on the ground that consideration for the promise is past or executed, if the consideration is expressed in the writing and is proved to have been given or performed and would be a valid consideration but for the time when it was given or performed."

Under the New York statute, the father's promise in Mills v. Wyman would be enforceable because it was made in a letter which presumably mentioned past services.

In the notes to R2K the promise would be unenforceable because "the enrichment of one party as a result of an unequal exchange is not regarded as unjust"

3. PROMISSORY ESTOPPEL. A promise may be enforceable even if not supported by consideration when it is made to induce action on the part of the promisee.

Basic Rule--RICKETTS v. SCOTHORN (Neb. 1898). FACTS: Before he died, John C. Ricketts gave his granddaughter, Katie Scothorn (P), a promissory note which declared his promise to pay her $2,000. He told P at the time of delivery of the note that none of his other grandchildren worked, and that she would not be obliged to work any longer. P abandoned her work shortly thereafter. The grandfather died after paying one year's interest on the note. P then brought this action against Andrew Ricketss (D), executor of her grandfather's estate, for recovery of the note. D pleaded want of consideration, but the trial court held for P. D appealed to the Supreme Court of Nebraska.

ISSUE: May a person who made a promise, thereby inducing the promisee to act in reliance on the promise, later deny liability because of lack of consideration?

HELD: No. Judgment for P is affirmed.

a) The evidence clearly shows that the note was not given in consideration of P promising, doing, or refraining from doing anything. Ordinarily such promises are not enforceable even when put in the form of a promissory note.

b) However, D is equitably estopped from pleading want of consideration. Equitable estoppel or estoppel in pais is defined to be a "right arising from acts, admissions, or conduct which have induced a change of position in accordance with the real or apparent intention of the party against who they are alleged." (Note that equitable estoppel does not require the act to be in the form of a promise, thus differentiating it from promissory estoppel.)

c) Having intentionally influenced P to alter her position for the worse on the faith of the note, it would be unfair to deny P recovery on the note.

COMMENT: equitable and promissory estoppel are separate concepts, although the terms are sometimes used interchangeably. Only the latter may be used "offensively" to obtain damages. It requires the existence of a promise. Equitable estoppel, on the other hand, is a defense based upon a representation of existing or past facts as opposed to a promise.

COMMENT: R2K 90 has moved to liberalize the doctrine of estoppel, applying it to more situations. It eliminates the requirement of "substantial reliance"; where reliance is less than substantial, partial enforcement of the contract may still be granted. Also, the doctrine is now applied to bargain situations as well as gift situations.

Gratuitous pension plans -- FEINBERG v. PFEIFFER CO. (Mo. 1959). FACTS: Feinberg (P) had been employed by Pfeiffer Co. (D) for 37 years when the Board of Directors promised her a pension of $200 per month whenever she desired to retire (she was then 56). A year later P retired and received the money until she was 63, when the new management of D stopped payment. P is unemployable now (she has cancer). P sued to collect; judgement was given for the amount due under the pension. D appeals.

ISSUE: If an employee, relying on a promise of a pension, does not work during years when she is employable, is she entitled to enforce the promise?

HELD: Yes. Judgement for P affirmed.

There is sufficient reliance by P. D should have reasonably anticipated such reliance. It would be unjust to P not enforce D's promise. It makes no difference whether P learned of her disability before or after D stopped the payments -- it is still unjust here not to enforce D's promise.

COMMENT: Query the result in this case if P had been able to work at the time when D stopped the payments. If this had occurred, it probably would not have been unjust not to enforce the promise by D.

QUASI-CONTRACTS

Alternatives to Formal Contracts--BAILEY V. WEST (R.I. 1969). FACTS: West (D) contracted for the purchase of a race horse (Bascom's Folly) from Strauss. D's trainer found the horse to be lame, and D ordered the return of the horse to Strauss, who refused delivery. The van driver called D's trainer for instructions, and the horse was taken to Bailey's (P's) farm where the horse was cared for for five months. P, not knowing for sure who the true owner was, sent bills to both Strauss and D. P sued D for the reasonable value of P's services. The trial court found an "implied in fact" contract between P and D and held for P. Both P and D appealed (P for insufficiency of the award).

ISSUE: May a person be held liable for the value of services he never requested or wanted?

HELD: No. Judgment for P is reversed for D.

1) There wa no "implied in fact" contract between the parties; there was no mutual agreement and "intent to promise" between P and D so as to establish such a contract.

a) Though P knew there was a dispute as to ownership, he did not know with whom he had a contract (D or Strauss).

b) P had never had any business transactions with D.

c) When the horse was found lame, D shipped it back to the seller, not to P.

2) There was no quasi-contract between the parties. In quasi-contracts, the obligation arises not from consent of the parties (as in the case of contracts express or implied in fact) but from the law of justice in preventing unjust enrichment. The essential elements of quasi-contract are: (i) a benefit conferred upon D by P; (ii) appreciation by D of such benefit; (iii) acceptance and retention by D of the benefit under such circumstances that it would be unfair to retain the benefit without payment of the value thereof; and (iv) P must not be acting as a "volunteer" in conferring the benefit. If performance is rendered by P without request by D, it is unlikely D is under an obligation to pay compensation.

3) The law applied to these facts shows no quasi-contract. Indeed, D upon receipt of P's first bill, immediately notified P that D was not the owner of the horse and would not be responsible for its keep.

COMMENT: This case illustrates the bases for formation of a contract. An express contract may be oral or written and consists of an offer, acceptance, and bargained-for consideration. An implied-in-fact contract is one inferred as a matter of reason and justice from the acts, conduct, or circumstances surrounding a transaction, rather than one formality or explicitly stated in words. And a quasi-contract is one implied in law -- an obligation imposed on a person not because of his intention to contract, but because the circumstances between the parties are such as to justify in one party a right and in the other a duty.

A "quasi-contract" is not a true contract, since there is no mutual assent bargained for and received by the parties (no bargain consciously made between A and B). Rather, the law creates or implies a contract. This is normally done where a benefit has been received by the D from P under such circumstances that in equity the D ought to compensate the P therefor. Thus, the law implies a promise by D to pay the reasonable value of the benefit which has been conferred on him by the P. The purpose of the implied promise is to avoid unjust enrichment of the D at the P's expense.

Elements of quasi-contract recovery: 1) P has rendered services or expended property which confers a benefit on the D. 2) P rendered such performance with the expectation of being paid. 3) P was not acting as an intermeddler or "volunteer." 4) to allow the D to retain the benefits without paying the P would result in the unjust enrichment of the D at the P's expense.

Alternative to contract remedy. Quasi-contract is often available as an alternative to enforcement of the express contract. For example, where the P has built a house for the D and the D refuses to pay, the P may sue for the reasonable value of the benefits conferred on the D, or the P may sue for damages under the contract between the P and the D.

Measure of recovery.

1) Unjust enrichment. Normally the recovery is measured by the reasonable value of the benefit conferred on D.

2) Detriment to P. But modern courts have also recognized that in some instances the proper recovery is the detriment suffered by the P (and hence the recovery is the reasonable value of the services or property expended by P). This may be critical in situations where the D has really received no benefit, although the P has suffered a detriment. Note that normally where the action is brought by a P who is in default under a contract, or where the suit is barred by the Statute of Frauds and P is suing for the benefits conferred under such an enforceable contract, then the measure of recovery is limited by the contract price, no matter what the detriment has been to the P.

III. THE REQUIREMENT OF A WRITING

A. THE STATUTE OF FRAUDS

In most instances oral contracts are valid. However, by statute, a few types of contracts are required to be in writing, or at least evidenced by a signed, written memorandum of the essential terms. The purpose of the Statute of Frauds is to prevent fraud and perjury as to the actual terms of the contract and to provide better evidence of the contract terms in the event of dispute.

Types of contracts which must be in writing.

Guarantee contracts. Promises to answer for or discharge the debts of another must be in writing to be enforceable. This applies only to promises made (a) by one who is not presently liable for the debt (the suretyship clause); (b) to a creditor, and (c) in order to discharge the present or future obligations of a third person (i.e., the present debtor).

a) Promises to debtor. Note that if the promise is made to the debtor ("I'll pay your obligation to X") and is supported by consideration, it is enforceable even though it is oral. R2K § 191.

b) Primary debt by promisor. The statute does not apply to "primary promises." This means that if the underlying contract was between the promisor and the creditor, the promise is enforceable although oral. [R2K § 182] Thus, if A orally tells C to send $100 of goods to B and "send the bill for $100 to me," the primary contract is between A and C and not between A and B. B is merely a third party beneficiary and the contract is enforceable.

c) Exception -- where the guarantor's main purpose is to benefit himself. Even where the promise is "collateral," if it appears that the promisor's main purpose is guaranteeing the obligation of another was to secure an advance or pecuniary benefit for herself, her promise is enforceable even though not in writing. [R2K § 184].

Advantage to the guarantor -- STATE AUTOMOBILE INSUR. CO. v. WILSON (Ky. 1955). FACTS: State Automobile Ins. Co. (D) had issued a liability policy on the car in which three persons (the Saddler family) were riding. They were injured when the car was involved in an accident. The Wilsons (Ps), father and son who were doctors, consented to treat the Saddlers at the hospital. At the hospital D's claim agent told Ps to do everything possible for the injured in order to minimize D's liability and said that D would pay for Ps' services. Also, on several occasions, D requested Ps' bills be sent to D. Ps brought this action to recover the value of their services. D countered that the alleged contract was void within teh Statute of Frauds. The trial court held for Ps. D appealed.

ISSUE: Must a contract for the benefit of the promisor be in writing?

HELD: No. Judgment for P affirmed.

1. There was sufficient evidence to find an express contract, i.e., implied-in-fact. A categorical promise need not be present in order to find such, but only the facts and circumstances that show that both parties intended and understood that compensation would be made for services rendered.

2. Regarding whether or not the contract is within the Statute of Frauds, the rule is that the Statute of Frauds is not applicable where the consideration redounds to the benefit of the promisor, or the promise is made to protect some interest of the promisor; i.e., if the contract is original vis-a-vis a collateral agreement.

3. In the present case, the contract is original.

The Executor-Administrator Clause

The promises of an executor or administrator "to answer for damages out of his own estate" or out of the decedent's estate must be in writing.

Contracts which are incapable of being performed within one year must be in writing. This provision refers only to contracts which, by their terms, cannot by any possibility be performed within one year from the making thereof. The one-year period begins from the date the contract is made, not when performance is promised.

Contracts for more than one year which include termination provisions -- NORTH SHORE BOTTLING CO. v. C. SCHMIDT & SONS, INC. (N.Y. 1968). FACTS: North Shore Bottling Co. (P) entered into an oral agreement with Schmidt and Sons (D) whereby "P became the exclusive wholesale distributor in Queens County of D's beer ... for as long as D sold beer" in that county. P went to great expense developing the distributorship. Shortly thereafter, within a year's time, D designated another distributor in place of P. P brought this action for damages for breach of contract. D argued that the agreement was void within the Statute of Frauds. The trial court granted D's motion for summary judgment. The appellate court reversed. D appealed.

ISSUE: If a contrct can be fully performed within a year, does it fall within the Statute of Frauds?

HELD: No. Judgment of appellate court affirmed for P.

1. The Statute of Frauds requires an agreement to be in writing if by the terms thereof it is not to be performed within one year from the making thereof. The Statute of Frauds only applies to agreements which are, by express stipulation, not be performed within a year. It does not apply to an agreement which appears by its terms to be capable of performance within a year.

2. Since the present agreement was susceptible to performance within a year, it falls outside the bar of the Statute of Frauds. Although the parties may have expected the agreement to last over a long period, they contemplated its possible termination by action within the year; i.e., D could stop selling beer in that county within one year.

COMMENT: Where there is some contingency that could terminate the contract within one year (even though it appears that the contract will go on for more than one year), the contract is outside the Statute of Frauds (i.e., "to perform until the War is terminated").

Exception for fully executed contract -- MASON v. ANDERSON (Vt. 1985) FACTS: Mason (P) loaned $5,000 to Miner pursuant to an oral agreement. Miner agreed to make monthly payments of $200. Miner paid for over a year, totaling $1,100, and then died. His adminstratrix, Anderson (D), rejected P's claim for the balance of the loan. P sued. D moved for summary judgment, asserting the Stat. of Frauds. The trial court granted summary judgment for P and D appeals.

ISSUE: Is a paryt who has fully performed his obligations under an oral agreement that could not be completed within a year barred by the Statute of Frauds from asserting a claim based on the contract?

HELD: No. Judgment reversed for D.

1. The Statute of Frauds requires a writing for any agreement not to be performed within one year from its making, but there is an exception when one party has completed performance. This exception has not been followed in Vermont.

2. The Statute of Frauds is intended to protect a party against having to comply with an agreement he never made. In this case, the Statute would perpetrate a fraud rather than prevent one, since P fully performed in reliance on Miner's agreement to repay the loan. Prior cases rejecting the exception are hereby overruled; the one-year rule does not prevent P from proving the existence of the agreement by parol evidence.

Parol Evidence: where an agreement has been reduced to writing which the parties intend as the final and complete expression of their agreement, evidence of an earlier oral or written expressions is not admissible to vary the terms of the writing. Collateral oral agreements admitted which do not conflict with written terms or cover subjects outside the written agreement.

Contracts for the sale of goods. A contract for the sale of goods for > or = $500

must be in writing. Note that the floor price above which a writing is required exceeds $500 in several jurisdictions.

a) Goods defined. "Goods" include all tangible movable property. It does not include intangibles, securities, or contracts for labor and/or other services.

(1) Note that often a contract requires that goods be supplied as part of rendering services. The issue is whether the contract is primarily one for the sale of goods or for the rendering of services.

(2) Thus, an oral contract for the service of constructing a building might be one primarily for services, and even though material worth more than $500 are supplied as part of the job, an oral contract would be enforceable.

b) Exceptions. Oral contracts for the sale of goods of more than $500 will be enforced in the following situations:

(1) Where the buyer receives and accepts all or part of the goods (the contract is enforceable as to the goods accepted).

(2) The buyer gives something in partial payment for the goods (the contract is enforceable as to the goods paid for).

(3) The contract calls for the manufacture of special goods for the buyer and the seller has made a substantial beginning in the manufacture thereof.

(4) The contract is between merchants, and within a reasonable time a written confirmation of the oral contract is sent by one of the parties and the party receiving it does not send a written objection within 10 days.

(5) The contract is admitted in court pleadings or testimony by the party against whom enforcement is sought.

Related provisions. The UCC also has separate provisions which require a written contract for transactions involving "intangibles" and "securities."

SALVIDORE DALI CASE

Contracts for the sale of an interest in land must be in writing.

a) Leases are normally covered by the Statute of Frauds; however, many states provide by statute that leases for one year or less do not have to be in writing.

b) An "interest" in land. It is often difficult to determine what is included under the term "interest in land." Fixtures, liens, growing timber, etc. have all been held to be an "interest" in land.

c) Part performance doctrine. Where the P brings an action for specific performance (and not an action at law for damages), part performance of the land sale contract may take it out of the Statute of Frauds. Thus an oral contract could be enforced. Generally applied in favor of purchasers and not vendors.

Satisfaction of the Statute. Where a contract is required to be in writing, it ordinarily must be in a permanent, written form and signed by the party to be charged. However, this does not mean that the writing must be a fully integrated, formal contract.

1) Memorandum of essential terms.

a) Requirements. A memorandum of the essential terms of the agreement (e.g., letters, telegrams, or even mere notations in the private books of one of the parties which were never communicated to the other) will satisfy the Statute, if the memorandum contains the following: parties, subject matter, terms and conditions, recital of consideration, and signature of the party sought to be charged. A party's initials, seal, etc., may be sufficient.

It is immaterial where the signature occurs. The name can be printed. A check, telex, receipt, invoice, letter, telegram may qualify for the above rule. The signature requirement has not been applied with rigor.

b) Integration of documents. The requisite writing may be composed of several documents, provided each document refers to or incorporates the others, or they are otherwise integrated (i.e., physically attached). R2K indicates it is sufficient if the documents involved simply refer to the same subject matter.

c) The UCC position. Under the UCC even less completeness is required in contracts for the sale of goods. There need only be some writing sufficient to indicate that a contract for sale has been made and which specifies the quantity terms, even though it omits or incorrectly states other terms agreed upon. However, the contract is only enforceable as to the quantity of goods specified in the writing. [UCC 2-201] Note also that if one "merchant" sends a written confirmation of a contract to another (in a form sufficient to bind the sender), the requirement of a writing is thereby satisfied and the other merchant is bound thereby unless she objects within ten days following receipt, even though she never signed anything. **

d) Effect of noncompliance with the Statute of Frauds. In most states, failure to comply renders the contract voidable (i.e., unenforceable at law), but not void. The statute many only be asserted by a party to the contract, never by a third party. If one party has signed a memo that satisfies the statute, the contract is enforceable against her even if it is unenforceable against the other party. Most courts allow quasi-contractual recovery for benefits rendered pursuant to oral promises that are unenforceable under the Statute.

e) Estoppel to plead the Statute. If either party, by words or conduct, directly or indirectly represents that she has (or will) put the agreement in writing, or that she will waive the Statute of Frauds as a defense, and the other party relies on such representation to his substantial detriment, the first party may be estopped to use the Statute as a defense.

f) Part Performance, as a general rule, does not make a contract enforceable within the statute.

ABUSE OF THE BARGAINING PROCESS - FRAUD, DURESS, AND UNCONSCIONABILITY. The fact that one or both parties' consent to the contract was induced by fraud, mistake, or duress is a defense to formation of the contract. The innocent party may seek affirmative relief in equity by rescinding the contract.

Bad result alone does not prove fraud -- MORTA V. KOREA INSURANCE CORP.

The case shows no evidence of misrepresentation. The fact that D's agent told P that he could only give P $900 is a negotiating tactic, not fraud or misrepresentation. Nor did D owe a duty to P based on a confidential or trust relationship, the violation of which would constitute constructive fraud.

Although P claims he did not read the release and was mistaken about its contents, a party may not rescind a contract based on his own neglect of his legal duty.

An express release may cover unknown claims arising from a particular accident. P freely entered his contract with D, releasing any unknown claims for latent or progressive presonal injuries in return for the prompt payment. There are no legal grounds for invalidating this release, despite the unfortunate factual situation.

Dissent: Casey does not prevent all settlements for unknown claims; it merely requires a showing of a conscious understanding that the release would discharge injuries suffered buy not yet manifest.

VOKES v. ARTHUR MURRAY (Fla. App. 1968).

Generally, a misrepresentation, to be actionable, must be one of fact rather than opinion. But this rule does not apply where the parties do not, in general, deal at arm's length, or where the representee does not have equal opportunity to become aware of the truth or falsity of the fact represented.

A statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms. D had superior knowledge as to whether P had dance potential and as to whether she was noticeably improving. P should be allowed to attempt to prove that D procured its contracts with P through intentional misrepresentations as to P's progress.

Real Estate Sale -- NORTON V. POPLOS (Del. 1982).

The normal ground for rescission of a real estate contract include fraud, misrepresentation, and mistake. A less common ground is innocent material misrepresentation by the seller.

A misrepresentation is merely an assertion not in accordance with the facts, even if not written or spoken in words. Even if a statement is true, it may be a misrepresentation if it leaves a false impression; i.e., a half-truth. The advertisement of P's land as zoned M-1 is this type of misrepresentation because in reality the special restrictions prohibited what was otherwise in an M-1 zone.

For D to recover, he must prove that a misrepresentation existed, that it was material, that it induced him to execute the contract, and that his reliance on the misrepresentation was justified.

The fact that the contract contained a merger clause excluding any representations not expressly written into the contract does not preclude a claim for fraudulent misrep. This rule should be extended to innocent but material misreps, because the person who made the misrep. should not retain the fruits of the bargain induced thereby.

Duty to disclose -- HILL v. JONES (Az. 1986).

Although the contract included an integration clause that purportedly released Ds from responsibility for any representations not included in the sales contract, this clause could not protect Ds from fraud or misrepresentation. Even if the clause applied to a misrep. made after the contract was executed, it would not protect Ds from liability.

Contrary to the common law caveat emptor principle, under modern law a vendor has an affirmative duty to disclose material facts if: (i) disclosure is necessary to prevent a previous assertion from being fraudulent or a material misrepresentation; (ii) disclosure would correct the other party's mistake as to the contents or effect of the writing; and (iv) the other person is entitled to know the fact because of a relationship of trust and confidence between them.

Suppression of a material fact is equivalent to a false representation when a party has a good faith duty to disclose. Under some circumstances, nondisclosure of a fact may be equivalent to an assertion that the fact does not exist. Particularly as to material facts regarding the sale of a home, some courts have required sellers to disclose facts that are not readily observable and are not known to the buyer.

Termite infestation, including past termite infestation and damage, has generally been deemed material. The materiality issue should be left to a jury to decide.

COMMENT: In ordinary business contexts, a party rarely has a duty to speak, and silence even as to a material fact is not, by itself, fraud or misrepresentation. A duty may arise from a fiduciary or confidential relationship, or from the need to correct a previous statement or false impression. In this respect, the HILL case is not typical but may represent a trend. Some commentators argue that the good faith standard applied to performance and enforcement of contracts by the UCC should also apply to the formation of contracts.