For the first day of class, please review the following cases: Mitchill v.

Lath (Court of Appeals of New York, 1928)

(icehouse removal) (page 656); Masterson v. Sine (Supreme Court of California, 1968) (family option to repurchase)
(page 660); and Alaska Northern Development, Inc. v. Alyeska Pipeline Service Co. (Supreme Court of Alaska, 1983)
(Caterpillar part purchase) (page 665).

NO MATTER HOW IT READS ON EXAM, IT WILL MEAN ***HOW MANY ARGUMENTS CAN YOU
MAKE TO DEFEND AGAINST ENFORCING THIS CONTRACT?***

His answer format:

ISSUE:
RULE: 1 sentence.
APPLICATION/FACT: does this qualify? 1 – 2 sentences.
IF EXCEPTION – MOVE DIRECTLY TO IT IN OUTLINE!

I. PERFORMANCE
A. THE PAROL EVIDENCE RULE (PER)– Supplemental Materials: U.C.C. § 202 (CS)
1. What is Parol Evidence?
a) It is extrinsic evidence; anything not inside the four corners of the contract.
b) Parol Evidence arguments will most likely come up concerning --
i. What the contract says
ii. What the parties said prior to contract formation (preliminary negotiations
2. Parol Evidence Rule:
a) RULE: Prevents a party to a written contract from presenting evidence that contradicts or
adds to the written terms of the contract that appears to be whole
b) What do we do with extrinsic evidence?
i. Either use it or do not use it.
ii. Generally, the rule states that extrinsic evidence should not be used in contracts;
iii. Generally, we do not look at evidence that is extrinsic to the 4 corners of the Contract.
iv. Only applies to fully integrated contracts
i. parties intend for this to be the full embodiment of the agreement)
v. The parol evidence rule operates in situations where there is a writing that represents the final
embodiment of the contract or some of its terms. The rule governs whether parties may
introduce evidence of extrinsic agreements to prove the existence of additional or modified
terms.
3. Rationale for Rule:
a) Prevent Fraud/People may lie
b) Can't trust people's memory – Memories fade and distort things
c) Creates more fairness & equity – If don’t have a parol evidence rule juries may be inclined to listen
to it even though it’s not good evidence & it contradicts other good evidence (oral testimony plays
on emotions)
d)
4. Issues:
a) Varies vs. Supplements – Determines whether Parol evidence can be used in partially integrated K.
i. Varies – Contradicts / Negates
i. Parol evidence that varies the terms of the contract
ii. Not allowed
 iii. RULE: Using parole evidence not allowed if it contradicts or negates the
partially integrated contract.
(1) Based more on 4 corners – needs a starting point
iv. CASES:
(1) Alaska Northern Development, Inc. v. Pipeline Service Co. (Supreme
Court of Alaska, 1983) (Caterpillar part purchase) (page 665)
a. FACTS: Caterpillar part purchase w/ blank price then later price
entered w/ “subject to final approval owner committee”
b. ISSUE: Can extrinsic evidence be used to determine what "subject
to approval by the owner" means by it's use in the contract
c. P used the "explains" argument b/c it is one of the exceptions that
allows parol evidence to be used.
i. Court rejects this argument b/c while it doesn't
negate/contradict, it doesn't do anything to explain it.
ii. No reasonable person would interpret the words to interpret
them what you said they mean.
d. Court finds the contract to be partial integration and does not allow
the parol evidence.
e. Court says it varied earlier term  applied a “Reasonable
Harmony” Test:
i. Absence of reasonable harmony & inconsistency.
ii. They could not read it in reasonable harmony with the
contract.
f. Judges probably like the parol evidence rule b/c they have discretion
in either allowing in the parol evidence or not.
i. Generally, lawyers are probably able to get evidence past
the parol evidence rule.
g. NOTE:
i. if had not been a price, ct would likely have gone with fmv
or something
h. Easiest approach: go with contract and say contradicts/negates =
less slippery slope.
ii. Supplements – Whether it can be read in reasonable harmony
i. Parol evidence that supplements the terms of the contract.
(1) Can it be read in reasonable harmony w/ the K?
ii. Maybe allowed
iii. RULE: Can only allow PE if supplements the partially integrated K, or can be
read in reasonable harmony.
(1) Can only use for definition explanation if there’s ambiguity in first place.
(2) Cannot allow if varies.
(3) Not as stringent – doesn’t necessarily need a starting point.
b) Full Integration vs. Partial Integration
i. Is the contract final (versus a draft)?
ii. RULE: If ALL of intended obligations in written K, K is fully integrated and must
follow Parole Evidence Rule – no extrinsic evidence is allowed. (exceptions below).
iii. Full Integration – of the terms and full understanding of each parties responsibilities is a
complete contract
i. Parol Evidence Rule applies – extrinsic evidence is not allowed
ii. How to best integrate a K:
(1) put integration/merger clause (i.e., “this is the full extent of our K, prior
considerations, etc. are not to be considered…”)
 (2) Look for all essential terms – (i.e., price, quantity, etc.)
iii. Cases:
(1) Mitchill v. Lath (Court of Appeals of New York, 1928) (icehouse
removal) (page 656)
a. (boathouse removal) – commercial real estate sale, collateral
agreement, formal long canadi. (“Collateral agreement”)
iv. Partial Integration – of the terms of a contract
i. If what the parties are obligated to do is only partially in K, then is partially
integrated..
ii. Maybe allowed
iii. Cases:
(1) Masterson v. Sine (Supreme Court of California, 1968) (family option to
repurchase) (p.660)
a. (family **option to repurchase) – family real estate sale, no
professionals, informal short deed. (Option K incl terms, how
long/exercise period, price). No integration clause BUT would not
expect to see one in a contract between family members.
b. **option = 1) consideration, 2) can be accepted, updated, rejected
until option period ends. MUST have price term.
v. Two Tests:
i. Majority:
(1) look at the 4 corners of the K (i.e., the explicit language) to determine full
vs. partial,
(2) Is there an integration clause?
ii. Others:
(1) Look to the K plus something else:
a. intent of parties,
b. preliminary negotiations,
c. conduct of parties,
d. PE evidence itself,
e. surrounding circumstances.
(2) Looks at the surrounding circumstances
5. Sub-RULES::
The parol evidence rule does not bar extrinsic evidence offered for the following purposes:
a) to aid in the interpretation of existing terms
b) to show that a writing is or is not an integration
c) to establish that an integration is complete or partial
d) to establish subsequent agreements or modifications between the parties (post-contract negotiations)
e) to show that terms were the product of illegality, fraud, duress, mistake, lack of consideration or other
invalidating cause
6. Exceptions:
a) Arguments Against Parol Evidence Use (i.e., Parol Evidence does NOT apply in these scenarios):
i. Post-Contract Negotiations
i. (PER applies if evidence is prior to or contemporaneous to the K) RULE: Extrinsic
parol evidence is allowed regarding post-contract negotiations. (ex. oral, scribbles
on a contract)
ii. Definition / Explanation of Meaning Issues
i. RULE: May use PE for exclusively determining what an ambiguous term means. -
Courts usually permit it
iii. Contract Formation Issues/Questions (i.e., Offer/Acceptance/Consideration)
 i. (if they don’t contradict). RULE: PER does not apply to an oral agreement that is
related to but separate from the integrated writing. If you can prove to ct. that
you’re just proving two agreements, PER doesn’t apply. Two contracts, same
subject. (Mitchill)
iv. CASE:
i. Luther Williams v. Johnson (unintegrated finance condition)
(1) Homeowners thought it was only an estimate,
(2) contractor thought it was a K.
(3) ct. held no contract in first place b/c the writing was not intended to be a
complete statement of the agreement of the parties.
B. CONTRACT INTERPRETATION (RULE, TOOLKIT) – Heirarchy  U.C.C. 1-205 (CS)
1. Express terms (e.g. definitions section of the contract itself, dictionaries to determine common
usage of a term, cross-references)
2. Course of Performance (e.g. Rest. 2-208) – what occurs after the contract has been formed…what
did you do post-formation so far, how did you perform so far?
3. Course of Dealings (UCC 1-205) – how the parties dealt with each other prior to this contract
formation (usually suggests repeated interactions, i.e. previous contracts and dealings between the parties)
4. Trade Usage (UCC 1-205, etc.) – is there a custom or trade usage?
5. Reasonableness of one interpretation over the other = “justice” = the catch-all when nothing else
has worked! Therefore, usually don’t even get to the following:
6. Other aids
a) **Construe Against Drafter (common! when there’s a contract case w/ a true interpretation issue)
b) Expression of One Excludes the Other (“we’re buying all on floors 2 and 3…so by definition not
buying what’s on 1, 4, 5)
c) Specific over General (see below)
d) **Negotiated over Non-Negotiated (lengthy and detailed language vs. boilerplate generic
language/form contract)
e) No Surplusage (every part of contract has to have some meaning, no duplication
7. CASES:
a) A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc., 852 F. 2d 493 (9th Cir. 1988) (United States Court
of Appeals, Ninth Circuit, 1988) (unseaworthy boat - City of San Diego) (TWEN)
i. FACTS: P contracted to charter D’s boat; P noticed contract differed from “letter of intent”
previously signed in that it disclaimed all warranties; P didn’t say anything & signed
contract; later the boat’s freezing system malfunctioned & cost the P his fishing profits
ii. Court found contract was fully integrated & parol evidence rule bars extrinsic evidence
iii. When contract is fully integrated don’t have to determine if extrinsic evidence varies or
supplements, but court looked anyway & found it would contradict the explicit disclaimer in
the contract
iv. parol evidence rule requires that courts consider extrinsic evidence to determine whether the
contract is ambiguous…But if the extrinsic evidence advances an interpretation to which the
language of the contract is not reasonably susceptible, the evidence is not admissible.
v. Not going to allow extrinsic evidence to define the term “good condition” b/c it would create
an unreasonable construction of the term- extrinsic evidence will not go to reasonable
interpretation of the term
b) Frigaliment Importing Co. v. B.N.S. International Sales Corp. (United States District Court, S.D.
New York, 1960) (what is chicken?) (page 690)
i. FACTS: P wants smaller chicken (for broiling & frying) & gets the larger chicken (for
stewing)- smaller chicken is more valuable
ii. P argues on face of contract that only young chicken come in small size & since adult
chicken doesn’t come in small size the larger chicken must also be young chicken
 iii. Court looks at contract itself which references the Department of Agriculture, Grade A,
Government Inspection
iv. Pre-contractual correspondence- negotiation between the parties
v. Custom usage or trade
vi. Performance- Conduct of parties
i. Post-contract formation = not barred by parol evidence
vii. Dictionary definition of “chicken” = still not helpful
viii. Course of prior business dealings = 1st time these parties have done business
ix. Market price for broilers v. fowl
i. Market price for broiler was between 35 & 37 cents (info was known by P)- would
be unrealistic for D to sell chicken at a lower than market price (33 cents) & suffer
loses – people will make profitable contracts!
(1) Really only decent evidence the Court has
x. Court is NOT using parol evidence here- it is looking at all sorts of extrinsic evidence
xi. Neither points of view are unreasonable so will permit extrinsic evidence- similar to Peerless
except this is an interpretation case not a mistake case. So, difference in the remedy.
i. Mistake:
(1) Remedy = non-enforcement
a. Leaves parties as it finds them.
b. Void the contract.
ii. Interpretation:
(1) Remedy = pick a side & enforce the contract with the interpreted terms;
a. Court should enforce – courts have a natural preference to enforce
the contract than to void.
xii. Other Rules of interpretation
i. Construe against drafter  last on hierarchy
(1) If Court here decides to construe against the drafter; it looks like P is the
drafter (D made 1st offer) & case would turn out the same
ii. Separately negotiated terms are going to trump standardized terms
iii. Duty to take an affirmative act such that the contract can be performed by both
sides (i.e. looking for financing if contract to buy a house)
C. SCOPE AND CONTENT OF THE DUTY OF GOOD FAITH – Supp. Material: U.C.C. Secs. 2-708 and 2-306 (CS)
1. 4.1 Rules of Professional Conduct: “Truthfulness In statements to Others: In the course of
representing a client a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third person; or
(b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a
criminal or fraudulent act by a client, unless disclosure is prohibited
Truthfulness requirement DOES NOT include price and value, settlement negotiations!
2. RULE: A duty of Good Faith is implied in all contracts, to deal with each other fairly and
ensure each gets the benefit of the bargain.
a) Timing
i. After Formation vs. Prior to Forming
i. Pre-contract? No – No OGF prior to contract formation
ii. Pre- Contract and Lawyers? No OGF (handout RPC 4.1)
iii. Cannot lie about material facts BUT price and value are not considered to be facts
iv. Post-Contract – OGF in all contracts, including modifications.
b) Type
i. All? – Yes, implied in all contracts and
i. RULE: OGF in a contract cannot be disclaimed
ii. Mandatory vs Default (UCC 1-302 & 1-304) – generally, standards/rules/principals of K’s
are governed by default rules that can contract around if so agree. OGF mandatory per 1-
 302. However, hard to successfully contract around OGF – although lawyers try to do it;
even if put language in a contract trying to contract around OGF by putting in conditions,
those conditions must still be “reasonable”
iii. Employment Agreement? Sometimes – see below
iv. Modifications? Yes – modification is essentially a new-formation contract occurring after
the formation of the first contract. See JC Penney case below
c) Requirements of Duty of Good Faith in all Contracts = essentially “truthfulness”
i. Less than Best Efforts required (“best efforts” MUCH stronger than “good faith”)
ii. Duty to Refrain from misrepresentation
iii. Duty to Act/Disclose
d) Two Tests: Evidence of good/bad faith
i. Objective test
i. Predominant rule.
(1) RULE: Evidence that reasonable person in that situation would be
dissatisfied is the objective test for good faith.
ii. ***Abuse of Discretion main test - Whether one party has discretion, and whether
or not the party vested w/ discretion vested it unreasonably/unfairly – if they have
used it unreasonably, then they’ve violated
(1) OGF RULE: When one party has discretion and abuses it by using it
unreasonably/unfairly, they have breached the duty of good faith.
Objective evidence of bad faith can be proof.
iii. Burton test. applies objective criteria to identify the unstated economic
opportunities intended to be bargained away by a promisor as a cost of
performance (attempt to renegotiate and take stuff already agreed to, “negotiate
bygone opportunities”)
(1) RULE: the Burton test for good faith applies objective criteria to
identify whether a party has attempted to renegotiate and take back
what they had already bargained away.
ii. Subjective test –
i. Minority rule exception to Objective Test: Evidence that my client is really
dissatisfied.
(1) RULE: the minority test for good faith requires honesty in fact from
an individual.
ii. Personal Fancy Contracts (ex. for massage)
iii. Merchants vs. non-merchants - ct may let non-merchant use subjective test (ex.
returning something to Wal-Mart).
iii. Cases
i. Centronics (unreleased escrow) –
(1) D acted in good faith in refusing to release a portion of the escrow fund
during arbitration- there was no breach of duty of good faith
ii. Market St/JC Penney (Judge Posner’s take on Good Faith) –
(1) “Good faith” is a compact reference to an implied undertaking not to take
opportunistic advantage in a way that could not have been contemplated at
the time of drafting, & which therefore was not resolved explicitly by the
parties.
(2) Posner says parties at pre-contract stage are naturally wary so there is no
deception (or duty to disclose all this info)
iii. Neumiller Farms (potato chipping pretext)
e) Types of Contracts and Good Faith
i. Modifications –
i. RULE: Modification of a contract requires good faith and fair dealings.
 ii. Output contracts – UCC 2-306 – 2-306(1):
i. RULE: An output contract requires best efforts by the parties to the contract.
ii. Motive – the “best efforts” requirement stronger than OGF;
(1) RULE: motive is element of bad faith
iii. RULE: UNLESS Bankruptcy (close business, liquidate assets, & pay debts) or
genuine business peril- Can only stop/reduce production under 1 circumstance=
when business itself is in genuine peril (bankruptcy)
iv. CASE:
(1) Feld v. Henry Levy (bread crumb supply)
a. D stopped crumb production w/o giving P-buyer 6 months notice).
b. Good faith required continued production until cancellation, even if
there be no profit.
c. This was only small part of D’s business.
iii. At-Will Employment – RULE: At-will employment agreements generally can be
terminated for any reason unless contract states specifically otherwise. OGF IS in
specific term employment contracts.
i. Vast majority of employment agreements are employment at will contracts
ii. Employer’s interest in running his business as he sees fit must be balanced against
his interest of the employee in maintaining his employment & this exception does
not strike the proper balance.
iii. Default rule: RULE: employment contract silent as to whether at-will employment
vs. employment for “specific term” = employment is at will and employee can be
fired for any cause whatsoever.
(1) Argument that default should be different because employees mistakenly
think can only be fired “for cause,” whereas employers know reality of
legal landscape. BUT – if change default, employers can just put 2 – 3
sentences expressly into a written K that “I can fire you for whatever
reason I want.” So, no big change.
iv. Limitations to no OGF in “at will” contracts: RULE: OGF may exist in an at-
will contract when:
(1) Public policy requires it. (as determined by judges – e.g. spite/malice,
revenge, notice is suspect)
(2) Statutory protections exist. (e.g. discrimination on race, sex)
(3) Some states req. Good Faith, limits discretion of employer
a. Requires cause (ex. a progressive state)
b. Requires cause-plus (ex. long length of employment, other evidence
of a company policy that “we keep people around,” etc.)
c. Requires compliance w/ public policy (i.e. notice, no spite/malice,
no revenge)
(4) Company handbooks/manuals
v. Cases:
(1) Hillesland v. Federal Land Bank (dismissal for conflict of interest)

D. WARRANTIES – Supplemental Materials: U.C.C. §§ 2-313 through 317 (CS)

1. A warranty is not so imperative so the contract will subsist after a warranty breach
2. Types of Warranties
a) Modified (i.e.AGREED) Warranties = Disclaimers – modifying or disclaiming = it’s not adding
more guarantees usually, it’s disclaiming them. RULE: a warranty is an assurance or guarantee that
certain facets of an article or service sold is as factually stated or legally implied by the seller.
i. Express (“as-is,” “with faults,”) (2-313) RULE next page p. 18b
 ii. Examination by buyer - agreed by conduct (2-316) RULE: A buyer may agree to warranty
by inspecting the item, as long as any defect would be obvious on a reasonable inspection.
iii. Drafting warranties (easy 2-313) vs. disclaimers (hard 2-316)
i. Lots overlap between warranties and disclaimers.
ii. Warranties = giving more rights/promises to buyer. Pretty easy to draw up. Can be
created by saying wrong thing.
iii. Disclaimer = taking away rights from buyer. Harder to draw up, needs lawyer,
more expensive. RULE: An attempt to exclude or modify an implied warranty
must contain specific and conspicuous language.
iv. Balance of easy vs. hard is good if goal is protecting consumer. Easier for sellers
to be careful about the language they use.
iv. Most cases are about modified warranties – many sellers will try to modify scope of
warranty, as DO NOT want to be in implied/default area!
b) Implied/Default Warranties (goods UCC default warranty) – warranty fails if seller can’t fix
problems after a reasonable amount of time- the default remedies are going to apply
i. IW of Merchantability – that the goods “work” as normally assumed (2-314)
ii. IW of Fitness for particular use – that the goods work the way you were told they would
work in a conversation (2-315)
iii. Remedy = loss value plus consequential damages
iv. This is where buyers want to be, PLUS whatever promises were made to them under the
modified warranties!
3. Attributes of Modified/AGREED Warranties – what to look for: If want to be in “modified
warranty land,” make sure warranty RULE: An agreed warranty contains 3 parts: scope, notice, and
remedy
a) Scope/Coverage/Limits – what does it/doesn’t it cover, what will/won’t include?
i. Reasonableness – the only limitation to scope. RULE: the scope of the warranty must be
reasonable. Ex. Is it reasonable that tires not covered on an RV by the seller? Probably, b/c
there’s probably a separate tire-mfg warranty.
b) Notice, Effective – who is the person w/ defective product to notify, steps to take?
i. Conspicuous Requirement – RULE: notice must be conspicuous. is it conspicuous on the K
or hidden?
ii. Specific Language – RULE: the language must be clear and specific.
iii. Consistent – RULE: the language in the warranty must be consistent with any other related
warranties and with what the buyer saw upon inspection. if inconsistency between what
buyer saw upon examination and the other warranties – buyer wins. Also, any
inconsistencies between language in modified warranty vs. implied/default warranties =
favor buyer.
c) Remedy – in case product is defective, look to:
i. Unconscionable/Unreasonable – remedy cannot be either! RULE: A remedy must be
reasonable.
ii. ***Essential Purpose Test – remedy must pass essential purpose test reasonably.
iii. RULE: a warranty fails if seller can’t fix problems affecting the essential purpose of the
product after a reasonable amount of time-
d) Case:
i. Murray v. Holiday Rambler: (TWEN) (defective motor home)(everything that could go
wrong did go wrong) – failed both reasonable and essential purpose tests
i. Even though buyer examined the motor home, lots of mechanical issues that
wouldn’t have been able to catch on inspection
ii. HR tried to get out of contract by disclaiming/limiting its use for its essential
purpose (pretty common, actually)
iii. The notice: was expressly stated and conspicuous BUT inconsistent.
 iv. Remedy of taking back for repairs 2 or 3 times was probably reasonable for
essential purpose test – more than that, unreasonable!
E. CONDITIONS – Supplemental Material: Restatement Sec. 241 (CS)
1. Conditions are terms which go to the very root of a contract. Breach of these terms repudiates the
contract, allowing the other party to discharge the contract
2. Creating Conditions – mean that someone is obligated to perform. RULE: A provision the
fulfillment of which creates or extinguishes a duty to perform under the contract.
a) Express put in contract (if, provided that, on condition that, etc- suggests expressed conditions)
b) Implied (by court) in order to make a contract make sense
3. Types of Conditions
a) Condition Precedent - Before performance becomes due. Creates a duty to perform (hinges on
whether or not something happens. ex. I will pay you $10K if the Braves win the World Series…I
will pay you $10 if you find my dog…Clark v West case = “We’ll pay you $2 + $4 additional if
you deliver to us satisfactory books and don’t drink”)
b) Condition Subsequent (e.g. “unless) – “discharges” obligation to perform. (ex. I will pay you $10K
unless the Braves win the World Series…in C v W case if had said “We’ll pay you $6 unless you
drink and then we’re only obligated to pay you $2”)
4. Avoiding Forfeiture (operation of condition that would release a party from performance)
a) Live up to the condition
b) Unconscionability not usually used for conditions
c) Waiver (“W”) - a way to defend against enforcement of condition RULE: A party is released from
performance of the condition if the condition is waived by the party benefiting from it.
i. Waiver and Consideration – no consideration required for a waiver
ii. Waiver can look like a modification (and modification must be balanced by new and
independent consideration) – C v W case: W gave nothing to give up the right to enforce the
drinking provision…thus looks like waiver. (Note: If W wanted, might could argue this was
modification and I didn’t get any consideration…W would win. BUT – see below. This
case was decided on W’s conduct/method of performance.)
iii. Creating Waiver (i.e. choice, reliance, courts)
i. Choice
(1) Does not have to be a written statement (but best way to affect the waiver)
(2) RULE:A party may purposely tries to effect a waiver
(3) Whoever has the benefit of the condition decides to waive it
ii. Reliance
(1) RULE: A waiver to a condition may exist if the Conduct of one of the
parties suggests he was granting a waiver and the counterpart relied on that
conduct as.
(2) Party’s conduct suggested a waiver & his/her counterpart relied (ex.
granted an exception in the past)
iii. Court
(1) Judicial Device - court makes the waiver
iv. Cases
i. Dove v. Rose Acre Farms (tardiness precondition) – express K and long-standing
history of employer in community: Dove failed to perform all of the conditions of
the contract and is not entitled to recover any portion of the bonus
ii. Clark v. West (drunken textbook author) – Ct said West waived the condition by
his conduct, that C relied on the waiver.
d) Substantial Performance – RULE: Substantial performance is an excuse to operation of condition
(the opposite of “material breach” – can’t get excuse to follow the condition): weigh -
i. Size of Breach – injury to non-breaching party. RULE: If the injury to the non-breaching
party is large, there is likely no substantial performance and the condition is enforceable.
 Large breach = probably no substantial performance, enforce the condition. (Reading pipe
case…breach was trivial, so sub perf)
i. ***Purpose of contract*** - this is usually where win or lose case. If don’t satisfy
purpose of contract, will lose! RULE: A party whose performance satisfies the
essential purpose of the contract has substantially performed and is excused from
the operation of the condition.
(1) Personal satisfaction
(2) Utility/functionality
ii. Damages Amount – can be argued either way
ii. Size of Forfeiture – how much did/would breaching party suffer, i.e. loss of profits for not
meeting the condition? (Reading pipe case – breach was trivial, yet costly for breaching
party to re-do the pipes) RULE: If the breaching party would suffer a large forfeiture as the
result of the breach, there is likely substantial performance, the condition is not enforceable,
and the other party must perform. Large forfeiture = probably substantial performance and
not enforcing condition. So, other party must perform, e.g. pay.
iii. Motive of Parties – sometimes considered, sometimes not RULE: motive of the parties
requires good faith and fair dealings.
i. Desire to be gratified (non-breaching party) – is there good faith reason for
requiring the condition?
ii. Excuse for deviation (breaching party), i.e. good faith reason for not complying?
iv. Courts want to avoid forfeiture so inclined to go with substantial performance
i. Perfect Tender Rule: don’t have to pay unless performance has been rendered
“perfectly and completely” – lawyers always trying to contract around substantial
performance! Cts almost always go with substantial performance though.
ii. Best “default” rule: Homeowners concerned cost, so is going to be fine with
substantial performance probably majority (because “Perfect” would be more
costly), so does average contractor...will charge out the ass for “perfect”!
v. Cases
i. Jacobs & Young v. Kent (uninstalled Reading pipe)
(1) Judge Cardozo
(2) Omission was trivial & innocent- would be too costly to repair – i.e. lots
injury to breaching party, small injury to non-breaching, so ct found
substantial performance.
ii. Grun Roofing (streaked roof)
(1) Contractor’s performance too deficient to find he has substantially
performed his contractual obligation. Any good roofer would know about
mixing lot #’s etc. and how to end up with uniform color for roof.
(2) Uniform color important to homeowner for value of home, etc. – not just
function.
(3) “To constitute substantial compliance the contractor must have in good
faith intended to comply w/ the contract, & shall have substantially done so
in the sense that the defects are not pervasive, do not constitute a deviation
from the general plan contemplated for the work, & are not so essential
that the object of the parties in making the contract & its purpose, w/o
difficult, be accomplished by remedying them.”
5. Part Performance (sometimes)
a) Labor contracts – partial performance is enough, it’s codified that you get paid for what you work.
RULE: If a party in a labor contract has rendered part performance, he will be paid for the
reasonable value of that part performance.
i. Can try to contract around it but would have to go to extraordinary lengths
 ii. Day-to-day employee-employer interaction is that the employer usually is going to have to
pay for partial performance- looks close to a mandatory rule
b) Importance (or not) of damages
i. Breaching party is theoretically liable for damages caused by breach (see below)
c) Case
i. Britton v. Turner – P entitled to recover as much as the labor performed was reasonably
worth under the theory of quantum meruit (unjust enrichment)
6. Considerations for Best default rule: allow excuse of part/substantial performance or don’t allow
excuse?
a) majoritarian default rule = Excuse. Most people agree with. Allowing no excuses would raise cost
for everyone. Damages can address the concern of “employee opportunism” in part performance –
but almost never comes up.
b) Justice (Ex Ante vs. Ex Post)
i. What is just? Try to figure out what parties would have agreed to IF they’d had time and
resources to work through the issues and possibilities
c) Economic Growth – which will create more economic growth? excuse or no excuse? - Excuse
7.
8. Dove v. Rose Acre Farms, Inc. (Court of Appeals of Indiana, First District, 1982) (tardiness
precondition) (page 793)
9. Clark v. West (Court of Appeals of New York, 1908) (drunken casebook writer) (page 808)
10. Jacob & Youngs v. Kent (Court of Appeals of New York, 1921)(uninstalled Reading pipe) (page
838)
11. O. W. Grun Roofing and Construction Co. v. Cope (Court of Civil Appeals of Texas, 1975)
(miscolored roof) (page 843)
12. Britton v. Turner (Supreme Court of Judicature of New Hampshire, 1834) (breaching employee’s
recovery) (page 855)
13. Stark v. Parker, 19 Mass. (2 Pickering) 267 (1824) (TWEN)
F. IMPRACTICABILITY, IMPOSSIBILITY, & FRUSTRATION OF PURPOSE – Supplemental Material: UCC 2-615
1. Commercial Impracticability (“CI”) as Defense to Enforcement (generally for services – does NOT apply
to money) (Possible and Costly) RULE: Commercial Impracticability is a defense to enforcement of a
condition in a contract for services. RULE: elements:
a) Elements
i. Impracticable – becomes more costly to perform then it is to breach, within reason. RULE:
A service is impracticable when the burden increases so that the service can only be done at
an additional and unreasonable cost.
ii. Failure to allocate risk of impracticability by contract – look at the contract
language/provisions to see what it does or doesn’t say!
i. Can get around with exculpatory clause (one party relieved of liability if such and
so…)
ii. Look at price: if overpriced, indicates parties realized things could change and
contracted for that possibility
iii. Look for liquidated damages clause ($100/day if late, etc.)
iv. “Force Majeur” clause (“Act of God”) Risk of loss allocated to one of parties.
v. Long-term fixed-price contract – can automatically say it suggests that they
anticipate the risk of price change and want to allocate the risk
vi. All above indicate have anticipated and allocated the risk
iii. Innocence (Good Faith/No Fault) by the party claiming impracticability
iv. Unexpected/unanticipated occurrence – something happened no one was expecting
b) Limits of Commercial Impracticability
 i. Middlemen –does not usually apply to middlemen. RULE: Presence of middleman
suggests/implies they have assumed risk if something happens to supply chain; otherwise,
end user could contract directly with producer.
ii. Limited to goods and services usually, sometimes real property, never money.
c) Commercial Impracticability and Mistake
i. Materiality – NO requirement for materiality in impracticability cases (whereas mistake
cases DO have requirement of materiality)
ii. Allocation of risk by conduct (i.e. risk of ignorance)
d) Cases:
i. Mineral Park (untaken gravel)(D contracted to take all gravel needed to build bridge from
P’s land but only took about ½ of gravel from land b/c remaining amount was under water,
would cost 12x as much to remove)
ii. Wegematoc (state of the art computer) D pushed back delivery for computer & eventually
requested cancellation of the order; contract had liquidated damages clause stated $100/day
penalty for late delivery & P could seek computer elsewhere w/ D paying excess cost.
Reasonable supposition is that new technology has already occurred, or at least, the
manufacturer is assuring the purchaser that it will be found to have when the machine is
assembled
2. Impossibility as Defense to Enforcement (Not possible, not anticipated)
a) Subject matter destroyed: RULE: If the subject matter of contract is destroyed, performance
becomes impossible and the obligation to perform is discharged.
b) RULE: Promisor dies/disabled: will usually discharge obligation of performance. Disabled,
incompetant, etc. usually defined in statute.
c) RULE: If Performance becomes illegal through a supervening legal act, the obligation of
performance is discharged. legislation (ex. outlawing widgets or gambling) – some legislation that
happened after the contract – a supervening legal act.
d) Case:
i. Taylor v. Caldwell (burnt music ball)- P contracted to rent music hall (license to use) from D
for 3 days & day before 1st event the hall burned down; parties didn’t specify who would
bear the risk, there is no way for them to have forseen this “act of God”
ii. Ex. FedEx Forum contract: Both parties relieved of contract. Concert promoter bears the
loss but it is fair b/c the CP is more likely to be able to get insurance more cheaply than the
Venue is
3. Frustration of Purpose (performance in question is payment of money (possible NOT costly…money is
money, so no increase in “burden”). RULE: If the purpose or value of the contract has been substantially
destroyed by an event that was not reasonably forseeable, performance may be excused. Elements;
a) Unexpected Occurrence
b) Failure to allocate risk of unexpected occurrence by contract
i. Contract
ii. Conduct (forseeability)
c) Innocence (good faith, no fault)
d) ***Substantial frustration – must show total/near total frustration for every possible purpose of
value for the subject of the contract.
i. Total frustration (or near total)
ii. Broadly defined purpose (i.e. land can be used in many different ways…just because not
available for farming, could still rent for hunting, etc.)
e) Cases:
i. Paradine v. Jane (p. 844) (Prince Rupert’s invasion)- D forced off land by invading prince
so didn’t pay rent to P – EXCEPTION to frustration of purpose – LAND. Land can almost
always be used for some other purpose.
 ii. Krell v. Henry (p. 898) (delayed coronation)- D licensed room to view processions of king’s
coronation but king got sick & coronation delayed. the contract was for a particular purpose
& the cancellation of that purpose excused both parties from performance (essential purpose
of contract was frustrated)
iii. Washington State Hop Producers, Inc. v. Goschie Farms, Inc. (p. 903) (worthless hop
allotment) Rare American decision granting relief under frustration of purpose
4. Force Majeure (not possible, but anticipated) RULE: A Force Majeur over which the parties have no
control may excuse performance. ELEMENTS
a) Event prevents performance
b) Parties have no control – party is protected & not forced to perform if certain things beyond the
party’s control happens making performance impossible
c) Specific event must be mentioned/anticipated in contract (i.e. narrow construction, so “catch-all”
clauses usually not good enough – must say something like “Congress passing an Act that…”
d) Case:
i. Kaiser-Francis Oil Co. v. Producer’s Gas Co. (p. 903) (take-or-pay gas)- P-seller (oil
company) & pipeline-buyer/reseller (gas company). Take -or-pay contract- buyer is
responsible for taking & purchasing a certain (minimum) amount of gas or if chose not to
take the gas (may want to save it for the next year) will still make a certain payment to the
seller. Lots details in the FM clause about interruptions by govt, etc…not good enough detail
though.)
5. Mineral Park Land Co. v. Howard, 156 P.458 (Supreme Court of California, 1916) (untaken gravel)
(TWEN)
6. United States v. Wegematic Corp. (United States Court of Appeals, Second Circuit, 1966) (“state of the art”
computer) (page 863)
7. Taylor v. Caldwell (King's Bench, 1863) (burnt music hall)
8. Canadian Industrial Alcohol Co. v. Dunbar Molasses Co. (Court of Appeals of New York, 1932) (dried up
source of molasses) (page 868)
9. Kaiser-Francis Oil Co. v. Producer's Gas Co. (United States Court of Appeals, Tenth Circuit, 1989) (take-
or-pay gas) (page 890)
10. Paradine v. Jane (King's Bench, 1647) (Prince Rupert’s invasion) (page 897)
11. Krell v. Henry (Court of Appeal, 1903)(delayed coronation) (page 898)
12. Washington State Hop Producers, Inc. v. Goschie Farms, Inc. (Supreme Court of Washington) (worthless
hop allotment) (page 903)
II. BREACH OF CONTRACT AND PERMISSIBLE REMEDIAL RESPONSES
A. RIGHT TO SUSPEND PERFORMANCE OR CANCEL UPON PROSPECTIVE LIABILITY FOR BREACH
Supplemental Materials: UCC 2-, -609 through 612; -708 through – 711 (CS)
1. Anticipatory Repudiation
a) Creating Anticipatory Repudiation – RULE: AR is created when there is a promise to breach, a
failure to live up to what they’ve obligated themselves to do (can’t be technical breach until
performance becomes due) How do you know they’re going to breach?
i. RULE: AR may be created expressly.Express (they clearly tell you) – “I am going to breach”
ii. RULE: AR may be created by conduct or implication. Implied – by conduct or implication,
suggests they are going to breach
b) Aggrieved Party – what can he do if he anticipates a breach by the other party? RULE: 2 options:
i. ***Suspend own performance (i.e. a suspension of his counter-performance) and sue
RULE: If an aggrieved party anticipates a breach by the other party, he may suspend his
own counter-performance and sue immediately.
i. not counter-perform
ii. sue immediately/pre-emptily
ii. Wait until time for performance (and sue) RULE: Restate above
 i. (downside- Court could hold party liable for not mitigating damages & repudiating
party gets a chance to retract repudiation & compromise the ability of the non-
repudiating party to sue – and you’ve lost the chance to suspend your own
performance)
c) Repudiating Party
i. RULE: Timely Retraction of the repudiation by the repudiating party (within a “reasonable”
time) can reinstate the contract
i. What is “reasonable” can also depend on whether there’s been reliance on the
repudiation – if reliance already, probably won’t be able to retract. Otherwise, just
“reasonable”
ii. Minor rule: from life insurance case – when further performance is only required by one of
parties in contract, there’s no anticipatory repudiation – there’s already been full performance
on the other side, the side suing for damages.
d) Cases:
i. Hochster v. De La Tour (p. 916) (guide’s tour)- D hired P to guide him on tour & then
changed his mind; P filed suit immediately & sought to mitigate damages by getting another
job before the original contract was due to be performed
ii. Taylor v. Johnston (p. 921) (premature breeding cancellation)- D repudiating & P forced D
to perform so D retracted, then D acted like he wasn’t going to perform so P sought to
mitigate damages & breed mares w/ another stallion. Ct found for D, b/c after various back-
and-forths said it looked like P ended up being the one to actually breach, as D still had some
time left to perform the original contract.
2. Demand for Adequate Assurance
a) Right to adequate Assurance (UCC 2-609) - Rule provides protection for the aggrieved/injured
party- can only exercise this right if they have real evidence that there is grounds for doubt that
performance will be tendered when it is due- limitation on the use of the rule RULE: A party may
demand adequate assurance of performance from the other party if there is real evidence for doubt
that the other party will perform.
b) Suspend rights if: elements: RULE: A party who has evidence for doubt that the other party will
perform may suspend their own counter-performance if there other party does not provide adequate
assurance that the performance will occur. ELEMENTS/STEPS:
i. Grounds for doubt/insecurity about their performance
ii. i. From bad experience with the party OR previous bad experience by another credible
source.
iii. Demand for adequate assurancefrom the other party in writing- generally required to give
written demand for adequate assurances from them that they WILL perform
iv. Failure to respond adequately – if they don’t respond adequately, you can suspend your own
counter-performance
v. Case:
i. AMF, Inc. v. McDonald’s Corp (p. 929) (cash for cash registers)- cash registers
didn’t work satisfactorily & McDonald’s didn’t think AMF would be able to
provide working cash registers in time. Prototype didn’t work, i.e. previous
experience was bad/ inadequate, so gave reasonable grounds for doubt/insecurity
about performance being tendered as and when due. McDonald’s didn’t have to
pay (their counter-performance)
3. Hochster v. De La Tour (Queen's Bench, 1853) (guide's tour) (page 916)
4. Taylor v. Johnston (Supreme Court of California, 1975) (premature breeding cancellation) (page
921)
5. AMF, Inc. v. McDonald's Corp. (United States Court of Appeals, Seventh Circuit, 1976) (cash for
cash registers) (page 929)
B. COMPENSATORY DAMAGES
1. Supplemental Materials: UCC 2-718 (CS); Restatement (Second) 356 (CS)
2. Legal Remedies – UCC 2-718; Restmt 356
a) Types of Legal Remedies = MONEY
i. Compensatory Damages
i. Expectation, plus foreseeable consequential – very rare (American Mechanical)
ii. Expectation Measure aka Expectation Damages = the usual case!******* RULE:
Expectation damages put the non-breaching party enough money to put him back
in the position he would have been in had performance occurred.
(1) It’s the ***Difference between contract price and market price***
(2) Market Price
a. Present value/aka time value or discounted value – just
acknowledges that there’s an interest rate, i.e. something “added”
b. Interest rate of 10% means multiply current amt by 1.1 (to get what
current amt will be worth at end of time period at that interest rate)
c. Discount rate of 10% means divide future amt by 1.1 (to get what
current amt need to equal a future amt at the interest rate, i.e. an
amount promised at a future date)
iii. Difference…More on
(1) Scenarios: From seller’s perspective, damages if non-breaching party?
a. CP > MP = yes (because didn’t get what contracted for)
b. CP = MP = No (no difference)
c. CP ? MP = No damages - speculative
d. CP < MP = No (seller got what contracted for)
(2) Scenarios: From buyer’s perspective, damages if non-breaching party?
a. CP > MP = no (because got what contracted for)
b. CP = MP = No (no difference)
c. CP ? MP = No damages - speculative
d. CP < MP = yes (because didn’t get what contracted for)
iv. More on Market Price
(1) Market value usually involves an arms length sale, parties can negotiate,
and there’s usually no timing problem
a. Arms Length (unrelated or reasonable approximation) – there’s
room for negotiation. (ex. foreclosure not arms length, no room to
negotiate)
b. Timing Issues – values fluctuate over time, so can become harder to
calculate what market value was at time of breach. American
Mechanical ct couldn’t determine market value at time of breach
because foreclosure sale was 7 months later.
v. Example: builder contracts to add room onto house. Homeowner’s cost/contract
price = 20k. Builder’s expected profits = 3k. Builder has built half of room, so far
out-of-pocket 1k on materials. I breach at this point. Measure his damages: 3k
(which would have been his profit from full performance). If he had fully
performed, his price would have been 17k…since k price 20k, he expected 3k
profits. His expectation damages = 3k!
vi. Case:
(1) American Mechanical: Seller in bad financial shape, facing foreclosure,
wants to sell equipment and real estate, K for $135k, buyer backs out of
deal, equip and real estate eventually sold for $90k 7 months later after was
foreclosed. Ct awarded damages of $45k – said couldn’t award
expectation damages because couldn’t calculate market value at time of
breach, BUT was foreseeable consequential, that everyone knew this was
 their last shot before a substantial loss if it did hit foreclosure. RARE case,
court found a way to do the right thing.
ii. Reliance Damages – Give the non-breaching party his costs incurred as the result of his
reliance on the contract, to put him back in the same position he would have been in had the
contract not been made.
iii. Restitution Damages – Can be used as an alternative to expectation damages against a party
who has breached a contract, if the non-breaching party would have lost money.
b) Limits of Legal Remedies
i. Avoidable Losses: Can recover up to and through anything that could not be avoided, i.e. the
need to mitigate. RULE: Cannot recover anything for expenses you could have reasonably
avoided
ii. Unforeseeable consequences: you can recover damages but you cannot recover anything
that’s unforeseeable. So, RULE: you can recover damages for whatever was foreseeable –
foreseeable is whatever was talked about. Not talked about, not foreseeable.
iii. Speculative damages: cts will not intervene if cannot figure it out, not adequate proof to
determine damages – no speculation! It is prohibited and limits ability to recover damages.
RULE: cannot recover damages for speculative amounts.
iv. (In cases of anticipatory repudiation/suspension, one side has completed performance – see
anticipatory repudiation note…they have nothing to “suspend”)
3. Liquidated Damage Clauses – RULE: always enforceable UNLESS it’s a penalty. Penalties NOT
enforceable.
a) Defined: Private Agreement on expected losses - look like penalties, but parties themselves
negotiate into the contract – how much will I get if you breach? Only ends up in court if one party
says “we couldn’t privately negotiate our remedy.”
i. ***Estimate of Actual Loss = revenue minus cost of performance
i. There’s always a cost to performance, so if breach by other party means you don’t
have to perform, you lose money BUT you offset some of your loss by not having
to perform
ii. Estimate for Enforcement
b) Limits of Liquidated Damages Clauses: RULE: If it’s unreasonable, it’s a penalty.
i. Reasonableness Tests
i. “Shocks the conscience”?
ii. Reasonable approximation of expected loss (e.g. over/under test)
(1) Does it sound like too little (underdone), or too much (overdone)
iii. Can ALWAYS challenge it as unreasonable, i.e. that it’s a penalty, for at least
some kind of argument.
ii. Does court prefer to enforce or not enforce?
i. Depends if efficient breach or not. Will enforce if breacher can be better off and
compensate the non-breacher.
c) Liquidated Damages clauses will tend more to keep people in contracts and discourage breach,
unless it’s an efficient breach for them.
4. Coase Theorem
a) Implications of Coase Theorem (“CT”) – Negotiable and clear rules!!! People bargain for rights!!!
i. Legal entitlements don’t matter b/c the parties will bargain them away, will sell them to one
another will sell them to the party that values them the most…whoever really values that
right most will end up owning that right b/c will bargain for it. Doesn’t matter what the
courts do.
b) Law-making with Coase Theorem
i. Liability Rules vs. Property Rules
i. Liability Rules are contract rules, voluntary, are alienable/easy to transfer.
ii. Property/land rules are hard to alienate, harder to transfer
 ii. Clear vs. Muddy Rules
i. Want clear rules, because parties need to know what they’re negotiating.
c) Problems with Coase Theorem
i. People might not bargain because bargaining itself is costly, i.e. “transaction costs” may stop
bargaining – so may end up with less bargaining
ii. Some rights are not as easily transferable as he described them
iii. too many rights are just muddy and parties don’t know who has right in first place, or they
both \ they have the right…ends up at a standstill until you go to court
5. John Hancock Mutual Life Insurance Co. v. Cohen (United States Court of Appeals, Ninth Circuit,
1958) (deadbeat insurer) (page 939)
6. American Mechanical Corp. v. Union Machine Co. of Lynn, Inc. (Appeals Court of Mass., 1985 )
(foreclosure price vs. market price) (page 946)
7. Bernstein v. Nemeyer (Supreme Court of Connecticut, 1990) (negative cash flow guarantee) (page
956)
8. Peevyhouse v. Garland Coal (Supreme Court of Oklahoma, 1962) (page 982)
C. EQUITABLE REMEDIES FOR BREACH OF CONTRACT – Supplemental Material: UCC 2-716 (CS); Ronald
Coase’s article (TWEN)
1. Equitable Remedies – courts prefer money/legal remedies! Equitable remedies only come up with
below. UCC 2-716; Coase
a) Types of Equitable Relief
i. Specific Performance - an order to DO something that involves steps that court must then
monitor (“continue to run that business and here’s what you need to do…”
ii. i. Court will ONLY grant WHEN/IF able to supervise/monitor!
iii. Injunction – an order to not do something. courts prefer this, can just say “stop” and not
have to monitor (“shut that business down”)
b) Considerations in Equitable Relief Cases
i. RULE: Damages are adequate = no equitable relief
i. Party can be made whole (e.g. can market cover = can the non-breaching party get
substituted performance from someone else?)
ii. Calculation of damages, Easy? = no equitable relief
(1) difficult = equitable relief. Ex. long-term lease that would require figuring
out lost profits, speculation.
c) Court Power (to order and supervise) – easy? Or hard?
i. Contract Terms – are the contract terms easy to order and/or supervise?
i. ex. if an exclusivity provision is very clear, involves negative injunction “another
store cannot come in”
ii. Costs to Administer (e.g. Negative Inj vs. Spec Perf)
i. Negative injunction is easy to order, much less costly to supervise/administer
d) Public Policy Considerations
i. Can override the concerns about administration/monitoring
ii. Most courts never get this far – usually look at 1 and 2 and go no further in analysis
e) Personal Service Contracts (unusual)
f) Cases:
i. Laclede Gas vs. Amoco – contract to provide propane to subdivisions. No natural gas
available. Laclede wanted specific performance from (breaching) Amoco to provide the
propane. Specific, clear contract, plus public policy considerations to keep people
warm (and political considerations local court). Plus, long-term contract, hard for Laclede to
find another long-term supplier at that price, prices fluctuating. Court ordered specific
performance even though hard to supervise.
ii. NIPSCO v Carbon Coal – long term contract, NIPSCO could buy electricity cheaper than
could buy coal and turn into electricity. Efficient breach – cheaper for NIPSCO to breach
 and pay damages – they’re being more productive by breaching. Carbon Coal wanted to be
able to specifically perform instead, to give miners jobs BUT would have to reopen mine. Ct
ordered 181 million damages, easy to calculate (difference between CP and MP).
iii. Walgreens – contract had exclusivity provision. Difficult to determine money damages. The
Ct granted negative injunction.
iv. United Airlines, Inc. v. Austin Travel Corp. (United States Court of Appeals, Second
Circuit, 1989) (liquidated computer reservation lease) (page 1072)
D. PUNITIVE DAMAGES
1. Punitive Damages – “penalties” (but can’t call them that) Damages extracted by the state after a
breach, state decides the amt
a) Usual? – NO. Generally courts should NOT award punitive damages in contracts cases.
i. Courts don’t like them because they tend to keep people in contracts when it might be more
efficient to breach.
ii. May require court to renegotiate a contract, which court does NOT want to do.
b) Exceptions?
i. Torts – if it really was a tort in the guise of a contract, can award punitive damages
ii. Fraud – ditto. Fraud is essentially a tort.
iii. Special Relationships (trust relationships, e.g. lawyer and client)
c) Rule in Exception Cases – reasonable punitive damages are ok
i. If court goes too high, can be overturned
d) Constraints in exception cases – how do you know if too high?
i. “Reasonable” Relation to Actual Damages – no mathematical ratio test usually, just not
unreasonable in relation to actual damages
ii. Due Process/Notice – if too high, they weren’t on notice of their penalty/liability, i.e. no due
process. What could they reasonably expect if they breached? – that’s notice.
iii. Other Considerations: motive, misconduct, wealth
i. Court usually doesn’t care about motive. It’s only pertinent to the level of
misconduct
ii. If breaching party wealthy, damages may need to be higher to make an impact.
Unless hit them hard, they won’t feel it.
e) Case:
i. Boise Dodge – sold used car as new, rolled back odometer. Fraud case. Court awarded
Punitive damages.
E. THIRD PARTY BENEFICIARIES – Supplemental Material: Restatement (Second) 302, 308, 313 (CS)
1. Types of Beneficiaries – Restmts 302, 304, 313, 315
a) Intended Beneficiaries – have the right to sue per 304:
i. 304:RULE: “A promise in a contract creates a duty in the promisor to any intended
beneficiary to perform the promise, and the intended beneficiary may enforce the duty.”
i. 302(a) and (b): universal intended beneficiary if nature of contract will satisfy
obligation to you
ii. Often are credit situation or gifts (below).
ii. Divorce contracts – example: child support; child is intended beneficiary even though child
never negotiated nor signed the contract; but child is referenced and is the intended
beneficiary.
iii. City contracts –common but not usually allowed.
i. Contract between government and party to perform a public repair or something,
ex. pave the road, party does not. Third party/public sues – will lose. Cts say
public in this scenario is not an intended beneficiary.
ii. Exception: *overwhelming circumstances” (ex. Zigas v Superior Ct,) Restmt 313:
says can put clause in the contract saying the contract creates rights for third
parties.
 iv. **Donations/Gifts Common. 302 also applies. EASY to argue, as can expansively view
what is a “gift.” UNLESS disclaimer in contract. Ct. looks at whether there was intent to
benefit the third party, usually donor’s intent is sufficient, occasionally a ct will want to see
intent by both parties. (Lawyer-will case)
v. *Creditors Common 302 Ex. mortgage at 1st TN. Someone offers to buy your home,
assume the mortgage. 1st TN is the intended third party beneficiary, as contract said 1st TN
was intended beneficiary of the contract. Tort victims (insurance) are “involuntary creditors”
vi. Injured party in accident is third party beneficiary/intended for purposes of liability
insurance.
vii. Can be ORAL contract.
viii. Third-party must also accept the terms of the contract benefiting them. Can prove by
showing “reliance” on it, i.e. auto accident – once 3PB injured, they’ve relied on the
insurance. Reliance is substitute for acceptance. Also, suing suggests acceptance.
ix. Third-party does not have to show any consideration, just offer and acceptance of some kind.
b) Incidental Beneficiaries – do not have the right to sue 315: RULE: “An incidental beneficiary
acquires by virtue of the promise no right against the promisor or the promisee.”
i. e.g. Homeowner’s sale. Above ex
c) Limits of Third-Party Rights – how far do they extend, how much are they constrained?
i. ***Type of Third Party:
i. Intended can sue
ii. Incidental cannot sue
ii. Language of contract
i. Language in contract: Sophisticated parties/attorneys include language specifically
disclaiming making gift so cannot be sued: “NO THIRD PARTY BEN…It is
specifically agreed between the parties executing the contract that it is not intended
by any of the provisions of any part of the contract to create the public or any
member thereof a third party beneficiary hereunder, or to authorize anyone not a
party to this contract to maintain a suit for personal injuries or property damage
pursuant to the terms or provisions of this contract. The duties, obligations, and
responsibilities of the parties to this contract with respect to third parties shall
remain as imposed by law.”
iii. Actions of real parties:
i. ARGUMENT: Any conduct on part of original parties to contract is pertinent. If
they didn’t form a contract (no offer/acceptance/consideration) OR they modified a
contract that impacts the third-party beneficiary, the third-party beneficiary cannot
sue (ex. the car-buyer ins case: if buyers and dealer had had subsequent
conversations about refund of money since insurance didn’t exist after all, etc.)
iv. Identified vs. Unidentified:
i. At time of promise, just the class of intended beneficiary is fine (i.e. someone I
injure with my car). At time of performance, must be identified specifically, e.g.
the injured party. Usually this causes no problem; named in contract is icing on
cake, not necessary.
d) Cases
i. Johnson v. Holmes Tuttle. Johnson bought car, oral agreement for liability insurance
included in payment, didn’t read written contract before signing. Got in accident, no
insurance. Injured party (third-party beneficiary) successfully sued dealership. Ct looked at
lots Parole Evidence here. (Tort victim “involuntary creditor”)
ii. Hale v. Groce. Lawyer supposed to put gift clause to a beneficiary in will, didn’t. Client
died, beneficiary sued lawyer and won. Gift.
iii. Zigas v. Superior Ct. Landlord with Fed HUD contract overcharged rent, Zigas sued for rent
back. Won. Circumstances. Ct ended up saying they weren’t the “public,” were individual
 tenants to whom contract was intended to benefit – so usual rule didn’t apply. Plus,
discussion cong intent, public policy of providing affordable housing.

Misunderstanding
Ambiguous term: Where a contract term is ambiguous and one party should know the meaning
understood by the other party, a contract is formed based on the other party's understanding.
Example: In October, C, an art collector, telephones A, an artist, and says, "In February I saw
your painting of Sunflowers. Is it still available, and, if so, how much do you want for it?" The
contract they later sign states: "A hereby sells to C A's sunflower painting …" C was referring to a
painting entitled "Sunflowers." In July A had painted another picture of sunflowers entitled
"Sunflowers II," and A subjectively was referring to this painting in the contract. C had the first
"Sunflowers" in mind. Since C mentioned that he had seen the painting in February, A should have
known that C was referring to the first "Sunflowers." Therefore, a contract exists, and for the first
Sunflowers.
On the other hand, if neither party was at fault in the misunderstanding, the lack of agreement
on which painting was intended would be great enough to cause the contract to be void for
misunderstanding.
I. Exam Tips on MISTAKE
Mistakes as to Existing Fact
Use the term "mistake," and the analysis in this chapter, only to cover those situations involving a
mistake as to the facts as they existed just prior to the contract. Where the parties are operating under
a mistaken assumption about future events (e.g., future market prices), use the
Impossibility/Impracticability analysis given in Ch. 12.
Mutual Mistake
The topic most frequently tested from this chapter concerns a mistaken assumption made by both
parties to the contract (mutual mistake). Before concluding that there has been a mutual mistake—and
that the contract can therefore be avoided by a party who is injured by the mistake—make sure that all
3 requirements are met:
(1) Mutuality. Make sure that both parties made the same (ultimately wrong) assumption when
entering into the agreement.
(2) Materiality. Make sure the assumption was "basic" to the bargain, and that the mistake had a
material effect on the agreed-upon exchanges. Watch for these situations:
Real estate transactions. Look out for a sale where there has been a mistaken acreage
count and the total acreage contained in the contract can't be conveyed by the seller.
 If the portion of land that cannot be conveyed is large or otherwise significant, then
its inclusion was probably a basic assumption of the contract. But if the parcel that
cannot be conveyed is insignificant (e.g., a 3-foot-wide strip along one end of a 50
acre parcel), then it probably would not be considered a basic assumption of the
contract.
Purchase of a unique good. Look for the purchase of a unique work of art where the
parties are mistaken as to its origin or creator. These will probably be basic assumptions.
Example: D, an art dealer, receives from one of her purchasing agents a painting entitled
"Sunset" which she is informed was painted by Van Goon. C, an art collector, sees the
painting at D's gallery and says to D, "What an interesting Van Goon." D responds
(honestly believing that he's telling the truth), "Yes, it is." C pays $50,000 for the painting,
its worth had it been a genuine Van Goon. C later finds out that the painting is a forgery
worth only a few hundred dollars and stops payment on her check. The assumption about
authorship was almost certainly a basic assumption, so C's nonperformance is probably not
a breach.
(3) Allocation of risk. Make sure the parties did not explicitly or implicitly allocate the risk of
the mistake to the party who is now trying to avoid the contract. (If they did so allocate the
risk, that party can't use the doctrine.) Also, remember that the court can allocate the risk of
mistakes wherever it is "reasonable" to do so.
Examples of situations where courts usually find an implicit allocation of risk of mistake:
Minerals in the land: The risk that there will turn out to be valuable mineral deposits is
allocated to the seller. (Example: S and B enter into an agreement for the sale of Farmland
for $8 an acre. Oil is then discovered under the land. S may not avoid the contract, because
he'll be found to have implicitly borne this risk, assuming the contract is silent.)
Auctions with object of unknown characteristics: At an auction, the risk that the item
won't have some desired attribute—where both the auctioneer and the buyer know that the
existence of that attribute is unknown—is allocated to the buyer.
Example: Auctioneer offers a 2-month-old calf at auction. Breed buys the calf for
$1,000, believing that the calf will prove fertile (as most calves are). No express
warranty is made about fertility. Two years later, the calf is conclusively shown to
have been born sterile, making it useless for Breed's purposes (of which Auctioneer
was aware). Had this fact been known at auction-time, the calf would have been
worth $150. Both parties knew at auction time that the fertility of a calf can't be
measured until it is at least 1 year old.
Breed can't rescind for mutual mistake. That's because both sides knew that the
fertility of the item couldn't be known, and the circumstances implicitly allocated to
the buyer the risk of a mistake on this point.
Building conditions: In a construction contract, the risk of undiscovered
unfavorable building conditions is normally allocated to the contractor.
Example: X is hired to drill a well for Y, to be completed by June 1. Two
hundred feet down X's drill strikes a solid layer of rock and breaks, plugging
the hole. It's no longer possible for X to complete the drilling of the well by
the agreed-upon date. Even though the accident may have been unavoidable and
neither party was aware of the rock which caused the drill to break, X may not
rescind the contract, because the contractor implicitly bears the risk of such
conditions if the contract is silent.
 However, always make sure that the contract language or surrounding circumstances
don't effectively allocate the risk in a different way.
Unilateral Mistake
Where only one party has made a mistake (unilateral mistake), he is excused from performance only
if the other party knew or should have known of the mistake.
If you don't know whether the other party knew or should have known of the mistake, argue the
evidence in support of each view, and then state that the result depends on which way the
"knew/should have known" issue is resolved.
Most common scenario: A unduly low bid is submitted by a sub-contractor to a general
contractor, on account of the sub's computational error. If the general contractor should have
realized that an error was made, the sub can get discharged.
Example: C, a contractor, solicits bids from sub-contractors for a construction job to be
performed for X. S, a sub-contractor, delivers a bid for the foundation work in the amount
of $140,000. The next lowest bid that is submitted to C is $150,000. Relying on S's bid, C
immediately submits its overall bid to X. Fifteen minutes later, S telephones C and says
that there was a mistake in the calculation and revises its bid to $170,000. Since the next
lowest bid was only $10,000 more than S's bid, C probably did not have reason to know
that S's bid was a mistake, in which case S will be not be able to avoid the contract based
upon unilateral mistake.
Reformation
If there is a clerical error and a written agreement doesn't accurately reflect the parties' agreement, the
aggrieved party can have the contract reformed to reflect the prior agreement. This usually occurs regarding
price: the contract states a different price than the one agreed upon, or leaves out the agreed-upon price
altogether.

II.Exam Tips on PAROL EVIDENCE AND INTERPRETATION

Overall rule: Remember the standard parol evidence rule:
Evidence of a prior (oral or written) agreement may never be admitted to contradict any final
writing (integration), and may not even supplement a final writing that was intended to constitute
the complete agreement (total integration).
(For more about making the distinction between partial integrations and total ones, see the last
three paragraphs of these tips, on p. 169.)
Focus on exceptions: Most exam questions involve not the standard parol evidence rule (or at least not
just that rule), but situations where the rule does not apply. Look for the three most-often-tested such
situations:
(1) Clarification of ambiguity: Evidence of prior or contemporaneous negotiations is
admissible to properly define an ambiguous term, even one contained in a total integration.
The ambiguity may either be apparent on the face of the contract or derive from the
underlying circumstances.
Example: A written contract between C, a building contractor, and S, a carpentry sub-
contractor, states that C agrees to "reimburse S for all material purchased by S for the job."
S purchases $5,000 worth of lumber and only uses $3,000 worth of it. (Assume that the
writing is intended as the final and complete expression of the parties' agreement.) C
refuses to reimburse S for more than $3,000 worth of lumber. S may testify to a
conversation which took place prior to the signing of the contract in which C agreed that
he would pay for materials purchased but not actually used—this evidence will not
 contradict or supplement (add a term to) the agreement, it will merely aid in the
interpretation of the ambiguous phrase "purchased for the job."
Hint: Some ambiguities will only become apparent after you analyze the unique
circumstances surrounding the contract. The above example is an illustration.
Can't change the meaning: Be sure that the extrinsic evidence is truly offered for the
purpose of interpreting an ambiguous clause, not adding or changing an unambiguous one
(in which case the standard parol evidence rule applies).
Example: In a contract between a laboratory and a disposal company, the
disposal company agrees that "the specified waste products are to be removed
from the site within 48 hours of our being notified that the waste containment
vessel is 80 percent filled." On one occasion, the waste container isn't emptied
until 96 hours after notification because notice was given the day before a holiday
weekend. The disposal company may not show that during contract negotiations,
the parties agreed that the 48-hour deadline wouldn't apply to holiday weekends.
This is so because the language isn't ambiguous ( "48 hours" can only have one
meaning) and the evidence the company seeks to introduce would change rather than
clarify the terms of the writing.
Remember that ambiguities are construed against the party who prepared the contract.
(2) Custom: There are several ways in which "customs" may be introduced to interpret the
meaning of a contract. When one of these ways applies, there is no parol evidence problem,
because the custom is being introduced for interpretation, not in order to vary the writing. The
two most frequently tested types of custom:
"Course of dealing" : This is evidence about a pattern of performance between the two
parties under past contracts. (Distinguish this from "course of performance," which is
how the parties have behaved under the current contract—the same rule allowing proof
applies to course of performance.) Evidence of how the parties acted with respect to the
past contracts may be used to show how a term in the current contract should be
interpreted.
Example: B, a retail florist, has been ordering roses from S, a flower wholesaler, for more
than a year. The orders are for "roses," and have always been filled with roses of assorted
colors. Evidence of these past transactions can be introduced by B to show that when she
placed her present order for "roses," she did not want (and the "contract," —i.e., the
present order—didn't call for) only red roses.
"Usage of trade" : This is evidence of a generally accepted practice or method of dealing
in a given industry or field. This can be introduced to clarify an otherwise ambiguous
term.
Example: S, a wholesaler of widgets, signs a contract with B, a retailer of widgets, for a
"gross" of widgets. B sends 144 widgets. S refuses delivery, stating that "gross" in the
widget industry means 100 units, not 144. Even if the writing is a complete integration, S
will be permitted to show that under a widget-industry trade usage, "gross" means 100
units.
(3) Existence of a condition and/or formation defect. Parol evidence can be introduced as proof
of a condition not included in the writing, as well as proof that the contract never legally came
into existence.
Example of condition: Painter signs a contract in which she agrees to paint Dave's
portrait. Painter finishes the work, and demands payment. Dave asserts that he and Painter
 orally agreed that Dave would not have to pay for the painting unless Dave's wife liked it
(which she doesn't). Even if the contract is an integration (final expression of parties'
intent), Dave will be permitted to show that the parties agreed to the wife's-satisfaction
condition.
Example of non-formation of contract: X and Y enter into a written contract whereby X
agrees to build a brick fireplace for Y, and Y agrees to pay the sum of $1,000 to X's
daughter on her birthday, February 12. Before signing the writing, X and Y orally agree
that Y will make a reasonable effort to obtain a loan to pay for the work, but that if she is
unsuccessful by January 1, the agreement will be canceled. Y is unable to obtain the loan
by January 1 and calls off the deal. Y may introduce the evidence of the prior oral
agreement, because it was a condition precedent to the formation of the contract.
Two types of integration: Where a writing (or group of writings) represents only the entire written
contract of the parties, but not their complete agreement, it is merely a "partial integration," and
evidence of consistent verbal understandings is ordinarily admissible (though evidence of inconsistent
ones is not). But if the agreement does represent the complete agreement ( "total integration" ), it can't
even be supplemented by evidence of prior agreements.
The more informal and shorter the writing is, the more likely it is to be found to be merely a
partial integration (which can therefore be supplemented by proof of consistent additional terms).
Example: If the agreement is in the form of a one- or two-sentence letter, its brevity will
usually indicate that it wasn't intended to be a total integration.
III. Exam Tips on CONDITIONS, BREACH & PERFORMANCE
Analyzing Conditions
When a party's performance appears to be dependent upon the occurrence of a condition or event:
First, confirm that there is a condition. A condition is an event that must occur (unless
occurrence is excused) before a party's performance is due.
Second, identify the type of condition: there are two types, express and constructive.
(1) Express condition: Express conditions are conditions that are agreed to by the parties.
Phrasing: The parties' language can still constitute an express condition even
though it doesn't use the phrase "conditional on" or "on condition that." Any
phrasing that indicates that the parties have agreed that one party's performance
will not be due unless some event happens is a condition.
Example: Painter and Owner agree that Painter will paint Owner's garage. The
contract says that Owner will pay $3,000 for the work "when the work is completed
to Owner's reasonable satisfaction." Since this language indicates the parties'
explicit agreement that Owner will not have to pay until the work is completed to
her reasonable satisfaction, such completion is an express condition to Owner's
duty of payment.
Strict compliance: The key thing to remember about express conditions is that
strict compliance is usually required— "substantial" performance is usually not
enough.
Satisfaction of a party: A clause requiring a party to pay only upon his
satisfaction is the most common type of express condition you'll encounter on
exams. (The above example is typical.) A satisfaction clause will usually appear in
contracts for the creation of an object or painting intended to please the taste of a
particular person, so that subjective satisfaction is required.
 Limitation: A condition requiring subjective satisfaction is valid as long as
the party's dissatisfaction with the object is in good faith (even if
unreasonable).
(2) Constructive condition: Conditions that are not "express" are "constructive" or
"implied in law." Here, the court is deducing that had the parties thought about it, they
would have made one party's performance to be dependent on the happening of some
event, typically the other party's prior or contemporaneous performance. The court reaches
this conclusion to ensure fairness.
Watch for a situation where, if a condition were not inferred, a party would end up
with so bad a deal that it's fair to say that she never would have entered the
arrangement.
Example: Inventor has invented a better mousetrap. Inventor and Manufacturer
have discussions about the terms under which Manufacturer would produce the
item and pay Inventor a royalty. Inventor then signs an agreement promising that in
6 months, Inventor will grant Manufacturer a 10-year exclusive license to make the
product; in return, Manufacturer promises to tool up immediately to make the item.
Manufacturer tools up, but due to technical difficulties in production, he is never in
fact able to make any mousetraps.
Inventor will have a strong claim that her duty to issue the license was subject
to a constructive condition that Manufacturer be capable of and willing to actually
produce the item. (Inventor will be arguing that she never would have agreed to
issue a license that would not be exploited.) If the court agrees, Inventor's duty to
issue the license will be discharged for failure of the constructive condition.
Third, after identifying the condition, confirm that the condition has been satisfied.
Trap: Be careful of fact patterns with multiple conditions. Be sure they have all been
satisfied.
Distinguish between express conditions, which must normally be strictly satisfied, and
constructive conditions, as to which substantial performance is usually enough. (See the
next section for more about the distinction.)
Strict Compliance and Substantial Performance
Express conditions: Remember that if the condition is an "express" one (explicitly agreed to between
the parties), strict compliance with it is normally required.
Example: Portraitist agrees to paint Sitter's portrait, with payment to be conditional on Sitter's
actual good-faith satisfaction. Since this is an express condition, the court will strictly construe
the condition—if Sitter is subjectively unsatisfied, the court will not deem the condition met
merely because Portraitist "substantially" performed (e.g., painted a portrait that most people
would say looked a lot like Sitter.)
Forfeiture: But the court can wriggle out of strict compliance if an excessive forfeiture would
result.
Typical scenario for forfeiture doctrine: Owner takes out a property insurance policy with
Insurer, requiring Owner to give notice within, say, 10 days of any loss. Owner is slightly
late in giving notice of loss, but in a way that does not cause actual prejudice to Insurer's
ability to investigate or defend. The court will hold that strict enforcement of the condition
would cause a substantial forfeiture (a damage to Owner out of all proportion to the
prejudice caused to Insurer by the lateness), and will excuse the condition.
Constructive conditions: Where one party's duty is subject to a constructive condition, however, strict
compliance with the condition will normally not be required.
Material breach / substantial performance: Instead, the condition will be deemed satisfied if
there was "substantial performance" by the party who had to satisfy the condition. Or, to put it
conversely, the condition will only be deemed unsatisfied if there was a material breach on the
part of the party who had to satisfy the condition.
Generic example: So you're looking for fact patterns where A doesn't want to pay or
perform because he says B breached first. You'll first have to check whether A's duty of
payment/performance was expressly conditioned on B's performance. If not, you're dealing
with a constructive condition. Then, you'll analyze the materiality of the breach: A won't be
relieved of his own duty unless B's breach was material (i.e., A won't be relieved if B
substantially performed).
Factors making a breach material: Here are the 3 main factors you should look at in
deciding whether the breach was material:
How completely was the party who benefits from the condition (A in the above
generic example) deprived of her expected benefit in entering the contract? The
more complete the deprivation, the more likely the breach is to be material.
Can A be adequately compensated for the breach by money damages, instead of
being relieved of performance? If damages will suffice, the breach is more likely to
be non-material.
Was the breach willful (intentional)? If so, it's more likely to be found material.
Example: P, an equipment company, promises to deliver and install
6 coolers for the grand opening of D, a meat market, on Sept. 1. The
price is quoted on a per-cooler basis. P only gets 5 coolers installed
by Sept. 1. On Sept. 3, D refuses to pay for any coolers, demanding
that P remove the 5 since it breached. D offers to install the 6th
cooler by Oct. 1, but P refuses. D sues for the pro-rata contract
price. (Assume that because of the large amount of installation services
required, this is not a UCC sale-of-goods contract.)
Unless there is a showing that the 5 coolers were rendered much less
valuable by the temporary absence of the 6th, the court will hold that the
breach was non-material (i.e., that P substantially performed). In that event,
D will not be entitled to cancel the contract, and P will be entitled to collect
the pro-rata contract price for the 5 coolers, less money damages for the
delay on the 6th.
Order of performance: Pay attention to order-of-performance issues: you can't say that someone
is in breach unless you first determine that her performance came due.
Service contracts: The most important rule to remember: In service contracts, unless
otherwise specified, the total performance must be done before any payment is due.
Example: Painter agrees, in a single writing, to paint 3 barns for Farmer, for a
total of $9,000. The contract is silent about when payment is due. After Painter
paints 2 barns, he demands $6,000. Is Farmer required to pay this money now?
Answer: no—Painter must paint all three barns first, then be paid all of the money.
Sale of goods: The issue of substantial performance/material breach most often arises in fact
patterns involving the sale of goods.
 "Perfect tender" rule: The UCC imposes the "perfect tender" rule: if the goods deviate from the
contract even in just a non-material way, the buyer can reject them, i.e., send them back and
refuse to pay.
Example: CompCo. contracts to deliver a high-priced computer to Bank, customized to Bank's
precise needs. The contract calls for delivery on May 31. CompCo. encounters some
manufacturing problems, and is unable to deliver until June 30.
Because the lateness meant that the tender failed "in any respect to conform to the contract"
(UCC §2-601), Bank will be entitled to reject the computer (see next Par. below), and recover
damages. That's true even if the delay did not result in material damage to Bank's economic
interests. (But if CompCo. can show that by a trade usage in the custom-computer industry, a
specific date for delivery is interpreted to give a 30-day leeway, then there won't be any default,
and Bank can't reject.)
Nonbreaching party has several options. If a buyer receives a shipment made up of both
conforming and defective goods he may: reject the whole shipment, reject just the part of
the shipment that's defective, or accept the entire shipment and sue for damages.
Exceptions to perfect-tender rule: But be on the lookout for the many exceptions to the
UCC's perfect-tender rule. Most important:
Cure: The seller usually has a right to try to "cure" the nonconformity after the
rejection. (But there's no right to cure a late delivery, as in the above Example.)
Revocation of acceptance: If the buyer has already "accepted" the goods (e.g.,
paid for them, or inspected them and remained silent), the buyer may revoke the
acceptance only if the non-performance is substantial.
Installment contracts: If it's an installment contract, even if one installment is
substantially nonconforming the buyer may not cancel the entire contract unless the
problem with the one installment substantially impairs the value of the entire
contract—instead, the buyer must give the seller the chance to cure the defective
installment. Beware of facts that signal that the nonconforming installment doesn't
impair the whole.
Example: Bathrooms 'R Us contracts to sell Apartments 40 identical sets of
bathroom sinks and toilets (collectively, "fixtures" ), for the renovation of a 40-
unit apartment building owned by Apartments. 20 sets are due on May 1, and
the other 20 on June 1. On May 1, Bathrooms tenders 19 sets, and explains that
the remaining one was damaged in transit from the manufacturer to Bathrooms.
Bathrooms promises to delivery a replacement for the missing one within 5
days.
Apartments must take (and immediately pay for) the 19 sets, and must give Bathrooms the chance to replace the
missing one within the promised 5 days. That's because there are two strong indications that the anticipated 5-day delay
in one set doesn't impair the overall value of the contract to Apartments: (1) none of the sets relies on the presence of
any other sets to work (unlike, say, a missing piece of a complex machine); and (2) the circumstances indicate that the
renovation project is being split into two pieces anyway, so having a slight delay on the 20th unit (which would be
installed in the middle of the overall job)
is very unlikely to make Apartments late in finishing the whole job. So
Apartments can't cancel the whole contract, or reject the 19 sets that have been
tendered.
Excuse of Conditions
Hindrance: A party can't willfully prevent the occurrence of a condition. If she does, the condition is
excused.
 Look for a seller of real estate who purposely thwarts the sale of the property (e.g., by placing a
mortgage on it after a contract of sale has been signed). This will result in her owing the real estate
commission to the broker despite the fact that the sale doesn't go through—the seller's thwarting of
the sale causes the condition to the commission (sale of the property) to be excused.
Waiver: If a party begins performance after learning that a condition to his performance has failed to
occur, he may be held to have waived the benefit of the condition. However, don't find waivers to have
occurred unless you're sure that the buyer knowingly and intentionally declined to take the benefit of the
condition's non-occurrence.
Requests for Assurances of Performance
If a party has reason to worry that the other party won't perform, the insecure party may demand
assurances that the other party will be able (and willing) to perform all its obligations. The
demanding party may then suspend his own performance until he receives the assurances. A failure to
provide assurances is a breach.
Delegations and Assignments: Demands for assurances often occur in situations where a contract
has been delegated and/or assigned to another. An obligee party has a right to demand assurances
from the delegatee that the delegatee is capable of performing under the contract, and the
delegatee will be deemed to have breached the contract if she does not provide such assurances.
IV. Exam Tips on ANTICIPATORY REPUDIATION AND OTHER ASPECTS
OF BREACH
An anticipatory repudiation occurs when, before performance is required, a party to a contract says
or does something which indicates that she will not perform as required. The other party's obligations
are discharged, and that party may immediately sue for breach of contract.
Words or action: Look for an indication by the promisor that she won't be able to perform her
promise, either through a reasonably clear statement, or a voluntary action which renders
performance impossible.
Example: Sue owns a farm in County. She hires Driller to drill a well to supply her with
better tasting drinking water than the County water she has been using. The contract
provides for a guaranteed completion by June 1. Two hundred feet down Driller's drill
strikes rock and breaks, plugging the hole. Driller tells Sue that he won't be able to
complete a substitute well any earlier than August 1. Sue refuses to let Driller start the
drilling of a new well, cancels the contract, and hires someone else. Sue's
refusal/cancellation was not a breach of the agreement because Driller's acknowledgment
that he couldn't complete the job except two months late was an anticipatory repudiation.
Breach must be clear: Make sure that performance has been made impossible and/or that
the statement of intention not to perform is reasonably clear.
Temporary inability not enough: Remember, if the promisor takes an action
which makes her only temporarily unable to perform, performance isn't impossible,
just improbable. In that case, the other party's obligation is usually merely
suspended, but not actually discharged.
Example: On the facts of the above Example, suppose that after the first hole got
plugged, Driller said, "I don't think I'll be able to finish by June 1." This statement
is not a repudiation, so Sue can't cancel the contract. But she could demand
assurances of performance—for instance, she could demand that Driller explain
how he plans to overcome the problems. If Driller doesn't give the explanation, she
can then cancel. Also, while she's waiting for the explanation, she can suspend her
 own performance (e.g., any progress payments that the contract said she must make
while the work progressed).
Statement of unhappiness not enough: Remember that the repudiator's statement
must unequivocally communicate that she can't or won't perform—a statement that
the promisor is unhappy at the contract, or wishes she had an escape from it, won't
suffice.
Example: B agrees to buy a cattle ranch from S. Two months before the
scheduled closing date, S tells B, "I'm very unhappy I made the deal to buy
your ranch, because the cattle market has weakened a lot since then. I don't intend
to complete the purchase unless I'm legally obligated to do so." This won't be a
repudiation, because S hasn't said she won't perform.
Delegation: Watch for a fact pattern where there is a delegation of a contract for personal
services or one calling for special, unusual skills. These types of contracts usually cannot
be delegated; doing so probably constitutes an anticipatory repudiation.
Example: Client hires Lawyer to handle a tort suit. It is clear that Client is relying on
Lawyer's particular trial skills, which are well known. Lawyer sells his practice to
Barrister, a much less well-known lawyer with lesser credentials, and tells Client that
Barrister will handle the case. The delegation is probably an anticipatory repudiation; if so,
Client may immediately cancel the contract.
Retraction: Remember that a repudiation, an anticipatory repudiation, or an indication of
prospective unwillingness/inability to perform can initially be retracted (withdrawn) by the
repudiator, in which case the contract is restored.
Example: In the above example, suppose that after Client objects to the delegation,
Lawyer says, "OK, I'll stay on to handle your case." At that moment, Client can no longer
cancel the contract, because Lawyer has retracted the repudiation. (But see immediately
below for how the repudiator may lose the right to retract.)
Loss of right to retract: The repudiation can no longer be retracted if any of these things
happens:
The other party materially (and reasonably) relies on the repudiation (e.g., by
procuring a substitute contract).
The other party sues for breach.
The other party says that she regards the repudiation as final.
In August, Pete enters into a written contract with Resort, a corporation that
owns and operates a summer resort, providing that Pete will work as the
caretaker of the hotel from the following October through April. Two weeks
later, Pete enlists in the U.S. Navy for a three-year period beginning in
September. Resort's owner sees notice of Pete's enlistment in the local
newspaper; Resort therefore enters into a substitute contract with Mark that
is identical to the one previously entered into with Pete. In September, Pete
fails the navy physical examination and is rejected for service. He then tells
Resort he's still counting on showing up for work. Resort has justifiably relied on
the repudiation (the enlistment), so Pete cannot retract it by saying he's available;
therefore Pete can't sue for breach.
Immediate suit for breach: Remember that when a party learns of a repudiation, she may
immediately sue for breach, even if damages have not yet accrued.
 Example: In January, Buyer and Seller enter into a contract whereby Seller is
to deliver 10,000 bolts per month to Buyer for a ten-month period, beginning
March 1, at a cost of 10 cents per bolt. On Feb. 1, Seller notifies Buyer that he
will not be delivering the bolts to Buyer because he has just contracted with
another buyer for the sale of his entire output of bolts at a higher price. On Feb.
10, Buyer enters into a cover contract at a cost of 10.5 cents a bolt. Buyer may
sue immediately for the cover/contract differential, even though the time for
Seller's performance has not arrived, and even though Buyer has not yet laid out
any money under the cover contract.

V. Exam Tips on STATUTE OF FRAUDS

When you come across an oral agreement, always ask yourself whether the agreement should be in
writing. The possible violation of the Statute of Frauds is frequently tested and can be easily
overlooked by students preoccupied with more obvious issues. Look for the following types of
contracts:
Guaranty or Surety Agreement
Look for a party's agreement to pay the debt of another party ( "answer for the debt of another" ) in
case that party defaults. Confirm that the guaranty is in writing.
"Main purpose" exception: The most frequently tested aspect of the guaranty/surety provision is
the "main purpose" rule: Where the guarantor's main purpose for entering into the guaranty
agreement is to benefit herself, the guaranty doesn't have to be in writing.
Example: Manco, a chair manufacturer, and Distribco, a company that distributes chairs,
have a five-year written contract whereby Manco furnishes Distribco with chairs on credit.
Distribco orders 150 chairs to be delivered by Manco directly to Cust, Distribco's
customer. However, Distribco is already in arrears for 30 chairs, so Manco calls Cust and
explains to Cust that, due to Distribco's outstanding bills, Manco won't provide the chairs
to Cust unless Cust guarantees payment for them. Cust responds, "OK, I'll pay promises
you directly for the chairs if Distribco doesn't pay." Since Cust's main purpose in making
the guaranty was to ensure that he got the chairs, his guaranty promise is enforceable even
though it wasn't in writing.
Land Contract Provision
Remember that the Statute of Frauds applies not only to the sale of realty, but also to the transfer of
any interest in land, such as leasehold interests.
Price required: In a fact pattern involving a written land contract, be sure that the document
includes the price. This is an essential term in a land contract and its omission will violate the
Statute of Frauds.
Exception for part performance and detrimental reliance: Remember that there's an exception
where one party (usually the buyer) detrimentally relies on the oral agreement in a way that is
"unequivocally referable to the agreement" —i.e., conduct that would not have been
undertaken had the oral contract not existed. Most commonly on exams, this takes the form of
moving on to the property and making improvements.
Example: At X and Y's wedding, X's father, F, tells them that if they agree to live with
him and take care of him for the rest of his life, he will deliver the deed to his home to
them within a year. X and Y accept the offer, move into F's home, and beginning caring for
him. They use their own money to add a new wing to the house, to pay off the mortgage
 and to pay the outstanding property taxes. After a year, F refuses to deliver the deed and
asks X and Y to leave his home.
X and Y should be able to enforce the oral agreement because their actions of adding a
new wing, paying off the mortgage and paying the property taxes are actions which are
"unequivocally referable" to the oral agreement—that is, there's no other logical
explanation for why X and Y took these actions than that the alleged oral agreement really
existed.
Construction contract not covered: A trap profs. love to spring is where the contract is to
build a structure on land. This is not covered by the Statute—even though it's a contract
involving land, it's not a contract for the "transfer of an interest in land."
Example: Contractor agrees to build a house on vacant land owned by Ohn. The
contract is in writing, and calls for the house to match certain written specs, and to be
completed for $100,000. While construction is in progress, Ohn orally asks for an extra
room to be added, at an extra cost of $15,000. Contractor agrees, but Ohn changes his mind
before the work starts. The modification will be binding even though oral, because the contract
(and the modification) are not covered by the statute of frauds—this was not a contract for the
transfer of an "interest in land."
One Year Provision
Look to see if it would be impossible for the contract to be "fully performed" within a year of the
time it was made. If so, the contract has to be in writing.
Example of a promise that can't be fulfilled within a year: On August 1, 1999, Mom orally
promises Daughter that if Daughter gets an average of better than 3.5 in her first year in
college, Mom will pay for Daughter's second year of school. Grades for the first year won't be
reported until late August of the following year. Mom's promise falls under the one-year
provision (and is therefore unenforceable since not in writing), because it can't possibly be
fully performed within a year of August 1, 1999.
Lifetime employment and other indefinite promises: Don't be fooled by a party's promise to do
something for an indefinite period of time—if he could die within the year yet still fully perform
his promise, the contract doesn't fall within the one-year provision. For this reason, a contract for
"lifetime employment" is not within the statute—the employee might die within the year, and
courts look on this as being "full performance."
Example: Son, S, asks his mother, M, to lend him $10,000 with which to pay past due bar
bills. On September 1, M orally agrees that if S promises to go to law school and to stop
drinking for the rest of his life, she will give him $10,000 on July 1 of the following year.
Because it's possible that S could die within the year and still fulfill both promises, the
contract is enforceable.
Discharge: But if a contract can only be "discharged," rather than "fully performed,"
within a year, it does fall within the statute.
Example: Boss hires Worker on a 5-year oral contract. This contract is invalid because it
can't be "fully performed" within one year of its making—it's true that if Worker dies, the
contract will be discharged, but a discharge is not deemed to be a full performance.
Sale of Goods or Personal Property
This is the most frequently tested application of the rule. Several pointers:
$500: The Statute of Frauds comes into play—thereby requiring a written contract—when the
agreement is for the sale of goods for the price of $500 or more.
 Personal property: A contract for the sale of personal property that is not goods (e.g.,
assignment of the right to receive payment under a contract) must be in writing if it's for a
price of $5,000 or more.
Goods, not services: Make sure the contract at issue is one for goods and not services.
A contract that's primarily for the provision of services doesn't fall under the sale-of-goods
S/F even if goods are, as an incidental matter, to be provided by the person performing
services.
Modifications: If a fact pattern involves an oral modification of a written contract, calculate the total
value of the contract as modified, to see whether the $500-threshold is met. If it is, the modification
won't be enforceable.
Example: A written contract for the sale of 2,000 widgets at $1 per widget is orally
modified for the sale of 1,000 widgets at the same price. The modified contract amount is
$1,000 and must be in writing. Probably the pre-modification contract remains in force.
Trap: Watch for an initial oral contract that doesn't fall under the Statute of Frauds (because it's
for less than $500), followed by an oral modification that raises the total price beyond $500. The
modification won't be enforceable (and probably the original oral deal remains in force).
Three important exceptions applicable only to UCC cases:
Acceptance or payment: Remember that if the buyer "accepts" the goods (e.g., receives
them and keeps them without complaint for a significant time) or pays for them, the buyer
can't assert the Statute as to the accepted or paid-for goods.
Example: Over the telephone, B agrees to buy from S 1,000 widgets at $2 per widget.
Several days later S sends an initial installment of 200 widgets to B. B inspects the goods
and puts them in his warehouse. One week later, B calls S and says that he never had a firm
contract with S and that he is going to ship the 200 widgets back to S; he also warns S not
to ship the 800 remaining.
B accepted the 200 widgets (by inspecting them and not complaining), so he's bound to
keep and pay for them notwithstanding the S/F. But B is not obligated to accept or pay for
the other 800.
Admission: Also, look for a statement under oath (i.e. in a pleading, during a deposition or
in court testimony) in which a party admits that a contract was made. In UCC cases, the
Statute of Frauds doesn't apply to the extent of such an admission (but does apply
notwithstanding the admission in non-UCC cases).
Written confirmation between merchants. Pay attention when one merchant has sent a
written confirmation of the oral agreement to the other merchant. This memorandum can
of course satisfy the Statute of Frauds to enforce the contract against the party who sent it,
if the document contains the essential terms of the agreement. More important, it can also
be used to enforce the oral agreement against the party receiving the memorandum if that
party does not object to its terms within 10 days of receipt.
Limited to quantity in confirmation: However, remember that under UCC § §2-
201(1) and (2), the confirmatory memorandum is not binding beyond the quantity
stated in it.
Example: StoreCo phones Manco, a manufacturer of towels, and offers to buy
between 100 and 200 large beach towels (Manco's choice as to quantity), delivery
to occur within 30 days, for $20 each. Manco orally agrees, without saying what
quantity it will ship. Manco then immediately sends a confirmation (which StoreCo
receives three days later) which says, "This confirms our agreement to sell you 100
 large beach towels for 30-day delivery. /s/ Manco." 26 days later, Manco delivers
200 (not 100) large conforming beach towels to StoreCo, all of which Storeco
rejects because it has gotten a better deal on price and terms elsewhere. The price
of such towels has fallen in the interim.
Manco can enforce a contract for 100 towels, but not 200, against StoreCo.
Even though StoreCo never signed anything, the confirmatory memo is binding
against it, because the confirmation was: (1) between merchants; (2) signed by the
sender; (3) received within a reasonable time of the oral agreement; and (4) not
objected to by the recipient within 10 days of receipt. However, the memo is only
binding as to the quantity stated in it—100—not as to the greater quantity that
StoreCo orally authorized.
The Memorandum Requirement
Watch out for the following testable issues regarding the signature requirement in order for a writing
(a "memorandum" of the agreement) to satisfy the Statute:
Look for a stamped signature. A handwritten signature isn't necessary and a stamp (or
typewritten signature) is sufficient as long as it was stamped after the document was
written. All that's needed is an "an intent to authenticate the document," and a stamped or
typewritten signature will do that, as long as it's affixed after the document was written.
The absence of a signature isn't necessarily fatal. Look for other signed documents to
which the unsigned document relates. A majority of courts hold that when it's apparent
that two or more documents refer to the same transaction, one that's unsigned may be
considered part of the memorandum if there is external evidence demonstrating that the
parties assented to the unsigned document.
Example: O contracts in a signed writing to sell Greenacre to B. B doesn't sign this
writing. B and X later enter into a written agreement where B assigns to X all his rights
under the contract with O and X agrees to pay the contract price for Greenacre to O. B's
signature on the assignment to X probably satisfies the Statute of Frauds in the B-O
contract, and B is therefore bound under that contract.
Reliance as Nullifying the Statute
Estoppel: Watch for a party who has relied on the oral agreement to his detriment. Some courts allow
for an estoppel that blocks application of the Statute, where there would be great injury to the plaintiff
or unjust enrichment of the defendant.
Trap: But make sure the reliance is more than just de minimis, or estoppel won't apply.
Example: Over the telephone, B agrees to buy from S 1,000 widgets at $2 per widget. S
then orders 1,000 clips from X, which are to be incorporated into the widgets he agreed to
sell to B. The clips cost S $.04 a piece. B later cancels the contract.
S will not likely be successful if he claims detrimental reliance as a way around the Statute of Frauds problem. Although
S relied on the contract with B when he ordered the 1,000 clips, his injury is not significant because the total cost of the
clips was only $40. (Note: But this argument, though weak, is still worth making on an essay exam—you'd be showing
that you are able to spot an issue and discuss its pros and cons.)

VI. Exam Tips on REMEDIES

The three most frequently tested subjects from this chapter are the equitable remedy of specific
performance, suits in quasi-contract, and damages in sales contracts. Be sure to bone up on these
important topics.
Specific Performance
 Specific performance is the most important equitable remedy for test purposes. When reading a fact
pattern, remember that the most important issue is whether money damages would be adequate to
protect the injured party—if they would, that party can't get specific performance.
Unique good: Look for a rare or unusual object that's the subject of the contract—money
damages are less likely to be adequate, because exact substitutes can't be found. (Examples: An
antique car; a highly unusual ring; a work of art.)
Speculative damages: Look for cases where damages would be hard to measure. This is
especially likely where the contract involves a new business or new product.
Example: S agrees to sell B the rights to make commercial use of a new secret-formula
sauce for hamburgers. If S reneges and B sues for specific performance, B will have a good
chance of prevailing. This is so because, due to the formula's newness, it will be hard to
predict what B's profits or losses would have been for the formula, making it hard for B to
recover money damages.
Land contract: In a straight contract for the sale of land in return for money, specific
performance will normally be granted to the buyer, because courts consider each piece of land to
be unique, so that the buyer can't adequately be compensated by a money-damage award.
If the suit is brought by the seller (i.e., it's the buyer who refuses to close), note in your
answer the possibility of several outcomes:
Some states allow specific performance to be ordered on behalf of the seller.
Of those who don't, some permit the seller to collect only the out-of-pocket costs
incurred in making the agreement. Others permit the seller to recover only the
difference between the contract price and the market price, which is often zero.
Employment contract: An employment contract is not usually enforceable (on either side) by specific
performance. This is so because employment contracts are a form of personal service contract, and
enforcement would violate the public policy against involuntary servitude (if the employee is the defendant)
or against forcing an employer to accept services of an unwanted worker (if the employee is the plaintiff).

Liquidated damages available: Remember the majority rule that the existence of a liquidated damages
award does not bar the remedy of specific performance.
Example: Buyer, a corporate transferee from out of town, contracts with Seller for the purchase
of Seller's house. Because Buyer plans to move her family on April 20, the contract provides that
the house is to be vacant and ready for occupancy by that date. The contract also contains a
liquidated damages clause and provides for payment to Buyer of $75 for each day after April 20
that the house isn't ready for occupancy. On April 20, Buyer moves her family into town and the
house isn't vacant, so they stay at a motel. On May 1, Seller informs her that he doesn't intend to
go through with the contract. Buyer may sue both for specific performance of the land contract
and for liquidated damages—since specific performance would be otherwise appropriate (it's a
contract for the sale of land), the court won't deny that remedy merely because Seller is also
subject to a liquidated damages clause.
Expectation Damages
This is the standard measure of damages for breach of contract. Expectation damages are awarded to
put the plaintiff in the position she would have been in had the contract been performed.
Formula: Expectation damages are usually calculated as:
the value of defendant's promised performance (generally the contract price) less
the benefits to plaintiff (i.e., money saved) from not having to perform her end of the
contract.
 Hint: You should always discuss expectation damages in any fact pattern where the contract
was valid and one party materially breached.
Common scenario: A contractor partially performs, and either the hiring party obtains a substitute
performance, or the contractor wants to be reimbursed for his partial work.
Substitute performance example: Owner owns a farm in County. She hires Driller to drill
a water well. The contract provides for a guaranteed completion by June 1. The contract
price is $10 a foot and Driller is to be paid $3,500 in advance, with any refund or
additional payment to be made on completion. Two hundred feet down, Driller's drill
strikes rock and breaks, plugging the hole. Driller refuses to start a new hole. Owner hires
Dan to drill the well for $4,500. Dan strikes water at 300 feet.
Because of Driller's repudiation of the contract, Owner may recover the $3,500
advanced to Driller (since she got no value for that advance) and the $1,500 difference
between the price for the substitute performance and the contract price (which would have
been $3,000 for a 300-foot well).
Reimbursement example: Contractor, a building contractor, enters into a contract with
Manco, a manufacturer, for the construction of a two-story factory on Manco's parcel of
realty for $250,000, to be paid upon completion. When the factory is partially completed,
Manco decides to retire from the manufacturing business, and tells Contractor to stop
work. Contractor has already spent $180,000 on the construction and would need to spend
another $35,000 to complete the building.
Contractor can collect expectation damages of $215,000, calculated as the contract
price ($250,000) minus the cost to him of completion ($35,000).
Reliance Damages
Reliance damages come into play when expectation damages would not adequately compensate the
plaintiff, or where there is no enforceable contract, but plaintiff is entitled to some protection anyway.
Most commonly, reliance damages generally appear on exams in questions involving promissory
estoppel.
Example: Buyer and Seller orally agree that Seller will sell Blackacre to Buyer for $200,000, with
Seller to deliver the property with a presently-existing unsightly shed at the back removed. Seller
spends $5,000 to remove the shed. At the time for closing, Buyer fails to tender the purchase
price. Seller won't be able to recover contract damages, since the contract is for the sale of an
interest in land, and thus was required to be in writing. However, Seller will probably be able to
recover on a promissory estoppel theory, in which case he'll recover the $5,000 spend on shed-
removal, since that cost was incurred in direct and reasonable reliance on the oral agreement.
Restitution Damages
Restitution damages are defined as the value to the defendant of the plaintiff's performance. (Think
unjust enrichment.) Restitution damages can be awarded in a suit on the contract, or in a suit brought
in quasi-contract.
Example (suit on the contract): Duster, the owner of crop-dusting planes, enters into a contract
with Farmer, a farmer, for the dusting of Farmer's crop four times a year for four years for a total
of $10,000, which is paid upon the signing of the contract. After two years, Duster sells her
business to Newco, assigning the contract with Farmer to Newco.
If Newco fails to perform, Farmer may collect as damages from Duster the $5,000 unearned
portion of the money paid to Duster, since Duster has been enriched by not performing the final
two years. (Alternatively, Farmer could try to recover the "benefit of her bargain" —the amount, if
any, by which the $10,000 contract price was less than Farmer's total payments would be by the
 time she procured a substitute duster for the last 2 years. But the point is that even without proof
of cost-of-substitution, Farmer can recover the unpaid deposit on a restitution-damages theory.)
Quasi-contract
Quasi-contract recovery is an important possibility to keep in mind whenever you are discussing
the possible remedies available. Always consider relief based on quasi-contract when the aggrieved party
is not entitled to damages for breach of contract. Remember that recovery will be the reasonable value
of the services rendered. Watch for these situations:
Contract never formed: Look for a fact pattern where an enforceable contract was never formed.
The party providing the services may be entitled to recover in quasi-contract if he had a
reasonable expectation of payment for those services (i.e., he did not intend them as a gift).
Common trick scenario: A party performs emergency services for a person in peril.
Usual conclusion: The savior has performed without an expectation of payment for
services or for losses incurred as a result, and therefore may not recover in quasi-contract.
Contract rendered unenforceable: Look for an originally-enforceable contract that only later
becomes unenforceable, i.e., where a party is excused from performing for some reason. Although
the performing party isn't entitled to contract damages, he may still be able to recover in quasi-
contract. This is most likely in cases of impossibility/impracticability and frustration of purpose.
Example: Owner owns a piece of undeveloped land adjacent to City Airport. On January
2, Owner enters into a contract with Architect, an architect, whereby Architect agrees to
produce and deliver by May 1 a design of a ten-story hotel which Owner wishes to build
on that land. On March 31, it's announced that City Airport flight operations will cease at
the end of the year, making it pointless for Owner to build the hotel. Owner refuses to
accept the completed hotel design from Architect on May 1.
If Owner is excused from performing because of frustration of purpose, Architect will
still be able recover the reasonable value of services rendered up until March 31, when the
event excusing Owner's performance occurred.
Building destroyed before completion: Look for a fact pattern where, through no fault of
either party, the structure that is being built is destroyed and the contractor refuses to begin
work again:
If the construction is of a new structure, the contractor is usually allocated the risk,
so he isn't excused from performing, and therefore may not collect damages in
quasi-contract for the value of the services performed through the time of
destruction.
If the construction involves a repair of an existing structure, then the contractor will
probably be excused from performing because of frustration of purpose and/or
impossibility, since the continued existence of the building is a basic assumption
upon which the contract is based. The contractor may, in that case, recover in
quasi-contract for the value of the work performed up until the time of the
destruction.
Partial performance, then breach: Quasi-contract remedies are frequently used by the party who
has partially performed but then breaches a contract, as a way to set-off the damages it owes to
the nonbreaching party. Look for a breaching contractor who hasn't substantially performed but
has nonetheless provided the owner with something of value.
Example: O contracts to have C, a contractor, build O a house on O's land. The contract price
is $300,000. C does about half the work, then defaults. The reasonable value to O of the work
done is $125,000. C has received a $60,000 deposit. It will cost O $225,000 to get another
 contractor to finish the job (meaning that if O has to pay the full value of C's work less the
deposit, O will be $50,000 worse off than had C fully performed). C can recover $15,000,
calculated as follows:
Reasonable value of work done, less deposit received and less O's damages for the breach,
or
$125,000 minus ($60,000?+?$50,000)?=?$15,000
Extra damages: If the standard expectation measure doesn't fully compensate a party for her losses,
remember that the additional damages can also be recovered. These are often called "consequential"
damages.
Example: C agrees to renovate O's house for $50,000, by March 1. C gets a $25,000 deposit,
does half the work, then defaults. O hires a replacement, X, who finishes the job for $25,000. The
standard expectation "benefit of the bargain" measure would give O $0 recovery, because there is
no difference between the contract and market price. But if X can't finish the job until April 30,
and O can't move in during the month of April, O will probably be able to recover the cost of
procuring substitute lodging for that month—the lodging costs will be "consequential" damages,
and will be on top of the contract/market differential.
Foreseeability: But remember that consequential damages are subject to an important limitation:
the requirement of foreseeability. Determine whether the additional losses were either: (1)
reasonably foreseeable to an objective observer in D's shoes, based on general principles; or (2)
foreseeable based on the plaintiff's special requirements, of which D had notice. (Remember that
this is basically the rule of Hadley v. Baxendale.) If the losses don't fall into either category,
they're not recoverable.
Example: Seller and Buyer enter into a contract for the sale of 10,000 pounds of
specifically described bolts each month for a period of ten months beginning March 1; the
contract has a total value of $40,000. On March 1, Seller informs Buyer that he will not
deliver any bolts to Buyer because he has just contracted to sell his entire output to another
buyer for a higher price. It takes Buyer 61 days to find a new supplier; the new supplier
charges the same price. Because of the delay in finding a new supplier, Buyer is late in
delivering motors to End User, a company with which Buyer has a contract containing a
valid liquidated damages clause providing for damages of $10,000 a day for delays in
delivery of motors. Although Seller knew that Buyer sold motors, Seller didn't know about
Buyer's specific contract with End User. May Buyer recover from Seller the $610,000 he is
required to pay End User under the liquidated damages clause?
Probably not, because it probably wasn't foreseeable to Seller that a 2-month delay in
delivery on a $40,000 contract would bring about $610,000 in losses. Buyer's needs—in
particular his need to avoid heavy liquidated damages—were probably "special
requirements" that cannot be the basis for recovery unless Seller knew about them at the
time of contracting.
Mitigation
Be sure to discuss whether the nonbreaching party has attempted to mitigate damages in a situation
where the loss was partially or totally avoidable—if she didn't, any damages that would probably have
been avoided by such an attempt are non-recoverable.
Look for a terminated employee, who fails to make reasonable efforts to find a suitable
replacement job.
Look for a disappointed buyer or recipient of services.
 Example: B, the owner of a furnace-repair company, maintains a fleet of personal trucks
for his employees' use and drives his personal station wagon when visiting customers'
homes. On February 15, B orders a new station wagon from S, a car dealer, to be delivered
by March 5. On March 4, B sells his old station wagon because of the expected delivery of
the new car the following day. However, the new car isn't delivered to S until March 30. B
sues S for lost profits because of his inability to travel to customers. B won't recover for
this: although business losses were foreseeable at the time of contracting, B could have
mitigated his damages by renting a car or using one of the company's trucks.
Liquidated Damages
Reasonableness: Remember that the liquidated damages amount will be deemed (in most courts)
reasonable if it is a reasonable estimate as of either the time of contracting or the time of the actual
loss. Normally, you should try to analyze the reasonableness as of each time frame.
Other points to watch for:
Pay attention to what the clause remedies. Even where the clause is enforceable, other types of
damages can still be awarded to address problems not covered by the clause.
Example: O and C, a contractor, enter into an agreement for various repairs to be made to O's
home. The contract provides that the repairs are to be completed within sixty days, and that if
C fails to complete the job on time, C will pay O$50 per day as liquidated damages. After the
repairs are finished, O discovers that C did a faulty job on one aspect, the roof; she has another
contractor redo the repair for $1,000. Since the liquidated damages clause only redresses late
performance, it doesn't eliminate the possibility of O's collecting damages for defective
performance in the amount of $1,000.
Damages in Sales Contracts
Buyer's damages: This area is more heavily tested than that of seller's damages. Several reminders:
Standard "contract/market" differential: If a buyer returns defective goods (or fails to receive
any shipment of goods from the seller) and doesn't purchase replacement goods elsewhere, she is
entitled to the difference between the contract price and the market price at the time of breach.
Cover: If a buyer returns defective goods (or fails to receive any shipment of goods from the
seller) and purchases them elsewhere, she is entitled to the difference between the contract price
and the cover price.
The buyer's cover price paid by the buyer must be reasonable in the circumstances. Look
the buyer's attempts to find a good price (or at least to verify the true "market" price)—if
these are absent, discuss the possibility that the buyer may have behaved unreasonably and
should be denied the full contract/cover differential.
Remember that if the market price (or the cover price) and the contract price are the same, there
are no damages to collect, except consequential or incidental ones.
Note: Where the market price or cover price is less than the contract price, the buyer gets
the benefit of the difference with no off-setting to what the seller owes for consequential or
incidental damages.
Breach of warranty: If a buyer accepts defective goods the damages are calculated as the
difference between the value which the delivered goods had at the time of acceptance and the
value which conforming goods would have had at the time.
Specific Performance: The buyer can only get specific performance if the goods are unique.
Seller's damages: The most testable issue in this area is whether a seller can be compensated for lost
profits. Trick: The seller appears to have suffered no damage because he resold the item or items for the
contract price or for an amount in excess of the contract price. Your inquiry should not end there,
however.
"Lost volume" seller: Look for a seller who has a supply of goods in excess of the level of
demand (the "lost volume" seller). He has lost a sale and is entitled to his lost profits—even if he
resold the goods in question—because he could have had both sales but for the breach.
Example: S, a computer reseller, contracts to sell a Model 101 Xtra personal computer
(made by Xtra Corp.) to B, for $3,000, delivery to occur Oct. 1. (The price from Xtra to S
will be $2,200.) On Oct. 1, B unjustifiably repudiates. S resells the same computer to T for
the same $3,000. The Model 101 is a popular computer, and S can get as many of it as he
wants from Xtra, with rapid delivery. What are S's damages?
S is a lost volume seller—although he's sold the computer in question to a different
buyer for the same price, he's lost one net sale due to B's breach, since S could have a
different copy of the 101 to T if B had honored the contract. Therefore, S is entitled to
$800 (plus any incidental damages), representing the profit that S would have made on the
sale to B if it had occurred.
Limited supply: But if the seller resells all the available goods of the type that is the
subject of the contract, then he is not a lost-volume seller and cannot collect lost profits for
the breach.
Deduct costs: Remember to deduct from all recoveries the costs that the aggrieved buyer or seller
didn't incur as a result of not having to complete his performance.
Punitive Damages
Remember that punitive damages are ordinarily not recoverable in breach-of-contract actions.
(However, if the breach was also independently a tort—as in fraud—punitives may be recoverable.)
VII. Exam Tips on CONTRACTS INVOLVING MORE THAN TWO PARTIES
Material from this chapter is heavily tested. Look for a fact pattern where rights or duties are created in a
third person either when or after the contract has been executed.
Assignment and Delegation
Remember that an assignment is a transfer of contract rights, and a delegation is a transfer of contract
duties.
Be sure to check whether the contract may be assigned, and/or delegated:
When assignment is allowed:
Consideration: Don't worry if the assignment isn't supported by consideration. Consideration is
unnecessary where there's a present transfer of rights.
Generally permissible: Where the contract is silent on whether assignment is allowed, the
contract is assignable, even without the obligor's consent.
Anti-assignment clause: If a contract contains an anti-assignment clause, an act of assignment
gives the obligor a right to damages against the assignor for breach, but does not render the
assignment ineffective (unless the assignment imposes an material additional burden on the
obligor, or would be void for some other reason independent of the anti-assignment clause).
When delegation is allowed:
Nondelegable duties: In delegation cases, check that the duties are in fact delegable. Remember
that the main rule is that delegation is permitted unless the obligee (the one to whom the delegated
performance is due) has a "substantial interest in having the delegator perform."
Personal services: Contracts for performance of personal services are generally not
delegable by the person who would do the work.
Example 1: Contracts of employment, which are not be delegable by the employee.
 Example 2: Contracts with independent contractors possessing special personal skills,
such as musical performers, interior decorators, architects, computer programmers, etc.
Note: In these personal-service circumstances, the delegation may be deemed an
anticipatory repudiation, in which case the obligee can immediately cancel the contract
and sue the delegator for breach.
Construction contracts: Generally, an obligation under a construction contract is not
considered a personal service and may be assigned.
Important distinction: A delegation of the duty to perform personal services is more likely
prohibited than an assignment of the right to receive the services (which is prohibited only
if it materially alters the duty of the obligor).
Example 1: The rights to receive the benefits of a one-year contract for gardening
services performed for an owner of a condominium may probably be transferred to the
party to whom he sells the condominium. (The duty to make payment may also be
assigned, though the assignor remains liable as guarantor.)
Example 2: The rights to a musical performance at one party's wedding may be
transferred to another party having a wedding, if all the contract terms (place, time, date,
contract price) are the same.
Waiver: Remember that even if the contract is nondelegable, the right to object may be waived.
Example: Ohn, the owner of a piece of undeveloped land, enters into a contract with
Arch, an architect, whereby Arch agrees to produce and deliver by May 1 a design of a
ten-story hotel to be built on the land. On January 15, because of health problems, Arch is
ordered to take a six-month break from work by his physician. Arch signs a documents
"assigning" to Bench—a well-known architect with whom Arch has sometimes
collaborated—all Arch's rights and duties under the contract with Ohn. One week later,
Bench meets with Ohn to discuss preliminary plans with him. Thereafter, he communicates
with Ohn by phone. When Bench submits the completed design on May 1, Ohn refuses to
accept it.
Ohn, by failing to object to the assignment during his initial encounters with Bench,
has probably waived his right to object.
Demand for assurances: When the party who is owed the performance receives notice of a
delegation of duties, she may demand assurances of performance from the delegatee, and may
suspend her own performance until assurances are furnished.
Rights and obligations on assignor/delegator side: Remember to evaluate the rights and obligations of
the assignor or delegator.
Assignor's right to revoke:
Assignor relinquishes rights: In an assignment, an assignor's rights are extinguished once there
has been an effective assignment. Therefore, don't make the mistake of allowing the assignor to
sue to enforce rights previously held by her.
Assignments for consideration are irrevocable: Also, watch for an assignment that is supported
by consideration—such an assignment is irrevocable, so the assignor can't change her mind and
cancel the assignment.
Gratuitous assignment: By contrast, a gratuitous assignment is revocable by the
assignor, unless one of the following happens:
the assignor delivers a symbolic document evidencing the rights (e.g., hands over a
bankbook, which would make assignment of the bank account irrevocable);
the assignor puts the assignment in writing;
 the assignee foreseeably relies to his detriment on the assignment; or
the obligor gives performance to the assignee.
Delegator's ongoing liability:
A delegation of contract duties doesn't divest the delegator of her obligations to the obligor.
Thus, the delegator can be sued if the delegatee breaches.
Example: Store, a retailer of home gardening supplies, enters into a one-year contract
with Seedco, a wholesaler of seeds, whereby Seedco will supply Store with all of its
requirements for rye grass seeds on a monthly basis. After delivering one delivery of rye
grass seeds to Store, Seedco sells its business to Byer, who fulfills Store's next month's
requirement of seeds. Store pays Byer for the seeds, but also demands that Byer assure it
that it will be able to meet Store's future rye grass seed needs. Five weeks later Store has
still not heard from Byer and notifies Seedco and Byer that it's canceling the contract.
Store may successfully sue Seedco for breach of contract—the delegation by Seedco to
Byer did not relieve Seedco of liability if Byer should not perform.
Trap: A fact pattern may indicate that an obligee has consented to the delegation. This
consent does not relieve the delegator of liability, unless the obligee explicitly agrees
to release the delegator (in which case there is said to be a "novation." )
Rights and obligations of assignee: Also, analyze the rights of the assignee.
Assignee's rights: The assignee is entitled to enforce the contract rights to the same extent that
the assignor could have—the assignee "steps in to the assignor's shoes."
Subject to defenses: However, the assignee's right to enforce the contract is subject to any
defenses which could have been asserted against the assignor, such as breach of the assignor's
return promise, lack of consideration, or occurrence of a condition to the defendant's duty.
Example: Pawn, a pawnbroker, sells to Jewel, owner of a jewelry store, a ring for
$2,500, representing it to contain a diamond. The following month, Pawn sells Jewel a
pearl necklace for $2,200, to be paid for within thirty days. Before Jewel pays for the
necklace, he learns that the ring he previously purchased contains a cubic zirconia and
is worth only $300. A day later, Pawn assigns his rights to payment for the necklace to
Art. Since Art steps into Pawn's shoes, if Art sues Jewel for payment on the necklace,
Jewel can successfully assert against Art (at least as a set-off to reduce Art's recovery)
the breach-of-contract claim regarding the ring.
Warranty of no defenses: An assignor (at least one who assigns for value, rather
than as a gift) makes an implied warranty that at the time of the assignment, the
obligor has no defenses.
Example: Thus in the above example, if Pawn assigns to Art for value his right to
payment from Jewel, Pawn has impliedly warranted to Art that Jewel has no
defenses. Since Jewel has a defense against Pawn, Pawn has breached the implied
warranty and is liable to Art for any amount by which Art's claim against Jewel is
reduced.
Modification of assignee's rights by original parties: In assignment scenarios, profs love to
test whether/when the two original parties (the obligor [who owes the duty] and the assignor)
may modify the assignee's rights. Remember that the assignee's rights depend on whether the
modification took place before or after the assignee got notice of the assignment:
Modification before notice: If the modification takes place before the assignee gets
notice of the assignment (not the scenario that's usually tested), the modification is
binding no matter what.
 Modification after notice: But if the modification occurs after the assignee has received
notice of the assignment, the modification is binding only if the assignor has not yet fully
performed.
Example: Conti, a contractor, agrees to build a house for Owen, at a price of $300,000. Since Conti owes
$400,000 to Bert, Conti's brother, Conti assigns to Bert Conti's right to receive payment from Owen, and
immediately notifies Bert of the assignment. Then, Owen and Conti agree to a price reduction to $250,000. If
the price reduction occurred before Conti finished the work, Bert is bound. But if the reduction

occurred after Conti finished, the reduction is not binding on Bert, and Bert can sue for the
whole $300,000.
Multiple assignments: Also, look for a fact pattern where there have been two
assignments of the same right. If the first assignment is irrevocable, then, generally, that
first assignee has priority.
Prior payment as defense: Remember that timing also counts where the obligor pays (or gives
performance to) the assignor instead of the assignee. If the obligor pays the assignor (in part or in
full) or gives the required performance before he has received notice of the assignment, he may
use this as a defense against the assignee. But if the obligor renders payment/performance to the
assignor after learning of the assignment, she may not use this as a defense vis-á-vis the assignee.
Example: In the above example, suppose Owen paid $200,000 to Conti (rather than to
Bert) after Owen got notice of the assignment. Owen would not be able to use this
payment as a set-off in an action for the $300,000 brought against him by Bert.
Assignee's obligations: Typically, the assignee will have obligations to both the assignor and to
the original promisee, since the latter will be a third-party beneficiary. So either can sue the
assignee if he breaches.
Example: Chef hires Delegator, a famous interior designor, to have Delegator design
Chef's new restaurant. Delegator hires Newdes, another designer, to take over the project.
Chef allows the deligation to take place (notice that he doesn't have to, since the contract
involves Deligator's unique personal skills). Newdes fails to do the work properly.
Newdes can be sued by both Chef and Delegator. First, Chef can sue Newdes—Chef
was almost certainly an intended beneficiary of the Delegator-Newdes contract (Chef was
to receive Newdes' performance, and Delegator clearly intended that Chef be benefitted by
Newdes' taking over Delegator's role—see the discussion of third-party beneficiaries
immediately infra). If, instead, Chef chooses to sue Delegator (which he can do because
the delegation did not let Delegator off the hook), Delegator can sue Newdes to be made
whole—Newdes owed the obligation of performance both to Delegator (the promisee of
Newdes' promise to perform) and to Chef (the third-party beneficiary of that promise).
Third Party Beneficiaries
This topic is always a favorite on exams. The two most important issues to concentrate on are the
distinction between intended and incidental beneficiaries, and the analysis of whether an intended
beneficiary's rights have vested.
Intended vs. incidental: You must distinguish between these two types of beneficiaries, because
the intended beneficiary may enforce the contract whereas the incidental beneficiary cannot.
Creditor: If the agreement is to pay money that one of the original parties owes to a third
party, that third party is an intended beneficiary, and may sue. (This is the classic "creditor
beneficiary" situation).
Example: Own hires Gard to landscape Own's property for $90,000. The contract
provides that Own is to pay $80,000 to Gard and the balance is to paid to Cred, to whom
 Gard owes money. Cred is an intended beneficiary of the contract between Own and Gard.
Therefore, Cred may sue if Own doesn't pay.
To whom performance runs: Look at whether the performance runs directly from the
promisor to the third party. If it does, the beneficiary is probably "intended." If not, the
beneficiary is probably incidental.
Example: Whole, a wholesaler, agrees to supply to Ret, a retailer, 100 bicycles made by
Manco. Ret is to pay Whole, who will then order from, and pay, Manco. Because Ret's
performance (payment) is to run to Whole, not to Manco, Manco is not an intended
beneficiary, and may not sue Ret if Ret cancels the contract.
Promisee's intent: Pay the closest attention to the intent of the promisee, not the promisor
—if the promisee didn't intend to benefit the third party, the latter is not an intended
beneficiary.
Trap: The mere fact that a third party is mentioned in a contract doesn't automatically
mean that he's an intended beneficiary. Analyze whether the promisee really intended to
benefit the third party.
Example: Cli owes Lawr money for legal services. Lawr suggests to Cli, "I'd like you to
pay me off by buying my nephew Neff a Goldray Special from the Zebra Car Agency—
they've got good prices there." Cli responds, "If that's what you want, I'll be glad to do it."
Neff is an intended beneficiary, because it's clear that Lawr (the promisee, to whom Cli
owes money) intends to benefit Neff. (The fact that Cli has no particular desire to benefit
Neff is irrelevant). On the other hand, there's no indication that Lawr intended to benefit
Zebra—Lawr seems to have suggested Zebra by name merely because she wanted a good
price, not because she had an affirmative desire to benefit Zebra. Therefore, Zebra is
merely an incidental beneficiary.
Vesting as a bar to modification or discharge: In exam fact patterns the two original parties
often try to modify or discharge the obligation after it comes into existence. The general rule is
that they may do this, but only until the beneficiary's rights have "vested." Vesting occurs when
the beneficiary does one of these 3 things:
she manifests assent to the promise,
she brings suit on the promise, or
she materially changes her position in justifiable reliance on the promise.
Examples of justifiable reliance: (1) A freelance book illustrator who is the
beneficiary of full-time employment for a year notifies her other clients that she
can't work for them. (2) A person who is the beneficiary of a promise to convey
land cancels a contract for the purchase of a different parcel.
Beneficiary doesn't know of contract: A common exam situation is that the beneficiary
doesn't know of the contract prior to the time it's discharged or modified. In this situation,
the beneficiary obviously can't do any of the 3 vesting events (manifest assent to the
promise, bring suit on it, or materially change her position). Therefore, the original parties
can modify or discharge the contract with impunity.
Example: Frank, owner of a house, hires Paynt, a painting contractor, to paint Frank's
residence. The contract price is $5,000, provided that Paynt delivers a "satisfactory result."
A provision in the contract directs that payment be made to Paynt's daughter, Dot
(intended as a wedding gift). When the job is completed, Frank says he doesn't find it
"satisfactory." Paynt agrees to settle for a lower price of $4,500, provided the money's paid
directly to him. Paynt doesn't give any of the money to Dot. Shortly thereafter, Dot finds
 out about the promise, and sues both Paynt and Frank for breach of the agreement. Dot will
lose, because prior to the settlement (a modification), Dot didn't manifest assent to
receiving the money, didn't bring suit on the agreement, and didn't materially change her
position in reliance. Therefore, Dot's rights never vested.
VIII. Exam Tips on IMPOSSIBILITY, IMPRACTICABILITY AND
FRUSTRATION
Exams often hint at the possibility of a defense based on Impossibility/Impracticability/Frustration (we'll
call this "I/I/F" for short). Usually, your fact pattern won't mention any of these defenses—it'll be up to
you to spot the issue, based on the fact that some unlikely event has occurred that makes it difficult or
senseless for one party to perform.
Issues Common to Impossibility, Impracticability and Frustration
Failure of basic assumption: Remember the basic standard for when I/I/F applies: it applies only
when the parties made the contract on the basic assumption that the contingency in question would
not occur. When you try to decide whether this test is met, focus on three sub-issues:
(1) Assumptions shared by both parties: Look first to see if both parties made this underlying
basic assumption—if the party who's trying to avoid a discharge (i.e., who's trying to enforce
the contract) didn't know that the contract was predicated on that assumption, I/I/F won't
apply.
Example 1: Stu, a high school senior, interviews with Count, an accountant, for a position
in his firm in January. Count then writes to Stu: "I offer you employment with my firm,
beginning August 1, at $25,000 a year." Stu accepts the offer several days later. In March,
Count sends Stu a letter stating: "It was my intention in hiring you to have you work with
my International Union account. However, the Union no longer retains my firm. Therefore,
I lack the funds and will not hire you. Good luck in securing other employment."
If Count asserts the defense of frustration, Stu can successfully contend that he wasn't
apprised of the special reason for hiring him. Therefore, the keeping of the account wasn't
a "basic assumption" of the contract, and Count can't be excused on grounds of frustration.
Example 2: In January, O and A enter into a contract under which A will design a ten-
story hotel to be built on a piece of land owned by O adjacent to City Airport. The design
is to be delivered on or before May 1. A is aware that O's interest in building a hotel is on
account of the business that will come from travelers using the airport. In March, the
government announces that the airport will shut down at the end of the year.
O will probably be able to argue successfully that the continuation of the airport's
operation was a basic assumption under both parties made the design contract. If he can
show this, he'll probably be able to have the contract excused on frustration grounds.
(2) Foreseeability: Remember that the more foreseeable the contingency was, the less like it is
that that contingency represents the failure of a basic assumption.
Circumstances which are usually foreseeable, and that therefore probably won't lead to
discharge:
Increase in costs. Look for a sudden large increase in the cost of labor or materials
which the seller of goods or services claims makes it impossible to perform.
Usually, such difficulties were relatively foreseeable when the contract was made,
in which case they probably won't excuse performance. (But this won't always be
true: if the cost increase is due to a truly unforeseen type of event—a sudden
industry-wide strike, outbreak of war, etc.—impossibility will generally apply.)
Circumstance which may or may not be deemed foreseeable:
 Weather conditions. Look for bad storms that either push off the date of
completion of performance or destroy a crop. Note in your answer that
foreseeability probably depends upon whether that type of weather was usual for
that time of year in that region.
(3) Risk allocation: The last step in determining whether a party's obligations have been
discharged because of I/I/F is to make sure that the risk of one of these outcomes wasn't
implicitly allocated to that party by the contract.
F.O.B. contracts: Watch for "F.O.B." and the name of a location in an agreement for the
sale of goods. The phrase means that the parties agreed that the risk of loss would not pass
to the buyer until the goods were delivered to a carrier at the location specified. Thus if the
location specified is the buyer's factory ( "F.O.B. buyer's plant" ), the buyer does not
assume the risk until the goods arrive at her factory.
Example: B agrees to purchase fifty gallons of chemicals from S at $5 a gallon "F.O.B.
B's factory." S delivers the chemicals to T, a trucking company, which loads it onto its
truck. While en route to the city where B's facto truly unforeseen many-fold market-price
increase (e.g., 10x) might be sufficient.
Technology breakthroughs: If S agrees to develop a customized product for B, and both
parties understand that the product will need to develop or use new, unproven, technology,
the court will almost certainly find that the parties allocated to S the risk of an inability to
develop the needed technology. (Example: CompCo agrees to develop a new type of
computer to meet Bank's special needs. If CompCo can't develop the new computer, it
can't rely on impracticability to escape the deal, even if CompCo's failure comes despite its
having made all reasonable development efforts.)
Supervening illegality: When you find a fact pattern where parties have entered into an illegal contract,
pay attention to when it became illegal. If it became illegal because of a change in law that took effect
after the formation of the contract, then the frustration or impossibility defenses may apply. But if the
illegality existed before the contract was signed, and one or both parties were unaware, analyze the
problem under illegality (next chapter), not I/I/F.
Example: In February, L, a landlord, and T, a tenant, enter into a written lease agreement for two
years beginning April 1 whereby T is to rent a building for use as a "sports book," an
establishment where bets are made on horse races and other sporting events. The rent is $1,000 per
month and 20 percent of T's gross profits. T gives L a $2,000 deposit. Between the time of the
signing of the lease and April 1, a law is passed which makes the operation of sports books illegal.
T may sue for the refund of his deposit and the parties will be excused from performing. This
is so because T's purpose, of which L was aware, has been frustrated by the supervening illegality.
Frustration of Purpose—Special Issue
When dealing with a fact pattern where one party claims frustration of purpose, make sure the purpose
is totally (not just partially) frustrated.
Illness: For instance, in cases not involving personal services, a party's serious illness may not
lead to total frustration, in which case it probably won't lead to excuse for frustration.
Example: Sol, a homeowner, enters into a written contract with Byer for the sale of Sol's
house in Illinois. Three months later Byer informs Sol that he's retiring down South
because he has suffered a heart attack, and that he therefore won't be going through with
the deal. If Sol sues Byer for breach of contract, Byer won't be excused from performing
because of frustration—Byer could still buy the house and re-sell it, so his illness and
 retirement probably haven't totally deprived him of all possible benefits from the
transaction.
Impossibility—Special Issues
When you're dealing with a fact pattern where one party claims impossibility, make sure performance
is totally impossible, and that the event creating the impossibility was unforeseeable at the time of
formation.
Destruction of subject matter: Destruction isn't always an excuse.
First, determine whether the parties allocated the risk to the party seeking to be
excused—if it was, then impossibility/impracticability won't apply.
Example: Where a builder agrees to build a new structure, most courts say that the
builder implicitly assumes the risk of total destruction of the structure during
construction (unless the contract expressly says otherwise).
Next, if the risk remained with the party claiming impossibility, determine whether
the subject matter is replaceable on a commercially sensible basis—if so,
impossibility won't apply.
Example: B enters into a written agreement to purchase 100 standard air
conditioning units from S, F.O.B. B's warehouse. While the truck carrying the units
is en route to B's warehouse, it overturns and the shipment is destroyed. Because S
could readily obtain replacement units, S won't be excused on account of the
destruction. (But S would be excused if what was being delivered was, say, a one-
of-a-kind painting.)
Also, make sure that the impossibility isn't due to the fault of the party claiming
impossibility.
Impracticability—Special Issues
Increased expense: Although an increased expense generally doesn't rise to the level of fulfilling the
requirements for an impossibility defense, some jurisdictions sometimes allow a party to use the
increased costs as an impracticability defense.
Extreme increase: In addition to ensuring that the parties didn't allocate the risk (e.g., an
explicitly fixed-price sales contract), make sure that the impracticality is extreme. Probably the
cost of performance should be a minimum of five times the anticipated cost.
Example: Fischco, a wholesaler of fish, enters into a one-year contract with Rest, a
restaurant, to provide Rest with 250 pounds of salmon per week at $4 per pound. One
month into the contract, Fischco announces that because of an oil spill that has reduced the
catch of salmon, Fischco's costs have gone from $3/pound to $8/pound, and that Rest must
now pay $9/pound. Fischco is very unlikely to succeed on an impracticability defense,
because: (1) a fixed-price contract for a commodity usually means an implied allocation to
the seller of an increase in market prices; and (2) the less-than-3x cost increase is not so
extreme as to be the kind of unforeseeable event that might justify use of the doctrine.
Slight reduction in profitability: Also, make sure that the increase wouldn't just make
performing slightly unprofitable. (For instance, even a 10x increase in the cost of one
component wouldn't suffice, if the component was only a very small percentage of the
seller's overall costs.)
Consequence of Excuse
Remember that if parties are excused from performing, contract damages aren't awarded, because
there hasn't been a breach.
 However, quasi-contractual remedies for the value of work performed (or benefits rendered) may
be appropriate. (See the chapter on Remedies).
IX. Exam Tips on WARRANTIES
Express warranty: Be on the lookout for descriptions of goods or services to be furnished, since such
descriptions are usually express warranties. For instance, a description of goods in a sales contract is an
express warranty that the goods will have those qualities.
Example: B agrees to purchase 250 2??×?4? "construction grade" wooden studs from S by a
written contract in which she agrees to tender payment on delivery prior to inspection. After
paying for the studs, B inspects them and discovers that they're utility grade instead of
construction grade. B sends a letter notifying S that the studs are defective, but keeps them and
uses them anyway. B is entitled to damages for breach of express warranty, since the description
of the goods as "construction grade" amounted to an express warranty that the goods would have
this feature, and B's use of the goods after inspection did not serve as a waiver of the warranty.
Implied warranty: Remember that a contract providing that goods are to be sold "as is" serves to
impliedly disclaim all implied warranties (including the warranty of merchantability and the warranty of
fitness for a particular purpose). But such language does not exclude express warranties.
Example: Seller offers, on e-bay.com, a "1951 Barbie & Ken matching 'Beach Party' doll set,
sold as is." The words "as is" would prevent the buyer from suing on account of the poor condition
of the set, even if a sale of dolls on e-bay would normally include an implied warranty that the
goods were in good enough condition to be worth collecting. However, the words would not
prevent the buyer from suing if the dolls turned out to be a 1980 set, because the description
"1950" constituted an express warranty that the dolls were from that year, and the words "as is" do
not modify or disclaim express warranties, only implied ones.

X. ESSAY EXAM
QUESTIONS AND ANSWERS
The following questions were adapted from various Harvard Law School First-Year Contracts examinations
of the past. The questions are reproduced almost exactly as they actually appeared, with only slight changes
to the facts. The sample answers are not "official" and represent merely one approach to handling the
questions.
XI. QUESTION 1
David Dole, owner of 75,000 acres of forest land in Dover County, Maine, had attempted for several years
without success to persuade state and local authorities to purchase the tract as a wildlife refuge. He was
approached by Paul Pinsky, a prominent producer of motion pictures and creator of an entertainment park in
California known as Pinsky Land. Pinsky said that he saw great possibilities in Dole's tract of land as a ski
area if properly developed with access roads, motels and a summer resort, and if several hundred cottages
were built for rental. However, extensive surveys would be needed before he would want to buy. Dole
explained that the taxes assessed against the property were delinquent, and that the 2007 tax would be
payable Dec. 11, 2007. Dole added: "I simply have to bail out by then." Dole then prepared and gave Pinsky
the following document:
Oct. 9, 2007
I hereby give Paul Pinsky the privilege of entering my land in Dover County, Maine to survey and
map it as a recreation area. I will sell him the whole tract of 75,000 acres for $7.5 million, provided he
accepts this offer by giving me a certified check for $750,000 on or before Dec. 4, 2007.
/s/ Paul Dole
 Pinsky sent a crew of surveyors and architects to the Dover County tract, where they worked for four
weeks, at a cost to Pinsky of $100,000. Their activities became widely known and on Nov. 12, a group of five
wealthy owners of land in Maine approached Dole, who informed them of his offer to Pinsky. They
persuaded Dole that the land should be preserved unspoiled if possible. During the next two weeks the five
secured pledges totaling $10 million from 500 persons, and on Nov. 30 the five gave Dole a check for $1
million and jointly signed a promissory note for the remaining $9 million. Dole then executed a conveyance
of the 75,000 acre tract to the Wilderness Society, a non-profit corporation whose charter authorizes it "to
receive and hold land that is still preserved in or can revert to its natural state and to dispose of such holdings
only on such terms as will insure that its natural state is preserved so far as possible."
On Dec. 1, 2007, Pinsky called from California to Dole's home in Webster, Mass., gave his name, and said, "I
have a $750,000 check for Mr. Dole. Where shall I mail it?" Acting on instruction from Dole, his wife
replied, "He has moved. I don't know where he is." Pinsky arrived in Webster on Dec. 2 with a $750,000
check in his pocket. He inquired around the city and was told that Dole was last seen leaving town by bus
with a lot of camping gear. Pinsky, in hot and continuous pursuit, proceeded to the Dover County tract and
after searching through the forest finally found Dole in a secluded cabin on Dec. 6. Pinsky said: "Mr. Dole, I
believe. Here is your check, well within your Dec. 11 tax deadline." Pinsky tendered a $750,000 certified
check but Dole refused to accept it. Pinsky now consults your law firm. The senior partner instructs you to
"prepare a memorandum discussing the legal and equitable remedies Pinsky may have against Dole and the
Wilderness Society, and stating your best judgment of the likelihood of success concerning each possible
remedy." Write the memorandum.
XII. ANSWER TO QUESTION 1
Was there an acceptance while the offer was still in force? I am putting aside until later whether Dole's offer
was an irrevocable one. Assuming that the offer was not irrevocable, the question is whether Pinsky accepted
while the offer was still in force.
As a preliminary matter, it is not clear that Dole's offer of October 9th is sufficiently definite to give
rise to an enforceable contract upon Pinsky's tender of a check. The offer contemplates that Dole will give
Pinsky $6.75 million worth of credit, but does not specify when this large sum must be paid, nor how it is to
be secured. Nor does the offer specify a conveyance date. Thus a court might hold that even if we show that
Pinsky did accept before Dole revoked or the offer lapsed, there is no enforceable contract for lack of
definiteness. But I think we have a fair chance of showing that as of October 9th, the parties fully intended to
reach sufficiently definite terms upon Pinsky's tender of a check. The court might therefore be induced to
supply the missing terms with respect to time for full payment, conveyance date, security, etc.
Turning now to whether Pinsky did anything to accept while there was still a valid power of
acceptance, the general rule is that the offeror has the right to set the time as of which his offer expires. Thus,
Dole's October 9th offer created a power of acceptance which lasted no later than December 4th. It is possible
that we will be able to show that Pinsky's call to Dole's wife, in which he said that he had the check ready for
mailing, constituted an acceptance. However, in all probability Dole will successfully contend that only
receipt by him of the check, not a statement of Pinsky's readiness to send it, constituted an acceptance. Dole
could point to the general rule that gives the offeror the right to prescribe the exact means by which his offer
may be accepted.
It is also possible that Pinsky's act of showing up in Webster with the check constituted a sort of
"constructive" acceptance, in that he did everything in his power to give Dole a check at the place where Dole
was supposed to be. Again, however, I would imagine that a court would hold that no acceptance could take
place until Dole was actually given the check. We could argue that Dole's act of disappearing constituted an
intentional interference with Pinsky's right of acceptance, and that therefore Dole has no right to insist upon
the precise conditions of his offer (i.e., that the check actually be given to him in person.) However, since I
am now assuming that Dole's offer was revocable at any time, presumably Dole had the right to thwart Pinsky
by moving, just as he had the right to revoke the offer outright. This would be an indirect communication of
revocation.
We might try the argument that Dole in fact made two offers to Pinsky: one was the written offer,
which terminated on December 4th, and the other was an oral offer which by its terms was to last until
December 11th (Dole's tax deadline). Therefore, we would contend, the oral offer remained in force until
expressly revoked, and Pinsky's December 6th tender of a check was a valid acceptance of this offer. (Dole's
refusal to accept this check on the 6th probably would not be a revocation of the offer, since I think a court
would hold that the tender of the check was sufficient to accept.)
I think, however, that this "two offers" theory is unlikely to prevail. Even if we convince the court that
there were two offers, Dole will have a good chance of showing that the oral offer was revoked. An offeror
can revoke his offer by indirect as well as direct means. Restatement 2d, §43, states that "An offeree's power
of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into
the proposed contract and the offeree acquires reliable information to that effect." Dole could argue that when
he went off into the wilderness without telling anyone of his whereabouts, and Pinsky learned of his having
done so, it should have been clear to Pinsky that Dole meant not to accept the offer.
In summary, unless we can show that Dole's offer was irrevocable, I think we will have a very hard
time showing that Pinsky accepted it while he still had a valid power of acceptance. I turn now to the
irrevocability question.
Irrevocability of the offer: There are a number of theories which we might advance to
establish that Dole's October 9th offer was irrevocable until Dffer was irrevocable until December 4th.
If we can succeed with any of these arguments, I think we will then be able to convince the court that Dole's
running off into the wilderness was an interference with Pinsky's right to exercise his option, and that Pinsky
should be regarded as having validly exercised the option by arriving in Webster with the check. (If the offer
was irrevocable, Dole should not have the right to get around its irrevocability by making it impossible for
Pinsky to accept.)
One theory is that the October 9th offer was a validly binding option contract. Restatement 2d, §87(1)
(a), makes an offer irrevocable as an option contract if it "is in writing and signed by the offeror, recites a
purported consideration for the making of the offer, and proposes an exchange on fair terms within a
reasonable time." The difficulty with this provision is that Dole's October 9th document does not recite a
purported consideration. Therefore, unless the jurisdiction in which Pinsky sues has a statute or case law
analogous to the UCC "firm offer" provision, §2-205 (by which a merchant's signed offer to sell that states
that it will be kept open for a certain time is irrevocable, even without consideration), I don't think a
conventional option contract theory will work. We might conceivably be able to show that Pinsky's act of
surveying was of benefit to Dole, and bargained for by him, and was therefore consideration for the option.
But since there's a good chance that the court will find that Dole didn't care whether Pinsky surveyed or not,
and that there was therefore no consideration for the option, I think this whole "binding option" contract
theory will probably go down the drain.
A more promising theory is that Dole's offer was for a unilateral contract, and that when Pinsky
began to perform the requisite act of acceptance (i.e., the tender of a check), the offer became temporarily
irrevocable. See Restatement 2d, §45. To win with this theory, we would have to convince the court that from
the time Pinsky got to Webster, he was engaged in the act of tendering the check (and not merely preparing
to tender the check.) If we can establish this, we have a good chance of getting the court to follow
Restatement §45, and Pinsky will be able to get the full expectation measure of damages.
Promissory Estoppel: If all of the above theories fail, I think we can at least let Pinsky get his
$100,000 in surveyors' fees, by use of the doctrine of promissory estoppel. Restatement 2d, §87(2) provides
that "An offer which the offeror should reasonably expect to induce action or forbearance of a substantial
character on the part of the offeree before acceptance and which does induce such action or forbearance is
binding as an option contract to the extent necessary to avoid injustice." This provision does not require that
the offer have been supported by consideration, and seems to fit Pinsky's situation to a "T." Dole certainly
knew that Pinsky planned to spend money on surveyors' fees.
The reason that this promissory estoppel theory is less than completely satisfactory is that, as the Restatement puts it,
enforcement will be given only "to the extent necessary to avoid injustice." I'm afraid that the court is likely to award
Pinsky only his $100,000 in fees, and not to give him the "benefit of his bargain" (i.e., the profits he could have made
from Pinsky World, or even the $2.5 million profit he could have made by reselling the land to the wilderness group.) It's
possible that we can convince the court that "justice" requires giving Pinsky at least this $2.5 million turnaround profit,
but I wouldn't count on it.
Specific Performance Against Wilderness Society: If we can establish, by one of the above theories,
that there is a valid contract between Pinsky and Dole, we might be able to get the court to order specific
performance, in the form of a decree ordering Wilderness Society to convey the land to Pinsky (and a
collateral decree ordering Dole to return the money raised to purchase the land for donation to the Society). In
support of this request for specific performance, we can point out that the Wilderness Society people are not
bona fide purchasers, but in fact had knowledge of the offer to Pinsky. But as a practical matter, I don't think
we're likely to find a judge who would be willing to turn this land over to a developer like Pinsky, rather than
keeping it in its natural state. Specific performance is a remedy very much left to the trial court's discretion,
and I wouldn't get our hopes up about it. I think the best we can hope for is a breach of contract verdict
against Dole, with damages of the $2.5 million profit that Pinsky could have made by selling the land to the
Wilderness people. If we can come up with some very specific figures showing how profitable Pinsky World
would have been, maybe we can get some damages for these lost profits as well, but I'm afraid they will be
held to be too speculative unless Pinsky has previously operated a similar business.
XIII. QUESTION 2
The General Construction Co. of Memphis, Tennessee decided to build for itself a new headquarters building
of an original and striking design. It secured much publicity in journals read by architects and builders by
printing artists' sketches of the building, located at a dramatic site at a bend in the Mississippi river. In the
publicity was included the announcement of a self-imposed deadline for completion, a deadline that was very
short by usual standards of the construction industry for a building of that size.
The Frank Corporation is a steel fabricator that buys steel ingots and transforms them into structural
steel. On September 1, 2006, the General Construction Co. and the Frank Corporation executed a written
contract under which Frank undertook to fabricate and deliver the structural steel called for by General's
specifications, which were made part of the contract. The contract provided a delivery schedule with five lots
to be delivered as follows:

Lot I March 6, 2007

Lot II March 27, 2007
Lot III April 10, 2007
Lot IV April 24, 2007
Lot V May 1, 2007
The contract also provided that although the tonnage and value of the lots would differ somewhat, the
total contract price of $10 million would be divided into five installments of $2 million each, and that General
would pay Frank $1.75 million "within five days after the timely and satisfactory delivery of each lot. The
$250,000 withheld from each payment will be paid by General Co. after complete performance, satisfactory
to the General Co., of all Frank Co.'s obligations." The contract also stated: "Because of the importance to the
General Co. of completing its own building by the published completion date, time is declared to be of the
very essence of this contract and for each day's delay in delivery of any lot General may retain $5,000 as
damages."
Lot I was delivered on March 12 (6 days late) and on March 14 General mailed a check for $1.75
million to Frank. Lot II was delivered April 6 (10 days late). On April 9 General's President telephoned
Frank's President to express her concern about the timeliness of future deliveries.
"I know your reputation is on the line, but supplies of steel are getting short. My usual suppliers have
failed me and I expect there will be some longer delays. But aren't you worried about the recent river
floods?"
General's President replied:
"Don't you worry about us. You go ahead and deliver or I'm going to saw you off."
By the date of this conversation, April 9, the steel contained in Lot I had been all attached to the
foundations of the structure and a few beams from Lot II had been attached (the rest was lying on the ground
at the site) when, on the morning of April 11, the levee protecting the area burst and the flood waters of the
Mississippi, which were then reaching their greatest height in 100 years, covered the building site to a depth
of 15 feet. The Army Corps of Engineers estimates that the water will not subside at the site before the
middle of June. Past experience makes it clear that lying under water for two months will make the steel at
the site unusable unless cleaned of muck and rust and covered with a special rust inhibitor. The cost of this
operation will be at least $1.2 million.
On April 12, Frank faxed General:
"Have not yet obtained steel for Lot III. Best promise from any supplier is delivery to us on May 25.
We can complete fabrication of Lot III and deliver it to you by June 15. After that I will do my best to
obtain supplies."
General faxed in reply:
"You have been late with every delivery. We cannot accept any promises from you. We cancel."
After canvassing all steel fabricators with substantial supplies of steel, General now finds that the best
delivery terms are offered by States Steel Corp., which will charge $7.5 million for the balance of the steel
due under the Frank contract. States Steel Corp. will promise to begin deliveries July 1 and complete them by
August 1. The architects' journals have published pictures of the original model of the General headquarters
building and beside it some steel beams projecting from the river, with such captions as
"Old Man River Rolls Over General And Just Keeps Rolling Along."
The President of General expresses to you her dismay over the effects of these events on General's
reputation, and her uncertainty as to whether to complete the submerged structure. She wants to know
General's rights against and liabilities to Frank if the building is completed by contracting with the States
Steel Corp. for the steel required. What would you advise? Why?
She also asks whether General's rights or liabilities would be altered if the whole building project is
abandoned? What is your answer? Why?
XIV. ANSWER TO QUESTION 2
I will examine first whether General's cancellation of the contract constituted a breach, and will then discuss
the question of damages.
The cancellation: I think General can make a fairly strong case that it was entitled to cancel the
contract when it did. For a definite answer, a number of UCC sections, particularly those dealing with
installment contracts, must be examined.
The contract was clearly an "installment contract," since it authorized in "separate lots," and since
each lot would obviously be "separately accepted" (or rejected), due to the relatively long time periods
between them. §2-612(1)). The real crux of the breach issue is presented by §2-612(3): "Whenever non-
conformity or default with respect to one or more installments substantially impairs the value of the whole
contract there is a breach of the whole.. . . "
Frank will undoubtedly argue that the delay with respect to Lot III did not "substantially impair the
value of the whole contract," and that General therefore had no right to cancel. Frank will base this argument
on the evidence that General could not have used the steel had it been delivered on time, since it would have
been submerged by the flood and would have cost a significant amount to clean. Thus, Frank will argue, the
delay did not substantially impair the value of the contract, since it didn't make things any worse for General
than they otherwise would have been.
I think General can make a fairly convincing response to this, to the effect that not only the delay on
Lot III, but also the uncertainty about whether Frank could make a timely delivery (or any delivery at all) on
Lots IV and V, must be considered in determining whether there was a "substantial impairment" of the whole
contract.
Frank in turn can respond that if it was anxiety about Lots IV and V that induced General to cancel,
General's proper remedy was to "demand assurances" pursuant to §2-609, and not to cancel. However, I think
that General can reply, successfully, that Frank's April 12th fax was itself a failure to furnish reasonable
assurances in response to General's request for assurances on April 9th. In that event, General had the right to
treat the lack of assurances as a repudiation (§2-609(4)), thus allowing it to cancel §2-711(1)). Alternatively,
General can contend that Frank's April 12th fax was an anticipatory repudiation (§2-610), giving General a
right to cancel. However, this is not as powerful an argument, in my opinion, as the "failure to give
assurances" argument previously stated.
Frank might attempt to avoid liability for breach by asserting the doctrine of impracticability or
impossibility. He could say that his source of supply dried up unforeseeably, making performance by him
". . . impracticable [because of] the occurrence of a contingency the non-occurrence of which was a basic
assumption on which the contract was made.. . . " §2-615(a). But assuming that the Frank-General contract
had not specified a particular source from which Frank was to obtain the deal, and assuming that a shortage of
steel ingots is reasonably foreseeable in the industry, it is unlikely that he would prevail with this defense.
In summary, I am fairly confident that: (1) General can establish that it had the right to cancel the
entire contract on grounds of Frank's breach; and (2) Frank should not escape liability by virtue of any
"impossibility" or "impracticability" defense.
Damages: Under §2-607(1), "[t]he buyer must pay at the contract rate for any goods accepted." Thus
General will be liable to Frank for the two lots of steel it accepted, although determination of the "contract
rate," and the possibility of a countervailing damage claim by General against Frank, complicate the damage
issue.
I suppose that General could argue that the "contract rate" is $1.75 million per lot, and the $250,000
per lot retainage is a separate sum which serves as compensation for completion of the whole project, not as
part of the payment for the lot in question. But I don't think we will get far with this argument, since it seems
to me that the retainage scheme really relates to the time for payment, not the items for which payment is to
be made. In any event, I think the question is academic. If the "contract rate" is held to include the $250,000
retainage, we will recover this $250,000 in the form of the contract/cover differential, which is discussed in
the next paragraph.
Assuming that General's deal with States Steel is "in good faith" and "reasonable" (§2-
712(1)), General can recover from Frank the difference between the cost of the cover contract with
States, and the cost of the original contract. Assuming that the court treats the first two installments
as having cost a total of $4 million, the difference between the cost of cover and the cost of
completion under the original contract is $1.5 million ($7.5 million?-?$6 million). This recovery must
be offset against the remaining $2.25 million which General would owe Frank on the first two lots. If
the "contract rate" on the first two lots is held to be $1.75 million, not $2 million, the net result is still
the same General would owe Frank $750,000.
However, General has a right to "consequential damages" in addition to this cover/contract
differential (§2-715(2)). Consequential damages would probably include any delay damages suffered by
General, as General's need for prompt delivery was a "particular requirement of which the seller at the time of
contracting had reason to know." (§2-715(2)). The contract fixes delay damages at $5,000 per day. However,
since this contract clause fixes damages at $5,000 for each day delivery is delayed, and not every day
completion of the building is delayed, it is not clear whether a court would enforce this clause, or would
attempt to make its own estimate of damages. Frank will have a good chance of arguing that the damages
clause applies only to a slightly delayed delivery, not to breach or other cancellation of the contract, and that
ordinary damage rules should apply in the latter event.
Frank will also have a good contention that its non-delivery of Lot III saved General upwards of $1
million, since the steel would have been covered by the flood, and would have cost that much to clean off.
Frank could point to §2-715(2), which allows subtraction from the cover/contract differential of any
"expenses saved in consequence of the seller's breach."
In summary, I would say that General will owe Frank $750,000, plus any consequential delay
damages (probably measured by usual standards, not by the $5,000 per day clause), but that the consequential
damages may be reduced by the amount which de-rusting the additional lots would have cost.
If General elects to abandon the building, and not make the deal with States, the only part of the
analysis which would be different is that General would use the difference between the contract price and the
"market price at the time when [General] learned of the breach," not the contract/cover differential. (§2-
713(1)). I have no idea what this market price is. Nor do I know whether the "time when [General] learned of
the breach" will be held to be April 10th (when delivery was due), April 12 (when the "repudiation" took
place), or whatever the date was on which General cancelled the contract; a good argument can be made that
it should be this last date, since that would best protect General's right to have "for a commercially reasonable
time await[ed] performance by the repudiating party." (§2-610(a)).
XV. QUESTION 3
The Alumalloy Co., manufacturer of metal sidings for home exteriors, has divided Brighton, a city of 800,000
population, into four districts for assignment of distributorships. The standard form of agreement used with
its distributors contains an undertaking by Alumalloy to fill orders secured from customers at prices to be
charged to the distributors according to a schedule attached to the agreement. Further, it appoints the
distributor for a four year period, "provided, however, and on express condition that Alumalloy may
terminate at any time the right of Distributor to sell Alumalloy products." The agreement also provides that
the distributor will have the exclusive right for the duration of his appointment to sell Alumalloy products in
the geographical district of Brighton to which he is assigned. Moreover, the distributor will purchase at his
own expense all equipment required for the installation of Alumalloy products and for their refabrication
where this is needed, and "Distributor undertakes for the duration of this agreement not to sell or solicit sales
of Alumalloy products outside the area assigned to him by this agreement." [Assume that this territorial
confinement clause is consistent with public policy and the antitrust laws.]
On Sept. 10, 2005, Alumalloy and Donald Dirk signed a copy of the Alumalloy standard
agreement, assigning to Dirk District II in Brighton, as defined on a map prepared by Alumalloy and
attached to the agreement. On Nov. 2, 2005, Alumalloy and Peter Pigeon signed a similar
agreement assigning to Pigeon District III, as defined on a map that was similarly attached. Dirk
and Pigeon each purchased installation and refabrication equipment at the cost to each of
approximately $200,000. During the period prior to May 1, 2007, Dirk prospered while Pigeon
suffered a net operating loss of $50,000. The losses by Pigeon were due to sales resistance that he
met in District III, which was for the most part a blighted area, and to the high cost of refabricating
sidings to fit the old-style houses located in most of the area. Dursalespeople solicited orders in a 12-
square-block area within District III but near its outer edge which adjoins District II. They discovered that
Dirk had already invaded this area and sold and installed Alumalloy sidings in 25 relatively new houses in the
area. The profit to Dirk on these installations averaged $3,000 per house.
(A) Pigeon inquires of you whether, if Alumalloy cancels his distributorship, he can recover any
damages by suing either Alumalloy or Dirk. On the basis of the facts so far stated, what would you advise?
Why?
(B) Pigeon then complained to the Alumalloy home office concerning Dirk's invasion of his territory
and received the following reply on May 1, 2007: "We do not care that much who sells our products. We are
completely satisfied with Dirk, to whom we are sending a copy of this letter. We are notifying him at the
same time that, for the remaining period of the contract, we waive the termination condition that we
originally reserved in his agreement. We will carry you along and won't cancel you out until you have got
back your investment but you will have to work out with Dirk any problems you have with him." Since
receiving this letter, Pigeon continued to purchase materials from Alumalloy as he pondered upon his course
of action and noted that Dirk continued to purchase and install Alumalloy sidings in ever-increasing
quantities. Pigeon now asks you whether this letter improves his chances of securing damages from Dirk for
the latter's past invasions of Pigeon's territory. He also asks you whether, in light of all the facts, he would be
able to enjoin Dirk from future invasions. What answers would you give, and why?
XVI. ANSWER TO QUESTION 3
Part (A): Pigeon has a possibility of recovering damages against either Alumalloy or Dirk.
Pigeon vs. Alumalloy: Pigeon will only have a right of action against Alumalloy if he can show that
the latter breached the contract. This will in turn depend principally upon whether the termination clause of
the contract ( "provided, however, and on express condition that Alumalloy may terminate at any time the
right of Distributor to sell Alumalloy products" ) is to be literally enforced. There are several indications that
the parties did not intend (or at least that Pigeon did not intend) that Alumalloy would have the right to
terminate the distributorship for no reason at all.
First, the contract clearly contemplated the expenditure of large sums by Pigeon for installation and
refabrication. It is unlikely that Pigeon would have agreed to this requirement, and would have in fact spent
$200,000, if the understanding was that he could be terminated for no reason at all.
Second, the common practice of businesspeople in distributorship arrangements like this is
to make the right of termination available only where the distributor does not perform satisfactorily.
Pigeon could probably introduce evidence of this common business practice (a "trade usage" —see
UCC §1-303(c)) to show that this is how the termination clause should be interpreted. Such
evidence would not run afoul of the parol the parol evidence rule, since Pigeon would be seeking not to
contradict the writing, but to "interpret" it.
The termination clause is stated to be an "express" condition of the contract as to which strict
compliance would ordinarily be necessary. However, the court has the power to require merely substantial
compliance, particularly where, as here, Alumalloy has received benefits under the contract. Thus, the court
could hold that the right of termination would be exercisable only if Pigeon did not perform satisfactorily.
Alternatively, the court might hold that the termination clause was unconscionable, allowing the
court to refuse to enforce it. In support of this contention, Pigeon could point out that the clause was buried in
a standard form contract, rather than being included upon the special attached sheets which contain the most
important aspects of the deal. Also, Pigeon could obviously point to the extremely one-sided and unfair effect
that literal enforcement of the clause would have. Alumalloy, on the other hand, could point to the fact that
both parties are businesspeople, and that the unconscionability doctrine has been used relatively rarely in such
business contracts.
Assuming that the clause is interpreted to allow a right of termination only if Pigeon performs
unsatisfactorily, the satisfactoriness of his performance would be in issue. Since the contract contains no
requirement that Pigeon sell a certain number of units, there is no objective standard by which to measure his
performance. In view of the fact that the district assigned to Pigeon was an unpromising one, and also
considering Dirk's incursion into Pigeon's territory, Pigeon's performance would probably be held to have
been adequate. In that event, Alumalloy would be held to have breached by terminating the contract.
Alumalloy might attempt to argue that the entire contract is invalid for lack of consideration. In
support of this argument, it could point to the fact that Pigeon is not required to make a certain number of
sales in the district, and has therefore not really promised to do anything. However, Pigeon could answer by
citing Wood v. Lady Duff Gordon, and by saying that he had an implied obligation to make a good faith effort
to sell the Alumalloy products. In all probability, Pigeon would succeed with this argument.
Damages against Alumalloy: If Pigeon establishes that Alumalloy breached, he could try to obtain
either expectation or reliance damages. He will have difficulty establishing with sufficient certainty that he
would have made any profits from the enterprise, and even more difficulty establishing a particular dollar
amount. Most courts do not permit the plaintiff to prove lost profits from a new business, and where the new
business is losing money, the task is even more difficult.
Therefore, Pigeon will be better off trying to get reliance damages. Where expectation
damages are difficult to measure, courts often use reliance as a measure of damages. However, if
the defendant can prove that the plaintiff was in a "losing contract," the court will not allow a full
measure of reliance damages, as this might put the plaintiff in a better position than he would have
been in had the contract been performed. However, Alumalloy will bear the burden of proving that
the contract would malloy had occurred. Even if Alumalloy does prove that Pigeon would have lost, say,
$75,000 over the four-year life of the contract, Pigeon still has a good chance of recovering his $200,000
gross reliance damages minus the $75,000 he would have lost anyway, or $125,000.
Pigeon vs. Dirk: In order for Pigeon to obtain damages from Dirk, he'll have to show that Dirk's
promise not to infringe on any other distributor's district created enforceable rights in Pigeon. He can do this
only by showing that he was a third party beneficiary of the Alumalloy-Dirk contract.
Dirk's promise to Alumalloy created rights in Pigeon only if Alumalloy intended to benefit Pigeon by
inducing Dirk to make the promise. Pigeon can make a powerful argument that Alumalloy's motive in
inducing such a promise of non-infringement from each of its distributors was to be able to offer each
distributor an exclusive area—without Dirk's promise of non-infringement, Pigeon might have been unwilling
to make his contract with Alumalloy. Therefore, Pigeon can say he was an intended beneficiary.
Dirk can counter this argument by contending that Alumalloy's motive in making him promise non-
infringement was to maximize its own sales by making sure that every territory was adequately staffed. But in
all probability, Pigeon will succeed in showing that the primary motive of the non-infringement provisions,
from Alumalloy's point of view, was to enable it to promise each of the other dealers, including Pigeon, an
exclusivity. Pigeon would therefore be able to sue Dirk as a third party beneficiary of Dirk's promise of non-
infringement.
Pigeon's damages against Dirk: Pigeon has a fairly good chance of recovering from Dirk the $75,000
in profits which Dirk made by virtue of his infringement. By the expectation measure, Pigeon's damages
should be enough to put him in the position he would have been in had Dirk not infringed. Dirk will
undoubtedly argue that Pigeon was not as good a salesperson as he, and that Pigeon would therefore have
made far less than $75,000 out of the neighborhood where infringement took place. This issue will turn on the
facts as they develop at trial, but in view of Dirk's wrongful conduct, Pigeon will have a good chance of
recovering the full $75,000.
Part (B): The letter is significant in two respects: (1) It sheds some light on whether Alumalloy originally
intended Dirk's promise to benefit Pigeon or not; and (2) If Pigeon did have a right to sue Dirk as third party
beneficiary, the letter may constitute a modification of Pigeon's rights.
(1) It is hard to say whether the letter makes it more or less ambiguous that the company intended to benefit Pigeon by
extracting the non-infringement promise from Dirk. Pigeon can claim that the company's statement that it doesn't care
who sells its products shows that its motive, when it made Dirk promise not to infringe, was to be able to offer an
exclusive deal to Pigeon and the other potential distributors near Dirk, and not to maximize the company's sales.
However, Dirk can just as easily argue that this statement of indifference shows that the company is not out to protect
its other distributors (i.e., Pigeon), and that it did not therefore intend to benefit these other distributors by extracting
such non-infringement promises.
Conflicting interpretations can also be advanced as to Alumalloy's statement that "You will have to
work out with Dirk any problems you have with him." Pigeon can claim that this shows that the company
contemplated a potential right of action by Pigeon against Dirk; Dirk can claim that this shows that the
company just didn't care.
However, the question is what Alumalloy intended at the time it extracted the promise from Dirk, not
what its intentions are currently. Therefore, Pigeon will still probably be able to show that he was (originally
at least) a third party beneficiary of Dirk's promise.
(2) Dirk can argue that even if Pigeon originally had a third party beneficiary's rights, these rights
have been altered (and destroyed) by Alumalloy's letter. He can make a perfectly reasonable argument that
Alumalloy's refusal to enforce the non-infringement promise, and its communication of that refusal to Dirk,
was an enforceable modification of any third party beneficiary rights Pigeon may have had. The modern
view, however, is that once the third party beneficiary changes his position in reliance on the promise, his
rights are vested, and cannot be altered. Pigeon's signing of the contract, and his making of expenditures,
could probably be shown to have been in reliance on the guaranty of exclusivity. Dirk can come back with the
contention that Pigeon, by continuing to deal with Alumalloy after the letter, implicitly assented to the
proposed modification.
Pigeon's right to injunction: If Pigeon can make his way through this thicket of argument and
counter argument, and can establish his third party rights, he has a good chance of getting an injunction.
Because his lost profits are hard to calculate, his legal remedy (i.e., his right to recover damages) is probably
not adequate. Furthermore, the injunction sought here is a negative one, and can be much more easily policed
by the court than an injunction requiring the defendant to do something affirmatively.
In summary, if Pigeon can prove breach, he can probably get an injunction, to last for the remainder
of Dirk's four-year contract, or until Pigeon's own contract is rightfully terminated, whichever happens first.