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Contributed by Roger Martin, 2L Student by night at Univ. of San Diego, Patent Agent by day at firstname.lastname@example.org
**WOOD V. BOYNTON (1885)
Facts: P. owned an rough and uncut stone she did not know the identity of, although she thought it might be a topaz. P. sold said stone to D., who also did not recognize the identity or value of the stone, for $1. Upon finding out that the stone was actually a very valuable diamond, P. tendered the D. $1.10, and demanded return of the stone. D. refused, and so P. brought suit.
Nature of the Risk(s): In the absence of explicit contractual statements otherwise, the seller assumes the risk that he under-charged for an item, and the buyer assumes the risk that he over-paid for an item.
Issue(s): Is the P. entitled to rescind the sale because she was ignorant as to the "hypothetical fair market value" of the stone she sold D.?
Holding(s): "In the absence of fraud or warranty, the [hypothetical] value of the property sold, as compared with the price paid, is no ground for recission of the sale."
Reasoning: Neither the P. nor the D. had any knowledge that the stone was a diamond, so there was no fraud. In addition, there was no agreement of warranty, either stated or implied. Therefore, the risk was equally borne by both the buyer and the seller, and the seller could not rescind the sale.
**ANDERSON V. BACKLUND (1924)
Facts: P. was having difficulty "making ends meet" because the crop was poor on the farm land he leased from D.. P. alleges that D. agreed to provide enough water for 100 additional head of cattle, if he would put them to pasture on his land. The water supply failed, however, and so the then 174 head of cattle lost value due to starvation, and the P. was damaged in the sum of $2,500.
Nature of the Risk(s): Both parties assume the risk of fulfilling exactly the terms of the contract, however absurd or improbable, as long as it remains possible to fulfill that contract.
Issue(s): Was there a contract between P. and D.?
Holding(s): "Contracts must be in certain terms and not so indefinite and illusory as to make it impossible to say just what is promised".
Reasoning: The language between P. and D. was taken as advice and not a contract, and so the court concluded there was no contract.
Notes: The court overlooked the fact that D. was aware that P. bought the cattle, as the D. had induced him to do by relying on D.'s "advice". This would probably constitute a contract.
**SHERWOOD V. WALKER (1887)
Facts: P. desired to purchase cow from D.. D. sent P. to D.'s farm to see remaining cows which P. believed to be sterile. P. went to D.'s farm and found a cow he wished to purchase, and D. agreed to sell cow to P. for 5 1/2 per lb in writing. D. gave P. an order directing the farm to deliver cow to P.. D. realized before delivery to P. that the cow was pregnant, and so more valuable than the agreed on price, and refused to deliver cow to P.. P. tendered agreed upon price to D., and then filed suit.
Nature of the Risk(s): In the absence of a warranty, the seller assumes the risk that the item sold was of higher quality than he surmised, and the buyer assumes the risk that the item was of lower quality than he surmised.
Issue(s): Did the fact that the cow was actually pregnant mean that the cow was not actually the "thing bargained for", thus meaning there was no contract.
Holding(s): A person who makes a contract may rescind if the contract was made upon the mistake of fact that induced the agreement.
Reasoning: The parties would not have made the contract except that both thought the cow to be barren, which amounts to mistake of material fact.
Dissent(s): The D. made the mistake, under his own judgment, "without any common understanding with the other party in the premises as to the quality of the animal", and is therefore remediless.
Notes: In Kennedy v. Panama Mail Co., the court held that the corporate shares, although they had gone down in value due to the company not being awarded a lucrative contract, were still the same item contracted for. Analogy of a company that might be "pregnant" with a contract, to the cow in Sherwood.
**SCHOOL TRUSTEES OF TRENTON V. BENNETT (1859)
Facts: P. contracted with construction company (insured by D.) to build a schoolhouse. P. agreed to pay arbitrary installments upon completion of significant milestones of the erection of the schoolhouse. During the construction of the schoolhouse, it was once felled by unforeseen gale winds, and subsequently felled by what the construction company alleged to be "latent defects in the soil". After this second setback, the construction company refused to rebuild it. So P. sues for $1,600 already paid in installments, plus interest.
Nature of the Risk(s): Both parties assume the risk of fulfilling exactly the terms of the contract, however absurd or improbable, as long as it remains possible to fulfill that contract.
Issue(s): Should the D. be liable for the loss if the schoolhouse falls down for reasons other than good workmanship?
Holding(s): "Where a party, by his own contract, creates a duty or charge upon himself, he is bound to make it good if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract".
Reasoning: The contract contained no clauses that explicitly assigned risk of latent soil defects to either party, so they are effectively assigned to the party charged with the construction.
**SYLVAN CREST SAND & GRAVEL CO. V. UNITED STATES (1859)
Facts: P. made 4 bids for providing rock to a U.S. gov't construction site at an airport. Each bid was accepted by the Procurement Office. The contracts were written on a gov't short form which provided in pertinent part that: 1. deliveries would be "as required", 2. "delivery to start immediately", 3. "definite delivery instructions" were available from competent authority, 4. "cancellation by the procurement office may be effected at any time". D. refused to request or accept a delivery from P.. Lower court gave summary judgment for D. on the reasoning that the unrestricted cancellation language made the document not binding as a contract.
Nature of the Risk(s): Risk to P. was that he must prepare and remain ready to perform the actions he contracted for, even though they might not be required by D. in a reasonable amount of time, and may instead be canceled with reasonable notice.
Issue(s): 1. Was the D. (U.S.) breaching contract by not either requiring delivery of any rock within a reasonable time frame or providing reasonable notice of cancellation? 2. Did the cancellation clause make the contract invalid?
Holding(s): 1. When a contract requires deliveries at unspecified times, and that contract specifies that cancellation may be effected at any time, a contractor is liable for breach of contract if the deliveries are not taken within a reasonable time unless reasonable notice of cancellation is given by the canceling party . 2. The option in a contract to cancel at any time does not, of itself, demonstrate a lack of consideration which would invalidate a contract.
Reasoning: 1. It was assumed that both parties were acting in good faith and intended the contract to be binding when it was made. Thus they interpreted the contract to read "We accept your offer to deliver within a reasonable time, and we promise to take the rock and pay the price unless we give you notice of cancellation within a reasonable time". To interpret otherwise would imply that the gov't had the right to cancel after delivery occurred, without paying. 2. The alternative of the gov't to give reasonable notice of cancellation is itself a sufficient consideration, however slight, because the reasonable notice spreads the risk somewhat between the parties, neither bearing the full risk of loss from immediate cancellation by the other.
Notes: Consult U.C.C. 2-309. Illustration 5 to Restatement Second ^205 is based on this case.
**BORG-WARNER CORP. v. ANCHOR COUPLING CO. (1959)
Facts: P. sent a letter to D. proposing a 60 day option to purchase D.'s assets. D. responded with a letter encouraging P. to invest time and money doing a survey of D.'s company, with the promise that D. would cooperate fully if P. made a firm offer which provided for the continued employment of certain employees under mutually satisfactory terms. P. thereafter asked if this letter was a formal offer, to which D. responded ambiguously, and further promised to enter a binding contract with P., with the minor details of employment to be worked out later in good faith. P. then made a formal offer, and both parties began to proceed as if they believed there was a legally binding contract. Some time later, one of the D.'s decided he did not wish to proceed with the alleged contract. P. sued.
Nature of the Risk: When entering a contract leaving certain terms to be worked out later, both parties assume the risk that these later negotiated items will not be as favorable as they desired.
Issue: Was there a binding contract?
Holding: "A contract is not rendered void because the parties thereto contract or agree to contract concerning additional matters."
Reasoning: The majority reasoned (against vigorous dissent) that the D. knew or should have known that his actions would lead the P. to believe that the contract had been made, and that the fact that some points were left for later agreement did not prevent the contract from being binding.
Dissent: The dissent reasoned that the contract had not been made because agreement as to the open terms had not been reached. They argued that as long as the parties knew there was an essential term not yet agreed upon, there was not contract as to the other terms.
Note: They more that a party to contract uses ambiguous language intended to leave itself an out, the more likely the court is to find that there was a contract. The court does not specify a bright line rule here, therefore actively motivating ethical business practice.
**ITEK CORP. v. CHICAGO AERIAL INDUSTRIES, INC. (1968)
Facts: After long negotiations, a letter of intent between P. and D. was signed which stated in part that they would both "make every reasonable effort to agree upon and have prepared as quickly as possible" a contract for the purchase of P. to buy D.. Soon thereafter, D. was offered a higher price by a separate company, and so terminated the contract based on "unforeseeable circumstances". P. sued, and lost by summary judgment at trial court, and appealed.
Nature of the Risk: When parties enter a contract, they assume the risk that a better opportunity will present itself, which they cannot take advantage of due to the nature of their previous contract.
Issue: Was there a binding contract between P. and D.?
Holding: "...the fact that some matters are left for future agreement among the parties does not necessarily preclude the finding that a binding agreement was entered into during the preliminary stages."
Reasoning: The court based their holding on Borg, and reasoned that the attempt parties did not try to reach agreement in good faith as they had promised. In essence, they had contracted to negotiate further terms. They used the Illinois law focusing on intent of the parties to say that there was evidence that would support a finding that both parties intended to be bound.
**DAVIS v. GENERAL FOODS CORP. (1937)
Facts: P. had an idea for a new food product. P. wrote a letter to D. offering to reveal such idea, and D. responded with a letter stating that they would consider her idea, "but only with the understanding that the use to be made of it by [D.], and the compensation, if any, to be paid therefor, are matters resting solely in our discretion." P. revealed her idea, which D. used, and paid P. no compensation. P. sued.
Nature of the Risk: When a seller discloses an idea after allowing the buyer the unlimited right to determine the price after use of the idea, he assumes the risk that the compensation may be less than he hoped.
Issue: Was there an implied promise to pay a reasonable value for the P.'s recipe?
Holding: Where the buyer retains an unlimited right to determine the price of goods, and the seller acts relying upon the good faith and sense of fairness of the buyer to provide reasonable value for the goods, the courts cannot enforce a payment by the buyer.
Reasoning: The court reasoned that the verbiage of the letter was too vague to consider a contract, and that the P. acted voluntarily at the mercy of the D..
Note: THE COURT WAS PROBABLY WAY OFF BASE HERE!!
**THE MABLEY & CAREW CO. v. BORDEN (1935)
Facts: P. is the sister of an employee of D. (company), who was named on the back of a certificate signed by her sister as the beneficiary of a year's salary in the event that her sister died while still in the employ of D.. The last paragraph of the certificate states that it "may be withdrawn or discontinued at any time by [D.] company". Upon the death of her sister, P. was paid no money, and D. claimed that the certificate carried no legal obligation.
Nature of the Risk: When a person enters into contract with another party who retains unlimited right to cancel the contract at any time, they assume the risk of non-performance by the other party.
Issue: Was the certificate a contract that would be binding upon her death?
Holding: When a person designates a beneficiary on a contract that becomes effective upon death of the contracting party, but to which both parties agree may be revoked at any time, it becomes binding upon the death of the contractor, and the "escape clause" does not invalidate the rights of the beneficiary.
Reasoning: There was a contract, because the language of the certificate was motivation for the P.'s sister to remain in the employ of D., so there was a consideration given on both sides. And although the P.'s sister had no cause of action while she was alive, this fact had no effect on the rights of the beneficiary (P.).
**SOMMERS v. PUTNAM BOARD OF EDUCATION (1925);, pg. 168
Facts: P. is a father of high school students. D. is the school board. P. requested D. provide high school facilities within 4 mi. of his house, as was the local public law. D. refused, and so P. transported his children to school for 1 semester, after which he presented the bill for transportation to D.. D. refused to pay, and P. sued. D. demurred claiming no cause of action, and lower court sustained. P. appealed to this court.
Nature of the Risk: When a person does not perform his obligations, and someone else fulfills his obligation for him, he may be held liable for a "quasi-contract" because he was benefited.
Issue: Was a there a contract between the father and the school board, solely because the father benefited the school board by taking his children to school?
Holding: Yes. When a person makes an "act of beneficial intervention" in discharging the duties of another, the parties resultantly enter into a contract.
Reasoning: The court reasoned that the school board had benefited inequitably. The father was required to make sure that his children were in school, so he was justified in performing the school's duties. Thus, there was a contract because of the beneficial intervention.
**UPTON-ON-SEVERN RURAL DISTRICT v. POWELL (1942);, pg. 171.
Facts: D.'s barn was on fire and he called the local Upton police chief and asked him to send "the fire brigade". The Upton fire brigade showed up and began to put out the fire. While the fire was still burning, a neighboring fire chief came by and informed all that the farm was really in his district, and so the Upton fire brigade was not under obligation to put it out for free. When the D. refused to pay for the service, they sued.
Nature of the Risk: You may contract by implied promise when you ask for assistance in protecting your property.
Issue: Was there a contract between the fire brigade and the farmer by implied promise of the farmer to pay if payment was required?
Holding: Yes. Parties create a contract by implied promise when one renders service that requires payment, even though the other may not be aware that the service requires payment.
Reasoning: The court reasoned that the fact that neither intended to enter into a contract was irrelevant. The contract was created because the service was performed and therefore there was an implied promise to pay.
**NOBLE v. WILLIAMS (1912);, pg. 76.
Facts: P.'s were teachers who were hired to teach public school. The D., school board, failed to pay the schoolhouse rent, or furnish necessary classroom materials. The P.'s allege that they were therefore required to pay for the supplies themselves, and so they sought to recover their costs in furnishing the schoolhouse. D. demurred and circuit court sustained the demurrer.
Nature of the Risk: When a person does not perform his obligations, and someone else fulfills his obligation for him, he may be held liable because he was benefited.
Issue: Was a there an implied contract between the teachers and the school board, solely because the school board benefited from the teachers' actions?
Holding: No. "No man, entirely of his own volition, can make another his debtor".
Reasoning: The court reasoned that the teachers had no right to provide the supplies themselves and then demand payment, because they would be forcing the school board into a contract that the school board did not intend.
Notes: This case is in sharp conflict with Sommers where a school board was found to have contracted when someone fulfilled their obligations for them.
**COTNAM v. WISDOM (1907)
Facts: Co-P.'s are physicians who performed an emergency surgery in an attempt to save the life of a accident victim who had fallen from a street car. The victim never regained consciousness and later died. The D. is the administrator of the victim's estate. P.'s are suing for the cost of performing the surgery, which they allege to be customarily dependent on the victim's ability to pay. D. claims that since the victim never gained consciousness, there could have been no contract (not very good argument), and further say that the ability of the victim's estate to pay should have no bearing on the value of the services provided.
Nature of the Risk: A person who commits resources by performing a service in the absence of the other committing resources, runs the risk that he might not be compensated for his performance.
Issue: 1. Was there a contract between the unconscious victim and the physicians?, and 2. If so, what was the value of the services they provided.
Holding: Yes. 1. A person who receives medical care while in an injured and helpless position is liable for payment by way of implied contract when such medical care is provided in good faith. 2. The value of medical services rendered to a victim who cannot negotiate is reasonable compensation for the services rendered.
Reasoning: 1. Although there was no negotiation, no agreement or "meeting of the minds", these are NOT requirements for the creation of a contract. The physicians provided competent medical care in good faith. The victim received a benefit which requires equitable compensation. 2. The victim could not have contemplated the charges since he was unconscious, and so this is an implied contract without a negotiated price where the only equitable determination of price would be the fair value of the service provided.
**VICKERY V. RITCHIE (1909)
Facts: P. built a Turkish Bath house on the land owned by D.. Both P. and D. had signed contracts which had different prices on them. The architect the defendant hired fraudulently put the price at $33,000 for the P. contractor (so he thinks he gets paid more), and at $23,000 for the D. (so he thinks he is paying less). The architect skipped town, and an independent auditor finds that the cost of the materials and labor is $32,950, however the resulting value of the property is only $22,000. P. sues for the $10,000 balance due. The trial court ruled for D., P. appealed for error.
Nature of the Risk: The D. ran the risk that the price he would pay for the value of the materials and labor would be more than the resulting hypothetical market value of the building. The P. ran the risk that he could have received more money for the resources he committed.
Issue: 1. Was there a contract between P. and D.?, and 2. If so, how should the price be determined?
Holding: Yes. 1. Parties enter into an implied contract when a benefit is provided for valuable consideration, even though the price may not have been fixed or agreed upon at the time the contact was made. 2. When parties enter into an implied contract in the absence of a negotiated price, the hypothetical fair value of the benefit furnished shall be used as the resulting price.
Reasoning: The materials and labor were furnished at the request of the D., and for his benefit. The fact that there was a mistake of material fact, namely the price, does not prohibit a contract. Equitably, an implied contract was therefore made, such that the D. was liable for the fair value of what was provided, and he bears the risk of his poor judgment in foreseeing the future value of the resulting building.
***FULLER & PERDUE, THE RELIANCE INTEREST IN CONTRACT DAMAGES (1936)
I. Three principal purposes for awarding contract damages.
A. P. has conferred some value upon the D. in reliance on the promise of the D. and the D. fails to perform. 1. Court may force D. to pay for the value he received from P.. 2. Restitution Interest - Prevention of "unjust enrichment". a. reliance by the promisee b. resultant gain by the promisor c. strongest case for court remedy
B. P. has changed his position upon reliance on the promise of the D. (e.g. committed some resources, passed on other opportunities) 1. The court may force D. to pay to put P. back in the condition he was in prior to committing resources. 2. Reliance Interest a. broader in scope than the restitution interest, which is a special case. b. covers "losses caused" and "gains prevented"
C. D. has not fulfilled a promise upon which the P. reasonably expected to be performed. 1. Court may either require promise be fulfilled, or put the P. in as good a position as he would have been in the promise were made good. 2. Expectation Interest a. distributive justice, meaning does not seek to re-establish status- quo, but rather establish a new status. b. court assumes an active role.
**HEYER PRODUCTS CO. V. UNITED STATES (1956)
Facts: P. submitted a bid to the Army to build some low-voltage circuit testers. The bid was not accepted, and P. alleges that the govt.' rejected their bid in "bad faith" because the P. had testified against the contracting agency at a senate hearing. P. then sued for the cost of preparing the bid ($7,000) and compensation for lost profits ($38,000). The court denied the US motion to dismiss.
Nature of the Risk: A company may commit resources to preparing an offer, in reliance on being honestly considered for the award of a contract, and subsequently not be awarded the contract, thus losing those resources which he may have, in retrospect, decided to commit to other profitable means.
Issue: Is P. entitled to recover based on an implied promise of consideration? If so, how much is he entitled to?
Holding: Yes. When a contractor entertains bids under the advertisement of giving them full consideration, he is be liable to the bidders for the cost of preparing their bids if the contractor "wantonly disregards" their bids.
Reasoning: The court reasoned, citing United States v. Purcell Envelope Co. as authority, that by conducting a bidding procedure to award a contract, the gov't receives the benefit of lowest market price. In return, they offer each bidder the chance at a bargain. If the gov't did not really consider the P.'s bid, then they received the benefit of their competitive bid in holding the other bidders low, however they never offered the chance at a bargain in return. Furthermore, they created a reasonable expectation in the P. that his bid would receive honest consideration, and the P. committed resources in reliance on the chance of being awarded a contract. They refused, however, to hold the gov't liable for the anticipated profit, because the gov't certainly made no promise that they would award the contract to P. if they submitted a bid.
**WHEELER V. WHITE (1965)
Facts: P. owns property on which he wished to build a commercial building. P. entered into a loan agreement with D. to provide finances to support construction. The loan agreement did not specify amount of monthly payments or interest rate. At the urging of D., P. tore down valuable revenue generating existing properties on the land to clear the way for the new construction. D., however, did not come up with the finances, so P. sued for either (1) breach of contract, or (2) damages on the theory of promissory estoppel. Trial court dismissed both actions.
Nature of the Risk: P. changed his position permanently by demolishing the pre-standing buildings, relying on the promise of the D. In the absence of a contract, P. would bear the risk that the funding for the new construction would not go through, and so he would bear the loss of the value of the prestanding buildings. A contract would shift that burden to the D.
Issue: 1. Was there an express contract between P. and D.? 2. If not, did promissory estoppel of D. constitute an implied in law contract?
Holding: 1. No. The Texas Supreme Court found that the terms of the contract did not "contain essential elements to its enforceability." 2. Maybe. The case was remanded for trail.
Reasoning: The court relied heavily on Goodman v. Dicker (radio franchisee case). The cases are similar in the sense that the P.'s in both cases relied on a promise of the D.'s to their own detriment.
Notes: If P. wins upon remand, the damages awarded should be based on protecting the reliance interest, thus they should be for the reasonable market value of the buildings. The rent that the buildings generated should not be awarded because even if the deal had gone through, the P still bears the risk that the new commercial property would not be profitable.
**HILL V. WAXBERG (1956)
Facts: Appellant is a property owner who asked Appellee to assist him in securing a FHA guarantee for a construction loan, with the mutual understanding that the Appellee would be awarded the contract for construction if the FHA guarantee came through. In securing the FHA guarantee, Appellee incurred many costs which he expected would be offset by the profits from the construction contract. However, once the FHA guarantee came through, negotiations on the construction contract broke down, and Appellee sued for his costs and the value of his services, without which the Appellant would not have secured the FHA guarantee. Appellant appealed stating the judgment was /excessive, and that the court incorrectly instructed the jury.
Nature of the Risk: The Appellee risked that he would have committed his time and money better had he not relied on the promise of a future construction contract. In constructing an "implied in law" contract, the court shifted that risk to the Appellant.
Issue: 1. Is there a contract? 2. If so, how should the damages be measured?
Holding: 1. Yes. An implied in law contract results when one renders service at the request of another, regardless of whether he expects his payment therefor to be in the form of immediate payment or future profits from an ensuing contract. 2. The damages should be limited to the amount of the unjust enrichment.
Reasoning: The court distinguished between "implied in fact" contracts, where both parties acted as if they had contracted, and "implied in law" contracts, where one party was unjustly enriched at the expense of the other. For "implied in fact" contracts, the court enforces what the contract would have been, and thus awards compensatory damages measured by the going contract rate. In "implied in law" contracts, the court limits the damages to the amount of the unjust enrichment. The court stated that either might apply in this case, but since the lower court had decided that it was an implied in fact contract, the damages would be the Appellee's costs and fees.
**MARTIN V. CAMPANARO (1946)
Facts: P. was a bus driver for a company that contracted year-to-year with its drivers. In the year in question, the contract had not been renewed, and the union was negotiating for higher wages while the drivers continued to work, in anticipation of being paid back wages. The labor negotiations broke down, and the bus company fell bankrupt and into the hands of D. who refused a gov't order to pay back wages at the higher rate. P. sued for back pay at the higher wage rate.
Nature of the Risk: In the absence of a contract, the P. bore the risk that he would only be paid at the previous rate after performing services that he expected would be paid at the higher wage rate. An implied in fact contract would shift that risk to D.
Issue: 1. Was there a contract? 2. If so, what should the nature of the damages be?
Holding: 1. Yes. A contract implied in fact arises from the "presumed" intention of the parties when their actions indicate that both considered the contract to be in existence. 2. The damages for implied in fact contracts should be the reasonable value of the services.
Reasoning: The Court of Appeals agreed with the lower court that there was a contract "implied in fact", however they reversed the decision that the amount of the services should be measured at the old rate. They stated that the reasonable value of the services should be determined by taking into account the fact that the union was negotiating new wages.
**CITY STORES CO. V. AMMERMAN (1967)
Facts: D. owned some land on which he intended to build a shopping center. D. promised P. the opportunity to become one of the shopping center tenants at terms "at least equal to that of any other major department store in the center" if P. would help persuade the local zoning authorities to allow the shopping center construction. Due to solicitation of the P., the zoning authority granted the construction permits, whereafter D. refused to give P. a lease. P. sued for specific performance of the promise (expectation interest).
Nature of the Risk: If D. would not have made a promise to P. to induce P. to solicit the zoning authorities on his behalf, he would have run the risk of not being granted the construction license. P. risked that he would invest time and effort on behalf of the D. and then realize no benefits of his actions. A contract awarding specific performance (expectation interest, benefit of the bargain), would remove this risk from P..
Issue: Will the court grant specific performance of the contract even though there was still much negotiation remaining if the opportunity to lease was granted?
Holding: Yes. A contract may be enforced for specific performance where the alternate remedy of restitution is either inadequate or impracticable, even though there may be some material considerations in the contract which have not yet been negotiated to close.
Reasoning: The court stated that it would be impossible to arrive at a measure of damages to compensate the P. for his loss of the opportunity to lease in the shopping center over several years, and even if it were somehow practical to do so, the resulting monetary damages would fall short of compensating the P. for the "incalculable future advantages" that would arise if P. did actually lease. The court gave instructions to follow the example lease given to other major tenant in finishing the performance of the contract, thus removing a large burden of supervision from the shoulders of the court.
**HERTZOG V. HERTZOG (1857)
Facts: P. is the son of D.. P. and his wife lived and worked for several years on D.'s farm, without pay, and upon D.'s death, P. sued D.'s estate, under claim of express contract, for back wages of his labor, his wife's labor, and for $500 loaned to D. at the time the farm was purchased. Testimony was given to indicate that D. had made comments to the effect that he planned to eventually pay P. for his work, but he never seemed to get around to it. Trial court found for P. and awarded $2200. D. appealed on ground of error of the court.
Nature of the Risk: In the absence of a contract, the P. risked that his labor which benefited the farm, would not be paid for.
Issue: Is there an express contract between P. and D. even though they are son and father?
Holding: No. "A party who relies upon a contract must prove its existence; and this he does not do by merely proving a set of circumstances that can be accounted for by another relation appearing to exist between the parties."
Reasoning: The court stated that it was not proven that the father ever expressly contracted with the son, in a hired servant relationship, because their relationship could be explained by simple father-son filial relationship. The court further reasoned that the statements of the father, that he intended to pay the son for his labor, showed that there was lack of contract, and were evidence against an express contract.
**HEWITT V. HEWITT (1974)
Facts: P. is a woman who became pregnant by D. while they were both still in college. D. promised P. that they would live together as husband and wife, exactly as if they were legally married, but without the official ceremony. P. relied upon this promise and gave up her career, and over the 17 years of this arrangement, assisted D. in many tangible ways to become a successful doctor. All the while, D. continued to represent to her and the rest of the world that they were husband and wife, and they had 3 children. When they split up, D. refused to give P. any share of the profits he had accumulated with her assistance, claiming that their relationship was a meretricious one. P. sued for equal division of all property, joint or otherwise, upon the claim of express oral contract, or in the alternative implied-in-fact contract. Trial court dismissed on the grounds that they were not legally married, and so P. had no cause of action.
Nature of the Risk: The P. risked, in the absence of contract, that her efforts, in reliance on D.'s promise, would never be rewarded.
Issue: Is there an implied-in-fact contract between P. and D. in the absence of an express contract of marriage?
Holding: Yes. Where non-marital partners live together as husband and wife, there is an implied-in-fact contract between them and "... a contract between non-marital partners will be enforced unless expressly and inseparably based upon an illicit consideration of sexual services..."
Reasoning: The court stated that the conduct of both parties for 17 years implied a contract between them. They found no meretricious relationship as the D. had alleged. They followed the reasoning of a precedent case Marvin, and stated that they need not treat marital partners as if they were constructively married in order to apply principles of contract, or to determine a remedy, but the only need to treat them as they would any other unmarried contractors.
**THE SUN PRINTING AND PUBLISHING ASS'N V. REMINGTON PAPER AND POWER CO., INC. (1923)
Facts: P. is a newspaper company who contracted to buy 16,000 tons of paper from D., a paper mill. The written contract stated that the price and term would be fixed for a short while, and then later to be agreed upon nlt 15 days prior the end of the term in effect, but in no case was the price to be higher than a standard market price. After the preset term had expired, and the next price and term was to be negotiated, the D. claimed the contract was incomplete, and refused to make any deliveries at any price. P. sued for breach of contract.
Nature of the Risk: The P. risked that he would have no paper at all, and sustain damages for that lack of paper in the absence of a contract. The D. risked that if the standard market price went down, he wouldn't get as much money for the paper as he expected.
Issue: Was the bound to agree to a price and term and therefore his refusal to do so amounted to a breach of contract?
Holding: No. When a contract is worded as an "agreement to agree", the parties are free not to agree without being liable for breach of contract (B.S.)
Reasoning: The majority reasoned that the contract was expressly written to allow both price and term to be negotiable, and so the court would have been "revising" the contract if it attempted to "construe" it to a reasonable market price and some fixed term that was not negotiated by the parties (B.S.). Further, the court purposefully disregarded the motive of the D. in his refusal to deliver (more B.S.), and stated that the P. had not stated sufficient cause of action because he did not allege that the D. "arbitrarily refused" to negotiate.
Dissent: The dissent stated that the fact that both price and term were to be later negotiated was not sufficient to allow the D. to avoid the contract. They felt that it was the duty of the court to enforce the contract with the price to be determined by the market, and the term to be determined either by month-to-month (as was the previous agreement), or fixed for the rest of the year. To allow the D. to avoid the contract would be to encourage deliberate breach.
**UNITED STATES V. BRAUNSTEIN (1947)
Facts: D. telegrammed a 10 cents/lb bid in response to a request for bids to buy a large amount of raisins from the gov't. The government's return telegram had a typo which stated that it had accepted the price of 10 cents/box (not 10 cents/lb), and to send payment within 10 days. D. did nothing, and 10 days later, when the gov't realized its error, it sent a follow-up telegram accepting the correct price. D. still did nothing, and so gov't sold the raisins at a loss and sued the D. for breach of contract.
Nature of the Risk: The gov't risked that it's typo would invalidate its acceptance, and therefore would have to sell the raisins at a loss. The D. risked that he might better spend his money than on old gov't raisins.
Issue: Is there a contract even though the telegram of acceptance had a typo causing the price to be off by 22,000 dollars?
Holding: No. "Since one who speaks or writes, can, by exactness of expression, more easily prevent mistakes in meaning, than one with whom he is dealing, doubts arising from ambiguity of language are resolved against the former in favor of the latter."
Reasoning: The court reasoned that the telegram with the typo did not constitute an agreement because it was ambiguous, and that they had no authority to construct the telegram differently because that would force the parties into a contract, and they would be constructing negotiations instead of constructing a contract that already existed. They further said that a quasi-contract was not applicable here because there was no unjust enrichment.
**MOULTON V. KERSHAW (1884)
Facts: D. sent a letter to P. stating that they were "authorized to offer...salt...in full carload lots of eighty to ninety-five bbls., delivered at your city, at 85c. per bbl....Shall be pleased to receive your order." D. sent a letter back ordering 2,000 barrels, and upon receiving the order, D. withdrew the offer. P. sued for damages.
Nature of the Risk: The D. risked that someone might order more barrels than he wished to sell at that price.
Issue: Is there a contract based on the letters between D. and P.?
Holding: No. A letter that does not express an offer of sale is not an offer.
Reasoning: The court reasoned that the language of the letter was not one of offering to sell specifically to plaintiff, but rather a solicitation for negotiations between the parties; an advertisement. It was not an offer to which they could be bound for any amount that the persons to whom it was addressed might see fit to order. The court reasoned that they had no authority to construe the letters into a contract because they were not an offer/acceptance but rather an advertisement/order.
**FAIRMOUNT GLASS WORKS V. CRUNDEN-MARTIN WOODENWARE CO, (1899)
Facts: Appellee sent a letter to Appellant asking for a quote on delivery of ten car loads of Mason Jars. Appellant responded with a quote stating prices that would be good if accepted immediately and shipment taken promptly. Appellee then responded by telegram (following up with a letter), ordering ten car loads of jars. Appellant responded that they were all sold out, and refused to book the order. Appellee sued claiming that the contract was closed when they placed the order, and lower court gave judgment accordingly.
Nature of the Risk: The seller risked that he may have found other, more lucrative, opportunities to sell, but that he was already committed at the quote he made.
Issue: Is there a contract based on the language that both parties used in their letters?
Holding: Yes. When determining the presence or absence of a contract, the actions of the parties and the meaning of the statements made must be viewed as a whole.
Reasoning: The specific language in the quote was that it was "for immediate acceptance". This can only be construed in the light of the language of the request for quote. It was clear that the buyer wanted to place a specific order, and so when the seller responded with a quote that was for "immediate acceptance", this must be construed as an desire to sell at that price to that buyer.
**LANGELLIER V. SCHAEFER (1887)
Facts: P. wished to buy the land belonging to D. promptly, and so sent him a letter asking how much he would sell it for and on what terms. D. responded that he would sell it for $800 cash, and if P. wanted to buy, then he should respond at once. P. sent a letter back stating that he would buy it, and for convenience, he would like the D. to handle the deed through a certain bank, and P. offered to pay $300 down, and the balance within a year. But in any case, the P. would like to transfer the deed as soon as possible. D. then refused to sell, and P. sued for specific performance of the contract. Trial court rendered judgment for P.. D. appealed to this court.
Nature of the Risk: P. risked that without the lot owned by D., he could not have enough influence to have his street graded. D. risked that he might be able to sell his property for a higher price.
Issue: Is there a contract based on the letters?
Holding: No (B.S.). In order for an acceptance to be valid, it must mirror the terms of the offer, otherwise it is invalid.
Reasoning: The court stated that the extra terms suggested in the P.'s letter invalidated his acceptance of the offer of the D.. The P. stated other than cash terms, and that the deed was required to be delivered to his local bank. The court reasoned that since the P. had not stated that he would bring the cash money directly to D. at his residence, then there was not an acceptance and therefore no contract.
Notes: In construing the letters, the court failed to consider that the P.'s additional terms were optional, and that he decided to buy the property exactly as offered, but wished for the D. to consider some other ways of proceeding besides straight cash. These considerations do not affect the "binding character of the contract."
**BUTLER V. FOLEY (1920)
Facts: P. bid $152 each for 50 units. D. said they would accept that price on 44 units only. P. responded by confirming purchase of 44 units, and asked for the stock to be shipped that day. D. did not ship the stock, and so P. had to buy enough on the open market to cover his commitments. The extra cost to P. for purchasing on the open market was $792. Trial jury found for P. in the amount of $885. D. appealed contending that the telegram company made a mistake and that the telegram should have had the word "subject" in it, meaning "subject to other considerations", and therefore there was no contract.
Issue: Is there a contract even though the mistake in language was made by the telegram company and not the seller?
Holding: Yes. "...the offerer takes the risk as to the effectiveness of communication if the acceptance is made in the manner either expressly or impliedly indicated by him."
Reasoning: When the D. replied stating that he would sell 44 units, he enlisted the telegraph company as his agent, and therefore took the risk that there may be an error in the communication. It does not matter that the office copy that the D. retained did have the word "subject" on it. The P.'s actions and expectations are used to determine the presence of a contract, even if the mistake was not in bad faith.
**Austin v. Burge (1911)
Facts: D. received and read a newspaper over the course of several years. He had at one time subscribed for a two-year period, but claims that after the expiration of those two years, he requested that service be stopped. P. is the newspaper owner, who claims he never received notice of stoppage.
Nature of the Risk: In the absence of a contract, the P. assumed the risk that D. would not pay for his newspaper.
Issue: Was there a contract implied by the conduct of the D. in reading the newspaper?
Holding: One who accepts an unsolicited newspaper, and reads it, is liable for the cost of the newspaper subscription if it is understood that the newspaper is not free.
Reasoning: The court stated that although one cannot be forced into a contract unilaterally by the newspaper company, the D.'s actions of reading the newspaper, which he knew was not free, implied that he had to pay for it. The court constructed a quasi-contract due to the D.'s deriving benefit, and held D. liable for the subscription price. (Restitution Interest). [Note that in this case, the amount of the remedy would be the same for Reliance and Expectation, namely the subscription price.]
Note: Statutes in individual states concerning unsolicited goods and services might overrule this decision.
**Cole-McIntyre-Norfleet Co. v. Holloway (1919)
Facts: A traveling salesman representing Holloway (seller) solicited and received an order from Cole (buyer) for 50 barrels of meal, to be delivered before the 31st of July. If the barrels were not delivered by then, Holloway would charge Cole 5 cents/barrel/Mo. for storage. The salesman continued to make weekly calls on Cole, never mentioning the previous order. Meanwhile, prices went up 50%. On May 26th, Cole asked for delivery, but Holloway refused claiming that they had never accepted the order, and so there was no contract.
Nature of the Risk: The contract would assign who would bear the risk of the price going up before delivery.
Issue: Did the sixty-day silence of the seller bar him from claiming that he had refused the order, thus resulting in no contract?
Holding: No. When the nature of goods, or the market conditions surrounding those goods, requires prompt action on the part of the contracting parties, the silent stalling of one of the parties constitutes an action from which assent may be inferred.
Reasoning: The salesman had weekly opportunities to inform the buyer, and the seller had daily opportunities to inform the buyer of the refusal of the order. The fact that there was no official refusal, coupled with conduct of "business-as-usual" by both all parties was sufficient to provide assent. To hold otherwise would be to give the seller the reservation of power to hold the buyer to the contract, while allowing the seller to exit the contract if the price went down. This would assign all risk to the buyer.
**Hoffman v. Red Owl Stores, Inc. (1965)
Facts: P. owned a bakery and desired to expand his business by obtaining a Red Owl franchise. P. called D.'s District Manager, who assured him that $18,000 was enough investment capital to get open a franchise. Over time, D. advised P. to open a retail store to get experience, to sell the same retail store and buy land on which to build a franchise, and to get a job at a Red Owl store for more experience. P. acted on each of these advisements, and eventually negotiations for the franchise broke down when P. stated that he would need $34,000 to open a franchise. D. sued for losses sustained in reliance on P.'s assurances.
Nature of the Risk: In the absence of contract, D. assumed the risk that his expenditures could have been avoided, and he could have spent his money more profitably.
Issue: Is there a contract implied between P. and D. based on D.'s reliance on P.'s promises? If so, how should the damages be measured? Holding: 1. Yes. Where a one acts to his own detriment in reliance on the promise of another, the other is liable for damages arising from such actions. 2. "...where damages are awarded in promissory estoppel instead of specifically enforcing the promisor's promise, they should be only such as in the opinion of the court are necessary to prevent injustice".
Reasoning: The court reasoned that there was not sufficient evidence to support a breach of contract action. They therefore were not going to award specific performance. They reasoned that the damages should be limited to the difference between the sales price and the fair market value of the store, losses on sale of the bakery, cost of the property, and moving expenses. They wished to put the D. back in the position he would have been had he not acted on the P.'s promises.
Kessler, Contracts of Adhesion - Some Thoughts About Freedom of Contract (1943).
I. Standardized Mass Contract A. Uniformity of terms assists in exact calculations of risk. 1. Risks that are difficult to calculate can be excluded. 2. Unforeseeable contingencies can be distributed. a) "Judicial Risks" of irrational decisions by courts. i. Specific clauses that limit P.'s remedies in case of breach. ii. Arbitration clauses.
II. "Battle of the Forms" A. Frequently the standard forms used by two parties have conflicts. B. When problems arise, parties are tempted to fall back on classical "agreement" theories to exit their contracts. C. To avoid conflict, trade associations attempt to generate "fair and acceptable" standard forms for use by whole industry. D. Trend towards uniformity has only been partially successful. E. UCC has designed several sections to regulate behavior of merchants, and honor the belief of parties that a deal is on.
**Roto-Lith, Ltd. v. F.P. Bartlett & Co. (1962)
Facts: P. manufactures plastic bags which are sealed by means of an emulsion sold by D.. The P. bought emulsion from D. that failed to adhere, and so the P. brought an action for breach of contract. The standard acceptance form generated by D. in response to P.'s order had an express disclaimer of any warranty whatsoever on the reverse side. D. sent acceptance to P.. P. claims that under the UCC 2-207, the D. was bound to the terms of P.'s order, and that the warranty disclaimer on the back of the acceptance letter was a proposal for additional conditions that P. did not accept.
Issue: To what extent may a buyer ignore additional or changed terms in a reply from an seller that does not mirror the original terms proposed by the buyer, and still result in contract formation?
Holding: A response by an seller that states additional terms or conditions that materially alter the obligation solely to the disadvantage of the buyer is an acceptance that is expressly conditional on assent to the additional terms. [B.S.]
Reasoning: It is unrealistic to assume that when the seller adds the additional terms it wishes to be bound to all the terms that the buyer set forth, and rely solely on the good nature of the buyer as to whether he would accept the additional terms. The court also reasoned [perhaps erroneously] that since the P. accepted delivery of the goods, he had become bound to the terms set forth by the D..
Notes: Roto-Lith misread 2-207. Sub. (3) of 2-207 states that a contract exists where there is conduct by both parties which recognizes its existence. Thus, the shipping and receiving of the goods was conduct sufficient to generate a contract. In addition, the warranty disclaimer on the reverse of the acceptance form was not an "additional" or "different" term, and so should have been treated as a proposal for addition to the contract according to sub. (2).
Contracts of Adhesion
I. Assent to terms not bargained for (not dickered). A. Llewellyn 1. As far as the specifics of boiler-plate clauses, there is no assent. 2. There is a blanket assent to terms that: a. do not alter the terms dickered. b. are not unreasonable or unfair. 3. There are 2 contracts that result: a. the dickered deal, and b. the supplementary boiler-plate. B. Restatement (Second) of Contracts 1. Para. (1): buyers are assenting to terms in writing that they have not read or do not understand, except when they are unlawful. 2. Para. (2): a standardized contract is to be interpreted so as to effectuate the reasonable expectations of the average buyer. 3. Para. (3): standardized terms are not part of the contract if the seller knows the buyer would not assent to those terms if he knew of their existence. C. Slawson 1. Most consumer transaction contracts are not contracts at all; the true contract is what is manifested by the actions of both of the parties. 2. The seller should be held to an implied warranty that his contract contains only what the buyer would reasonably expect it to contain. 3. A court should construe a contract based on what a reasonable buyer would have chosen to buy had he been able to shop around, and was not forced into adhesion. D. Rakoff 1. "Invisible terms" (those for which the buyer would neither bargain nor shop) would be replaced with terms from "background law" which the courts would formulate. a. the proper balance between the rights of the seller and buyer is not stated.
**Woodburn v. Northwestern Bell Telephone Co. (1979)
Facts: P. is a physician who contracted with D. to have a yellow-pages ad placed. The D. sent a standard form contract to P.. The standard form contract had a limitation of damages clause on the reverse side which P. states he never saw. D. failed to place the ad, and trial court found that the damages should be limited according to the disclaimer on the back of the contract. P. appealed. Nature of the Risk: A contract would assign the risk that the P. would make less profit if P. had no yellow-pages listing.
Issue: Does the disclaimer become part of the contract, even though the P. did not read or see it?
Holding: No. In order for contract formation to occur, there must be a mutual manifestation of assent as to the stated terms.
Reasoning: The court of appeals agreed with the lower court that the disclaimer was lawful. However, they reasoned that the determination of a contract was skipped in the lower court and remanded for a showing by P. of his lack of mutual assent.
Notes: If the case were decided in strict accordance with section 211 of the Restatement (Second) of Contracts, the limitation would automatically become part of the contract unless the P. could show that the D. knew that he would not have assented to the limitation had he know about it (sub 3).
The Bargain Theory of Contract and the Reliance Principle
I. Consideration Doctrine
A. Bargain Theory.
1. A contract is a "bargain" which requires reciprocity; consideration
exchanged between contracting parties.
2. No binding contract in the absence of consideration (gifts).
B. Reliance Principle
1. An act of reasonable reliance can create liability for a resulting
2. Restatement (Second) Section 90 "promissory estoppel":
a. promise that could reasonably be expected to induce action or
b. actual inducement of the action or forbearance by promisee, and
c. injustice can only be avoided by enforcement of the promise (damages
may be limited).
3. Most justified in competitive markets where there is a half-complete bargain that is suspiciously aborted (better opportunity presents itself).
**Siegel v. Spear & Co. (1923)
Facts: P. bought furniture from D., making monthly payments. Upon deciding to leave the city for the summer, P. asked D. to store P.'s furniture at D.'s warehouse. D. stated that they would store the furniture for free, and promised to obtain insurance for the furniture so that the P. didn't have to do so. Relying on this promise, P. sent the furniture over. However, D. did not obtain the promised insurance, and it was subsequently destroyed in a fire.
Nature of the Risk: A contract would assign the risk of loss of the value of the furniture. Issue: Whether D. liable for the value of the furniture when he offered to store it for free (no consideration), and when he accepted possession of it?
Holding: "If a person makes a gratuitous promise, and then enters upon the performance of it, he is held to a full execution of all he has undertaken."
Reasoning: The confidence placed in the promisor, and his undertaking to complete the trust, create a sufficient consideration to find a contract. Had there been no delivery of the furniture, there would have been no contract - only a gratuitous promise. However, once the furniture had been delivered in reliance on the promise of insurance, a consideration was created.
Notes: 5. In determination of the damages, the court should subtract the cost of the insurance premium. Otherwise, the P. recovers more than he would had he bought his own insurance.
**Capital Savings & Loan Assn. v. Przybylowicz (1978)
Facts: D. signed a home mortgage agreement with P. for $251.76/mo. payment terms at 9% interest. However, these monthly payment terms were not enough to pay off the home loan at 9%. The mistake in calculation was made by P., and not discovered until the house was to be sold. P. then demanded the correct figure of $40/mo. more. D. refused to pay claiming that he relied on P.'s monthly payment promise (and not the interest rate figure), when accepting the loan.
Nature of the Risk: A contract would assign the risk that the calculations were in error, and therefore someone was going to lose money.
Issue: Whether the P. barred by promissory estoppel from demanding the higher payment, when the mistake was in good faith, and when the other terms of the contract were correct?
Holding: Parties liable for damages under promissory estoppel when they reasonably induce action on the part of the other, even though the inducement was made without fraud.
Reasoning: The court reasoned that the mistake was to be placed on the party that could have most easily avoided it. The bank made these calculations frequently, so the D. reasonably relied on the monthly payment term in determining the contract. The interest rate term had meaning only to the bank. A consumer in this situation, who does not have the ability to make the calculation, should not be required to double-check the bank's calculations. The consumer only needs to rely on the monthly payment figure, which can be understood easily, as opposed to the interest rate figure which holds little meaning on it's face.
**Underwood Typewriter CO. v. Century Realty Co, (1909).
Facts: P. leased a building from D.. The lease stated that P. could not sublet without the written permission of the D.. The P. and D. also entered into a written agreement that D. promised to give written assent for P. to sublet to an "acceptable tenant". P., relying on D.'s promise, spent considerable effort and found a suitable tenant, who was willing to pay a higher rent than P. currently paid. But D. refused to allow P. to sublet. P. sued for the profits it would have made if it would have sublet. D. demurred. Trial court sustained the demurrer. Appellant court reversed and remanded for trial.
Nature of the Risk: The P. risked that he could have invested his money more wisely. D. risked that he could have found a more lucrative tenant.
Issue: Is there a contract supported by P.'s reliance on D.'s promise?
Holding: Yes. Contracts may be formed by the offer of a promise for an act and the acceptance by performing the act.
Reasoning: The court reasoned that the performance by the promisee was sufficient consideration to support a contract, even though the promisor gained no benefit. This is the standard reliance principle.
**Feinberg v. Pfeiffer Co., (1959)
Facts: P. worked for D. company for 40 years. In recognition of her faithful service, the D. board of directors passed a resolution promising her $200/mo. for life when she retired, and that she could retire at any time. P. retired 1 1/2 years later, and began receiving the pension. The ownership of the company changed hands, and the new president (under advice of counsel) refused to pay the full pension, stating that it was only a gift, not a contractual obligation. P. testified that she had relied on the promise of the pension, or she would not have retired since she was still capable of working.
Nature of the Risk: The P. risked that she could have made more money if she remained employed. The D. risked that they could have spent the pension money in a more profitable way.
Issue: Is there a binding contractual obligation between P. and D. based on P.'s reliance on the pension in retirement?
Holding: Yes. A promisor who induces action or forbearance on the part of the promisee is bound by his promise by the principle of reliance or "promissory estoppel".
Reasoning: The court relied upon the Restatement 75 in finding that an act or forbearance is sufficient consideration for a promise. The court also relied on 90 to find that a promise which the promisor could reasonably expect to induce an action or forbearance, and which does induce such behavior is a binding contract if injustice can only be avoided by enforcement of the promise. The court found that the P. did rely on the promise of pension to change her position to her own detriment by retiring.
**Elsinore Union Elementary School District v. Kastorff (1960).
Facts: P. is a school board who requested bids for the building of a schoolhouse. D., a general contractor, gathered bids from his various sub-contractors, and totaled them on his bid worksheet which he submitted to the P. school board. The D. unfortunately made a mistake on the form, causing his bid to be $12,000 lower than the next lowest bid. The D. discovered the mistake the next day, and asked the school board to rescind his bid. The P. school board refused, and then voted to award him the contract. The D. refused to sign the contract, and P. hired the next lowest bidder, and sued D. for the $12,000 difference. Trial court found for P., and D. appealed to this court.
Nature of the Risk: The D. risked that he would not make as much profit as he wanted. The P. risked that they would pay more than the fair market value for the construction of the school building.
Issue: Is the D. able to rescind his bid even though the school board accepted it?
Holding: Yes. When a promisor makes a mistaken promise in good faith which could reasonably be expected to induce action on the part of the promisee, and the promisee acts in reliance upon that promise when he knows it is in error, then the promisor is not bound by his promise, but may instead rescind.
Reasoning: The court reasoned that once the mistake became known to the P., it became a mutual material mistake of fact, and therefore defeated the reliance principle contract.
**Dickinson v. Dodds (1876)
Facts: On Wed., D. wrote a letter to P. stating that he was offering his property for sale to P. for a certain sum, and that the offer was good until Friday at 9am. The D. then offered to sell to another on Thurs. P. brought a letter of acceptance to D. on Friday morning at 7am. D. refused the letter, stating that he was too late, and the property was already sold. P. sued for specific performance (expectation interest).
Nature of the Risk: The D. risked that he would find another buyer with better terms. The P. risked that he would not find a better buy.
Issue: Whether an offer that states that it is good for a period of time (a firm offer) can be revoked by the offeror at any time before the acceptance by the offeree.
Holding: A statement to make an offer valid for a length of time does not bind the offeror. [B.S.]
Reasoning: The court reasoned that the D. was free at any time to rescind the offer, because it had not been accepted by the P., and a contract would not become binding until there was "agreement" between both parties.
Notes: This is a classical contract theory court. The modern view under the reliance doctrine would be that the risk was redistributed by the promise by D. that the offer was valid until Friday morning, and the resultant reliance by the P. on that promise.
**James Baird Co. v. Gimbel Bros. (1933)
Facts: D. mfgrs. linoleum. Upon hearing of a contract to be awarded for a public building, D. sent offers to each of the bidders, including P., stating that they would provide the requisite amount of linoleum for a certain price, contingent upon the bidder being awarded the contract to build the public building. However, the D. realized the same day that it had sent the offer to P., that it had made a mistake in the calculation of the price, and would resubmit the offer at twice the price. P. used D.'s original quote as a component of its overall bid, and was therefore awarded the contract. D. claimed no contract. P. sued for breach.
Nature of the Risk: The P. risked that they would not be awarded the contract if they did not have the lowest bid. D. risked that could get a higher price for its linoleum.
Issue: Is there a contract between P. and D. based on P.'s reliance, even though P. had an opportunity to withdraw its bid after it knew of the mistake on the part of D.?
Holding: No. "An offer for an exchange is not meant to become a promise until a consideration has been received."
Reasoning: Judge Hand reasoned that the contract did not exist until there was an awarding of the contract, because the offer expressly stipulated such. Furthermore, the offer could be revoked at any time before acceptance, and there could be no acceptance until the contract was awarded.
Note: Under the consideration doctrine, there should have been a contract, because there was a shift of risk. The P. would have lost its deposit had it withdrawn the bid after knowing of the mistake, however, they would not claim reliance on a promise that they knew to be in error.
**Drennan v. Star Paving Co. (1958)
Facts: P. is a general contractor who was bidding for a contract to construct a school. D. phoned in a bid of $7,000 to P. to do the paving. P. used this bid in his calculations, and was awarded the contract based on having the lowest bid. When P. told D. that he was awarded the sub- contract, D. stated that he had made a mistake in his calculations, and could not do it for less than $15,000. P. found a company to do it for $10,000, and sued for the difference.
Nature of the Risk: The P. risked that he would not be awarded the contract unless he had the lowest bid. The D. risked that he could get more money for his paving services.
Issue: Is there a contract between P. and D. based on P.'s reliance on D.'s bid, and his subsequent award of the contract?
Holding: Yes. Reliance principle.
Reasoning: When P. used D.'s offer in computing his bid, he bound himself to perform in reliance on D.'s terms. It was in D.'s best interest that the P. use his bid, and so therefore D. clearly had a stake in its acceptance. Thus, the D. could reasonably expect that his bid would be accepted. The prices of the bids were radically different, so there was no reason for P. to believe that there was a mistake in the bid. Thus, the P. reasonably relied on the bid.
**Loranger Construction Corp. v. E.F. Hauserman Co. (1978).
Facts: P. is a general contractor who solicited a bid for metal partitions from D. subcontractor. D. provided a bid of $15,900 on the last day, and P., receiving no other bids, used this in the determination of his general bid. P. was awarded the contract, but D. refused to perform for his bid price, claiming that it was only an invitation to further negotiations. P. hired someone else to do the work for $23,000 and sued for the difference. Appeals court upheld damages on the basis of promissory estoppel.
Nature of the Risk: The P. risked that he would not be awarded the contract unless he provided the most attractive (lowest) bid. D. risked that he could get more money for his services.
Issue: Was P.'s reliance on D.'s bid sufficient to bring about a contract based on promissory estoppel?
Holding: Yes. A promise by the D. and resulting reliance by P. constitute a contract due to promissory estoppel, or even express contract supported by consideration.
Reasoning: The court reasoned that the bid was more than just an invitation to negotiate. It was a specific offer that was expressly accepted by the P.. Furthermore, they didn't need to rely on promissory estoppel because an express contract could be found by construing the testimony of the D. that he actually did agree verbally by phone to provide the services. The jury could find that the P.'s actions were induced by the D.'s promise, and that therefore there was a "typical bargain" supported by consideration.
**Southern California Acoustics Co. v. C.V. Holder, Inc. (1969)
Facts: P. is a subcontractor who submitted a bid to D., a general contractor, which was used in the calculation of a general bid. The contract was later awarded to P.. P. was required by law to list all of the subcontractors he used in a local notice, which P. saw, and relied upon by not taking on other bids which would cause him to exceed his bonded limit. D. then claimed that he used P.'s bid in error, and asked the school board to allow him to change to a different sub. P. sued for damages for not being awarded the subcontract after relying on the notice, and D.'s silence, as implied acceptance of the bid.
Nature of the Risk: The P. risked that he could have allocated his resources better by not bidding on this contract. The P. risked that he might find a lower bid from a separate contractor after he submitted his general bid.
Issue: 1. Is there a contract based on promissory estoppel (reliance by P.), in addition to the silence of the D. after the publishing of the contract award? 2. Was the D. justified in requesting to change subcontractors?
Holding: 1. No. There is not a promise that can be relied upon when the bids are listed by mandate of a statute. Silence is not assent unless it is understood as the normal business relationship between the two parties. 2. No. The statutory listing confers the right of performance on the subcontractor unless he is unable to perform. [both of these seem to miss the point of reallocation of risk].
Reasoning: The court reasoned that the listing was not a promise because it was required by statute, and was therefore not a manifestation of a promise by D.. However, the court then reasoned that the D. had no right to request substitution from the awarding authority because the P. was not incapable of performance. [If the P. knew his rights under the statute, and D. knew his obligations under the statute, then why was this not a garden variety reliance case?].
I. When does a contract become binding? - 4 possibilities.
A. By the mere posting (mailing) of an acceptance.
B. By the delivery of the acceptance even if it is not read.
C. When the offeror receives the acceptance, but the binding effect relates back to the moment the acceptance was dispatched.
D. At the moment the offeror has been informed of the acceptance.
**Cushing v. Thomson, (1978)
Facts: P. is a representative of an anti-nuclear group that wanted to hold a dance at the local National Guard hall represented by D.. The P. filled out an application, and D. mailed an offer to be accepted within 5 days. The P. signed the offer, and put it in the mail drop box, which was customarily mailed every day. That night, the D. called P. and told him that the offer was revoked because the Governor denied it. The P. claimed that the offer could not be revoked because it was already accepted based on his mailing. Trial court held for P. and granted specific performance.
Nature of the Risk: The D. risked that he could find a more suitable renter for the hall. P. risked that he would have nowhere to hold his "dance."
Issue: In the case of negotiations by mail, can an offeror revoke after the offeree has put his acceptance in the mail?
Holding: No. A contract negotiated through the mail becomes binding when the offeree posts his acceptance in the mail.
Reasoning: The P. introduced sworn affidavits that he put the letter of acceptance in the mail before the call by the D. The D. did not argue. The use of mail for acceptance is sufficient when the offer was communicated by mail. The offeree can not control the mail delivery once the letter is delivered.
Notes: 1. The policy is that to require actual notice would lead to an infinite exchange of notification between the parties. The P. would notify acceptance, then the D. would have to notify the P. of receipt and assent to the acceptance, etc. 4. Revocations, however, are generally held to be effective only upon actual notice. Some states have statutes overruling this requirement. The person making the contract is always free to make the offer contingent upon actual notice of acceptance.
**Rhode Island Tool Co. v. United States, (1955)
Facts: P. sent a bid for furnishing bolts to the Navy Dept. The bid contained a mistake in price, and the P. called D. and tried to revoke the acceptance. The D. refused however, stating that they had already mailed the award of the contract to the P.. P. is suing for the difference between the award price and the price they would have got without the mistake.
Nature of the Risk: The P. risked that he could get a better price for his goods. The D. risked that they could pay less for the goods.
Issue: Is there a binding contract based on the posting of the award before actual notice of revocation of the acceptance?
Holding: No. "The acceptance, therefore, is not final until the letter reaches destination, since the sender has absolute right of withdrawal from the post office...."
Reasoning: The majority reasoned that the fact that the letter was retrievable meant that a person could not be held to the mailing date for determination of acceptance. They reasoned that if the tables were turned, and the U.S. withdrew the letter from the post office, that the P. could not have held the U.S. to the higher price just because they mailed it. [An acceptance may be revocable until actual notice, but it does not necessarily follow that an offer may be revoked after acceptance has been mailed.]
Notes: Policy is that the acceptance takes effect upon dispatch because the offeree needs a dependable basis for his decision to accept.
**Palo Alto Town & Country Village, Inc. v. BBTC Company, (1974)
Facts: P. signed a 5 yr. lease with D. giving it the right to extend the lease for 5 yrs by "giving not less than 6 mo. prior notice in writing" to P. Within the stipulated time, D. mailed a letter to P. stating that it accepted the option to extend the lease. D. then began improvements on the property in reliance on (anticipation of) the upcoming lease. P. claims they never received the letter, and seek ejectment. Trial court found for D., P. appealed to this court.
Nature of the Risk: The P. risked that he could find a higher paying renter. D. risked that he would pay more than he wanted for a property.
Issue: Whether notice by an optionee of his exercise of an option is effective upon its deposit in the mail or only upon receipt by the optionor.
Holding: An option is effectively exercised when written acceptance is deposited in the mail.
Reasoning: The court reasoned that the option, if viewed as an irrevocable offer, falls under the statute governing acceptance of offers, and is therefore exercised upon posting of acceptance. In an option contract, the optionor stipulates that for a specified or reasonable period, he waves the right to revoke the offer. It is a binding promise because consideration was exchanged. It is the sale of a "right to purchase."
Notes: Both Corbin and the Restatement Second require actual notice for the exercising of an option. Langdell (1880) says that it is easier for the person sending the letter to ensure its proper arrival than it is for the receiver who has no notice of it. Llewellyn says that the policy is to protect the offeree who would most likely be the majority of the parties on whom the hardship would lie if the option was not accepted upon mailing.
**Caldwell v. Cline (1930)
Facts: D. sent a letter to P. stating that he offered to buy P.'s land for a sum, and further stated that the P. had 8 days in which to accept the offer. P. received the letter, and 6 days later, wired his acceptance to D.. D., however, refused to perform claiming that the 8 days had expired. P. sued for specific performance, and D. demurred. Lower court found for D.. P. appealed.
Nature of the Risk: Seller risked that he could get more for his property, buyer risked that he would pay too much.
Issue: Did the term of the offer begin to run at the time it was mailed, or at the time it was received by the P.?
Holding: "[W]here a person uses the post to make an offer, the offer is not made when it is posted but when it is received."
Reasoning: The court reasoned that the fact that these parties were contracting through the mail at a great distance did not change the requirement that face-to-face negotiators have that words spoken by one party must "strike the ear" of the other party for there to be a mutual assent. [This is only valid if you believe that formal agreement is necessary for the formation of a contract].
**Carlill v. Carbolic Smoke Ball Co. (1892)
Facts: D. placed an ad stating that they would give 100 to anyone who caught the flu after using their smoke ball remedy 3 times daily for two weeks. To show their sincerity, they deposited 1,000 with a local bank. P. is a lady who did catch the flu after using the ball 3 times daily for 2 weeks. She sued, and trial court awarded her the 100. D. appealed.
Nature of the Risk: The P. risked that she would catch the flu. D. risked that he would not sell enough balls.
Issue: Is there a binding contract even thought the D. did not know that the P. was performing the act?
Holding: Yes. A promise which invites acceptance by performance of an act does not require prior actual notification of acceptance to complete a contract. The performance of the act is acceptance, and notification of performance is notification of acceptance.
Reasoning: The advertiser, by the nature of his advertisement, impliedly empowers the other party to accept by performance of the act, without notification. They reasoned that to hold otherwise would require anyone reading an advertisement to give actual notice of the acceptance before performance. For example, a person responding to a lost dog ad would be required to let the owner know before he found the dog, that he accepted the offer and intended to look for the dog. The advertiser invites potential acceptors to proceed without prior notification unless otherwise specified.
**Davis v. Jacoby (1934)
Facts: P. is the "daughter" of a couple who became sickly and requested that P. and her husband come to take care of them in their illness, so that nobody could take advantage of them. In return for P.'s assistance, the couple promised that they would will all their possessions to P.. P. accepted by letter, and traveled to be with the couple. The "father" then committed suicide without changing his will, which left everything to D.. P. continued to take care of the "mother" until her death, and then everything was willed to D.. P. sued for specific performance of the promise to will all money to her. Trial court found for D.. P. appealed.
Nature of the Risk: The P. risked that they would not inherit the money of the "father". The "father" risked that he would not be able to save any money unless he got help.
Issue: Is there a binding contract even though the "father" died before the P. performed the acts specified?
Holding: Yes. Where there is doubt as to whether the offer is to be accepted by promise or actual performance, a promise to perform is sufficient for acceptance.
Reasoning: The court reasoned that the offer by the "father" was not an invitation to accept only by performance. His letter stated "will you let me hear from you as soon as possible", indicating a desire for a promised reply. Furthermore, when the father received the letter, he acquiesced in that means of acceptance. It is not reasonable to assume that the will would be made only after completing the specific performance, because the "father" could have died (and did) before the "mother" who needed the care.
**Crook v. Cowan, (1870)
Facts: P. is a manufacturer of carpets. D. sent a letter to P. ordering a specific kind of carpet and stated in his language: "...and wish you to have them made up. You can forward them to my address at Wilmington, N.C. per Express, C.O.D, or else advise me of the cost, and I will remit while you are having them made up." The P. began to manufacture the carpets and delivered them to the Express service 11 days later, but did not reply to D.. The D. sent a telegram asking for confirmation of the order, but the P. did not answer. The D. then bought his carpets from someone else.
Nature of the Risk: The P. risked that he could have allocated his resources better than by making carpets. The D. risked that he would pay more than a fair market price for carpets.
Issue: Is the delivery of the carpets to the Express service 11 days after the order as sufficient acceptance to make a binding contract?
Holding: Yes. The filling of an unconditional and specific order that invites acceptance by delivery or promise completes a contract.
Reasoning: The majority reasoned that the D. did not specifically ask the P. to inform him by anything other than delivery, in fact he implied in his order that it was not required. The order asked for delivery C.O.D, or for notification only if P. wanted payment up front. They further reasoned that it could be reasonably inferred from D.'s not going to the Express office for a long time, or responding to notices, that his purpose was to avoid the contract.
Dissent: The dissent stated that when the order was for goods that took a long time to manufacture, there was a requirement to notify the D. of acceptance within a reasonable time so that he would not be kept in the dark until delivery. The delivery was in a reasonable time for the manufacture of carpets, but the notification by delivery was not in a reasonable time for the purpose of notification of acceptance. Furthermore, it would be easier for the P. to make notification by mail, than for the D. to check the Express station daily to see if there was a delivery.
**White v. Corlies, (1871)
Facts: P. is a builder. D. sent a specification to builder who provided an estimate for completion. The D. then sent a letter to the P. telling him that "upon agreement to finish...[within] two weeks, you can begin at once." Upon receiving the notice, P. bought supplies, but did not notify D. of his formal acceptance. The next day, P. rescinded the letter. D. sued for breach of contract. Trial judge found for P. stating that the P. was not required to provide actual notice of acceptance before buying materials.
Nature of the Risk: The P. risked that he would be paid more for his services, the D. risked that he could get the building for less.
Issue: Based on the language in the D.'s letter, was the P. required to give actual notice to D. of his acceptance before commencing performance?
Holding: Yes. "Where an offer is made by one party to another when they are not together, the acceptance of it by that other must be manifested by some appropriate act."
Reasoning: The court reasoned that the act of buying the lumber was not sufficient because the P. could have bought the stuff for any other job. They reasoned that the P. never did anything special to accept the offer before it was revoked. [B.S. unless you agree that the P. was not buying the material for this particular project in reliance on the letter.]
Notes: Restatement Second section 62 (similar to UCC 2-206): (1) Where an offer invites an offeree to choose between acceptance by promise and acceptance by performance, the beginning of the invited performance or a tender of part of it is an acceptance by performance. (2) Such an acceptance operates as a promise to render complete performance.
**Los Angeles Traction Co. v. Wilshire, (1902)
Facts: P. paid $1,505 to the city of Los Angeles for a franchise to construct a railway in the downtown area, based on an escrow note from D. which stated that it would pay $2,000 to the P. upon completion of the railway. P. began the construction, but was taking a long time. D. then notified the P. that it no longer considered itself bound to the contract because the construction did not occur quickly enough. P. thereafter completed the railway line and sued for the $2,000. Trial court found for P.
Nature of the Risk: Both P. and D. risked that they could have more profitably allocated their resources.
Issue: Is the beginning of the work by P. sufficient to create a binding contract, even though it was not being completed with diligence?
Holding: Yes. A unilateral offer that is subsequently acted upon by the other, becomes a binding contract.
Reasoning: The court stated that the D. was bound by just the beginning of the performance, and so if it wanted to back out thereafter, it would have to find legitimate grounds for recission, and then compensate the P. for what he had spent based on his reliance (protection of the reliance interest under promissory estoppel?). The court gave the $2,000 benefit of the bargain (expectation interest).
I. Requirement Contracts and Output Contracts A. Requirement Contract - seller promises to sell the buyer as much as the buyer requires over a certain time period. 1. Buyer's advantages a. assures a supply b. protection against rise in prices (may get discount) c. enables long-term planning d. eliminates need for storage 2. Seller's advantages a. reduction in selling expenses b. protection against price fluctuations c. predictable market 3. Risk of non-disposal (too much supply) or increasing needs (too little supply) is borne by seller. B. Output Contract - buyer promises to buy a fixed amount from seller over a certain period of time. 1. Same advantages for both buyer and seller 2. Risk of non-disposal (too much supply) or increasing needs (too little supply) is borne by buyer.
**Great Northern Ry. v. Witham, (1873)
Facts: P. is a railroad company who needed a supply of iron. D. responded to a solicitation by P. for providing as much iron as they may need for a year. The D. offered that they would provide as much iron as the P. might order, and the P. made a formal acceptance by letter. After filling a few of the orders from P., the D. refused to fill any more, arguing that there was no consideration because it was a 1 sided promise (P. had no obligation to buy), and P. brought this suit.
Nature of the Risk: Common purchase of goods risks. Pre-contractually, both parties risked that they could get a better price for the goods. Post-contractually, the D. assumed the risk of too much or too little supply.
Issue: Was there sufficient consideration for finding a contract under the reliance principle?
Holding: Yes. A promise to supply as much as a buyer may order becomes binding upon the promisor when the buyer makes an acceptance.
Reasoning: The court reasoned that the fact that the contract may have been unilateral in nature did not prevent it from being binding. [In terms of consideration, the redistribution of the pre-contractual risks was sufficient consideration for contract formation.]
**Westesen v. Olathe State Bank, (1922)
Facts: P. wished to have a line of credit of $5,000 at D.'s bank because he wished to write checks during a trip to California. The V.P. of the bank promised that they would establish the line of credit, and had P. sign 5 promissory notes of $1,000 each to cover the line of credit in case he overdrew. However, when P. wrote his first check in California, it was dishonored. P. sued. D. argued that there was no consideration because the P. had no obligation to use the line of credit. Trial court sustained D.'s demurrer.
Nature of the Risk: The P. risked that he would not have enough money to take a trip. D. risked that he would not make as much money as he wanted to because of making too few loans.
Issue: Is there sufficient consideration to find a contract even though P. had no obligation to borrow any of the $5,000?
Holding: Yes. An agreement on the one part to sell, and upon the other part to buy, all the goods, or articles, that the purchaser may require during a stated term is a valid contract.
Reasoning: First, the court stated that signing of the promissory notes itself was sufficient consideration because it put the P. at a disadvantage to which he was not required to expose himself, absent the line of credit. Furthermore, they stated that both parties recognized the relevant risks, that the P. might overrun his balance, and that the P. might not even borrow any. [The risks were identified and redistributed.]
**Eastern Air Lines, Inc. v. Gulf Oil Corp., (1975)
Facts: P. and D. had been dealing for several years in good faith. D. has supplied jet fuel to P. based on a requirements contract for all the fuel they would reasonably need at a price based on the fluctuating Texas Sour index (a measure of the market price). However, when OPEC raised prices during the oil embargo, the Texas Sour index became much lower than the real world market price because it only reported domestic oil prices which were under government control. Because of this, D. threatened to cut off P.'s fuel supply if P. did not agree to pay a higher price than stipulated in the requirements contract. P. obtained a temporary injunction and sued for specific performance of the contract. D. argued that the contract was invalid because 1) It lacked mutuality of obligation, and 2) P. breached the contract by practicing "fuel freighting" whereby a plane bought more fuel than it needed from the lowest price gas station, and then only "topped off" at the higher priced station.
Nature of the Risk: The P. risked that they would not have enough fuel at a low enough price to run their airline. D. risked that they would not be able to sell as much oil as they desired for as high of a price as they desired.
Issue: 1. Is there sufficient consideration for a contract even though the P. had no obligation to buy a particular amount (quantity was not fixed)? 2. Was there a breach of contract by P.'s practice of "fuel freighting", even though it was common practice and known by the D.?
Holding: 1. Yes. A requirements contract is binding on the seller to provide a reasonable amount of product to the buyer, consistent with commercial standards of fair dealing, and is binding on the buyer to act in good faith in making orders consistent with his requirements. 2. No. A requirements contract is not breached by the buyer making fluctuations in the requirements in accordance with normal business practices of which the seller is aware.
Reasoning: Using UCC 2-306, 1. Both parties identified and understood the risks involved in making the requirements contract. The fact that the price went up drastically was one of the foreseeable risks that was redistributed to the D. when the P. and D. redistributed their respective pre-contractual risks. Since the parties had relied upon each other over the years in light of the understanding of these risks, it should not have been a surprise to D. that he was contractually bound. 2. The practice of "fuel freighting" in the industry was a well known and accepted practice, and as such did not violate the nature of the requirements contract which required good faith dealing. "Good-faith" between merchants means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." The court then awarded specific performance because to award anything less would be useless.
**Utah International, Inc. v. Colorado-Ute Electric Ass'n., Inc., (1976)
Facts: The P. is a coal mining company that signed a requirements contract with D. to furnish coal at a certain price for electrical generators over 35 years in amounts as would be required by two 350,000 kW generators. The contract had both a maximum sales obligation and a minimum purchase obligation. The D.'s minimum purchase obligation was a negotiated figure that the D. guaranteed that they would purchase each year regardless of whether they used it. At some point prior to the signing of the contract, the D. chose to use larger generators requiring more coal, but they purposefully failed to inform the P. of the change, because they didn't want to adversely affect the negotiations. Sometime after the contract was signed, the price of coal went up sharply due to the oil embargo, and the P. sued to be released from the contract completely, alleging breach by D. in using larger generators than the contract specified. D. countersued for specific performance.
Nature of the Risk: Pre-contractually, both the D. and the P. risked that they could do better (standard sale of goods risks). Additionally, both parties risked that the future would be uncertain. This particular transaction attempted to redistribute the risk such that the P.'s (seller's) risk would be limited somewhat by the D.'s guarantee to buy a minimum amount, and the D.'s risk would be limited somewhat by the P.'s guarantee to provide as much as required up to a certain amount.
Issue: Whether the change in the size of the generators was a breach that entitled P. to recission of the entire contract.
Holding: No. The minimum purchase limit in a requirements contract is a right of purchase of the buyer, and any deliveries above that could be demanded only to the extent that they were actual business requirements of the buyer as identified by the parties prior to contract formation.
Reasoning: The court reasoned that the contract had two parts. The negotiated minimum purchase amount was separate from the actual requirements of the D., in that it was guaranteed regardless of how much fuel the generators would need. Therefore, the obligation to purchase implied the right to purchase a minimum amount, and so the P. would be held to providing it. Secondly, the court reasoned that the amount above the minimum purchase and below the maximum was directly tied to the actual fuel requirements of the generators, and therefore their size. Thus, a change in the size, especially in bad faith, substantially altered the amount that the P. would be required to supply. The P. relied upon the size of the generators in determining the price of the coal and in designing its mine, and so was only contractually obligated to supply the actual requirements of the smaller generators.
**Schlegel Manufacturing Co. v. Cooper's Glue Factory, (1921).
Facts: P. is a "jobber" who wished to buy glue from D. and re-sell it at retail. D. sent a letter to P. promising to provide as much glue as they might require for the year, for 9 cents per pound. The price of glue went up to 24 cents a pound during the year, and so D. refused to make deliveries at some point. P. sued, and both trial court and court of appeals found for P..
Nature of the Risk: The P. risked that he could get glue for less. The D. risked that he could get more for his glue.
Issue: Whether there was sufficient consideration in this transaction to find a binding contract.
Reasoning: The court reasoned that the contract failed for lack of mutuality. They reasoned that the P. was under no obligation to buy any glue whatsoever, and so the D. could not have sued had the price gone the other way, and the P. refused to make an order. [The court saw this as a slick, speculative P. victimizing an honest manufacturer.
Notes: The notes following revealed additional facts. The D. and P. had the same contract year to year. When the price went up, and P. got more orders, D.'s representative repeatedly promised that the orders would be shipped. Thus, the P. relied upon D.'s promise in continuing to make orders. Furthermore, the D.'s letter could be viewed as a continuing offer that was accepted by P..
**Wood v. Lucy, Lady Duff-Gordon, (1917)
Facts: D. is a "creator of fashion" who gave P. the exclusive right, subject to her ultimate approval, to market her name as an endorsement. She was to receive half of the profits, and he was to obtain any necessary patents, copyrights, etc. to protect her interests. D. sold her name to others on the side, and P. sued for damages. D. claims that there were not the elements of a contract because P. had no obligation to sell anything of hers.
Nature of the Risk: D. risked that she could make more money if she had the right "agent". P. risked that he would make more money selling something else.
Issue: Is there consideration on the part of the P. as found by the actions and relationship of the parties sufficient to find a contract, even though there was no explicit amount of sales of D.'s name that he had to make?
Holding: Yes. Where there is not an explicit obligation in a written contract for the amount a person will perform, it may be implied that the person is obligated to perform using reasonable efforts [in good faith].
Reasoning: The court reasoned that the contract did not fail because of the mechanical wording. They implied a meaning based on the actions and the relationship of the parties. Viewing the contract as a whole, it was evident that both parties expected P. to make reasonable efforts to make profits.
**Bernstein v. W.B. Manufacturing Co., (1921)
Facts: The P. was the seller of some boy's wash suits. The D. placed an order to buy 174 doz., plus 5 sets of samples to be delivered at once. The record of the transaction was written down by the P., and not signed by the D., and it stated that "All orders accepted to be delivered to the best of our ability...This order is given and accepted subject to a limit of credit and determination at any time by us." The P. delivered the 5 samples, which were paid for, and then 72 dozen suits, which were refused upon delivery. The D. then argued that the transaction lacked mutuality because of the reservation of power language in the letter. [D. wanted out]. P. argued that the language only referred to the P.'s reservation to determine how much the line of credit would be. Trial court found for P.. D. appealed.
Nature of the Risk: Standard sale of goods pre-contractual risk. P. risked that he could get more for his goods. D. risked that he could better allocate his resources.
Issue: Is there sufficient consideration on the part of the P. based on the actions and relationship of the parties, even though the language in the letter (which was unsigned) could be constructed as broad reservation of power?
Holding: No. [B.S.] "[I]n a bilateral agreement both of the mutual promises must be binding or neither will be, for if one of the promises is for any reason invalid the other has no consideration and so they both fall." [Let D. out.]
Reasoning: The court reasoned that the language of the letter encompassed a reservation of power of the entire binding nature of the transaction. Further, the P. was not obligated to fill the balance of the order unless they chose to do so. [This ignores the conduct of the parties, their previous relationship, and the wording of the letter to promise delivery to the best of their ability. The court could just have easily have enforced the contract, not stumbling over a poorly phrased sentence.]
**Gurfein v. Werbelovsky, (1922)
Facts: P. sent an order to D. to buy some glass. D. sent a letter formally accepting the order and specifically granting the P. the option to revoke his order if done before shipment, which was to occur within 3 months. The P. demanded delivery on several occasions, but the D. refused, claiming that the letter of acceptance was not binding because it gave P. the option to revoke.
Nature of the Risk: Pre-contractual standard sale of goods risks.
Issue: Does the granting of an option to P. destroy the binding effect of the contract?
Holding: No. An acceptance that grants an option to the offeror results in a binding contract which is enforceable unless and until the offeror revokes the offer prior to the expiration of the option.
Reasoning: The court reasoned that the contract was enforceable because the D. had the opportunity to ship concurrently with sending the letter granting the option, thus causing the option to expire immediately. Additionally, because the P. never attempted to exercise his option to revoke, the D. could have extinguished the power of revocation by shipment at any time.
**Kirskey v. Kirskey, (1845)
Facts: The P. is the widow of the D.'s brother. When the D. heard of his brother's death, he sent a letter to the P. advising her to sell whatever interest she had in the land she was presently on, and to move her family to his farm. He promised that "[i]f you will come down and see me, I will let you have a place to raise your family, and I have more open land than I can tend...." The P. abandoned her land, and moved down to the D.'s land. After 2 years of cultivating his land, he eventually told her to leave.
Nature of the Risk: P. risked that she could raise her family better if she moved to D.'s farm. D. risked that he could not tend all of his land, and so would not make as much as he could.
Issue: Is there sufficient consideration to find a binding contract based on the P.'s moving and giving up what she had?
Holding: No. A promise which is a mere gratuity does not create a binding contract.
Reasoning: The writer of the opinion reasoned that there was sufficient consideration because she had moved, but they reversed anyway? [This looks like promissory estoppel. The P. acted to her detriment in reliance on the promise of the D.. P. should be entitled to at least reliance damages, perhaps expectation because she didn't give up much, and because it looks like standard redistribution of risk. She gave up what she had for a chance at more money, he gave her shelter in return for cultivating his land. There may be the overshadowing of familial relationship.]
**Forward v. Armstead, (1847)
Facts: P. is suing his father's estate for land which was not willed to P. upon his father's death. The father promised the son a plantation if he would move to Alabama. The son did move, and made improvements on the land.
Nature of the Risk: The son risked that he could make more money if he moved to the plantation. The father risked that he would not have his son present.
Issue: Is the son's moving to Alabama sufficient consideration for the formation of a binding contract?
Holding: No. Based on Kirskey.
Reasoning: The court reasoned that the expense and trouble of moving to Alabama could not serve to create a binding contract because the son was not "bargaining" for the plantation, nor was the father "contracting" for the son's move. The father was not gaining anything. As to the improvements in the land, the court reasoned that the son was foolish for making improvements to property that he knew as a matter of law did not belong to him. [Again, this looks like promissory estoppel. The father (or at least his estate) did gain by the improvements, and it is not unreasonable to assume that the father wanted the son present so that he could work the plantation.]
**Hamer v. Sidway, (1891)
Facts: P. is the nephew of a man who promised him $5,000 on his 21st birthday if he would abstain from smoking, drinking, or playing cards, etc. P. did abstain and let his uncle know. The uncle then responded with a letter stating that the money would continue to collect interest until the P. was able to take care of it. The uncle then died, and the executor refused to give the money to the P., claiming that there was no consideration, and that the P. did not act to his detriment, because abstinence actually was to his benefit.
Nature of the Risk: The P. risked that he could be happier if he took up vices. D. risked that he would be unhappy if the nephew took up vices.
Issue: Is there a binding contract based on consideration, even though the actions were to the benefit of the P. even without the promise?
Holding: Yes. A contracting party need not perform an act or forbearance that is of any value to anyone in order for there to be sufficient consideration to support contract formation. It is sufficient that the party perform the act or forbearance requested.
Reasoning: The court reasoned that the P. had a legal right to use tobacco, or to drink, and that by abandoning that right in reliance on his uncle's promise, he was entitled to the $5,000. [In this case, promissory estoppel results in protection of the expectation interest by invoking the reliance principle.]
**Allegheny College v. National Chautauqua County Bank of Jamestown, (1927)
Facts: The P. college was making a fund drive to raise funds for the college. A woman named Mary Johnston made a pledge of $5,000 by letter to be paid after her death. She wrote that the money would be used for a memorial scholarship fund for herself, and then gave $1,000 on account before she died. She later repudiated the promise, and then died. The college seeks to get the money from the bank where her estate is being settled.
Nature of the Risk: The P. risked that they would not raise enough money to provide education for their students in the future. The dead woman risked that she would not be remembered after her death, or respected during her life.
Issue: Is there a binding obligation based upon her promise to pay $5,000, and the initial payment of $1,000 to be used for a specific purpose?
Reasoning: The majority (Cardozo) reasoned that the letter and giving of money was not a one-sided promise. It was fully bilateral. The dead woman gave the money under the instructions to set up a memorial fund in her name. She would benefit by having her name live on beyond her death. The "down-payment" was accepted by the college with an obligation to use it for that purpose, and the expectation that the rest of the money would eventually show. The college could not have accepted the money and then done something else with it. They were bound to the implied promise to use it for a memorial fund. Furthermore, the woman gained benefit during her own life, because the college used her name on circulars, and she gained social recognition and status for it. [The partial payment could be viewed as a partial performance of the woman's obligation]
**Gillingham v. Brown, (1901)
Facts: The D. held a demand note that the D. owed money upon. However, the statute of limitations had run, and so extinguished his remedy to recover on the note. D.'s sister, as his agent, approached D. who acknowledged the debt and promised to pay $10 per month, but only had $5 to pay on account right now. D. failed to make any future payments, and D. sued. Trial court found for D. for the full value of the demand note. D. appealed alleging that the D. was only entitled to the amount of the missed payments to date.
Nature of the Risk: The D. risked that he would not be able to collect any part of an expired debt. The D. risked that he would be morally upset if he did not pay something.
Issue: Does a new promise to pay an expired debt according to a monthly payment schedule obligate the promisor to pay the full amount of the prior debt?
Holding: No. The rights of the creditor are only determined by the nature of the new promise, and not by the expired debt.
Reasoning: The court reasoned that the statute of limitations barred recovery by the D., but that the D. could waive that right and promise to pay. However, the D. could effect a partial waiver of the statute of limitations and make a promise to pay under monthly installments. This did not waive the entire statute, but rather became a new promise set to new terms.
**Mills v. Wyman, (1825)
Facts: P., as a good Samaritan, took care of D.'s 25 yr. old son when he returned from sea and fell ill. The P. gave the son shelter and comfort until he died. After the son's death, the D. sent a letter to the P. promising to reimburse him for the son's care. P. then later refused to do so, and P. sued.
Nature of the Risk: The P. risked that his son would die without dignity. The D. risked that he could spend his money more wisely than by taking care of a sick person.
Issue: Is the P.'s promise to pay legally enforceable, even though the son was of full age?
Holding: No. [B.S.] To be legally enforceable, a moral obligation must be founded upon some pre-existing legal obligation which has since expired, but was revived by a renewed promise.
Reasoning: The court reasoned that although the P. should pay, they could not, as a matter of law, compel him to pay. They stated that this sort of promise fell outside of the court's regulatory power because it had no previous "exchange". [This overlooks the fact that the father was unjustly benefited because his son died with dignity. That is a measurable (although vicarious) risk that was redistributed before the new promise arose, so there was a previous consideration.]
**Perreault v. Hall, (1946)
Facts: The P. worked for the D.'s testator for 40 years until her retirement in 1937. At the time of her retirement, the D. wrote her a letter promising a $20/week pension "in consideration of" her service. The pension was to be paid for the rest of her life, as long as the D.'s estate had enough money to do so, and as long as she remained unmarried and did not speak any bad words against him.
Nature of the Risk: The P. risked that she would not be financially stable during her work or after retirement. The D. risked that the P. might say bad things about him, or be a poor employee if she married.
Issue: Is the promise of the D.'s testator binding even though it was after the P. retired (after performance), and contained statements that canceled the pension if she married (and therefore contrary to public policy)?
Holding: A promise given after a performance is evidence that the parties had made an earlier contract. A contract against marriage is legal if it is reasonable.
Reasoning: The court reasoned that there was some consideration because the letter admitted to it. However, they stated that the letter itself was not sufficient because it occurred after the performance, and so there was no reliance upon it. [The promise was probably made informally before the actual writing of the letter, so the P. could have relied upon it before it was set in writing. Additionally, the clauses concerning secrecy and not making "statements against the moral character" of the D. lend evidence that there was a pre-existing arrangement.]
**Elbinger v. Capitol & Teutonia Co., (1932)
Facts: The P. is a real estate broker who made an oral lease agreement with the D.. The lease was not in writing, and was therefore contrary to a statute. The P. was not able to demand any particular commission on this transaction because it was not in writing. However, the D. paid $200 and then gave a note for $146 for the remaining balance. The D. then refused to honor the note, claming that it was void because it was given without consideration.
Nature of the Risk: The P. risked that he could get more for the lease. The D. risked that he could pay less.
Issue: Is the promissory note by the D. binding, even though the lease was in violation of the statute, making the P. powerless to recover a commission based on the lease itself?
Holding: Yes. Whenever a party receives a benefit which was not identified as a gift, and promises to pay for it, the promise is binding.
Reasoning: The court reasoned that although the original commission agreement was not binding, the D. made a promise to pay which then became binding. There was no need for a pre-existing obligation which was canceled by law. [A promise of compensation for earlier performance is binding because the risk has already been redistributed.]
**Webb v. McGowin, (1935)
Facts: The P. was cleaning the upper deck of the place where he worked. As part of his cleaning duties, it was normal practice to toss a large wooden block down to the floor below. As the P. attempted to throw the block, the D. suddenly stepped into the drop zone, and the P. held on to the block as it fell, thus saving the D.'s life. The P. was crippled for life, and the D. promised to pay him $15 every two weeks for the rest of P.'s life. When D. died, his estate stopped the payments. P. sued, and trial court dismissed on the grounds that the promise to pay was not binding.
Nature of the Risk: The P. risked that he would kill the D. or become injured to the point where he could no longer work for money; the D., that he would be killed.
Issue: Is the D.'s subsequent promise to pay, after the P. had saved his life, a binding promise?
Holding: Yes. "Where the promisee cares for, improves, and preserves the property of a promisor, though done without his request, it is sufficient consideration for the promisor's subsequent agreement to pay for the service, because of the material benefit received."
Reasoning: The court reasoned that the D. was benefited, and the P. was injured. Thus, the P.'s subsequent promise to pay was enforceable because there was redistribution of risk (consideration). They compared it to the standard doctor/patient relationship, where the doctor saves the patient's life, and the patient is required to pay. They argued a commercial relationship. The doctor gets money for saving the life, which is also worth money. The Supreme Court added that the compensation was not only for the benefit received, but also for the injuries sustained.
**Medberry v. Olcovich, (1936)
Facts: P.'s son was injured while riding as a guest in D.'s son's car. The P. did not have enough money to pay the medical bills, and the D., feeling responsible, promised to pay for the P.'s son's reasonable medical expenses. The D. paid for two separate bills, for a total of $135, but refused to pay thereafter. The total of the medical expenses was $1058. The P. sued, claiming that he had relied upon the D.'s promise, and the trial court found for D., claiming lack of consideration for the promise [that D. had no reason to be bound because he did not gain anything].
Nature of the Risk: The P. risked that his son would not be able to get adequate medical care because he did not have enough money, the D. risked that he would bear the guilt of letting the P.'s son suffer for an accident that his own son caused.
Issue: Is the promise by the D. to pay the medical expenses binding, even though he was not the person who caused the injury?
Holding: Yes. A moral obligation to pay is sufficient consideration to support a promise to pay and to make the promise enforceable.
Reasoning: The court reasoned that the D. identified his own risk (anxiety) and the risk of the P. (possibility of poor medical care) and the D. made a promise which was a redistribution of that identified risk. Because the P. could not pay himself, P. had relied upon the promise of the D. to pay. Furthermore, the D. did actually make two payments, creating a presumption that there was a recognized transaction. Even though the D. did not cause the accident directly, that does not preclude him from contracting out of bearing the anxiety he was feeling.
86 Restatement (Second) of Contracts
(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. (2) A promise is NOT binding under Subsection (1) (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or (b) to the extent that its value is disproportionate to the benefit.
I. Bargaining and Economic Liberty
A. Cohen, The Basis of Contract
1. The parties to the contract must themselves determine what is fair, even though common sense might require equivalence.
2. Even though promises have no inherent value, they are sanctioned in order to protect transactions that would otherwise be left outside contract law if equivalence were required.
B. The Peppercorn Theory of Consideration...
1. Age-old formula: mere inadequacy (inequitability) of consideration is never a bar to enforcement of a contract.
2. The doctrine of "laesio enormis" arose in the post-classical period to remedy gross unfairness.
3. With the advent of capitalism, more freedom was given to the parties to determine what was fair; only requiring an opportunity to arrive at a just result, provided there has been no abuse of bargaining power (fraud, duress, etc.).
4. Courts previously had to construe the contract to show fraud or duress to avoid enforcement of a lopsided contract, but now they have U.C.C. 2-302 which allows the court to find unconscionability as a matter of law.
a. The court may refuse to enforce the entire contract, only enforce the equitable portion, or limit the unconcionable portion.
b. The parties may present evidence of the commercial setting of the transaction to prove or disprove the "unfairness" at the time the contract was created.
5. The definition of unconscionability is purposefully vague to allow courts the flexibility needed to regulate.
**United States v. Bethlehem Steel Corp., (1942)
Facts: During W.W.I, the U.S. needed ships built quickly. The D. offered to build the ships for a cost-plus-fixed-fee contract with a savings- clause to reward them 50% of the money that they saved over the estimated cost. They set the cost estimates very high to assure themselves a profit, and the U.S. felt that they had no choice but to go along because they were in such a bad position. Upon completion of the ships, the U.S. refused to pay the total amount of the savings clause.
Nature of the Risk: The P. risked that they would not be able to build enough ships soon enough to win the war. The D. risked that they would not make much money from their shipbuilding business. [Ordinary commercial pre-contractual risk.]
Issue: Is the relationship between the U.S. and the D. so lopsided that it would render the contract "unconscionable" and unenforceable?
Holding: No. A contract is enforceable when it is made with the full recognition of the risks by both parties, and there is no fraud.
Reasoning: The majority reasoned that although the U.S. resented the greediness of the D., they made the contract with their "eyes open", and therefore the express contract should be enforced.
Dissent: The dissent reasoned that there was not an opportunity to reach a just result because of the extreme lopsidedness of the bargaining power of each side. The need of the gov't was extremely urgent, and they were faced with either agreeing to the D.'s terms or commandeering the plant and building the ships themselves. Whenever one party can dictate all the terms of the contract, and the other must acquiesce, it is coercion. They further reasoned that the D. took no risk of loss because of the cost+ff contract.
I. Consumer Protection
A. Although consumers are not free to dicker any more, they gain the benefit of lower prices due to the seller's lower transaction costs. However, the consumer still needs protection.
B. The Uniform Consumer Credit Code section 5.108 deals with unconscionability.
1. The court, if it finds unconscionability, may refuse to enforce the contract, enforce only the "fair" portion, or limit the unconscionable portion.
a. selling property which the seller knows that the buyer cannot benefit from.
b. gross disproportion between selling price and fair market value. 2. The creditor is not allowed to engage in "unconscionable" collection practices.
a. threats of force.
b. fraudulent or misleading representations simulating legal action.
**Patterson v. Walker-Thomas Furniture Co., (1971)
Facts: Appellant put merchandise on layaway, and then failed to pay all of the installments. The Appellee sued for the balance, to which the appellant responded that they were grossly over-priced, and therefore the contract should be negated due to unconscionability. The appellant wished to have the court subpoena the invoices of the appellee to show that she was over-charged based on what they paid.
Nature of the Risk: The P. risked that she could pay less for the items, and the D. risked that they could get more. [Standard commercial pre- contractual risks.]
Issue: Is there sufficient evidence to show unconscionability and void the contract?
Holding: No. "[T]wo elements are required to exist to prove unconscionability; i.e., 'an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party".
Reasoning: The court reasoned that the appellant provided no evidence that she had an absence of meaningful choice. Therefore, there was no reason to investigate the validity of the price by subpoena of the appellee's invoices.
Note: "Huge profits" of the seller may reflect the high-risk nature of the business, and therefore not be unreasonable or unconscionable.
**Davis & Co. v. Morgan, (1903);
Facts: Morgan was under contract to work for Davis for $40/month for the term of one year. Morgan found a better job in Florida, and so Davis made a promise to Morgan for more money. Davis says he promised that if Morgan would stay out the balance of the year, he would pay him $120 bonus. Morgan insists the promise was to add $10/month from the time Morgan began, and owe him a total of $120 more than his regular salary at the end of the year. Morgan went to Florida for several days, claiming that Davis had consented to the visit, but Davis insists that he did not consent, and fired Morgan with 3 weeks to go. Morgan sued for the extra compensation promised, and the jury found in his favor. Davis appealed.
Nature of the Risk: Morgan risked that he could make more money at a different job. Davis risked that he would lose money if he did not keep Morgan for the rest of the year, and further risked that Morgan would default.
Issue: Is Davis' promise for more money a "gratuitous promise" without consideration, since Morgan was already bound to work the rest of the year?
Holding: Yes. For a promise to be binding, it must be supported by consideration.
Reasoning: The court reasoned that since Morgan had already contracted for $40/month for one year, that Davis' promise to pay him more was gratuitous and without consideration. It was a naked promise because Davis received no benefit from it above what Morgan was already legally bound to do. [However, this ignores that a new redistribution of risk was made by the second promise. Strictly, it should not matter that Davis already had Morgan's commitment. Even though Morgan was already legally bound, Davis still faced the risk that Morgan would default, and so felt he needed to reallocate that risk further. UCC 2-209 (1) specifically allows modifications to a contract when the modifications are not supported by consideration as long as they were not negotiated in bad faith.]
**Schwartzreich v. Bauman-Basch, Inc., (1921)
Facts: The P. signed an employment contract to work for D. for one year at a salary of $90/week. Sometime later, the P. received an offer to work for more money, and it came to the attention of the D.. The D. claims that because he could not replace the P. at that time, he offered him $100/week. The P. claims the offer was given without duress, as between friends. Both parties signed a new contract, but at the end of the term, the D. only wanted to pay the original amount. P. sued, and the trial jury found for P.. The trial judge, however, set aside the verdict. The court of appeals reinstated the verdict for P., and D. appealed to this court.
Nature of the Risk: The P. risked that he could make more money at a different job. The D. risked that the P. would breach, and cause him to lose money because he could not be replaced easily at that critical time.
Issue: Is there a new and separate contract, supported by consideration, based on the D.'s promise to pay the additional money?
Holding: Yes. Where two parties modify an existing contract to reallocate the risk of default by one party, it becomes a new contract which is binding.
Reasoning: The court reasoned that the old contract was rescinded by both parties by the action of signing the new contract. Therefore, there was consideration to support the new contract, because it was not simply an extension of the old contract, but a completely new entity with the same risks that were originally contracted to. Thus, the P. was not already bound to perform at the time the new contract was made.
Notes: Posner states that when market fluctuations provide a better opportunity to someone who is already involved in a contract, he may rightly default and pursue the better opportunity if he pays proper damages for breach. Thus, the parties should be allowed to renegotiate concerning the risk of breach. UCC 2-209 Comment 2 provides that market shifts which would cause one party to perform at a loss are sufficient reason to supply motivation for renegotiation, and are not in bad faith.
I. The consideration doctrine may be poorly suited to handle cases where
there already exists a duty to perform, and the debtor is seeking
A. Courts have traditionally viewed this dogmatically, stating that pre- existing obligation is not sufficient consideration to support a promise.
B. Perhaps these issues are better solved with the help of categories like duress, unconscionability, or public policy where one can argue that there was not an opportunity for identification and redistribution of risk due to the extreme reservation of power of the debtor.
**Lingenfelder v. The Wainwright Brewing Co., (1890).
Facts: P. was hired by D. as an architect to design and build a brewery for 5% commission on the cost of the buildings. After P. started performance, D. awarded a contract for a refrigerator, against P.'s wishes, to a competitor. P. stopped performance in protest, and said he would not finish. D., out of haste to have the brewery finished, offered the P. an additional 5% commission on the refrigerator so that he would continue work. At the conclusion, D. did not want to pay the extra 5% because he claimed that the promise was without consideration since P. was already under contract to perform. P. sued claiming that a new contract was formed by the new offer.
Nature of the Risk: The P. risked that he would lose money to his competitor. D. risked that he would pay too much for the brewery and not have it finished on time if the P. breached.
Issue: Was the promise by D. to pay more money to convince the P. not to breach binding?
Holding: No. "[A] promise to pay a man for doing that which he is already under contract to do is without consideration."
Reasoning: The court reasoned that the D. received no "benefit" from the new promise, and that the P. was not required to do anything more than he was already obligated to do. The court saw it as outright extortion, done in bad faith, and refuted P.'s argument that he would be "detrimented" if a competitor were allowed to install the refrigerator. They further refuted the idea that since P. defaulted, D. was entitled to sue for breach, and having not elected to sue, he was estopped from claiming that his promise was without consideration. [It would be assumed that if he forewent the opportunity to sue, that he recognized that he was gaining value from the additional promise.]
**Central London Property Trust, Ltd. v. High Trees House, Ltd., (1947).
Facts: P. rented some apartment buildings to D. for 99 years at 2,500/year beginning in 1937. However, in 1940, the D. was unable to pay the rent because the apartments were unrentable during the prevailing wartime conditions. The P. and D. met and renegotiated the rent down to 1,250/month, which the D. continued to pay, even after the war ended. The P. then sent a letter to the D. raising the rent and sued for the difference in rent beginning after the end of the war.
Nature of the Risk: The P. risked that he would get no rent at all because the D. would go bankrupt. The D. risked that he would not be able to make any money on the buildings due to the high rent.
Issue: Does the renegotiation of the lease to the lower amount last for the entire term of the lease?
Holding: No. A party who waives part of the performance of a contract may later re-instate that portion if it would not be unjust or violate the reliance of the other party.
Reasoning: The court reasoned that the rent waiver was only meant to cover the wartime period. Therefore, it was not unjust to raise the rent back to the original amount after the war, when the D. was able to pay it again. [See UCC 2-209 (5) which reads: A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver. ]
**Austin Instrument, Inc. v. Loral Corp., (1971)
Facts: The D. was under general contract from the gov't to make radar equipment. The contract had a delivery schedule that provided for liquidated damages for late delivery. They sub-contracted to P. for a number of high-quality gears. During the performance, the D. was awarded a second contract, and did not give any of the new business to P.. According to the D., the P. then stopped delivery until the D. agreed to award all of the second contract needs to P., as well as pay higher prices retroactively for the first delivery. D. claims that they were unable to find any replacement vendor for the gears who could deliver in time, and so were forced to concede to the P.'s demands or face damages that would be much greater than the amount they could recover from the P. for breach. P. is suing for the additional money not yet paid.
Nature of the Risk: The P. risked that they could get more money for their gears; the D. risked that they would pay too much for the gears, and not have them delivered in time.
Issue: Was the exercise of power by the P. sufficient to be considered to put the D. under economic duress, thus voiding the modification to the original contract?
Holding: Yes. "A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will." [What does "free will" mean? Either party would like to have more power to bargain with in order to exercise their own will. This is better couched in terms of risk. The P. may have been able to reserve enough power to prevent adequate redistribution of risk.]
Reasoning: The court reasoned that the facts supported a finding that the P. was using the fact that they were a key supplier to extort the D. into paying more money. The majority found that the D. could not have obtained the parts from any other source, and that the normal remedy of damages for breach in this case would be insufficient because of the clause for liquidated damages for late delivery.
Dissent: The dissent reasoned that the facts did not conclusively show economic duress. Austin's version of the story was that there was lack of common understanding as to the specifics of the contract that led to a mutual reformation. They also contended that the delivery stoppage was due to customary vacation period, not an extortion attempt. They also asserted that there were many alternate suppliers that the D. did not approach.
**Skinner v. Tober Foreign Motors, Inc., (1963).
Facts: The P. purchased a plane from the D. with an installment contract to pay $200/mo. The plane then immediately had engine troubles which required the replacement of the engine for $1,400. The P. was unable to make the payments and pay for the repair, so he offered to return the plane as-is, in return for a cancellation of the previous agreement. After some negotiation, the parties arranged orally to reduce the payments to $100/Mo., for the first year. After a few months, the D. decided that the payments were too small, and he repossessed the plane. P. sued for the amount they had paid.
Nature of the Risk: The P. risked that he would pay too much for the plane, and the D. risked that he would not make enough money on the plane.
Issue: Is the oral agreement to lessen the payments to $100/Mo. binding, even though it was "without consideration"?
Holding: No. UCC 2-209 states that an "agreement modifying a contract...needs no consideration to be binding."
Reasoning: The court reasoned that the oral arrangement was binding, even though the P. did not have to do as much as they were originally obligated to do. [The dealer was free to contract with reference to the risk that the buyer would default on the installment contract.]
**Ricketts v. Pennsylvania R.R., (1946)
Facts: P. was injured while in the employment of D.. D. wished to have P. sign a waiver for money to settle the P.'s claim. The P. hired an attorney to represent him against the D.. There is a factual discrepancy as to whether the attorney was hired to represent the P. for all claims or just for back wages and tips. The attorney deceived the P. into signing the waiver, which he did not read, but in language said that he released the D. from all liability. P. sued for the remaining damages. Trial court found for P..
Nature of the Risk: The P. risked that he would not be adequately compensated for his injuries. The D. risked that he would over- compensate the P. for his injuries.
Issue: [Hand] Is the signed waiver valid, even though the attorney was only hired to collect back wages, and the waiver was a full release?
Holding: [Hand] No. A person who signs a contract without reading it accepts whatever the contents of the contract because he could have read it, or was too careless in choosing the person who represented it too him. However, an attorney has no right to bargain with respect to things outside the scope of his retainer.
Reasoning: Hand reasoned that the attorney had overstepped his bounds in representing the P. with regard to all claims, because he was only hired to collect back wages. Thus, although the risks would have fallen according to the signed waiver (even if the attorney were deceiving the P.), the waiver was not binding because of a problem with the attorney's agency. [This is a technicality and does not really address the risk distribution problem head on. A better argument would be that there was no risk distribution because of the fraud of the attorney when he withheld critical information that bore on the guts of the transaction. The P. wished to be adequately compensated, and there is no way that could happen if he were signing something that waived his rights entirely.]
**Consolidated Edison Co. v. Arroll, (1971)
Facts: The D. felt that the P. was charging too much for electricity bills. After several letters to the president and billing department, the D. sent what he considered to be correct payment to the P.. The check and many letters said on them clearly that the check was intended to be payment in full of the disputed bills. The check went to the P.'s post office box, where it was picked up and cashed by the bank employees directly. The P. brought this action to recover the rest of the amount owed, and the D. claimed the defense of accord and satisfaction because the P. had cashed the checks and kept the money, never mentioning the checks in subsequent letters.
Nature of the Risk: The P. risked that they would not get fair market value for the electricity, the D. risked that he would pay more than fair market value for the electricity he received.
Issue: Is the cashing and retention of the checks by P. sufficient to be considered accord and satisfaction, even though the P. arranged for the bank to pick up the checks for them?
Holding: Yes. Where an amount is in dispute, and the debtor sends a check for less than the amount claimed, and clearly expresses that the check is "payment in full", the cashing or retention of the check by the creditor operates as accord and satisfaction, waiving the obligation by implication.
Reasoning: The court reasoned that Con Edison should not be exempted from the law of accord and satisfaction, simply because they were too large to examine every check, and instead had the bank pick up the checks directly. [This ignores the fact that the D. may have been trying to take advantage of the size of the company to force the accord and satisfaction defense by sending the payment to the post office box where he knew it would most likely be ignored, instead of to someone in the company who would have adequate notice to take action to preserve the P.'s rights. In this way, Con Edison may have come to rely on the fact that disgruntled customers do not try to "slip one by" the company by using the post office box. The reliance principle could have been invoked to protect Con Edison.]
**Hudson v. Yonkers Fruit Co., Inc., (1932)
Facts: The P. owned a bunch of apples for which he desired the D. to find a buyer. The D. did find a buyer, and collected the payment for the P.. The D. deducted a 10% commission on the sale, however, and only forwarded the 90% balance. The P. claimed that the transaction was done for free, and that no commission was due to the D.. The P. then retained the funds, and so D. claims that the P. waived his right to the additional money because of accord and satisfaction.
Nature of the Risk: The P. risked that he would not get enough money for the apples without the D.'s help. The D. risked that he could have spent his time more profitably than to find a buyer for the P.'s apples.
Issue: Is the retention of the money by the P. sufficient to bar him from collecting the remainder of the money from the D.?
Holding: [Cardozo] No. The doctrine of accord and satisfaction does not apply to a fiduciary duty between a principal and an agent where there is no notice to the principal that acceptance and retention of the funds is a settlement of the transaction in full.
Reasoning: Cardozo reasoned that the doctrine of accord and satisfaction only applied to a debtor/creditor relationship where there was a condition lawfully imposed by the debtor as to how the money should be used. In that relationship, the debtor is free to put any conditions at all on the use of the money, for example that use of it is assent to waiver of a greater debt, because the money belongs to the debtor. However, in principal/agent relationship, the money does not belong to the agent, but it is the principal's money all along. To attempt to withhold a portion of the money is embezzlement. Thus, there arises no presumption that the principal waives any rights to the full amount of his own money when the agent attempts to withhold. Furthermore, in the instant case, the D. did not give the P. actual notice that the payment was considered to be in dispute.
I. Objective view of contract formation. (Williston)
A. The meaning and effect of the contract depends on the interpretation given the written language by the court. The court will give the language its natural and appropriate meaning, and both parties may be surprised by the resultant meaning imputed to their language and conduct.
B. Does not take into account what the "intent" of the parties may have been at the time of contract formation.
II. Compromise to the objective view of contract formation. (Frank J. concurring in Ricketts). The realities of the actual practice of business require more flexibility.
A. Assumption of Risk.-Parties to a contract are presumed to undertake the risk that the facts upon the basis of which they contracted might be wrong, but unless they deliberately assume that risk, they should only be held pay actual expenses of the other party when there is material mistake of fact, otherwise the other party receives a windfall (unjust enrichment).
B. It is assumed that business is conducted with full information about the vital facts, and so when a material mistake is found, it is assumed that the contract would not have been entered had the parties known. Thus the mistaken party should be released to prevent unjust enrichment of the other.
C. There are two ways to view mistaken language.
1. (First Restatement) If a person offers to sell his cow, but accidentally states "horse", and the offeree knows it and promptly accepts, then there is no contract at all.
2. (Second Restatement) If a person offers to sell his cow, but accidentally states "horse", and the offeree knows it and promptly accepts, then there is a contract for the cow, not the horse.
**Raffles v. Wichelhaus, (1864)
Facts: The P. offered to sell the D. a certain amount of cotton arriving from Bombay on a ship called the "Peerless". The D. accepted the offer to take shipment and pay within a certain time after arrival of the ship in England. Unfortunately, there were two ships named "Peerless". The one which arrived in October had the cotton, and the D.s refused delivery claiming that when they accepted the offer, they meant that the other ship "Peerless" which was to arrive in December. The P. brought action for breach.
Nature of the Risk: Standard sale of goods risks.
Issue: Is the contract void because each of the parties thought that the shipment was coming by a different ship?
Holding: Yes. Where there is mistake of material fact, there is no binding contract.
Reasoning: The court reasoned that there was not a "meeting of the minds". To hold the contract binding would be to impose on the D. a contract different from what he entered into. [This would only hold weight if it affected the basic redistribution of risk. If the fact that the goods arrived early was not a risk that was redistributed to the D., then the outcome was right, even if the reasoning was dogmatic. However, it is possible that this was simply a mistake of words, and the conduct of the parties should govern. Perhaps the D. saw this mistake as a technical excuse to exit the contract to more lucrative options.]
**Dadourian Export Corp. v. United States, (1961)
Facts: The United States advertised a sale of army surplus nets which were advertised as cargo nets made of manila rope. The P., without inspecting the ropes, put $7,000 down, and bid $30,893. The U.S. accepted, but when the nets were delivered, the P. refused to take them because they were not cargo nets made of manila rope. The U.S. had a clause in the contract that disclaimed any warranty for quality or kind. The U.S. then resold the nets. P. brought an action to recover the down payment.
Nature of the Risk: Standard sale of goods risks.
Issue: Was the contract for the sale of the cargo nets void because there was a significant mistake in the type of goods being bargained for?
Holding: No. When a purchaser of goods ignores a disclaimer of warranty and fails to inspect the goods before purchase, the purchaser is liable for damages for breach if he refuses the goods upon delivery.
Reasoning: The majority [Medina] reasoned under the specific disclaimer for warranty, which was standard in gov't contracts, and in light of the P.'s failure to inspect the goods before contracting, that the P. could not recover the down payment. [Hopefully, this means he gave the benefit of the mistake in understanding to the U.S. because P. had been less reasonable in his understanding of the type of rope.]
Dissent: The dissent [Friendly] reasoned that the buyer should always be able to reject goods that are non-conforming, even in the presence of such a warranty disclaimer. He compared the case to Raffles v. Wichelhaus, where the contract was dissolved because of a mistake of material fact. [Although the Raffles decision was probably not in keeping with present day construction of parties' conduct.]
**Wood v. Boynton, (1885)
Facts: The P. had a small stone which she had been told was probably a topaz. She took it to the D., a jeweler, who examined it, and offered her one dollar. The D. claims that he did not know that it was an uncut diamond when he bought it, but later it was determined that it was. The P. attempted to rescind the sale by offering back the dollar plus 10 cents interest, but the D. refused to transfer the diamond, which was determined to have a value of about $700.
Nature of the Risk: Standard sale of goods.
Issue: Is the P. entitled to recission of the sale simply because they were both mistaken as to the value of the stone, and it turned out to be more valuable than either thought?
Holding: No. In the absence of fraud, where a mistake as to the value of the object sold is made by both parties to a contract, the burden of the loss remains with the person upon which it falls.
Reasoning: The court reasoned that there was not fraud. The P. had held the stone for a long time, and had even made inquiries into what its nature was. The P. cannot rescind the sale simply because it was a bad deal. It does not appear that there was a mistake of material fact that prevented the parties from contracting as to the same item. Both were contracting as to the uncut, and unknown stone. The P. thought that $1 was all that it was worth, and the D. thought that he might be able to resell it for more than $1. [The risk of the value being more than the price paid was transferred to the P., and it just so happens that risk materialized.]
**Sherwood v. Walker, (1887)
Facts: The P. wished to buy a cow, and the D. were in the business of selling cows. The P. went out into the field, selected his cow, which both parties supposed was barren, and paid for it according to the going market price for beef cows. When he came to pick it up, however, the D. refused to deliver, because they found out that the cow was pregnant and therefore of much higher value.
Nature of the Risk: Standard sale of goods.
Issue: Is the mistake as to the value of the cow significant enough that it was a mistake of material fact which voided the contract?
Holding: Yes. When there is a mutual mistake of material fact as to the thing being purchased, the sale may be rescinded.
Reasoning: The majority reasoned that the pregnant cow was a different thing than a barren cow, not simply an item of higher quality. If it were only a mistake as to the value of the item, then the contract would be binding. The parties would not have made the contract of sale except upon the understanding that the cow was barren. [Poor reasoning. Every mistake can be considered a "but for" reason of the contract. The true test is whether the risk was redistributed to a sufficient degree.]
Dissent: The dissent reasoned that there was no mistake of material fact. He reasoned that the D. thought that the cow would never breed, and the P. thought that it might someday breed. Thus, both parties understood the risk involved. The D. risked that the cow, which they thought was barren, might not actually be barren, and the P. thought that the cow, which he was told was barren, might actually be made to breed someday. Therefore, there was not a mistake as to a material fact. The P. was simply correct in his speculation.
Notes: 2. The decision can best be put on the grounds that the price paid did take into account the probability that the cow was pregnant. So the value of the cow was discounted by the belief of the P. that she may not be able to have a calf, but there was a slight chance that she might. There is also a a policy reason to put the burden of the loss on the seller because he had access to more information, and so should have known the cow might become pregnant.
**Smith v. Zimbalist, (1934)
Facts: The P. owned some violins that he wished to sell. The D. identified two of the violins as a Stradivarius and a Guarnerius, and offered to buy them both for $8,000 and made a down payment. The P. accepted. Later, it was discovered that one of the violins was a copy, worth about $300. D. refused to pay the balance, and P. sued.
Nature of the Risk: Standard sale of goods.
Issue: Is the mistake as to the maker of the violins a material mistake of fact (rather than just quality) which would justify recission?
Reasoning: The court reasoned that the a copy violin is not the same item as a Stradivarious violin. They were items of a different identity, not merely quality. [Note that since the buyer was the person who identified the violin initially as a Stradivarius, he originated the mistake of fact. This could easily have gone the other way by arguing that both parties were taking the risk that the value of the item was different from the price paid.]
**Amalgamated Investment and Property Co. Ltd. v. John Walker & Sons, Ltd., (1976)
Facts: The P. offered to buy some land for development purposes, and offered the D. 1,710,000 for some property that had an old-time brewery on it. However, after the sale was made, the land dropped in value to 200,000 because the gov't suddenly granted recognition of the old brewery as a historical landmark. Thus, the land was not developable unless the P. obtained a special waiver from the gov't. The P. sued for recission on the grounds of mistake of material fact, and frustration.
Nature of the Risk: Standard sale of goods. The P. risked that the property value would go down.
Issue: Is the fact that the gov't intervened to name the brewery a historical landmark, thus depreciating the value of the land, ground for recission of the contract?
Holding: No. The buyer of a piece of property runs the risk that it will go down in value.
Reasoning: The court reasoned that the fact that the brewery was named a historical landmark was unfortunate, but that the risk was distributed by the contract. They rejected the mistake of material fact claim because the contract was formed before the gov't named the brewery a historical landmark. They reasoned that all owners of property must realize that they are subject to gov't intervention that may make their land less enjoyable.
**McRae v. Commonwealth Disposals Commission, (1951)
Facts: The D. was in charge of disposing of sunken war wrecks in and around New Guinea by selling them to bidders. The D. advertised a sunken oil tanker lying on a reef 100 miles north of Samarai, and asked for bids. The P.s put in a bid of 285, and were notified of acceptance by letter. Other forms were also sent which included warranty disclaimers that the oil tanker was sold "as-is". When the P. was unable to locate the wreck on a map, the D. sent a lat and long position to the P.s who, in reliance on the D.s representations, outfitted a salvage ship to go recover the wreck. By the time that the P.s arrived at the reef, everyone was aware that there never was a sunken oil tanker - it was a rumor. P. sued for damages amounting to the profit he expected to make on salvaging the wreck. The D. claimed that there was no contract because since there was no wreck, there was no consideration. The trial court found for P. on a deceit claim, but not the contract claim, and awarded damages equal to the amount the P. would have had to pay to verify the ship was actually there before outfitting the salvage crew.
Nature of the Risk: The P. risked that the salvage operations on the tanker would not be as profitable as other ventures he could have undertaken. The D. risked that he could have gotten more money for the tanker from another bidder.
Issue: Is there a contract based on the parties' communications? If so, how should the damages be assessed if there is no fair market value of the goods, because they were non-existent?
Holding: Where a party contracts to deliver goods, and those goods do not actually exist, he is liable for breach of contract.
Reasoning: The court reasoned that the D. had contracted that a sunken tanker did exist in a specific place. The actual existence of the tanker was not a condition precedent to contract formation. The contract was formed at the time the bid was accepted, and the P. did not have an obligation to verify the existence of the tanker before the contract would become binding. Furthermore, if there was any mistake which might pose a problem to contract formation, it was entirely the fault of the D. for carelessly advertising the sale of a ship based on rumor. In determining the remedy, the court found that it was reasonable for the P. to rely on the representations of the D. without doing an independent verification of the actual existence of the ship. Thus, they awarded reliance damages equal to the amount of money that the P. had reasonably spent in preparation to salvage the tanker.
**Paradine v. Jane, (1647)
Facts: The P. was the owner of a piece of land which he leased to the D.. The D. in turn, used the land for his own profits. The lease was for a fixed number of years. During the time of the lease, the D. was forced off of the property by an invading army, and so could not make payments because he could not work the land. The P. sued for the rent not paid.
Nature of the Risk: The P. risked that he could make more money by renting the land to someone else, or using it in some other way. The D. risked that he could make more money by renting some other property, or doing some other work.
Issue: Is the D. absolved from liability for paying rent on the lease during the period of time which he was unable to occupy and work the land because of foreign invasion?
Holding: No. When a party creates "a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract."
Reasoning: The court reasoned that the law could not reform the risk distribution as it lay upon contract formation. The contract did not provide for any reallocation of the loss due to foreign invasion, so the loss remained where it fell - upon the D.. The D. could just have easily have made a provision for unforeseen events that would have affected his ability to pay the rent, yet he did not. Thus, the D. retained the risk that foreign invasion would prevent him from paying his rent. [Impossibility does not void a contract once the risk has been distributed.]
1. Taylor v. Caldwell, (1863)
2. Facts: The P. wished to put on a show at the D.'s Music Hall. The parties negotiated a written document which contained terms setting forth the various responsibilities of each party. There was no mention made of contingencies in case of destruction of the Music Hall before the show date. The Music Hall burned down a few days before the date through the fault of neither party, and both parties had spent some money in preparation.
3. Nature of the Risk: The P. risked that he could spend his money more efficiently if he didn't put on a show at the Music Hall. The D. risked that he could make more money from another patron.
4. Issue: Is the fact that the Music Hall burned down sufficient to absolve the parties from their contractual obligations.
5. Holding: Yes. Where contracting parties do not make explicit representations otherwise, and the nature of the transaction is one in which an objective view of the parties' negotiations shows that they intended not to be bound if the performance became "impossible" due an uncontemplated event, then an "implied condition" is said to exist which excuses the parties from performance upon the happening of the event.
6. Reasoning: [Blackburn] The court reasoned that if the parties had contemplated the burning down of the Music Hall before the performance, they both would have considered themselves not bound. They likened the transaction to one where a painter who was commissioned to paint a work died before it was finished, thus releasing him from his obligation. [B.S. this seems entirely inconsistent with an objective view of the contract. The parties did not make any redistribution of the risk that the Music Hall would burn down, so it was left on the owner to provide it. Where a party has, by his own contract, created a duty upon himself, he is bound to complete it, or be in breach, because he might have provided against it in the contract. The P. may not be able to recover anticipated profits, but he should be able to recover the costs of advertisement based on his reliance on the contract.]
1. Krell v. Henry, (1903)
2. Facts: P. owned a room which had windows that looked out over the area where the King's coronation was to take place, and put up signs in his window offering the use of the rooms for people to watch the coronation. The D. paid a down payment to use a room for the days of the coronation, but the King became sick and was unable to be coronated. The D. refused to pay the balance of the money for the room, and P. brought this suit.
3. Nature of the Risk: The P. risked that he could get more money for his room. The D. risked that he could have better spent his money than on P.'s apartment.
4. Issue: Is the fact that the coronation did not take place sufficient to release the parties from their contractual obligations?
5. Holding: Yes. Where from the nature of the contract, it can be objectively determined from the parties' conduct that both parties meant to be released from liability upon the failure of a certain event to happen, even if it is not expressly stated by the parties, it is an implied condition of the contract.
6. Reasoning: The court reasoned that the "foundation" of the contract was that the room could be used to view the coronation. Thus, the happening of the coronation was an implied condition of the contract. They reasoned that the non-happening of the coronation was of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made. [This result is correct if the implied condition was part of the risk distribution of the parties themselves. Note that the D. dropped his counterclaim for the down payment (restitution or reliance damages) probably as a strategic move to avoid forcing the court to choose between protecting the expectation interest of the P., and any recovery by the D..]
1. Chandler v. Webster, (1904)
2. Facts: The owner of an apartment building facing the King's coronation sold the use of his room to a guest for the days of the coronation. The guest made a down payment, and did not pay the balance, which was due before the King actually canceled. The guest sued for the down payment back, and the owner counter-sued for the balance.
3. Nature of the Risk: The owner risked that he could get more money for his room. The guest risked that he could have better spent his money than on P.'s apartment.
4. Issue: Is the fact that the coronation did not take place sufficient to release the parties from their contractual obligations, even when the balance of the payment was due before the coronation was canceled?
5. Holding: The failure of an implied condition to a contract that frustrates performance relieves the parties from future performance, but does not invalidate any performance completed prior to the occurrence of the frustration.
6. Reasoning: The court reasoned that once performance takes place, the rights of the parties become blurred to the extent that a court would not be able to work out with any exactness what the actual rights of the parties would be. Thus, where the contract has been frustrated by a supervening event so as to release the parties from future performance, the loss will lie where it falls. [Is this like saying that partial performance is sufficient to entitle the parties to partial enforcement of the contract? The full expectation interest of the owner was protected in this case, but if the whole balance would not have been due before the frustration, this case seems to indicate that the owner would have his reliance interest protected by keeping the down payment. However, the protection may be inadvertent. The argument claims that because it is impossible to be exact, that the adjustment of the losses should not be attempted.]
1. Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd., (1943)
2. Facts: The P. is a polish company who expressly contracted with the D. to buy some machines and have them delivered to Poland. They were supposed to have made a down payment of 1/3 upon order, but paid somewhat less than that. The D. began the construction of the machines. Poland was subsequently invaded by Germany, which made it impossible to deliver the machines. The P. sued to get his down payment back.
3. Nature of the Risk: Standard sale of goods risks.
4. Issue: Is the subsequent impossibility of performance by the D. sufficient to release the parties from further contractual liability, as well as entitle the P. to recover any down payment, even though the D. had already gone to some expenditure to make the machines?
5. Holding: Yes. Where the performance of a contract has begun, but further performance of a contract becomes impossible due to events unanticipated by the parties and beyond their control, the contract fails for lack of consideration, and any partial payment by the buyer is refundable.
6. Reasoning: The court expressly overruled Chandler v. Webster, and claimed that the P. was entitled to recovery, not by release by implied condition, but that failure of consideration prevented the contract from being formed at all. The court reasoned that the contract was for delivery, and so when delivery became impossible, the whole contract failed for lack of consideration. Thus, they awarded restitution damages to the P. on a theory of quasi-contract because the whole contract had failed. [The promise by the D. to deliver was an unconditional one. Thus, the risk of invasion preventing delivery was never reallocated to the P.. Under that view, this is an express contract, entitling the P. to expectation damages. But these would be hard to calculate. The burden would be on the P. to demonstrate how much it would have made if the machines were actually delivered. However, they only sued for their down-payment. It seems that the announced theory of the case - quasi contract, was a means to get the theory to match the request for reimbursement.]
7. Notes: In English law, there has been a Law Reform (Frustrated Contracts) Act which attempts to make an equitable adjustment of the losses of the parties when performance is frustrated. It attempts to protect a reliance-type interest of the party who has begun partial performance (as in Fibrosa), as well as the restitution interest of one who has pre-paid for services which have not yet been performed. The U.S. law has taken a less forgiving approach. letting the losses fall where they may unless the parties have contracted otherwise. For example the holding in Bennet: "[W]here a party, by his own contract, creates a duty or charge upon himself, he is bound to make it good if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract."
1. Butterfield v. Byron, (1891)
2. Facts: The P. made an express contract with the D. to build a house for the P. according to specifications that the P. would provide. In the specifications, the P. was to due the grading, excavating, stone work, brick-work and painting. The P. was to pay the D. 75% of the cost of materials and work per month, and the final 25% after the competion of the building. The contract had a deadline date, after which, the D. was to forfeit $15/day of the payment. When the building was nearly finished, it was destroyed by lightning. At that time, the P. had paid the D. $5,265 for material and labor. After the destruction of the house, neither party approached the other to begin rebuilding, and the P.'s insurance paid the P. for the entire loss. This action was brought on behalf of the insurance company.
3. Nature of the Risk: The D. risked that he could make more profit if he took another job. The P. risked that he could have his house built for less.
4. Issue: Is the P. entitled to recover damages for the failure of the D. to finish the house because of the destruction by fire? If so, how much?
5. Holding: Yes. Where a person unconditionally contracts to build a house, he is liable for breach if it is not completed, however, if the other party owns or controls part of the house, such that the contractor could not proceed to finish his contractual obligation without the performance of the owner, there is an implied condition that the parties would release each other from performance if the house was destroyed by inevitable accident.
6. Reasoning: The court reasoned that the general rule in School Trustees v. Bennet was not applicable here because the P. was to perform a large amount of work itself. After the destruction of the house, neither party seemed interested in rebuilding, so the court implied the condition that they would be released. They analogized to a contract to do repair work on a building. The repairman could be held to his obligation if the building were to be destroyed. However, they also found that the contract was for the completion of the house, not for several separate and independent performances. So because the parties were released, the partial payments represented unjust enrichment to the D. at the expense of the P.. Thus, the P. was able to recover the money he had already paid to the D. [restitution damages], but they gave the D. the right to file a set-off claim. [To protect his reliance interest. But as between reliance an restitution, restitution trumps. If the court tried to protect both, it could not protect both fully because any of the D.'s reliance damages would come out of the P.'s restitution damages. The court grounded their decision on express contract, but it was one which they deemed to include implied release.]
7. Notes: 6. In Albre Marble & Tile Co., Inc. v. John Bowen Co., the P. was a subcontractor to the D., who was the general contractor to build a hospital. The general contract was declared void because of some problem with the D.'s bid, and the P. sued for reliance damages for the costs it had incurred in preparation to perform. The court allowed Albre to recover damages, but stopped short of declaring that a subcontractor could always recover reliance damages from the general when performance was frustrated for reasons beyond the fault of the two parties because in this particular case, the frustration was caused by the general.
1. Canadian Industrial Alcohol Co. v. Dunbar Molasses Co., (1932).
2. Facts: The P. made an express contract with the D. to buy 1.5 million gallons of molasses. The D. was a middleman who bought molasses from the National Refinery, and resold them. During the time for performance, the National Refinery reduced production such that the D. was unable to make the full deliveries to the P. according to the conractual timeline. At no time did the D. make a contract with the National Refinery to assure the continued supply of any molasses.
3. Nature of the Risk: Standard sale of goods risks.
4. Issue: Is the D. discharged from contractual liability to deliver the molasses because the National Refinery reduced production, making it impossible to make the delivery?
5. Holding: No. Where a seller brings contractual liability upon himself to deliver a specified amount of goods on a specified date, he is bound to make good on that promise notwithstanding any impossibility brought about by the seller's supplier reducing production, because the seller could have provided against that contingency.
6. Reasoning: [Cardozo} The court reasoned that the P. was entitled to the full expectation damages because the D. could have provided against the eventuality of the reduced supply by either 1) providing a clause in his contract with the P., or 2) contracting with the National Refinery. In this case, the D. simply failed to take proper action to ensure it could meet its contractual obligation.
1. Lloyd v. Murphy, (1944)
2. Facts: The P. is the landlord of a property which was rented to the D.. The lease stated that the premises would be used to sell cars and gas, and that the tenant could not sublet or change use of the land without the written permission of the P.. As WWII began, the gov't instituted rationing on auto sales, which substantially hurt the profitability of the tenant's car sales business. The landlord, sympathetic to the tenant's plight, offerred to reduce the rent, and waive the written permission for subletting and change of use. The tenant, however, decided to abandon the property and claim that the lease was frustrated by the gov't rationing. The landlord mitigated damages by releasing the property immediately, and then brought action for back rent.
3. Nature of the Risk: The landlord risked that he could make more money on the land if he leased to someone else. The tenant risked that he would not make much money on the lease.
4. Issue: Is the gov't rationing a condition sufficient to release the parties from the contractual nature of the lease due to frustration of purpose?
5. Holding: No. If the happening of the event that causes the "frustration" was foreseeable at the time of contract formation, then it is assumed that it is one of the risks that was distributed by the contract.
6. Reasoning: The court [Traynor] reasoned that the parties knew that the possibility of reduced auto sales due to the war was an imminent risk. Since the contract did not provide for the occurrence of war, it was assumed to be borne by the tenant, as one of the risks of assuming and estate of land. Furthermore, the business of selling cars was only partially frustrated, not completely banned. The tenant was found to bear the risk that his business might be less profitable. To allow discharge, a party must show that the risk of the frustrating event was not reasonably foreseeable [thus not one of the risks contracted about] and that the value of substitute performance is totally or nearly totally destroyed.
1. American Trading and Production Corp. v. Shell International Marine, Ltd., (1972)
2. Facts: The P. is the owner of a cargo ship. The D. is the charterer of the cargo ship. The charterer and the owner negotiated a price to transport and deliver some cargo from Texas to India. During transit, the Suez Canal became closed because of war in the Mideast. The owner was forced to take the cape of good hope route to India, and thus incurred extra costs. The P. is suing for the extra costs incurred on the theory of commercial impracticability of the contract which excused him from performance, and entitled him to reimbursement for the added costs incurred.
3. Nature of the Risk: Standard sale of services risks.
4. Issue: Is the closing of the canal a condition upon which the contract was grounded, thus causing frustration when the canal was closed? Did the closing of the canal result in commercial impracticability.
5. Holding: No. Expectation that the parties will be able to profit from a contract does not make profitability a condition of performance. Mere increase in cost alone is not a sufficient excuse for non-performance; it must be an "extreme and unreasonable" expense.
6. Reasoning: The court reasoned that although the parties expected that the canal would be used, the cape route was an acceptable alternative. [This seems to indicate that as long as an acceptable alternative is available, it must be substituted rather than discharging the contract. But what constitutes "acceptable" alternate performance?] The fact that the parties negotiated a price based on the going rate for the suez crossing does not mean that the openness of the suez canal was a condition of the contract. The owner made an unconditional promise of delivery to the charterer. Also, the additional cost incurred was only 30% more than the contract price, so the loss was not extreme. [The charterer withdrew his counterclaim which probably claimed damages because of the late arrival of the goods. This was probably a strategic move so as to make the loss that the owner would take be small enough not to look "extreme and unreasonable."]
7. Notes: There were three English cases that dealt with similar facts: Sidermar, where the judge found that the closing of the canal was a frustration of the charter and awarded the owner the added costs for the cape route (later overruled by Eugenia); Tsakiroglou, where the contract was for c.i.f. (cost, insurance, and freight) terms, which was held not to be frustrated by the closure; and Eugenia, where the charter was for time and the charterer ordered the ship into the canal where it was trapped by war for months. The court in Eugenia, overruled Sidermar, and claimed that the charterers could not claim frustration because they sent the ship in themselves. It also noted that it did not matter whether the terms of the contract were c.i.f, contract of sale or a time charter.
1. Hellenic Lines v. United States, (1975)
2. Facts: The U.S. (AID) chartered 80% of the Hellenic cargo ship Italia to take supplies to Palestinian refugees in the Red Sea. The ship did not go directly across the Atlantic, but made some intermediates stops on the east coast. By the time it reached the Suez, it was closed. If the ship were to have left immediately, it could have gone through. The ship instead went to the Greek port of Piraeus, and unloaded the cargo. Additional port expenses were incurred at Piraeus. AID then had to pay for the supplies to be reflagged on a U.S. vessel and taken to Ashdod. Hellenic started the litigation by suing for the standard cost of shipment to Piraeus. [What?? Shocking.]. The U.S. counterclaimed for the extra expenses to move the cargo from Piraeus to the closer port. The Circuit court judge said that the U.S. could recover either the prepaid freight to Aqaba [restitution or reliance for not completing the contracted performance] or the Piraeus expenses plus the market rate for transportation of the cargo from Pireaus to Ashdod [additional costs incurred = expectation?].
3. Nature of the Risk: Standard sale of services.
4. Issue: Can the Hellenic claim frustration due to the canal closure even though their own delay to get extra cargo contributed to the frustration?
5. Holding: No.
6. Reasoning: The court [Friendly] stated that the deviation to the other ports to get extra cargo was unjustifiable. Thus, they could not claim frustration for the situation that they created.
I. Impossibility under the Restatement (First) A. Included not only "strict impossibility" but impracticability because of extreme and unreasonable expense. 1. Subjective Impossibility - due to the individual promisor (himself not being able to perform an otherwise performable task). 2. Objective Impossibility - due to the nature of the performance. a. if present at the beginning, it prevents contract formation. b. if arising after formation, discharges contractual duty.
B. A party who had partially performed when the impossibility arose which discharged the other party could recover the "value" of the "benefit" the other party derived, but not to exceed some ratable portion of the contract price.
C. On the whole, no amount of "unanticipated difficulty" (different from impracticability) was sufficient to discharge a performing party.
D. There was also a broader and thus confusing section on "Frustration".
II. Impossibility under the U.C.C. A. 2-613 - a contract is avoided (the seller is discharged) if the goods which are in existence are accidentally destroyed before the risk of loss has passed to the buyer.
B. 2-614 - requires a substitute performance to be tendered and accepted as long as it is available.
C. 2-615 - Excuse by presupposed conditions 1. The seller is excused if performance has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made. 2. When only a part of the seller's capacity to perform is affected, he must allocate his deliveries among his customers "in any manner which is fair and reasonable."
D. 2-216 gives the buyer the option to accept or reject an allocation proposed by the seller under 2-615.
E. With the onset of inflation in the 1970's, many fixed price requirements contracts became distressed because of the radical change in market conditions, and the seller claimed he should be discharged uner 2-615. 1. Most famous case is Westinghouse where the judge solved the problem by encouraging the parties to renegotiate a settlement on their own.
III. "Impracticability" under the Restatement (Second) A. Broadened the conditions for discharge. B. Discharge is allowed if a "basic assumption" on which the contract was entered into has proved to be untrue. C. Provides that the court may grant relief on such terms as justice requires including the protection of the parties' reliance interests.
1. Hall v. Wright, (1859)
2. Facts: Hall was engaged to marry Wright when he contracted a severe lung disease which made it dangerous for him to enter into such a stressful arrangement as marriage. Hall sued for breach of contract.
3. Nature of the Risk: Both parties risked that they could do better for a spouse.
4. Issue: Is impracticability due to great personal risk of injury sufficient to discharge parties from any contractual obligation in an engagement contract?
5. Holding: No.
6. Reasoning: The majority [Williams] reasoned that although Wright should not be compelled to specific performance of the marriage, he should still be required to pay damages for breach. The majority mostly relied upon the absolute liability theory of Paradine v. Jane.
7. Dissent: The dissent [Pollock] reasoned that the nature of an engagement contract was one that had the implied condition that the parties would be discharged if one became physically prevented from marriage because of his health. The case was likened to one of personal services like a painter whose estate would not be required to pay damages if he died before completion of performance, because his living was an assumed condition of the contract.
8. Notes: 4. Assuming that the promisor is discharged by illness from a contract to perform personal services, the promisee is also likewise discharged. That is to say that the promisee is not on the hook once the promisor gets better. An example is Poussard v. Spiers & Pond, where Poussard had been hired to sing in an opera which ran for 3 months. She became ill before the first show, and the D. hired someone else in her place. When Poussard became well again, she wanted to sing for the rest of the engagement, but the D. refused. The court [Blackburn] held that the consideration was broken by her illness, and that it was not reformed by her getting well. However, in Bettini v. Gye, Blackburn did not discharge the parties on similar facts because the singer had only failed to show up for rehearsals. Blackburn reasoned that Bettini's failure to appear for rehearsal did not "go to the root of the matter" so as to make his presence at the rehearsal a condition precedent.
I. Historical Development of the Law of Conditions A. Concurrent Conditions 1. A party could not recover for breach unless he was ready to tender performance. 2. In land, if the sales transaction was scheduled for a certain day, but neither party did anything, one party could put another in default by making a tender of performance within a reasonable time thereafter. 3. In sales contracts, the buyer was discharged if the seller did not perform on the specified date.
B. Conditions Precedent vs. Conditions Subsequent 1. Conditions precedent - must be fulfilled before a right of action could accrue, thus burden of proof was on P.. 2. Condition subsequent - occurrence barred a cause of action, thus burden of proof was on D.. 3. ANY CONDITION CAN BE EXPRESSED AS EITHER PRECEDENT OR SUBSEQUENT, SO THE DISTINCTION IS MEANINGLESS. C. Express Conditions vs. Implied Conditions 1. Express conditions are enumerated in the contract writing, and implied conditions are constructions of the court. 2. It is not always true that express conditions entitle the drafter to literal performance by the other party. The classic case is the insurance contract that is explicit to the maximum. To avoid injustice, the courts can use tools such as semantics, construing ambiguities against the drafter, and waiver by estoppel to avoid enforcement of these express conditions. 3. Recently, courts have awarded damages in excess of the insured value when the insurance company has attempted to avoid liability in "bad faith".
D. Conditions of Personal Satisfaction 1. In Brown v. Foster, (1873) a customer refused to pay a tailor for a custom suit because he was dissatisfied with it. The contract expressly stated that the suit would be made "to the satisfaction" of the customer. The court held that the condition was binding. 2. In Hawkins v. Graham, the P. installed a heating system in the D.'s factory, which he guaranteed would heat the factory to 70f in the coldest weather, or he would get nothing. The D. refused to acknowledge that it worked. In awarding damages, the court stated that the risk was to be determined by an objective standard of the reasonable man, not the subjective standard of the mind of the D.. 3. In Gerisch v. Herold, the court held that a P. who was to have built a house "to the satisfaction" of the owner could recover after the house was built even if the owner was personally dissatisfied because a third party architect had stated that the house was acceptably done. The court stated that the personal tastes of the D. would not prevent the restitution recovery.
E. Gov't contracts and the "disputes" clause 1. The standard gov't contract stated that any disputes by the contractor could only be appealed in writing to the head of the department. Thus, the gov't would be the final judge of contractual performance. 2. In U.S. v. Wunderlich, the Supreme Court stated that the disputes clause was valid as long as it was not fraudulent, in bad faith, or not supported by substantial evidence.
1. Norrington v. Wright, (1885)
2. Facts: The seller and buyer negotiated a written contract which provided that the seller would ship "about" 1,000 tons of iron per month for a total of 5,000 tons, to be completed before the end of six months. Also the seller was required to notify the buyer of the shipments as soon as he knew about them. The seller proceeded to ship partial deliveries over the first few months, and the buyer notified the seller that he felt that the entire contract was breached and that he intended not to accept shipments if he felt entitled by law to do so. The price of iron continued to decline substantially during this time. The seller interpreted the contract as being divisible, such that a failure in any month would not be a failure of the entire contract, but only that month's portion. The buyer interpreted the contract to be according to the letter, and if not performed exactly according to the terms, that he had no futher obligation. The trial court found for the buyer, on the ground that the seller had breached during the first month, and that the buyer had notified him immediately.
3. Nature of the Risk: Standard sale of goods.
4. Issue: Is the contract divisible or a whole which is breached by the failure of the seller to deliver correct amounts according to the schedule?
5. Holding: The contract is a single contract.
6. Reasoning: The court reasoned that the contract was for the delivery of at total of 5,000 tons of iron, with 5 deliveries of 1,000 each and perhaps one extra delivery to account for slight and unimportant variations. Any deviation was a breach because of the importance of timeliness. They stated that the buyer properly rescinded, even though he accepted a first partial shipment in the first month because at that time they had no notice that the shipment quantities were not going to be completed. They found that the P., in not tendering his full performance, could not demand performance by the other side. They held that the parties has stipulated their own express conditions and that they did not have the right to reform the contract. [This ignores the true reason for wanting out of the contract. The exact schedule of the shipments was not critical to the consideration. It could have bent or evolved to allow the modified shipments. This holding ignores the reliance interest of the seller in going to the expense to ship in reliance on the soundness of the contract.]
7. Notes: 1. The P. argued that since the shipments could be from any European port, that the regularity of delivery was not important because shipping times might have varied from 3 weeks to 4 or 5 months. The irregularity of delivery meant that the size of any shipment could not be counted on and was not important. Also P. argued that the contract was severable into monthly shipments. A similar case was Filley v. Pope. In Filley, the contract was for an amount of iron to be shipped from Glasgow as soon as possible. However, the seller could not arrange for a ship from Glasgow promptly, but could get one from Leith. They shipment from Leith took longer, and so the buyer refused to accept the iron (which had dropped dramatically in price) because of the imperfection in the origin of delivery. The court found for the buyer under the same theory as in Norrington. 4. Allowing the buyer to reject shipment given the slightest deviation by the seller is to make the perfect performance by the seller a condition precedent instead of simply an independent covenant. 5. In the U.S., the same result was reached. In Mitsubishi v. Aron, Judge Learned Hand came to the conclusion that nothing in the Uniform Sales Act overturned the perfect tender rule. He stated that "there is no room in commercial contracts for the doctrine of 'substantial performance'." 6. The perfect tender rule fell in Reardon v. Hansen Tangen. In that case, the Reardon agreed to subcharter a tanker which was under construction named 354 Osaka. However, because of size limitations, the ship was built in Oshima, and given the name 004 Oshima. The tanker market crashed that year, and so Reardon attempted to get out of the contract because the ship was not named as described. The court found for the P., stating that it would be ridiculous to discharge the parties over a term that was obviously immaterial to the parties at the time of contract formation. [Thus, they allowed the consideration to change, instead of remain absolutely rigid.] 7. The perfect tender rule, even at its heights, was subject to some balancing rules of application. Thus, a court could, when it felt that the buyer was attempting to avoid a contract in a falling market, invoke one of the exceptions to keep from discharging the parties.
I. The UCC and the Perfect Tender Rule A. Article 2 makes a distinction between single delviery contracts and installment contracts. 1. 2-601 allows the buyer to reject if the seller's tender fails "in any respect" to conform to the contract, however it is subject to: a. the right to reject evaporates once the buyer has been deemed to accept the goods (but he can revoke acceptance). 2. 2-612 on installment contracts requires the buyer to accept non- conforming tenders and limits the buyer's right to get ot of the balance of the contract. a. 2-612 makes the distinction between a nonconformity that "substantially impairs the value of that installment" which the seller can compel the buyer to accept as long as he assures him it will be "cured", and b. one that "substantially impairs the value of the whole contract."
1. Britton v. Turner, (1834)
2. Facts: The P. was a hired hand working for the D. under a 1 year employment contract. The P. quit working for the D. before the end of the year, and the D. therefore refused to pay him any part of his salary, claiming that the P. breached the contract, and so he was discharged from his performance.
3. Nature of the Risk: The P. risked that he could get better money at a different job. The D. risked that he could get a better employee for less.
4. Issue: Is the D. liable for payment of the value of the partial performance even though the P. breached the express contract?
5. Holding: Yes. Where a person has only partially performed a contract, and the contract does not explicitly state that payment will not be tendered for anything less than complete performance, the benefiting party is liable for the value of the performance to the extent that 1) he benefited from the partial performances, and 2) he has accepted the performance.
6. Reasoning: The court reasoned that it would be unjust for the employer not to pay for the benefit he received. The common understanding of the hired-hand employment contract is that the employee is entitled for compensation for services actually performed, even if the contract is not completed. Otherwise, an employer would be motivated to try and convince the employee to quit near the end of his term. This presumption can be contracted out of only by specific and express language to the contrary. [The court will recognize and protect any unjust enrichment it finds, even if it is technically outside the scope of the express contract, in adjudicating the parties transaction.
1. Smith v. Brady, (1858)
2. Facts: The P. is a builder who contracted to build some buildings according to the D.s specifications. The contract provided for partial payments along the way, and a final payment when the building was complete. The specifications called for 12 center-to-center distance on the floor joists, and the builder made the building with 16 spacing. Upon completion of the building, the contractor refused to pay the final payment, but instead moved into the building.
3. Nature of the Risk: The builder risked that he could get more money for his materials and services. The contractor risked that he could get the building made correctly for less.
4. Issue: Is the builder entitled to the final payment because the building he constructed was sound, even though the joist spacing was incorrect?
5. Holding: No.
6. Reasoning: The court reasoned that the builder could not have innocently erred in the spacing of the joists. Therefore, he was willfully breaching the contract to save himself some money and make a larger profit. They reasoned that the fact that the contractor chose to occupy the building was not a waiver of the specifications; it was th only reasonable thing to do. [B.S.] The court was afraid that to allow any partial recovery would encourage builders to breach the contract. [This opinion seems to totally disregard the idea of unjust enrichment recovery in partial performance as a danger to contract law. Although the result may have been correct mathematically, the reasoning was wrong.]
7. Notes: In Avery v. Wilson, the seller and buyer contracted for a delivery of 699 boxes, but then the buyer accepted a partial delivery of 365 boxes. The buyer then refused to pay, or to give the boxes back. The court modified the rule in Smith v. Brady to allow for waiving of the condition of full performance, stating [w]hile the defendants were not bound to accept a delivery of a portion of the boxes of glass, and had a right to reject or retain the same as they saw fit, yet if they elected to receive the part delivered, appropriated the same to their own use, and by their acts evinced that they waived this condition of full performance, they became liable to pay for what was actually delivered. Another means of escape from the harshness of Smith v. Brady is to treat the contract as divisible, instead of entire. In Clark v. West, the writer contracted with the publisher to write a book, with a payment of $2 per page until the book was published, then royalties up to an additional $4 per page. The contract had a special clause that the writer must abstain from alcohol, which he did not do, but the book was a success anyway. The publisher claimed that he was discharged because the writer breached the contract, however the court found that the alcohol clause was effectively waived by the publisher because they knew he was drinking but accepted the manuscript anyway.
1. Jacob & Youngs, Inc. v. Kent, (1921)
2. Facts: The P. built a house for the D.. The contract specification called for wrought iron pipe made by Reading. The P.'s subcontractor delivered Reading pipe for the first 1,000 feet of pipe, but thereafter delivered pipe from other manufacturers. When the building was completed, the D. took possession and noticed that the pipe was not made by Reading. The P.'s architect refused to sign off the final certificate, and the P. withheld payment. There was evidence that the pipe actually used was of the same quality as Reading pipe, and that the cost of replacing the entire plumbing with the Reading pipe would have been exorbitant because it would have required rebuilding the house.
3. Nature of the Risk: The D. risked that he could have a better house for less money. The P. risked that he could be paid more for his building services.
4. Issue: Is the omission of Reading pipe in the house a cause for forfeiture of the final contract payment?
5. Holding: No. An omission which is trivial and innocent does not necessarily result in a forfeiture, but rather may be remedied by the payment of damages.
6. Reasoning: The majority [Cardozo] reasoned that the omission of the pipe was not wilful, and furthermore, there was evidence that the pipe actually used was of the same quality. The brand name of the pipe was not crucial to the building of the house, and it would be extremely burdensome on the P. to require him to rebuild the plumbing. Although the P. could not simply substitute his own judgement for what is stipulated in the contract, the deviation was so minor as to be considered a convenant and not a condition. The measure of damages, therefore, was not the price of installing new plumbing, but rather the difference in value between what was actually installed and the Reading pipes.
7. Dissent: The dissent [McLaughlin] stated that the D. was entitled to exactly the kind of pipe that was stated in the contract, whether the other kind was just as good, even if it was simply a whim. The dissent concluded that the deviation was not innocent, and whether it was intentional or unintentional, it should be treated as intentional because it was careless. Otherwise, parties would be motivated to deviate from contracts intentionally, and the law would suffer.
8. Notes: 2. Cardozo conceded that the D. could have used explicit terms to evidence his desire to have exactly what was called for in the contract, but he felt that the deviation was not significant. However, there was an explicit clause in the contract that stated that all work not exactly to spec would be torn down and rebuilt correctly. 3. There was evidence that the use of the brand name "Reading" was as a generic reference to any high quality wrought iron. The D. may have seized upon this event to express other dissatisfactions with the P.'s work. 4. Both opinions cited Spence v. Ham, where the court held that the partially performing party had to prove not only the value of what he had done, but also the value of what remained to be done. In the instant case, the P. clearly had not met the burden of proof as to the difference in value between the actual pipes and the Reading pipes. However, Cardozo got around this by stating plainly that his conclusion was that it was either "nominal or nothing." In Mass., the courts have adopted a quasi- contract theory to deal with substantial performance cases, so the P. does not have to prove the difference in value, but only the value of his performance. Under either theory, the cases come out the same way. 5. The absence of the architect's certificate probably is not essential to the outcome of the case because the architect could be acting unreasonably. It may not have been critical to the parties' consideration. 6. Cardozo stated that the "cost of replacement" is the general rule for the D.'s remedy in a case of substantial performance, but that the "difference in value" rule is used when the "cost of replacement" would result in unjust results. Part of this determination involves whether the builder was warned by the contractor of the importance of strict adherence with the specification before it became unduly burdensome to correct the deviation.
1. Lawrence v. Miller, (1881)
2. Facts: The P. wanted to buy some land from the D., and made a $2,000 down payment. When the day came to execute the sale, the D. showed up with the deed, but the P. asked for more time. The D. refused, and sold the land to someone else at a profit, but kept the down payment.
3. Nature of the Risk: The P. risked that he could buy a better piece of land for less. The D. risked that he could get more for the land.
4. Issue: Is the D. entitled to keep the $2,000 down payment because of the P.'s breach, even though he did not lose money?
5. Holding: A person who had paid money on an executory contract may not recover if he has refused or neglected to perform. [B.S.]
6. Reasoning: The court reasoned that to allow the P. to recover would be to "declare that a party may violate his agreement, and make an infraction of it by himself a cause of action. This would be ill doctrine." [This ignores the restitution interest of the P.. The D. has been unjustly enriched. He would be able to recover reliance damages if he lost money because of the breach, but since he did not, the P. is entitled to the full refund of his downpayment.]
1. Amtorg Trading Corp. v. Miehle Printing Press & Mfg. Co., (1953)
2. Facts: The P. was a New York corporation acting as a purchasing agent for the Soviet Union. The P. entered into a contract with the D. to buy 30 printing presses for exportation to Russia. The P. made a 25% down payment, and upon accepting delivery of the first shipment of 10, paid an amount greater than the balance of the purchase price on those 10 presses. The remainder constituted, in effect, a down payment on the further 20 presses. The remaining presses were never delivered to the P. because the U.S. passed trade sanctions against the USSR. The P. refused to pay the balance of the presses it had not taken delivery of, and countersued for the return of its downpayment. The D. resold the remaining presses at a profit.
3. Nature of the Risk: Standard sale of goods.
4. Issue: Is the P. entitled to return of its downpayment?
5. Holding: Yes.
6. Reasoning: The court [Clark] reasoned that to allow the D. to keep the profit from the resale, as well as the downpayment, would amount to a double recovery.
7. Notes: 2. The amount a buyer can recover on his down-payment when he breaches is covered under the UCC 2-718(2). It allows recovery for any amount in excess of a reasonable downpayment for up-front liquidated damages.
1. Acme Mills & Elevator Co. v. Johnson, (1911)
2. Facts: Acme contracted with Johnson for the delivery of 2,000 bushels of wheat, at $1.03/bushel from the 1909 crop on July 29th. Acme provided the bags for $80. Johnson used Acmes bags to deliver a large portion of its crop to another customer, who paid $1.16. Thereafter, Johnson was not able to deliver Acmes order on time. On the 29th, the wheat market had dropped to $1.00/bushel (so Acme would have lost $0.03/bushel had the delivery been made). Acme brought suit for the cost of the bags, plus (unknown) damages in the amount of $240.
3. Nature of the Risk: Standard sale of goods. If Johnson sold the crop at a higher rate to someone else, he risked breaching his contract with Acme.
4. Issue: What are the measure of damages for breach of the standard sale of goods contract?
5. Holding: [T]he measure of damages is the difference between the contract price and the market price of the property at the place and time of delivery.
6. Reasoning: The court reasoned that since the market price had fallen to $1, the measure of damages would be negative, in fact the breach saved Acme $0.03/bushel. The measure of damages was not from the price at which Johnson sold the rest of the crop to another customer ($1.16), even though because of that sale, Johnson could not deliver to Acme. Because Johnson used Acmes sacks inappropriately, he should be liable for the cost of them, but no other damages were shown. [It could have been that there were some additional reliance damages not correctly pleaded.]
1. Lumley v. Wagner, (1852)
2. Facts: Lumley hired Wagner, an Opera singer, to sing for a specified time at his opera hall. IN the written contract, there was a provision that the singer not perform at any other opera hall. Wagner did not sing for Lumley however, but instead decided to sing for another party. Lumley sued for an injunction to prevent her fro singing elsewhere.
3. Nature of the Risk: Lumley risked that he could get a better opera singer for less. Wagner risked that she should make more money for her singing services. Lumley also risked that Wagner would breach.
4. Issue: May a court use an injunction to prevent someone from taking a job from a competitor in order to encourage them to fulfill their obligation to another?
5. Holding: Yes. As a matter of morals, contractors for personal services should be bound to a true and literal performance of their contract, and not be permitted to breach at their leisure, leaving the other party to the mere chance of damages that a jury may award.
6. Reasoning: The court reasoned that since Wagner voluntarily breached, that she should be morally obligated to perform. Although they could not compel the portion of the contract that required her to sing, they could compel the portion that required her not to sing for a competitor. [Thus, they really didnt need to reach the questions of moral blame worthiness because the condition of not singing for a competitor was a specific provision of the contract. Lumley could have written more explicit language into the contract to handle the specific damages he wanted in case of breach.]
7. Notes: 2. The opposite point of view is held by Holmes, who believed that a promise to perform was really two alternative promises: one to perform, and one to pay damages in case of breach. Thus, a person could not truly be morally blameworthy for the failure to perform, they were simply choosing the alternative of paying damages. 3. It has often been said that to compel specific performance in the case of personal services is against public policy because it deprives the promisor the alternative a paying damages, thereby creating a kind of involuntary servitude. However, the recipient of the services may also complain that they are being compelled to continue to accept personal services that they do not want. In Staklinski v. Pyramid Elec. Co., Staklinski entered into an 11 year contract with Pyramid. Two years after contract formation, the company decided that Staklinskis work was unacceptable due to his disability, and so he should be terminated. The arbitrators held that Pyramid should be compelled to reinstate Staklinski. A split court of appeal confirmed the decision.
1. Stokes v. Moore, (1955)
2. Facts: Stokes was hired by Moore to manage their finance company in Mobile. The employment contract stipulated that if Stokes were to leave the employment of Moore at any time [indefinite], that he could not work in the finance business in Mobile for a period of one year [specific performance remedy clause]. Furthermore, he was to pay $500 liquidated damages for each breach. After 4 years of employment, Stokes left Moore's company and formed his own competing company, actively soliciting the business of his former clients. Moore brought this action for breach to enforce the injunction term of the employment contract.
3. Nature of the Risk: Most of a finance company's business comes from the personal influences of its manager. Thus, Moore risked that he would lose profits if Stokes worked for someone else in direct competition. Stokes risked that he could make more money if he went to work somewhere other than Moore's company.
4. Issue: Is a term in a contract that explicitly requires specific performance of the contract binding simply because it is expressly provided as a remedy?
5. Holding: No. Although the presence of a specific performance clause is a factor the court must consider in making an equitable remedy, it is not determinative.
6. Reasoning: The court reasoned that an injunction was a discretionary tool of the court to prevent substantial injury when no adequate monetary remedy was available. Since the contract provided for liquidated damages, as well as an injunction, the court could consider doing both. However, it was not bound by the contract to automatically grant an injunction since breach was shown. In this case, the court noted that liquidated damages were inadequate because the effect of Stokes competition was great and not easily measurable. Thus, they did grant the injunction.
7. Notes: 2. Kronman says that the court's refusal to honor specific performance clauses is based on two desires: 1) to avoid private abuse of a powerful and intrusive remedy, and 2) because it tends to create an involuntary servitude. However, these arguments can be weakened, particularly if the injunction is to NOT work for a competitor because that only results in monetary loss to the breaching party, not personal enslavement. If the court is concerned about the balance of power, they can look to the voluntariness of the agreement as in other lopsided contracts. Furthermore, if it was voluntary, the employer should be able to take into account the fact that the employee might do poor quality work out of spite if he were required to perform. Also, the party in breach may be able to buy his release. 3. Penalty clauses that provide for payment of a penalty upon breach are generally held invalid under the same reasoning as the specific performance clause. 4. When an injunction is given, the breaching party can still buy his way out, however, the price he will have to pay is solely at the promisee's discretion. The non-breaching party can hold out indefinitely if he really needs the specific performance, but by the same reasoning, he can hold out for a higher amount of money than what he may have been able to obtain in damages. Thus, specific performance should be reserved for only those cases where the monetary damages are inadequate, because otherwise, the non-breaching party is given absolute power to determine the monetary damages. 6. U.C.C. 2-719 provides that modifications may be made to the remedy in the contract. [However, they still must not make the bargain too lopsided.]
1. City Stores v. Ammerman, (1967)
2. Facts: Ammerman wanted to obtain a permit from the city to build a shopping center. In order to persuade the city to grant the permit, Ammerman needed the endorsement of a large potential tenant. They wrote a letter to City Stores stating that if City Stores endorsed them to the city, Ammerman would give City Stores the opportunity to become one of the "contemplated center's major tenants with rental terms at least equal to that of any other major department store in the center." After the permit was granted, Ammerman refused to give City Stores a lease. City Stores sued for specific performance, and Ammerman objected claiming that it was too intrusive and burdensome for the court.
3. Nature of the Risk: Ammerman risked that it would not be able to build the shopping center without City Stores' endorsement. City Stores risked that it could get a more lucrative lease elsewhere.
4. Issue: Whether a court of equity will grant specific performance of a contract which has left such substantial terms open to further negotiation. [Where there is barely a shell of a contract, all terms are still open].
5. Holding: Yes. Where monetary damages are inadequate and impracticable to calculate, specific performance may be granted even if there are substantial terms left open to further negotiation.
6. Reasoning: The court reasoned that monetary damages could not be calculated because it would be impossible to tell how much money City Stores would make if it were granted a lease, or lose if not granted the lease. Furthermore, the strict monetary damages would be inadequate because the chance to participate in a mall is a crucial element in a store's success. There are opportunities which arise only for businesses in that setting. They further reasoned that although several details needed to be worked out, the court would not be overburdened because there were example leases and building specs to go on from the other tenants in the mall.
7. Notes: 2. In Grayson Robinson Stores v. Iris Construction, Iris and Grayson contracted to build a store for Grayson. The contract contained an arbitration clause. When Iris refused to erect the building, Grayson submitted the contract to arbitration. The arbitrator awarded specific performance, and Iris appealed. The court narrowly upheld the specific performance award, but it is doubtful that they would have initiated it themselves. The court reasoned that since the parties had mutually consented to submit to the arbitration rules (which they knew included specific performance), the court should uphold their remedy arrangement. This is in tension with the Stokes case which claims that a party can not expressly require specific performance in his contract. 3. In Northern Delaware Ind. Dev. Corp. v. E.W. Bliss Co., the court refused to grant specific performance to compel the developer to hire additional laborers during the time that the plant being refurbished was shut down. The court distinguished from City Stores, claiming that the supervisory burden on the court in Bliss was far greater than that in City Stores, and that monetary damages would not be inadequate as they were in City Stores. [This ignores the fact that there are unknown potential lost opportunities when a plant is shut down. The parties would never know what the exact effect on reputation and marketing that a closure would have.] 4. The longer the contractual obligation, the more difficult it would be to put a present value on damages. This problem is further complicated by requirements contracts, where the size of the transaction is also unknown. Consider Eastern Rolling Mill Co. v. Michlovitz, where Eastern had a 5 year output contract to sell all it's scrap steel to Michlovitz, at a price that would be determined from quarter to quarter. Eastern's new president breached, and Michlovitz sued for specific performance because the quality of steel was available nowhere else in the area. The court awarded specific performance, stating that since the both the output and the price were variable, a jury could not possibly award correct damages. 5. The same problem is illustrated in Laclede Gas Co. v. Amoco Oil Co., where Amoco entered into a long term requirements contract with Laclede to supply propane at a low price. Later, Amoco breached, and the court awarded specific performance because: 1) since it was a long-term contract it had additional benefits that were immeasurable over the other short term contracts that it might be able to substitute in its place, 2) there may not be enough propane to fill its needs in the long run because of the uncertainty of the world fuel market, and 3) Laclede would have to go to considerable and unknowable expense to get adequate gas.
1. Campbell Soup Co. v. Wentz, (1948)
2. Facts: Wentz is a farmer who contracted with Campbells soup to provide 15 acres worth of Chantenay carrots for $30/ton to be delivered at Campbells. Campbells soup needed these particular kinds of carrots for their soup because of their shape, color, and consistency. The contract contained some very lopsided provisions that excused Campbells soup from performing in many cases, but prevented the farmer from selling elsewhere without permission. The carrots were of a rare kind, and as of the time of delivery, the market price was $90/ton. Wentz sold his carrots to a neighboring farmer, who in turn began to sell to Campbells. When Campbell's found out that they were buying contract carrots they sued for specific performance.
3. Nature of the Risk: Standard sale of goods risks. Campbell risked that they would lose profits if they did not have this particular kind of carrot at a low price.
4. Issue: May specific performance, and equitable remedy, be granted where the contract is prima facie inequitable?
5. Holding: No. Equity does not enforce unconscionable bargains.
6. Reasoning: The court reasoned that the carrots were of a special type, unavailable on the open market. They were necessary to Campbells business. Campbell had foreseen to contract for them far in advance and supply the farmers with seeds. This would have been enough to decree specific performance, except for the fact that the contract was too one- sided. It was obviously written by shrewd drafters with the buyers interests in mind. [Strategically, if you want to have specific performance, you must draft the contract equitably. For every power that you reserve, you should grant an fair power to the other side.]
7. Notes: 1. Kronman, Specific Performance. Although specific performance is based on the theory that a particular good or service is unique, under a purely economic view, there are always substitutes for that particular good or service, although they may be poor substitutes. A consumer may be as satisfied with a good book as he would with violin lessons. Thus, in order to compensate a promisee for the promisors breach, the court must determine what are the acceptable substitutes. However, in many cases it is difficult to do so because of lack of information. Even when the parties can provide the information, it is inefficient for the court to wade through the testimony to determine what is the correct compensation. Thus, specific performance is granted in cases where the court is really saying that they cannot obtain, at a reasonable cost, enough information on proper substitutes to permit it to calculate money damages without high risk of under compensation. 3. Campbells soup actually paid the market value for the carrots into the court pending the outcome of the case. Since they already had the carrots, they could have simply sued for damages. However, the contract- market price differential was $60, and they had provided for liquidated damages of only $50. Thus, specific performance would save them $10/ton over liquidated damages because the market price went higher than the drafters anticipated. 4. Schwartz, The Case for Specific Performance. In paying money damages, there is a risk of under compensation because of opportunity cost, lack of proper substitutes, and early obsolescence. The promisee is not likely to require specific performance unless money damages are actually inadequate because of the increased cost of litigation, burden of supervision, and probability of a substandard performance. Also, the promisee knows more about his transaction than the court does. 5. Under certain circumstances, a seller may sue for the full contract price, instead of just damages. This is the flip side of specific performance because it gives the seller exactly what he bargained for.
1. Freund v. Washington Square Press, (1974)
2. Facts: Freund is a college professor who entered into a written contract with Washington to publish a manuscript. Freund was to receive a down-payment and royalties, and in return, Washington was to have the rights to the work, subject to the option of returning the rights to the unpublished work with 60 days notice. Washington paid $2,000 down, but refused to publish the work. The 60 days notice was not given. Freund sued for damages representing the lost potential of not being promoted sooner because of not being published, lost royalties, and the cost of publication had he made his own arrangements to publish.
3. Nature of the Risk: The publisher risked that the Freund book would not sell well. Freund risked that he would make more money if he sold to a different publisher.
4. Issue: May Freund recover for loss of anticipated profits (royalties)?
5. Holding: No. Damages for breach of contract are normally limited to compensation for foreseeable injury caused by the breach - injury which was contemplated by the parties at the time the contract was entered into.
6. Reasoning: The court reasoned that Freunds expectation interest had two parts: the down payment and the royalties. Since he kept the down payment, the royalties were the only issue. Since he did not provide adequate support showing that he had any reliance losses in preparation for the publishing, or any comparable examples of royalties, the court refused to give him any. Furthermore, the contract was for a percentage of the profits from book sales, not for the actual books themselves, thus the Appellate Court erred in awarding him the cost to publish on his own. The damages are measured from the loss to Freund, not the savings to Washington. [Probably had poor counsel. This case illustrates that the remedy should match the risk distribution by the parties.]
7. Notes: 2. Tort damages are traditionally viewed as restoring the plaintiff to where he was previously, while contract damages are viewed as putting the plaintiff in as good a position as he would have been had the other party performed. Thus, Tort damages are essentially restorative, while contract damages are more forward-looking. However, there is only a fine distinction between them. Tort damages can compensate for future losses. 3. It may be economically efficient to breach in some transactions, and thus the parties should be encouraged to breach. This occurs when the performing party suddenly has an opportunity, by selling to another, to make more profit on his goods than he would have to pay in losses to the original buyer. This occurs where the market price has increased beyond what is necessary to cover the original buyers lost profits. Thus, there would be a net gain to society because the goods would be moved to their highest value use. It follows then that the original buyer should be compensated for his lost profits, to ensure that the seller only breaches when another party offers enough to give an incentive to breach.
1. Peevyhouse v. Garland Coal & Mining Co., (1962)
2. Facts: Peevyhouse leased part of their farm to Garland Mining for strip mining of coal. The express written contract stated that one of the terms of the contract was that Garland smooth out the land once it was done strip mining. After all the mining was done, Garland refused to smooth out the land, and Peevyhouse sued for the cost of completion of moving the dirt back, which was estimated at $29,000. However, Peevyhouse's farm was only worth less than $5,000, and the increase in value of the farm would only be $300 if the dirt were to be smoothed out. The trial jury returned a verdict of $5,000 which did not match either party's theory of damages.
3. Nature of the Risk: The farmer risked that he could make more money if he leased his farm to someone else. The miner risked that he could make more money if he leased a different farm for strip mining.
4. Issue: Is the proper measure of damages the cost of completing the terms of the contract, even though they outweigh the value of performance significantly?
5. Holding: No. Where the cost of completion of a contract is disproportionate to the "end to be attained" the proper measure of damages is the difference in value if the contract were fully performed.
6. Reasoning: The majority reasoned that the farmer would unlikely be willing to pay $29,000 to make improvements to his property that would increase its value only $300. So to award him the $29,000 would be a windfall. Thus, the primary purpose of the contract was to recover coal from the ground to the benefit of both parties, not to regrade the land. The provision to regrade the land was merely incidental to the main purpose of the contract [the consideration]. The damages should be awarded according to the results contemplated by the parties at the time of contract formation, and they did not believe that the parties objectively intended such a high damage amount when they entered the contract, since the farm was worth something less than $5,000. It was unlikely that the farmer wanted his farm graded so badly that he would not have accepted anything less than specific performance.
7. Dissent: The dissent reasoned that since the cost of performance could have been anticipated at the time of contract formation, the miner knew what he was getting into. That was one of the risks that was distributed by the contract.
8. Notes: 1. If the court had awarded specific performance, it is likely that the parties would have negotiated a settlement somewhere between the value of the farm and the cost of the performance. Perhaps the jury's $5,000 award was an attempt to do just that. However, it would be preferable that the parties negotiate it themselves. [But since the negotiating range is so broad, the farmer could hold out a long time.] 2. When the court refuses the higher award, it is making the statement that it believes, upon an objective view of the contract, that the farmer did not value the completeness of his farm any more than the market did ($300). 3. That completion of the contract would be "economically wasteful" does not mean that the breach should always result in only a difference in value award. Even where the contract is a "losing" one (ex: where the construction of a giant bird-bath will diminish the value of the property), when it is breached the remedy should be in accordance with the consideration. [Perhaps the only remedy could be specific performance because that would be the true test of whether the buyer really wanted the bridbath or would settle for less.] 4. Groves v. John Wunder held opposite to Peevyhouse on similar facts, except that the land was devoted entirely to commercial use. The court awarded the cost to complete certain levelling, even though the increase in value was only slight. [It was probably wrongly decided because a commercial landowner is probably even less inclined to value the property more than the market.]
1. Gainsford v. Carroll, (1828)
2. Facts: The buyer and seller made a contract for shares of bacon stock. When the time of delivery came, the seller failed to deliver. The buyer brought an action to recover the stock. The lower court awarded damages based on the contract-market differential at the time of trial.
3. Nature of the Risk: Standard sale of goods.
4. Issue: What is the proper measure of damages in a standard sale of goods case for the seller's failure to deliver the goods?
5. Holding: Contract-market difference on the date of delivery.
6. Reasoning: The court reasoned that in the standard sale of goods case, the buyer has the money in his pocket to pay for the goods upon delivery. Thus, he has the power to go to the open market on the day of delivery and cover his requirements if the seller breaches.
7. Notes: 1. The contract-market differential is the only remedy that makes sense in a stock market type transaction. Lost profits could not be calculated because they are entirely speculative. Reliance damages in preparation for the purchase would be minimal, if any. 2. The contract- market differential in most slow-moving markets amounts to nothing. Thus, in the majority of cases, there seems to be no penalty for breach, except for special situations.
Uniform Commercial Code on Remedies
2-706 - Upon a breach by a buyer, a seller may resell the goods in good faith, and be entitled to the difference between the sale price and the contract price, together with incidental damages. [Contract-market differential remedy for seller].
2-708 - (1) The seller is entitled to the contract-market differential upon breach by the buyer, less expenses saved in consequence of the buyer's breach. (2) If the contract-market differential is inadequate to put the seller in as good a position as performance would have done, then he may recover the profit he would have made on the sale, as well as reasonable reliance damages.
2-710 - Incidental damages include commercially reasonable expenses incurred in responding to the buyer's breach (transportation, storage, etc.)
2-712 - (1) Buyer may "cover" his requirements in good faith by going to the open market upon a seller's breach. (2) The buyer may then recover the contract-market differential, together with incidental damages. (3) Failure of the buyer to effect cover does not bar him from any other remedy.
2-713 - The buyer's remedy for seller's breach is the contract-market differential at the time the buyer learned of the breach, [protecting the reliance of the buyer on the contract until he has notice] at the place of delivery.
2-715 - The buyer's incidental damages include cost of rejection, and covering the breach. (2) Additionally, the buyer may recover for any loss resulting from the the needs of the buyer which the seller had reason to know of at the time of contracting, and which could not be reasonably covered [losses which were part of the consideration]; and personal injury caused by breach of warranty.
1. Panhandle Agri-Service Inc. v. Becker, (1982)
2. Facts: Becker made a contract to sell Panhandle 10,000 tons of hay for $45/ton. When he still had 912 tons left to deliver, the market price had risen to $62/ton at the time and place of delivery, and Becker refused to sell. Panhandle sued for breach, and the trial court awarded him the difference between the $67/ton market price in Texas (where Panhandle had a contract to resell it) and the contract price of $45/ton, minus the cost of transportation from Kansas to Texas.
3. Nature of the Risk: Standard sale of goods.
4. Issue: What is the proper measure of damages for seller's breach in a standard sale of goods contract under the UCC?
5. Holding: The difference between the market price at the time that the buyer learned of the breach and the contract price, together with any incidental and consequential damages, but less expenses saved in consequence of the seller's breach.
6. Reasoning: First, the court reasoned that deducting the transportation cost was error because it was not money saved by Panhandle because of the breach. If Panhandle were to cover, then he would have had to pay for the transportation anyway, so he did not save. Then the court stated that since Panhandle decided NOT to cover, he was not entitled to consequential damages including lost profits. The buyer has the choice of covering and taking the actual damages including lost profits (the difference between what he would have made on resale if he had paid the contract price and the amount he actually did make from the substitute goods) or not covering, and making the difference between the market price and the contract price. Thus, Panhandle was awarded $62- $45=$17/ton*912 tons.
7. Notes: 1. The buyer who does not cover recovers the loss he would have suffered if he had made a substitute purchase at the time and place of delivery. The buyer who does cover is entitled to recover for his actual losses. Therefore, the buyer can choose whether he wants to cover or not. Thus, the buyer should not cover if he can not resell right away and he thinks that the market will go down, and he should cover if he thinks the market will go up. 2. If Panhandle had to cover the breach by buying from another state, you would have to take the difference between what he would have spent in the Kansas transaction, and what he had to spend in the substitute transaction. 3. The buyer's damages are measured at the time he learns of the seller's breach, but the seller's damages are not measured until the time of tender.
1. Hadley v. Baxendale, (1854)
2. Facts: Hadley owns a mill. The crank shaft broke and they urgently needed a new one because the mill was stopped otherwise. Hadley hired Baxendale to take the broken shaft to the engineer so that a new one could be made. Baxendale promised next-day delivery. However, they delayed in sending the shaft, and so the mill was shut down for several days. Hadley sued for lost profits. Baxendale claimed the damages were too remote. The trial court found for Hadley.
3. Nature of the Risk: Hadley risked that he could lose less money if he chose a different carrier. Baxendale risked that he could make more money if he carried a different customers package instead.
4. Issue: Is a breaching party liable for the others lost profits?
5. Holding: The damages to be awarded are the damages resulting from the breach which the parties could reasonably contemplate at the time of contract formation.
6. Reasoning: The court reasoned that Hadley would be entitled to lost profits if he had clearly communicated that to Baxendale. Then the parties could have negotiated a contract based on this special circumstance. Baxendale had no reason to believe that the mill would be down during the time that the crank shaft was in their hands. This was not the normal course of business. Thus, Baxendale should not be liable for lost profits. [Because it was not part of the consideration.]
7. Notes: The scope of contract remedies is much more narrow than that of Tort remedy. The test is not one of proximate cause, but whether the parties had distributed such risk in their contract, either expressly or impliedly. 2. Although there are judicially created rules on the limit of liability in certain contract cases, commercial parties are aware of these rules when they enter the contract. Thus, their consideration would include risk distributions according to the damage rules that they knew were applicable. 3. Posner: where a risk of loss is known to only one party, the other is not liable for the loss if it occurs. This induces the party with the knowledge of the risk to take appropriate precautions himself, or pay the other party to do so if he is the more efficient loss avoider. However, this does not apply to a sale of goods transactions where the normal business procedure is to withhold reasonable knowledge in order to gain a bargaining advantage. Danzig, in a study of Hadley v. Baxendale states that the most important outcome of the case was that the prediction of damages for breach could be much better calculated by the parties. Thus, they would be less often litigated than before.
1. Globe Refining Co. v. Landa Cotton Oil Co., (1903)
2. Facts: Globe contracted with Landa to buy an amount of crude oil, to be delivered at Landas mill. Globe obligated itself to pay in advance for the railroad transportation of its tanks to Landas mill. Landa refused to deliver the oil, and Globe sued for the transportation costs, loss of customers, credit and reputation.
3. Nature of the Risk: Globe risked that they could make more money if they bought their oil elsewhere. Landa risked that they could make more money if they sold elsewhere. Standard sale of goods risks.
4. Issue: Is Landa liable for anything other than the contract-market differential?
5. Holding: The proper damages are those which the parties themselves, expressly or by implication, fix for themselves.
6. Reasoning: Holmes reasoned that Globe and Landas consideration did not include damages for lost profits and additional costs above the contract-market differential. The parties should not be able to recover for risks which were not distributed to the other party. Had Landa known that Globe wished to hold them liable for these extra damages, they would have renegotiated the contract to make a greater profit. The reliance damages incurred by Globe would be covered by awarding the contract-market differential because they were expenditures made in anticipation of the delivery which would have been deducted from their profits.
7. Notes: 1. Where the damages sought are so largely out of proportion from the consideration of the parties, they can not be assumed to be part of that consideration. 3. For the buyer to give notice to the seller of the special circumstances is not itself sufficient. It must be distributed in the contract in order to be recoverable. 4. The Hadley rule only requires that the buyer notify the seller of the consequences of breach. Thereafter, the seller is liable for the special damages unless he refuses the conditions. Silence would be held to be assent. However, Holmes does not go so far in Globe. He requires that the knowledge must be brought home to the other party so that he must know that the person he contracts with reasonably believes that he accepts the contract with the special conditions attached to it. [The best approach is to protect the reliance of the parties. The conditions do attach if the buyer has reasonably relied that they are there, and they do not attach if the seller has reasonably relied that they are not present.] 7. UCC 2-715(2)(a) provides that the buyer may recover for damages which the seller had reason to know at the time of contracting which could not be prevented by cover. [Thus, Holmes requirement that the point be brought home to the seller should not be interpreted to mean explicit assent to the special terms.] 8. In the standard sale of goods contract to a person who is in the business of reselling them, the seller is deemed to have reason to know of the lost profit damages under the UCC.
1. Kerr S.S. Co., Inc. v. Radio Corporation of Am., (1927)
2. Facts: Kerr is a shipping company that wrote a telegram and delivered it to RCA to be sent to the Philippines. The telegram was in cipher, and so did not reveal the nature of its contents on its face. The telegram was to load a certain cargo on a certain ship. It was lost by RCA, and so the cargo was never loaded, and was lost. Kerr sued for the value of the lost cargo, claiming that although the telegram was in cipher, that RCA had knowledge from its appearance that it was important business and thus should be liable under the rule in Hadley for the lost cargo as general damages. RCA claims that it had no way of knowing the natural consequences of losing the telegram would be so large, and that Kerr should thus be limited to the cost of the telegram because the lost cargo would be special damages.
3. Nature of the Risk: Kerr risked that he could make more money if he chose a different method of communication other than RCA. RCA risked that they could make more money from a different customer.
4. Issue: Is a telegram company liable for the consequences of the receiver not receiving a telegram if they do not have notice of its importance?
5. Holding: No. A telegraph company is liable for damages arising from the non-delivery of a telegram only when it had reason to know of the special importance of the transaction being transmitted.
6. Reasoning: Cardozo reasoned that RCA could have no way of knowing the contents of the telegram since it was in cipher. Thus, under the rule in Hadley, they could not be held liable for the lost cargo. To hold RCA liable, they would have had to be able, by reasonable exercise of diligence, to ascertain that this particular telegram was not only business related, but business of a high order. He did not go as far a Holmes in Globe to say that the point must be brought home, but only that they would be held accountable for what they should have known. He also stated that the public interest is best served by requiring this notice to be given. That way, the telegram company can keep costs down by taking only those precautions which are required on a case by case basis, and not having to treat each message as if they were liable for the special damages.
1. The Heron II (Kaufos v. C. Czarnikow, Ltd.). (1967)
2. Facts: A charter party chartered the shipowners vessel to transport some sugar from Constanza to Basrah and then re-sell it. The time of the trip was reasonably about 20 days. However, the shipowner breached the contract to make a direct voyage, and delayed 9 days in making unauthorized stops. When the ship arrived at Basrah, the price of sugar there had recently dipped because of the recent arrival of another ship which was selling sugar. The charterer sued for the lost profits, claiming that they would have made more on their sale if there had not been a delay.
3. Nature of the Risk: The charterer risked that he could make more money if he chose a separate ship. The shipowner risked that he could make more money from another charterer.
4. Issue: Can a charterer recover damages for lost profits from a breach of contract when the shipowner should have known, at the time of contract formation, that the risk of lost profits was not an unlikely result of his breach in delay?
5. Holding: Yes.
6. Reasoning: [Lord Reid] first distinguished between the measure of tort damages and that of contract. Although in tort, the tortfeasor is liable for reasonably foreseeable damages, the contract breacher is not so generally liable because if the non-breaching party wished to protect himself against the harm, he could have brought it to the breaching partys attention at the time of contract formation, and the breaching party could have negotiated a better deal. He then analyzed In Re Hall and Pim, a standard sale of goods case where the seller failed to deliver the wheat to the buyer who then lost profit on a resale. In such a case, the question was whether the seller should have known that the buyer was likely to resell it, and if so, he would be liable. Also, in Victoria Laundry, where a boilermaker was held liable for a laundrys lost profits upon failure to deliver the boiler on time, because it was certainly not unlikely on the information that the [boilermaker] had when making the contract that delay in delivering the boiler would result in a loss of business. However, Lord Reid refused to go so far as to say that the liability was for any reasonably foreseeable damages, because there are damages which are very unlikely but still foreseeable. The expectation of commercial businessmen is that contract damages would not be broadened to that extent.
7. Notes: 3. In a sale of goods case where a market exists and buyers often resell the merchandise (instead of consuming it), the seller should probably be held accountable for knowing of a buyers potential lost profits if he does not deliver. 6. Instead of arriving 9 days late, if the Heron had arrived a few days early, and the market was low at that time, the charterer could only recover damages if the risk of early delivery was one that was allocated to the shipowner at the time of contract formation. Thus, the charter contract would have to be phrased in terms that indicated that the on-time delivery (within some reasonable margin) was critical, and that both early and late deliveries were unfavorable. In Hadley v. Baxendale (the mill shut down because the carrier delayed in delivering the repaired crank shaft), there would have been no penalty for early delivery. Thus, the two cases may be distinguishable on those facts.
1. Neri v. Retail Marine Corp., (1972)
2. Facts: Neri contracted to buy a boat from Retail Marine, a retail boat dealer who sold custom order boats. Neri placed a down payment of $4,250, but then became ill, and decided not to go through with the boat sale. By the time he notified the dealer of the repudiation, the boat had been manufactured and delivered to the dealer. The dealer resold the boat a few months later for the same price, but incurred $674 in incidental storage and maintenance fees. The dealer would have made $2,579 profit on the sale to Neri. Neri sued for the balance of his down payment, and the dealer countersued for the lost profit and incidental damages, claiming that he was injured by the breach even though he resold the boat for the same amount because he was only able to make one sale, where he should have realized the profit on tow sales.
3. Nature of the Risk: Standard sale of goods.
4. Issue: What is the measure of damages upon a buyers breach where the retail seller has a virtually unlimited supply of the goods?
5. Holding: Under UCC 2-708, if the contract-market differential does not put the seller in as good a position as he would have been if the buyer had performed, he may recover the profit he would have made had the buyer fully performed, together with any incidental damages.
6. Reasoning: The court reasoned that there must be an offset in awards to protect the interests of both parties. Under UCC 2-718, the buyer was entitled to a refund in any amount which exceeded fair liquidated damages, or absent a liquidated damage clause, any amount which exceeded lesser of 20% or $500. However, this buyers right to restitution is subject to offset to the extent that liquidated damages would fail to put the seller in as good a position as he would have been if the seller performed. Even though the seller resold the boat at the market price, since he was not a private individual with only one boat to sell, but rather a dealer in the retailing of boats, he was actually permanently injured by having his number of sales forever reduced by one. Thus, the measure of damages should be that found in UCC 2-708 because the contract - market difference was an inadequate remedy for a retailer. Thus, Neri was awarded to restitution in the amount of $4,250 (the down payment) less $3,253 (the sum of the retailers lost profit and incidental storage costs.)
7. Notes: 1. Professor Harris describes this case as one of a lost- volume seller. The lost-volume seller has made one less sale than he would have had the buyer performed, thus his damages are necessarily the lost profits. 2. The same reasoning may be applicable to custom order manufacturers as well. 3. The phrase in UCC 2-708 due credit for payments or proceeds of resale refers to a manufacturer who, when he learns of the buyers breach, has not completed the product, and decides that it is better to sell what has been completed so far as scrap. The manufacturer is entitled to the lost profits he would have made less the amount he recovered from sale of the scrap.
1. Daniels v. Newton, (1874)
2. Facts: The D. (buyer) contracted to buy a parcel of land from the P. (seller) within 30 days of the contract date, contingent on the D.'s (buyer) being able to sell their own land within that time frame, but in any event, within the next 60 days. Shortly after contract formation, but before the expiration of the term, the D. (buyer) repudiated the contract and stated that they would not buy the P.'s (seller's) land. The P. (seller) brought this action immediately, before the term for performance had expired. It was still possible for the D. (buyer) to change his mind and decide to buy the land.
3. Nature of the Risk: Standard sale of goods.
4. Issue: May a seller of land bring an action for breach of a contract to buy land before the end of the term stipulated to buy the land when the buyer has repudiated the contract?
5. Holding: No. Until the P. has either suffered a loss or wrong with respect to a right already vested in him, or has been deprived or prevented from having performance which he is entitled to receive, the has no ground on which to seek a remedy.
6. Reasoning: [Wells] reasoned that the seller had not been prevented from receiving the performance yet because he had not been prevented absolutely from receiving performance within the term. The buyer could still change his mind and perform within the term specified. This was distinguishable from the previous cases that allowed recovery for anticipatory breach because in the previous cases, the land had been sold or leased by the seller prior to the end of the term, so the buyer was immediately and absolutely prevented from obtaining performance; the seller had put it "beyond his power" to ever perform. Additionally, the court reasoned that the contract was a fully executory contract which gave the seller no right before the end of the term. There was no implied relationship between the parties that created a present right, as there would be in a contract for marriage (where the status of being engaged is a present right).
1. Roehm v. Horst, (1900)
2. Facts: The seller of hops had made several independent contracts for the sale of hops to the buyer. They were for a certain amount each crop year. The price of the hops went down, and so the buyer used the occasion of the seller's going out of business to repudiate the contract. However, the seller still intended to make the deliveries under the present contract. The buyer refused to accept them, so the seller brought an action for anticipatory breach of the contracts for the remaining years.
3. Nature of the Risk: Standard sale of goods.
4. Issue: May a seller of goods bring an action to recover damages for anticipatory breach of a contract when the buyer states that he will refuse to accept the goods under the contract, even though the date for delivery has not yet arrived?
5. Holding: Yes. When a party announces his intention not to fulfill the contract, the other side may either take him at his word and treat the notification of repudiation as discharging him from his contractual obligation to perform, and bring an action immediately for damages subject to the requirement that he must take good faith efforts to mitigate the damages, or the non-breaching side may also wait until the time when the performance was to take place, still holding the contract as prospectively binding so long as such waiting is not prejudicial to the breaching side.
6. Reasoning: [Fuller] reasoned that a positive and unqualified refusal by one side to perform should be treated [under the reliance principle] as being in the same category of cases where the breaching party has put it beyond his power to perform. The breaching party, once absolutely declaring that they plan to breach, should not be permitted to object to the non-breaching side taking him at his word. The court disapproved of the reasoning in Daniels v. Newton, and stated that the parties to a wholly executory contract do have present rights arising from the interest in future performance. Furthermore, why should the non- breaching party be required to wait until the day of performance, making futile preparations, and always keeping himself ready to perform, if the breaching side has left for more lucrative prospects? [To require the non-breaching party to wait would be to violate the reliance principle.]
7. Notes: 1. Williston argues that to allow action before the date of performance is to expand the scope of the contract beyond the parties' consideration. "A promise to perform in June does not preclude changing position in May." 2. In Hochster v. De La Tour (the grandfather of anticipatory breach cases where it was still possible to perform) the defense argued that the announcement of intent to breach should be treated as an offer to rescind, not a breach. Thus, it would remain at the parties' option to rescind until the date of performance, when it would become a breach. But the breaching side could revoke the offer to rescind at any time before then if not acted upon by the other party. However, this would mean that the P., to recover anything, would have to remain ready and willing to perform, because if they accepted the "offer" to rescind, that would prevent any recovery. 6. In Equitable Trust Co. of New York v. Western Pacific Railway Co., Judge Hand stated that "a promise to perform in the future by implication includes an engagement not deliberately to compromise the probability of performance. A promise is a verbal act designed as a reliance to the promisee." And although there are many risks that the P. may bear that the D. will breach due to other difficulties in performance, and the P. must still be ready to perform, the P. does not bear the risk that the D. may repudiate the contract gratuitously while still holding the P. to be ready to perform.
1. Missouri Furnace Co. v. Cochran, (1881)
2. Facts: The Furnace Co. (buyer) entered into an large fixed futures contract for coke with Cochran (seller) for delivery of a certain amount each day. The contract price was $1.20/ton, but soon the market soared to $4.00/ton or more. The seller then repudiated any further deliveries (knowing that he could get more for his coke). The buyer treated the repudiation as a breach of the entire contract, and entered into a new futures contract with another seller for the remaining large amount of coke at $4.00/ton. However, then the market dropped back down to $1.30/ton, and the buyer had to negotiate out of the high priced contract at some tremendous loss. The buyer wished to sue the repudiating seller for the difference between the new contract price ($4.00) and the old contract price ($1.20) for the entire amount of coke remaining to be delivered. [The difference between the two contract prices, even though the price fell after the buyer effected cover.]
3. Nature of the Risk: Standard sale of goods, with the addition of the extra risks involved in futures contracts.
4. Issue: What is the correct measure of damages for breach of a divisible futures contract for multiple deliveries of goods according to a schedule?
5. Holding: The sum of the differences between the contract and the market price at the time of delivery, for each of the breached deliveries.
6. Reasoning: The court reasoned that the buyer had two options, he could treat the repudiation as a breach, and then effect cover to mitigate damages, or he could simply treat the notice of repudiation as inoperative, and preserve the contract for the benefit of both of the parties. Thus, since the buyer was not compelled to enter a new long- term futures contract subject to its risks, he was to bear any additional risk that he undertook in effecting the cover. The seller was not a party to the cover contract, and therefore was not required to bear the risks the buyer would make a bad bargain or read the market incorrectly.
7. Notes: 1. A large consumer who has to effect cover is may be motivated to make such long futures contracts rather than making several spot transactions at each time of delivery because they are thus shielded from wandering market effects. This might also be in the breaching sellers best interests as well, because he would desire the same protection for the payment of his damages. 2. However, Professor Jackson writes: Presumably, the markets aggregate perception of the risk [of a future market price] is a factor reflected in that forward market price...Since there is no compelling reason to expect that either the seller or the buyer can outguess the markets perception of the future price, there would be no compelling reason to suspect, ex ante, that either of them would prefer [the future or the spot price strategies]...This conclusion, however, no longer holds true if we assume a pre-existing contractual relationship between a buyer and a seller.
1. Oloffson v. Coomer, (1973)
2. Facts: Oloffson (buyer) was a grain dealer. Coomer (seller) was a farmer. Buyer and seller contracted for the purchase of 40K bushels of corn to be delivered half in October, and half in December. The contract price was $1.12 per bushel. In June, the seller notified the buyer that he did not intend to plant the corn, at which time the price was $1.16/bushel. The buyer insisted that he perform, and waited until just before the time scheduled for delivery to effect cover. However, in the mean time, the price of corn skyrocketed, and the cover price was $1.49/bushel.
3. Nature of the Risk: Standard sale of goods.
4. Issue: How long may a buyer wait to effect cover when a seller repudiates before performance?
5. Holding: A commercially reasonable time.
6. Reasoning: The court followed the remedy options in UCC 2-610 for anticipatory repudiation. The court reasoned that a commercially reasonable time could be less than the time for performance, particularly when the notice of repudiation is unconditional and clear. Furthermore, the court found that the buyer acted in bad faith by failing to notify the seller of the usage of trade of letting his customers out of the contract at any time if they paid the contract- market differential on the date of repudiation. In bad faith, the buyer took advantage of the sellers lack of knowledge, thinking that he could continue to wait before covering. Thus, when the buyer learned of the breach, the commercially reasonable time expired, and the buyer then had a right to pursue damages under 2-713. In this case, the contract- market differential on the day the buyer learned of the repudiation. [During the commercially reasonable time, the repudiating party continues to bear the risk of market fluctuation, but at after the expiration of the commercially reasonable time, that risk is shifted to the aggrieved party.]
7. Notes: 1. If a buyer repudiates, and the seller elects to sue for market damages under 2-708(1), he can get the contract-market differential at the time and place for tender. [Assuming that the time of performance is a commercially reasonable time, in a perfect market, there is no reason to believe that the seller could predict the price at the time of delivery any better than the buyer, so there is not any reason to limit him to damages at the time he learned of the breach. Sellers can effect cover as well.] 2. If the suit goes to trial before the performance is due, the market price is determined as of the time that the aggrieved party learned of the breach. This prevents parties from waiting until the market becomes favorable to bring the action.
1. Clark v. Marsiglia, (1845)
2. Facts: An owner of some paintings took them to a painting repair craftsman to have them restored. However, during the course of the restoration, the owner decided not to continue with the restoration, and ordered the craftsman to stop working on them. The craftsman, however, persisted in the restoration of the paintings until he was done, claiming that the owner had no right to tell him to stop once he had began performance.
3. Nature of the Risk: Standard service contract. The craftsman risked he could get more profit from restoring someone elses painting, the owner risked that he could get more profit from not having his painting restored by this craftsman.
4. Issue: May a party who has undertaken partial performance of a contract continue to perform at a cost to the other party even after the other party notifies him of his repudiation?
5. Holding: No. In all such cases the just claims of the party employed are satisfied when he is fully recompensed for his part performance and indemnified for his loss in respect to the part left unexecuted; and to persist in accumulating a larger demand is not consistent with good faith towards the employer.
6. Reasoning: The court reasoned that the craftsman was acting in bad faith by continuing to complete the work on the painting with the knowledge that the owner did not desire to have the work completed. The craftsman had a duty to mitigate damages. The court did not express an opinion as to whether the craftsman could put a lien on the paintings to recover for the work which he had already performed. [However, they did not limit his damages strictly to the work he had already performed either. They stated that the craftsman could be indemnified for loss, which may be as much as the total cost of the service if the craftsman could show that he could not prevent that loss to himself after trying to mitigate damages in good faith. His reliance would be protected, but not to the extent that it violated the reliance of the owner.]
7. Notes: 1. In Rockingham County v. Luten Bridge Co., the county contracted with Luten to build a bridge across a gorge in a forest, but after construction was partially completed, the county decided not to go ahead with the connecting road. The bridge company, on the other hand, continued to build the bridge to completion. Parker, J. held that the bridge construction company could not recover for the full price of the bridge because of the notice given. 2. In White and Carter (Councils) Ltd. v. McGregor, an advertising agency had a contract to make and display the clients advertising sign for 3 years. Before the signs were built, the client attempted to cancel the contract, but the ad agency continued with the work and displayed the signs for 3 years. The court allowed the ad agency to recover the full contract price. Perhaps this case is distinguishable because it conferred an unjust enrichment on the client. However, the ad agency, like the craftsman in Clark, probably also derived some benefit in reputation from completing the work which could not be compensated adequately with money damages. 3. In Clark, the craftsman would be able to recover reliance damages, and perhaps lost profits. However, if the craftsman were able to find other work, there is a risk of overcompensation because he could profit on twice as much work as he could have done in the same amount of time. 4. In a contract for the manufacture and sale of goods which is repudiated before the goods are finished, UCC 2-704(2) states that the aggrieved seller may either complete the manufacture and wholly identify the goods to the contract [thus getting the lost profit, but not being able to commit his resources to a competing contract] or cease manufacture and resell the scrap for salvage [thus being able to commit his resources to another contract, but not getting lost profits. In this way, he is not better off if the buyer repudiates.]
UCC Section 2-508 - Cure by Seller of Improper Tender, Replacement
1) When the buyer rejects non-conforming goods before the period for performance has expired, he may seasonably notify the buyer of his intent to cure, and then cure within the contract time. 2) Where the buyer rejects non-conforming goods, and the seller reasonably believes they should have been acceptable (even if at a discount price), the seller may cure with a substitute performance (and notice) within a further reasonable time. [Even after the period for performance has expired.]
UCC Section 2-609 - Right to adequate assurance of performance.
1) A contract imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. If a party reasonably suspects insecurity, he may demand in writing an assurance of due performance. Until he receives such assurance, he may take commercially reasonable steps to suspend his own remaining performance. [A contract is not merely a promise to perform plus the right to win a lawsuit. There is an increment of reliance created by the existence of the contract itself, because the parties must make preparations and buy raw goods at then existing market prices.] 2) An objective standard of reasonableness, based on commercial standards [and good faith], is used to determine whether the party has reason to believe there may be insecurity. [The reason for suspecting insecurity need not be directly related to the contract in question. If the suspect party is breaching other contracts, that may give rise to reasonable belief of insecurity as long as he has not assumed the risk of payment before inspection anyway.] 3) A party can still demand assurance after accepting an improper performance. 4) If the suspect party does not provide an adequate assurance [good faith under the circumstances] within a reasonable time (nlt 30 days), the requesting party may treat the lack of adequate response as a repudiation.
UCC Section 2-610 - Anticipatory repudiation.
The repudiation must be with respect to a performance not yet due, which substantially impairs the value of the contract [burden of risk increased such as by bad faith or demand for performance outside of the consideration] to the aggrieved party. The aggrieved party has the option of (a) waiting for a commercially reasonable time, [but if he waits longer, he can not recover losses he should have avoided.] (b) resort to any remedy for breach even if he still urges performance, [and continue to negotiate with the repudiator in good faith.] (c) in any case suspend his own performance
UCC Section 2-611 - Retraction of Anticipatory Repudiation
(1) Until his next performance is due, the repudiating party can retract his repudiation unless that would violate the reliance principle [aggrieved party relied on the repudiation as in 2-610(b).] (2) The repudiating party may retract by any method which clearly indicates an intention to perform, but the aggrieved party may make a justifiable demand for assurance. [Repudiation/retraction is reasonable grounds for suspicion of insecurity.] (3) Retraction reinstates the repudiating partys rights with due allowance to the aggrieved party for any delay caused. [Protection of the reliance interest].
UCC 2-612 - "Installment Contract" Breach
1) An "installment contract" is one which requires or authorizes [even tacitly] the delivery of goods in separate lots, even if it contains a clause that tries to deny that the separate deliveries are related in one contract. [Commercial reasonableness and good faith reading of the consideration mean that it is what it is, not something else.] 2) The buyer may reject any non-conforming installment which can not be cured, but the buyer must accept delivery if the seller gives him adequate assurance of its cure. [Protect the reliance of the seller by requiring the buyer to make a good faith effort to accept what he can reasonably use and cooperate.] 3) If the non-conformity in one delivery impairs the value of the whole contract [increases the buyers risk based on time, quality, etc,] then there is a breach of the whole. But the buyer must notify the seller seasonably. [This sub. furthers the continuance of the contract in the absence of an overt cancellation. The whole contract is not breached if the defects are only local to the installments. This protects the seller's reliance on the buyer not being able to take advantage of minor defects to treat the contract as repudiated.]
1. Jameson v. Board of Education, (1916)
2. Facts: Jameson was a music teacher who was hired by the Board to teach music at the school for a period of one school year (9 months) at a salary of $75/month. However, the Board then revoked her appointment as music teacher, and refused to let her teach at all. Jameson continued to show up at the school every single day and demand that she be assigned work to do. The Board refused, and she sued after two months for her first two month's wages, and won $150. She is now suing again for the rest of the school year's wages claiming that she was ready to perform every single day.
3. Nature of the Risk: Standard service contract.
4. Issue: Whether an employee may recover damages for the full amount of an employment contract when the employer notifies the employee of their final repudiation before the term of the contract begins, the employee continues to make himself available for performance and continually demands performance, and the employee has recovered damages already which were a calculation based on a percentage of the whole contract price.
5. Holding: No. An aggrieved party does not gain any more right to damages by continuing to remain ready to perform, and demanding performance beyond a reasonable time. The aggrieved party's "only right of action is one for a breach of the contract."
6. Reasoning: The court reasoned that the music teacher was not entitled to stand on her rights under the express provisions of the contract after it had been finally repudiated. She was only able to recover damages for breach, which did not include the payment of the full sum of wages under these facts. They refused the doctrine of "constructive service" (Gandell v. Potigny, holding that an employee discharged early could maintain a suit for damages for all wages owed to the end of the contract term, even without performing), because the contract was "entire" and the repudiation went to the entire contract, not just each day as it arrived. They instead followed Howard v. Daly, which held that an employee can not recover for voluntary idleness. Futhermore, she had already recovered once. This was not a contract which required multiple suits to determine damages. Her previous action was a bar to any further action. Otherwise, there would be an incentive for multiple suits [increased transaction costs] and idleness. [The contract's own consideration does not allow this kind of recovery. The music teacher could only demand performance for a reasonable time, and waiting the entire school year is unreasonable, especially if the Board was probably able to hire another teacher. The contract damages are not necessarily measured by the amount of wages, but rather the consideration.]
7. Notes: 1. Most courts hold that a discharged employee must seek other comparable work and that the wages at his new substitute job are deductible from his damages for breach of the previous contract. Even if he turns down an appropriate substitute position. Therefore, as long as the costs of litigation to the employee outweigh the loss, the employer can be confident that he won't be sued for breach. However, unemployment compensation is probably not offset against an award. 3. Because it may be impossible to get a substitute teaching job once the school year has begun, this would factor into the reasonablness of how long a teacher could wait to bring an action. If the teacher brings the action immediately and it comes to trial before the end of the school year, she should be able to recover for only those future damages which are objectively within the consideration. [So she only gets what she could not have mitigated for.] 4. In Dixie Glass Co. v. Pollack, Pollack was fired after 2 years of a 5 year contract with an option to extend for another 15 years. In determining the damages, the Texas court took the "majority" view, awarding Pollack the difference between what he would have made under the contract and his expected future earnings, discounted to present value. 6. In Griswold v. Heat Incorporated, Griswold, a CPA, was hired for $200/mo. by Heat for "such [personal] services as he, in his sole discretion may render." Relying on Lady Duff Gordon, the court found that the promise was not "illusory". He was fired. [By the same rule, he should be only able to recover damage for what he could not effect cover.] 7. The burden is on the employer to show that the damages could have been mitigated by reasonable diligence by the employee.
1. Lucas v. Hamm, (1962)
2. Facts: Lucas is the intended beneficiary of a will that was drafted by Hamm. Hamm negligently drafted the will such that the provision for the trust to Lucas violated the rule against perpetuities. Thus, during probate, Lucas was forced to settle with the blood relatives of the testator for about $75,000 less than he would have received if the trust were valid.
3. Nature of the Risk: Standard service contract between the lawyer and the testator. But the risks were borne for the benefit of the beneficiary.
4. Issue: May a beneficiary of a will bring an action against the drafter for negligently preparing the will so as to damage the recovery that the testator intended?
5. Holding: Yes. Where a contracting party knows that the purpose of the contract is to benefit a third party, then the third party has a right of recovery against the breaching party. [When it is part of the consideration that a third party be the beneficiary of the breacher's performance, then the third party has a contract action against the breacher.]
6. Reasoning: The court overruled the previous decision in Buckley v. Gray (holding that a third party beneficiary to a will does not have an action against the drafting attorney for negligent drafting because he is not privy to the contract). As a matter of policy (in tort) if the third party were not allowed to recover, then nobody would deter the D.. It is possible to have a contract for the benefit of a third party, where the performance is rendered to the contractor, and not the beneficiary directly. If the purpose of the contract is to benefit the third party, and the breaching party knows it, then he is liable to the third party for breach. [The risk to the third party becomes part of the consideration.]
7. Notes: In Heyer v. Flaig, the court stated that since negligence was involved, the crux of the action was in tort, even though there was a "superflous" action for the third party beneficiary in tort. Additionally, "when an attorney undertakes to fulfill the testamentary instructions of his client, he realistically and in fact assumes a relationship not only with the client but also with the client's intended beneficiaries." The court stated that the duty to the client extended to the beneficiary. [Thus, the duty and the consideration were related.] 2. The court in Lucas eventually found the attorney not liable because he had not been negligent. In Ultramares Corp. v. Touche, Niven & Co., a CPA prepared a balance sheet for the Stern company, which was used by the company to obtain loans from the P.. After the company went bankrupt, the loan company went after the CPA, even though they had not hired him, on the theory that they were entitled to a tort action as a third party beneficiary of the contract. In his opinion, Cardozo stated that there was no contractual relationship between the CPA and the loan company because the service was "primarily for the benefit of the Stern company...and only incidentally or collaterally for the use of those to whom Stern...might exhibit it thereafter." [Since the loan company was only one of the possible beneficiaries of the contract, their individual loan risks can not be objectively included in the balance sheet contract to be borne by the CPA; his liability was limited to the consideration. Especially since Ultramares was conducted in a commercial environment, as contrasted to the personal services setting of Lucas. Thus Ultramares is reconcilable with Lucas.]
UCC 2-318 - Third Party Beneficiaries. Warranties express or implied.
A seller's warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such persons may use, consume or be affected by the goods and who is injured in person by breach of the warranty. A seller may not exclude or limit the operation of this section.
[If the person is in the family or household, then the contractual relationship and consideration extends to them as well. The purchaser is acting on behalf of those beneficiaries, and thus their risks of injury by breach are imported into the consideration of the contract.]
Third Party Beneficiaries
Under Restatement (Second) 302, a third party beneficiary may have an action against the breaching party in the primary contract if he was an "intended beneficiary". Examples are where a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary [if insurance is to pay creditors directly, then they have an action as "intended" beneficiaries, otherwise if the money was to go to the insured directly, the creditors may only be "incidental" beneficiaries.] or b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance [the contract is on behalf of the third party]. Furthermore, Comment d states that "if the beneficiary would be reasonable in relying on the promise as manifesting an intention to confer a right on him, he is an intended beneficiary." This is clearly meant to protect the reliance interest of the beneficiary, and suggests that neither of the contracting parties need to have an actual intent to benefit the third party, but that he may sue for promissory estoppel under 90 [reliance principle invoked to protect the third party.]
Under Restatement (Second) 311, the original parties to the contract can not modify the duty to the third party if, "before he receives notification of the discharge or modification, [he] materially changes his position in justifiable reliance on the promise." Also, if the promisee [who is essentially acting on behalf of the third party] receives consideration by the promisor [who is on the hook to perform for the third party's benefit] the third party would have a right to the payoff, since he is losing out because of it. But if he does go after the promisee for the payoff money, he loses his right against the promisor.
UCC 9-318 -Defenses against an assignee
When a creditor assigns his rights of action as against a debtor, the assignee gets exactly what claims the creditor [assignor] had at the time, subject to any defenses the debtor may have had against the creditor. All the contract terms that were binding on the creditor become binding on the assignee. [In protecting the reliance of the debtor, this includes all defenses that may arise based on the actions of the creditor until the debtor receives notification of the assignment.]
1. Alaska Airlines, Inc. v. Stephenson, (1954)
2. Facts: Stepheson was an airline pilot who originally worked for Western Airlines. Under his employment contract with Western, he was allowed a 6 month leave of absence with guarantee of retaining his job. Alaska airlines recruited him as a pilot on a monthly salary basis, but they were waiting on a license to fly to the states before signing him for a long term contract. Stephenson's 6 months expired before the license came through, and so he could not convince Alaska to sign him to a contract, even though they promised him that they eventually would sign him for 2 years. Eventually, Stephenson was fired, and he brought this suit to recover the 2 years worth of salary. Alaska claimed that they should be granted summary judgment because the statute of frauds clearly required a 2 year employment contract to be in writing.
3. Nature of the Risk: Alaska risked that they could make more money off of the money they minght have paid Stephenson. Stephenson risked that he could make more working for a different airline.
4. Issue: Is a promise which is reasonably expected to induce an employee to remain with the company, and which does induce the employee to remain, valid even though it has not been reduced to writing as required by the statute of frauds?
5. Holding: Yes.
6. Reasoning: The court reasoned that this was a case of promissory estoppel. The airline had induced Stephenson to forego his employment with Western. Looking to section 90 of the retatement comment f, the court concluded that promissory estoppel could trump the statute of frauds if the additional requirement of a promise to reduce the contract to writing is present.
7. Notes: 1. In Monarcho v. Lo Greco, the parents promised their son that if he remained on their farm, he would receive the property when they died. He did stay, and gave up other opportunities. In the court's opinion, Traynor wrote that it was not necessary that there be a promise to reduce the contract to writing to overcome the statute of frauds. It is sufficient that there has been reasonable reliance on a promise. However, in that case, there was unjust enrichment. 2. Section 139 fo the restatement does not require either unjust enrichment, nor a promise to put it in writing to protect the reliance interest of the promisee. 3. The remedy for an unenforceable oral promise shoulod be measured as whatever justice requires. This could go beyond just out of pocket expenses, and also cover loss of a favorable bargain.
UCC 2-201 Formal Requirements, statute of frauds
1) Contract for sale of goods for the price of $500 or more must be signed and in writing, except that the terms do not all need to be included nor even correct. However, the quantity of goods stated is the maximum enforceable.
2) Between merchants, if the seller sends a writing [bill of sale] to the buyer within a reasonable time, and the buyer does not object within 10 days, then it is satisfactory [even if not signed].
3) Even if the contract does not satisfy the writing requirement,
a) a seller may recover for specially manufactured orders whicha are not suitable for sale to others, and which he has already comitted to making before receiving repudiation;
b) if the party admits in his testimony that a contract was made, it is enforceable to the limit of the quantity admitted,
c) if the goods have already been paid for and accepted.
Official Comment 2-202 Parol Evidence
1. This section definitely rejects:
(a) Any assumption that because a writing has been worked out which is final on some matters, it is to be taken as including all the matters agreed upon;
2. Paragraph (a) makes admissible evidence of course of dealing, usage of trade and course of performance to explain or supplement the terms of any writing stating the agreement of the parties in order that the true understanding of the parties as to the agreement may be reached. Such writings are to be read on the assumption that the course of prior dealings between the parties and the usages of trade were taken for granted when the document was phrased. Unless carefully negated they have become an element of the meaning of the words used. Similarly, the course of actual performance by the parties is considered the best
indication of what they intended the writing to mean. 3. If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact.
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