Contracts II - Schooner - Spring 2011 - 4

CONTRACTS II SCHOONER SPRING 2011 1
THE MEANING OF THE AGREEMENT

I. PRINCIPLES OF INTERPRETATION
a. Assume an enforceable K exists or at least have a bargain
b. Three basic theories:
i. Subjective
1. Meeting of the minds
a. What parties thinking at moment they entered into K
b. About protecting autonomy
2. Raffles v. Wichelhaus (Eng.)
a. Big K for delivery of cotton; two ships called Peerless
b. P thought cotton was coming on earlier Peerless
c. Holding: no meeting of minds so no K
3. Problems:
a. Often prevents Ks from being enforced, not what most want
b. Doesnt recognize words that have certain meaning in normal usage
ii. Objective
1. What reasonable person would conclude based on words and conduct of parties
2. Sophisticated business and attorneys often like, judges favor as well
3. Problem:
a. Neither party may have thought what reasonable person thought
4. Lands End Hypo:
a. Specific industry definition of red
b. You didnt get red you wanted and Lands End red doesnt follow
industry definition
iii. Modified-objective
1. Most identified w/ Prof. Corbin
2. Three step approach R 201:
a. (1) If parties attach same meaning to term it has that meaning
b. (2) A is the innocent party, use As interpretation when:
i. If A didnt know B thought different, but B knew what A
thought
ii. If A had no reason to know B thought different, but B did have
reason to know what A thought
c. (3) If neither knows what other was thinking then no K exists
d. Knowledge at the time agreement was made!
c. Joyner v. Adams (NC)
i. P Joyner originally K w/ Brown Investment Co. to develop office park
1. Brown has financial difficulties, lease amended to substitute D Adams
ii. K includes term if fail to develop by end of Sept., then rent escalates under price index
formula
1. Parties disagree as to what development means
iii. Adams claims developed means get lots ready for construction (water, sewage, etc)
1. All lots developed, but one has no building
iv. Joyner claims development means constructing buildings on all lots
v. Trial court: MSJ granted for D Adams
1. Reversed and remanded to determine parties intent
a. Trial ct. then said no meeting of minds on rent escalation term
i. Takes subjective approach

ii. Ambiguity should be resolved against D Adams as drafter of
amended lease
vi. Both parties on appeal disagreed that there was no meeting of the minds
vii. Memo from accountant saying Adams agreed to completion of buildings w/in five yrs
or rent escalates
viii. D Adams talks about trade usage; sophisticated parties in real estate business
understand develop means get lots ready for construction
ix. Holding: reversed and remanded; trial court didnt error in finding no meeting of the
minds on rent escalation term
1. But need to determine what parties knew about each others meaning
a. Court takes side of innocent party
b. Modified-objective approach of R 201(2)
2. Rejects interpreting term against drafter (contra proferentem); R 206
a. Ambiguous as to who chose the language for the rent term
b. Not an adhesion K, both parties wrote K and arms length negotiation
x. On remand:
1. Found in favor of D Adams b/c neither knew nor had reason to know
development meant starting construction on all buildings
2. P Joyners testimony reveals two versions of her meaning
3. P lack of communication w/ negotiations didnt give D reason to know
4. Lack of evidence D assented to K in reliance on completed building meaning
a. D rejected completed building language
b. None of Ps negotiators informed D that P knew of rejection, disagreed
w/ it, or would not accept it
5. Extensive experience w/ real estate gave D no reason to know development
meant construction
d. Maxims of Interpretation (not in order of importance, shouldnt be used all at once)
i. Noscitur a sociis: meaning of word affected by others in same series
ii. Ejusdem generis: general term + more specific terms includes only like specific terms
iii. Expressio unius exclusio alterius: if one or more specific times listed w/ more general
terms, other items, although similar in kind, are excluded
iv. Ut magis valeat quam pereat: prefer interpreation that makes K valid
v. Contra proferentem: if two reasonable meanings, interpret against drafter
vi. Interpret K as whole
vii. Purpose of parties
viii. Specific provision qualifies more general one (states exception to it)
ix. Handwritten or typed provisions control printed provisions
x. Public interest preferred
xi. R 203(a): prefer interpretation makes agreement reasonable, lawful, and effective
1. Posner: common sense approach
e. If courts finds failure to agree on material term, may be appropriate to find no K; R 33
i. Other cases, may supply reasonable term; R 204
f. Frigaliment Importing v. Intl Sales Co. (NY)
i. Issue: what is a chicken?
1. P Frigaliment says chicken means young chicken, broiler
2. D Intl Sales Co says chicken means any bird of genus meeting K
specifications
ii. Action for breach of warrant on second K
1. First K: 75,000 lbs. 2.5-3 lbs @ $33 and 25,000 1.5-2 lbs. @ $36.50

2. Second K: same except 50,000 lbs. of heavier chicken called for, price of
smaller birds $37
3. Both for US Fresh Frozen Chicken, Grade A, Government Inspected
iii. Holding: P Frigaliments complaint dismissed; failed to meet burden showing
chicken used in narrower rather than broader sense
1. Plain language: in cables P used English word chicken instead of German,
Huhn, which includes both Brathuhn (broilers) and Suppenhuhn
(stewing chicken)
a. D asked if meant any kind of chickens, and P said yes
2. Trade usage: P claims chicken means young chicken
a. No evidence seller knew about trade usage
b. One witness says when he wants broiler he says broiler
c. Defendants witness says a chicken is everything except a goose, a
duck, and a turkey
3. Legal standard: D claims government regulation should be dictionary; has
several categories of chicken
a. K doesnt say if in doubt use agriculture regulations
4. Price: D claims impossible to obtain broilers at $33
a. P must have expected D to make some profit
b. Schooner: not really good argument b/c Ks are taken for a loss
5. Course of performance: D points out that after it received 1st shipment of
larger birds, D confirmed it wanted 2d shipment
a. If P sincere, wouldnt have allowed 2d shipment
6. Ds subjective intent coincides w/ objective meaning of chicken
iv. Using R 201(2)(b):
1. No objective evidence seller had reason to know buyer meant young chicken
2. Given statements, government regulation, and price, buyer had reason to know
D meant larger chicken
v. Parol evidence rule wouldnt apply b/c parties didnt intend writing to be final
expression of agreement
g. Ambiguity & Extrinsic Evidence
i. Courts often state plain meaning of K should govern, and extrinsic evidence
(surrounding circumstances) admissible only if court finds K ambiguous
ii. Modern contextual approach:
1. R 202(1) rejects ambiguity as prerequisite for extrinsic evidence
a. Words and conduct interpreted in light of all circumstances
i. Limited by parol evidence rule (see below)
2. Unless different intention manifested R 202(3):
a. Words given generally prevailed meaning
b. Technical terms and words of art favored if transaction in technical
field
iii. Latent ambiguity: not apparent from words alone, some courts allow extrinsic
evidence to uncover
1. PA only allows extrinsic evidence if court finds it could be used to support a
reasonable alternative interpretation
a. If yes, then fact finder chooses among competing interpretations
2. 7th Cir.: allows objective extrinsic evidence to establish latent ambiguity
(disinterested parties, trade usage, etc)
a. Doesnt allow subjective extrinsic evidence (parties intent)

iv. All courts allow use of extrinsic evidence to interpret K w/ patent ambiguity
h. Regulations
i. Modern view: definitions in statutes or administrative regulations not determinative
i. Trade Usage (see below)
i. Existence of relevant trade usage can overcome even apparently unambiguous plain
meaning of K language
ii. UCC 1-205 defines usage of trade, says relevant to interpretation of agreement
j. C & J Fertilizer v. Allied Mutual (IA)
i. Action to recover for burglary loss on two separate insurance Ks
ii. K required visible marks of force and violence made by tools, etc. on exterior
iii. Guy allegedly broke in and stole fertilizer chemicals
1. Evidence of forced entry on interior door, no visible marks on exterior
2. Truck tire tread marks visible in mud in driveway leading to and from
Plexiglas door entrance to warehouse
3. Front door could be opened w/ leaving marks
iv. Agent told 37-yr. old farmer there had to be visible evidence, but didnt say visible
marks on front
1. Even agent thought P was covered
v. Farmer didnt recall reading fine print
vi. Trial court: found for D, policy unambiguous, nothing in record to find door entered
by actual force and violence
vii. Holding: reversed and remanded; applies reasonable expectations doctrine b/c
adhesion K
1. Interprets non-dickered terms wrt to reasonable expectations of non-drafting
party
a. Even if express language contradicts those expectations!
2. Adhesion K:
a. Boilerplate language or standard form
i. Not all form Ks (e.g., real estate form)
ii. Insurance policy
b. Disparity in bargaining power
i. 37-yr. old farmer w/ high school education
c. Take-it or leave-it language (cant edit)
3. Defeats reasonable expectations if:
a. Eliminates dominant purpose of transaction
i. Policy for burglaries that doesnt cover burglaries
b. Bizarre or oppressive
i. Odd for coverage to depend on skill of burglar
c. Eviscerates non-standard terms explicitly agreed to
i. Not applicable here
4. Court suggests sympathy to farmer, definition doesnt comport w/ laymans
concept or legal interpretation not reasonable
5. Doctrine doesnt apply to terms they dickered for
a. Coverage on chemicals and equipment
b. Inside job clause
i. Some conversation b/w agent and farmer
c. Majority claims visible mark clause wasnt dickered for
6. Dissent: no evidence P believed wrong coverage

a. Not fine print must be objectively reasonable std.
b. Purpose of clause to stop inside jobs
c. Farmer knew disputed provision in policy b/c just like one I have on
my farm
viii. Seven Characteristics of Adhesion K
1. Printed form w/ many terms + meant to be a K
2. Drafted by only one party
3. Transaction is routine for drafter
4. Implicit or explicit that only those terms allowed
5. Document signed by innocent party post-dickering
6. Innocent party enters into few of these type transactions (compared to drafter)
7. Innocent partys obligation is pay $
ix. Reasonable Expectations Doctrine
1. Adopted by more than half of states
2. Three variations:
a. Many Js limit by requiring presence of ambiguity
i. Ambiguous policy should be construed against insurer
b. Fine print undermines more prominent expectations
c. When overall circumstance suggest reasonable expectations
negated
3. As C & J shows, doctrine may involve court refusing to apply exclusion
unambiguously stated
4. R 211(3): standard form + other party knows party wouldnt manifest assent if
knew term
a. Narrower than full-fledged doctrine (insurers perspective)
II. PAROL EVIDENCE RULE
a. R 209-218; UCC 2-202
b. Give legal effect to intention to make writing final and perhaps complete expression of
agreement; R 209(1)
i. If parties had this intention, then agreement integrated and bars evidence of prior or
contemporaneous communications introduced to add to or contradict a written
agreement
ii. Finality is first gate get past integration before deciding if complete and partial; R
209(2)
1. Is there a written agreement?
2. Is it final or can add to agreement?
3. Preliminary to Qs of interpretation and parol evidence; R 209(2)
c. Complete v. Partial Integration
i. R 209(1); UCC 2-202
ii. Partial: everything that isnt completely integrated; R 210(2)
1. Cant contradict written agreement; R 215
2. May supplement w/ additional consistent terms R 216; UCC 2-202
iii. Complete: adopted by parties as a complete and exclusive statement of the terms of
the agreement; R 210(1); UCC 2-202
1. Cant even supplement the agreement! R 216(1); UCC 2-202(b)
d. Determining Integration
i. Strict classical approach: figure out if integrated or not by reading it; Willistons
four-corners approach

ii. Today merger clauses commonly used to indicate complete integration
iii. Liberal modern approach: writing cannot prove its own completeness; R 210
1. Even if language doesnt appear unclear on its face (latent ambiguity); R
214(a)
2. Corbin: finding integration should depend on intention of parties
a. Should consider all facts and circumstances surrounding execution of
contract, as well as writing
3. Merger clause doesnt necessarily control
e. Purpose
i. Certainty, take written agreements more seriously, prevent fraud, deters rewriting or
rethinking agreements w/ hindsight
ii. Substantive rule (can reverse on appeal for improperly admitting parol evidence)
f. Thompson v. Libby (MN)
i. Libby buying logs from Thompson
ii. Libby not paying, claims oral warranty agreement not in writing
1. Warranty: agreement that logs would be of certain quality
iii. Sold all my logs marked HCA in winters of 1982 and 1983 for ten dollars a thousand
feet, boom scale at Minneapolis
iv. Contradiction: perhaps, K says all logs marked HCA
1. Saying all marked HCA of good quality may contradict
v. Holding: lower ct. erred in admitting parol evidence, strict four corners approach
1. Writing completely integrated b/c doesnt seem informal or incomplete on its
face
a. Therefore, exclude all parol evidence unless exception
2. Warranty term of sale, not separate K not collateral agreement
a. Doesnt relate to subject distinct from writing
3. Extrinsic evidence admissible if necessary to apply K to its subject matter or
in order to a more perfect understanding of its language
vi. Hypo: assume Libby and Thompson talk about warranty, Thompson sends follow-up
letter promising logs of certain quality
1. Seems letter isnt prior or contemporaneous to agreement
a. Evidence shouldnt be barred
2. What if Thompson says he will send letter before K signed, but never gets
around to it?
a. Helpful to deciding if agreement partially integrated or not
g. Exceptions to Rule
i. Interpret or explain meaning of agreement; R 214(c); UCC 2-202 comment 2
1. Periods of time included in phrase winters of 1982 and 1983
2. What meant by term boom scale
ii. Oral or written agreements after writing
iii. Show agreement wouldnt take effect unless some specified event occurred; R 217
iv. Invalid for fraud, duress, undue influence, incapacity, mistake, or illegality; R 214(d)
1. Some courts limit fraud exception to fraud in the execution
2. Most courts will extend to fraud in inducement
a. Some limit exception for fraud in inducement if alleged
misrepresentation contradicts a term in writing (Sherrod)
v. Right to equitable remedy
1. However, most cases reject use of promissory estoppel to avoid rule
2. Reformation of K

vi. Collateral agreements
1. R 216(2)
a. Separate and independent consideration
i. Like going to Best Buy and being offered chance to buy
warranty
ii. Where was consideration for warranty on logs?
b. Term in circumstances would ordinarily be omitted from writing
2. UCC 2-202(b):
a. More admissible, only exclude if find that if terms had actually been
agreed upon would certainly have been included in writing
h. Taylor v. State Farm (AZ)
i. Bobby Sid Taylor in accident and mad at his insurance company
ii. Didnt settle w/ other parties w/in amount of his policy, now has judgment against him
for $25 million
iii. Claiming company refused to settle in bad faith
iv. Taylor gets some uninsured motorists money for a release of future claims
1. In full satisfaction of all contractual claims, causes of action he has or may
have against State Farm and all subsequent matters
v. Taylor argues didnt intend release to limit tort claims, only K claims
vi. Trial judge found release ambiguous allowed parol evidence
vii. Appellate court said not ambiguous
viii. Issue: decide if release language reasonably susceptible to Taylors proffered
interpretation in light of evidence relevant to parties intent
ix. Holding: reversed and remanded; language reasonably susceptible to Taylors
proffered interpretation in light of evidence relevant to parties intent
1. AZ adopts Corbin view:
a. (1) Examine all evidence to determine integration and intent of
parties
b. (2) Use parol evidence rule to exclude evidence that would vary or
contradict the meaning of the written words
c. Judge may stop listening if proffered interpretation highly improbable
2. Legal character of bad faith not universally established so release could be
reasonably interpreted as Taylor asserts
3. Parol evidence to support Taylors interpretation:
a. State Farm apparently didnt insist that release contain broad language
suggests knew Taylor wouldnt sign if it did
b. State Farm knew large size of bad faith claim, Taylor would seek
something more than $15,000 to release claim
c. Parties used limiting language in release, confining it to contractual
and subsequent matters
4. Substantial evidence supports State Farms interpretation as well
x. Concurrence: rule amorphous, only this court can make final determination in K
i. Comparing Thompson with Taylor (approaches to parol evidence rule and interpretation)
i. Thompson = supplementation; trying to add warranty term
ii. Taylor = interpretation; extrinsic evidence didnt show separate agreement
1. Showed conduct and background circumstances Taylor claimed were relevant
to issue of whether release covered bad faith tort claim
iii. Cases demonstrate tension b/w views of parol evidence rule:

1. Classical Willistonian view: great weight to formal writing (both to parol
evidence rule and questions of interpretation)
2. Modern Corbinian view: much greater use of extrinsic evidence in
determining the completeness and meaning of written K
iv. Cases show relationship b/w four corners approach to integration under parol
evidence rule and plain meaning approach to interpretation:
1. Courts relying on facial completeness of written K to conclude complete
integration more likely to rely on plain meaning of words to bar extrinsic
evidence to aid interpretation
a. Occurs even though parol evidence rule explicitly states rule doesnt
bar use of extrinsic evidence to explain or interpret!
b. Existence of merger clause may further compel such courts to assign
plain meaning to words
2. Plain meaning doesnt allow extrinsic evidence to uncover latent ambiguity
(see above)
v. Modern approach in Taylor allows use of extrinsic or parol evidence if disputed
language reasonably susceptible to different proffered meanings
1. In making determination, court will consider at least preliminarily extrinsic
evidence and need not find agreement patently ambiguous
2. Endorsed by R 214(c)
j. Sherrod v. Morrison-Knudsen (MT)
i. Sherrod sub w/ COP who is sub for Morrison-Knudsen
ii. Constructing family housing under government contract for Army
iii. Disagree about amount of earth that needs to be moved
iv. Sherrod thought it wouldve to move 25,000 cubic yards to get $97,500
v. Problem: didnt say in K that it was $390 per cubic yard as in Thompson where it
was $10 per 1000 feet
1. Here, bargain $97,500 for lump sum of dirt
vi. Both parties agree LS means lump sum, controversy over how much LS is
vii. Merger clause barred verbal agreement w/ any agent either before or after K
viii. Sherrod claims Morrison rep. told him 25,000 cubic yards
ix. Sherrods bid accepted, started work, then found out double amount of dirt
x. COP threatened to w/hold payment unless K signed, Sherrod claimed COP officer
verbally promised deal would be worked to pay for more than sum in K
xi. Sherrod brought suit to set aside price provision, recover quantum meruit, and tort
damages, claimed fraud and breach of good faith
xii. Trial ct.: summary judgment for D Morrison
xiii. Holding: affirms summary judgment for D
1. Fraud exception to parol evidence rule only applies when alleged fraud
doesnt relate directly to subject of K
a. Here, Sherrod claims fraud over amount of dirt to be moved
2. Oral promise directly contradicts express terms, parol evidence rule
applies
a. Here, contention that $97,500 covered only 25,000 cubic yards
contradicts merger clause and work done is lump sum
3. Since parol evidence rule applies, bad faith claim fails as well
xiv. Dissent: acknowledges fraud claim and focuses on injustice to parties
1. Prime has better information
2. Sherrod lost its credit and bonding, went out of business

3. Majority eliminated fraud exception
xv. Unilateral mistake, not clear bilateral mistake
1. Morrison: no mistake, told them what they were getting into!
xvi. Less strict parol evidence rule of Taylor would allow fraud evidence 214(d)
k. Nanakuli v. Shell Oil (9th Cir.)
i. Nanakuli second largest asphaltic paver in HI (only two co. in HI though)
ii. Two long term supply Ks b/w buyer Nanakuli and seller Shell for asphalt
1. Five yr. K in 1963 for asphalt at reduced prices
iii. Breach of 1969 K for asphalt in Q
1. Price term as stated in K was Shells posted price at the time of delivery
a. Price and quantity
iv. Price remained the same until 1974 when Shell began to charge market price
1. Shell management changed in 1974
2. Arab oil embargo
3. Increasing price allowed by K
v. Nanakuli Pres. claims Shell promised never to charge more than Chevron charged
vi. Trial ct: granted JNOV in favor of D Shell b/c posted price term in K
unambiguous exclude parol evidence
1. Excluded evidence on Shells course of dealing w/ Nanakuli
vii. Buyer Nanakulis breach of K theories:
1. Trade usage of price protection
a. Evidence all aggregate suppliers routinely price protected in 1960s and
1970s in HI, including largest supplier, Chevron
2. Good Faith requires price protection
a. Price protected in past in 1970 and 1971 for four and three months
good faith requires it to continue
b. At very least good faith requires more notice of price change
viii. Seller Shells Arguments:
1. Shouldnt expand trade usage to include suppliers
2. Waiving K Term 2x doesnt = course of performance
a. UCC 2-208 comment 4: one instance not COP, but ambiguous
whether two instances = COP
b. Difference b/w interpreting K a certain way and reading K to mean X,
but willing to do Y this one time (waiver)
c. Interpret as a waiver when the parties acts are ambiguous
3. Price protection is not consistent w/ express K term
ix. Holding: reverse; trade usage of price protection was reasonably consistent w/ K terms
enough evidence for reasonable jury to find for Nanakuli
1. Accepting Nanakulis broad definition of trade usage; includes both asphaltic
pavers and asphalt suppliers in HI
2. UCC 1-205(2): practice of dealing having regularity of observance in place,
vocation or trade as to justify expectation of observance
3. UCC 1-205(3): court interprets to mean usage doesnt have to be one in partys
trade as long as so common in locale should be aware of it
a. Nanakuli showed more than just regular observance b/c evidence all
aggregate suppliers price protected
l. Standards of preference in interpretation; UCC 2-208(2); R 203(b)
i. Express K terms

0
ii. Course of performance; UCC 2-208; R 202(4)
1. Must be consistent w/ express terms
2. Here, evidence Shell price protected Nanakuli in 1970 and 1971 (see above)
iii. Course of dealing; UCC 1-205(1); R 223
1. Sequence of previous conduct b/w parties fairly regarded as establishing
common basis of understanding for interpreting expressions and conduct
iv. Trade Usage; UCC 1-205(2); R 222
1. Existence and scope Q of fact, but if based on writing Q of law; R 222(2)
2. Must establish that usage exists:
a. Clear and convincing evidence
b. Doesnt need to be universal, but well settled
c. Known or shouldve known
3. May even add terms to agreement; UCC 1-205(3); R 222(3)
m. Possible to write term to exclude course of dealings, course of performance, and/or trade
usage when interpreting the contract; UCC 2-202 comment 2
n. Three approaches to COP, COD, and TU:
i. Restrictive approach: all are inadmissible
ii. Middle ground approach: must be consistent w/ express terms
1. If inconsistent, intent of parties is unclear
2. If unreasonable, express terms = parties intent
3. Prof. Kirst article cited in Nanakuli
iii. Modern approach: almost always admissible, unless it cuts down express terms
o. Nanakuli embraces contextualism: interpret and enforce in light of commercial setting,
parties aims and real-world context
SUPPLEMENTING THE AGREEMENT

I.
THE RATIONALE FOR IMPLIED TERMS

a. Implied by law, not the parties
b. Why would a party enter into an agreement w/o terms?
i. Cost of negotiating every term outweighs benefits
ii. Determine how much time to put into K based on experience
c. Default rules (justifications) for implied rules:
i. Tailored: what parties wouldve agreed to if they had actually bargained
1. Assumes rational ppl. wouldve decided on X v Y
ii. Untailored: used to save time; economic efficiency
1. Example: implied warranties
iii. Fairness and public policy reasons for imposing regardless of what parties want
d. UCC wants K to be fulfilled, so courts have power to imply terms
i. No price term? Court usually uses market value
1. Standard: reasonable price
ii. No quantity? Not likely to imply; UCC 2-201 comment 1
1. Driven by needs of parties, not market
e. Wood v. Lucy, Lady Duff-Gordon (NY)
i. K signed by both P and D giving P the exclusive right to use Ds name on fashion
items that he finds and then promote the sale of those items
1. D gets half of all revenues and profits
ii. Breach: D began to promote herself through Sears

1
1. D says agreement is not a K b/c no consideration; P didnt have a performance
minimum no mutuality
iii. Trial ct. denied Ds motion for judgment; appellate ct. reversed
iv. Holding: reversed; court reads in a garden variety best efforts requirement
1. An implied obligation to use reasonable efforts will prevent a somewhat
indefinite promise from being illusory
2. Must imply terms for K to have business efficacy
a. Otherwise Wood could do nothing, while at same time represent
whomever else he wants
3. Cardozo believes promise to pay = promise to use reasonable efforts
a. Why would P bind himself if he wouldnt benefit?
i. Implies term b/c believes reflects intention of parties
v. What if it was a non-exclusive agreement? One sided no K
f. UCC 2-306(2): duty to use best efforts to supply goods or promote sale where K is for
an exclusive deal
i. How exclusive unclear
ii. MDC Corp v. John H Harland Co.
1. Holding: even though seller permitted to maintain certain relationships,
sufficiently exclusive to obligate buyer to generate a market for sellers
goods
g. Leibel v. Raynor (KY)
i. Dealer-distributor relationship for garage doors
ii. Dealer is Leibel; Raynor is the manufacturer and supplier of the garage doors
iii. Dealer has exclusive right to sell Raynors garage doors for indefinite time period
iv. Sales decrease over two yrs.
1. Supplier contacts dealer and terminates dealership (effective immediately),
informing dealer that he is giving the exclusive right to another dealer
v. Supplier says he can terminate at will
vi. Dealer agrees, but says he is entitled to a reasonable amount of notice
vii. Holding: summary judgment vacated; written notice was not reasonable; what
constitutes reasonable is a question of fact for a jury
1. Reasonable = acceptable commercial conduct based on nature, purpose, and
circumstances
viii. UCC 2-309
1. (2) If indefinite in duration; valid for reasonable time
2. (3) Termination, except on happening of agreed upon event, requires
reasonable notification be received by other party
a. Parties can agree to terminate w/o advance notice as long as it would
not be unconscionable to dispense w/ notification
3. Comment 8 interprets (3) in light good faith, need time to:
a. Get rid of current inventory
i. Enough time to recoup the initial $ they put into it
b. Seek a substitute agreement (find another manufacturer to go into
business with)
ix. Distribution relationships generally covered by UCC; Princess Cruises (Coakley):
1. Language
a. Not clear from facts

2
II.
2. Nature of business
a. Distribution relationship, but overall purpose is sale of garage doors,
not about being paid commissions
3. Intrinsic worth
a. Not clear from facts, but sales primary essence
THE IMPLIED OBLIGATION OF GOOD FAITH
a. UCC 1-203: obligation of good faith performance and enforcement for every K covered
b. UCC 1-201(19): honesty in fact in the conduct or transaction concerned
c. UCC 2-103(1)(b): for merchant good faith = honesty in fact and observance of reasonable
commercial standards of fair dealing in the trade
i. Subjective: honesty
ii. Objective: reasonable; can be wrong, but not intentionally
d. R 205: every K imposes upon each party duty of good faith and fair dealing
e. Good faith: intangible, abstract, no technical meaning, no statutory definition
i. Honest belief, absence of malice and fraud or seek unconscionable advantage
ii. Spirit of the K
iii. NY: depriving right of other party to receive fruits of K
Form of Bad Faith Conduct
1 Seller concealing a defect
2 Builder willfully failing to perform in full
(substantial performance)
3 Openly abusing bargaining power to coerce
increase in K price
4 Hire broker; deliberately prevent consummation of
deal
5 Conscious lack of diligence in mitigating damages
6 Arbitrarily/capriciously exercise power to terminate
K
7 Adopt overreaching interpretation of K language
8 Harass for repeated assurance of performance
Meaning of Good Faith Conduct

Fully disclosing material facts
Substantial performance w/o
knowingly deviating from specs
Refraining from abuse of bargaining
power
Acting cooperatively
Acting diligently
Acting w/ some reason
Interpret K language fairly
Accept adequate assurances
f. Seidenberg v. Summit Bank (NJ)

i. Ps owned two brokerage firms; sold them to D Bank in exchange for stock in third co.
1. Ps retained executive positions in the two cos.
ii. Ps took reduced salaries in exchange for a bonus w/ expectation that they would work
until age 70
1. K says would work a min of 5 yrs.
2. Bank fires them after 2 yrs.
iii. K said would work together wrt future performance; joint marketing programs
1. Performance linked to Ps compensation
iv. Ps claim bank:
1. Failed to allow close working relationship
2. Failed to develop existing relationships (low hanging fruit)
3. Delayed direct mail campaign
4. Failed to provide information and advice concerning employee benefits
v. Trial ct: dismissed claim

3
vi. Holding: reversed and remanded; bad faith determined by D state of mind and context
1. Includes the nature of the alleged breach and applicable industry standards
a. Can find a breach even when an express K term was not violated
2. Good faith performance = expectation of parties + purpose of K
3. Parol evidence rule ordinarily has no impact on good faith claim b/c
implied term
vii. Three situations for applying good faith:
1. K doesnt provide term necessary to fulfill expectations
a. Expectation relationship end at age 70 based on oral agreement
b. May find breach even when no express term of agreement has been
violated (Nanakuli)
2. Bad faith was a pretext for exercising right to terminate K
a. Bank just wanted Ps co. and were willing to make employment
agreement in order to get them
3. K expressly provides a party discretion regarding its performance
a. Subjective: imply a term based on reasonableness
b. Dont need to imply when objective
4. Sons of Thunder v. Borden, Inc
a. When bargaining power is unequal, cannot and should not assume
parties acted in good faith
i. But only one factor in determining good faith
g. Good Faith and Open Price Terms
i. Subjective: honesty in fact
ii. Objective: commercially reasonable behavior
iii. Can show breach of good faith w/ improper motive even if prices appear reasonable
h. Requirements and Output Ks
i. Requirement K: seller agrees to supply whatever buyer needs
ii. Output K: buyer agrees to purchase whatever seller makes
iii. Potentially illusory? (common law said yes, but no more)
1. Exclusiveness is one sided: one party has an exclusive bargain, but other
doesnt
2. Indefiniteness raises concern that one party has promised nothing
a. Example: promise to buy all that you produce, but you produce nothing
so I buy nothing
iv. UCC 2-306
1. Applies to dealers and distributors, as well as manufacturers
2. Comment 2 implies good faith outputs and requirements
a. Good faith variations permitted
b. Minimum or maximum sets limits on intended elasticity
i. Morin Building Products v. Baystone Construction (7th Cir.)
i. Owner GM hires prime Baystone to build addition prime contracts sub Morin to build
the aluminum siding
1. K said mill finish to match finish and texture of existing metal siding
2. Owner rejects Morins walls; Baystone refuses to pay Morin
ii. Satisfaction clause: if dispute over quality or fitness of materials or workmanship,
decision as to acceptability rests strictly w/ owner
1. Work should be first class and what is usual or customary for other
buildings is not part of the decision

4
III.
2. Decision of architect in matters relating to artistic effect final

3. Clauses came out of form K
4. Problem: how much discretion does owner have?
iii. Trial ct.: jury verdict for Morin
iv. Issue: was jury instruction that satisfaction clause be evaluated using an
objective, reasonable person standard proper?
1. Difference b/w aluminum siding (commercial job) and a portrait painting
(personal aesthetics/artistic effect)
a. Buying a portrait to be happy
v. R 228: satisfaction of a reasonable person in the obligors position
1. Subjective standard more likely to be applied for personal services
vi. Holding: K states satisfaction based on aesthetics, but K is ambiguous and
probably didnt intend to subject subs work to aesthetic whim
1. If it had been about aesthetics, rejection of subs work wouldve been proper
even if unreasonable, as long as in good faith
2. GMs objective was to build auto plant, not build piece of art
3. Morin wouldve demanded premium if subjective std.
4. Objective reasonable person std. when K involves commercial quality,
operative fitness, or mechanical utility
j. Locke v. Warner Bros (CA)
i. Two agreements:
1. Eastwood and Warner Bros
a. Eastwood agreed to pay WB if Locke didnt succeed in getting films
produced and developed
b. Locke unaware of this agreement
2. Warner Bros and Locke (agreement in dispute)
a. Locke essentially doesnt need to do anything and WB will pay her
$250K/yr for 3 yrs supposed to submit ideas WB can approve or reject
b. Pay or play: if they take on one of her ideas, they can either pay her
$750K or use her as the director
ii. Background: Locke and Eastwood divorce
1. Locke sues Eastwood for compensation owed, and Eastwood secures an
agreement for Locke w/ WB in return for her dropping the suit against him
iii. Four claims: sex discrimination, breach of good faith, breach of K, fraud
1. Violation of positive law (sex discrimination) doesnt necessarily = breach of
K
iv. Trial ct: granted MSJ in favor of D Warner Bros.
v. Holding: reverse MSJ on breach of K and fraud claims
1. Evidence shows that WB may never have intended to accept any of Lockes
proposals
a. She was K-ing for opportunity to make movies w/ WB in order to
get the experience to make movies elsewhere in the future
b. WB could reject based on subjective dissatisfaction, but can breach K
if didnt consider proposals in good faith
2. Trial ct. failed to differentiate subjective decision v. right that dissatisfaction be
genuine
WARRANTIES
a. Caveat Emptor

5
b.
c.
d.
e.
i. Classical rule: Chandelor v. Lopus

ii. Now implied warranties in Ks for sale for sake of high speed, high volume commerce
1. Implied by legislature
Warranty of merchantability: UCC 2-314
i. Goods quality and fit for ordinary purpose
Warranty of fitness for a particular purpose: UCC 2-315
i. Goods are not fit for the buyers purposes
Express warranties: UCC 2-313
i. (1)(a) Any affirmation of fact or promise made by seller to buyer that relates to goods
and becomes basis of bargain
ii. (1)(b) Any description of goods made part of basis of bargain
iii. (1)(c) Any sample or model made part of basis or bargain
iv. (2) Doesnt have to use formal words; can be oral
1. More than mere puffery
v. Comment 3: buyer doesnt need to rely on fact, just needs to show affirmation
Warranty of habitability
i. Javins v. First Natl Bank Corp (D.D.C.)
ii. URLTA
f. Bayliner Marine Corp v. Crow (VA)

i. Crow bought a boat from Bayliner based on a test run of a model boat and prop
matrix stating the boat (w/ 600 lbs. of equipment) would reach 30 mph
ii. His boat is customized (w/ 2000 lbs. of equipment) and only reaches 13 mph
iii. Bayliner repairs boat on multiple occasions and gets speed to reach 24mph once and
consistently only 17 mph
iv. Dealer contacts Crow and tells him matrixes misrepresented the max speed, which is
really only 23-25 mph
v. Dealer made no express warranties, but buyer felt the prop matrixes were an
express warranty
vi. Trial ct: agreed w/ buyer and entered judgment for P
vii. Holding: no express warranty was made to P; prop matrixes were an express
warranty limited to those exact makes and models
1. Buyer didnt make his intended usage known to seller so there is no implied
warranty of fitness for a particular purpose here
2. UCC 2-313: anything express can be an express warranty; dickered aspects of
bargain (comment 1)
a. (c) If model had a speedometer that could have been an express
warranty
b. Representation, description, sample/model
3. UCC 2-314: ordinary purpose
a. Applies to merchants, but doesnt need to be commercial transaction
i. (2)(a) Pass w/o objection in the trade?
ii. (2)(b) Fungible goods of average, fair quality
iii. (2)(c) Fit for the ordinary purpose for which such goods used
iv. (3) Others may arise from course of dealing, trade usage
b. Comment 4: if not merchant UCC 2-314 serves as guide to resulting
express warranty
c. Its a boat and it stays afloat so suitable for fishing

6
i. Crows intended usage is irrelevant; fulfills the expectation of a
reasonable buyer
d. 850 hours of usage suggests it is being used for its ordinary purpose
4. UCC 2-315: particular purpose, not ordinary
a. Buyer must make purpose known to seller for this to apply
b. Not limited to merchant sellers
c. Warranty created only if rely on sellers skill or judgment
g. Disclaimers; UCC 2-316
i. Express warranties:
1. UCC 2-316(1): disclaimer of express warranty is inoperative if cannot be
construed consistent w/ terms in K that create express warranty
2. Existence may turn on application of parol evidence rule (subject to UCC 2202)
ii. Implied warranties:
1. Requirements: UCC 2-316(2)
a. Merchantability: must mention merchantability and in case of
writing must be conspicuous
b. Particular purpose: can be less specific, but must be in conspicuous
writing
2. Other ways to disclaim: UCC 2-316(3)
a. Can exclude w/ as is language
i. Most say have to be conspicuous
b. Can exclude or modify w/ course of dealing or performance and trade
usage
i. Example: no warranties extend beyond description on face
h. Caceci v. Di Canio Construction Co (NY)
i. Have to redo foundation of house four yrs. after house built b/c builder built on
decomposing soil
1. Builder had guaranteed for one year from title closing; title closed 1977
2. Repairs ($57K) more than house is worth ($55K)
ii. Builder does repairs four years after title closes in 1981
1. Hires firm who finds out house placed on bad soil
iii. Holding: adopts implied housing merchant warranty
1. Two components: (may be two separate warranties)
a. Constructed in skillful manner
i. Manner in which work is performed
ii. May include defects that dont render house uninhabitable
b. Free from material defects
i. End result
2. Merger clause, for one year from title closing, has no legal effect wrt latent
defects
a. Latent defects would not be exposed through a reasonable inspection
b. Against public policy, illusory, and self-contradictory
3. What reasonable builder shouldve known
a. Sellers knowledge is not important
b. Want to encourage them to find problems
4. Fact that builder came back willingly time and time again to fix floor suggests
implied term

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IV.
5. Disclaimers can be used, but viewed w/ suspicion

iv. Extensions and limitations:
1. Doesnt apply to non-merchant owner who sells home
2. May extend to lenders when involved in construction
3. Divided on whether applies to commercial buildings
AVOIDING ENFORCEMENT
a. Sometimes otherwise enforceable bargains are voidable
i. One party lacked ability to assent b/c of lack of capacity (age/mental infirmities)
ii. Procedural, process unfair to one party (duress, undue influence, misrepresentation,
fraud)
iii. So unfair shouldnt enforce (unconscionability)
b. Minority or infancy doctrine
i. Traditionally K voidable by minor, but power to affirm upon reaching majority; R 14
1. Very restrictive: no restitution unless minor misrepresented age or willfully
destroyed the property
2. Justified on ground didnt have judgment to protect themselves in market place
ii. Today less justification given sophistication of teenagers and great involvement in
consumer marketplace
1. More minor understood and exploited party, less sympathetic ct.
2. Some Js: minor who misrepresents age can still disaffirm, but may be liable for
tort for fraud
iii. Dodson (P) v. Shrader (D) (TN)
1. 16-yr. old Dodson borrowed money from girlfriends grandmother to buy car
2. Runs it into the ground; w/in 9 mo takes in for service, cant afford burnt valve
repairs
3. Calls Shraders and wants money back
4. Parks car in parents front yard, gets hit by passing car
a. Originally worth $5000, now worth $500
5. Two rules:
a. Benefit rule
i. Focused on value minor got from K
ii. Lease payments for similar vehicle
b. Use rule
i. Focus on depreciation
ii. What can potentially be returned?
6. Holding: throws rules togethermodified use rule
a. If minor hasnt been overreached, no undue influence, K fair and
reasonable, minor actually paid, and took and used article,
b. Then minor must provide reasonable compensation for use,
depreciation, and willful or negligent damage
i. Doesnt apply if fraud or unfair advantage over minor
c. Remand
i. Findings on gross negligence wrt valve damage
ii. Review tortious counterclaim
iv. Minor liable for reasonable value of necessaries; R 12 comment f
1. Parents responsible if minor cant pay
2. Not true rescission b/c cant take them back
v. Mere ignorance of minors age no defense to disaffirmance

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vi. Minor must disaffirm w/in reasonable time
1. Depends how fast will depreciate
vii. Statutory limits:
1. Still bound to checking account if under 18
2. If statute says age is irrelevant, cannot use minority to avoid K.
viii. Courts split on pre-injury exculpatory agreements
ix. Courts split on effect of marriage and capacity to K
x. Mills v. Wyman reconsidered:
1. Make Levi a minor, different case?
2. Wanted compensation for alcohol, lodging, necessaries
3. Now a K, instead of restitution
c. Mental Incompetence
i. Hauer v. Union State Bank of Wautoma (WI)
1. Motorcycle accident results in brain injury
2. Guardianship eventually terminated after physician writes letter
3. Living off mutual fund of $80K
4. Bank loans Eilbes $7600 to start small business, defaults on loan
a. Suggests to Hauer that she take out short-term loan and invest in
company using stocks as collateral
b. Promises to give job, pay interest on loan, and pay loan off when due
5. Schroeder (banker) called Hauers financial advisor
a. Concedes possible told him about Hauers brain damage
b. Was told Hauer needed interest income to live on
6. When loan matured, Hauer sued and tried to disaffirm
a. Jury finds Hauer lacked capacity and bank failed to act in good faith
7. Bank claims lack of evidence, asserts estoppel based on end to guardianship
(objective standard)
8. Holding: affirms incompetence; adopts traditional cognitive test
a. Whether person involved knew what he or she was doing and nature
and consequences of the transaction; 15(1)(a)
b. Finds jury had credible evidence
i. Under guardianship one-yr. before loan
ii. Lacked understanding of nature of transaction
1. Thought she was co-signing for Eilbes
iii. Expert found Hauer very gullible
c. Minority doctrine doesnt apply b/c adult incompetents subject to
different degrees of infirmity
i. Avoidance must accord w/ equitable principles
1. Traditional rule: K not voidable if parties cant be
returned to original positions; R 15(2)
a. Exceptions:
i.
Breach of good faith
ii.
Unfair terms/consideration
iii.
Knew or shouldve known of
incompetence
d. Breach of good faith tied up in constructive knowledge of Hauers
condition
ii. Restatement test:

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1. Adopts traditional cognitive test, but also incorporates a reasonable test;
15(1)(b): qualified volitional test
a. Unable to act in reasonable manner wrt transaction and other party
has reason to know
b. Person may understand what he is doing, but lack control
c. Did they understand (cognitive)? Were they able to act (volitional)?
2. Example: old lady changes life insurance to no death benefit w/ larger annuity
after stroke, unable to change back b/c of nervous breakdown and prospect she
will die before husband, company knows about it
iii. Burden of proof generally on party seeking to avoid K; presumption of competency
d. Duress and Undue Influence
i. Legally unenforceable b/c of process by which K was made
ii. Traditionally courts refuse recognize undue influence unless confidential relationship
iii. Modern approach: broader definition of threat and undue influence; has been applied
to situations where no confidential relationship
iv. Totem Marine Tug v. Alyeska Pipeline (AK)
1. Totem Marine shipping load from Houston to AK via Panama canal
2. Supposed to load 6,000 tons of material on West Coast
3. Stopped in Houston and had to reconfigure barge to load 7,200 tons of
haphazardly stacked steel beams, etc.
a. Took a long time to load b/c Alyeskas delay in assuring Totem it would
pay additional expenses, bad weather, etc.
4. Alyeska unloads barge in CA and terminated K w/ explanation
5. Totem wanted reimbursed for $300K
a. Alyeska admits owes money, says will pay in day to eight mos.
6. Had to take $97.5K from Alyeska or go bankrupt (ultimate threat to co.)
a. Possible accord and satisfaction
b. Perfectly legitimate tactic to avoid litigation, unless in bad faith
7. Totem sues to rescind settlement based on economic duress
8. Holding: duress is improper threat that overbears the will
a. Elements:
i. One party involuntarily accepts terms of another
1. Did against will, will being $300K instead of $97.5K
ii. Circumstances permitted no reasonable alternative
1. No time to go to court, bankrupt in 30 days when
payments due
iii. Such circumstances result of coercive acts of other party,
not Ps necessities
1. No alternative b/c Alyeska was one who terminated K
and jerked Totem around by withholding payment
b. Alyeska doesnt have to admit to owing precise sum, just
approximately what Totem thought
v. When duress makes K voidable; R 175
1. Less emphasis on free will element (involuntary acceptance of terms)
2. (1) Wrongful/improper threat, (2) no reasonable alternative, (3) actual
inducement (subjective standard; is this particular victim induced?)
a. Reasonable alternatives:
i. Use of legal action if possible

0
ii. Alternative sources of goods, services, or funds
iii. Toleration if threat involves minor vexation
vi. Improper threat; R 176
1. (a) Crime or tort
2. (b) Criminal prosecution
3. (c) Use of civil process in bad faith
4. (d) Threat is breach of duty of good faith and fair dealing under K
5. (2) Resulting exchange not on fair terms, and:
a. (a) Harm recipient w/ no gain for party making threat
b. (b) Effectiveness increased by prior unfair dealing
c. (c) Other illegitimate use of power
vii. K under economic duress voidable rather than void
viii. Most courts require causal link b/w coercive acts and financial hardship
1. Selmer Co. v. Blakeslee (7th Cir.)
a. Posner: just b/c agree to settlement b/c desperately need cash is not
basis for duress
ix. Rationale: excessive gain resulting from exploitation of impaired bargaining-power
x. Criticisms:
1. Undermines autonomy or free-will that makes economic system work
2. Can only use as band-aid, cant work all the time
3. Settlements or bargains b/w parties w/ disparity in bargaining power not
inherently bad in market
e. Odorizzi v. Bloomfield School District (CA)
i. Gay bar sweep likely, no facts about being involved w/ student
ii. Day after being arrested and charged w/ homosexual activities, Odorizzi submits
written and signed resignation
1. Superintendant and principal came to house, told events wouldnt be
publicized if resigned immediately
2. K in question is resignation
iii. Odorizzi claims K voidable b/c of duress, fraud, and undue influence
iv. Holding: no duress or fraud
1. No duress b/c threat of civil action was not in bad faith
a. Initiating dismissal proceedings under education code was not only
legal right, but positive duty
2. No fraud b/c Odorizzi failed to allege that school officials knew falsity of
statements
a. No constructive fraud b/c no confidential relationship b/w employer
and employee (very arms-length)
3. Finds undue influence: over-persuasion that overcomes will w/o convincing
the judgment
a. Doesnt require misrepresentation
4. Existence of dominant and servient party is key element; R 177(1)
a. Could be lesser weaknesses such as elderly, sick, other forms of
lessened capacity
i. Here, exhaustion and emotional turmoil of Odorizzi
b. Often confidential relationship, but trust is important
5. Over-persuasion factors:
a. Discussion of transaction at unusual time

1
i. Didnt sleep for forty hours
b. Consummation at unusual place
i. Negotiation terms of employment at his house
c. Insistent demand business be finished at once
i. Said he needed to resign immediately
d. Extreme emphasis on untoward consequences of delay
i. If didnt resign at once, they would fire him and publish
wouldnt get another job
e. Multiple persuaders by dominant party against servient party
i. Principal and superintendant v. Odorizzi
f. Absence of third-party advisors
i. Just Odorizzi
g. Statements no time to consult financial advisors or attorneys
i. Told him there was no time to consult attorney
ii. Like seduction v. rape, manner is important w/ undue influence
v. Odorizzi and duress:
1. Court used much narrower definition than R 176
2. CA duress now encompasses wrongful threats that leave victim w/o reasonable
alternatives
a. Dont resign never get another job
b. Could threaten lawsuit, but will publicize and get no job still
3. R 176(1): improper threat
a. Bad faith threat of civil process wrt firing (knew charges were going to
be dropped?)
b. Breach of duty of good faith wrt employment K (publicizing)
4. R 176(2): resulting agreement unfair (substantive)
a. Odorizzi doesnt want to argue unfair, he doesnt want agreement b/c
process unfair
f. Misrepresentation and Non-Disclosure
i. At time K is formed!
ii. Choice b/w two significant avenues of redress: tort action for damages or right to
avoid K by rescission
iii. Rescission can be defense to action to enforce or affirmative action seeking
restitution of benefits conferred
1. Requires injured party to return any money or property received
2. May not be allowed if injured party unable to return property received
iv. R 164(1) broader than Syster: misrepresentation may be material or fraudulent as
long as party justified in relying
1. Fraudulent; R162(1): intends assertion to induce assent
a. (a) Knows or believes not in accord w/ facts
b. (b) Doesnt have confidence he states or implies
c. (c) Knows doesnt have basis for assertion
2. Material R 162(2): likely to induce reasonable person or maker knows it will
likely induce person
v. Syester v. Banta (IA)
1. Widow living alone who buys 4,000 hours of dance instruction for $33K
2. Syester wants to get out of release, claims fraudulent misrepresentations

2
a. Can then assert tort claim for damages based on fraud in inducing her
to enter dancing Ks
3. 1st release: manager of studio convinces her at home to discharge her counsel
and agree to settle for refund of $6,000
4. 2d release: signed note to pay them $4,000!
5. Holding: jury needed to find (1) concerted effort, (2) lacking in propriety, to
(3) obtain releases as to constitute a fraudulent overreaching
a. Evidence was sufficient to find fraudulent representations
i. Mr. Carey told her at her job she still had ability to be
professional dancer
ii. Told her she didnt need a lawyer b/c he and studio manager
only friends
iii. Implied he had romantic relationship w/ her
b. Two damage options: out of pocket and benefit of bargain
i. Benefit of bargain rule: sounds like K, but many courts may
apply in tort
1. Depends on bargain she was seeking
2. Professional dancer or seeking companionship of Mr.
Carey?
ii. Out of pocket rule: difference b/w value she paid and what she
received
1. No value for what she was seeking (making progress
toward becoming professional dancer)
c. Court committed to benefit of bargain rule
i. Verdict for Ms. Syester for $14K
ii. Knowingly overcharged $20K
iii. Possible jury factored in value of Ms. Syesters enjoyment
iv. Also got $40K in punitive damages
vi. Restatement and Syester:
1. Misrepresentation:
a. Fraudulent: told her she could be professional dance and knew it wasnt
true; R 162(1)(a)
i. Made it w/ intention of inducing her to sign release
b. Material:
i. Knew telling her she could still be professional dancer and
hinting at romantic relationship would likely induce her to sign
release; R 162(2)
ii. Not reasonable though? She knows already sued them once!
2. Undue influence
a. R 177(1):
i. Mr. Carey dominant party v. Ms. Syester servient party due to
romantic overtones
1. Fact that brought Mr. Carey back to persuade her
implies dominant/servient relationship
ii. Justified in assuming Mr. Carey wouldnt act inconsistent w/
her welfare?
1. Justified to her given romantic overtones?

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b. Odorizzi elements:
i. Discussion of transaction at unusual time
1. Mr. Carey showed up at Ms. Syesters workplace
ii. Consummation at unusual place
1. Danced together for 45 minutes right before
settlement was signed!
iii. Use of multiple persuaders by dominant party against servient
party
1. Mr. Carey and Mr. Theiss in on it together
iv. Statements there is no time to consult financial advisors or
attorneys
1. Not no time, but told her she didnt need lawyer
vii. Assertion of opinion; R 169
1. Claim just opinion or puffing v. statements of fact?
2. R 168(1): opinion is an implied representation (quality, value, authenticity)
a. R 168(2): if reasonable, party may interpret as assertion that:
i. (a) Facts known are not incompatible w/ his opinion
1. Mr. Carey knew Ms. Syester old lady
2. Admitted Ms. Syester wasnt progressing
ii. (b) Knows facts sufficient to justify opinion being formed
3. Reliance on opinion not justified unless: R 169
a. Relationship of trust and confidence such that reasonable to rely on
opinion
i. Romantic relationship, teacher-student relationship
b. Reasonably believes person has special skill, judgment, or
objectivity wrt to subject of opinion; or
i. Mr. Carey is professional dance teacher
c. Particularly susceptible to misrepresentation of type involved
i. Lonely widow
viii. Hill v. Jones (AZ)
1. Hills enter into K to purchase Jones home for $72K
2. Agreement provided sellers were to pay for and place in escrow a termite
inspection report
3. During inspection Mr. Hill asks if ripple in dining room step termite damage
Mr. Hill had seen such damage before as janitor
a. Mr. Jones said it was water damage
4. Mr. Hill decided that report would establish if damage or not
a. Report came back w/ no termite damage
5. After moving in Hills find out $5,000 in termite damage
a. Also find out that there was past damage and treatment that Jones
never disclosed
6. Inspector returned and found out that he didnt find damage b/c boxes and
plants were covering the infested areas
7. Want to rescind K (so they can get rid of house), but K included merger clause
a. Jones argue K is completely integrated, misrepresentation after the fact
b. Hills claim not bound by K until satisfactory termite report

4
8. Holding: seller has duty to disclose material facts; merger clause cannot free
one from own fraud (parol evidence exception)
a. R 161(a): non-disclosure is assertion if knows disclosure of fact is
necessary to prevent some previous assertion from being a fraudulent
or material misrepresentation
b. If Mr. Jones doesnt disclose past termite damage, then assertion that
house is free of termites and/or ripple was water damage would be
fraudulent and material
i. Fraudulent R 162(1)(a): knows about termite damage past and
present
ii. Material R 162(2): knows it would likely to induce them from
buying home b/c Mr. Hill said he was going to rely on termite
report!
c. More generally, court adopts FL rule: seller of home under duty to
disclose facts materially affecting value of property which arent
readily observable and unknown to buyer
i. Existence of termite damage past or present is material
ix. R 161
1. (a) Knows fact necessary to prevent previous assertion from being fraudulent
or material misrepresentation
2. (b) Knows fact would correct assumption and non-disclosure is breach of
good faith and fair dealing
a. Broader basis for relief
3. (c) Knows fact would correct mistake as to contents or effect of writing
4. (d) Entitled to know b/c of fiduciary relationship
5. Doesnt cover innocent non-disclosures!
a. Different case if Jones didnt know about termite damage
b. Possible tort liability for non-disclosures though
x. Laidlaw v. Organ
1. 1817 large sum of tobacco
2. War ends, tobacco worth more, seller wants out of K
3. Asked if any information calculated to enhance price or value
a. R 161(b): not responding is bad faith, shouldve written back and told
seller to do more research
4. Case shows how courts are inclined to distinguish b/w information that one
party shouldve known from information other parties have
xi. Prof. Keeton fairness factors: (applied to Hill)
1. Difference in degree of intelligence of parties
2. Relation of parties to each other
3. Manner in which information acquired
a. Hills discovered hard way, didnt hire somebody to do their own
research
4. Nature of fact not disclosed (latent defect not reasonably discoverable)
a. Termite damage hard to uncover if not trained eye
5. More likely seller must disclose than buyer
a. Jones were selling home to Hills
6. Nature of K
a. K included requirement of termite report

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xii.
xiii.
xiv.
xv.
i. Would expect seller to disclose past termite damage then

7. Importance of fact
a. Wooden home, termite damage
8. Active concealment
a. Evidence used boxes and plants to conceal
Economics
1. Kronman says courts should favor non disclosing information obtained
through deliberate and costly investigation
a. As opposed to acquiring by chance
Disclaimer or merger clause
1. Unlike Hill, some courts find if disclaimer is specific then cant rely on oral
representations
Fiduciary relationship; R 161(d)
1. Special relationship of trust and confidence; R 173
a. Lawyer-client, trustee-beneficiary, etc.
b. Mere friendship not enough
i. One party reposes trust, other accepts and fosters
Park 100 Investors v. Kartes (IN)
1. Kartes owned a video store, KVC; Park 100 leases commercial real estate
2. Kartes Ks w/ Park 100 to lease space for growing business.
3. Park 100 brought suit to collect unpaid rent from Kartes under signed personal
guaranty
4. Ps rep. came day before lease began for Ds to sign more lease papers
a. Potential issueits been yrs. how do Ds remember exactly what Ps
rep told them they were signing?
5. Ds called their lawyers who told them to sign
a. Ds had a rep. negotiate lease for them
6. Ds just leaving to go to daughters wedding rehearsal and were running late
a. Rep. told Ds their signatures were needed in order to move in the
following day
7. Ds signed a personal guaranty; Ps rep never told Ds this was what signing
8. After some yrs. go by, P sends D their tenant agreement and Ds refuse to
affirm the personal guaranty
9. Ds then sell KVC and buyers fail to pay P; P sues Ds
10. Holding: affirm fraud b/c papers misrepresented to Kartes who relied believing
only signing a lease
a. Rep had a duty to inform the Kartes of what they were signing
b. Elements of fraud: (must prove all)
i. (1) Material misrepresentation of past or existing fact by the
party charged, which:
1. Said more lease papers
ii. (2) False
1. Werent lease papers; was personal guarantee
iii. (3) Knew or shouldve known was false
1. Appears knew; did it right before Ds leaving for
wedding rehearsal
iv. (4) Relied upon
1. Relied on lawyer, not Park 100

6
v. (5) Proximately caused the complaining partys injury
11. Park 100 is fraud in execution (so was Ray v. Eurice Bros.)
a. Sherrod, Syester, and Hill represent fraud in the inducement
12. Misrepresentation justifies reformation; R 166
a. Recipient justified in relying upon
b. Extent 3d parties as good faith purchasers not unfairly affected
13. Dont assume family business = small business (Hilton)
14. Dont assume small businesses are weak or unsophisticated
g. Unconscionability
i. Procedural and substantive elements
1. Minority, mental capacity, duress, undue influence, and misrepresentation are
only procedural
ii. Does it shock the conscience?
1. Everyone must react the same, must think it is a grossly unfair bargain
iii. Must be unconscionable at time K entered into
1. R 208:
a. Matter of law for judge to decide
b. May refuse to enforce whole K
c. May enforce w/o unconscionable term
d. May limit application to avoid unconscionable result
2. UCC 2-302
a. Matter of law for judge to decide
b. Opportunity to present evidence regarding commercial setting,
purpose, and effect
c. Same enforcement options as R 208
d. Some courts find unconscionability a defensive concept
iv. Williams v. Walker-Thomas Furniture (DC)
1. Store sends sales reps. out to houses of welfare recipients right after welfare
checks are received every mo.
a. Sold welfare recipient an item more than two times value of welfare
check when needs check to pay for necessities for her and her kids
2. Purchase items from seller and make mo. payments, but cross collateral
provision (add-on clause) in K keeps a balance due on every item purchased
until the balance on all items is liquidated
3. Buyers defaulted and seller seeks repossession of all items purchased from
them; buyers appeal when trial ct. finds in favor of seller
a. DC hasnt adopted UCC 2-302
4. Holding: reversed and remanded; trial ct. can determine whether
unconscionable
a. Procedural: absence of meaningful choice for one party
i. All circumstances surrounding transaction
1. Shes on welfare $218 per mo.
2. Seven kids to feed
ii. Negated if gross inequality of bargaining power (one-sided
bargain)
1. Walker-Thomas knew situation
a. Almost done paying off and sold her new item
iii. Important terms hidden or minimized

7
1. Hidden in long K
iv. Reasonable opportunity to understand terms
1. Education of parties may be significant
b. Substantive: K terms unreasonably favorable to other party
i. Outcome of enforcing K term
1. Unable to pay her kids will sit on floor b/c going to take
all her furniture
ii. Fairness of terms considered in light of commercial background
and needs of trade
1. Nobody wants used furniture; Walker Thomas has to
protect itself by getting back before depreciates
c. Dissent: believes policy decision not for court to decide
v. Ahern v. Knecht (IL)
1. A/C breaks during heat wave and P picks repair co. out of phone book based
on claim of honesty
2. Charged $762 when services really only worth $150; demanded check before P
left for doctors appointment
3. Left A/C inoperable; hired someone else who did it for $72
4. Holding: K unconscionable; took advantage of condition, circumstances or
necessity of other parties
a. Heat wave, P didnt know anything about A/C and relied on repair guy
5. Excessive price may be a basis for finding unconscionability
a. Some empirical evidence under UCC people feel greater than
100% objectively unconscionable
b. But in Batsakis ct. refused to consider adequacy of consideration
c. Market changes allow rates to increase or decrease
vi. Goals of Consumer Protection Legislation:
1. Greater disclosure to consumers so they are more informed
2. Substantive regulation- unfair K terms are unlawful
3. Improve enforcement
vii. Higgins v. Los Angeles County (CA)
1. Before moms funeral five kids dad dies
2. A church family, the Lemoitis, adopts orphans; Extreme Home Makeover
contacts family about renovating familys home
3. EHM offers K w/ 24 single-spaced pages and 72 numbered paragraphs
a. Said in all caps: do not sign this until you have read it completely
4. Paragraph 69 included arbitration clause:
a. EHM could seek injunctive or other equitable relief while kids cannot
b. Contained in last section of K among 12 numbered paragraphs, w/o
titles or headings
c. No different font or caps used; didnt contain box to initial
i. Six other paragraphs in K had box to initial
d. Said I agree, instead of parties agree
5. One orphan, Charles (21-yr. old), served as guardian for three minor orphans
a. Told to flip through and sign K
b. Ten minutes b/w being handed K and signing
c. Didnt know what arbitration clause was; or other legal terms

8
6. EHM took three-bedroom house and turned it into nine-bedroom house (one
bedroom for each orphan, plus familys children); also paid off mortgage
a. Show first aired on Easter Sunday; Leomitis said home theirs; kicked
orphans out afterward
b. EHM continues to air episode anyway
7. Issue: arbitration clause unconscionable?
a. Orphans want jury trial b/c more sympathetic party
8. Holding: arbitration clause unconscionable
a. (1) Adhesion K
i. Form K
1. Big company w/ long form; 72 paragraphs
ii. Disparity in bargaining power
1. TV co. v. orphans
iii. Take it or leave it language
1. If dont sign, dont get on show
2. No prior negotiations; told to flip through and sign
b. (2) Procedural unconscionability
i. Entire agreement drafted by stronger party
ii. Clause appears near end of lengthy, single-spaced document
1. Not titled, in miscellaneous section
iii. Had to initial multiple clauses in K, but not the arbitration
clause
iv. Vulnerable and unsophisticated party doing signing
1. TV co. knew this
c. (3) Substantive unconscionability
i. One sided
1. Says, I agree, not the parties agree
2. Only requires orphans to submit their claims to
arbitration; TV co. free to sue in court
3. Orphans cant appeal arbitrators decision, while TV co.
can appeal if lose in court
ii. Excessive costs to party requesting relief
9. Although ABC is giving the home as a gift, trying to profit off of the most
vulnerable ppl. they can find
viii. Arbitration clauses look good, but it is actually not as prompt or inexpensive as ppl.
think and consumer rarely chooses this method
1. Lack of formal rules and preclusion from suing via class action make this not
an attractive option
JUSTIFICATION FOR NONPERFORMANCE

I.
MISTAKE
a. Mistaken belief using language w/ same intention (Frigaliment)
i. Judicial response usually to choose one of intended meanings and apply it
b. Lenawee County v. Messerly (MI)
i. Pickles bought 600-square-foot tract of land from Messerlys, w/ three-unit apartment
building situated on it
ii. Barneses assigned all interest in property to Messerlys using quit-claim deed

9
iii. Pickles inspected land and purchased it for $25K
iv. Six days after buying land, Pickleses discovered raw sewage seeping out of ground
1. Previous owners the Blooms installed nonconforming septic tank w/o permit
2. 2500 square-feet of property needed for three-unit dwelling!
v. Lenawee County condemned property: injunction prohibiting human habitation until
sanitation unit is brought up to code
vi. Pickleses stopped paying and Messerlys filed complaint seeking foreclosure
vii. Pickleses counterclaimed for rescission, misrepresentation against Barneses
viii. Trial ct.: neither party knew of Blooms mistakes w/ septic tank no fraud or
misrepresentation
1. Property bought as is
ix. Appellate ct.: mutual mistake b/w Messerlys and Pickleses
x. Holding: mutual mistake, but allocation of risk via as is clause
1. Mistake: belief not in accord w/ facts; R 151
a. Must relate to fact in existence at time K entered into (execution)!
i. Noncompliant septic tank at time K entered into
ii. Income-producing capacity of property in Q?
1. Mistake AFTER K signed
2. Sewage wasnt seeping out of ground when K executed
2. A & M Land Development
a. P bought 91 lots, but could only develop 42 b/c couldnt obtain septic
tank permits for the other lots
b. Ct. refused to allow rescission: got what K for just less valuable
3. Sherwood
a. Barren Cow Case
b. Parties agreed to sell cow which both thought was barren
c. Seller found out cow fertile
d. Barren = $80; pregnant = $750
e. Ct. granted rescission; said animal K for was not in existence
4. Court references old common law distinction b/w quality or value v. essence
of consideration
5. Ultimately goes w/ case-by-case analysis of R 152:
a. Mistaken belief at time K entered into
i. Thought that there was compliant septic tank
ii. Blooms installed noncompliant tank w/o permit
b. Relates to assumption on which K was made
i. Would be habitable by humans
c. Materially effects agreed performances
i. Land has no value, people cant live there
d. Unless party bears risk of mistake; R 154
i. Allocated by agreement
ii. Examined property and accepts in present condition
e. Pickleses stuck w/ as is clause in K R 154(a)
i. (b) Aware limited knowledge wrt facts to which mistake relates,
but treats as sufficient
1. Mr. Pickles asked Barneses about septic tank and they
told him they cleaned it once w/o problems
2. Also, quit-claim deed (as is deed)

0
c.
d.
e.
f.
g.
xi. Reasonable under circumstances to bear risk

xii. Correctly decided?
1. Most people expect reasonable inspection of improvement to real property
a. Not septic tank (unless inspector involved)
Law and Economics
i. More modern law is if nobody knows put on seller
ii. Lack of consistency in mistake cases
iii. Gartner v. Eikill (MN)
1. Purchaser of land sought rescission by mutual mistake
2. Claimed unknown that land was subjected to past zoning restriction
a. K said seller would convey marketable title subject to zoning laws
3. Ct. allowed rescission, relying on Sherwood in part!
4. Difference b/w Lenawee:
a. Put on notice by zoning laws, shouldve checked
iv. Possible cases are backwards?
1. Could argue everybody shouldve seen it in Gartner
2. Latent in Lenawee
v. Risk allocation b/w cases right?
Conscious Ignorance; R 154(b)
i. Nelson v. Rice (AZ)
1. Representative of estate sold expensive paintings for $60 w/ getting them
appraised, actually worth more than $1 million
2. Aware of possibility worth more, but didnt bother
Mutual Mistake Written Expression
i. Remedy is reformation to express intent of parties
ii. Exception to parol evidence rule
1. E.g., promissory note fails to state correct interest rate
Equitable Relief Remedy for Mistake
i. Rescission + restitution that is appropriate
Wil-Freds, Inc. v. Metropolitan Sanitary (IL)
i. Wil-Freds answers Metros 11/26 ad w/ sealed bid and $100K
1. Rehabilitation of sand drying beds
2. Must remove clay pipe and old filter material, then replace w/ plastic pipe and
new material
3. Pipes must withstand standard construction equipment
4. Estimated cost $1.257 million
ii. 12/22: addendum changed material to less expensive type
iii. 1/6: bids close: Wil-Freds bid = $882K; next lowest = $1.118 million
iv. Wil-Freds president told chief estimator and Ciaglo to check figures immediately
after being notified on 1/6 that bid $235K below next co.
v. 1/8: realizes mistake made in sub Ciaglos bid
1. Ciaglo thought it could drive heavy construction equipment on filter bed
b/c ad said standard equipment
vi. 1/12 sends explanatory letter to Metro
1. Used Ciaglo in past, always performed skillful work acted reasonably in
relying on Ciaglos quoted price
vii. 2/26: after withdrawal denied, Wil-Freds files suit, alleging irreparable injury if
required to perform at unconscionably low price

1
1. Wants $100K security deposit back
viii. Issue: rescission due to unilateral mistake
ix. Holding: Wil-Freds granted rescission and gets security deposit back
1. Elements for rescission due to unilateral mistake:
a. Mistake at time K made
i. Ciaglo thought could use heavy equipment
b. Relate to material feature of K
i. Resulted in 17% decrease in Wil-Freds bid
ii. Severing ramifications v. magnitude
1. Other cases (Drennan) combine elements two and three
c. Reasonable care exercised
i. Wil-Freds never withdrew bid quote before
ii. Worked w/ Ciaglo on 12 previous ocassions
iii. Ciaglo inspected job site and examined specs. w/ Wil-Freds
estimators
iv. Wil-Freds made two separate reviews of bid
d. Enforcement unconscionable
i. Ciaglo not financially able to sustain $150K loss bankruptcy
ii. Wil-Freds would lose $2-3 million in bonding capacity if lost
security deposit
e. Other party can be placed in status quo
i. Mistake discovered w/in 48 hr. of bid opening, Sanitary District
awarded K to next lowest bidder
2. Mixed mistake of judgment and fact
a. Plastic pipes would support trucks judgment
b. But predicated on misleading ad by sanitary district fact
c. Facts surrounding error are what is important
d. Must be genuine + identifiable mistake, not a poor prediction wrt
outcome of K
h. Unilateral mistake elements; R 153
i. Mistake at time K made
ii. Relates to basic assumption
iii. Material effect on agreed exchange
iv. Doesnt bear risk of mistake under R 154; and either
1. Assumption wont back out of bid = bearing risk?
v. Unconscionable or;
1. Unconscionable = substantial loss
vi. Other party had reason to know or his fault caused mistake
i. R 157 doesnt require mistaken party to be nonnegligent
i. Only requires good faith and reasonable standards of fair dealing
j. Unilateral Mistake as to Content of Writing
i. Generally still bound by K if fail to read (Ray v. Eurice Bros.)
ii. Duty to read may be overcome by number of doctrines
1. Lack of capacity (Hauer), fraud (Park 100), or unconscionability (Higgins)
iii. Nauga v. Westel

2
II.
1. Nauga attorney added to proposed agency agreement clause requiring Westel

to pay $250K for settlement of all claims
2. Westels attorneys didnt notice and signed
3. Court enforced even though seemed harsh
4. No ambiguity, fraud, or mutual mistake present
k. Unilateral Mistake in Advertisement
i. Donovan v. RRL Corp. (CA)
1. Used Jaguar for sale in newspaper ad for $12K less than $38K due to errors
made by newspaper
2. Ad was considered offer (ads not usually offers though)
3. Holding: K, but subject to rescission by unilateral mistake
CHANGED CIRCUMSTANCES: IMPOSSIBILITY, IMPRACTICABILITY, AND
FRUSTRATION
a. Supervening event after K entered into!
i. Deprives party of apparent benefit fairly expected from original bargain
b. Impossibility: R 262-64; UCC 2-613
i. Taylor v. Caldwell
1. First exception to rule of strict K liability
2. Fountainhead of impossibility
3. Agreed to rent music hall, but burned down shortly before first performance
ii. Destruction (casualty): R 262, 263; UCC 2-613
1. Easy to apply w/ unique goods (racehorse)
2. Harder to apply w/ fungible goods
iii. Impossibility via government action: R 264; UCC 2-615(a) and comment 10
c. Frustration of purpose: R 265; UCC 2-615
i. Krell v. Henry
1. Sudden illness of King forced cancellation of coronation, making room
reservation useless
d. Impracticability: R 261; UCC 2-615-16
i. Mineral Park Land Co. (CA)
1. Agreed to purchase and extract all gravel from land at fixed prices required for
construction of concrete bridge
2. Removed all gravel from above water line, but removing below would cost 10
to 12 times as much
3. Extreme increase in cost justified nonperformance
e. Karl Wendt Farm v. Intl Harvester (6th Cir.)
i. Severe downturn in farm equipment market
ii. 1974 dealer sales and service agreement b/w Karl Wendt and IH
iii. IH negotiated an agreement w/ Case and Tenneco to sell farm equipment division
1. $479 million paper loss
iv. 400 conflicted areas were not given new Case dealership and Karl Wendt one
v. Wendt filed suit against IH, alleging breach of IHs dealer agreement
vi. IH relied on defenses of impracticability, frustration, and implied covenant limiting
duration of K
vii. Jury found for IH on impracticability, but directed verdict for Wendt on frustration of
purpose, and implied covenant limiting duration of K
viii. Holding: denies all defenses relied on by IH
1. No impracticability under R 261:

3
a. Occurrence of event
i. Fallout in farm equipment market
b. Non-occurrence was basic assumption of K
i. Continuation of strong farm equipment market not basic
assumption
c. Unless:
i. His fault
1. Not responsible for downturn, but responsible for
chosen remedy
2. What if economists said FOS farm equipment business
going south?
ii. Language of K
1. Agreement had detailed 6 mo. termination clause; UCC
2-309(3)
iii. Circumstances say otherwise
1. IH would avoid liability and Case would pick up only
dealerships it sees fit
2. Windfall for IH
d. Must be extreme and unreasonable difficulty, expense, injury, loss
i. Mere lack of profit due to market downturn not excuse; R 261
comment b; UCC 2-615 comment 4
1. IH claims losing $2 million a day and if division not
sold wouldve had to declare bankruptcy
ii. Severe shortage of raw materials or supplies due to war,
embargo, local crop failure, unFOS source shutdown
iii. Different if corp. dead b/c no longer Q of profitability
2. No frustration of purpose under R 265:
a. Principal purpose
i. Purpose to establish dealer relationship b/w IH and Wendt
ii. Not mutual profitability
iii. That would be principal purpose of every K!
b. Substantially frustrated
i. Reduced profitability, but doesnt affect dealership relationship
c. By occurrence of event
i. Severe downturn in farm equipment market
d. Non-occurrence basic assumption of K
i. K didnt assume that market would continue to be strong
e. Unless:
i. His fault
1. Frustrating event actually IHs decision to sell farm
equipment business w/o following termination clause
ii. Language of K
1. Termination clause
iii. Or circumstances say otherwise
1. Purpose of doctrine to apportion risk as parties wouldve
for unFOS circumstances
3. No implied covenant limiting duration of K:

4
f.
g.
h.
i.
j.
a. IH argued that reserving right to terminate certain lines from dealership

agreement = right to go completely out of business
b. K provided for termination for cause!
c. Neither party anticipated IH would go out of business completely
d. Places all risk on dealer
ix. Dissent: Q of fact for jury whether no downturn was basic assumption of K
1. But under Restatement Q of law for judge
War and natural Disaster
i. Generally not allowed as excuses
ii. American Trading v. Shell (2d Cir.)
1. Denied relief when prices increased b/c Suez Canal closed due to war
2. Route not basic assumption of K
iii. Wolf Trap Foundation (4th Cir.)
1. Impracticability allowed when thunderstorm caused power outage at outdoor
theater
2. Dissent: Wolf Trap failed to provide for auxiliary power equipment
Impracticability and Terrorism
i. Bush v. ProTravel (NY)
1. R 261 comment d: may be impracticable b/c involve risk of injury
2. Sought refund for $1500 deposit on honeymoon safari trip mo. after 9/11
3. Claimed damage to telephone systems made it nearly impossible to contact
travel agents office in Manhattan and NYC under state of emergency
4. Ct. said she shouldve been able to prove temporary impossibility
ii. Scottsdale Road v. Kuhn Farm Machinery (AZ)
1. Good faith apprehension of terrorism danger to conference attendees traveling
on airline b/c of 1991 Gulf War
2. Not substantial enough for impracticability or frustration
3. Perception of danger must be objectively reasonable
Role of FOS
i. Relief under impracticability and frustration not denied just b/c event FOS
ii. R 261 comment c: other factors may explain failure to allocate FOS risk
iii. UCC 2-615 comment 1: unFOS supervening circumstances (may deny if FOS?)
Law and economics
i. Posner: allocate risk to superior risk bearer
ii. Not simply deepest pocket or bigger co.
iii. Party in best position to prevent event from occurring
iv. Or minimize consequences at lowest cost, usually by purchasing insurance
Mel Frank Tool v. Di-Chem (IA)
i. 1994: three-yr. warehouse lease to Di-Chem to use it for storing chemicals
ii. No evidence Mel Frank owner knew hazardous chemicals were going to be stored
1. Lease limited Di-Chems use of premises to storage and distribution
iii. Had to comply w/ all city ordinances
iv. Also destruction of premises provision
v. 1995: citys fire chief comes and inspects and finds not up to 1994 Uniform Fire Code
adopted by city
vi. Hazardous materials have to be removed w/in seven days to eliminate hazard
vii. Mel Frank and Di-Chem discussed splitting costs to bring up to code, but Mel Frank
thought too expensive

5
k.
l.
m.
n.
viii. End of Oct. Di-Chem vacates premises

ix. Mel Frank sues for breach of lease worth $55K, Di-Chem raises several defenses
x. Holding: no impracticability or frustration of purposes
1. Frustration due to government regulation (uses R 265 instead of R 264)
a. Change in circumstances makes one partys performance worthless to
other
b. Both parties understand that w/o object transaction makes little sense
i. Mel Frank didnt know about hazardous chemicals
2. Regulation indirectly affected principal purpose
a. Purpose of lease was to store chemicals, not just hazardous chemicals
3. No substantial frustration of purpose
a. Not substantial b/c can still store chemicals, not just hazardous ones
b. Di-Chem can still store its food additives
4. Cant claim impracticability or frustration when serviceable use still
available consistent w/ use provision of K
a. Less profitable or unprofitable doesnt = substantial frustration
5. Force majeure clause:
a. Total destruction of business use
b. Purpose of clause is building being damaged, not subsequent
government regulation prohibiting a particular use
xi. Law and economics: Di-Chem deals in chemicals, should be aware of regulations and
K to protect itself if regulations change
Government Regulation as Excuse
i. Courts much more willing to grant rescission over war, natural disaster, or market
change
ii. UCC 2-615 specifically mentions good faith compliance w/ government regulation
iii. R 264: performance impracticable b/c supervening regulation
1. Regulation goes to basic assumption of K
a. Mel Frank: basic assumption was being able to store chemicals, not just
hazardous chemicals
iv. Courts still impose stringent limits
1. Frustration must be quite substantial (Mel Frank said virtually worthless)
2. May deny relief if supervening regulation FOS or failed to guard against
Impracticability and Frustration under UCC
i. UCC 2-615 broad enough to encompass both impracticability and frustration
1. Addresses sellers breaching, but courts have given relief to buyers
a. Buyers K must in reasonable commercial understanding be conditioned
on specific venture or assumption
i. Example: war procurement subcontract when prime K subject
to termination
Force Majeure Clauses
i. Clauses that anticipate partial or total destruction of property
ii. Windstorm, fire, flood, other acts of God
1. Also may include strikes and labor disputes
iii. Clauses may be subject good faith, UCC 1-102(3), UCC 1-203, and unconscionability
provisions, UCC 2-302
Remedy
i. Normal remedy is rescission + restitution for benefits conferred (same as mistake)

6
III.
ii. Most courts uniformly reject reformation so performance obligation continues

1. Aluminum Co. of America v. Essex
a. Granted reformation of long-term K for supply of aluminum processing
services to account for costs increases
b. Increases not reflected in negotiated price increase formulas
2. No longer binding precedent b/c opinion vacated as part of settlement
MODIFICATION
a. Qs to ask:
i. Was there separate consideration for the modification?
ii. Did the parties agree to the modification under legitimate circumstances?
b. Preexisting duty rule; R 73
i. Performance of legal duty neither doubtful nor subject to honest dispute is not
consideration
ii. Slightly different performance if reflects more than pretense of bargain
c. Modification binding if: R 89
i. Equitable b/c unFOS circumstances
1. May apply even if impracticability defense wouldnt work
ii. Provided by statute
iii. Justice requires due to material change of position in reliance on promise
1. Promise means accepting reformation
d. UCC 2-209(1) dismisses pre-existing duty rule
i. Modification must abide by SOF
ii. Attempt at modification may amount to waiver of limitation on modifications or SOF
iii. Can retract waiver w/ reasonable notification that strict performance required
1. Unless unjust in view of material change of position
iv. Modification doesnt need consideration to be binding
v. Good faith bar to extortion of a modification without legitimate commercial
reason
e. Alaska Packers Association v. Domenico (9th Cir.)
i. Fisherman picked up in CA and taken to AK for summer season
ii. Promised $60 bucks per summer + 2 cents for every fish they catch
iii. About a mo. in they stop working and demand an additional $100 for the summer
1. Claim given rotten nets
iv. Document signed by shipping commissioner in AK who claimed he didnt have
authority to enter into K
v. Lower ct: improbable that nets were bad
vi. Holding: no consideration, court adopts preexisting duty rule
vii. Notes: historical research showed that nets may actually have been rotten
viii. What about the K terms, to do any other work whatsoever when requested?
1. Either its unconscionable or it should be read in context
2. On a ship, everyone depends on each other for survival; if the ship is sinking
and the captain orders you to do something, youre agreeing to this ahead of
time
3. Just read w/ regular ships duty
ix. Posner: not fair to allow a party to use a threat of breach to get the K modified in his
favor when nothing has occurred requiring a modification
f. Contempo Design v. Chicago Carpenters (7th Cir. 2000)

7
i. Unionized employees went on strike despite no strike provision at same time co.
was about to ink new K w/ major client Bank of America
ii. Employer agreed to pay raise and other benefits, but reserved right to sue
iii. Majority relied on Alaska Packers and adopted preexisting duty rule
iv. Dissent: would enforce b/c workers had good faith belief not bound by no strike clause
g. Mutual rescission
i. Some courts allow mutual rescission followed by new K
ii. Restatement says fictitious if rescission and new K simultaneous
h. Kelsey-Hayes v. Galtaco (MI)
i. KH makes brake assemblies for auto manufacturers (including big co. like Ford)
ii. G supplies KH w/ castings to make brake assemblies; G is only supplier to KH
iii. 1987: three yr. requirements K: I will make as much as you need
iv. 1989: G experiencing losses; KH aware of this; May 1989: Gs BOD makes decision
to cease producing castings.
v. May 10: G says it will stay in business for KH if agree to 30% $ increase
vi. KH agrees; would not be able to get a new supplier soon enough
1. Would halt brake production halt Fords vehicle production
2. KH reserved no rights to sue
vii. June 9: G will operate solely for KH if agree to additional 30% $ increase
1. Still no other supplier, so KH agrees
2. Again, KH reserves no right to sue
viii. 282 shipments made; KH pays for first 192, but fails to pay for last 84
ix. KH says $ increases breach of 1987 K; seeks an injunction
x. G counterclaims for breach of 1989 $ increase Ks
xi. Holding: sufficient evidence that KH was under economic duress when agreeing to
modify to present triable issue of fact
1. Triable issue of fact had no reasonable alternative than accept modification
2. Triable issue of fact of improper threat, but harder argument
a. G threatened to breach K and go out of business unless KH accepted
modification
3. R 176(2): threat of increased $ as KH didnt agree to it on fair terms b/c G
saying it plans to breach K w/ KH
a. (a) Breach + increased $ harms KH and, b/c G is going out of business,
doesnt significantly benefit G
4. Weak unconscionability argument: two sophisticated manufacturers, so looks
like = bargaining power
a. Procedurally: had them over barrel b/c if dont accept increase, then
Ford and other car manufacturers stop doing business w/ KH
b. Substantially: 30% price increase so high it shocks to conscience?
5. Ct. doesnt buy Gs argument that KH acted in bad faith by intending to
never pay the higher prices
xii. Think of modification as a K w/in a K or a collateral K
1. Need separate consideration
xiii. Roth Steel Products v. Sharon Steel Corp. (6th Cir.)
1. $ increase modification unenforceable b/c bad faith
RIGHTS AND DUTIES OF THIRD PARTIES

8
I.
RIGHTS AND DUTIES OF THIRD PARTIES AS CONTRACT BENEFICIARIES

a. Assign rights; delegate duties
b. Duties can exist through a K
c. Easy to figure out who is a beneficiary, but must draw lines b/w 3d party beneficiaries
allowed recovery under the law and those not permitted
i. R 302 distinguishes intended and incidental beneficiaries
1. Only intended beneficiaries can recover intent to benefit test
d. Must be able to describe the type of rights the 3d party has
e. Public law has the power to invade/destroy the rights of non-consenting persons
f. Private law cannot destroy/impair the rights of anyone not a party to agreement or impose
duties on such a person
i. But may create by K a right in a 3d party
g. Lawrence v. Fox (NY)
i. L loaned $ to H
ii. H loaned $ to F, who promised to repay L directly
1. L intended 3d party beneficiary
a. Creditor beneficiary: performance of promise satisfies obligation of
promisee to pay money to beneficiary; R 302(1)(a)
iii. F never pays L; L sues F, but L & F are not in privity
iv. Holding: ct. allows L to sue anyway
1. Advantages: efficiency b/c one lawsuit
2. Disadvantages: may be contrary to intentions of the parties
h. Seaver v. Ransom (NY 1918)
i. Dying woman wants to leave her niece something in will
ii. Husband tells her to sign will, and he promises that he will leave niece something in
his will
1. Afraid she will die before the will can be changed and sign.
iii. He dies w/o putting niece in will
iv. Holding: ct. allows niece to recover
1. Niece is a donee; aunt doesnt owe her anything; R 302(1)(b)
2. 3d party standing on basis of close relationship
i. Vogan v. Hayes Appraisal Assocs. (IA)
i. June 1989: prospective homeowner (V) gets a mortgage from MidAmerica Bank to
build house
ii. MA Ks w/ Hayes to do appraisals and monitor contractors progress so MA can
disburse progress payments to contractor (make sure loan gets repaid)
iii. Nov. 6: purchase lot for $66K (not from loan)
iv. Dec. 28: 25% complete; Feb. 1990: only $2000 left of $170K loan
v. Second mortgage for $42,050 + some of Vs own $ gets paid to contractor
vi. March 20: 60% complete; 8 days later: appraised as 90% complete
1. V saying this report 8 day later was in error
vii. Oct. 1990: still substantial work needs to be done
viii. Contractor defaults and all of the mortgage $ is gone
1. Another contractor says $60K to finish
ix. V stops making mortgage payments and MA sues
1. V counterclaims: MA supposed to keep 30% of loan until house completed
a. V settles w/ MA

9
j.
k.
l.
m.
x. V sues Hayes for negligence in certifying appraisal; trial ct. grants V a judgment;
appellate ct. reverses
xi. V and Hayes not in privity; V suing for breach of K b/w Hayes and MA
xii. Holding: reinstate jury verdict; erroneous report in March 1990 caused bank to
disburse $ to contractor
1. Purpose of reports was to assist MA in knowing when to disburse funds to
contractor
a. Recovery for this doesnt violate Hadley v. Baxendale rule
i. Rule says can only recover for actual breach of K unless
damages resulting from breach were reasonably contemplated
2. 3d party who is not a promisee and gave no consideration has an enforceable
right by reason of a K made by two others if:
a. Promised performance will be of a pecuniary benefit to 3d party
b. K expressed to give promisor reason to know that benefit is
contemplated as a motivating cause for making K
i. Hayes knew about V; reports contained their name!
Variation of Duty to a Beneficiary; R 311
i. (2) In absence of term; promisor and promisee retain power to discharge or modify
duty by subsequent agreement
ii. (3) Power terminates when, before notification, beneficiary:
1. Changes position in justifiable reliance on promise
2. Brings suit on it
3. Manifests assent to it at request of promisor or promisee
Three Types of Court Approaches:
i. Dual intent: whether both promisor and promisee intended to benefit 3d party
1. Most ct. use this
2. Tough standard
3. Not only must friend intend to benefit friend; attorney must also
ii. Promisor knows or has reason to know of promisees intent
1. Not just piece of paper given to attorney; did he actually intend to benefit
friend?
iii. Intent of promisee only
1. Lax standard
2. What friend wrote on piece of paper
3. Doesnt matter if attorney intended to benefit friend
iv. R 302(1):
1. Focuses on both parties (intention of parties)
2. But then subparts (a) & (b) focus only on the intent of the promisee
v. All approaches: intent at the time the K was made; subsequent intent irrelevant
Absence of Clear Intent
i. Totality of circumstances
1. Language and provisions of K
2. Background of K
3. Fairness and practicality
Eisenbergs Test
i. Opposed to intent to benefit test: 3d party has power to enforce if and only if
1. Necessary or important to objectives of Ks performance as manifested by
circumstances; or

0
2. Doesnt conflict w/ performance objectives and supported by policy or moral
reasons
n. Zigas v. Superior Court (CA)
i. Class action: Ts sue LLs for violation of financing agreement w/ HUD
1. LL charged more than approved schedule of rent
2. Ts paying more than max allowed rent
ii. Suit against Superior Ct. b/c alleging they do have 3d party standing to sue on breach
of K b/w LL & HUD
iii. Issue: can sue when govt is not a party, but can Ts sue when govt is a party?
iv. Holding: Ts have standing to sue: $ taken from Ts in breach of K, not the govt
1. Ts intended beneficiaries?
a. Purpose of agreement to protect Ts against excessive rent
b. Govt was promisee; intended to benefit Ts by placing condition on $
HUD gave to LLs
c. Rent control doesnt benefit HUD
2. Problem if dual-intent test used?
a. Hard to say LL intent was to benefit low income tenants
b. Unless argue complying w/ K is same as intending to benefit Ts
3. Promisor knows or has reason to know?
a. Govt doesnt get anything out of rent control for benefit of Ts
b. Statute says purpose of insured mortgages is to facilitate rental
accommodations at reasonable rates
4. Distinguishing Shell v. Schmidt & Martinez v. Socoma Cos.
a. Shell: agreement by D w/ FHA to build homes for sale to veterans
according to plans and specs submitted by D to FHA
b. Martinez: funds in exchange for promise to hire and train hard core
unemployed
c. Shell: govt suffered no $ loss; Martinez: govt out of pocket
pecuniary benefit (Vogan)
d. Shell: direct benefit to veterans from sales of homes (narrow & specific
objective); Martinez: direct benefit to community (broad, long range
objective)
i. Workers in Martinez received training and employment; but
intended benefit was improving community
e. Shell: recovery by veterans allowed; Martinez: workers not allowed to
recover
i. Here, like Shell, Ts intended direct beneficiaries
5. Suit is just about 3d party standing; still remanded to determine if K was
actually breached
v. R 313(2) not discussed by court b/c $ sought by Ts is the breach itself and not just
consequential damages
1. H.R. Moch v. Rensselaer Water (NY)
a. Water co. K w/ municipality
b. 3d partys house burns down completely due to water co.'s failure to
maintain water pressure
c. Holding: 3d party not allowed to sue water co. for consequential
damages

1
2. Relevant Factors:
a. Govt control over litigation & settlement of claims
b. Likelihood of impairment of services or of excessive financial burden
c. Availability of alternatives, i.e., insurance
vi. Ct. split wrt whether Ts of govt financed housing are incidental or intended
beneficiaries
o. Ayala v. Boston Housing Authority (MA)
i. Mother and 2 minor children sue BHA b/c kids suffered lead poisoning in BHA
housing
1. BHA never inspected housing
ii. Holding: standing to sue as 3d party beneficiaries b/c intended benefit was to afford
children of families of meager means a decent, safe, and sanitary place to live
iii. Two reactions:
1. MA enacted legislation; 3d parties could only recover against housing
authorities when they have made an explicit and specific assurance of safety to
that 3d party
2. BHA altered standard K to expressly state that no 3d party rights are created by
K
II.
ASSIGNMENT AND DELEGATION OF CONTRACTUAL RIGHTS AND DUTIES

a. Right: concert ticket example
i. Ticket is a right to go to a place which you would otherwise be excluded from
ii. Give ticket to someone else, you have assigned your right to enter that place to that
person your right is gone
b. Duty: turning in brief example
i. K to have someone else to write brief for you
ii. It is still your duty to make sure brief gets in on time
iii. You have delegated that duty to someone else, but you are still on the hook for getting
the brief in on time
c. Three scenarios:
i. Assignment of rights (Herzog)
1. Assignor/assignee
2. Can assign just about everything except: R 317(2)
a. (a) Substitution would materially:
i. Change obligors duty;
ii. Increase burden or risk to obligor;
iii. Reduce chance of obtaining returned performance; or
iv. Reduce value of performance
b. (b) Statute or public policy says no assignment
c. (c) K says no assignment
2. UCC 2-210(2) contains similar limitations as R 317(2)(a)
ii. Delegation of duties (Sally Beauty)
1. Delegator/delegatee
2. Unless agreed otherwise, person originally bound to perform remains subject
to duty until performance is rendered; R 318(3)
3. Not all duties are delegable
a. Depends on the degree to which the individuals performance was what
was bargained for; R 318(2)

2
i. Substantial interest in having obligor perform acts promised
4. Courts likely to enforce clause prohibiting delegation of duty; R 322(1); UCC
2-210(4)
iii. Total assignment of both rights and duties; R 328(1); UCC 2-210(5)
1. Transferor/transferee
2. All rights under the contract total and complete assignment
3. Unless language or circumstances indicate otherwise; R 328(1); UCC 2-210(5)
4. Example: sale of bike shop; outstanding orders (duties) and people owe money
(rights)
d. Ask:
i. What was done? Assignment, delegation, or both?
ii. Was it valid under terms of K? Under law?
e. Herzog v. Irace (ME)
i. Dr. Herzog sues Jones attorney, Irace, for breaching assignment of settlement
proceeds to Dr.
1. Attorneys had notice of assignment
ii. Dr. performed shoulder surgery for Jones, who requested that payment be made
directly from settlement of a claim currently pending for an unrelated [motorcycle]
accident
1. Can assign $ from a claim, but cannot assign the claim itself
2. Settlement for $20K
iii. Jones instructed attorneys he is revoking assignment and to issue him a check for
$10,027; said he will send a check to Dr. directly
1. Sends check, but it bounces
iv. Holding: assignment was valid and enforceable; Jones couldnt revoke
1. Two things for effective assignment:
a. Assignor has to actually own right
b. Owner has to make manifestation to make present transfer
i. Present transfer: transfer something that may or may not happen
in the future, but the transfer of the right occurs at this moment
2. Once assigned, unlawful to pay assigned $ to assignor; R 317(1)
a. Jones had no right to the settlement $
3. Claim proceeds arent future right b/c existed at time of assignment; R 321(2)
4. Ct. still sees as a legitimate assignment despite the discretionary aspect of the
word request
a. Words from the settlement suggests that he will pay Dr. from the $ he
gets v. assigning all of the $ he gets to the Dr.
b. Better to direct or declare, but there was no indication that Jones
wanted to retain control
c. But there are no magic words to create an effective assignment
5. Attorneys had ethical obligations to Jones and they are not allowed to place a
lien on a clients file for payment to a 3d party
a. But they didnt place the lien, their client did, which is allowed
b. No rule of PRE that says they dont have to honor an assignment
f. Partial Assignment; R 326
i. Jones was allowed to assign a part of the settlement proceeds to Dr.

3
g. Can assign K rights even in face of K language expressly providing otherwise; R 322;
UCC 2-210(2)
i. R 322(2) first interprets no assignment clauses in Ks to mean no delegation of
duties unless language is strong enough to show that it meant the rights could not be
assigned.
h. Sally Beauty v. Nexxus Products (7th Cir.)
i. Best has an exclusive distributor agreement w/ Nexxus
ii. Nexxus-Best distributor agreement is in form of a personal letter from Bests Pres. to
Nexxuss VP
1. Bests Pres. claims he signed it as Pres. rather than as a personal agreement
iii. Best is then acquired by Sally Beauty, subsidiary of Alberto-Culver
1. Alberto-Culver is Sally Beautys competitor
2. But Nexxus sells to beauty salons, whereas Sally Beauty is marketed toward
retail stores
3. General assignment: both rights and duties given away
iv. Can terminate agreement once a year w/ 120 days prior notice
v. Nexxus decides not going to wait; terminated K w/ Sally Beauty against K terms after
transfer
1. Transfer of both rights and duties
2. Didnt provide 120 days prior notice of termination
vi. Nexxus argues personal services K; Sally Beauty says simple K for goods
vii. Trial ct. found distributor agreement to be a personal services K that was not delegable
to Sally Beauty
1. Based on personal trust and confidence
2. Personal service Ks are almost always nondelegable
viii. Holding: affirms, but finds no personal services K; UCC applies b/c exclusive
distributor agreement for sale of goods (Leibel v. Raynor); UCC 2-306(2)
1. Cant delegate under UCC 2-210(1) b/c substantial interest in having
original promisor perform or control acts required by K
a. Nexxus K for Bests best efforts in promoting sale of Nexxus
products in TX; UCC 2-306(2)
b. Risk of bad outcome if allow SB to takeover Bests duties under K
i. Clear choice if it comes down to choice b/w Nexxus needs
and Alberto-Culvers demands
2. Duty of performance under distributorship cannot be delegated to
competitor or wholly-owned subsidiary of competitor
ix. Posner dissent: people not going to change brands if Alberto-Culver tells Sally Beauty
not to promote
1. Selling competitors hair products commonplace in market
2. The more $ Sally Beauty and Nexxus make, the more $ Alberto-Culver
does harms Alberto-Culver not to promote Nexxus products
3. Suggested remedy: Nexxus could demand assurances from Sally Beauty that
they would perform K; UCC 2-609(1)
CONSEQUENCE OF NONPERFORMANCE: EXPRESS CONDITIONS, MATERIAL

BREACH, & ANTICIPATORY REPUDIATION
I.
EXPRESS CONDITIONS

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a. Classical approach: perfect tender
i. Must do everything in the K or you breach
b. Modern approach: distinguishes between total, material, and partial breach
i. Breach = any non-performance of K duty at time when performance of duty is due; R
235(2)
ii. Underlying issues:
1. What is the magnitude of the breach?
2. What is its effect on the other party?
3. What is the likelihood that the breach will be cured?
c. If there is a breach, you can sue for damages
i. Whether it is partial or total doesnt affect non-breaching partys right to sue, but does
effect non-breaching partys duty to continue performance
ii. Total breach? Can sue and withhold performance
iii. Material breach? Can sue and suspend performance
iv. Partial breach? Can sue, but cannot suspend performance
d. Condition: one or both parties duty depends on some other event or occurrence happening
i. Performance of K duties is conditional on the occurrence of this event
ii. Still have an enforceable K!
1. Performance is just not due until condition is fulfilled
e. Express conditions: written in the K
i. The event is a condition precedent to the obligation of the party or parties performing
their K duties
1. Usually only conditions the duty of one party to protect that party from having
to perform when it would be less advantageous
2. Condition may be in neither partys control, one, or both
3. Nonoccurrence of condition may be excused for variety of reasons
ii. Term can be interpreted as both promise and an express condition
iii. Language that creates an express condition:
1. If; unless and until
2. Failure of condition will cause agreement to be of no further force or effect
3. Neither party shall have any rights against nor obligation to the other
f. Constructive conditions: created by the courts
i. Implementing what they believe is the underlying intentions of the parties
g. Obligor = one whose performance at issue (performance conditioned); obligee = one to whom
the performance flows to
h. Oppenheimer & Co. (original T) v. Oppenheim, Appel, Dixon, & Co. (Sub-T) (NY)
i. T wants to move to new building, but still has 3 yrs. on lease on 33d floor of NY Plaza
ii. Sub-T and T enter conditional letter agreement to sublease 33rd Fl to Sub-T
1. Sub-T already occupies 29th floor of NY Plaza
iii. Proposed sublease attached to letter
iv. Letter said sublease only executed if conditions satisfied:
1. T must obtain LL written confirmation that okay w/ Sub-T by Dec. 30, 1986
a. T obtained
2. Sub-T must submit plans for construction of telephone line b/w 29th and 33d
floors to T by Jan. 2, 1987
3. T must then obtain LLs written consent to construction by Jan. 30modified
to Feb. 25

5
a. T never delivered written consent; instead, Ts attorney called Sub-T on
Feb. 25 to inform T that LL consent secured
v. Feb. 26: Sub-T calls to inform that sublease invalid due to failure to meet deadline
vi. Written consent received Mar. 20, 23 days after deadline
vii. Not satisfying a condition by the agreed upon date made both the agreement and
sublease null and void
viii. Jury found that T had substantially performed and awarded damages
ix. Trial ct. granted JNOV in favor of Sub-T, but appellate ct. reversed and reinstated jury
verdict for T
x. Holding: reverse term of letter requiring written consent of LL was express condition
precedent to formation of sublease K
1. Condition precedent: act or event, other than lapse of time, which, unless
excused, must occur before duty to perform a promise in agreement
arises; R 224(1)
a. Most conditions precedent acts or events must occur before party
obliged to perform promise of existing K
b. Different from condition precedent to existence of K itself
2. Substantial performance doesnt excuse the occurrence of an express
condition precedent
a. In Jacobs & Young, court uses substantial performance for constructive
condition b/c imposed by law to do justice
3. Language of letter agreement unambiguous; parties didnt intend to form
sublease K unless and until Sub-T received written notification by Feb. 25
a. If language is not clear, ct. will not find express condition when it
would increase obligees risk of forfeiture; R 227(1)
i. Here, no risk of forfeiture; $1 million licensing fee paid by T to
get LL consent wasnt expended executing sublease
ii. Ts new LL promised to indemnify T for loss if failed to
sublease
4. Express conditions decided by the parties same sanctity as promise itself
i. Nonoccurrence of condition
i. Classical K theory and R 225 agree w/ strict enforcement of express conditions
1. Once court has determined K term is express condition on Ds duty of
performance, until condition occurs duty does not arise
ii. No substantial performance qualification for express conditions; R 237
comment d
1. Some situations where nonoccurrence of express condition may be excused
a. Prevention of condition or possibly forfeiture
j. Conditions v. promises
i. Need enforceable K before start worrying about conditions
1. Example: if Nationals win World Series, you must cater event
a. Both performance obligations conditioned, but still enforceable K
2. Condition doesnt happen parties walk away
ii. Sometimes conditions can also be promises, but not always
1. Oppenheimer: if you get LLs written consent to me by certain date, I promise
to enter into sublease K
iii. Dont fall into trap of mixing up conditions and promises

6
k. Prevention of condition
i. R 245; condition is excused (and nonperformance is justified) if promisee wrongfully
prevents condition from occurring
1. If conditioning event to some extent w/in obligors control, obligor likely to
have obligation to at least attempt to cause condition to occur (Lucy, Lady
Duff-Gordon)
l. JNA Realty Corp. v. Cross Bay Chelsea (NY)
i. JNA leased to Foro Romano Corp. on Jan. 1, 1964; lessees operated a restaurant
1. Original lease for 10 yr. term;
ii. Paragraph 58 had option to renew for another 10 yr. as long as notified LL in writing
by certified or registered mail six mo. prior to end of lease
iii. Restaurant losing $ so Foro sells restaurant; March 1968 assigns lease to Chelsea Bay
on condition that option to renew be for 24 yr.
1. 5 1/2 yr. remaining on original lease
iv. LL modified option and consented to assignment
1. Separate document attached to lease stated shall have right to renew lease for
further period of 24 yr., instead of 10 yr.
2. All other provisions of paragraph 58 in lease shall remain in full force and
effect, except as hereinabove modified
v. June 1973: LL sends letter to T about taxesno mention about option
vi. Nov. 12: informs T that option has lapsed and must vacate by Jan. 1, 1974
vii. Nov. 16: T tries to exercise option
viii. Chelsea spent $15K on improvements, some after option expired
1. T says it never got a copy Paragraph 58, which stated the option
ix. Trial ct. said that T was chargeable w/ notice
x. Holding: T is guilty only of negligence and should not be punished for mere venial
inattention b/c T will suffer a forfeiture
1. Excuse nonoccurrence of express condition when:
a. Actual forfeiture
i. T put $15K into place, improved it, and LL knew this
b. Failure to comply was due to mere venial inattention
i. Must be a good faith honest mistake; here, mere forgetfulness
ii. Cant be scheme to play the market
c. Relief can be granted w/o prejudice to other party
i. Remanded to trial ct. to get more facts about this
ii. Opportunity to lease to a T who might pay more is not enough
1. Sign another lease? Thats different!
iii. Mere delay in being notified is not enough
xi. Dissent: investment in property is not enough
1. Fear of economic manipulation
a. Should be held to bargain that are plainly expressed
2. Mere carelessness is no excuse
a. Doesnt think T was guilty of manipulation
i. Concerned w/ setting a precedent for recovery based on ones
forgetfulness
m. R 229 differs from test in JNA Realty b/c forfeiture must be disproportionate and
occurrence of condition must be a material part of the bargain
n. Courts divided wrt whether Ts failure to give timely notice to renew is excusable

7
II.
i. Almost uniformly agree that failure to comply with time period for an option to
purchase is not excusable
MATERIAL BREACH
a. A material breach means that non-breaching party can suspend performance; R 237
i. But if you substantially perform, non-breaching party still has to perform
1. Can still sue for damages!
2. Depends on the industry
a. Construction tends to be about substantial performance
b. Jacob & Young v. Kent (NY)
i. P is general contractor who builds a house for the D
1. P sues for balance owed for construction
ii. K says that all the pipe used for plumbing work should be of Reading manufacture
iii. Contractor checked first 1000 ft. of pipe, but stops checking after first 1000 ft. is all
Reading
1. 50-60% of pipe in house ends up not being from Reading
iv. Plumbing work is now encased in walls, D living in building
1. Owner wants non-Reading pipe replaced w/ Reading pipe
2. Cost to replace is enormous
v. Owner tells architect not to issue certificate that work is done
1. Need certificate to get final payment
vi. Trial ct. says contractor breached and rules in favor of owner, but appellate ct. reverses
and grants a new trial
vii. Holding: Cardozo; contractor substantially performed, so owner can recover
compensation for defects, but owner still must pay
1. Cardozo basically says that the damages are going to be nominal or zero
a. He got pipes of essentially the same quality, value and cost as he had
bargained for!
b. Damages is measured by difference in value
i. Not the cost of reconstruction
ii. No difference, no real damages
iii. Diminution in value when breach was unintentional and
substantially performed in good faith
2. Trivial and innocent omissions can be atoned for by allowing damages and will
not always mean a breach of a condition followed by forfeiture
a. If bad faith or willful transgression, must accept penalty; R 241(e)
b. But innocent transgressions should not when penalty is grievously out
of proportion from transgression
3. Q of degreemust weigh:
a. Purpose to be served
b. Desire to be gratified
c. Excuse for deviation from the letter of the K
d. Cruelty of enforced adherence
viii. Dissent: promise to use Reading pipe was express condition
1. Gross negligence: didnt bother examining all of the piping
ix. Under classical common law, perfect tender wouldve been the standard
c. Substantial performance = variance from K specs didnt impair building as a whole and
defects can be remedied or building can be used for actual purpose

8
d.
e.
f.
g.
h.
i.
i. Defects cannot be throughout entirety of building or so substantial that K price is no

longer reflective of bargain
ii. Small v. large damages not the issue
Mansfields Covenants:
i. Mutual and independent
ii. Conditions and dependent
iii. Mutual conditions to be performed at same time
Constructive Conditions
i. Restatement keeps rules of constructive conditions developed by Mansfield, but
changes terminology
1. Now have express conditions and constructive conditions
ii. Constructive conditions: judicially created (as opposed to express); what parties
wouldve bargained for; R 226
1. Implicit bargain that there be no uncured material failure of performance
by other party; R 237
iii. Principle of substantial performance one part of constructive conditions doctrine
Order of Performance
i. Mutual conditions to be performed at the same time; R 234(1)
1. Can only sue other party for breach if you performed or offered to perform;
R 238(1)
a. Same goes for UCC 2-507(1) (delivery as a condition to accept and
pay) and UCC 2-511(1) (payment condition to deliver)
ii. If performances cannot be rendered at same time, performance requiring longer period
of time must be rendered first; R 234(2)
1. Construction Ks
UCC 2-508: qualified perfect tender rule
i. (1) If a seller delivers an imperfect good before deadline, seller can send you a
perfect good as long as w/in K time
1. Imperfect means not what you bargained for
ii. (2) If seller sent a good that they know is nonconforming, but thought the buyer would
accept it, seller has a reasonable amount of time to make tender conform
iii. Can bargain for a higher standard
1. Language of K must be clear and seller must be on notice of language
Doctrine of divisibility; R 240
i. Must be possible to apportion the performance of multiple parties into corresponding
pairs of part performances; and
ii. Pairs of part performances are agreed equivalents
1. Example: K for 35 homes built in groups of ten; 20 houses built; contractor can
recover
Sackett v. Spindler (CA)
i. D is owner of S&S Newspapers who enters an agreement w/ P to sell P 6,316 shares of
stock at $85K by Aug. 15
1. Payment schedule:
a. Buyer pays first $6K on time
b. Second payment a week late and $200 under agreed $20K
c. Third check for balance of $59,200 bounces
2. Buyer had received all but 454 shares of stock; certificates reclaimed
ii. Various negotiations b/w buyer and seller

9
1. Agrees to pay balance by Sept. 22, plus interest along w/ $3,944.26 as an
advance for working capital
a. Buyer fails to pay
iii. Oct. 5: Sellers attorney sends letter say there will be no sale of balance of stock
1. Unless can offer seller cash
a. Seller needs capital
2. Buyer never makes another meaningful tender
iv. July 1962: sold full shares for $22K
v. Both sue each other for breach of K
1. Trial ct. awards Spindler; appellate ct. affirms
a. Expectation damages of $34,574.74, plus interest
i. Difference b/w what he should have made and what he sold it to
a 3d party for
vi. Holding: Oct. 5 repudiation letter was not a breach of K by Spindler
1. Didnt discharge Sacketts duty to perform or to pay Spindler damages for
breach
2. Restatement (First) materiality factors:
a. (1) Injured partys chance of obtaining substantial benefit reasonably
anticipated
b. (2) Whether injured party can be adequately compensated in damages
c. (3) Part performance or preparations for performance by party failing to
perform
d. (4) Amount of hardship on party failing to perform in terminating K
e. (5) Willful, negligent, or innocent behavior of party failing to
perform
f. (6) Amount of uncertainty that party will perform
i. This is the factor that swayed the ct.; extremely unlikely that
Sackett would pay remaining balance
3. If material breach not partial
a. Second payment being a couple days late and a couple bucks short was
a partial breach
b. But check bouncing was a material breach
i. Material breach justifies a suspension of performance by nonbreaching party
j. Restatement (Second) factors for determining materiality: R 241
i. (1) Extent that injured party was deprived of benefit
ii. (2) Whether injured party can be adequately compensated for deprived benefit
iii. (3) Extent that party failing to perform will suffer forfeiture
iv. (4) Likelihood of performance being rendered
v. (5) Whether behavior comported w/ standards of good faith and fair dealing
1. Main difference b/w Restatement (First) factors in Sackett
k. 7th Cir. factors:
i. (1) Does breach defeat the bargained for objective?
ii. (2) Did breach cause disproportionate prejudice to non-breaching party?
iii. (3) Does custom and usage consider breach material?
iv. (4) Does excusing non-breaching from performing result in an unreasonable and unfair
advantage?
l. Federal test:

0
III.
i. (1) Harm caused by breach

ii. (2) Harm breaching party suffers if non-breaching party excused from performing
iii. (3) Good faith of parties
m. Material v. Total Breach
i. Material breach = performance suspended; total breach = duties discharged
1. Total breach in Sackett Spindler could sell paper to 3d party
ii. R 237 suspends performance until breach is cured when breach is material
1. Nonoccurrence of constructive condition
iii. R 242 material breach becomes total based on:
1. Extent to which further delay appears likely to prevent or hinder making of
substitute arrangements by nonbreaching party
2. Degree of importance term attach to performance w/o delay
a. Comment d: stock phrases such as time is of the essence not
necessarily controlling
i. Consider along w/ other circumstances
b. Could use language of express conditions
i. Example: Spindler couldve said failure to tender payment in
full by stated date was express condition on duty to sell
3. Comment b: reasonableness of injured partys conduct in communicating
grievances and in seeking satisfaction
iv. Courts use material and total interchangeably
1. Difference makes almost no difference as matter of law
n. Qs to Ask to See if Duties Discharged
i. Was breach material?
ii. Are their opportunities for substantial performance?
iii. Is time of the essence?
iv. Performance becomes constructively conditioned on breaching party curing breach
ANTICIPATORY REPUDIATION
a. R 250: repudiation is a: (a) statement or (b) act by obligor indicating intent to not perform
i. Must be a definite and unequivocal manifestation of repudiation
ii. Looking for total breach, not partial
b. R 253(1): can sue before breach committed for non-performance
c. R 253(2): if performances were to be exchanged, repudiation discharges the other partys duty
to render performance
d. UCC 2-610: overt communication of intention or action which renders performance
impossible or demonstrates clear determination not to continue w/ performance
i. (a) Wait commercially reasonable time for performance
ii. (b) Resort to any remedy for breach
iii. (c) Suspend performance
e. Truman L. Flatt & Sons Co. v. Schupf (IL)
i. Truman wants specific performance on K for sale of land by Schupf to Truman
ii. P had agreed to buy Ds property for $160K on condition that property be approved by
Zoning Board for construction and operation of asphalt plant
1. If not approved, P can void K and get refund
iii. May 21: P sends D letter about opposition to asphalt plant
1. P withdraws rezoning request
a. P withdrew, but was not, not approved
2. Also offers $142.5K for property in current zone state

1
a. D declines lower amount
iv. June 14: P sends another letter saying will take land in current state for original price
v. D says P repudiated the K, returned Ps $, but doesnt want to sell P land anymore
1. Says Ds duties were terminated by May 21 letter from P
vi. Trial ct. granted Ds MSJ
vii. Holding: May 21 letter was not a repudiation b/c language was not a clear implication
of nonperformance, but an ambiguous implication
1. Request for a change in the price term in K doesnt constitute a
repudiation
a. Doubtful and indefinite statements are not enough
i. Must be definite and unequivocal
b. Modification doesnt = repudiation
c. But saying they are not going to pursue zoning
i. This is an affirmative manifestation that would amount to a
breach, but ct. doesnt buy
2. Even if May 21 letter was repudiation, P retracted statement before D
materially changed his position in reliance; R 256(1); UCC 2-611(1)
a. No indication needed if position materially changed
3. Didnt indicate that he was treating May 21 letter as a repudiation until after P
retracted; R 256(1); UCC 2-611(1)
a. Free to retract w/o an indication by D
4. Repudiation is a Q of fact
viii. Hypo: what if day of offer for less price seller sold to someone else
1. Buyer would claim didnt repudiate, merely modification suggested
2. Buyers conduct would be repudiation by act under R 250(b)
f. For conduct to be repudiation, it must indicate that performance is practically
impossible
i. Financial difficulty doesnt count in and of itself
g. High standard for repudiation to make parties accountable
i. If not sure if K was repudiated, can just ask other party or send a letter saying that you
are treating it as a repudiation
h. Hornell Brewing Co. v. Spry (NY)
i. Exclusive distributorship b/w Arizona Ice Tea (Hornell) and Spry in Canada
1. Based on a purely oral agreement; no paper agreement ever executed
ii. By 1994 Spry owes fair amount of money and sales below projections
1. Hornell asks for line or letter of credit to firm up relationship
iii. Hornell speaks w/ Metro Factors, who agrees to buy Sprys accounts receivable
1. Hornell agrees to continue shipping once Metro paid in full
2. Hornell receives wire payment from Metro for balance
iv. Spry then proceeds to order 30 trailer loads of product for $390K to $450K
1. Over $300K credit limit Spry has w/ Metro and Hornell agreed to
2. Sources tell Hornell that Sprys warehouse is empty and was all a sham
v. Hornell demands a letter confirming the existence of (Sprys) line of credit as
well as personal guarantee
1. Spry never responds
vi. Discuss termination, but Spry never signs and returns termination
vii. Hornell sues to get out of K
viii. Holding: K repudiated b/c Hornell had reasonable grounds to demand assurances

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1. UCC 2-609; if reasonable grounds for insecurity party can demand
adequate assurance and if commercially reasonable can suspend performance
until received
a. B/w merchants reasonableness of grounds determined by commercial
standards, rather than legal standards
i. Here, Spry had no financing in place, bounced checks, and
failed to sell small fraction of product
2. Reasonable grounds may include sole fact that a buyer has fallen behind
on account
a. Unreliable rumors and insignificant risks dont
b. Ct. significantly influenced by Sprys lack of credibility
3. If demands assurances and receives them, bound to proceed w/ duties unless a
further change of circumstances
a. Spry argues received assurances when Hornell talked to Metro and
Metro then paid balance of $79K
4. Here, further change of circumstances commercially reasonable to seek
further adequate assurances
a. Spry placed order over credit limit w/ Metro Factors and not long
enough to know if Spry would meet 14-day payment terms
b. Plus misled about scope of Sprys operation (had no trucks or staff)
5. Failure to respond to demand for confirmation of line of credit and personal
guarantee = repudiation; UCC 2-609(4)
a. Must wait 30 days or less if circumstances dictate
ix. Failure to provide adequate assurances in a reasonable time is a repudiation
depending on the circumstances; R 251(2)
i. Adequate Assurance
i. UCC 2-609 comment 4: can range from mere verbal guarantee to posting of bond
ii. R 251 commend d: adopts similar facts and circumstances approach
j. Demand in Writing
i. UCC 2-609(1) says yes
ii. Restatement prefers writing, but oral is acceptable
k. UCC begins w/ demand, but dont have to demand assurance if clear repudiation; can also
retract repudiation by any method under UCC 2-611(2)
i. Better business practice demand assurance first, rather than treat as repudiation?
EXPECTATION DAMAGES: PRINCIPLES & LIMITATIONS

I.
COMPUTING THE VALUE OF PLAINTIFFS EXPECTATION

a. (1) Can the non-breaching party suspend performance or treat his performance as discharged?
b. (2) Can he sue for damages
c. (3) If so, how much?
d. K remedy approaches: Fuller & Perdue Terminology
i. Expectation; R 344 (1)
1. K remedy
2. Position had K been fully performed
3. Two Qs:
a. Why is lost expectation the min amount P should receive?

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b. Why is it the max amount?
ii. Reliance; R 344(2)
1. K and non-K remedy
2. Position had promise never been made
iii. Restitution; R 344(3)
1. Non-K remedy
2. Focus on unjust enrichment of breaching party
iv. Specific performance is highly unique
e. Strong preference for expectation damages
i. Fed cts. dont like the speculative nature of expectation damages
ii. Common law of the states do
f. R 347
i. Damages = loss in value of other partys performance + other loss (incidental or
consequential damages) (cost avoided or other loss avoided)
1. Net Expectation
2. Subject to limitations of R 350-53 (see below)
ii. Loss in value = what the non-breaching party actually lost
1. Difference b/w the value of full performance and what was actually
performed at time of breach; or
2. Difference between K price and market price at time of breach; or
a. Real estate Ks
3. Expected net profit on entire K plus unreimbursed expenses at time of breach
a. Construction Ks
iii. Cost avoided is what the non-breaching party saved by stopping performance after the
breach
iv. Loss avoided is what the non-breaching party saved by salvaging or reallocating
resources from breached K
g. UCC 2-715
i. (1) Incidental damages
1. Reasonable expenses
2. Incurred typically to avoid or minimize loss
ii. (2) Consequential damages
1. Tacit agreement test is rejected
a. Under that test, injured party had to show not only that breaching party
knew, but that they had consciously assumed the liability in Q
2. Only recover if seller had reason to know and buyer could not reasonably
prevent the loss through cover
h. Roesch v. Bray (OH)
i. R Ks to sell house to Mrs. Rs parents, Bs for $65K; $45K due at closing, $20K once
Bs sold their house
1. Five days after Bs say cant buy house
ii. Bs had encouraged Rs to buy another house
1. Rs have to borrow $65K at 16% interest to not breach their own housing K
iii. Ultimately resold property for $63.5K
iv. Issue: award for consequential damages
1. Ds say only entitled to differ b/w K price and actual price sold
a. $65K $63.5K = $1,500

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2. Ps say about $9K b/c net proceeds only about $52K
a. Saying lost on upkeep of home for yr. before resale
v. Holding: $1,500, plus 10% interest
1. Not going to include any losses not directly correlated to purchase price
a. Doesnt provide full compensation to non-breaching party
2. Costs incidental to ownership (maintenance & utility) cannot be included b/c
too many variables and too speculative to be buyers concern
a. Dont know how long seller is going to remain in house
b. Must be reasonably expected as a probable result of breach =
reasonably FOS
3. Damages = $1,500 plus interest
a. LIV: $65K K price of home
b. Ct. doesnt include other loss
c. Cost avoided: $63.5K- sale of house 1 yr later
i. Ct. uses this as market value b/c one yr. to resell was not an
unreasonable time given market conditions
vi. Use Roesch to argue incidental damages or not
i. Limitations on incidental/consequential damages
i. Reasonably FOS to breaching party
ii. Prohibition on speculative damages
1. Reasonable certainty requirement; R 352
iii. Duty to mitigate; R 350
1. (1) Cant recover damages couldve been avoided w/o undue risk, burden, or
humiliation
2. (2) Must use reasonable efforts to avoid or minimize loss
j. Handicapped Childrens Education Board v. Lukaszewski (WI)
i. Hire L as speech and language therapist for $10,760 per yr. in Jan.
1. Handicap School 45 miles from home
ii. Offered $13K job at day care close to home in Aug.
iii. She resigns, but Board refuses to release from K
1. She has to go back to Handicap School
iv. In Sept., calls doctor and leaves school
1. Heart problems being aggravated by long drive to Handicap School
2. Resigns on basis of health and shortly thereafter reapplies for day care
v. Board sues L for differ in K price b/w her and new applicant they hired
1. Applicant must be paid more based on payment schedule: $1000K
a. More experience
b. But less education
c. Only qualified applicant
vi. Issues: (1) Did L breach? (2) Can Board recover damages?
1. L: they got a more qualified teacher!
2. Board: didnt get what bargained for: higher education
vii. Holding: L breached and Board entitled to recover benefit of bargain
1. Board attempted to find an equivalent at lowest cost
a. Only one qualified applicant
b. If there had been someone w/ same credentials as L and hired more
expensive teacher, Board wouldnt be able to recover extra cost
2. Damages = $1,222.50

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a. LIV: 0 b/c actually gained value
i. But not what was bargained for!
ii. Greater value forced upon it
b. Incidental: $222.50 for costs of finding a replacement
c. Cost Avoided: $10K - $11K = $1K
d. R 347 doesnt really work here
viii. Dissent: resignation was justified, medically certifiable
1. Even if self-induced, still a medical condition
k. American Standard v. Schectman (NY)
i. Am. Std. operated a manufacturing plant and K w/ S for all buildings and structures on
land if promise to remove and demolish structures and grade the property at $275K
1. S to remove all structures to a depth approximately one foot below grade
lines
ii. Removes all the equipment and demolishes the structures, but doesnt do subsurface
work
iii. Am. Std. sues S for not doing subsurface work
iv. Trial ct. grants $90K for Am. Std. for Ss failure to grade one foot below
1. Measure of damages used was the cost to complete the grading
2. S said it should be the difference between value of the property as constructed
and the value if performance had been properly completed
v. Holding: cost of completion, not difference in value for the land, proper measure
1. $90K to do subsurface work, but resale value of land is only $3K less w/o
subsurface work
a. Am. Std. sold it for $183K (FMV was $186K)
b. P is entitled to promise bargained for even if it doesnt necessarily
increase the value of the property
2. S argues Jacobs & Young theory of substantial performance
a. Saying Am. Std. is getting a windfall$87K extra
b. But in Jacobs & Young, the pipes were a small part of the larger K
build a house
i. And just the wrong pipes were put in!
1. Not like there was no plumbing
c. Here, one third of what Am. Std. paid for wasnt fulfilled!
i. Purpose of K was to grade the land and that wasnt done
1. Not incidental!
d. Also mistaken about pipe branding, here, S intentionally chose not
fulfill; intentional = bad faith
3. Usual measures of damages in construction cases is cost of replacement or
completion
a. Apply diminution in value rule when there is economic waste
i. Such as the sort in Jacobs & Young, i.e., tear down walls to take
out good pipes to put in good pipes
vi. Law and Economics
1. Economic waste; do work that doesnt need to be done or pocket $ for nothing
a. Problem: after K made, a party cant decide that a part of K is valueless
or not important to other part
2. Peevyhouse v. Garland Coal & Mining Co.
a. Failure to restore land after mining

6
II.
b. Ct. applied diminished value measure

i. Different if land was owned by a nature conservatory
ii. Different today w/ environmental concerns?
c. Posner agrees w/ this measure b/c says cost-to-restore damages
overcompensate owner
vii. R 348(2): if breach results in unfinished construction and LIV cannot be proven with
sufficient certainty, damages should be measured by either:
1. (a) Diminution in market value
2. (b) Reasonable cost of completing performance or remedying defects
a. As long as not clearly disproportionate to probable LIV
RESTRICTIONS ON THE RECOVERY OF EXPECTATION DAMAGES:
FORESEEABILITY, CERTAINTY & CAUSATION
a. Hadley v. Baxendale
i. Craft shank breaks on mill, needs new shaft
ii. Must send old shaft to manufacturer to get a new one made
1. Mill cant operate w/o shaft
iii. Hires carrier to bring old shaft to manufacturer
iv. Carrier gets delayed in delivering old shaft to manufacturer
1. Mill sues for lost profits b/c delay
v. Jury awarded damages
1. Carrier says lost profits are too remote
vi. Holding: lost profits were not a reasonable consequence and special circumstances not
communicated or known to carrier
1. Can only recover for damages arising naturally from breach of K
a. Arises naturally = loss in value
b. Direct result of breach
2. Also recover damages reasonably supposed to have been in contemplation of
both parties
a. Must be FOS
b. Special circumstances must be communicated
b. Modern limitation on consequential damages; R 351
i. (1) Part in breach must have reason to FOS as probable result of breach
ii. (2)(a) Ordinary course of events
iii. (2)(b) Special circumstances recoverable if breaching party had reason to know
iv. (3) May limit FOS loss by excluding loss of profits and including only reliance losses
if justice so requires in order to avoid disproportionate compensation
1. Unconventional and uncommon for courts to use
2. Usually where there is extreme disproportion b/w price charged and
liability sought
c. Florafax Intl v. GTE Market Resources (OK)
i. F is a flower order via telephone company
ii. F Ks w/ Bellerose, a leading flower marketer, to direct all orders to Florafax via 1800-FLOWERS
iii. F then Ks w/ GTE to provide the telecommunication services to answer those calls
1. GTE knows Fs K w/ Bellerose is big business
2. GTE is fighting for market share
3. In K, agrees to pay Florafax consequential damages and lost profits on
business lost if K is terminated or GTE doesnt perform

7
III.
a. Said Florafax may suffer tremendous loss

4. GTE knows K is not going to be profitable; market share push
iv. GTE fails to adequately staff call base in week leading up to Mothers Day
1. Failure leads to Bellerose cancelling K w/ F
v. F terminates K w/ GTE and sets up its own call center
1. Sues for profits lost from Bellerose K
vi. Jury awarded Florafax $750K for lost profits and $820K incidental damages for other
costs and setting up call center
vii. Holding: profits of the Bellerose K were in GTEs contemplation at time of entering K
w/ GTE
1. Plus GTE already agree in K itself to pay all consequential damages and lost
profits!
a. Ct. just enforcing express agreement
b. GTE should have put a price cap
2. Damages = $750K for lost profits & $820K for incidentals
a. LIV: difference b/w what GTE provided and what F actually got
b. Incidental: $800K for setting up call center
3. Consequential: lost profit under Bellerose K nothing to suggest that
Bellerose would have terminated but for GTEs poor performance
a. Causation + K interpretation
b. Despite 60-day termination clause in Florafax/Bellerose K
i. That K was w/ Bellerose, not GTE
c. F says $1.9M
d. GTE says $500K or less
i. Jury split difference
e. GTE says $294K if factor in GTE right to cancel w/in first two yr.
4. (1) First prove damages happened w/ certainty and breaching party
caused damages
a. High standard
5. (2) Then quantify
a. Once prove fact of damage, jury given wide latitude in amount
6. Cost/loss avoided: mitigated damages by setting up call center
viii. R 352; must show with reasonable certainty the fact of damage, not the amount of
damage
d. Can recover consequential damages for breach of employment K if employee can show loss
of a particular opportunity
i. Cant just be harm to employees general reputation
RESTRICTIONS ON THE RECOVERY OF EXPECTATION DAMAGES: MITIGATION OF
DAMAGES
a. Rockingham County v. Luten Bridge Co. (4th Cir.)
i. K b/w County and Luten for bridge to nowhere
ii. County notifies Luten to stop constructing bridge because are no longer building road
for bridge
1. Luten keeps building anyway
2. Sues County for breach of K
iii. Holding: county breached K, but Luten had a duty to mitigate damages
1. Non-breaching party not allowed to collect damages couldve been avoided
2. Not really a duty, but a limitation on recovery

8
IV.
3. Compensate builder for labor and materials expended prior to Countys

repudiation, plus profit that wouldve been realized
a. After repudiation, builders loss was economic waste
iv. Hypo 1: stop building right after repudiation (no expenses on bridge)
1. LOV: $1 million bridge K
2. Cost avoided: $900K
3. Damages = $100K
v. Hypo 2: spend $200K on materials before repudiation
1. LOV: $1 million bridge K
2. Cost avoided: $700K
3. Damages: $300K (County pays more, but Luten pockets same $100K)
b. Havill v. Woodstock Soapstone Co. (VT)
i. Complicated employment K breach case
ii. P worked for D in varying capacities over the yrs
iii. Basic allegation is that never received warnings prior to termination as dictated by
personnel policies
iv. Dispute wrt damages:
1. Close to retirement agetestimony she wouldve retired at 68 and not 65
2. Probably wouldve received bonuses, but raises more questionable
a. She didnt get every raise in past
3. Self-employed now, didnt seek another job
v. Holding: employee has to make a good faith effort to find suitable alternative
employment and the number of yrs awarded is limited to a reasonable time, not too
speculative, in light most favorable to P
1. Employment must be of a substantial equivalence:
a. (1) Suitable to position lost
b. (2) Suitable to background and experience
c. (3) If can only find a non-equivalent job, at least cost avoided
2. In favor of P b/c want the breaching part to lose all the close calls
c. Hypos: law prof. employment K, school wrongfully terminates
i. Hypo 1: tries to find another job, but no other law prof. jobs available
1. Only job is at a local law firm for 3 to 5x law prof. salary
a. Declines offer
2. Sues law school for breach of K, entitled to recovery?
ii. Hypo 2: makes no effort to find another job b/c knows (and can show) that all the
hiring is done for the academic yr.
1. Still entitled to recovery if sue school?
2. At base level need to confirm no jobs
iii. Same result: no job, but different damages/limitations on recovery?
NONRECOVERABLE DAMAGES: ITEMS COMMONLY EXCLUDED FROM
PLAINTIFFS DAMAGES FOR BREACH OF CONTRACT
a. Note: this is absent dickered terms
i. Default rules; parties can agree otherwise
b. No more than expectation damages
i. No windfalls!
ii. K liability is just about putting non-breaching party back in position they wouldve
been had performance been rendered
c. No attorney fees

9
V.
i. American rule: each side bears the cost of their own attorney fees
d. No non-economic injuries
i. K liability doesnt care if the lost job led to a divorce which led to you needing
psychiatric care, which led to . . .
e. No punitive damages
i. In Ks, no deterrence, not trying to send a messagejust expectations
f. No specific performance unless $ wont suffice; R 359
i. Unfairness, undue hardship, gross inadequacy; R 364
ii. Public policy; R 365
iii. Disproportionate enforcement burden; R 366
iv. Personal services; R 367
BUYERS AND SELLERS REMEDIES UNDER THE UCC
a. Buyers Remedies
i. Cover; UCC 2-712
1. Allows buyer to purchase substitute goods (cover) and recover for difference
b/w cover price and K price
2. Must purchase in good faith and without unreasonable delay
3. Cover is elective
ii. Market Damages; UCC 2-713
1. If elected not to purchase substitute goods and recover under UCC 2-712
2. Recover different b/w market price and K price
3. If seller repudiated, three interpretations of time for evaluating market price:
a. Date buyer learned of repudiation;
i. Plain meaning
b. Date buyer learned of repudiation plus a commercially reasonable time
thereafter;
c. Date when actual performance by seller is due
iii. Damages for Accepted Goods; UCC 2-714
1. Difference at time and place of acceptance b/w the value of the goods
accepted and the value they wouldve had if they had been as warranted
2. If retain nonconforming goods, must notify seller w/in reasonable period of
time to preserve right to collect remedy
iv. Specific Performance; UCC 2-716
1. When goods are unique
v. Incidental and Consequential Damages; UCC 2-715 (see earlier section)
b. Sellers Remedies
i. Resale Damage; UCC 2-706
1. Three steps:
a. (1) Seller must ID goods being resold as same ones under breached K;
b. (2) Must give buyer proper notice of resale;
i. Private sale- reasonable notification of intention to resell
ii. Public sale- reasonable notice of time and place of resale
c. (3) Resale must be made in good faith in commercially reasonable
manner
ii. Market Damages; UCC 2-708(1)
1. Award if market price changes from time K formed and resale wont suffice
iii. Lost Profits; UCC 2-708(2)
1. Only if suffered a loss on resale; or

0
2. Started to assemble product and not commercially reasonable to complete
manufacture
iv. Action for the Price; UCC 2-709
1. Buyer fails to pay, three situations for recovery:
a. (1) buyer has accepted goods;
b. (2) goods damaged after risk of loss has shifted to buyer;
c. (3) essentially force goods on buyer and make pay if unable to resell
v. Incidental and Consequential Damages; UCC 2-710
1. Out of pocket expenses
2. Doesnt actually reference consequential b/c sellers rarely suffer consequential
damages as can just resell

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CONTRACTS II SCHOONER SPRING 2011 1

THE MEANING OF THE AGREEMENT

CONTRACTS II SCHOONER SPRING 2011 2

CONTRACTS II SCHOONER SPRING 2011 3