Contracts Summaries

8/2/2019 Contracts Summaries

http://slidepdf.com/reader/full/contracts-summaries 1/40

Week 1

1. Donative Promises: The Basics―Simple‖ donative promises -- that is, simple promises to gift a gift, without more -- are unenforceable. This is pretty much universally true throughout theworld. We discussed reasons that so many legal systems, including ours, mightadopt this rule. Among these reasons are (1) concerns about evidence (that is,about fake donative promises being enforced); (2) a fear that donative promisesare made without enough deliberation; (3) a sense that mere disappointment atnot receiving a gift isn‘t a serious enough injury to burden the courts; and (4)maybe most significant, a concern that enforcing donative promises would both(a) intrude too much into familial and other personal matters (recall the problemsof ―improvidence‖ and ―ingratitude‖), and (b) actually make those relationshipsworse, in a way, by turning something otherwise done out of affection into a legalobligation.Donative promises are distinguished from ―bargain‖ promises. A donativepromise is one made purely out of kindness or affection. A bargain promise ismade because you get something (beyond a very broad kind of affection orgratitude) in return. The course is mostly about bargain promises, which we‘ll getto next week, but a threshold question is ―what‘s a bargain promise, and why dowe usually enforce those but not others?‖ That‘s why we start by discussingdonative promises.Sometimes, a donative promise is ―conditional‖ and has the form ―If you do X, I‘lldo Y,‖ but that doesn‘t, by itself, make it a bargain. For example, ―If you send meyour bank details, I‘ll wire you $20,000 for college‖ isn‘t (without more) a bargainpromise, because the parties don‘t see ―sending bank details‖ as the PRICE of the $20,000 wire. It‘s just something needed for the wire to happen. Obviously,you could construct weird scenarios where sending bank information WAS the

price of a promise, given in exchange for it. Maybe, for example, an employerwants all employees to use direct deposit for their paychecks because it savesthe employer money, so it says ―Send us your bank details, and we‘ll give you a$100 bonus for the year.‖ But we know from experience that typically a promiselike ―If you send me your bank details, I‘ll wire you $20,000 for college‖ is just apromise to give a gift -- and thus, without more, unenforceable.2. What‘s Needed To Make a Donative Promise Enforceable? We considered, in class, a few features of donative promises that might -- oronce did, in the past -- make donative promises enforceable.A. Nominal Bargains

A bargain is ―nominal‖ when it‘s a bargain in name only. For example, ―In

exchange for $1, I‘ll give you $20,000 for college.‖ Such a promise is just asmuch a donative promise as ―I‘ll give you $20,000 for college,‖ but it‘s put in theform of a bargain. For classical contract law, this was enough. That rule haschanged over time, and the modern rule is that putting a donative promise in theform of a nominal bargain doesn‘t make it enforceable. There are two exceptions, which both the book and I discussed briefly: (1)promises to keep an offer open and (2) promises to pay someone else‘s debt. Inthose two cases, under modern law, the promises will be enforceable even if



they‘re just given in exchange for nominal sums of money (at least if the nominalbargain is actually made -- that is, the $1 or whatever is actually paid over, whichis a vaguely stupid requirement). The reason is, basically, that those two kinds ofcontracts are largely commercial rather than donative, and there are goodreasons that parties want those contracts to be enforceable; they don‘t intrude

into family or personal affairs in most cases. We‘ll talk more about this later in thecourse.B. SealsOnce, solemnly stamping a document with hot wax had a legal effect, andeveryone -- or, at least, anyone who was going to be making legally significantdonative promises -- knew this. It was thus a ―natural formality,‖ and it solvedsome of the problems with enforcing donative promises, especially concerns thatdonative promises often aren‘t deliberate enough. Over time, however, more people started making significant contracts, and fewerof them had personal signet rings and seals. So the seals started becoming lessand less significant, ending with simply printing the word ―SEAL‖ on a

document. This destroyed the natural formality of the seal, and the lawresponded by removing the seal‘s special legal effect. As a result, seals aren‘tguaranteed to do anything today (though they do have some effects under somestates‘ statutes), and there‘s no way to ensure, everywhere in the US, that youcan make an otherwise simple donative promise enforceable.Should there be? Putting aside the ―intrusion into the family and convertingsomething nice and personal into something legal‖ concerns, the answer is―probably.‖ But the law hasn‘t found a way to do it. The law could, for example,enforce all written promises, or all notarized promises, or even all promises thatare nominally put into the form of a bargain. It doesn‘t, however. Perhaps thissuggests the separation between what Eisenberg calls the ―world of contract‖and the ―world of gift‖ is really what‘s motivating the law here: we simply don‘t likethe idea of enforcing intrafamily gift promises, we‘re afraid of evaluatingimprovidence and ingratitude, and there isn‘t enough reason for the law to do soanyway.C. RelianceHowever, there is one significant case where donative promises areenforced: when they‘re relied on. The obvious reason for this is that losses inreliance are more serious harms than the mere disappointment at not receiving ahoped-for gift. Reliance losses are just as real as all the losses you discussed intort law.Since the time of the First Restatement, the law has enforced donative promiseswhere the promisee has reasonably relied on a promise on which the promisorknew the promisee might reasonably rely. The law didn‘t always do this; the―Dear Sister Antillico‖ case is an example of very old law‘s hardheartedness (andlack of analytical support for its conclusions). But it‘s uncontroversial today. What‘s a little more controversial, or at least has been over the last 80 years or so, is the WAY that relied-upon donative promises are enforced -- morespecifically, the computation of damages in those cases. We‘ll discuss damagesmore comprehensively later, but for now, what‘s important to understand is that



there are at least two ways to figure out what to award promisees. You mighteither (1) restore them to the position they‘d have been in if the promise hadnever been made, thus undoing their reliance losses, or (2) push them forward tothe position they‘d have been in had the promise been performed, thusvindicating their expectations.

The First Restatement and the formalists behind it said, without much reason, ―If a promise is enforceable because of reliance, that means it‘s an enforceablepromise. So it must be enforced like all other promises, which means we fulfillpromisees‘ expectations.‖ This might actually make sense in some cases, aswe‘ll discuss briefly next week, but as a general rule it‘s hard to support. The modern rule is looser than that. The Second Restatement says thatdamages can be limited ―as justice requires.‖ This isn‘t usually interpretedbroadly; for example, there are few or no cases that use that phrase to evaluateimprovidence or ingratitude in the context of an intrafamily donativepromise. What that phrase typically means in practice is ―relied-upon donativepromises are only enforceable to the extent necessary to remove reliance losses,

because after all that‘s the interest we were trying to protect by making donativepromises enforceable in the first place.‖ We‘ll talk more about reliance next week before moving to bargain promises. Fornow, a few examples may be helpful, based on today‘s cases. Take the followingvariation of Feinberg: a company promises an employee $200 when she retires,solely because they want to do something nice for her. She never finds out aboutthe promise, however, and retires two years later for unrelated reasons. In thatcase, there‘s no reliance on the donative promise, and it‘s not enforceable. (Itmay be helpful to recognize that ―reliance‖ requires something very much like the―but-for causation‖ you studied in tort law: what harms did making the promisecause?)Another variation: The employee‘s told of the offer when she‘s 60, and sheimmediately retires. The company refuses to pay, and the employee takesanother job at $400/month instead of her old $500/month salary. Her relianceharms are probably $100/month for the period of time we estimated that she‘dhave worked at her old job. (I say ―probably‖ only because courts might stillevaluate her new job and find, for example, that it‘s a job she enjoys much moreand might have taken anyway. We‘ll talk a little more about this when we talkabout ―mitigation‖ of damages.) Yet another variation: The employee‘s told of the offer when she‘s 60, at whichtime she‘s making $500/month, and she retires when she‘s 62. Now, having quit,she can‘t get any other job. Very reliable evidence exists that she was going toretire when she was 65, regardless. This example‘s the trickiest so far, becausewhile the employee is out $500/month because she quit, the lure of $200/monthwas enough to get her to quit, so it‘s har d to say that her reliance losses areanything more than $200/month. Her reliance harms will likely be awarded asthree years‘ worth of the $200/month retirement payments. It may be easiest tolook at this variation in the following way: it‘s true that she‘s out $500/monthfinancially, but her corresponding benefit is that she doesn‘t have to work; she



was willing to accept $200/month for that benefit, so that seems to be the rightaward for her.

Week 2

1. Reliance, continuedWe didn‘t add that much on reliance this past week; we started Tuesday with areview of what we‘d already discussed. What‘s new, perhaps, are a handful of difficulties in computing reliance damages.One question is: do we subtract what the promisee has received, as a result ofthe promise, when computing reliance damages? The answer is ―in principle, yes,but we often end up ignoring it when it‘s difficult to compute.‖ For example, ifUncle promises Nephew to support him on a ten-week vacation to New York upto $10,000 in expenses, but then repudiates the promise after two weeks andonly $2,100 of expenses on hotels and airfare, Nephew‘s reliance damages look

at first to be $2,100. But Nephew got the enjoyment of the vacation; he didn‘t justlose the $2,100 he spent, and the reliance principle isn‘t meant to make NephewBETTER off than he started. Nonetheless, because this enjoyment is difficult tomeasure and because we don‘t want to overvalue it to the detriment of Nephew,who didn‘t do anything wrong, courts will usually ignore it. By contrast, if the $2,100 was spend on souvenirs that can be resold for $1,100,the $1,100 is clearly subtracted: the reliance damages are only $1,000 ($2,100 −$1,100). This is meant to be true even if Nephew doesn‘t actually sell thesouvenirs, but if he doesn‘t, and their value is hard to measure, it may be ignoredas well.A separate question is: what about opportunity costs that are hard to

measure? The reliance principle is meant to give people back the value ofopportunities they‘ve lost as a result of the promise. For example, if I promisethat I‘ll pay you $10,000 plus your costs to design my website, and in reliance onthis promise you choose not to enter into a contract to design someone else‘swebsite for $8,000 plus your costs, and when I breach you can‘t get that $8,000opportunity back because it‘s gone to someone else, your reliance damages are$8000. But if Uncle promises to pay for Nephew‘s trip to New York (up to$10,000), and Nephew thus doesn‘t make other plans with friends, and thenUncle breaches the promise, Nephew has lost out on an opportunity to take a tripwith friends—which may be significant if he gets relatively few vacationdays. Some courts will say ―It‘s hard to measure this opportunity cost, but

expectation damages—that is, $10,000—do a pretty good job because we knowthat Nephew‘s opportunity costs could be as great as $10,000, for that wasenough to get him to choose to go to New York rather than go on a trip withfriends.‖ 2. Statute of FraudsAppendix A in the casebook does a good job of summarizing the Statute ofFrauds. We‘ve discussed a few principles so far. The basic force of the Statute of Frauds is to make particular promises



unenforceable unless there‘s some kind of record to serve as evidence of thepromise. It doesn‘t apply to all promises; it applies only to particular categories,as the book explains. We‘ve talked about a few of those categories so far: salesof land, sales of goods, and promises ―not to be performed within . . . one year.‖ Regarding sales of goods: Because modern sales of goods are covered by

Article 2 of the UCC (for domestic contracts in the US), the UCC‘s statute of frauds (UCC § 2-201) applies. That statute requires there to be a ―writing‖ for sales of goods whose price is $500 or more, but it provides for a number ofexceptions; the book describes these on pages 1040 –41.Regarding contracts that take longer than a year to be performed: Becausecourts tend to disfavor the Statute of Frauds and limit it where they can, they‘veinterpreted this category to apply only to ―promises that CAN‘T BE completed in ayear.‖ If a contract is governed by the Statute of Frauds, it needs a record to beenforceable. This can typically be a writing or some electronic or other kind ofrecord, and it needs to be ―signed‖ by the party against whom enforcement is

sought. (―Signed‖ is interpreted broadly; basically any mark or recorded act thatintends to say ―Hey, this is me marking this record‖ is likely to be enough.) Notethat only the party against whom enforcement is sought needs to have signed thedocument; this might mean, for a contract within the Statute of Frauds, that it canbe enforced only against one of the parties, asymmetrically.3. BargainsTo make something a bargain, rather than a donative promise, each party has togive up some legal right as the ―price‖ of the exchange. What they give up can beminimal, as long as it‘s a real legal right they give up and as long as they‘reactually giving it up as the price of the exchange (rather than pretending to sellsomething significant for $1, in which case we‘re dealing with a ―nominal‖ bargainrather than a real one). We don‘t ask whether it‘s a significant legal right that theparties are giving up, whether the individual parties saw it as significant, whethereach party was harmed or benefitted, or anything like that. ―Giving up a legalright‖ can include (1) doing something, or promising to do something, that youhad no obligation to do, and (2) promising not to do something that you had aright to do. We‘ll look at some edge cases surrounding bargains over the nexttwo weeks. For example, we‘ll see what the courts do when you promise to dosomething that you already had a legal responsibility to do, when you promise todo something you had a moral responsibility but not a legal responsibility to do,etc.4. Duress and distressThough courts don‘t usually try to figure out whether each party made a ―good‖bargain—and, for the most part, avoided that question entirely under classicalcontract law—modern courts may, for a variety of reasons, decide to evaluatewhether a bargain should be enforced. This is what we‘ll talk about next weekwhen we talk about unconscionability.

Week 3



1. UnconscionabilityUnder classical contract law, there wasn‘t a way to directly invalidate a bargain

just because it was horrible or because people might have doubted that one ofthe parties even knew what they were doing. That‘s no longer true. Moderncontract law is directly willing to consider, as it should be, whether or not torefuse to enforce a contract because it‘s extremely unfair, oppressive, or surprising. In that sense, you can think of it as a limit on the principle thatbargains are normally enforced according to their terms—a limit very similar inspirit to our law‘s refusal to let people sell their babies or their kidneys, but withprobably more potential day-to-day application.It‘s hard, though, to know the precise bounds of unconscionability. The UCC—astatute—explicitly endorses unconscionability, but it doesn‘t give a precisedefinition of it. The courts haven‘t developed one. But there are a few usefulthings to say.First, it‘s often helpful to separate ―procedural‖ from ―substantive‖

unconscionability. ―Procedural‖ unconscionability is both easier to analyze and,normatively speaking, easier to apply. It refers to some defect in the bargainingprocess, so that when we look at what happened, we don‘t really think it was abargain in the first place; there was no deal made, just one person using forms,fancy words, ignorance, or a pushy approach to take advantage of another whodidn‘t even really know what was going on—at least not in all importantrespects. Procedural unconscionability is relatively simple to handle because you

just have to ask ―Was this really a deal?‖ If not, refusing to enforce the contract iswholly consistent with the bargain principle, and it‘s easy to refuse enforcement. Procedural unconscionability often comes up in form contracts, which we‘llencounter again later in the semester. But for now, it‘s easy to recognize that if I

bury something deep in a form that I know you wouldn‘t agree to, and Iencourage you to sign the form, and you do, we obviously haven‘t reached a―bargain‖ about everything in the form. As to some particular term, the deal maysuffer from procedural unconscionability. More generally, you can think ofprocedural unconscionability as a flavor of either fraud, duress, or both: I may nothave lied, and I may not have actually pointed a gun to your head, but I‘ve donesomething that courts think is similar enough for them to refuse to enforce thecontract. We discussed a variety of examples of this in class.Substantive unconscionability is harder because it tells parties that they can‘tcontract about certain things even if they want to do so and know exactly whatthey‘re doing. Of course, just because a restriction is ―paternalistic‖ in this sense

doesn‘t mean that we shouldn‘t have it or that the law doesn‘t already have it. Forexample, the rules about kidney sales are paternalistic in this way, as areminimum-wage laws, rent-control laws, and the like. Unconscionability is acommon-law analogue to those areas, where the courts refuse to enforce acontract because the result is unpalatable; usually, it‘s unpalatable if it‘sextremely oppressive or causes severe hardship. The core question is perhapssomething like ―Can we sleep at night if we enforce contracts like this one?‖ EvenJohn Stuart Mill, a champion of individual liberty, wouldn‘t have enforced a



contract to sell yourself into slavery; it‘s just too oppressive, and the after -the-factenforcement would hurt ―liberty‖ more than the ―freedom‖ at the time of contracting would promote it. The same is perhaps true, today, of many contractsthat would force people out of their homes, destroy their lives, or deny themsomething that we think they should have as almost a basic civil right.

Note also that substantive unconscionability can simply be evidence ofprocedural unconscionability, in which case it becomes easier to apply. Peopledon‘t ordinarily sell themselves into slavery, nor do they knowingly sign contractswith obscurely oppressive terms that leave them out on the street, so theextreme imbalance in the contract‘s terms serves as an indication that at leastone of the parties didn‘t know what he or she was doing. 2. Mutuality and ―illusory promises‖ Classical contract law had a sharp rule of dubious value, often expressed as―both parties have to be bound under the contract or neither is bound.‖ The bookand I both started out with a variety of routine counterexamples to show that thiswas never literally true; for example, if you make a contract with a child, the child

can sue you but you can‘t (without more) sue the child. Or if the statute of fraudsrequires a signed writing but only one party has signed a writing, the contractmight be enforceable only in one direction. And of course no unilateral contract(which is, recall, simply a promise accepted by an act) has mutuality of obligationon both sides, but courts unproblematically enforce them.So what did this rule of ―mutuality‖ mean? Basically, for our purposes, it had asimple meaning: illusory promises—or promises that look like promises but don‘trestrict people‘s choices in any way, such as ―I promise to pay for your lunch nextFriday if I feel like doing so at the time‖—were not valid consideration, and sopromises given in return for them weren‘t enforceable. Thus, if I gave you thepromise above, and in exchange you promise to pay me $50 on Thursday (whichis a real, not an illusory, promise), and when Thursday comes you decide tobreak your (real) promise, classical contract law would not let me (the maker ofthe illusory promise) sue you (the maker of the real one).Most defenders of classical contract law—either in classical times or today, forclassical contract law does have defenders today—never really justify thisrule. It‘s not clear on what proposition of morality or policy it rests. The personwho‘s made the ―real‖ promise is still committing a wrong if she breaks it, andwhen these promises are the result of actual commercial bargains, they have allthe economic force of capitalism behind them. It‘s possible the mutuality rule was,in classical times, a kind of crude proxy for unconscionability; recall that classicalcontract law didn‘t actually have a rule of unconscionability, so maybe saying ―Ah,but you didn‘t really promise anything in exchange!‖ served to strike down ahandful of unpalatable or grossly unfair bargains.Courts have opposed the rule in modern times. Though it still exists, it‘s beenwhittled away, and the excerpts from courts in the book—my favorite is ―themutuality doctrine has become a faltering rampart to which a litigant retreats athis own peril‖ on page 100—are correct and instructive. Sometimes, if a rule isbad—which is to say, if it‘s inconsistent with morality and policy—courts willsimply overrule it, saying ―This was once the rule, but it‘s not



anymore.‖ Sometimes, for whatever reasons, they decide not to do this, andinstead they erode the rule by creating exceptions or by making other decisionsthat weaken the force of the rule. Modern courts have, for the most part, erodedrather than replaced the mutuality rule.How have they done it? We discussed a few ways. One way is just to find the

tiniest obligation or restriction of freedom inherent in a purportedly illusorypromise. The cases on pages 98 and 99 do this, for the most part. Another way,which we‘ll discuss more next week, is to interpret the illusory promise asincorporating an implied requirement of some kind; for example, ―I promise to buyyour computer we‘ve arranged for you to deliver if I like it‖ might, in some cases,be interpreted to mean ―… and if I can‘t give any plausible reason for not l iking it,obviously I won‘t object to buying it.‖ Finally, some courts have recognized thatthough the mutuality rule highlights a problem with some alleged bilateralcontracts, many of the situations at issue under the rule are more properlyconceived as good unilateral contracts rather than as defective bilateralones. For example, a student who says to an employer ―I‘ll work for you a year at

half your usual salary if you give me a chance‖ may well get valuableconsideration back if the employer hires the student, even if the employer doesn‘thave any ongoing promissory obligation. We can talk more about this too onMonday if you still have questions about it.

Another pattern that arises in this area concerns ―requirements‖ and ―output‖contracts. A requirements contract is simply a contract to buy all you need ofsomething from someone (versus his or her competitors); an output contract issimply a contract to sell all you produce or acquire of something to someone(versus his or her competitors). Thus, ―I‘ll buy all the chairs I need for my newoffice building from you at $150/chair‖ leads to a requirements contract; ―I‘ll sellyou all the coal I mine at whatever market rate obtains on February 1‖ leads to anoutput contract. Historically, courts had difficulty enforcing these contractsbecause they looked like cases of illusory promises; after all, the number ofchairs I need or the amount of coal I produce is often fully within my control. Butthese contracts do restrict the promisor‘s scope of freedom because thepromisors now can‘t buy stuff from (in requirements contracts) or sell stuff to (inoutputs contracts) other people. As the UCC and courts have recognized, thesecontracts should just simply be enforced as bargains.The courts should probably just go further and apply similar reasoning to anykind of commercial ―structural agreement‖—that is, any agreement that fixessome of the terms for future trade. Courts don‘t usually go quite that far andoverrule the illusory-promise rule (at least if you believe what they say), but theycome extremely close, for all the reasons and in all the ways I listed above.Note that cases of illusory promises are very similar—often identical—to cases of―options.‖ If I say, ―You can buy all the grain you‘d like, unt il the end of 2012, fromme at $1.50/bushel,‖ that potentially confers a very valuable economic right. (It‘sparticularly valuable if, for example, the price of grain skyrockets to $9.50/bushel,because it gives me a way to get it for less.) As we discussed briefly whencovering ―nominal consideration,‖ both classical and modern courts wouldenforce such an option promise even if one cent is paid for it, without regard to



whether that consideration is real or nominal. Why does this matter? Well, forone thing, it‘s a practical way around the illusory-promise rule; if instead of givinga purportedly illusory promise, a party gives an illusory promise plus one cent,that avoids the problem in some cases. Second, it shows a weakness of theillusory-promise rule. Why would such an option contract be given in exchange

for nothing more than a hope that someone would eventually place anorder? The answer is, typically, that the party making such a promise (a realpromise, in exchange for an illusory one) is making it to increase the likelihood oftrade. That chance is often extremely valuable, as any spammer or advertiser willtell you. It‘s obviously more valuable than one cent, in most cases. Why enforcesuch contracts if a tiny monetary amount is given in exchange but not enforcethem if something very valuable, like someone‘s time or attention, is given inexchange?

Week 4

A quick reviewSo far, the most general things we‘ve learned are (1) that donative promisesaren‘t typically enforceable except up to the extent of the promisee‘s reliance onthem, and (2) that bargain promises usually are enforceable according to theirterms. We‘ve also seen a few exceptions to the rule about bargainpromises. Most significantly, under modern law, bargains aren‘t enforceablewhen they‘re unconscionable. Less significantly, even commercial bargains aresaid to be unenforceable if they run afoul of the illusory-promise rule, but that ruleis hard to justify and has been substantially eroded.1. The legal-duty ruleThe legal-duty rule is another exception, in classical contract law, to the rule thatcommercial exchanges are usually enforceable according to their terms. And,

just like the illusory-promise rule, it‘s hard to justify and has been substantiallyeroded.A. Public officialsOne area where the legal-duty rule comes up is where a public official promisesto do something but their job already requires them to do it—or where a publicofficial otherwise asks to be rewarded for her job beyond her salary, as when apolice officer claims a posted reward from the victim‘s family for arresting acriminal.That these promises run afoul of the legal-duty rule seems, in many ways, besidethe point. For one thing, the problem here is corruption, not consideration, and inmany cases we wouldn‘t allow even an executed bribe (rather than a promise) tostand. For another thing, the legal-duty rule is only a crude approximation of whatwe‘re trying to prevent; public officials can‘t take bribes, or take advantage of their positions in other ways, even when their promises have nothing to do withthe legal-duty rule. It would probably be better to say these contracts simplyviolate public policy, not to strike them down on technical grounds.



For example, if a DMV official promises to process your driver‘s-licenseapplication only if you pay her $20, that triggers the legal-duty rule because shealready, as a DMV official, had an obligation to process your application. Butwe‘d reach the same result (unenforceability, and maybe a criminal prosecu tionfor bribery) if the DMV official promises to let you cut the line if you slip her

$20. Whether there‘s a preexisting duty or not is beside the point, and for our purposes it‘s just a distraction. Note the state statute, cited in the book, thatprohibits bargains where the official was ―required OR AUTHORIZED‖ to performan act.B. ContractsMore commonly in classical contract law, the legal-duty rule was applied toprevent certain modifications to contracts—namely, those where one of theparties‘ modifications doesn‘t have consideration because it doesn‘t cause themto give anything up. Under classical contract law‘s rules, if you promised to dosomething you already had an obligation to do, you didn‘t restrict the scope of your freedom by making the promise, and thus the promise wasn‘t good

consideration. The upshot of this was that a contract modification where oneparty got more for doing what they‘d already promised to do would be struckdown, and the parties would be stuck with their original contract.If the rule ever made any sense at all, it would have been as a crude proxy forunconscionability. To put it differently, the rule seems to assume that allmodifications to bargains (or at least those where one party doesn‘t promise todo anything new) are unconscionable or a product of duress. This may seemintuitive, particularly after you read Lingenfelder and hear about the cases wheresailors threatened to hold up their captain and refuse to return from a far-awayport unless he doubled their salary, but in practice, contract modifications areordinary, and there‘s little reason to think that most of them are unconscionable(or products of duress). In any event, where contracts are unconscionable (orproducts of duress), we already have rules in modern contract law (namely,unconscionability and duress) to strike them down. So it‘s unclear what usefulrole the legal-duty rule plays.Austin v. Loral shows us that determining whether some modifications areunconscionable or not is difficult. But we should address that difficulty squarely,rather than with a brittle rule. Two things seem to matter most to modern courtswhen deciding the unconscionability of modifications when those modificationsare made under a threat of breach: (1) how much pressure does the threat ofbreach place the other party under, and (2) how much have circumstanceschanged since the original contract? We discussed these in some detail in classand analyzed the casebook‘s cases accordingly. It‘s important to remember that a request for a modification, or even a threat ofbreach, doesn‘t amount on its own to duress or extreme, unconscionablepressure. For example, a party may have little choice but to breach unless he orshe receives a concession, and the concession may be in the interest of bothparties at the time it‘s made; moreover, the concession may be relatively minor for the other party. A structured settlement of debt, as in Foakes and Sugarhouse,is a common example of this. If someone owes me money, I‘d rather give him a



little extra time, or forgo interest, rather than force him into bankruptcy. I‘d like togive the debtor‘s friends more of a chance to help him or her; I‘d like to give thedebtor chance to take out other loans or ―consolidate‖ them with someone elseand pay me off. In any event, whether there‘s duress depends on how muchpressure I‘m under to accede to the request, or the ―threat‖ of breach.

2. Full-payment checksI just wanted to remind you here that we covered the notion of full-paymentchecks and the UCC‘s rule about them. Note that because the rule comes fromArticle 3 of the UCC, rather than Article 2, it has nothing especially to do with thesale of goods; it applies generally to checks.The reason we discuss this material now is that a full-payment check is like acontract modification, and theoretically it could trigger the legal-duty rule if theparty offering the settlement is simply paying less than he or she would otherwiseowe. But it doesn‘t, and thus it can be seen as another erosion of the legal-dutyrule.3. Accord and satisfaction

This topic is heavy with terminology. An ―accord‖ is an agreement to modify a contract. Accords, being just exchangesof promises, can raise consideration problems on their own, in which case you‘vegot to address them the way you‘d address any other consideration problems. But ―executory accords‖ raise a separate problem. The word ―executory,‖ whichyou‘ve encountered at least in Property (in the phrase ―executory interest‖),means—perhaps somewhat counterintuitively—―not executed.‖ (The etymologyof the word is weird; it basically means ―having the characteristics of somethingto be executed in the future.‖) An old rule of common law, which few people thinkmakes any sense, held that ―executory accords‖—that is, accords that had notyet been performed—were unenforceable.An example may be helpful here. If I have a contract to give you a sheep inexchange for two pigs, but then we agree that I‘ll give you two sheep in exchangefor two pigs, that‘s an accord. At the moment it‘s made, before we exchange anysheep or pigs, it‘s an executory accord. It has a legal-duty-rule problem inaddition to being an executory accord, because you had an obligation to pay metwo pigs already and give up nothing (formally speaking) but get something extrafrom me (namely, an extra sheep) in return. (Again, that doesn‘t mean it‘s right or good to strike down the accord; it just means it raises the problem in classicallaw.)Now, suppose we instead agree to modify the sheep/pig contract so that, insteadof that exchange, I promise to give you a cow and you promise to give me agoat. That‘s an executory accord WITHOUT a legal-duty problem; that is, it hasconsideration on both sides, since we‘re each promising something new andgiving up something. But it‘s still, under the old rule, unenforceable, just becauseit‘s an executory accord. That rule probably never made sense, and it was always subject toexceptions. One big exception is that once an accord is PERFORMED (i.e.,executed), it‘s not reversible. The performance is called ―satisfaction,‖ and wesay that the satisfaction—e.g., the actual cow/goat exchange, when it happens—



discharges both the original agreement and the accord, and we have no furtherduties to give each other anything else.The rule also didn‘t apply if the accord was treated as a ―substitute contract,‖though it‘s never been clear exactly how a ―substitute contract‖ is different froman ―accord.‖ Courts should just treat all such things as substitute contracts and

enforce them, particularly where there‘s consideration, and that‘s the directionthey‘re heading. But it‘s still good to be aware of the old rule because it can stillcome up as a doctrinal argument.The book discusses other exceptions too.4. WaiverThe basic rule about waivers—and you can think of this rule as anotherexception to the legal-duty rule that requires formal consideration formodifications to contracts even in commercial contexts—is that conditions incontracts can be expressly waived, even without consideration. That rule probably needs some discussion to be clear, and it runs into a variety ofcomplications. To start with, expressly waiving a condition is like making a

promise (which is how the Restatement treats waivers). Specifically, the promiseis something like ―I won‘t stand on that condition‖ or ―I won‘t plead that conditionin court, so you don‘t have to worry about it.‖ For example, a typical home-insurance contract has lots of conditions thatdescribe the ways in which claims have to be made. They might have to be filedwithin 14 days of damage, in writing on a particular form, and sent to a particularaddress. If you call up your insurer and they say ―Yeah, the contract says weneed to receive a written claim form in 14 days, but most of our claims adjustersare away for the holidays anyway, so it‘s no problem if you get the claim form tous in four weeks instead of two, and we promise that won‘t make any difference,‖that‘s an express waiver, and it will be enforceable.

Note that it might have been enforceable anyway, even without a special rule,because of promissory estoppel (i.e., reliance). The homeowner could easily andreasonably rely on the insurance company‘s promise not to stick to the rigidterms of the ―14-day claim form‖ condition. But the rule goes further, as we see inClark v. West. In that case, the waiver applies even to Clark‘s drinking before hewas given the waiver.The law is murky here for a variety of reasons. For one thing, an express waiver(rather than a mere implication from conduct) seems to be necessary, but thereisn‘t agreement on precisely how express a waiver has to be. Courts tend to beunlikely to treat a simple pattern of ignoring a condition in the past as a waiver forthe future, possibly because they don‘t want to encourage parties to strictly standon all their conditions for fear of losing them if they don‘t. But courses of conduct,as we‘ll see later in the course, can often provide very helpful evidence aboutwhat the parties intended in the first place, and so a course of conduct mightimply that there isn‘t really a condition anyway (even if that same course of conduct technically couldn‘t be taken to imply that a condition was waived). For another thing, not all conditions can be waived. The Restatement is clearerhere than the underlying law; it says that conditions can‘t be waived if they‘re



―material part of the agreed exchange‖ or ―uncertainty of the occurrence of thecondition was an element of the risk assumed by the promisor.‖ These provisionsrequire judgment, of course. As an extreme, easy example, a fire-insurancecompany can‘t waive the ―condition‖ that they‘ll pay you $500,000 only if your house burns down, because that would amount to a very significant donative

promise and was the very subject of the risk taken by them in thecontract. Closer cases are tough here, though.Another question with very murky answers is whether waivers of conditions canbe revoked, thus reinstating the original conditions. The basic force of theRestatement‘s attempt to summarize the law here is ―you can‘t revoke a waiver if it would be unfair to do so.‖ Once performance is done, you generally can‘trevoke a waiver. There are some other clear rules (like a waiver WITHconsideration—e.g., ―I promise to waive that condition if you pay me $50‖—can‘tbe revoked), but the actual law is inconsistent here in many cases, and it‘s veryhard to summarize.Though the law is murky, the underlying motivations in this area seem to be

twofold: (1) there‘s a give-and-take in commercial contexts, and the promiseswe‘re discussing are all made for reasonable commercial reasons, not (for example) intrafamily reasons, so they should probably be enforced anyway, and(2) conditions often implicate ―forfeitures,‖ which the law doesn‘t like. Toelaborate on that second point, a lot can turn on very little when conditions areinvolved. For example, in Clark‘s contract with West, two thirds of Clark‘spayment depends on the condition about his drinking; that alone makes thecourts skeptical of it, particularly where it didn‘t even seem to matter to West andwhere, from the contract, it seems like West got exactly what it wanted. Thus, forexample, courts are unlikely to let very minor technical defects in insuranceclaims void a whole insurance payment even without waiver; waiver just makesthings easier for them.You can do a pretty good job guessing the outcomes in these cases, and arguingfor the right outcomes, by tying your sense of the case to the reasonablebusiness expectations of the parties. If something seems like an unfair surprise,the courts are likely stacked against it. That‘s roughly as it should be. It‘s harder to reach better or more detailed conclusions about this area, though theRestatement—and of course the study guides—can easily create a false senseof certainty. For what it‘s worth, it‘s better that you be a little unsure of this areathan that you take away the wrong rule.

Week 5

1. Past considerationThe promises that raise past-consideration problems are typically donativepromises, not bargains: they‘re promises to give something voluntarily to thepromisee. They‘re different from ―simple donative promises,‖ though, becausethey have an extra feature—specifically, that they‘re done ―in return‖ for



something that‘s already happened (or they discharge a prior moral, but not legal,obligation). The difference is between ―I promise to pay for your college tuition‖(simple donative promise), ―I promise to pay for your college tuition because,years ago, you paid for mine‖ (past consideration), and ―I promise to pay for your college tuition if you work for me for two years‖ (bargain).

Under classical contract law, ―past consideration‖ counted as valid consideration(and thus led to enforceable promises) in only a handful of cases: (1) promises topay a claim on which the statute of limitations had already run, (2) promises byan adult to pay a claim he or she incurred as a child, and (3) promises to pay adebt eliminated in bankruptcy proceedings. So, for example, ―I promise to makegood on the $700 I owe you for hitting you with my motorcycle, even though it‘sbeen nine years since the accident and, thus, you couldn‘t sue me for the originalaccident because the statute of limitations has passed‖ would be an enforceablepromise. But as we saw in Mills v. Wyman, ―I promise to reimburse your costs inhelping out my terminally ill son‖ wouldn‘t be enforceable, just because it didn‘tfall into one of the specific enforceable categories.

Modern law doesn‘t change those three categories, except that federalbankruptcy law now makes it harder to revive a debt that was eliminated by abankruptcy proceeding. But it may make other kinds of promises enforceablebased on ―past consideration.‖ Thus, for example, Webb v. McGowin has factsbroadly similar to Mills v. Wyman, but the court enforces the promise.That change is probably justified. As some courts have explained, when you‘vereceived something valuable from someone but didn‘t ask for it, we might thinkyou have some general moral responsibility to pay something for it, but in mostcases we don‘t make you pay because (1) we‘re not sure you wanted it, and (2)even if you wanted it, we don‘t know what you‘d have been willing to pay for iteven if you wanted it. So, for example, if you notice that my house is for sale andspeculatively landscape my yard hoping I‘ll pay you for it, I don‘t ordinarily have alegal obligation to pay you even if you can show, beyond a doubt, that yourlandscaping increased the price I ultimately received for my home. You didsomething costly that conferred a benefit on me, but I don‘t have to pay youbecause I didn‘t ask for it; we had no bargain. If, however, I say ―Great work; I‘llgive you $3000 for it‖—a simple case of ―past consideration‖—why not thenenforce the promise? I‘ve got a moral obligation not to break my promise; Ireceived something of value from you that was costly for you to provide; and,most importantly, I‘ve recognized it as valuable and set a value to it. There mayalso be an administrative benefit to enforcement; my promise to pay you $3000in some sense ―ratifies‖ what you‘ve done and serves as useful evidence,perhaps, that we may have had some kind of general and hard-to-establishagreement in the past.In any case, it‘s hard to predict exactly what courts will do here in cases beyondthe three classical ones (statutes of limitations, childhood debts, and bankruptcy),but modern law has moved in favor of enforcement. The Second Restatement,section 86, says simply: ―A promise made in recognition of a benefit previouslyreceived by the promisor from the promisee is binding to the extent necessary toprevent injustice.‖



2. RemediesA. BasicsThere are three commonly used ―remedial interests‖ in contract law: theexpectation interest, the reliance interest, and the restitutionary interest. We‘vealready seen that reliance damages are the ordinary way to enforce relied-upon

donative promises and that expectation damages are the ordinary way to enforcebargain promises. The section of the course on remedies gives us time to studythese measures, some problems they raise, and a variety of other remedialpossibilities.B. The theory of efficient breachSometimes there‘s a question about whether the promisee should get (1) their costs and lost profits, or (2) something more, like an order for the promisor toperform (which is called ―specific performance‖) or the promisor‘s damages frombreach (―disgorgement‖).The ―theory of efficient breach‖ is an argument for (1) over (2). Usually, it‘sapplied to the following basic fact pattern, which the book calls the ―Overbidder

Paradigm‖: S contracts with B to sell some custom good for $100, which B isgoing to use to make a profit of $30. T then comes along, after B and S‘scontract is made but before it‘s performed, and offers S $150 for the customgood. If S is selfish, doesn‘t care about her reputation, and faces a rule like (1)instead of (2) above, S will breach: she‘ll accept $150 from T and pay $30 indamages to B (to make up for B‘s lost profits, which in this case are his simple―expectation interest‖). Posner and other economists say, basically, ―Breaching isexactly what S should do. It‘s efficient. S makes more money from breach thanfrom performance, and B doesn‘t lose out: he gets the $30 in damages that hewould have made as $30 in profits instead.‖ One problem with the theory is that it‘s amoral; it purports to decide a rule of contract law based ONLY on efficiency. While efficiency is important, it‘s not theonly aim of contract law; we also care about whether a rule comports with moralconsiderations, like fairness.Even on economic grounds, though, the theory is seriously flawed. The theory‘smost significant economic flaws are easy to see once they‘re pointed out. First,

just because T is willing to bid more than B after B signs a contract with S doesn‘tmean that T values the goods more highly than B; B may simply have cut abetter deal or negotiated at a better time. Second, as even Posner recognizes,breach is not the only way T (the third party who putatively places a higher valueon the goods) can get the goods; he could also buy them from B, the originalbuyer. (Posner claims that it will be cheaper for the original seller S to sell to Tthan for B to sell to T, perhaps because S is in the business of selling things andB may not be, but this is little more than an arbitrary supposition, and it seemsunlikely to be right in view of the extremely large transaction costs of the litigationthat would result from breach, compared to the relatively small transaction costsfor B to sell a good to T.) Third, B‘s damages will not necessarily measure B‘scosts for all the reasons that contract damages may fall short of the fullsubjective damages that would make promisees indifferent between performanceand breach, such as litigation costs and rules (which we haven‘t learned yet)



concerning foreseeability and certainty.Worse, the theory—if applied—would weaken the contracting systemdramatically. There wouldn‘t be a stigma attached to breaking your contracts,and so on. The book describes these more general problems well. If you‘d likemore information on this and related damages questions, a good article to read is

Mel Eisenberg, Actual and Virtual Specific Performance, the Theory of EfficientBreach, and the Indifference Principle in Contract Law, 93 Calif. L. Rev. 975(2005). I‘ve also written about it at 86 Tul. L. Rev. 135, 160–167.In short, the theory of efficient breach isn‘t more than an inefficient theory aboutbreach—at least in cases like this, the book‘s ―Overbidder Paradigm.‖ C. Disgorgement in practiceIt‘s a black-letter rule of classical contract law, still often mentioned by courts,that promisees can‘t be made better off by breach than by performance—and,similarly, that contract law doesn‘t allow for the promisee to receive the breachingpromisor‘s gains, a remedy called ―disgorgement.‖ Relatively few cases actuallyhold this, rather than mention it as dicta; Naval v. Charter does, however.

It turns out, however, that disgorgement or disgorgement-like damages are quiteoften available, as we see in Coppola v. Alfone and a variety of other cases. Howdo we square this with the often-stated rule that there‘s no disgorgement incontracts? First, the rule might just be wrong in some cases. Second, oftendisgorgement is available as long as the promisee can plead a non-contracttheory of recovery, like ―the promisor stole my property‖ or ―the promisor was myagent.‖ (But disgorgement is sometimes available in practice even when courtsreject non-contract theories; see, for example, Laurin v. Decarolis, a note caseon page 208).When faced squarely with a question of willful, opportunistic breach, it‘s hard toknow exactly what courts will do. Mel Eisenberg has a good article on this topicas well, in case you‘re curious: The Disgorgement Interest in Contract Law, 105Mich. L. Rev. 559 (2006). Generally speaking, it‘s important to be aware of thepossibility of disgorgement and to consider ways of making (and defendingagainst) claims for it. We talked in class about a variety of particular situations inwhich disgorgement does seem like the fairest and most efficient rule.D. Cost-of-completion damages versus diminution-in-value damagesWhen measuring damages (often in response to a breach by someone who‘spromised to create or build something), there‘s sometimes a tension betweenwhether to give the promisee (1) the value they‘d need to pay to movethemselves from (a) where they are to (b) where they should be, under thecontract, or (2) the difference in value between (a) what they got and (b) whatthey should have gotten.In a perfectly competitive market, (1) and (2) will be the same, or at least veryclose. For example, if you sell me a TV that would be worth $1000 except that itneeds $200 of easy-to-get repairs, then it‘s very likely that the ―value‖ of mybroken TV will be $800—because with $200 paid to get it working, it would beworth $1000 again. In this situation, there‘s no difference between cost-of-completion and diminution-in-value damages.Sometimes between these measures do sometimes arise, however. Sometimes,



as perhaps in Louise Caroline, it‘s just because it‘s hard to measure the val ue ofan incomplete nursing home. It‘s very easy to underestimate the value of abroken item, though (for example, my broken TV above, though actually worth$800 because $200 of repair will make it worth $1000, might initially seem to beworth nothing, or at least very little, because a broken TV doesn‘t function well as

a television, or indeed as much of anything). For this and potentially otherreasons, the general measure of damages in these cases is cost-of-completiondamages, NOT diminution-in-value damages.Occasionally, however, cost-of-completion damages vastly EXCEED diminution-in-value damages. For example, consider a car that‘s been ―totaled.‖ It‘s possiblethat your insurer could pay a mechanic $50,000 to take your wrecked car andturn it back into something usable, but if your car is only worth $8,000, why wouldanyone do this? It would just be better to get another car.Peevyhouse presents a similar situation. The reason the court‘s decision isarguably so awful in Peevyhouse isn‘t because we l ike wasted effort; in my carexample above, it‘s obviously better not to waste $50,000 fixing an $8,000

car. The decision‘s questionable because the Peevyhouses appear to havespecifically negotiated the ―repair our land‖ provision in their contract, rather thantaking a monetary payout, because they placed significant subjective value onthe land. Spending $10,000 to fix an ―$8,000‖ car doesn‘t seem so crazy if thecar has sentimental value, or indeed any other kind of subjective value, to theowner. (Maybe the owner has installed a special audio system that suits theirdistinctive tastes, or the owner is handicapped and has installed an expensivehand-operated pedal that is, after all, worthless to most potential buyers.)To be clear, I wouldn‘t question the Peevyhouse decision if the promisees weresimply planning on selling the land anyway. But if they wanted to live there (orhad some other use for the land) and specifically contracted for a provision torestore the land to a particular state, it seems hard to justify denying thatpossibility to them. It‘s neither fair nor efficient; at best, perhaps someadministrative considerations weigh in favor, like the difficulty of estimatingsubjective values, but (1) we do that frequently anyway in law and (2) thedifficulty doesn‘t pose a special problem for cases like Peevyhouse, where thepromisor was asked only to do what it would have expected to have to doanyway.In any event, this is another area where it‘s hard to predict exactly what courtswill do. One doctrinal test IS the one applied in Peevyhouse, which is somethinglike ―use diminished value where completion of the contract would amount toeconomic waste.‖ But this leads to bad results as in Peevyhouse because itignores subjective value; we don‘t have rules generally that prevent people from―wasting‖ their money on their own things. Also, it‘s not even really clear whatmotivates that test, because simply awarding the money doesn‘t lead to anyeconomic waste; it‘s just a transfer. There are two better tests that some courts have used. One is to ask ―Will thepromisee actually spend the damage award on performance?‖ If we think so,there shouldn‘t be any problem with using the cost-of-completion measure; thebuyer simply gets what he wanted. Consider the example I used in



class: suppose I‘m buying a new condo and pay the builder an extra $2000 toinstall quartz instead of granite, because I like quartz better than granite (it‘seasier to clean and less often radioactive). The builder installsgranite. Demonstrably, this doesn‘t harm the ―value‖ of my home if I were to sellit; even though quartz is more expensive than granite, it‘s not valued in general

by homebuyers because ―granite countertops‖ have become a recognizablefeature. Suppose that, now that the granite is installed, it‘ll take $4000 to replaceit with quartz. I sue the builder for $4000, asking for cost-of-completiondamages The builder says, ―There‘s no harm done, so I owe you nothing.‖ First,we clearly don‘t think the builder should be able to keep the $2000payment. Second, if I actually don‘t want to live with granite—I‘m ahypochondriac and am afraid of the radon gas it may leak, or I simply don‘t wantto have to clean the granite in the way that granite needs to be cleaned—thenpresumably I‘d take the $4000 in damages and actually replace the granite withquartz. If that‘s what I‘m going to do, that damage measure seems like exactlythe right award to vindicate my expectation interest.

Now, if I‘m just a real-estate magnate buying and selling condos, the builder isactually right that no harm was done to my interests by installing granite. I wasgoing to sell the condo for $200,000, and I still get to sell the condo for$200,000. Probably we still wouldn‘t let him keep the $2000 payment, butawarding cost-of-completion damages seems wrong there. One test, then, issimply to try to determine what I‘d do with the award; if I‘ll use it for a substituteperformance, cost-of-completion works well; otherwise, diminution-in-value worksbetter.Another test, which you can see applied in Ruxley, is simply to try to convert thepromisee‘s subjective loss in value into money. Thus, suppose I can live just finewith granite, and it doesn‘t really make any difference to me, but I was hoping for quartz because it reflects the light a little differently and makes me happy to ownwhat I perceive to be a nicer product. Perhaps the court could give me $1000 incompensation for my subjective loss of pleasure—pleasure I‘d have had if I hadgotten the right amenity in my home.Either of those tests is probably better than the simple Peevyhouse test, but it‘shard to predict which specific test that courts will use. Obviously, planning andlitigation in this area would benefit from an understanding of what the tests (andthe courts that apply them) are aiming to achieve.

Week 6

1. Breach by people who have contracted to have services performedThe PowerPoint slideshows that I‘ve posted on the class website should do apretty good job summarizing this material, but the basic idea is that we want toput service providers in the position they‘d be in had their contracts beenperformed. With performance, they‘d have done some work and earned someprofit. We want them to end up with the same profit. One way we can give them



their profit is by awarding a sum of money that (1) pays them back for the coststhey‘ve already spent partially performing the services they were hired to performand (2) adds, on top of that, their expected profit.That‘s what I called the ―intuitive‖ formula in class. There‘s a more common butsomewhat less intuitive formula that reaches, in theory, the same result: contract

price MINUS costs remaining on the contract plus. The reason this is the same intheory is thatContract price = Cost of work performed + Costs of

remaining work + Profit

So (Profit + Cost of work performed) is the same amount as (Contract price – Costs of remaining work). If this isn‘t clear, you can prove it to yourself bysubtracting ―costs of remaining work‖ from both sides of the equation, as if wewere back in high-school math classes. Thus, using K to mean Contract price,Wr to mean the cost of work already performed, etc.:K = Wp + Wr + P

-Wr -Wr

And soK – Wr = Wp + P

The ―costs of work performed‖ and ―costs of remaining work‖ generally don‘tinclude ―overhead‖; that is, they refer specifically to the ―variable‖ costs of thecontract, because those are the only ones that are influenced by breach.2. Goods: Breach by sellerIf you promise to sell me a good and you breach, then under the UCC (and alsounder modern contract principles generally), you have two choices: (1) you can―cover,‖ which means that you can find a reasonable substitute and charge mefor it, or (2) you can sue for ―market-price damages,‖ which are the differencebetween the price I promised to charge you for the good and the market price ofthe good at the time you learn about breach.We discussed a few difficulties that arise in this area. Cover has to be reasonable,and there may be difficulties in determining whether some activity counts ascover. Differently, but sometimes related, if a court decides you did cover, doescovering then force you to ask for cover damages when you sue for breach of thecontract, or can you choose market-price damages even after covering? (Thelaw‘s ambiguous, but if you can choose market-price damages even aftercovering, it seems like a bad rule: you could wait a little while to see whether themarket price goes up or down and then choose whether to cover. More simply, ifyou‘ve covered, you‘ve gotten what you wanted; your damages should just beyour costs in covering.) A variety of other issues arise; for example, a ―market‖price isn‘t always easy to determine, but the UCC allows evidence of recent,nearby transactions; basically, we use what information we can to construct a―market‖ price even if there isn‘t anything that resembles a traditional ―market‖ for the goods in question.3. Goods: breach by buyersBreach by buyers can raise essentially the same questions in the context of salesof goods as it did in sales of services. But the problem of ―lost-volume sellers‖arises more often in the context of goods, and we considered that problem herewith cases like Neri. The question is just ―If a buyer breaches, does the seller get



to recover lost profits on the buyer‘s particular sale, even if the same goods areresold to someone else without any loss?‖ The classical rule was no; the UCC,and modern principles of damage computation, say yes when the seller is simplyfishing for customers, could handle more of them, and, thus, simply lost onecustomer (and the profits on that customer) from the customer‘s breach. (A seller

with those characteristics is called a ―lost-volume seller.‖ The opposite is aperson who has, for example, one used car to sell. Such a seller loses nothing ifone buyer walks away and, ten minutes later, a new buyer emerges and pays thesame price for the car.)But deciding the right thing to do in these cases isn‘t easy, at least in consumersales contracts, because it‘s not clear that consumers expect this result. It‘s alsonot entirely clear what productive purpose lost-volume damages wouldserve. Though I didn‘t discuss it this way in class, one thing to consider in caseslike Neri is that the buyer could have borrowed money, bought the boat, resold itto someone else, and then paid off the loan. (Of course, in practice, a used boatwon‘t sell for the same price as a new boat, but suppose the buyer simply found

a way to transfer his responsibility under this contract to someone else: he―assigned‖ the contract to a third party, and now that third party would both payfor the boat and receive it herself.) Isn‘t it easier if we reach effectively the sameresult simply by letting the seller make this resale and giving him only theincidental costs he incurred to sell this buyer‘s boat (plus, of course, any lostprofits on that boat)? Sure, in concept that takes away one sale from the seller,but so does the buyer‘s resale of the boat to a person who‘d otherwise haveentered into a new contract with the seller.Consider also that if the seller had breached, the buyer probably wouldn‘t havehad significant damages; he could just have bought the same boat from anotherseller.4. Incidental damages, etc.Other than the decision about whether the UCC formally applies or not, thereisn‘t necessarily a sharp difference between goods and services or betweenbreach by buyers and breach by sellers. In all cases, we‘re just trying to putpromisees back into the situations they‘d have been in had there beenperformance. To do that, in addition to giving market-price damages or cover-likedamages, we also given ―incidental‖ damages, which are the costs of, for example, reselling a good to someone else or, in the most general case, simplyof covering. This should seem relatively straightforward. For example, if I promiseto buy something from you for $10,000, you breach, and I buy a replacement for$12,000 after incurring $200 in costs to find the replacement (for example, inadvertising costs), I‘d get $2200 ($2000 plus $200) in damages from you. 5. MitigationMitigation is easy to summarize: you have a duty to take reasonable, simplesteps to avoid running up your damages bill at your breaching promisor‘sexpense. Obviously, you can‘t massively waste effort just to raise your damagesneedlessly (as in Luton Bridge), but your duties don‘t stop there: you might alsohave an affirmative duty to take steps to reduce your damages. These stepsdon‘t have to be onerous; they just have to be reasonable under the



circumstances. In the employment context specifically, we do say you have tolook for new work (even though that may seem somewhat personally intrusive),but we also say you don‘t have to take a worse job just to mitigate your damages.Your reasonable costs while trying to mitigate your damages are recoverable (assimple ―incidental damages,‖ as above), even if that means you end up

recovering MORE, rather than less, by trying to mitigate.6. Foreseeability and the Hadley ruleUnlike in other areas of law where we ask what harms were foreseeable at thetime of a wrong (in this case, that would be breach), in contract law the classicaland modern rule alike is that only damages foreseeable at the time a contract ismade are recoverable. Such damages are considered foreseeable either if (1)under the circumstances, reasonable people would have forseen them or (2) thepromisor had specific knowledge of the damages when the contract was made.The standard of foreseeability is probably somewhat higher (that is, damages areharder to prove) in contract law than, for example, in tort law‘s proximate -causation tests. Lord Reid‘s explanation (using the phrase ―serious possibility‖)

probably states the modern test fairly well.The rule is generally accepted, but I pointed out several reasons in class that asimple rule of proximate causation, judged at the time of breach, might be moredesirable. The law has moved, though only very slightly, to relax the strictness ofthe Hadley rule and make more damages recoverable, often by observing (forexample) that delayed items have rental value that anyone could expect, or thatindustrial equipment was obviously going to be used for industrialpurposes. Some modern statements of the law would exempt all ―intentionalbreach‖ from the Hadley principle, and the UCC excludes physical injuriesresulting from sales of goods from the rule (thus making them recoverable underordinary proximate-causation principles even if they weren‘t foreseeable at thetime of breach).In practice, the rule may not matter that much. Promisors often disclaim unusualdamages anyway and charge special fees to provide ‗insurance‖ for buyers whowant it. For example, today, shippers like UPS provide a ―menu‖ of choices: youcan refuse insurance, pay a certain amount of money for particular kinds ofcompensation if the package is lost, etc. The Hadley rule hasn‘t arisen in thecases we‘ve considered up to this point; just to pick an example, in Delchi lostprofits were available because it would have been clear to the American seller ofair-conditioning units that Delchi was planning to repackage and resell them.

Week 7

1. CertaintyThe simple rule is that damages have to be certain enough to be awarded. Thedifficulty is in figuring out what ―certain enough‖ means. In the past, when the lawdidn‘t handle probabilities and chances well, there was a tendency to cut off many damages that probably ought to have been recoverable; in particular, therequirement that damages be certain often cut off lost profits, even in caseswhere it was otherwise clear that the expectation measure ought to permit lostprofits to be recovered.



A particular incarnation of the certainty rule was the ―new business rule,‖ whichawarded no lost profits whatsoever to a new business on the theory that all newbusinesses were speculative.We‘ve seen the certainty rules erode (and the ―new business rule‖ almostentirely disappear in most contexts); thus, for example, the book highlights cases

showing profits from raffles and horse races not to be too speculative. Thisprobably makes sense, given that modern business routinely requires theestimation of profits using probabilistic models, and modern law routinelyrequires estimating other things (like the losses from a personal injury in tort law)that are significantly more speculative than lost business profits.The modern tendency seems to be to award any damages that are backed up bya reliable methodology or other expert testimony; of course, this testimony issubject to dispute, as it should be, and courts might exclude it if it‘s completelyunrealistic. But just because damages are uncertain no longer means they‘re notawarded. At the very least, instead of awarding no damages at all, courts cansegment the available damages and award at least those that are more likely

than not to have been caused by a breach. The better thing to do would probablybe to simply award what the best modern business techniques estimatedamages to be—retaining, perhaps, a healthy skepticism of formal academicmodels and making sure that they‘re not TOTALLY speculative. In economicterms, the ―expected value‖ of a lost business opportunity ought to be, andprobably is, recoverable under modern law.2. Liquidated damages and penaltiesAcross the board, courts scrutinize remedial measures in the terms of contracts(e.g., ―if you breach, you owe me $1000 a day‖) more than they scrutinize theother substantive terms of contracts (―you agree to install quartzcountertops‖). There‘s considerable debate about why this is so and whether courts should continue to do it.In the particular context of contract terms that specify a particular sum of moneyto be awarded as damages—that is, terms that attempt to ―liquidate‖ the damages (which just means ―turn them into a cash figure‖)—the general rule isthat the liquidated damages have to be reasonably related to the promisee‘s realexpectation damages in order for them to be enforceable. If a provisionattempting to liquidate damages is treated as unenforceable, the court willtypically just calculate and award real expectation damages instead.Historically, whether liquidated damages ―reasonably relate‖ to real damageswas judged as of the time the contract was made; that is, courts would askwhether, at the time the contract was made, the liquidated-damages provisionwas a reasonable estimate of future expectation damages—and would enforcethe provision only if it was. Some modern courts consider the liquidated-damagesprovision‘s reasonableness as of the time of breach, in addition to (or perhapsinstead of) the time of contract formation. These courts look at information that‘scome to light since the contract was made in order to decide whether it makessense, all things considered, to award liquidated damages or calculate regularexpectation damages.If the reason for liquidated-damages provisions is just that they‘re a proxy for



procedural unconscionability, considering the damages clauses at the time ofcontracting might make sense. If the goal is broader—if it includes some notionof substantive unconscionability, or if the concern is with (as the book discusses)a variety of cognitive limitations among contracting parties—then it may makemore sense to consider these clauses in retrospect, using all the extra

information that‘s available at the time of breach. That is, if we‘re trying to avoidunfair or onerous application of terms that people are simply apt to get wrong, itmight makes sense to see quite how wrong a liquidated-damages provision isbefore awarding it.Of course, if the parties explicitly negotiated about and agreed to a liquidated-damages provision, and they‘re sophisticated, then there‘s probably little reasonnot to enforce such a clause. Economically speaking, there‘s little differencebetween ―damages terms‖ and ―other terms‖ of a contract. That said, the form theterms take may make them less, or more, likely to run afoul of the cognitiveproblems the book discusses. For example, if a $10,000 deposit is paid andunderstood as ―nonrefundable,‖ it seems less harsh to refuse to refund the

deposit than it does to stick someone with a barely expected $10,000 penalty onwhat could be a contract that the parties expected to involve much less money inthe ordinary case.In any case, the rule is that the damages should reasonably relate to realdamages, with disagreement among courts as to when we try to make thatdetermination. There are other ancillary rules, like ―if real damages are hard tomeasure, liquidated-damages provisions are more likely to be enforced,‖ butthese are probably just ways of addressing the same question of ―reasonablerelation‖: the harder damages are to compute, the more reasonable it mightseem to try to liquidate damages.One final note on terminology: it‘s sometimes said that ―liquidated damages‖ areenforceable and ―penalties‖ aren‘t, but these are just labels: if a court decidesthat a stipulated-damages provision is reasonable, it says it‘s enforceable andcalls it ―liquidated damages,‖ and otherwise it says it‘s not enforceable and callsit a ―penalty.‖ (This is what I mean when I say the terms are ―conclusory‖: they‘restatements of the court‘s conclusion as to enforceability.) 3. Specific performanceWe‘ll continue discussing specific performance this coming week, but we‘vediscussed a few principles so far.First, just definitionally, ―specific performance‖ refers to an order by a courtdirecting the promisor to perform what she promised to perform. If the promisorstill refuses to perform, she‘s in contempt of court and can face significant finesor jail time.Second, the general rule is often stated as ―specific performance is availableonly when damages are inadequate.‖ This isn‘t always precisely true, but it‘s asignificant part of the law here; it might be easier to understand and apply thistest if you ask, instead, ―Can the promisee use damages to purchase a ‗cover‘ -like substitute for performance that serves as an adequate substitute for thepromised performance?‖ Courts exercise discretion, consistent with the―equitable‖ origins of specific-performance doctrine, in deciding what‘s adequate



and what‘s not. Third, specific performance might be allowed or disallowed for reasons that don‘tdirectly have to do with ―adequacy‖ of damages. For example, in real-estatecontracts, specific performance is usually available. (We‘ll discuss this more nextweek.) In employment contracts, it‘s almost never available, on the thought that a

command from a court telling someone to work is too intrusive and risks toomuch of an infringement of autonomy. It‘s sometimes said that specificperformance won‘t be awarded if it would be difficult for courts to monitor performance, but that principle is applied inconsistently, and it doesn‘t reallymake any sense, because ―monitoring performance‖ is no different from whatcourts typically do in deciding whether there‘s a breach of contract in the firstplace. (That is, the argument is ―a court shouldn‘t issue an order to doconstruction work, because then the court will have to be in the business ofmonitoring construction work‖; it wouldn‘t, however, have to do any more than ittypically does in a breach-of-contract case involving construction work.)

Week 8

1. Specific performance, continuedThe Walgreen case is interesting for a few reasons, and it ties together a coupleof loose threads in our discussion of contract remedies. Walgreen, you mayrecall, had a contract with its landlord providing that the landlord wouldn‘t bring apharmacy into the shopping center where Walgreen was renting space. Thelandlord wanted to breach and pay Walgreen damages for its lost business;Walgreen wanted specific performance, in the form of an order preventing thelandlord from bringing in the competing pharmacy.In the case, Posner seems to abandon the theory of efficient breach (as heshould); if that theory were right, damages would be the obvious remedy in thecase, and specific performance wouldn‘t be available. Posner instead applies amore sensitive analysis (one that another judge on the panel apparently liked somuch, he couldn‘t help but write a separate concurrence saying nothing morethan how happy he was to concur) that weighs the advantages anddisadvantages of specific performance in a case like Walgreen‘s. On one hand,specific performance gets Walgreen what it wants, and it avoids the uncertaintyand expense in determining damages. On the other, however, specificperformance might give Walgreen too much bargaining power; Walgreen coulduse the threat of the specific-performance order to force the landlord to pay itmore money than it deserved. (Of course, the landlord could try to negotiate togive Walgreen LESS than it deserved, and negotiations might break down; if thathappened, the landlord might have to perform even if both the parties would havebeen better off with some amount of damages.)In any case, the remedy of specific performance is (as a matter of descriptivelaw) discretionary in this way, and courts can look at the advantages anddisadvantages of an order before awarding it.



We discussed a more general principle that fits many cases and seems to bewell justified: specific performance should be available unless (1) the buyer caneffectively cover or (2) specific performance would be too intrusive (as inemployment cases) or would have some other significant, unjustifieddisadvantage (like some of the hypothetical cases Posner mentions in Walgreen,

where the costs of negotiation are high). If you‘d like more, Mel Eisenbergdescribes this principle in more detail in ―Actual and Virtual Specific Performance,the Theory of Efficient Breach, and the Indifference Principle in Contract Law,‖ 93Calif. L. Rev. 975 (2005).2. Reliance as a substitute for expectation damagesWhen expectations are too speculative (or when a promisee simply doesn‘t wantto pursue them, perhaps because they‘d be too difficult or expensive to establish),the promisee can sue for the costs it incurred on the contract instead. We callthis ―reliance damages,‖ though it would probably be easier to think of it as―letting the promisee get back its costs as a surrogate for hard -to-proveexpectation damages.‖ Ordinarily, if the contract had been performed, a

promisee would have earned (1) its costs back, plus (2) some profit. Suits for―reliance damages‖ in cases like Security Stove involve a promisee basicallysaying, ―I‘m theoretically entitled to (1) and (2), but I‘m just asking for (1) because(2) is hard to prove or some other rule blocks me from getting it.‖ The rule is thatthe promisee can do this and get (1) as a damage award.There are two related sub-rules. First, (1)—that is, the promisee‘s costs—caninclude costs that the promisee incurred even before the contract wasmade. These costs were in no way ―caused‖ by the breach, but that doesn‘tmatter, because we‘re giving them only as an estimate of part of the promisee‘sexpectation damages. (We could also say ―the breach didn‘t cause the costs, butit did cause them to be wasted,‖ but we don‘t even have to say that. The point is

just that we‘re not really giving ―reliance damages‖; we‘re just using costs toestablish a basis for giving the plaintiff an award that approximates part of theirexpectation damages.)Second, not all contracts are profitable ones, and the promisor (the defendant)should have the chance to prove that the plaintiff wouldn‘t have had anyexpectation damages (or wouldn‘t have had enough to cover the reliancelosses). If so, the ―reliance‖ damages should be reduced accordingly. 3. RestitutionRestitution is complicated, and in some other countries it‘s a whole separatecourse. Even in the US, there are some who claim there‘s a ―restitutionrevival‖: there‘s a new Restatement of Restitution, some institutions are offeringwhole courses in the subject again, and so on. We just scratch the surface; withfour credits, we don‘t even have time for all of basic contract law, much lessrestitutionary principles in general.Restitution damages, in contract law, give the plaintiff back what the plaintiff paidthe defendant. (Restitution costs are thus a subset of reliance costs, thedifference between the two measures being that reliance costs include costs paidto anyone, whereas the restitution measure includes only costs paid for thebenefit of the defendant.) One basic principle is that the restitution measure can,



like the reliance measure, serve as a proxy or surrogate for expectationdamages. This is basically the Osteen case, except that that case leads us intoone further principle: though a promisee can recover restitution damages forbreach, the promisee has to deduct the value of the services she received. Incases like Osteen, that value is just the value she‘d have had to pay on the open

market for those services.Algernon Blair, which we started to discuss but didn‘t finish, raises a question inrestitution parallel to the last thing I said about reliance above: namely, on acontract that wasn‘t going to be profitable, can a promisee recover restitutiondamages that would leave it better off from breach than from performance? We‘llget to that question on Monday after the break.

Week 9

1. Finishing restitutionWe started this week by finishing our discussion of restitution.The rule exemplified by Algernon Blair is that plaintiffs who would have lostmoney on a completed contract can still sue for the value of the services theyrendered if the other party breaches. That is, unlike reliance damages, restitutiondamages are available even on losing contracts—as long as there‘s abreach. The ―value of the services they rendered‖ is computed as of the time theservices are rendered; it‘s not necessarily the contract price or some particular proportion of it.That rule is still probably the majority rule, though it‘s opposed by the newRestatement Third of Restitution, which holds that parties who would have lostmoney on a completed contract shouldn‘t be made better off by breach. A separate use of restitution, as in cases like Kutzin, is basically to preventforfeitures (of things like deposits) even when they‘d hurt only the breachingparty. Suppose a buyer pays $5000 toward a $10000 purchase and thenbreaches, refusing to take delivery or pay the full amount; why should the buyerlose $5000 just because that amount was already paid? Of course, the buyermight be on the hook for the full $10000 anyway, but suppose that the buyerproves that the seller‘s expectation damages were just $650; letting the seller keep the $5000 deposit, then, seems rather harsh. And it would probablydiscourage partial performance; why pay $5000 toward a $10000 if you‘re goingto lose it all just because it was paid?Courts generally allow for recovery of this kind of partialperformance. Sometimes they say they won‘t do it for ―willful‖ breach, but that‘sprobably an irrelevant distinction to draw. (In general, there‘s little agreement onexactly what the word ―willful‖ means throughout the law; there‘s not evenagreement on how to spell it.) On the question of whether a buyer gets a depositback, for example, why should it make a difference whether the buyer couldn‘tarrange for financing or simply changed his or her mind?UCC § 2-718(2) and (3) have some special rules that apply in the case of sales



of goods.2. Basics of interpretationa. Subjective or objective interpretation?Perhaps the key point to take away from our discussions of interpretation is thatcontract law‘s rules about interpretation are neither wholly ―subjective‖ or wholly

―objective.‖ There‘s a complex interplay between (1) the reasonableinterpretations of things people have said and done and (2) what‘s actually intheir heads.The book nicely lays out four core interpretive principles in contract law (seepages 393 –95) to help demonstrate this interplay.The first principle (based on Restatement Second § 201(2)(b)) is that where Aand B assign different meanings to something and don‘t realize the other assignsa different meaning, but A‘s is more reasonable, A‘s prevails. This is essentiallyLucy v. Zehmer. Keep in mind that in Lucy, the court has already (at leastimplicitly) made a determination that under the circumstances of the particularcase, reasonable people who saw the claimed real-estate sale would believe it to

have been a legitimate sale, not a joke or a drunken brag. (The court could wellhave been wrong about that decision, but that‘s not the issue that concernsus.) Given that determination, the fact that the seller thought (to himself) that hewas joking doesn‘t matter. In general, that has to be the right rule or else simplycrossing your fingers, or making what the medieval European scholars called a―mental reservation‖ (they actually called it a ―reservatio mentalis‖), could defeata contract.The second principle is that if A and B assign different meanings to somethingand don‘t realize the other assigns a different meaning, but A‘s and B‘s meaningsare equally reasonable, then there isn‘t assent as to the term with the disputedmeaning. In cases like Raffles (the ―Peerless‖ case), that means there‘s nocontract at all: each party had in mind a different ship named ―Peerless,‖ and thatmattered because the particular ship on which goods were to arrive was (as ithappened) a core economic feature of contracts like those at issue inRaffles. The ―Swiss coins‖ case is probably easier to understand, factually; in thatcase, ―Swiss coins‖ could reasonably have meant either (1) the seller‘s ―Swisscoin collection,‖ compared with other collections or (2) all the seller‘s Swiss coins,throughout her collections. The parties didn‘t actually reach a deal.The third principle is that parties can subjectively attach a weird, objectivelyunreasonable meaning to their interactions with each other. If they choose to dothis (and can later prove it), then their subjective meaning prevails. Thus, twopeople pretending to sell each other land, as a practical joke on their neighbor,haven‘t actually sold each other the land—or at least, they haven‘t as long as acourt believes one of them that they were joking. What‘s the difference betweensuch a case and Lucy v. Zehmer? They both knew it was a joke, rather than justone of them.The final principle is that you can‘t take advantage of the interpretive ignorance of someone you‘re contracting with; this is another example of a ―duty to rescue‖ incontract law. Thus, if A says something and she knows that reasonable peopletake it to mean X but that B will take it to mean Y, what she says will be taken to



mean Y because it was so easy for A to correct B. Another way to look at thiskind of case is to say that while B is at fault for imposing an unreasonablemeaning on what A said, A is even more at fault for knowing this and doingnothing about it. So, for example, if I say ―I‘ll sell you my vacation home for $200,000‖ knowing that the only ―vacation home‖ I own is some crappy villa in

the rural panhandle but also knowing that you‘ll misinterpret me to be referring toa nice condo I own as an investment property (i.e., not a vacation home) inClearwater, I‘ll be interpreted to have agreed to sell you that home.b. Interpreting purposive languageLanguage never completely describes its purpose. In order to fill gaps in whatpeople have said, Williams points out (on page 397) that we can try to figure out(1) what the parties actually meant but didn‘t say, (2) what they would have saidif they‘d thought about it, but didn‘t think about it; or (3) what seems fair or reasonable under the circumstances. Only (1) is literal ―interpretation.‖ Thesecond is a kind of imaginative interpretation; the third is just a recognition thatwe can‘t always know what parties would have done, and even if we‘re trying to

help them, we sometimes have to interpret what they said in view of what other,fair-minded parties would have done.c. Trade usage, course of dealing, and course of performanceThe term ―trade usage‖ refers to ways of communicating and patterns of interpretation that are known in a trade. Often, trade-specific jargon is completelynonsensical to those who don‘t understand trade usage, and it‘s pretty obviousthat you need some context in order to figure out what people are saying. Thus,you need to know something about football to know what a ―touchdown‖ is, andyou need to know something about computer networking to know what a ―router‖is. If I‘m a football player and my contract provides a bonus for each touchdown,obviously we need to look at the way people use the term ―touchdown‖ in theworld of football to know what the term means; similarly, if a computer-networking technician agrees to install twelve ―routers‖ at your office, obviouslyyou can‘t easily know what that means without understanding something aboutcomputer networking.The less obvious cases, perhaps, are those were trade usage gives a specificmeaning to a term that also has some general, non-trade meaning. The starkestexamples of this are the cases where a trade uses ―white‖ to mean ―black,‖ or ―1000‖ to mean some number that isn‘t actually 1000. These aren‘t differentconceptually from cases in which tradespeople use their own jargon that soundslike gibberish to other people; they‘re just potentially more confusing because the

jargon doesn‘t sound like gibberish—it instead sounds intelligible but conveyssomething different from what tradespeople mean.The general rule is that trade usage is relevant throughout contract law, andcourts will look to it to inform their interpretations of the parties‘ language. Insome ways, this is just an application of the various principles in section (a),above.―Course of dealing‖ is like an ad hoc trade usage developed by the two particularparties in a given case. Like trade usage, it‘s generally admissible in order toshed light on what words mean.



―Course of performance‖ refers to what happens after a contract is made, as theparties begin to perform their contracts; it, too, is useful to shed light on what theparties actually meant. Its use in cases is more controversial, however, or at leastmore complicated, because it might conflict with what we‘ve previously studiedon ―waiver‖: just because I haven‘t insisted on a right I have doesn‘t mean that I

should necessarily lose that right.

Week 10

1. Offers generallyIn general, an offer is anything that a reasonable person would think they couldaccept and thus have a contract. That‘s what we mean when we say an offer hasto be ―definite‖ enough. ―I‘d very much like to sell you my home for somethingover $200,000. What price would you give for it?‖ isn‘t an offer; it not somethingthe offeree could say ―yes‖ to. In the area of offer and acceptance, we might simply apply general rules ofinterpretation to ask what reasonable parties would think. The definition I‘ve justgiven of an offer does just that: an offer is something that reasonable peoplewould interpret as something they can accept. But in this area of law, there are avariety of particular, bright-line rules (the book calls them ―expression rules‖) thattell us the legal effect of particular kinds of language or other expressions ofintent that people use.So, for example, one ―expression rule‖ is that advertisements are not, by default,offers. (See Lonergan.) An exception to this is that advertisements that offer areward, or provide something to certain customers that meet a condition (like thefirst 1000 people to sign up for something on a website), ARE treated asoffers. (See Lefkowitz.) It‘s important to note that these rules are NOT simplyrules of interpretation; that is, many reasonable people who see advertisementsmight well think they are offers meant to be accepted. But that‘s not the rule ofcontract law. (As we discussed, some federal and state regulations governadvertisements and impose penalties for misleading people in ways that wouldotherwise be consistent with this rule of contract law.) Given that the default ruleabout advertisements might surprise people, it‘s not clear that it‘s a good rule. 2. How offers dieThere are a variety of ways that an offer can go away.The simplest way for an offer to terminate is simply for it to ―lapse.‖ The basicrule about lapse is quite consistent with simple interpretive rules: an offer lapsesafter a reasonable amount of time. That is, you can‘t accept an offer if reasonablepeople would no longer think the offer is on the table because too much time haspassed.There‘s one specific ―lapse‖ rule that‘s NOT necessarily consistent with generalreasonableness; it‘s just another bright-line ―expression rule‖: offers made duringa conversation lapse, by default, at the end of the conversation.The rest of the rules in this area probably have little to do with accurate



interpretation and more to do with making rules simple and clear and thus, ideally,ordering the parties‘ behavior. If an offeree rejects an offer, that terminates theoffer. Thus, saying ―No‖ means you can‘t, a few minutes later, say ―Yes.‖ Wedon‘t specifically ask whether that‘s what the parties expected; we take ―No‖ tomean that the offer is now off the table—that is, completely gone.

Two bright-line expression rules govern counteroffers: (1) a counteroffer declinesthe original offer and (2) a counteroffer acts as a rejection, thus terminating theoriginal offer.

Again, these are ―default rules‖; the parties can change them by being explicitabout what they want. Thus, an offeror can say in advance ―I‘d like to entertainany counteroffers you have, but to be clear, my offer stands even if you make acounteroffer.‖ Similarly, an offeree can say ―Look, I want to keep thinking aboutyour original offer, but if you‘d like to close the deal today, we can do it for $550,000.‖ Similarly, an offeree can simply ask a question rather than propose acounteroffer.As Ardente shows, the rules governing counteroffers can seem somewhat harsh,

particularly where the acceptance comes in the form ―I accept, but I‘d like tomake sure…‖ Even something that looks like an acceptance may be treated as acounteroffer; if there‘s any reason for this, it‘s that we want to make sure theparties really have a deal before holding them to it. In modern law, there are afew ways around the harshness of this rule. The general European approach,also in the CISG, is that modifications proposed in a purported acceptance don‘tmake the acceptance a counteroffer if they don‘t ― materially later the terms of theoffer.‖ Similarly, courts might hold that an ―I accept, but…‖ message was reallyan acceptance, and the ―but…‖ was just an ancillary offer, or a protest, or arequest for a gift, or something similar.The other major way that offers can die is for them to be revoked. By default, alloffers are revocable: if I say ―I‘d like to sell you my car for $20,000,‖ I can revokethat offer anytime before you accept it. A relatively minor but still interesting rule,which we saw in Dickinson, is that the offeror doesn‘t have to communicaterevocation outright; if the offeree learns that the offeror has revoked, or even justacted inconsistently with an offer‘s continued effectiveness, the offer is deemedto have been revoked. This rule seems to make sense; why hold an offeror to anoffer when even the offeree is clear that the offeror doesn‘t want to be bound? The big complication regarding revocations is the old, somewhat surprising ruleof classical contract law that offers can usually be revoked even if the offerorpromises not to revoke them. ―You can buy my car for $20,000, and I promisethat you‘ll have until Friday at 9:00 a.m. to accept this offer; under nocircumstances will I revoke the offer before then.‖ The classical rule is that youcan still revoke at will. Why? It‘s less surprising, perhaps, when you realize thatthe classical courts treated the promise here (to hold the offer open) as apromise without consideration; as a simple donative promise, it wasunenforceable. This was sometimes called the ―firm-offer rule‖—the idea that youcouldn‘t make a firm offer simply by a unilateral promise, without more.In commercial contexts, the firm-offer rule almost always serves to defeat parties‘reasonable expectations, and few or none of the reasons for refusing to enforce



donative promises seem to apply here. What is the moral or commercial upsideof the rule? Courts have long recognized that it‘s basically a bad rule, and theresult has been its steady erosion. One erosion is that even nominalconsideration is enough to support a promise to hold an offer open, even inmodern law. Thus, ―If you give me a sunflower seed, then you‘ll have the right to

buy my car for $20,000, and I promise you‘ll have that right until Friday at 9:00a.m.‖ would be treated as an enforceable promise (even though the sunflower seed is just nominal consideration and wouldn‘t be valid consideration for theunderlying promise to sell my car, rather than to keep the offer to sell it for$20,000 open). Another erosion is that the UCC outright overrules it, at least formerchants and under particular circumstances. Finally, if the offeree relies on afirm offer, modern law tends to use that as a basis to keep the offer open.A related rule—one of the most bizarre in classical contract law—was that anoffer for a unilateral contract (that is, an offer that can be accepted by an act) wasnot deemed to be accepted, and could still be revoked at the offeror‘s will, even if the proposed act had been started. The classic example was that ―I promise to

give you $100 if you climb this flagpole‖ could be revoked when the offeree was90% up the flagpole. Even the First Restatement reversed this rule in § 45; wediscussed in class precisely how it did this, but it‘s more important to know justthat the result is that partial performance would, practically speaking, lead anoffer for a unilateral contract to become irrevocable.3. AcceptanceOffers can specify the way they need to be accepted. Thus, an offer that says―We don‘t have a contract unless you mail this form to the following address andit‘s received by Friday at noon‖ prescribes the modes of acceptance. When an offer doesn‘t do this, there are a few default interpretive rules. Onegeneral rule is that, where it‘s plausible, offers can typically be accepted either byact or by promise. So if I say ―I‘ll give you $500 if you write me a double-dactylpoem for my birthday,‖ that offer can probably be accepted either by (1) your writing me a double-dactyl poem for my birthday or (2) your saying ―Sure, Iaccept.‖ In the first case, we‘ve got a unilateral contr act (acceptance by an act);in the second, we have a bilateral contract (acceptance by a promise). Anothergeneral rule, which is just an ―expression rule,‖ is that an offer that specifies onemanner of acceptance doesn‘t, by default, foreclose others. So saying ―You canaccept this offer by visiting the following website and clicking on the ‗Accept‘button…‖ doesn‘t mean you can‘t also accept the offer by mailing in anacceptance or by doing some other act.The ―mailbox rule‖ is a rule that affects contracting at a distance; it‘s less and lessimportant with the rise of fast communication. As background, normally lettershave legal effect only when they‘re received. The ―mailbox rule‖ is a specificexception for acceptances only; the rule is that acceptances are effective whenthey‘re sent. We discussed in class what might justify this rule (and thecomputer-networking theory that sheds light on it); the simplest explanation isthat it accelerates the possibility of performance. The mailbox rule has asecondary effect, which is that it shifts the risk of lost messages to the offeror;once I accept, I‘ve got a contract, and that stays true even if you never receive



my letter (though if I learn that you haven‘t received the letter and don‘t tell you ina reasonable amount of time, my right to rely on the contract might go away).Klockner showed us that when you accept by an act, you don‘t have to havebeen specially motivated to accept the contract. To put it differently, people dothings for many reasons, and ―you‘d have done it anyway‖ doesn‘t typically

undermine an acceptance. Similarly, when an offer can be accepted by an act,the acceptance comes from doing the act, not notifying the offeror about it; thatsaid, you may still need to notify the offeror in a reasonable amount of time.There are other, more complicated ways contracts can be accepted. InInternational Filter, the purported offer was ―We‘d like to sell you a filter for $1230. We‘ve got a contract if you send back this form, as long as it‘s thenapproved by one of our executives.‖ It‘s probably easiest just to say the partieshad a contract as soon as the buyer responded to the offer, but that this contractwas conditional on the executive‘s acceptance. Classical contract law might haveseen the seller‘s promise as illusory, however, so instead the court decided thatthe buyer‘s mailing was an offer and that the executive‘s thought processes (―I

approve‖) counted as an acceptance. Thus, the case is in a section of the bookcalled ―Subjective Acceptance.‖ ―Acceptance by conduct‖ is easier: in Polaroid, the waste-disposal companyreceived Polaroid‘s offer and then acted as if they had a contract. As a result, theterms of Polaroid‘s offer governed the parties‘ conduct. 4. Implied-in-law and implied-in-fact contracts

Implied-in-fact contracts are very easy to understand: they‘re just real contractswhere the parties‘ assent is implied rather than expressed. Under the rightcircumstances, parties can make contracts with their eyebrows, or by raising theirhands (as at an auction), etc. That‘s all that ―implied-in-fact‖ contracts are. ―Implied-in-law contracts‖ aren‘t really contracts. The term is used to coversituations where the parties DON‘T have a contract but we‘ll nonetheless givethem contract-like rights. We‘ll finish this topic next week, but for now, consider the core example in Nursing Care Services: emergency services. If I‘m knockedunconscious and an ambulance takes me to the hospital, I clearly have nocontract with the ambulance company. They haven‘t offered anything; I haven‘taccepted anything. But if they bill me $600, and that‘s the going rate for ambulance services, I‘ll have to pay them. The court ―implies‖ a contract. Theresult is sometimes, incidentally, called a ―quasi-contract,‖ which just means ―as if it were a contract.‖

Week 11

1. The power of the written word generally in contract law

The material this week all concerns what effects written documents have on theinterpretation and enforcement of contracts. It may be helpful to recall that weencountered one example of the special legal powers that are sometimes given



to written words toward the very beginning of the course: the Statute ofFrauds. The Statute of Frauds requires that certain promises be evidenced inwriting or else the law won‘t enforce them at all; obviously, the idea behind it isthat requiring written evidence in some cases will help prevent frauds. As wediscussed earlier, though, courts have long disfavored the Statute of Frauds; the

sad fact is that by requiring writing inflexibly, in some cases the Statute ended updoing as much to promote fraud as to stop it.

The general lessons are roughly the same throughout this whole area: (1) Manypeople think written words are a particularly good, reliable kind of evidence, (2)But often they create exactly the wrong impression, so (3) To what extent shouldwe rely on them, and how should we weigh them against other kinds ofevidence?

The law here is very murky; it varies widely from place to place, and not all therules are totally coherent. If a year from now, all you remember from this area is

―Contract law sometimes pays special attention to written words, or at least saysit does, but written words are rarely the end of the story,‖ you‘ll have gotten 8 0%or so of the material here, and your understanding will probably match that ofmost lawyers who don‘t focus on contract litigation or special problems incontract planning. (Some lawyers have the incorrect understanding that writtenwords always dictate results; they hear ―parol-evidence rule‖ and think ―oh, thatmeans that courts only enforce what‘s written down.‖ If you stay away from thatmisimpression, that again gets you about 80% of the way toward understand thematerial here.)

Now, on to the specific rules and patterns we studied…

2. The parol-evidence rule

―Parol‖ just means ―oral,‖ so you can think of this rule as ―the one about oralevidence.‖ But if you do think of it that way, it would be misleading, because theparol-evidence rule isn‘t either (1) a rule about all kinds of oral evidence or (2) arule that applies only to oral evidence. A better name for it would probably be―the side-agreement rule.‖ The basic idea is that for certain kinds of writtencontracts, the rule refuses to enforce side agreements—either contemporaneousoral agreements or prior agreements of any kind (including written ones).

When does the parol-evidence rule apply? First, there has to be a writtencontract. Usually, there‘s little dispute about whether a writing exists or not in thefirst place. Electronic records count.

Second, the written contract has to be an ―integration.‖ The term ―integration‖ isapplied (as a conclusory term) to those writings that someone decides havecaptured the parties‘ whole agreement (or some definite part of it). Historically,under classical contract law and what‘s been characterized as Williston‘s view,



the question of whether a writing was an ―integration‖ was determined based onobjective evidence; that is, a judge would typically look at a contract and decidewhether it appeared to be an integration. Even by the First Restatement,however, the rule was that ―any relevant evidence‖ can be used to show whether a writing was an integration. The modern rule is essentially that ordinary rules of

interpreting the parties‘ intent (using all relevant evidence, including nonwrittenevidence) apply to determine whether a particular document is an integration;however, a judge (rather than a jury) typically makes this determination.

Third, once a judge decides that a document is an integration, the next questionis whether the alleged outside agreement ―contradicts‖ the written document or simply ―adds to‖ it. There are a variety of ways that courts talk about this rule;Mitchill v. Lath shows one approach, for example. They all basically come downto the idea that (1) if there‘s an integration, outside agreements can‘t outrightcontradict it, (2) but if the outside agreement is consistent in some way with thewriting, the outside agreements will still be enforced. What ―consistent‖ means

here varies widely across the courts and across time. The First Restatement‘srule (§ 240) was that to be enforced, the outside agreement had to be ―notinconsistent‖ with the integration AND either (1) had to be made for separateconsideration or (2) would have ―naturally‖ been left outside the writing (based onobjective evidence). Modern courts have taken a variety of approaches: somehave held that any outside agreement that wouldn‘t DEFINITELY have beenincluded in the integrated writing can still be enforced; others have held that theoutside agreement has to be ―reasonably harmonious‖ with the writing.

Overall, the parol-evidence rule has been significantly weakened but is still verymuch a part of contract law. The main effect under modern law is at least (1) torequire a judge (rather than a jury) to determine whether there‘s an integration,even if that judge uses nonwritten evidence and (2) if the judge decides there isan integration, to give the judge a chance to refuse to enforce outsideagreements if they contradict the integration or are otherwise too inconsistentwith it. (For step #2 here, it‘s worth pointing out that once a judge finds there‘s anintegration, outright contradictions with the integration will almost never beenforced. If the writing says ―this contract doesn‘t include the neighboringproperty that I also own,‖ an outside oral agreement that the contract DOESinclude that property won‘t be enforced.)

The stuff about ―partial integrations‖ is probably mostly a red herring; basically,questions about ―partial‖ versus ―complete‖ integrations just concern the scope of the integration, and that question merges into the question of whether a particularoutside agreement is reasonably consistent with the integration.

We discussed some other details that are worthwhile to keep in mind. Forexample, you may want to review the material on ―no-oral-modification‖clauses. Also, keep in mind that fraud and duress can almost always be shownby nonwritten evidence (e.g., a contract that says ―I sign this freely without having



a gun pointed at me‖ won‘t exclude evidence that a gun was being pointed at me),though increasingly, parties are getting away with ―no-fraud‖ or ―no-reliance‖clauses that include terms like ―I have not relied on anything the other party saidto me, regardless of whether it‘s true or not, so I give up any claims related tofraud.‖ This kind of clause probably doesn‘t present a problem if the parties are

sophisticated and are explicitly negotiating about the risks of being misinformed;it strikes me as ridiculous that a court would enforce such a term against aconsumer in a non-negotiated form contract. We‘ll discuss form contracts ingeneral next week.

3. The plain-meaning rule and the interpretation of written words

Separately (at least as a logical matter) from the parol-evidence rule is thequestion of how written contracts are to be interpreted. We face this questionwhen the parol-evidence rule doesn‘t apply (because a writing, though not anintegration, still sheds light on what the parties wanted); we also face it even

when the parol-evidence rule does apply (to figure out what the integrationMEANS).

The ―plain-meaning rule‖ is a rule of interpretation. In courts that adopt it, awriting with a meaning that‘s plain on its face dictates that the court interpret thewriting consistently with that meaning. In other words, if a writing seemsunambiguous to a judge, then under the plain-meaning rule, the judge will rely onthe writing. (If the writing‘s ambiguous, obviously outside information is going tomatter, regardless of whether a court adopts the plain-meaning rule or not.)

In its strong form, the rule meant (for example, under the First Restatement) thata writing might be given a meaning that neither party wanted, as in the ―buymeans sell‖ coded-messages cases. The rule has been significantly weakened,and in some cases outright overruled. Thus, for example, the SecondRestatement would admit evidence to let the parties show that ―buy‖ in their contract really means ―sell.‖

It may be helpful to consider and compare the advantages and disadvantages ofthree possible rules: (1) don‘t treat the written word specially; treat everything asa basic factual question of interpretation, using the rules of interpretation we‘vealready studied; (2) any evidence can be used to shed light on whether a writingis ambiguous, and only after we look at all the evidence can we decide whether awriting is ―unambiguous‖ and should control the interpretive questions in thecase; (3) like #2, but we decide whether the writing is ambiguous just by lookingat the writing.

As a rough summary, the First Restatement and Williston seem to have been infavor of #3; modern courts generally don‘t adopt a rule much stronger than #2;and many have moved very close to #1.



The modern rule is generally that written contracts are interpreted in the light oftrade usage, course of performance, and course of dealing. In cases covered bythe UCC, the UCC directs courts to interpret all these forms of evidence asconsistent with each other, but where that‘s unreasonable, it sets up a hierarchyin § 1-303:

(e) [T]he express terms of an agreement and any applicable course ofperformance, course of dealing, or usage of trade must be construed wheneverreasonable as consistent with each other. If such a construction is unreasonable:

(1) express terms prevail over course of performance, course of dealing, andusage of trade;

(2) course of performance prevails over course of dealing and usage of trade;and

(3) course of dealing prevails over usage of trade.

This is probably too rigid (imagine a very strong trade usage and a course ofperformance that‘s only slightly suggestive of a particular interpretation), butwhat‘s important is that all these forms of evidence can supplement eachother. There‘s only a plain-meaning-type problem if there‘s an outrightcontradiction between express terms and other evidence (like trade usage), andeven there, courts can try to harmonize the two. (Thus, ―a dozen‖ doesn‘tcontradict ―13‖ if in a particular industry, like baking, ―a dozen‖ is taken to mean13. Similarly with ―a gigabyte‖ in the technology industry, as wediscussed.) Obviously, parties can disclaim trade usage or course of dealing ifthey do so explicitly. (―We understand that in our trade, ‗1000‘ usually means‗anything between 850 and 1150.‘ But in this particular contract, we actuallymean literally 1000.‖)

Perhaps the hardest cases here are those where we‘re not sure whether theparties meant to adopt a very strong trade usage or to disclaim it. A stylizedexample of this is a written contract that says, ―This is not a coded message inwhich ‗buy‘ means ‗sell‘; ‗buy‘ actually means ‗buy,‘‖ and then one of the partiesattempts to supplement it with outside evidence that it‘s a coded message after all and that this text was just designed to throw off especially skepticaleavesdroppers. Is there a text so strong and unambiguous that outside evidencecan never matter? Presumably not, at least in the case of duress. But beyondthat obvious case, can we ever be sure a writing reflects the parties‘ intentwithout looking at least a little past the writing? If so, should we, or are therecompelling administrative reasons to stick with text even though we‘re not surewhat it was intended to mean? That‘s one of the fundamental questions in thisarea, and courts (and scholars) disagree sharply.



Week 12

1. The ―battle of the forms‖

This material is technically intricate but conceptually rather easy. Classicalcontract law had two rules relevant to this area. First (the ―mirror -image rule‖),you couldn‘t get a contract merely by exchanging forms unless those contractswere identical. If my form‘s terms didn‘t match your form‘s completely, each formwould be treated as a new counteroffer, rather than an acceptance, even if itmatched all the negotiated terms and was accompanied by a letter purporting toaccept the offer. Second (the ―last-shot rule‖), once one of the parties performedunder the contract, there would be ―acceptance by conduct‖ (as in the Polaroidcase). If this happened, the performance itself would be treated asacceptance. Whenever there‘s acceptance, you have to ask ―Of what?‖—that is,what was the offer? The ‖last-shot rule‖ answered this question by treating thelast form sent as the outstanding offer; the subsequent conduct accepted thatform. Thus, classical contract law largely decided the ―battle of the forms‖ in

favor of whoever sent the last form, though it never gave a moral or policy-relatedreason for that decision.

The UCC repeals both the ―mirror -image rule‖ and the ―last-shot rule‖ in mostcases. This is one area where we focus on the UCC because it outpaced thedevelopment of court-made law. Technically, the statutory ―repeal‖ covers onlycontracts for the sale of goods, but it suggests a useful general development inthe law.

The UCC‘s repeal is accomplished in two stages. First, UCC § 2-207(1) repealsthe mirror-image rule; it says, basically, that you can get a contract by

exchanging forms if you send a form that is functionally an acceptance ―eventhough it states terms additional to or different from those offered or agreedupon.‖

To trigger § 2-207(1), which basically applies only to form contracts, a form hasto be a ―definite and seasonable expression of acceptance‖ in the first place (thatis, it can‘t be an actual substantive counteroffer, or an inquiry, or anything otherthan an attempt to accept the contract in definite terms).

To be covered by § 2-207(1), a purported acceptance also can‘t opt out of it; § 2 -207(a) says that it doesn‘t apply if ―acceptance is expressly made conditional on

assent to the additional or different terms.‖ So, for example, if I send a formcontract that says ―I accept, but only if you agree to my form rather than whatever terms are in your form,‖ that leaves us back with the older rule: the form is then acounteroffer rather than an acceptance. Courts have interpreted this particularexception narrowly. At the very least, it‘s not enough for a form to say ―Theseare the terms that matter‖ or even ―This is an acceptance subject to the followingform terms‖; the form has to be clear that it‘s an acceptance that‘s ―condition on

ASSENT to the additional or different terms‖ (that is, not ―this is subject to these



terms‖ but ―this is an acceptance ONLY IF YOU AGREE to these terms‖).

If there‘s a contract under § 2-207(1), that means the parties are immediatelybound; they can‘t arbitrarily walk away from the contract. There‘s a further question, however, as to what the terms of the contract are. UCC § 2-207(2)

goes part of the way toward answering this question. As to ―additional terms‖ inthe acceptance—that is, terms in the accepting form that weren‘t in the offeringform—it says they‘re part of the contract unless a few potential exceptions (listedin subsections (a), (b), and (c) of § 2-207(2)) apply. Specifically, ―additional‖terms become part of the contract unless (a) the offer specifically says they don‘t,(b) the new terms change things ―materially‖ (by which the UCC means that theycause either surprise or hardship), or (c) the offeror either has already objectedto them or does so within a reasonable time after receiving them. (Note that § 2-207(2) admits additional terms from the acceptance into the contract only if theforms are exchanged ―between merchants‖; study guides tend to dwell on this,but it‘s not particularly the vast majority of form-exchanges are between

merchants.)

UCC § 207(2)‘s answer to ―What are the contract‘s terms?‖ is incomplete. Weknow that the terms in the contract are (1) those in the offer and (2) those addedunder section § 2-207(2), but what happens when the accepting form term‘saren‘t simply ―additional terms‖ (admitted to the contract by §2-207(2)) but areactually different and directly contradictory with the offer‘s terms? The UCCdoesn‘t say. The dominant approach has been to read into § 2-207 somethingthat‘s come to be called the ―knockout rule,‖ which is just the idea that different,contradictory terms between the offer and the acceptance simply eliminate eachother. What fills the resulting gap? As usual with the UCC, the answer is either(1) stuff that‘s included specifically in the UCC as default terms, or (2) whatever‘sreasonable.

Finally, § 2-207(3) repeals the ―last-shot rule.‖ It applies when, for whateverreason, the parties don‘t have a contract under § 2 -207(1) merely by exchangingforms. (Perhaps, for example, there wasn‘t any form that counted as a ―definiteand seasonable acceptance,‖ or perhaps the purported acceptance was―expressly made conditional on assent to the additional or different terms‖ andthe offeror never gave such assent.) It‘s worth noting that if the parties don‘thave a contract under § 2-207(1), they can walk away, at least until performancethat ―recognizes the existence of a contract‖ begins. UCC § 2-207(3) tells uswhat happens when they don‘t walk away and instead start performing. Thesection recognizes the Polaroid rule (acceptance by conduct) and tells us whatthe terms of the resulting contract are. Specifically, the terms are (1) whateverthe forms agree on, and (2) UCC defaults and other reasonable gap-fillers. Thus,§ 2-207(3) is very similar to the ―knockout‖ rule that courts have read into § 2 -207(2). One difference is that the acceptance‘s additions don‘t get included ascontract terms, nor do unchallenged terms in the offer; when there‘s anacceptance by conduct under § 2-207(3), only ―those terms on which the writings



of the parties agree‖ are added by the forms, and the rest of the terms come fromthe UCC (including reasonable gap-fillers).

2. Form contracts and unconscionability

Just as courts don‘t enforce unconscionable terms generally, they don‘t enforceunconscionable written terms. Conceptually, there‘s probably not much newhere, but we saw a few cases that show modern courts‘ skepticism in enforcingunfairly surprising form terms. A general rule is that courts won‘t enforce a formterm that the form‘s writer knew, or should have known, would have led the other party not to accept the contract. This is more or less a direct application of theprinciples of procedural unconscionability that we already studied, but it‘s animportant situation that arises often.

3. Mechanical (―unilateral‖) mistake

We started our discussion of mistakes, and their effects on contract enforcement,on Thursday. We‘ll continue this in the coming week. So far, we‘ve separated―evaluative mistakes‖ from mechanical ones. If I make a bad bet, I‘m ordinarilynot excused from performing a contract. But if the contract results from a simpletypo, or a similar kind of error, there‘s more of a chance I‘ll be excused, at leastfrom performing or paying expectation damages.

There‘s a doctrinal area that‘s concerned with ―unilateral mistake,‖ but what itreally seems to cover are simply mechanical errors—a bad price quote from awebsite because of a software bug, a mathematical error while adding upnumbers in making an offer, a misprint in an ad that‘s for whatever reasontreated as a formal offer, and so on. The core question in this area is whetherthe person who makes a mechanical mistake ends up in an enforceable contractthat they never wanted.

As we‘ll see throughout our discussion of mistake and unexpected circumstances,reliance damages are generally easier to get that expectation damages. If myunilateral mistake causes you reliance harms, you can generally recover reliancedamages from me—almost as if it were a recoverable economic tort. In otherwords, if my mechanical mistake makes you worse off than you started, you canusually recover the difference. For example, in the car-dealership case westudied, the car dealership offered the buyer his expenses for gas, wasted time,and so on. ―Wasted time‖ is often hard to recover for in general, at least for individuals, but the dealership was right to try to restore the buyer‘s reliancelosses.

The more difficult questions concern expectation damages. The classical rulewas more or less that (1) if the other party knew or should have known about theerror, there was no enforceable contract, but (2) otherwise, there WAS anenforceable contract. The first of those rules is easy, and it‘s unchanged under



modern law; if anything, it‘s strengthened by being more obviouslysubjective. That is, if I actually know (under the circumstances) that your websitehas simply given me the wrong price, it‘s pretty clear I shouldn‘t be able to takeadvantage of your error, just as I can‘t take advantage of your interpretivemistakes when I actually know about them. Similarly, if I SHOULD know that

you‘ve made an error—either because of special expertise or, more commonly,because it‘s a ―palpable error‖ (an obviously wrong price under thecircumstances, as it would be if Amazon offered to sell you a 60-inch televisionfor $20.99 instead of $2099)—I shouldn‘t be able to recover.

The harder case is where the other party is totally innocent; it doesn‘t know, andhas no reason to know, that there‘s been a mistake. To say it differently, itreasonably expects performance. In this case, as I noted above, the classicalrule was that there‘d be an enforceable contract. The emerging modern rule, aswe saw in the car-dealership case in California, is that there won‘t be, but that‘sstill the minority rule. The modern thought seems to be that expectation

damages are a harsh remedy merely for creating a fleeting expectation; you don‘tusually bargain for the risk of mechanical errors, and they can lead to prettysignificant losses—losses that would be pure windfalls to the other party. And ifthe other party can recover its reliance losses, any significant harms to it willalready be taken care of

Contracts Summaries

Documents