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Contracts
St. Johns University School of Law
Kniffen, Margaret N.

FINAL: (Professor Kniffin) ext. 6634
(1)   We need not memorize cases, BUT we do need to memorize the content of the UCC and Restatements [don’t give exact §’s, but do tell if it is UCC or Restatement.
(2)   Do not have to argue both sides, but must make the decision of the court.
(3)   Issues are the key, they are the most important to spot and write down. [Only talk about the issues in the problem, DO NOT ADD FACTS] (4)   To begin
(a)    Askà if the UCC applies (Is there a sale of goods?)
(b)   Askà is this a S.O.F. K, must it be in writing?
Note Bene: Some Judges/Lawyers do NOT believe in Public Policy at all. They believe you should focus only on the parties, issues and circumstances at bar.
Goal of Contract Law: To compensate rather than punish. Compensation is usually in the form of money damages.
Unilateral Contract seeks performance. (1-sided promise)
Bilateral Contract seeks a promise. (2-sided promise)

Law and Economics: It is possible to breach so you wont be hindered from being able to (1) breach (2) fully compensate the victim and (3) get a better deal elsewhere.(Efficiency)
àThere are no punitive damages in a breach of K case. The court does not care why you breach only that you did.
àIt is possible to breach, give other party expectation damages and still be better off by breaching. This is supposed to help the economic system as a whole.

Types of Damages: *Damages do not usually cover lawyer’s fees.*

(1) Expectation damages: [§2-713] (Usually the most often sought damage, usually gives the most money.) [Good for goods and services.] àExpectation Damages can be sought by both buyers and sellers.
“Puts the P in the position he would be had the K been performed.”
[Puts the victim of the breach back where he was had the K not been breached.] (a)    Damages for a result that did not occur because the party who breached failed to provide a good or service.
(b)   Award Given: Difference between FMV when buyer learned of breach (or cover price) and price agreed upon in the K, plus any incidental or consequential damages. [All of this minus any money P saved by not having to finish the K.] Cover: When buyer purchases reasonable substitute for lack of goods or services because of a breach. (Buyer must use good faith in covering.)
à If P does cover, he gets the difference b/w the purchase price and the contract price.
à P does not have to cover. If P does not cover then he is still compensated as if he did cover. P will get the difference between the K price and the FMV at the time P learned of the breach. [If you cover in bad faith, then treated as if you did not cover at all.] E.g. If buyer was supposed to buy for $10 and learned of the breach on a day where the market value was $15, he gets $5 in damages. (Cover price is price when buyer “learned” of the breach, NOT necessarily when the breach 1st occurred.)
E.g. If the buyer was supposed to purchase for $10 and then had K to sell for $12, then $2 in damages.
(1-A) Incidental damages: [§ 2-715 (1)] P will get any reasonable cost associated with getting cover such as inspection, receipt, transportation, care and custody of the rejected goods, and any commercially reasonable charges, expenses and commissions in connection with covering. These would include transportation costs, phone calls, all the extra stuff you need to do in order to cover for your breached K.

(1-B) Consequential damages: [§2-715 (2)] Any loss from requirements or needs that seller (at the time of K formation) should have known could not have been prevented by cover or otherwise. Any injury to person or property proximately resulting from the breach of K. *Seller responsible for foreseeable damages only.*

(2) Reliance Damages: (Reliance when can’t calculate damages, if can calculate damages then use expectancy damages.) [Generally on a K, but promissory estoppel may apply also.] “Put the P in the same position as he would have been had the K not been performed.” (aka “same position as before the K was made”)
àIncludes out-of-pocket expenses.
àIncludes damages for the worsening of your condition/position.
àIncludes incidental and consequential damages. [See 1-A and 1-B supra.] àCannot get damages for money you “would have made,” but can get any expenditures that you paid for.
àCannot get damages for stuff before K was signed, can’t rely on an offer.
It is used when lost profits cannot be proved with sufficient certainty but nonetheless there was expenditure of some sort; thus, P should get reimbursed.
Sullivan v. O’Connor: Doc performed K and promised nose/outcome did not occur.
àReliance is awarded when a K is performed and the desired or promised outcome has not occurred as promised or desired.
***If you started out with a $5 nose, you were promised a $7 nose, and you ended up with a $3 nose; your damages would be $2. ((The difference between where you started and where you ended up.))

(3) Restitution Damages: (May be a K or a non-K.)
“Damages for unjust enrichment of the breaching party.”
àD must pay money equal to the FMV of the benefit D received from P.
àD must pay the FMV of P’s work (irregardless of the K price). So you may actually get more then the K price, so can get more than expectation damages.
àWhen K is fully performed and only $ has to be handed over, then usually no restitution damages.
Requirements of Restitution:
(a)    D received a benefit.
(b)   Benefit was at the expense of P.
(c)    It would be unjust to allow D to retain the benefit.
(d)   The benefit was not intended as a gift.
*No restitution for illegality, unless one of the parties is less at fault.
*Don’t necessarily need a K.
*Shrubbery case, benefit was not at expense of P?

Hypo: Sullivan v. OconnoràP went to the Dr. who promised that he could enhance her beauty through procedures. It usually only takes 2 operations, but she required a 3rd to fix her face. The 3rd operation put her in a worse position than when she started.
So… what damages does she get here? 

no nose           after surgery              original nose               what Dr. promised     
0                          2                                   4                                       7

What Damages are possible in this situation?

(4) Specific Performance: [An equitable relief, no juries in these cases.] § 2-716(a): Specific performance may be decreed where the goods are unique or in other proper circumstances. Always at the discretion of the court.
à May be used in real estate, artwork, long term output K’s.

Requirements of Specific Performance: Only if C/L remedy is not adequate.
(1)   You can prove that $ damages are inadequate to put victim back in the position in which he would be had the K not been broken. Uniqueness. (Examples include land, K involving “taste”, no substitute, can’t calculate $.)
ৠ2-716: Objects or “rare” or “sentimental” value.
(2)   It would not be troublesome for the court to supervise the particular specific performance. (No personal service K’s, they are too difficult.)
(3)   The terms of the contract are specific enough to allow the court to write up a decree of specific performance.
(4)   Courts will not force hostile/antagonistic individuals to associate with each other. (They will allow hostile companies to work together.)
àMeeting all 4 does not guaranty specific performance, courts may use discretion because it is an equitable remedy.
**Can be imprisoned if you don’t follow specific performance, thus the K must be clear enough to allow the courts to write a very specific order of specific performance.**
example: Running a company as CEO or finishing a building K are not specific enough to allow specific performance.

Injunction: Is another equitable form of relief whereby you prohibit someone from doing a specified act.
Requirements of a Valid Contract
I.                   Consideration (bargained-for-exchange); or a substitute
II.                Mutual Assent, i.e., Offer and Acceptance
III.             No Way Out (No defenses to the formation of the Contract)

I. Consideration (bargained-for-exchange); or a substitute

“A court will enforce a bilateral or unilateral K only if there is consideration, or a substitute for consideration.”
àConsideration gives evidence of the parties’ intent to be bound.
àConsideration assures/helps assure that parties do not get bound too easily. When consideration is involved parties are more cautious.

“Consideration occurs whenever there is a bargained-for-exchange in which each party receives something that is either a benefit or a detriment.”
(***Minority recognizes a psychological benefit as considerationL.***)

Detriment: a loss, doing something that you either do not have to do or refraining from something that you do have the right to do.
àUsually if it is a loss to one party it is probably a hidden benefit to the other (otherwise would be a sadist J)
àIf it is not a bargained-for-exchange then it is a gift. [Consideration is what distinguishes a contract from a gift.] àObligations of honor or gift are not enforceable, no matter how disgraceful not accepting would be.

Performance can be:
(1)   an act
(2)   a forbearance
(3)   creation/modification/destruction of a legal right.

à ”Adequacy of the consideration should be measured at the time of the K’s formation.”

Voidable K’s:
(1)   Duress: Force someone into K by threat. (i.e. “your brains or your signature”)
(2)   Fraud: Deliberate intent to deceive. Some states say K never formed some say voided. Can also entail leaving out/withholding information.
General Rules re: Size/Value of Consideration:
***Courts do not usually consider the adequacy of the consideration.***
(a)    The courts allow both generous and foolish contracts; as long as they are NOT illegal.) 
(b)     Giving up a possible legal claim or a legal right may be consideration. (NB. you must know you are giving up the claim or right, and have an honest belief in such, not necessarily reasonable) [Can be totally unreasonable as long as honest. Kissing=Pregnant] (c) A verbal/written promise w/o consideration cannot be enforced. (No matter how disgraceful failure to perform would be)
(c)    Moral obligation is not consideration.
(d)   Benefits received in the past are not sufficient to be held as consideration.
(e) A past act cannot be consideration (pension immediate w/o having to work). Some states (like NY) have statutes that give exceptions to this rule.

NY Statute: Exception to the rule that “Past acts are not considered consideration.”
Four requirements for past acts to be considered “consideration”:
1)      promise is expressed in writing
2)      consideration is expressed in writing
3)      performance is proven
4)      K would be valid if not for timing
àThe promisee must be aware of the promise or no consideration. (Reward for return of bad guy.)

Three cases where the courts WILL evaluate the relative size/value of consideration:
“Usually the courts DO NOT consider the adequacy of the consideration.”
(a) People exchanging identical items: (very rare) same quality/quantity etc. If they cannot show a difference between the products courts won’t accept consideration.
No Difference = No Consideration.
(b) Unconscionability: extreme unfairness such that it “shocks the conscience of the court.” (subjective test on part of the court) [different from foolish K in degrees] e.g. $300 refrigerator financed to newlyweds for $1200
Unconscionability is an extreme area of foolish contracts.
(c) Token consideration: (courts are divided on this issue)

Three situations where a promise with NO consideration IS enforced anyway:
(a)    S.O.L Expires: When one re-promises to pay a debt that is no longer enforceable due to expired S.O.L., then no new consideration is needed.
(b)   Minors re-promise as adults: Voidable duty imposed upon someone, on a promise he made as an infant (voidable a la infancy). If, as an adult, he assumes responsibility and re-promises, then he is bound even if no new consideration.
(c)    Promise which repeats/restates that one will pay/make good a bankruptcy debt (that he is no longer legally liable for) is enforceable, even w/o consideration.
àSetting up a benefit to another may form a K.
àDad to estranged daughter “meet me at Macys and I will give you…” Consideration cause he gets to see her, he benefits.
àDad to stranger “meet me at Macys and I will give you…” No consideration cause dad don’t care if he sees stranger. Instead a “Conditional Gratuitous Promise”.
A.   Restitution (a substitute for consideration): Alternate Basis for Recovery.

Four Requirements of Restitution:
(a)    D receives a benefit.
(b)   The benefit is at P’s expense.
(c)    It would be unfair to allow D to maintain benefit w/o paying for it (very important)
(d)   The benefit was not given as a gift (compensation must be expected from the particular party with whom you had the agreement(courts are split hereL))

When can you get restitution?:
(a)    A Valid Contract (get recovery by remedy)
(i)                  If a K is too indefinite, then you can get restitution.
(ii)                If a K is unenforceable via;
(1)   statute of frauds,
(2)   no consideration,
(3)   K is too indefinite or,
(4)   no bargained-for-exchange)
and as a result one party is unjustly enriched, then the other party can get restitution, i.e., he will get the difference of the enrichment.
Exceptions:
(a)    There is no restitution for illegal contracts.
(b)   There is no restitution for psychological benefits

Examples:
(1) Officious Intermeddler: One who forces gifts upon another. Out-of-the-blue paint neighbors house and then expect them to pay you for it. (No Restitution Here)

(2) Constructive Trust: (kind of restitution) Someone steals one dollar and wins 64 million in lotto with “that” dollar. Conversion would give you only 1$. This fictitious/constructive trust could give you the whole 64 million if you could track/prove it was your dollar. (Here you can get Restitution, if you can track the $.)

(3) Forging Doctrine: If there is an invalid bilateral K but one side finishes/tenders performance, then the court may forge a unilateral K out of invalid bilateral K.
(Can also try to get estoppel or restitution damages.)
The court pretends that there was bargaining. (This is a minority viewL)

B.   Reliance: Promissory Estoppel and Equitable Estoppel (a substitute for consideration) Alternate Basis for Recovery
àThere is never reliance on an “offer” unless there is a chain of K’s (E.g. construction contracts)
àThere is no reliance on a “contract”; instead sue for a “breach of K”
àUse reliance for a promise, a representation of fact, or an unenforceable K.

àPromisory Estoppel and Equitable Estoppel are basically the same, the have the same requirements. The major difference between the two is:
(1)   Promisory Estoppel: Is reliance on a “PROMISE”
(2)   Equitable Estoppel: Is reliance on a “REPRESENTATION OF FACT”
Five Requirements for Promissory Estoppel:
(For equitable estoppel, substitute the word “promise” with “representation of fact.”)
(1) A promise made by promisor
(2) The other party detrimentally relied on promise (gave up time, $

cepted by someone who knows the offer has been made, and acts in performance of the known offer. One cannot perform, then find out there was an offer, and then accept offer after performance.
E.g. Return of a “wanted” man, later find there was a reward, can’t accept offer after performance. No reward is given in this instance.
àOne can’t accept an offer he did not know about = no mutual consent.
àOne can’t bargain for an offer he did not know about = no consideration.

Purchase Order: An offer that originates from the buyer. Acceptance comes in the form of acknowledgement from the seller.

mirror image rule: Under the Common Law, the terms of the acceptance must exactly match the offer. If the terms do not match then the attempted acceptance is considered a counter-offer. (game then starts all over again) [UCC 2-207 abolished this mirror-image rule for sale of goods only.] **Reasoning behind the rule was that the courts didn’t want to/tried not to bind people to K’s they don’t want to make.**

Mistakes in Offers: If mistake is too big, then the other side should know it is wrong.
àG.C.’s who bid (put in offer) for public works can rescind if there is an honest mistake.
(a) Mutual Mistake: Here both parties are mistaken. In this case, K is rescinded and each party gives back whatever it was holding. The court gives Rescission and Restitution.
(b) Unilateral Mistakes: Only one party is mistaken. Too bad, so sad.
Some exceptions include G.C.’s, see above.
E.g. You intend to order (offer) 10K paper clips, your secretary puts in an order for 10 million. If mfg. could reasonably believe you wanted 10 million you are stuck, if unreasonable to believe then you will not be stuck.
E.g. You correctly indicate 10K, but Western Union changes it to 10 million. If mfg. has reason to believe, then you are stuck. But you do have a separate action against Western Union.
àRelief from a mistaken bid is allowed when one party knows or should know of the other’s error (and requirements for rescission are fulfilled).
(c) Equitable Exception: Use fairness and discretion. Allow relief from K if the enforcement of such a K would be unconscionable. Look at the burdens to both P and D if the K were to be kept or denied. Balance the hardships that would befall each party.

Irrevocable Offers (Termination of an Offer): Offers that can never be revoked once they have been made.
(1)   Options Contracts: (supported by consideration): Look at house, unsure if you can afford it. Owner offers it to you at 200 large, you can’t accept but you don’t want it revoked. Thus, you pay consideration to keep the offer open for a specified period if time. 
àIt is a separate K to keep the offer open.
àSo this option K, to keep the offer open, is irrevocable once it is agreed upon.
(2)   Firm Offers: (§ 2-205) Merchants Only. Sale of goods.
A firm offer must:
(a)    Merchants only (NY expanded to include non-merchants and all K’s; not just sale of goods.)
(b)   be written and signed
(c)    must give assurance it will be held open
(d)   non-revocable for lack of consideration (only for time stated)
(e)    never valid more than 3 months (NY expanded to reasonable time)
àIf offeree makes terms offeror must sign (offeror would otherwise be severely handicapped.
(3)   Offers made to Governmental Units: These are irrevocable by statute. The legislature gives advantage to governmental units. Governmental bids cannot be withdrawn. (Some state/municipalities allow revocation; minority L)
(4)   Unilateral offers for specific performance: Hamer v. Sidway “I’ll pay you if you refrain till your 21st birthday.” Rule: Once the offeree begins performance and notifies offeror he has begun, the K is irrevocable.



(5)   Restatement 2nd § 45: Option K Created by Part Performance or Tender (for unilateral contracts)
1)      if an offer invites the offeree to accept by rendering performance, an option K is formed (thus irrevocable) as soon as the offeree (i) begins the invited performance or (ii) tenders a beginning of it
(6)   Promissory Estoppel: If offeree detrimentally relies upon the offer and the offeror could have reasonably expected such reliance.
(7)   If the offeree knows/should know it was a mistake then no K. “One cannot snap-up   an offer or bid knowing it was made in mistake.”

Termination by Operation of Law:
(1)   Death or Insanity of Either Party: This does not have to be communicated to the other party. (Unless it is an irrevocable offer, like an option K.)
(2)   Destruction: of the proposed K’s subject matter
(3)   Illegality of K:
(4)   Offer in face to face conversation: It lapses when conversation is over; not applicable to phone conversations or e-mails. (watch out!)

How can termination of an offer occur?:
(1) offeror revokes
àThe slightest communication indicating that the offeror does NOT want to be bound is a revocation of the offer
àOfferor can revoke offer before it is accepted. The revocation includes notification to the offeree.
E.g. If offeror offer’s to sell his house to A, but offeror sells it to B first. Then A must be notified, otherwise, if A accepts offer before notified that it is revoked, the offeror is in trouble.
***You should/must revoke the offer before you go and sell your house to another.
***If offeree (A) had heard from a reliable 3rd party source that the offeror had already sold the house or is unwilling to deal, then this is good enough notice to be a revocation.
(2) offeree rejects

(3) offer can lapse
àOfferor in offer can set time at which the offer lapses. Basically saying “If I don’t w/draw it myself, the offer is revoked as of Tuesday.”
àIf no specific time is set, then the offer revokes w/in a reasonable time after it is made.
***There would be different reasonable times for perishable v. nonperishable good (i.e. bananas v. bookends)

(4) offeror’s/offeree’s death or incapacity kills the offer






(5) Others Examples:
***Under mirror image rule, if you change the offer, it is terminated
***Option contracts can NEVER be revoked. Even if both sides assent, the offer survives