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Contracts I

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Contracts I

Course Info

  • Professor: Unknown
  • Semester: Fall 2015
  • Year: 2015

Topics Covered

  • Purpose of contract law; freedom of contract and efficient breach
  • Types of damages: expectancy, reliance, and restitution
  • Consideration: bargained-for exchange, detriment/benefit, illusory promises
  • Mutuality of obligation and the preexisting duty doctrine
  • Promissory estoppel (justified reliance) and Restatement 2d § 90
  • Unjust enrichment and quasi-contract
  • Promises for benefit received (moral obligation / past consideration)
  • Tort vs. contract liability; misfeasance and nonfeasance
  • Statute of Frauds: common law and UCC § 2-201
  • Expectancy damages: cost-of-performance vs. diminution-in-value
  • Consequential and special damages; the Hadley foreseeability rule
  • Mitigation of damages
  • Reliance damages; liquidated damages provisions
  • Specific performance
  • Nature of mutual assent; the objective theory of contracts
  • Offer: definition, advertisements, duration, revocation, firm offers
  • Acceptance: prescribed manner, mailbox rule, silence, unilateral contracts
  • Battle of the Forms: UCC § 2-207
  • Agreements to agree; indefiniteness

Detailed Outline

1. Purpose and Policy of Contract Law

Freedom of contract is essential to public policy. Efficiency in the economic system is promoted by private agreements. Private agreements are usually performed because litigation is expensive and there are reputational harms from nonperformance.

Efficient breach: breach is efficient when the breacher pays expectation damages and still comes out ahead, reallocating resources to higher-valued uses. However, it causes instability and dissuades contract-making; punitive damages are never available for breach (only compensatory).

Fuller’s three functions of contract formality:

  1. Evidentiary — provides proof of the agreement
  2. Cautionary — induces deliberation before making promises
  3. Channeling — standardizes dealings and reduces ambiguity

2. Theories of Obligation

2A. Agreement with Consideration

Rule (Restatement 2d § 71): Consideration requires a bargained-for exchange in which the promisor manifests intent to induce a return promise or performance, and the promisee’s act is induced by the promisor’s promise. A detriment to the promisee or a benefit to the promisor suffices — law does not inquire into adequacy.

Elements:

  1. A promise by the promisor
  2. The promise induces a return act or promise by the promisee
  3. The promisee’s act or promise induces the promisor’s promise (bargained-for exchange)
  4. Detriment to promisee or benefit to promisor (however slight)

Key distinctions:

  • Psychic benefit alone is not sufficient consideration
  • Past consideration is not consideration (the act was not induced by the later promise)
  • Nominal consideration in option contracts can be valid if it serves a cautionary function (Rest. 2d § 87(1)(a))
  • Forbearance from a colorable legal claim is consideration if done in good faith (honest or reasonable belief in the claim)

Illusory promises: A promise is illusory if it depends entirely on the promisor’s wish, will, or pleasure, making it unenforceable for lack of mutuality. However:

  • Satisfaction clauses are not illusory: commercial value/fitness/utility terms → objective reasonableness standard; matters of fancy/taste/judgment → good faith (subjective) standard
  • Partial performance of a new job, forgoing accrued salary at former employer, creates valid consideration
  • A promise conditioned on some contingency is not illusory if the contingency constrains the promisor

Mutuality of obligation: Both parties must be bound or neither is. If one party has an absolute right to terminate or walk away, the contract may be illusory — but a right to terminate on reasonable notice or upon some condition is sufficient.

Preexisting duty rule: Performance of, or a promise to perform, a duty already owed is not valid consideration for a new promise. Modifications at common law require a new bargained-for exchange (often achieved through a “mutual rescission” fiction). Exception: UCC § 2-209 allows modification of a sale-of-goods contract without additional consideration if done in good faith.

2B. Promissory Estoppel (Justified Reliance)

Rule (Rest. 2d § 90): A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee, and which does induce such action or forbearance, is binding if injustice can be avoided only by enforcement of the promise. The remedy granted may be limited as justice requires.

Elements:

  1. A promise (not mere puffing or negotiation)
  2. The promisor should reasonably expect the promise to induce reliance
  3. The promisee actually and reasonably relies (detriment — opportunities foregone)
  4. Injustice can only be avoided by enforcement

Key distinctions:

  • More specific the promise, more reasonable the reliance; general assurances during negotiation tend to be puffing
  • Precontractual reliance (failed negotiation): distinguishable from puffing by the specificity of the promise and the foreseeability of the investment
  • Remedy: typically limited to reliance damages (not expectancy), though some courts award expectancy when warranted by justice
  • When a contract fails for indefiniteness, the promissory-estoppel remedy is reliance, not expectancy

2C. Unjust Enrichment (Quasi-Contract)

Rule: When a plaintiff confers a benefit on a defendant under circumstances making it unjust to retain without compensation, the law implies an obligation to pay.

Elements:

  1. Plaintiff conferred a benefit on defendant
  2. Plaintiff did not act gratuitously (reasonable expectation of payment)
  3. Unjust for defendant to retain benefit without paying

Key distinctions:

  • Contract implied-in-fact: all elements of an agreement inferred from conduct; contract implied-in-law (quasi-contract): no actual agreement but law imposes obligation
  • No unjust enrichment where plaintiff was trying to gain business advantage and defendant could not reasonably have supposed plaintiff expected a fee
  • Closeness of relationship (long-time friend, family) tends to indicate gratuitous services
  • Unmarried cohabitants may raise unjust enrichment for business-like services and property acquired through joint efforts
  • When contract is unenforceable (Statute of Frauds, indefiniteness), unjust enrichment is available
  • Remedy: market value of services/benefit, not expectancy; plaintiff cannot claim both contract price and unjust enrichment
  • If breaching contractor seeks restitution: Recovery = value conferred − damages caused by breach
  • Britton v. Turner rule: party who breaches may recover reasonable value of services actually rendered, less damage from breach, to incentivize partial performance and prevent forfeiture

2D. Promises for Benefit Received (Moral Obligation / Past Consideration)

Rule (Rest. 2d § 86): A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice, unless:

  • (a) the promisee conferred the benefit as a gift or the promisor has not been unjustly enriched; or
  • (b) the value of the promise is disproportionate to the benefit

Key distinctions:

  • Pure past consideration (Mills v. Wyman rule) is not enforceable; moral obligation alone is insufficient
  • But if the original obligation was legally enforceable and is only “artificially barred” (e.g., by the statute of limitations), a subsequent promise to pay revives it
  • Humanitarian acts voluntarily performed (like saving someone’s life) generally do not give rise to enforceable obligation unless the promisor subsequently promises to pay
  • Subsequent promise acts as “legal fiction” equivalent to a prior request if benefit was conferred on the promisor

2E. Contractual Obligation from Form (Option Contracts, Warranties)

Option contracts (Rest. 2d § 87(1)): An offer is binding as an option contract if it is in writing, signed by the offeror, recites a purported consideration (even nominal/sham), and proposes an exchange on fair terms within a reasonable time.

UCC § 2-313 Express warranties: A statement of fact or description by the seller that is made part of the basis of the bargain creates an express warranty. No particular language needed. Mere opinion/commendation of value does not create a warranty. A buyer who inspects before purchase may waive warranty for discoverable defects but not for latent defects.

UCC § 2-315 Implied warranty of fitness for particular purpose: (1) Buyer intends a particular purpose; (2) seller knows of the purpose at contracting; (3) buyer relies on seller’s skill/judgment; (4) seller knows of buyer’s reliance.

UCC § 2-314 Implied warranty of merchantability: Goods must be fit for their ordinary purposes. Applies to merchants. Objective knowledge of the trade/locality controls (e.g., bones in fish chowder are merchantable if consumers reasonably expect them).

3. Tort vs. Contract

  • Misfeasance (defective performance): may give rise to both tort and contract claims; party can elect between them.
  • Nonfeasance (failure to perform): contract claim only; no independent tort.
  • Tort remedies (including punitive damages) require an independent legal duty beyond the contract.
  • Fraudulent misrepresentation requires: (1) material existing fact; (2) scienter; (3) intent to induce reliance; (4) reasonable reliance; (5) injury.
  • Breach of implied covenant of good faith supports tort only where a “special relationship of trust and reliance” exists (e.g., insurance contracts with insureds who cannot turn to the market; not ordinary employment).

4. Statute of Frauds

Common law categories requiring writing:

  1. Executor’s promise to pay estate’s debts personally
  2. Suretyship — promise to pay another’s debt (only gratuitous surety requires writing under Rest. 2d § 184)
  3. Promise made in consideration of marriage
  4. Contract for sale of land or interests in land (including mortgages)
  5. Contract not capable of performance within one year from date of formation (measured from contract date; indefinite contracts are outside; right to terminate = fully performable within that period)
  6. Goods over $500 — UCC § 2-201

Satisfying the common law writing requirement (Rest. 2d):

  • Must be signed by the party to be charged
  • Reasonably identifies the subject matter and the parties
  • Sufficient to indicate that a contract has been made
  • States the essential terms of the unperformed promises
  • Multiple writings may suffice if one is signed and they relate to the same transaction
  • Need not be made at the time of contracting; memo before or after suffices

Satisfying UCC § 2-201 (goods):

  • Writing signed by party against whom enforcement is sought
  • Must state a definite quantity
  • Exceptions: (1) specially manufactured goods; (2) partial performance (payment accepted, goods accepted); (3) admission in court pleading or testimony; (4) between merchants, if confirmatory memo received and not objected to within 10 days

Mitigating doctrines:

  • Part performance (equitable doctrine): for land contracts, more than payment alone is required — improvements + acts explainable only by the contract’s existence
  • Promissory estoppel (Rest. 2d § 139): An oral promise that the promisor reasonably expects to induce reliance, and which does, may be enforced if injustice can only be avoided by enforcement; remedy is limited as justice requires (note: some states bar this approach)
  • Waiver: admitting the contract in court proceedings

5. Remedies

5A. Expectancy Damages

General rule: Put the injured party in as good a position as if the contract had been performed.

Cost of performance vs. diminution in value:

  • Ordinary rule: cost to complete the contemplated performance
  • Economic waste exception (Rest. 2d § 346): if physical completion would require unreasonable economic waste (e.g., tearing down a structure), courts award diminution in market value instead
  • Cardozo test (Jacob & Youngs, Inc. v. Kent): was the defect intentional or inadvertent? Is the hardship of full performance grossly disproportionate to the benefit to the owner?
  • If party bargained specifically for the performance itself (not just the resulting value), cost of performance is the appropriate measure

Building/construction contracts:

  • Breaching contractor: contractor recovers contract price minus cost to complete (lost profits + expenses incurred)
  • Breaching owner: contractor recovers the sum it would have realized in profits had the contract been performed: Recovery = contract price − (total cost − cost expended)

UCC § 2-713 (buyer’s damages for seller’s breach): Market value at time buyer learns of breach − contract price + incidental/consequential − saved expenses.

Lost volume seller (UCC § 2-708(2)): When the seller had supply to fill one more order, reselling to a replacement buyer does not make the seller whole; seller is entitled to profit from the lost sale. Applies when § 2-708(1) (market price formula) is inadequate.

5B. Consequential Damages (Hadley Rule)

Rule from Hadley v. Baxendale: (1) General damages — those arising naturally from the breach in the usual course of things; (2) Special/consequential damages — those in the reasonable contemplation of both parties at the time of contracting as the probable result of breach.

Elements for consequential damages:

  1. The type of loss was reasonably foreseeable to the breacher at the time of contracting
  2. The loss was caused by the breach
  3. The loss can be proven with reasonable certainty
  • Expert knowledge of the breaching party can expose them to greater consequential damages
  • UCC § 2-715(2)(a): consequential damages include loss from the buyer’s general or particular requirements known to the seller at contracting, not reasonably preventable by cover
  • Tacit agreement test rejected under UCC; foreseeability test controls

5C. Mitigation of Damages

Rule: Injured party has a duty to take all reasonable steps to mitigate (minimize) losses.

Negative duty (contractor): Upon countermand by owner, contractor may not continue performance and thereby increase the owner’s liability. Must stop work and seek cover (reasonable substitute contract).

Employment: Wrongfully discharged employee must seek comparable employment. Other employment must be substantially similar to the one from which employee was deprived; different or inferior employment does not trigger mitigation.

UCC sale of goods: Affirmative duty to investigate other ways to minimize damages (e.g., resale, other buyers). Substitute buyers obtained after breach do not defeat a lost-volume claim.

5D. Reliance Damages

Available when expectancy is too uncertain (e.g., new business, speculative profits). Recovers expenditures made in reliance on the contract.

  • Pre-contract reliance costs are recoverable if they were foreseeable to the breacher and in reasonable contemplation of both parties
  • If the contract would have been a losing one, reliance recovery is reduced by the expected loss
  • Costs incurred after the contract but not fixed overhead are generally recoverable; fixed overhead requires showing allocation to the specific contract

5E. Liquidated Damages

Rule: A liquidated damages clause is enforceable if:

  1. Determined at the time of contracting (ex ante)
  2. A reasonable estimate of just compensation (not a penalty)
  3. Actual damages were difficult to estimate in advance

A “sliding scale” tailored to the extent of breach is more likely to be valid. When the clause is double the purchase option, it may still be reasonable if it accounts for lost opportunities and the difficulty of re-leasing.

5F. Specific Performance

Rule: Available when monetary damages are inadequate — typically for unique goods or land (land is inherently unique, prima facie case). Also where no reasonable substitute exists in the market.

UCC § 2-716: Buyer may obtain specific performance for unique goods or in “other proper circumstances” (financial inability to cover; no long-term alternative contracts available).

Defenses to specific performance: (1) unfairness (unclean hands); (2) lack of mutuality of performance; (3) indefiniteness; (4) impracticability of enforcement; (5) personal-service contracts (would create personal servitude).

6. Offer and Acceptance

6A. Nature of Mutual Assent

Objective theory: A contract requires that (1) a reasonable person would believe the offeror intended to be bound, and (2) the offeree actually understood the offer. Not a subjective “meeting of the minds” but an objective determination of what a reasonable person would take the words to mean.

Misunderstanding (Rest. 2d § 20): If both parties attach different meanings to a material term and neither knows (or has reason to know) the other’s meaning, there is no contract. If one party knew or had reason to know the other’s meaning, that party is bound by the other’s interpretation.

6B. Offer

Definition: A manifestation of willingness to enter into a bargain such that the offeree’s assent would conclude the bargain. Must be clear, definite, and explicit — leaving nothing open for negotiation.

Advertisements: Generally invitations to bargain, not offers. Exception: an ad that is clear, definite, explicit, and leaves nothing open for negotiation (e.g., first-come-first-served, specific quantity and price) may be an offer.

Duration and revocation:

  • An offer terminates upon: (1) rejection or counteroffer; (2) lapse of time (reasonable time if not stated; immediately in face-to-face conversation); (3) revocation by offeror; (4) death or incapacity of either party; (5) failure to comply with prescribed acceptance terms
  • Revocation: effective upon receipt by offeree (not mere dispatch)
  • Indirect revocation: when offeree learns through a reliable third party that offeror has acted inconsistently with keeping the offer open
  • Firm offers (UCC § 2-205): A signed written offer by a merchant to buy or sell goods, which gives assurance it will be held open, is irrevocable for the stated time (max 3 months) without consideration

6C. Acceptance

Rule: Acceptance must be definite and unequivocal. The offeror is the “captain of the offer” and may prescribe the manner of acceptance.

Prescribed manner: If offeror prescribes an exclusive manner and offeree does not comply, the offeree makes a counteroffer; the offeror’s failure to object may constitute acceptance of the counteroffer.

Silence: Silence is generally not acceptance, unless the offeree takes the benefit of services with a reasonable opportunity to reject and a reasonable expectation that compensation was wanted.

Part performance:

  • Unilateral contracts: performance is acceptance; option contract arises once offeree begins performance (Rest. 1st § 45; Rest. 2d § 45) — offeror cannot revoke once offeree has tendered or begun performance
  • Bilateral contracts: beginning performance may be a reasonable mode of acceptance (UCC § 2-206); offeree must notify offeror within reasonable time

Mailbox rule: Acceptance is effective when dispatched (sent), not when received. Revocation is effective only upon receipt. Offeror can override the mailbox rule by prescribing that acceptance is effective upon receipt.

Counteroffer: A conditional acceptance (adding new terms or changing terms) is a counteroffer at common law, not an acceptance.

6D. Unilateral vs. Bilateral Contracts

Unilateral contract: Offer invites acceptance by performance, not promise. Bound only upon completion of performance (but option contract arises upon beginning performance).

Bilateral contract: Offer invites acceptance by return promise. Bound upon exchange of promises.

Presumption (Rest. 2d § 31): When ambiguous, bilateral contract is presumed.

Subcontractor bids (Drennan rule): Promissory estoppel (Rest. 2d § 90) protects the general contractor who reasonably relies on a subcontractor’s bid, making the bid irrevocable during the time the general is relying on it.

6E. Agreements to Agree / Indefiniteness

A preliminary agreement or letter of intent may or may not be binding depending on whether a reasonable person would believe the parties intended to be bound.

Three possible outcomes: (1) enforceable contract; (2) agreement to negotiate in good faith; (3) no contract — parties merely memorializing ongoing talks.

Supply of missing terms: Courts can enforce a contract despite missing terms if the parties intended a contract and there is a reasonably certain basis for remedy (UCC § 2-204(3)). Objective extrinsic standards (fair market value, course of dealing) can fill gaps.

6F. Battle of the Forms (UCC § 2-207)

Rule: A definite and seasonable expression of acceptance operates as an acceptance even if it states terms additional to or different from the offer, unless acceptance is expressly made conditional on assent to the additional/different terms.

Additional terms between merchants: Automatically become part of the contract unless: (a) the offer expressly limits acceptance to its terms; (b) the additional terms materially alter the contract; or (c) the offeror objects within a reasonable time.

Material alterations (examples): disclaiming standard warranties, unreasonably shortening complaint periods, requiring guarantees not common in the trade.

Non-merchant or expressly conditional acceptance: The terms of the contract are those agreed upon by both parties, plus any terms supplied by UCC gap-fillers.

Key Doctrines

  • Consideration — bargained-for exchange; detriment to promisee or benefit to promisor; adequacy irrelevant; illusory promises fail for lack of mutuality
  • Preexisting Duty Rule — performance of a duty already owed is not consideration; common law requires new bargained-for exchange; UCC § 2-209 allows good-faith modification without additional consideration
  • Promissory Estoppel — Rest. 2d § 90; promise + reasonable expected reliance + actual detrimental reliance + injustice without enforcement; remedy may be limited to reliance
  • Unjust Enrichment — benefit conferred + not gratuitous + unjust to retain; remedy is market value of benefit, not expectancy
  • Statute of Frauds — common law (land, one-year, suretyship, marriage, etc.) and UCC § 2-201 (goods over $500); mitigated by part performance and promissory estoppel
  • Expectation Damages — put injured party in position had contract been performed; cost-of-performance vs. diminution-in-value; economic waste doctrine
  • Consequential Damages — Hadley foreseeability rule; reasonably contemplated by both parties at contracting; tacit agreement test rejected under UCC
  • Mitigation of Damages — negative duty for contractors; affirmative duty for discharged employees; comparable employment required; UCC imposes affirmative duty to cover
  • Liquidated Damages — enforceable if reasonable ex-ante estimate and damages difficult to calculate; sliding scale preferred; must not be a penalty
  • Specific Performance — inadequate remedy at law; land is inherently unique; UCC § 2-716 for unique goods or other proper circumstances
  • Offer and Acceptance — objective theory; offeror is “captain of the offer”; mailbox rule; firm offers under UCC § 2-205; Battle of the Forms under UCC § 2-207
  • UCC Article 2 — governs movable goods; § 2-201 (Statute of Frauds); § 2-205 (firm offers); § 2-206 (acceptance by performance); § 2-207 (battle of forms); § 2-313/2-314/2-315 (warranties); § 2-708/2-713/2-715/2-716 (remedies)

Key Cases

  • White v. Benkowski — neighbors shared water supply; court awarded only compensatory damages for $400 loss; no punitive damages for contract breach because it would undermine efficient breach and dissuade contracting.

  • Hamer v. Sidway — nephew forbore smoking, drinking, and swearing until age 21 at uncle’s request; court held that forbearance of a legal right is sufficient detriment for consideration regardless of whether promisor benefited; establishes the detriment-based consideration rule.

  • Dougherty v. Salt — aunt gave nephew a promissory note as “present”; held unenforceable as a gift promise lacking bargained-for consideration; illustrates that gratuitous promises require both promisor and promisee to extract something.

  • Baehr v. Penn-o-Tex — economic benefit to promisor (e.g., keeping a gas station in business to collect accounts) can support forbearance to sue as consideration, even without explicit bargain.

  • Wood v. Lucy, Lady Duff-Gordon — promise to give exclusive endorsement rights implied consideration from mutual duties (marketing efforts, accounting, sharing profits); Cardozo holds that a promise fairly implied from commercial context is not illusory.

  • Kirksey v. Kirksey — brother-in-law invited widow to come live with him; she moved and later was evicted; early promissory estoppel case — court denied recovery but the case demonstrates reasonable detrimental reliance on a promise (later used to show the development of § 90).

  • Wheeler v. White — developer promised to procure a loan or personally fund it; plaintiff tore down his building in reliance; contract failed for indefiniteness but promissory estoppel awarded reliance damages for opportunities foregone.

  • Hoffman v. Red Owl Stores — Red Owl made specific representations assuring franchise; plaintiff sold bakery, moved family, in reliance; court applied promissory estoppel to precontractual negotiations; more specific promises = more reasonable reliance.

  • Sparks v. Gustafson — business services rendered by longtime friend for business purposes; court found unjust enrichment because services were not of the kind ordinarily expected to be done gratuitously.

  • Webb v. McGowin — worker deflected falling pine block to save employer, injuring himself permanently; employer promised lifetime payments; held enforceable under Rest. 2d § 86 — subsequent promise in recognition of material benefit received is binding to prevent injustice.

  • Watts v. Watts — unmarried cohabitants; court allows unjust enrichment for business services and property contributions after relationship ends but refuses to enforce claims rooted in domestic services alone.

  • Britton v. Turner — employee breached employment contract but had partially performed; court allows recovery of reasonable value of services actually rendered minus damage from the breach; incentivizes partial performance and prevents unjust enrichment.

  • Groves v. John Wunder Co. — defendant stripped gravel and failed to restore land as promised; court awarded cost of restoration (not diminution in value) when party had specifically bargained for the performance itself and deviation was intentional; economic waste exception inapplicable when breach was willful.

  • Hadley v. Baxendale — mill sent broken crankshaft for repair; carrier delayed; mill sued for lost profits; court held consequential damages are recoverable only if both parties reasonably contemplated them at contracting as the probable result of breach; establishes the foreseeability test.

  • Parker v. 20th Century Fox Film Corp. — actress wrongfully discharged from musical replaced by a Western role; court held that she had no duty to mitigate by accepting a different or inferior kind of work; establishes the comparable-employment rule for mitigation.

  • Clark v. Marsiglia — upon owner’s countermand, contractor had no right to continue painting and increase damages; establishes negative duty to mitigate (must stop work).

  • Warner v. McLay — breaching owner; contractor recovers the profits he would have realized: contract price minus (total cost minus costs expended) — the lost-profits formula.

  • Neri v. Retail Marine Corp — buyer repudiated contract for boat; seller could have made two sales; awarded lost volume profit under UCC § 2-708(2) less a statutory $500 offset; establishes the lost-volume seller rule.

  • Laclede Gas Co. v. Amoco Oil — no similar long-term contracts available in the market; court awarded specific performance even for sale of goods because no adequate substitute existed; inadequate remedy at law despite goods not being inherently “unique.”

  • Truck Rent-a-Center v. Puritan Farms — liquidated damages clause equal to double a purchase option; court upheld it as a reasonable sliding-scale estimate of hard-to-quantify damages (lost rental opportunity, storage, re-leasing costs); not a penalty.

  • Lefkowitz v. Great Minneapolis Surplus Store — newspaper ad offered specific coat for $1 to “first come, first served”; court held it was a valid offer because it was clear, definite, and explicit, leaving nothing open for negotiation; consumer’s arrival was acceptance.

  • Drennan v. Star Paving Co. — subcontractor’s bid incorporated into general contractor’s bid; sub attempted to revoke before general’s acceptance; court applied promissory estoppel (Rest. 2d § 90) to hold the bid irrevocable once general reasonably relied on it.

  • Ardente v. Horan — buyer’s “acceptance” letter asked whether furnishings were included; court treated it as a conditional acceptance (counteroffer) because a reasonable person would view the furniture question as a condition on the acceptance, not a mere inquiry.

  • Davis v. Jacoby — “If you can come and help, we will make it worth your while” is an offer for a bilateral contract (bound upon return promise); when ambiguous between bilateral and unilateral, courts presume bilateral.

  • Jacob & Youngs, Inc. v. Kent — contractor substituted Cohoes pipe for Reading pipe inadvertently; Cardozo holds the use-of-Reading-pipe term is a promise, not a condition precedent; substantial performance triggers owner’s duty to pay minus diminution-in-value damages (nominal); establishes the three-factor test.

  • Baehr v. Penn-o-Tex — forbearance to sue, when there is economic benefit to promisor and colorable claim by promisee, suffices as consideration.

  • Kitchen v. Herring — land is inherently unique; seller who conveys land to second bona fide purchaser must pay damages to the first purchaser based on a “constructive trust” on the difference.

Exam Approach

Step 1 — Threshold: Is there an Enforceable Obligation?

A. Agreement with Consideration

  1. Was there a valid offer (objective test: would a reasonable person believe offeror intended to be bound)?
  2. Was there a valid acceptance (definite, unequivocal, in prescribed manner)?
  3. Was there consideration (bargained-for exchange; detriment to promisee or benefit to promisor; not illusory; not past consideration; no preexisting duty problem)?
  4. Did any formation defenses apply (duress, fraud, mistake, incapacity)?

B. Promissory Estoppel

  1. Was there a promise (not puffing; specific enough to induce reasonable reliance)?
  2. Did the promisor reasonably expect reliance?
  3. Did the promisee actually and reasonably rely (opportunities foregone)?
  4. Is enforcement necessary to avoid injustice?
  5. Remedy: usually reliance (not expectancy); limited as justice requires.

C. Unjust Enrichment

  1. Was a benefit conferred on defendant?
  2. Was the conferral non-gratuitous (reasonable expectation of payment)?
  3. Is it unjust to retain without paying?
  4. Remedy: market value of benefit; not expectancy; not available if contract price is the ceiling.

D. Promises for Benefit Received (§ 86)

  1. Was a material benefit previously conferred on the promisor?
  2. Did the promisor later make a promise in recognition of that benefit?
  3. Is enforcement necessary to prevent injustice?
  4. Was the prior obligation merely “artificially barred” (statute of limitations, etc.)?

Step 2 — Statute of Frauds

  1. Is the contract within the statute (land, one-year, suretyship, marriage, goods > $500)?
  2. Is there a sufficient writing? (Signed by party to be charged; essential terms; multiple writings tied together?)
  3. Are there mitigating doctrines? (Part performance for land; promissory estoppel (§ 139); admission in court; UCC exceptions: specially manufactured, part performance, merchant-to-merchant confirmation)

Step 3 — Formation Defects (Offer and Acceptance)

  1. Was the offer definite enough? (Was it an advertisement or a true offer?)
  2. Did the offer lapse, was it revoked, or was there a rejection or counteroffer?
    • Revocation effective only upon receipt; firm offer under UCC § 2-205 irrevocable?
    • Was there indirect revocation (third-party information)?
  3. Was the acceptance valid?
    • Prescribed manner? Exclusive or permissive?
    • Mailbox rule (effective when sent)?
    • Conditional acceptance = counteroffer?
    • Silence as acceptance? (Only when offeree takes benefit of offered services with opportunity to reject)
  4. Unilateral contract? Option contract arise upon beginning performance?
  5. Battle of the Forms (UCC § 2-207)?
    • Definite and seasonable expression of acceptance?
    • Additional terms: material alteration? Objection within reasonable time?
    • Expressly conditioned on new terms?
  6. Agreements to agree: Was there intent to be bound? Sufficient certainty for remedy?

Step 4 — Consideration Problems

  1. Bargained-for exchange present?
  2. Is the promise illusory? (Depends entirely on promisor’s will?)
  3. Mutuality of obligation?
  4. Preexisting duty bar to modification?
    • At common law: mutual rescission + new bargain?
    • UCC § 2-209: good-faith modification without new consideration?
  5. Past consideration (not bargained for → no consideration)?
  6. Forbearance to sue: colorable claim + good faith requirement met?

Step 5 — Remedies

Work through each available measure; identify the controlling measure for this plaintiff.

  1. Expectancy

    • Cost of performance (ordinary rule) vs. diminution in value (economic waste exception)?
    • Was the breach intentional or inadvertent? (Jacob & Youngs three-factor test)
    • Building contract: lost profits formula or cost-to-complete?
    • UCC: buyer’s damages (§ 2-713 market formula); lost volume seller (§ 2-708(2))?

  2. Consequential damages

    • Were the losses reasonably foreseeable to the breacher at the time of contracting?
    • Were they in the reasonable contemplation of both parties as the probable result of breach?
    • Expert knowledge held by breacher? (Increases exposure)
    • Was the type and amount of loss proven with reasonable certainty?

  3. Mitigation

    • Did injured party take all reasonable steps?
    • Contractor: negative duty to stop work upon countermand
    • Discharged employee: affirmative duty to seek comparable (not different/inferior) employment
    • UCC: affirmative duty to cover or resell; lost volume exception

  4. Reliance damages

    • Appropriate when expectancy is too speculative (new business, indefinite contract)?
    • Pre-contract reliance costs recoverable if foreseeable?
    • Reduced by amount injured party would have lost even if contract fully performed?

  5. Liquidated damages

    • Was it a reasonable estimate at time of contracting?
    • Were actual damages difficult to estimate in advance?
    • Sliding scale / proportional to extent of breach?
    • Does it look like a penalty (double the actual damages with no basis)?

  6. Specific performance

    • Is the subject matter unique (land, custom goods, no substitute in market)?
    • Is there an adequate remedy at law?
    • Does any defense apply (unclean hands, indefiniteness, impracticability of supervision, personal service)?

  7. Restitution / unjust enrichment

    • Is expectancy too speculative or is the contract unenforceable?
    • What is the market value of the benefit conferred?
    • Is the contract price a ceiling on the restitution recovery?
    • Losing contract: reduce reliance by expected loss?

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