Mike Shecket’s Contracts Outline[1]


I.                   What is a Contract?

a.      Contracts are promises.

b.     Restatement § 1 says “A contract is a promise the law will enforce.

c.     Some contracts are written, and others are oral.

d.     Contract disputes are frequently caused by failures in communication.

II.                Breach of Contract

a.      To prove a breach of contract, a plaintiff must prove three things:

                                                              i.      Contract formation

                                                            ii.      Breach

                                                          iii.      Damages

b.     Anticipatory repudiation (UCC § 2-610)

                                                              i.      When either party breaches before the date they were supposed to perform, the aggrieved party has several options.

1.     They can wait a “commercial reasonable” amount of time for the repudiating party to change their minds and perform (Oloffson v. Coomer)

a.      Pursuant to UCC § 2-610(a), one may await performance by the repudiating party for a “commercially reasonable time”.  Then one has a duty to “resort to any remedy for breach”, pursuant to UCC § 2-610(b).

2.     They can use a remedy for breach (at § 2-703 for aggrieved sellers, and at § 2-711 for aggrieved buyers)

                                                            ii.      The doctrine of anticipatory breach by repudiation is meant to help the injured party and thus does not apply when it helps the breaching party (Reliance Cooperage v. Treat)

c.     Breach of an employment contract

                                                              i.      What damages should be mitigated by the plaintiff?  The plaintiff must accept employment that is substantially similar to the employment offered by the breaching defendant.  The plaintiff need not seek or accept employment that is not substantially similar or comparable.  The plaintiff is also not required to mitigate damages by doing the same work at lower pay.  (Billetter v. Posell)

                                                            ii.      Can a defendant’s offer of alternate employment mitigate the damages from the breach of the original employment contract?  The damages to a wrongfully dismissed employee should be the salary for the period of the contract minus the amount the employer affirmatively proves the employee did earn or could have earned from another similar job.  (Parker v. Twentieth Century-Fox)

III.             Remedies for Breach of Contract

a.      The Goals of Contract Damages

                                                              i.      There are no punitive damages for contract breach except in very extreme cases.

                                                            ii.      A court may award expectation damages, reliance damages, restitution damages, or nominal damages.

                                                          iii.      Hawkins v. McGee – “Hairy Hand” – expectation damages are awarded, meaning the difference in value between the hand promised and the hand actually received.  The pain of the operation doesn’t matter.

b.     Nominal damages

                                                              i.      The injured party does not need to show actual injury to prevail in court.

                                                            ii.      If they don’t show any actual injury, they will collect nominal damages, which are usually $1 or $0.06.

c.     Expectation interest

                                                              i.      Definitions

1.     Expectation interest – The interest in getting the value you would have gotten if the contract had been performed, or in other words, getting damages such that you’d be in the same position that you’d be in if the promise hadn’t been broken.

2.     “One is entitled to recover an amount that will put one in as good a position as one would have been in had the contract been performed.” – Farnsworth § 12.8

3.     This gives the injured party the “benefit of the bargain”.

4.     It is based on the actual value the contract would have had to the injured party if the contract had been performed.

5.     Damages = loss in value + other loss – cost avoided – loss avoided

                                                            ii.      Expectation damages cap the amount a plaintiff can recover for breach.

                                                          iii.      When expectation damages are improper or insufficient, reliance and restitution damages may be substituted in certain cases.  (Dempsey)

                                                         iv.      Uncertainty as a Limitation

1.     We put the burden on the plaintiff to prove their damages to a reasonable degree of certainty.  If you can’t or don’t, you don’t recover, even though that will put you in a worse position than performance would have done.

2.     You must lay an evidentiary foundation for your damages.  “The uncertainty principle boils the bullshit out of claims.”  (Security Stove)

3.     When you think about “certainty”, think about the necessity of establishing an evidentiary foundation for damages.

d.     Reliance interest

                                                              i.      Definitions

1.     Reliance interest – the interest in getting back the value you lost because you were counting on the contract to be performed

2.     “The interest a nonbreaching party has in recovering costs stemming from that party's reliance on the performance of the contract.” – Black’s 7th

3.     This attempts to put the injured party in the position it would have been in if the contract had never been made.

4.     It’s a cost that came out of the plaintiff’s pocket but didn’t go into the defendant’s pocket.  It might have gone to a third party, for example, Hawkins’s hospital fees.

                                                            ii.      Reliance damages should be granted when expectation damages are seen as excessive (because, for example, the defendant was not liable for negligence) or too uncertain but restitution damages are seen as insufficient (because the agreement ought to be at least minimally enforced).

                                                          iii.      Example – Dempsey’s case

                                                         iv.      Most contract breach cases award expectation damages.  However, there seem to be a few cases where reliance damages are favored.  Why don’t we usually go with reliance?

1.     Reliance is a lot harder to prove than expectation, and so if you want to ensure good contracts from a policy standpoint it’s more practical to use expectation.

2.     When we don’t get what we’re promised, our feelings are hurt.  There is an interest in protecting against the stress of broken promises that is best enforced with expectation damages.

3.     A modern economy based on credit needs remedies based on expectation because of the risk and uncertainty involved in changing markets.

4.     Expectation damages prevent promisors from being tempted by gain through breach of contract.

e.      Restitution interest

                                                              i.      Restitution interest – the interest in getting the money back that you paid while trying to do your part of a contract

                                                            ii.      With restitution you’re merely taking the benefit away from the defendant that the plaintiff gave him/her.

                                                          iii.      Statute of frauds – restitution ≠ enforcement – that is, even if the contract is unenforceable under the statute of frauds or for some other reason, you can still get your money back.

f.       Buyer in Breach and Seller’s Damages under the UCC (generally at § 2-703)

                                                              i.      Resell the goods and recover damages (§ 2-706) – seller’s “cover”

1.     The resale must be made in good faith and a commercially reasonable manner

2.     The seller can recover the difference between the resale price and the contract price (only if the resale price is less than the contract price)

3.     The seller can also recover incidental damages (§ 2-710)

4.     The seller must deduct expenses saved due to the buyer’s breach

                                                            ii.      Recover damages for non-acceptance (§ 2-708)

1.     The standard measure of damages (§ 2-708(1))

a.      The seller can get the difference between the market price and the contract price (only if the market price is less than the contract price)

b.     The seller can also get incidental damages (§ 2-710)

c.     The seller must deduct expenses saved due to the buyer’s breach

2.     The “lost volume” seller (§ 2-708(2), like in Neri v. Retail Marine)

a.      If the standard measure is inadequate, the seller can recover the profit the seller would have made from the buyer

b.     That profit includes reasonable overhead

c.     The seller can get incidental damages (§ 2-710)

d.     The seller can get “costs reasonably incurred”

e.      The seller can get credit for payments or proceeds of resale

                                                          iii.      Action for the price (§ 2-709) – seller’s specific performance

1.     The seller can sue for the price of goods that the buyer failed to pay for:

a.      When the goods get lost or destroyed after they’ve passed to the buyer’s control

b.     When the goods can’t be resold (like pencils with the person’s name on them)

g.     Seller in Breach and Buyer’s Damages under the UCC (generally at § 2-711)

                                                              i.      Cover (§ 2-712) – for fungible goods

1.     The buyer can get substitute goods if their bought in good faith and without unreasonable delay

2.     The buyer can get as damages the difference between the cost of the substitute goods and the contract price (only if the substitute was more expensive than the contract price)

3.     The buyer can get incidental or consequential damages

4.     The buyer must deduct expenses saved

5.     Cover is an actual transaction when a buyer aggrieved by a breach goes out on the market and buys something to replace the thing they would have received under the contract.

6.     What damages should be awarded to the plaintiff if they made a contract to replace the original contract part of the way through its term?  Damages are to be measured by the difference between the cost of the goods on the date of delivery and the contracted cost of the goods. (Missouri Furnace v. Cochran)

                                                            ii.      Damages for non-delivery (§ 2-713)

1.     The buyer can get the difference between the market price at the time the buyer learned of the breach and the contract price (only if the market price is greater than the contract price)

2.     The buyer can get incidental or consequential damages

3.     The buyer must deduct expenses saved

4.     This is a complete alternative to cover

                                                          iii.      Specific performance/replevin (§ 2-716)

1.     Buyer can sue for specific performance when the goods are unique

2.     Buyer can get replevin if they try to cover but fail because there isn’t any stuff out there (like if there’s a shortage of that good)

h.     Employee in breach and employer’s damages

i.        Employer in breach and employee’s damages

j.        Avoidability – Hadley and all that

                                                              i.      Mitigation

1.     [D]amages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation. – RESTATEMENT (SECOND) OF CONTRACTS § 350(1)

2.     Once a contract is repudiated, the plaintiff should stop working on the project.  They can’t “pile up damages” for useless work.  They should only be compensated for the labor and materials they had already used at the time of the breach.  (Rockingham County v. Luten Bridge Co.)

3.     The principle of substitution says that replacement cost puts a ceiling on loss.  (Louise Caroline Nursing Home, Inc. v. Dix Constr. Corp.)

                                                            ii.      Forseeability

1.     The injured party cannot recover damages that the party in breach did not have reason to foresee at the time of contract formation.  (Hadley v. Baxendale)

a.      The injured party may recover damages for losses that “arise naturally” from the breach of contract itself.

b.     Consequential damages can only be recovered if the loss was “in the contemplation of both parties” at the time they made the contract.

                                                                                                                                      i.      Compare UCC § 2-715(2)(a): consequential damages (of the buyer) include any loss resulting from requirements that the seller knew about at the time of contracting.

2.     Foreseeability test

a.      Foreseeability is not affected by any events after contract formation.  Rest.2d Cont. § 351  UCC § 2-715 (2)(a)

b.     Foreseeability may be necessary but not sufficient

                                                          iii.      Cover by buyer as injured party

k.     Agreed damages clauses

                                                              i.      Penalties

1.     Restatement (Second) § 356 says that the parties to a contract cannot create a penalty for its breach.

2.     Contracts ain’t torts.

3.     If a contract contains stipulations of varying degrees of importance that would cause harm with varying degrees of certainty, a fixed damages clause will be taken to be a penalty and thus unenforceable.  (Wilt v. Waterfield, practice exam question with the actor)

                                                            ii.      Liquidated damages

1.     A liquidated damages clause in a contract is enforceable if the damages are difficult to predict and the damages fixed in the contract are a reasonable prediction of what it will take to compensate the injured party.  (Pacheco v. Scoblionko, City of Rye v. Public Service Mut. Ins. Co.)

2.     A liquidated damages clause is enforceable if the damage amount is “reasonable either at the time of contracting” or, if the injured party suffers actual damages, “at the time of injury”.

3.     There is no recovery on liquidated damages when there are no actual damages.  (Massman Constr. Co. v. City Council of Greenville, Miss.)

4.     UCC § 2-718

                                                          iii.      Limited damages clauses

1.     Even if you can’t contractually fix damages, you may contractually limit damages.

2.     Compare UCC § 2-718(1) to § 2-719: an agreement may limit damages.  The UCC gives broad permission to limit damages except in cases where it is unconscionable.

l.        Enforcement by Specific Performance and Injunction

                                                              i.      Specific performance

                                                            ii.      Injunction

                                                          iii.      The Adequacy Test

1.     There can be no remedy in equity (specific performance) if there is an adequate remedy at law (cash money).  (Fitzpatrick v. Michael)

                                                         iv.      Other Limitations

IV.            Grounds for Enforcing Promises

a.      Contracts with consideration

                                                              i.      Bargained-for test

1.     Rest. § 71 – The question is: “Was there a trade here?”  Example – Whitten v. Greeley-Shaw – The defendant’s only promise is that she won’t call the plaintiff at home.  But that’s not a valid ground to enforce the plaintiff’s promise.  Valid consideration must be something that is “sought after” (another way of saying “bargained for”) by the other party.

2.     You can have 99% gift and 1% trade and still have an enforceable promise (§ 81).  Example – Earle v. Angell – It’s the aunt who promises $500 to her nephew for attending her funeral.  You only need a smidgeon of trade in order to make consideration valid.  This promise is enforced against the aunt’s estate.

3.     Consideration has nothing to do with reliance.

4.     If nothing is traded or exchanged for the promise, we won’t enforce the promise unless we can find another legal basis to enforce the promise.

                                                            ii.      Benefit-detriment test – We used to talk about this a different way: “Benefit to the promisor or detriment to the promisee would make a promise enforceable.”

1.     Example – Hamer v. Sidway – Story promised his nephew cash in exchange for foregoing drinkin’, smokin’ and that kind of stuff.  The court enforces the promise because not drinkin’ and smokin’ was valid consideration for the uncle’s promise of $5,000.

2.     This is 82% right, and the drafters of the Restatement have changed it – Restatement § 79 says if you have consideration according to § 71, you don’t need the old stuff like benefit/detriment or “equivalence of values” or “mutuality”.

                                                          iii.      Settlements of Valid (Disputable) Lawsuits

1.     We’ll enforce promises where the consideration is dropping a lawsuit if there’s any chance at all it’s valid.  “The claim upon which settlement is based must be made in good faith [honestly].”

2.     There are policy reasons for this: we want to encourage out of court settlements because they’re fast and cheap.

                                                         iv.      Past benefit – The Restatement § 86 will enforce promises based on past benefit if it’s necessary to prevent injustice.

b.     Contracts without consideration

                                                              i.      Reliance – Old view – Example – Kirksey v. Kirksey – The plaintiff’s brother-in-law said she could move in with him, and this was held to be a gift promise without any consideration.  Later, he broke the promise.  Justice doesn’t require enforcement because the sister-in-law was allowed to live on the property for two years before she got kicked out.  It’s sort of a “conditional gift”.  “Come and get it!”

                                                            ii.      Reliance – Restatement § 90

1.     The doctrine of promissory estoppel can be applied when:

a.      There is a promise.

b.     The promisor foresees reliance by the promisee.

c.     The promisee actually relies on that promise.

d.     We’ll only make the promise binding when justice requires it.

e.      We may limit the remedy as justice requires.

2.     Same thing as unbargained-for reliance

3.     Doesn’t apply when there is consideration

4.     § 90 is the most famous section of the whole Restatement – If someone makes a promise to you, and you reasonably rely on it to do something or not do something, then that promise will be enforced “if justice demands it”.

5.     This can lead to partial enforcement

6.     Exceptions:

a.      Marriage settlements

b.     Charitable subscriptions

7.     Examples

a.      Ricketts v. Scothorn – Katie gets her dough because the executor of her grandfather’s estate was barred from claiming a lack of consideration.  Why?  Because Katie relied on the promise of money (which was gratuitous) to quit her job.

b.     Allegheny College v. National Chautauqua County Bank – Cardozo says there is consideration.  The promise wasn’t enforceable until Johnston paid the first $1,000.  The college promised to memorialize Johnston in a small way.  It’s kind of a reach overall.  But some charitable promises are enforceable on the basis of consideration.

8.     Promises to procure insurance

a.      East Providence Credit Union v. Geremia – consideration is thin, so is reliance, but the promise of the credit union to pay the Geremias’ insurance premiums is enforced.

                                                          iii.      Contracts implied-in-fact

1.     The promise to pay is implicit in the circumstances.

2.     Business stuff

a.      You know, or certainly should know that you’re asking for a service from someone who is in the business of charging for that service.

b.     You implicitly promise to pay a reasonable charge.

c.     Examples

                                                                                                                                      i.      Like hailing a cab

                                                                                                                                    ii.      Going to a restaurant where you eat then pay

                                                                                                                                  iii.      Going to get a haircut

3.     Other stuff – Example – Collins v. Lewis – The deputy sheriff seized some cows.  The defendant didn’t have room to keep the cows.  The defendant was told that the plaintiff would keep the cows for him at the defendant’s expense.  The plaintiff in fact kept the cows for 38 days until the defendant sold them.  It was held that there was a quasi-contract under which the defendant owed the plaintiff for boarding the cows.

                                                         iv.      Charitable subscriptions – everybody loves charities, they’re so warm and fuzzy and we’re going to make sure they get the money that’s promised to them.

                                                           v.      Formality

1.     Characteristics

a.      Written

b.     Signed – with an “X” if you were illiterate

c.     Sealed – with wax

d.     Delivered

2.     Functions

a.      Formal contracts are good evidence that a promise was made!

b.     Contracts with a lot of rigmarole made people stop and think about what they were getting into.

c.     The seal was a cheap test of enforceability, which promoted faster, cheaper courts. 

3.     All 50 states have now abolished the seal.

V.               Grounds for Not Enforcing Promises

a.      Statute of frauds – some promises must be in writing in order to be enforceable!

                                                              i.      What promises must be written?

1.     Contracts for the sale of goods, value $500 or more

2.     Contracts for the sale of land

3.     Contracts not to be performed within a year (that can’t be performed within a year)

4.     Contracts in consideration of marriage (Clovis won’t bug us about this)

5.     Contracts to answer for the debt of another (same here, don’t worry about it)

                                                            ii.      The statute of frauds never prevents restitution.

b.     Illusory promises

                                                              i.      An illusory promise is a promise that is impossible to break.

                                                            ii.      To the extent that a promise is illusory, you can’t hold someone to it.

c.     Gift promises – we won’t enforce promises of gifts in most cases.

                                                              i.      Example: Fischer v. Union Trust – the father didn’t make a deal with his mentally incompetent daughter; he gave her a gift with the mere illusion of trade.  It was just pretense.  We won’t enforce his promise to pay off the creditors.  The completed gift of stuff (land) is OK, but the gratuitous, non-bargained-for promise shall not be enforced.

                                                            ii.      Counterexample: Simmons v. United States – Mr. Simmons caught Diamond Jim in Chesapeake Bay and tried to pass off his prize as a gift from the beer company in order to avoid taxes.  Can’t do that!  It was no gift, it was a completed contract.  The offer was the announcement of the contest, and the acceptance was the catching of Diamond Jim.

                                                        iii.      Example: Batsakis v. Demotsis – The consideration here was slight, basically trading very little money for a lot more money later, but mere inadequacy of consideration will not void a contract.

d.     Unconscionability

                                                              i.      The unconscionability of a contract is a question of law (for the judge) rather than a question of fact (for the jury).  If the contract shocks the conscience of a law-abiding person, the court may choose not to enforce the entire contract or just strike down the bad bits.

e.      Past Consideration – it isn’t consideration

                                                              i.      Moral obligation

1.     Example – Mills v. Wyman – The father promised to pay for the care of his son after finding out he died.  This promise isn’t enforceable because the promisor got no benefit.  This isn’t a case to promise to pay past debts.

2.     Counterexample – Webb v. McGowin – “Human rudder” case – promisor got a big benefit by having his life saved.  There was a lot of time to think before making the promise.  The promise was performed for eight years before performance was stopped.  This promise gets enforced

                                                            ii.      Preexisting Legal Duty Rule

1.     “A promise to do what the promisor is already legally bound to do is an unreal consideration.”

2.     An agreement to amend an earlier contract must rest on “new and independent consideration” in order to be enforceable.  Performance of an existing legal duty can never constitute consideration for a new contract.  (Levine v. Blumenthal)

f.       Settlement of Invalid Lawsuits

                                                              i.      We won’t enforce more or less extortionary claims.

                                                            ii.      Old rule

1.     In order for dropping a claim to be consideration:

a.      The claim must be made in good faith and

b.     The claim must have some substance

2.     Example – Duncan v. Black – Dropping a bogus lawsuit doesn’t constitute valid consideration.

                                                          iii.      Restatement rule: § 74 – it’s not and, it’s or

1.     Either good faith or

2.     Substance (some doubt as to outcome)

3.     If you write it down, that writing is consideration if bargained for

g.     Volunteer Activities – “Unsolicited action”

                                                              i.      There is no ground for requiring payment for services you didn’t ask for.

                                                            ii.      In the absence of a contract, restitution is only available when someone has been “unjustly enriched at the expense of another”.

                                                          iii.      Volunteers generally have no right to restitution.

                                                         iv.      Example – Martin v. Little, Brown & Co. – If your voluntary actions enrich another party, but not unjustly, like writing in to let them know they’re being plagiarized, you can’t exact compensation from them.

VI.            Contract Formation

a.      Mutual Assent

                                                              i.      If a reasonable person would have taken a party’s words to constitute assent to the formation of a contract, then that contract will be enforceable.  (Embry v. Hargadine, McKittrick Dry Goods Co.)

                                                            ii.      When a court determines whether a party has assented to an agreement, the only intention that matters is the party’s apparent, objective intention (or the intention that a “reasonable person” would infer).  (Kabil Developments v. Mignot)

b.     Offer

c.     Acceptance


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[1] Based on Dawson, CONTRACTS: CASES AND COMMENT (2003) and FARNSWORTH ON CONTRACTS (2d ed. 1998).