Contracts

BY MELVIN A. EISENBERG
University of California, Berkeley

Fourteenth Edition

GILBERT LAW SUMMARIES

Board of Editors

RICHARD J. CONVISER
Professor of Law, IIT/Kent

MICHAEL R. ASIMOW
Professor of Law, U.C.L.A.
JOHN A. BAUMAN
Professor of Law, U.C.L.A.
PAUL D. CARRINGTON
Professor of Law, Duke University
JESSE H. CHOPER
Professor of Law, U.C. Berkeley
GEORGE E. DIX
Professor of Law, University of Texas
MELVIN A. EISENBERG
Professor of Law, U.C. Berkeley
WILLIAM A. FLETCHER
Professor of Law, U.C. Berkeley
MARC A. FRANKLIN
Professor of Law, Stanford University
EDWARD C. HALBACH, JR.
Professor of Law, U.C. Berkeley
GEOFFREY C. HAZARD, JR.
Professor of Law, University of Pennsylvania
STANLEY M. JOHANSON
Professor of Law, University of Texas
THOMAS M. JORDE
Professor of Law, U.C. Berkeley
HERMA HILL KAY
Professor of Law, U.C. Berkeley

JAMES E. KRIER
Professor of Law, University of Michigan
JOHN H. MCCORD
Professor of Law, University of Illinois
PAUL MARCUS
Professor of Law, College of William and Mary

RICHARD L. MARCUS
Professor of Law, U.C. Hastings
ROBERT H. MNOOKIN
Professor of Law, Harvard University
THOMAS D. MORGAN
Professor of Law, George Washington University
JARRET C. OELTJEN
Professor of Law, Florida State University
JAMES C. OLDHAM
Professor of Law, Georgetown University
ROGER C. PARK
Professor of Law, U.C. Hastings
WILLIAM A. REPPY, JR.
Professor of Law, Duke University

THOMAS D. ROWE, JR.

Professor of Law, Duke University

DOUGLAS J. WHALEY
Professor of Law, Ohio State University

CHARLES H. WHITEBREAD
Professor of Law, U.S.C.

KENNETH H. YORK
Professor of Law, Pepperdine University
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Attorney At Law

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Sanetta M. Hister

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Summary of Contents

CONTRACTS TEXT CORRELATION CHART

CONTRACTS CAPSULE SUMMARY
APPROACH TO EXAMS
INTRODUCTION—SOURCES OF CONTRACT LAW

I. CONSIDERATION
Chapter Approach
A. Introduction
B. Bargain Promises
CHART: Approach to Enforceability of Promises—Consideration
CHART: Examples of Illusory and Nonillusory Promises
CHART: Examples of Legal Duty Rule—Public Duties
CHART: Examples of Legal Duty Rule—Contractual Duties
C. Accord and Satisfaction
CHART: Approach to Accord and Satisfaction
D. Waiver
E. Unrelied-Upon Donative Promises
CHART: Conditional Donative Promise vs. Bargain Promise
F. Relied-Upon Donative Promises—Doctrine of Promissory Estoppel
G. Moral or Past Consideration

II. MUTUAL ASSENT—OFFER AND ACCEPTANCE

Chapter Approach
A. Mutual Assent
B. Offers
CHART: Status of Advertisements
CHART: Approach to Interpreting Parties’ Expressions
CHART: Approach to Acceptance Containing Additional or Different Terms
CHART: Approach to Revocability of Offers
C. Acceptance
CHART: Acceptance—Bilateral vs. Unilateral Contracts
 D. Time at Which Communications Between Offeror and Offeree Become Effective
E. Interpretation
F. The Parol Evidence Rule
CHART: Summary of Parol Evidence Rule

III. DEFENSES
Chapter Approach
A. Indefiniteness
CHART: U.C.C. Gap Fillers
B. Mistake
CHART: Summary of Types of Mistake
C. Contracts Induced by Misrepresentation, Nondisclosure, Duress, or Undue
Influence
D. Unconscionability
E. Statute of Frauds
CHART: Contracts Requiring a Writing
F. Lack of Contractual Capacity
G. Illegal Contracts

IV. THIRD-PARTY RIGHTS AND OBLIGATIONS

Chapter Approach
A. Third-Party Beneficiaries
CHART: “Assuming” vs. Purchasing “Subject to” Mortgage
CHART: Third-Party Beneficiary Contracts—Rights and Duties
B. Assignment of Rights and Delegation of Duties
CHART: Approach to Revocability of Assignments
CHART: Assignment vs. Delegation

V. PERFORMANCE AND BREACH

Chapter Approach
A. Obligation to Perform in Good Faith
B. Express Conditions
CHART: Promise vs. Condition
CHART: Approach to Duty to Perform Issues
C. Implied Conditions
D. Order of Performance
E. Doctrine of Substantial Performance
F. Divisible Contracts
 G. Material vs. Minor Breach
H. Anticipatory Breach
I. Changed Circumstances—Impossibility and Frustration
J. Discharge

VI. REMEDIES
Chapter Approach
A. Introduction
B. Basic Measures of Damages
C. Limitations on Expectation Damages
D. Specific Performance
E. Expectation Damages and Specific Performance in Certain Contexts
CHART: Summary of Article 2 Remedies
F. Nominal Damages
G. Liquidated Damages
H. Punitive Damages
I. Damages for Emotional Distress
J. Restitutionary Damages

REVIEW QUESTIONS AND ANSWERS

SAMPLE EXAM QUESTIONS AND ANSWERS
INDEX
i
Text Correlation Chart
ii
iii

iv
I
Capsule Summary

I. CONSIDERATION

A. INTRODUCTION §1
Generally, a promise is not enforceable unless it is supported by consideration. Early
theories described consideration as a benefit received by the promisor or a detriment
incurred by the promisee. Today, most authorities treat consideration as equivalent to
“bargain” (i.e., an exchange of promises, acts, or both, in which each party views what
she gives as the price for what she gets). However, the bargain approach does not
explain all situations where promises are enforceable (e.g., detrimental reliance), and so
some authorities treat as consideration any factor that will make a promise or contract
enforceable.

B. BARGAIN PROMISES
1. General Rule—Bargain Constitutes Consideration §6
As a general rule, a bargain constitutes consideration. The law usually does not
require bargained-for promises to be of equal value, but gross disparity may be used
as evidence of defenses such as unconscionability, incapacity, fraud, and duress.
Also, adequacy of consideration may be reviewed if an equitable remedy such as
specific performance is sought.
2. Exceptions—Bargains that Are Not Consideration
a. Nominal consideration §12
A contract based on nominal consideration will fail for lack of consideration. A
transaction involves nominal consideration if it has the form of a bargain but
lacks the substance of a bargain; i.e., no real bargain exists. For example, a
promise to pay $1 for a house worth $100,000 usually is nominal consideration.
(1) Distinguish—options and guaranties §14
Under the majority view, nominal consideration will make an option
enforceable if the option is in writing and proposes fair terms. Similarly,
under the majority view, nominal consideration makes a written guaranty
binding. These transactions are usually enforceable because they serve an
important commercial purpose and are likely to be relied on.
b. Promises to surrender or forbear from asserting a legal claim §19
The modern rule is that a bargained-for promise to surrender or forbear
 II

from asserting a legal claim (or the actual surrender or forbearance) is deemed
consideration if the promisor’s belief in the claim’s validity is honest or
reasonable. Some authorities hold that a written release may constitute
consideration even without an honest or reasonable belief in the claim.
c. Illusory promises
(1) General rule for bargains §27
A bilateral contract is a bargain contract in which the parties exchange a
promise for a promise (e.g., A promises to wash B’s car in exchange for
B’s promise to pay $10). A bilateral contract requires mutuality of
obligation; i.e., both parties must be bound or neither is bound.
(a) Effect of illusory promise §29
If one party makes an illusory promise (a statement in the form but not
the substance of a promise) in exchange for the other party’s real
promise, the rule of mutuality applies and neither party is bound. For
example, a promise coupled with the power to terminate the obligation
at will and without notice is illusory.
(2) Exceptions to the mutuality rule
(a) Unilateral contracts §33
The rule of mutuality is not applicable to a unilateral contract (a
contract in which a promise is given in exchange for an act).
(b) Limited promises §34
Promises that limit the promisor’s options in some way—no matter
how slight—are real and are consideration. For example, a promise
coupled with the power to terminate the obligation at will with 10 days
notice is not illusory, because the promisor must give advance notice of
termination.
(c) Voidable promises §35
An otherwise real promise is not illusory merely because it is voidable
by one party as a matter of law (e.g., a promise by a minor).
(d) Conditional promises §37
A promise that the promisor need only perform if a specified condition
occurs is not illusory, because the promisor has limited her future
options.
(e) Alternative promises §38
If the promisor reserves the right to discharge his obligation by
choosing between two or more alternatives, there is consideration only
if each alternative would be sufficient consideration if bargained for
 alone. If the promisee

III

can choose one of several alternative promises from the promisor,

consideration exists if any of the alternatives would be sufficient
consideration if bargained for alone.
(f) Agreements allowing one party to supply a material term §41
At common law, such a promise is illusory. However, where one party
has the power to alter or modify contract terms, many authorities hold
that the promise is not illusory since the power is subject to the
obligation to perform in good faith. Note that even the power to
supply (rather than vary) a material term is not illusory if the term must
be fixed in relation to an objective measure (e.g., market price).
1) U.C.C. provisions §47
U.C.C. section 1-203 imposes a general obligation of good faith on
all parties to a contract for the sale of goods. Thus, a contract for
the sale of goods that gives one party the right to set a term contains
consideration because the party must set the term in good faith.
Furthermore, U.C.C. section 2-305(1) explicitly provides that the
right to set a price in such a contract is enforceable if the parties so
intend.
(g) Implied promises §49
Mutuality is satisfied if a promise can be implied in fact or in law from a
party’s words or actions. A common type of implied promise involves a
promise to use one’s reasonable or best efforts to perform (rule of
Wood v. Lucy, Lady Duff-Gordon).
1) U.C.C. in accord §52
The U.C.C. codifies the rule in Wood by providing that, unless
otherwise agreed, a lawful agreement for exclusive dealing in goods
imposes an implied obligation by the seller to use best efforts to
supply the goods and by the buyer to use best efforts to promote
their sale.
(h) Requirements and output contracts §53
Modern courts and the U.C.C. usually enforce these contracts since the
party who determines quantity has limited his options; if he buys or
sells at all, he must buy from or sell to the other party. Under the
U.C.C., the quantity of the output or requirements must be provided in
good faith and must not be unreasonably disproportionate to any stated
estimate.
d. Legal duty rule—promise to perform act promisor already obliged to
perform §60
The promise or performance of an act that the promisor has a preexisting

IV

legal duty to perform does not constitute consideration. This is commonly known
as the legal duty rule.
(1) Preexisting public duties §63
If an official’s promised performance is within the scope of official duties,
neither the promise nor the performance thereof is legally sufficient
consideration. Performance of a public duty required by law other than an
official duty (e.g., jury service) is treated similarly.
(2) Preexisting contractual duties §68
Generally, neither a promise to perform a preexisting contractual duty nor
the performance of the duty is consideration. This rule covers the two
following types of cases.
(a) Performance of preexisting contractual duty for increased
payment §69
Where A and B have a contract and A refuses to perform unless B pays
more than originally promised, A’s new promise to perform (or A’s
performance) does not constitute consideration for B’s promise to pay a
greater amount than originally promised. However, courts do not favor
this rule, and the following exceptions have emerged.
1) Promise of different performance §71
Consideration exists where a party promises to perform an act
similar to, but different from, the action he was contractually
obliged to perform. Even a slight difference will be sufficient.
2) Preexisting duty owed to third party §72
Most authorities recognize the existence of consideration where a
party owes a preexisting contractual duty to someone other than the
party who makes the new promise. And nearly all authorities
recognize an exception where a third party’s promise runs to the
two original contracting parties jointly.
3) Defense under original contract §73
If a party had a valid defense to performing under the original
contract, the new promise to perform is sufficient consideration.
4) Modification—unanticipated circumstances §74
Under modern law, a new promise to pay is enforceable if
 unanticipated circumstances arise that make modification of the
original contract terms fair and equitable.
5) Modification—sale of goods §75
The U.C.C. does not require consideration to make binding
modifications of contracts for the sale of

goods. However, the modifications must be sought in good faith.

6) Writing as substitute for consideration §78
A few state statutes provide that a contract may be modified by a
subsequent written contract with no new consideration.
7) Mutual rescission §79
A few courts get around the legal duty rule by applying the fiction
that the parties mutually rescinded the original contract and formed
a new one.
8) Effect of performance §80
The legal duty rule is a defense to an action to enforce a contract; if
the contract has been fully performed, neither party can use the
legal duty rule to recover what it paid unless the party seeking to
recover performed under economic duress (an improper threat
leaving no reasonable alternative can constitute sufficient economic
duress).
(b) Payment of lesser amount as discharge of debtor’s full
obligation §82
Generally, a promise by a debtor to pay less than the full amount she
owes to a creditor in exchange for the creditor’s agreement to accept
the lesser amount in full satisfaction or discharge of the entire debt is
not consideration, and the creditor’s promise to accept the lesser
amount is not enforceable. Exceptions to this rule follow.
1) Different performance §83
The general rule is inapplicable where the debtor does something
different from that which she is obliged to do (e.g., makes early
payment).
2) Honest dispute §84
If there is an honest dispute as to whether a lesser amount is owed,
payment of the lesser amount is consideration for the creditor’s
discharge in full.
3) Unliquidated obligations §85
 If the amount owed is unliquidated (uncertain), a debtor’s payment
of the lesser amount is consideration for a creditor’s discharge in
full even if the debtor pays no more than she admittedly owes.
However, if the debtor owes the creditor two separate debts, one
liquidated and one not, payment of the liquidated obligation will not
serve as consideration for the creditor’s agreement to discharge the
unliquidated obligation.

VI

4) Composition of creditors §88

Where a composition of creditors releases a debtor in full in
exchange for part payment to each creditor, consideration may be
found in the creditors’ mutual agreement to accept lesser sums.
The debtor may be able to enforce the composition agreement as a
third-party beneficiary.
5) Agreement not to file for bankruptcy §89
If a creditor’s purpose in discharging a debt in exchange for a lesser
sum is to induce the debtor not to file for bankruptcy, consideration
exists.
6) Written release §90
Statutes in several states provide that a written release by a creditor
extinguishes the original debt.
7) Executory contracts §91
Some authorities hold that an agreement to accept lesser payments
in a contract involving periodic payments is enforceable to the
extent that the agreement is executed, i.e., as to those periodic
payments already made and accepted. Other authorities permit
recovery of the shortfalls of prior periodic payments.
8) Full-payment checks §93
At common law, cashing a full-payment check (i.e., a check that
claims to be tendered in full payment of the creditor’s obligation,
but that is for an amount less than the creditor claims is owed)
constituted an accord and satisfaction that discharged the entire
debt. Under U.C.C. section 3-311, however, cashing a full-payment
check generally discharges a creditor’s entire claim, provided: (i) the
check is tendered to the creditor in good faith, (ii) the check or an
accompanying writing contains a conspicuous statement
concerning full payment, and (iii) either a bona fide dispute exists
as to the amount owed or the claim is unliquidated.
C. ACCORD AND SATISFACTION
1. Accord Defined §97
An accord is an agreement in which one party to an existing contract agrees to accept
some performance other than the performance the other party originally agreed to
perform.
2. “Satisfaction” Defined §98
A satisfaction is the performance of the accord by the promisor, the effect of which
is to discharge both the accord and the original contractual duty.
3. “Executory Accord” Defined §100
An accord that has not yet been satisfied is an executory accord. Under the

VII

traditional rule, an executory accord is not enforceable. However, the traditional rule
is usually ineffective in modern practice due to many distinctions and exceptions.
a. Substituted contract §104
An executory accord may be treated as a substituted contract that immediately
discharges the original contract if the parties so intend. Such intent is most easily
found if the duty under the original contract was disputed, was unliquidated,
had not matured, and did not involve the payment of money.
b. Where executory accord is not a substituted contract §105
Even if an executory accord is not treated as a substituted contract and thus does
not discharge the original contract, the executory accord has three important
effects:
(1) It suspends the promisee’s rights under the original contract during the
time in which the promisor is to perform the accord;
(2) If the promisor fails to perform the executory accord, the promisee can
sue under either the old contract or the accord; and
(3) If the promisor tenders performance of an executory accord and the
promisee refuses to accept the performance, under some authorities the
promisor can either enjoin the promisee from bringing suit or can sue the
promisee for damages for breach of the executory accord.

D. WAIVER
1. Definition §110
A waiver occurs when a party to an existing contract promises to perform even
though some contractual condition to his obligation to perform has not occurred.
2. Enforceability §111
A waiver is enforceable if it is given for separate consideration or if (i) the waived
 condition was not a material part of the agreed upon exchange and (ii) the
uncertainty of the occurrence of the condition was not a risk assumed by the party
who gave the waiver.
3. Retraction §112
An otherwise enforceable waiver can be retracted if: (i) the waiver was not given for
separate consideration; (ii) the other party has not changed position in reliance on
the waiver; (iii) the waiver relates to a condition to be fulfilled by the other
contracting party (not by a third party); and (iv) the retraction occurs before the
time that the waived condition was supposed to occur, and notice of the intention to
retract was given within a reasonable time for performance (or a reasonable
extension of time was given).

E. UNRELIED-UPON DONATIVE PROMISES

1. General Rule §113
A donative promise to make a gift is unenforceable for lack of consideration

VIII

unless: (i) it is relied upon, (ii) it is compensation for a previously conferred

material benefit that created a moral obligation (under the modern rule), or (iii) in
some states, it is under seal.
2. Effect of a Seal §115
At common law, a seal made a donative promise enforceable. However, today most
states have statutorily abolished the binding effect of the seal.
3. Effect of Writing §118
A writing does not make a donative promise enforceable at common law. However, a
few state statutes provide that a donative promise in writing is presumed to have
been given for consideration.
4. Nominal Consideration §120
Although not unanimous, the prevailing view is that nominal consideration (i.e.,
where the parties falsely put their agreement in the form of a bargain) will not make
a donative promise enforceable.
5. Conditional Donative Promise §121
A conditional donative promise exists where some condition must be met before the
gift is made (e.g., “If you come to my house, I will give you my old television set”).
It is no more enforceable than any other donative promise, even if the condition has
been satisfied.
a. Conditional donative promise vs. bargain promise §122
The test for which of these categories a promise falls into is the manner in which
the parties view the condition. If the condition is viewed as a necessary part of
 making the gift, the promise is donative. However, if performance of the
condition is viewed as the price of the promise, there is a bargain.

F. RELIED-UPON DONATIVE PROMISES—DOCTRINE OF PROMISSORY

ESTOPPEL
1. Modern Rule §124
If a donative promise induces reliance by the promisee in a manner the promisor
should reasonably have expected, the promise is enforceable—at least to the extent
of the reliance. This is known as the principle of promissory estoppel.
2. Reliance as Consideration §130
Some authorities (e.g., Rest. 2d) treat “consideration” as equivalent to “bargain”;
thus, a relied-upon promise is enforceable despite the lack of consideration.
However, others view promissory estoppel as simply a type of consideration. The
result is the same under either view.

G. MORAL OR PAST CONSIDERATION

1. Definition §131
A promise is given for moral or past consideration when the promisor seeks to
discharge a moral (but not legal) obligation owed to the promisee and created by
some past event.

IX

2. Traditional Rule §132

Under the traditional rule, a promise based on moral or past consideration is
unenforceable.
3. Core Exceptions
a. Promise to pay debt barred by the statute of limitations §134
Such a promise is enforceable despite the absence of new consideration.
However, it is the new promise, not the old debt, that is enforceable.
(1) Effect of acknowledgment or part payment §136
Generally, a promise will be implied from an unqualified acknowledgment
of the debt, or from a part payment of it.
(2) Requirement of a writing §138
Most state statutes require such a promise either to be in writing or to be
partially performed (part payment) to be enforceable.
(3) New promise made before statute runs §139
The above rules also generally apply if a new promise, acknowledgment, or
part payment is made before the statute of limitations has run; the limitations
 period on the new promise will run from the date of the new promise.
b. Promise to perform a voidable obligation §140
A new promise to perform an obligation that is voidable (e.g., by reason of fraud
or infancy) is enforceable despite the absence of new consideration as long as the
new promise is not subject to the same defense as the original obligation.
c. Promise to pay a debt discharged by bankruptcy §141
This was generally treated under contract law like a promise to pay a debt barred
by the statute of limitations. However, today the Bankruptcy Code places a
number of conditions on such promises.
4. Modern Rule—Promise to Pay Moral Obligation Arising Out of Past
Economic Benefit to Promisor §145
The emerging rule is that, even if a core exception to the traditional rule does not
apply, such a promise is enforceable, at least up to the value of the benefit
conferred, if the promise is based on a material benefit (usually economic)
previously conferred on the promisor that gave rise to an obligation (even if only
moral) to make compensation.
a. Gratuitous benefits §149
If the past benefit was conferred as a gift, even the modern authorities would not
enforce the promise since a gift does not create a moral obligation to repay.
b. Promise based on expense incurred by promisee §150
Even under the modern view, such promises generally are unenforceable if the
promisor did not receive a material (i.e., economic) benefit—even if the
promisee incurred expenses.

5. Promise to Pay Fixed Amount in Liquidation of a Legal Obligation §151

A promise to pay a fixed amount in liquidation of an unliquidated legal obligation is
consideration if the promisee accepts the promise.

II. MUTUAL ASSENT-OFFER AND ACCEPTANCE

A. MUTUAL ASSENT
1. Objective Theory of Contracts §154
A contract is formed by mutual assent of the parties. In determining whether the
parties have mutually assented to a contract, one should generally use the objective
theory of contracts (i.e., determine what a reasonable person to whom an
expression has been addressed would understand the expression to mean). The
objective theory operates to protect the parties’ reasonable expectations by
permitting each party to rely on the other’s manifested intentions. However, under
 certain conditions (infra, §§366-368) subjective intent is also relevant.
2. Express and Implied Contracts
a. Express contracts §155
In an express contract, mutual assent is manifested in words of agreement, oral
or written.
b. Implied contracts
(1) Implied-in-fact contracts §156
If the promises of the parties are inferred from their acts or conduct, or
from words that are not explicit words of agreement, the contract is implied
in fact.
(2) Implied-in-law contracts §157
These are cases where a court fictionally implies a promise to pay for
benefits or services to avoid inequities and unjust enrichment (also known as
quasi-contracts).

B. OFFERS
1. Legal Significance of an Offer §159
An offer creates a power of acceptance in the offeree (i.e., the power to conclude a
bargain and bind the offeror by giving assent).
2. What Constitutes an Offer §160
An offer is a manifestation of present willingness to enter into a bargain, made in
such a way that a reasonable person in the shoes of the person to whom it is
addressed would believe that she could conclude the bargain merely by giving her
assent—i.e., by accepting the offer.
a. Essential elements
(1) Intent to enter into a bargain §162
Offers must be distinguished from invitations to begin negotiations. An intent
to make an offer is reflected by language and the surrounding circumstances
of the statement.

XI

(2) Definiteness of terms §166

A statement usually will not be considered an offer unless it makes clear the
subject matter of the proposed bargain, the quantity involved, and the
price.
(a) Intent determinative §167
Even if an important term is omitted, a statement can still be construed
 as an offer if (i) the statement otherwise evidences an intent to conclude
a bargain, (ii) the omission does not indicate a lack of intent to conclude
a bargain, and (iii) the court can fill in the missing term by implication.
b. Special rules
(1) Advertisements §169
Advertisements are generally deemed to be invitations to deal rather than
offers. However, a particular advertisement may be construed as an offer if
it is definite in its terms and either (i) the circumstances clearly indicate an
intention to make a bargain, (ii) the advertisement invites those to whom it is
addressed to take specific action without further communication, or (iii)
overacceptance is unlikely.
(a) Rewards §171
An advertisement for a reward is normally construed as an offer.
(2) Offering circulars §172
These are normally construed as invitations to deal rather than offers.
However, they may be interpreted as offers if a reasonable person in the
shoes of the addressee would think the communication had been addressed
to him individually rather than as one of a number of recipients.
(3) Auctions
(a) Auction with reserve §173
An auctioneer’s call for bids (putting an item “on the block”) is
considered an invitation to make offers. A bid by a member of the
audience is an offer, which can be accepted by the auctioneer’s
“hammering it down” or discharged by a new bid. The auctioneer can
withdraw the goods at any time prior to having “hammered down” a
particular bid.
(b) Auction without reserve §176
Same as an auction with reserve, except that once the auctioneer calls
for bids, the goods cannot be withdrawn unless no bid is made within a
reasonable time.
(c) Determining whether auction is with or without reserve §177
An auction is deemed to be with reserve unless otherwise stated.

XII

(4) Putting contracts out for bid §178

Putting a contract out for bid usually is not deemed to be an offer, but the
responding bids usually are considered offers. However, the language and
circumstances may result in reverse interpretations; e.g., a bid might be
 interpreted as only an invitation to deal.
3. Termination of Power of Acceptance §181
The termination of the offeree’s power of acceptance may result from any of the
following causes:
a. Expiration or lapse §182
This is the most common means of terminating an offer.
(1) Where time for acceptance is fixed in the offer §183
In this situation (e.g., “Acceptance must be in 10 days”), the offeree’s
power of acceptance lapses at the end of the stated period without any
further action by the offeror. Usually, the stated period runs from the time
the offer was received.
(2) Where no time for acceptance is fixed in the offer §186
In this situation, the offeree’s power of acceptance lapses after the
expiration of a reasonable time, which depends on the circumstances (e.g.,
subject matter of offer, medium through which made, etc.). When the
parties bargain face to face or by telephone, the time for acceptance
ordinarily does not extend beyond the conversation unless otherwise
indicated. Acceptance of an offer sent by mail is timely if mailed by
midnight on the day of receipt, or within a reasonable time depending on the
circumstances.
b. Rejection by the offeree §190
The offeree’s rejection of the offer terminates his power of acceptance even
though the power of acceptance would not otherwise have lapsed.
(1) Exception for options §191
Some courts hold that an offeree’s rejection during the option period does
not terminate his power of acceptance because he has a contractual right to
have the offer held open during its term. However, this rule does not apply
if the offeror relies on the rejection.
c. Counteroffer §192
A counteroffer by the offeree (i.e., an offer by the offeree concerning the same
subject matter but containing different terms than the original offer) terminates
the power of acceptance. However, because a counteroffer is also an offer, it
creates a new power of acceptance in the original offeror.
(1) Distinguish—inquiries and requests §195
The offeree’s power of acceptance is not terminated by an inquiry regarding
the offer or by a request for different terms. The

XIII
 test for distinguishing between a counteroffer and an inquiry is whether a
reasonable person would believe the offeree’s communication was itself an
offer inviting acceptance.
(2) Exception for options §196
A counteroffer made during the option period does not terminate the
offeree’s power of acceptance under an option since the offeree has a
contractual right to have the offer held open during the term of the option.
d. Conditional or qualified acceptance §197
This is a purported acceptance that adds to or changes the terms of the offer.
(1) Legal effect—general rule §198
Except in sale-of-goods contracts (infra, §§207 et seq.), a conditional or
qualified acceptance terminates the offeree’s power of acceptance. But like
a counteroffer, it is itself an offer that can be accepted by the original
offeror.
(2) Exceptions to general rule
(a) Requests accompanying acceptance §200
An unconditional acceptance coupled with a request does not terminate
an offeree’s power of acceptance and instead forms a contract.
(b) “Grumbling” acceptances §201
A grumbling acceptance does not constitute a rejection, and instead
forms a contract, if the expression of dissatisfaction stops short of
actual dissent.
(c) Implied terms §202
An acceptance that is conditional or qualified in form, but that in
substance merely spells out an implied term of the offer, does not
terminate the offeree’s power of acceptance; a contract is formed.
(3) Common law mirror image rule §204
At common law, an acceptance had to mirror the terms of the offer; any
deviation made the putative acceptance a counteroffer.
(a) Last shot rule and form contracts §205
Typically, merchant sellers and merchant buyers use preprinted form
contracts with individualized (e.g., typed-in) terms. While the
individualized terms may agree, the preprinted terms may not. Under
the mirror image rule, if the parties’ preprinted forms did not match, so
that no contract was thereby formed, but the parties performed
anyway, the courts would treat the last form sent as a counteroffer and
the other party’s performance as an acceptance of the counteroffer.
Thus, the terms of the counteroffer would
 XIV

govern the contract. This was known as “the last shot rule.”
(4) U.C.C. rule §207
The U.C.C. changes the mirror image rule concerning sale-of-goods
contracts so that “a definite and seasonable expression of acceptance or a
written confirmation that is sent within a reasonable time operates as an
acceptance even though it states terms additional to or different from
those offered or agreed upon, unless acceptance is expressly made
conditional on assent to the additional or different terms.”
(a) Acceptance “expressly made conditional” §212
If acceptance is expressly made conditional on the offeror’s acceptance
of additional or different terms, no contract arises. However, if the
goods are delivered and accepted, the parties’ performance establishes
a contract. The terms of the contract would then consist of the written
terms to which the parties agreed, plus any supplemental terms
provided by the U.C.C. Courts are reluctant to find a conditional assent
unless it tracks the language of the U.C.C.
(b) Effect of additional terms §219
Unless both parties to a contract are merchants (i.e., persons who deal
in the kind of goods sold or who otherwise hold themselves out as
having knowledge or skill peculiar to the practices or goods involved in
the transaction), additional terms in the acceptance are construed as
proposals for additions to the contract that the offeror may agree to or
ignore. However, if the parties are both merchants, the proposed terms
become part of the contract unless (i) the offer expressly limits
acceptance to the terms of the offer; (ii) the additional terms would
materially alter the contract; or (iii) the offeror notifies the offeree
within a reasonable time that he objects to the additional terms.
(c) Effect of different terms §221
Different terms (i.e., terms that contradict rather than add to the terms
of the offer) do not automatically become part of the contract.
1) Knockout rule §222
Under the majority knockout rule, conflicting terms in both the
offer and the acceptance drop out, and the contract consists of the
agreed-upon terms plus terms supplied by the U.C.C. to replace
the conflicting terms.
2) Minority views §223
One minority view treats different terms like additional
 XV

terms; under another minority view, different terms in the

acceptance always drop out, and thus the terms of the offer
govern.
e. Termination by revocation §225
A revocation (i.e., an offeror’s retraction of an offer) normally terminates the
offeree’s power of acceptance, provided that the offer has not already been
accepted.
(1) Communication of revocation §228
To be effective, a revocation must normally be communicated by the
offeror to the offeree.
(a) Exceptions
1) Offer to the public §229
An offer made to the public at large can normally be revoked by
publishing the revocation in the same medium as that in which the
offer was made. The publication terminates the power of
acceptance even of persons who saw the offer but not the
revocation.
2) Indirect revocation §230
An offer is also deemed revoked, despite the lack of direct
communication between the offeror and offeree, if the offeree
obtains reliable information that the offeror has taken action
showing she changed her mind.
(2) Revocability of “firm offers” §231
An offer that by its terms is to remain open until a fixed date can generally
be revoked prior to the expiration of its term.
(a) Exceptions
1) Options §232
An option is irrevocable for the stated period since the offeree has
given consideration for the promise to hold the offer open.
2) Nominal consideration §233
A firm offer is irrevocable if it recites a purported or nominal
consideration, at least if it is in writing and proposes an exchange
on fair terms within a reasonable time.
3) Foreseeable reliance §234
A firm offer is irrevocable if there is reasonably foreseeable reliance
by the offeree prior to acceptance.
 4) U.C.C. provision §239
A signed written offer by a merchant to buy or sell goods, which
gives assurance that it will be held open, is not revocable for lack of
consideration during

XVI

the time stated (or if no time is stated, for a reasonable time); the
period of irrevocability cannot exceed three months.
(3) Revocability of offers for unilateral contracts §245
Under the old rule, offers that were to be accepted by performance of an
act remained revocable until performance was complete. However, modern
courts do not permit revocation once performance has begun.
(a) Codification of modern rule
1) Offer open for a reasonable time §249
Under Rest. 2d section 45, the offeror impliedly promises that once
performance has begun, she will hold the offer open for the time
stated in the offer, or, if none, for a reasonable time.
2) Preparation vs. performance §250
Under Rest. 2d section 45, preparation, as opposed to beginning
performance, is not sufficient to make an offer for a unilateral
contract irrevocable. However, if the offeree’s preparation
constitutes reliance, the reliance may prevent revocation under
Rest. 2d section 87 and entitle the offeree to recover reliance or
expectation damages, as appropriate.
f. Termination by operation of law
(1) Death or incapacity of offeror §254
This terminates the offeree’s power of acceptance whether or not the
offeree knows of the death or incapacity. However, this rule does not apply
to options, at least where the individual performance of the decedent was
not an essential part of the proposed contract. Also, the offeree’s power to
accept an offer to form a unilateral contract is not terminated by death or
incapacity of the offeror once the offeree has begun performance.
(2) Changed circumstances §257
Changed circumstances, such as supervening illegality of the proposed
contract or destruction of its subject matter, can also terminate the offeree’s
power of acceptance.

C. ACCEPTANCE
1. Is Offer for Unilateral or Bilateral Contract?
a. Acceptance of offer for a bilateral contract §260
An offer that calls for acceptance by a promise is an offer for a bilateral
contract.
(1) General rule—promise mandatory §261
Ordinarily, such an offer can be accepted only by a promise,

XVII

not by an act. There is a possible exception where the offeree tenders full
performance prior to expiration of the offer.
(2) Modes of promissory acceptance §265
These include a verbal promise, a promise implied in fact by the
promisee’s conduct, an act designated by the offeror to signify a promise,
and, in some situations, silence.
(3) Communication of acceptance §269
Generally, an offer to enter into a bilateral contract can be accepted only by
a communicated promise. However, there are several exceptions:
(a) Mailbox rule §270
Where the mail, telegraph, etc. is a reasonable method of
communicating an acceptance, the acceptance is usually effective when
dispatched. This is true even though the acceptance does not actually
reach the offeror because it is lost in the mail.
(b) Waiver of communication §271
When the offer provides that the offeree must “accept” or “approve”
the offer, but waives notice of such acceptance or approval, a contract
is formed when the offeree accepts or approves, even though he does
not notify the offeror. However, although such a contract is formed
without notice, there may be an implied condition of notice of
acceptance before the contract is enforceable.
b. Acceptance of offer for a unilateral contract
(1) Performance mandatory §274
A unilateral contract is a contract in which the parties exchange a promise
for an act. Generally, an offer for a unilateral contract can be accepted only
by performance, not by a promise.
(2) Notice of acceptance §275
A unilateral contract is formed by the offeree’s beginning or completing
performance, even though the offeror does not know at the time that the
performance has occurred. However, if notice of the completed
performance is not given to the offeror within a reasonable time, the
 contract will be discharged unless notice is waived.
(a) Sale-of-goods contracts §279
The U.C.C. provides that in sale-of-goods contracts, if the beginning of
a requested performance is a reasonable mode of acceptance, an
offeror who is not notified of the offeree’s beginning of performance
within a reasonable time may treat the offer as having lapsed before
acceptance.

XVIII

(3) Subjective intent of offeree

(a) Performance without knowledge of offer §281
The general rule is that if the actor has no knowledge of the offer for a
unilateral contract at the time she performs the requested act, no
contract is formed. A few cases have made an exception to the general
rule for reward offers.
(b) Offer not the principal motive for performance §284
Generally, if the actor knows of the offer for a unilateral contract at the
time he performs the requested act, a contract is formed even if the
offer was not the principal motive for performance. However, no
contract is formed if the act is done involuntarily (e.g., under duress).
(4) Obligation of offeree §286
An offeree’s acceptance of a bilateral contract binds the offeree as well as
the offeror. However, if the offer is for a unilateral contract, the offeree is
ordinarily not bound, since he never promised anything.
(a) Exception §287
If an offeree who has begun to perform should know that her
performance is likely to come to the offeror’s notice and that the
offeror may treat her beginning of performance as an implied promise
not to abandon her performance, the offeror’s reliance on the offeree’s
conduct may make the implied promise enforceable.
(5) Subcontractor’s bid §288
If a contractor uses a specific subcontractor’s sub-bid in determining his
own bid, as a matter of contract law the contractor’s use of the sub-bid does
not constitute acceptance of the subbid, because the contemplated mode of
acceptance in such cases is communicated assent, not the act of using the
sub-bid.
c. Consequences of unilateral vs. bilateral offer §290
Whether a contract is bilateral or unilateral is important when considering (i) if
the mode of acceptance used by an offeree was proper, and (ii) if an offeree
 who has begun performance without having made a promise is protected against
revocation by the offeror. An offeree is protected in this situation if the offer was
for a unilateral contract.
d. Offers calling for acceptance by either a promise or an act
(1) Rule of Restatement Second §295
Where ambiguity exists, an offer is interpreted as inviting acceptance by
either a promise or performance. The U.C.C. is in accord.
(2) Orders for prompt shipment §297
Under the U.C.C., an offer to buy goods for prompt or current

XIX

shipment is construed as inviting acceptance by either a promise to ship or

prompt and current shipment. Moreover, shipment of nonconforming
goods is both an acceptance and a breach unless the seller seasonably
notifies the buyer that the shipment is intended only as an accommodation.
2. Silence as Acceptance
a. General rule §299
As a general rule, silence (i.e., inaction) of an offeree does not constitute
acceptance.
b. Exceptions—silence constituting acceptance
(1) Offeree’s behavior §301
Silence will constitute acceptance where the offeree, by her own prior words
or conduct, has given the offeror reason to interpret her silence as
acceptance.
(2) Subjective intent to accept §302
Silence can be acceptance where the offeror has said that silence will
constitute acceptance, and the offeree remains silent, subjectively intending
to accept.
(3) Exercise of dominion §303
Silence constitutes acceptance where the offeree improperly exercises
dominion over property sent for approval, inspection, etc. The offeree is
contractually bound to purchase the property at the proffered price (unless
manifestly unreasonable), even if she does not have the subjective intent to
accept.
(a) Statutory exceptions §304
Several statutes (state and federal) have created an exception to this
rule in the case of the exercise of dominion over unordered
 merchandise.
(4) Solicitation of offers §305
Acceptance may also occur if (i) the offeree solicited the offer and drafted
its terms, (ii) the offer is so worded that a reasonable offeror would deem it
accepted unless notified of its rejection, and (iii) the offeror relies or is likely
to have relied on the belief that silence constituted an acceptance (e.g.,
solicitation of orders for goods by traveling salespersons).
(5) Late acceptance §308
A late acceptance has the legal effect of a counteroffer; i.e., it is an offer
that may be accepted by the original offeror. Moreover, where an offeree
sends acceptance after a reasonable time for acceptance has elapsed, but
within a period that the offeree might plausibly regard as reasonable, courts
may require the original offeror to notify the original offeree that the
acceptance was too late; otherwise, the late acceptance/counteroffer will be
deemed accepted by the original offeror’s silence.

XX

(6) Implied-in-fact contracts §309

In the context of the general rule that silence does not constitute acceptance,
“silence” means inaction. Thus, communicated action (e.g., nodding one’s
head) does not constitute silence for purposes of this rule. In some cases,
both the offer and the acceptance may be implied in fact from nonverbal
actions.
(7) Quasi-contract §312
Liability may be imposed on a person who silently receives benefits from
the plaintiff if the plaintiff can show that (i) he has conferred a benefit on
the defendant; (ii) he conferred the benefit with the expectation that he
would be paid its value; (iii) the defendant knew or should have known of
the plaintiff’s expectation; and (iv) the defendant would be unjustly
enriched if allowed to retain the benefit without paying its value.

D. TIME AT WHICH COMMUNICATIONS BETWEEN OFFEROR AND

OFFEREE BECOME EFFECTIVE
1. In General §314
Normally, an acceptance is effective on dispatch and all other communications are
effective on receipt.
2. Acceptance—“Mailbox Rule” §315
An acceptance is effective on dispatch (except for options, for which many courts
hold that acceptance takes effect on receipt).
a. Requirements of mailbox rule
(1) Timely dispatch §318
If no time period is specified in the offer, the offeree must accept within a
reasonable time. If a time period is specified in the offer, unless otherwise
specified, the time period begins running when the offer is received, and
the acceptance must be dispatched within that time period.
(a) Consequence of late dispatch §322
If an acceptance is not dispatched in a timely manner and arrives too
late, it is ineffective as an acceptance. However, it serves as a new offer
and thus creates a power of acceptance in the original offeror.
(2) Proper manner §326
The acceptance must be dispatched with appropriate care—e.g., correctly
addressed. Unless otherwise specified by the offeror, under the modern rule
an offer is deemed to invite acceptance by any medium of communication
reasonable in the circumstances.
(a) Reasonable medium §329
A medium of communication is reasonable if (i) it is the one used by the
offeror (unless specified otherwise), or (ii)

XXI

it is customarily used in similar transactions at the time and place the

offer is received. If the medium does not meet one of these two tests, it
may still be reasonable, depending on circumstances such as the speed
and reliability of the medium, the prior course of dealing between the
parties, and usage of trade.
(b) Consequence of unreasonable medium or lack of reasonable
care §333
If an acceptance was received, the offeree’s failure to use a reasonable
medium or reasonable care will not itself prevent contract formation,
unless there was a failure to use a required medium. If the medium
used was unreasonable or if reasonable care was not used in dispatching
the acceptance, generally the acceptance will be effective when it is
received, unless the acceptance was sent on time and received on time
—such an acceptance is effective on dispatch.
b. Significance of mailbox rule
(1) Crossed acceptance and revocation §337
Because an acceptance is effective on dispatch and most states hold that a
revocation is effective on receipt (supra, 314), if an acceptance is
dispatched before a revocation is received, a contract generally is formed.
 (2) Lost or delayed acceptance §339
A properly dispatched acceptance that is lost or delayed en route to the
offeror is still effective under the mailbox rule; risk of loss or delay is on the
offeror.
(3) Effective date of obligation to perform §341
Under the mailbox rule, the obligation to perform becomes effective when
the acceptance is dispatched.
c. Offeror’s power to negate rule §342
The offeror may negate the mailbox rule by providing in the offer that the
acceptance will be effective only upon receipt, but normally only very explicit
language will have that effect.
3. Revocation §343
The general rule is that a revocation by the offeror is effective only upon receipt,
although a few states have statutorily changed the rule to make the revocation
effective on dispatch.
4. Rejection §345
Generally, a rejection of the offer by the offeree is effective only upon receipt.
a. Where offeree sends both rejection and acceptance
(1) Acceptance mailed before rejection §347
In this case, a contract arises on dispatch of the acceptance,

XXII

regardless of which communication is received first by the offeror, unless

the offeror detrimentally relies on a rejection that she receives before the
acceptance.
(2) Rejection mailed before acceptance §349
No contract is formed if the rejection arrives first; the mailbox rule does
not apply and the acceptance becomes a counteroffer. If an acceptance
arrives first, a contract is formed. However, if the offeror regards the later-
arriving rejection as a repudiation of the contract, and relies thereon, the
offeree is estopped from enforcing the contract.
5. Repudiation of Acceptance §355
A repudiation of an acceptance is a communication dispatched by an offeree who has
already dispatched an acceptance, stating that he does not intend to be bound by the
acceptance. A repudiation differs from a rejection in that in a rejection, the offeree
turns down the offer, while in a repudiation the offeree “turns down” his own earlier
acceptance.
a. Acceptance arrives first §356
 In this situation, a contract is formed because the later-arriving repudiation does
not relieve the offeree of liability under the contract. However, if the offeror
regards the offeree’s repudiation of the acceptance as a repudiation of the
contract and relies upon it, the offeree will be estopped from enforcing the
contract.
b. Repudiation arrives first §358
Under the Rest. 2d, a contract is formed in this situation (although the cases are
split). However, if the offeror regards the repudiation as a rejection and relies on
it, the offeree will be estopped from asserting that a contract was formed.
6. Withdrawal of Acceptance §360
This occurs when the offeree dispatches an acceptance and then manages to retrieve
it before it reaches the offeror. Under the Rest. 2d, a contract is formed when the
acceptance is dispatched, and a withdrawal is ineffective.
7. Crossed Offers §361
A contract usually is not formed by crossed offers, on the theory that an offer is not
effective until received and cannot be accepted until it is effective. However, the
result may differ where the parties had previously agreed on all but one minor point,
and in crossed letters they each propose identical terms as to that point.

E. INTERPRETATION
1. General Rule §363
Expressions used by the parties usually are to be given an objective interpretation;
i.e., words or acts are given the meanings a reasonable person standing in the
addressee’s shoes would attach to them. In applying the objective test, one should
ask what interpretation would be given by a reasonable person knowing all that the
addressee knew.

XXIII

2. Exceptions
a. The Peerless rule §366
Where an expression is susceptible of two equally reasonable meanings and
each party understands the term differently, no contract is formed.
b. Both parties have same subjective interpretation §367
If both parties subjectively attach the same meaning to a term, that meaning will
govern even if it is not the reasonable meaning of the term.
c. One party knows of the other’s different interpretation §368
If two parties attach different meanings to a term and only one party knows of
the meaning that the other party attached to the term, the meaning that the party
without knowledge attached to the term prevails, even if that party’s meaning is
 less reasonable.
3. Extrinsic Evidence §369
The traditional rule was that if there was no ambiguity in a written contract on its
face, and no special meaning attached to the words of a written contract by custom
or usage, extrinsic evidence was inadmissible. Today, however, extrinsic evidence is
increasingly allowed to show what the parties intended by their words.
4. Course of Performance, Course of Dealing, Usage, and Usage of Trade §372
Course of performance (i.e., the parties’ repeated, unobjected-to performance
during the course of the contract), course of dealing (i.e., conduct between the
parties prior to the contract), usage (i.e., habitual or customary practice), and usage
of trade (i.e., usage regularly observed in a vocation or trade) may be helpful in
interpreting what was meant by the contracting parties.

F. THE PAROL EVIDENCE RULE

1. The Rule §379
Parol evidence will not be admitted to vary, add to, or contradict a written contract
that constitutes an integration.
a. What constitutes an “integration” §380
For the rule to apply, it must appear that the parties intended the writing to be
the final, complete expression of their agreement.
(1) Formal intent test §381
The traditional view is that the parties’ intent must be determined from the
face of the instrument itself (Williston view).
(2) Actual intent test §382
Today, many or most courts consider a writing to be an integration only if
the parties actually intended it to be so. These courts will consider any
relevant evidence when determining the parties’ intent (Corbin view).

XXIV

(3) Application of competing views §383

The actual intent test results in a more frequent admission of parol evidence
than the formal intent test.
(4) Merger clauses §384
Under the traditional approach, merger clauses (e.g., a clause stating, “this
contract is the entire contract between the parties”) are determinative of
whether a writing is an integration, unless there is a defense to the clause’s
effectiveness (e.g., mistake). Some modern courts have held that a merger
clause is only one factor in determining whether a writing was an
integration.
 b. What constitutes parol evidence? §385
If there is a writing that is an integration, evidence of an alleged prior oral or
written agreement that is within the scope of the writing, or evidence of an
alleged contemporaneous oral agreement that is within the scope of the writing,
constitutes “parol evidence.” The alleged agreements that such evidence
concerns may be called “parol agreements.”
2. Exceptions to the Rule
a. Separate consideration §387
Where the written agreement and the alleged parol agreement are each supported
by separate consideration, courts permit the admission of the parol agreement.
b. Collateral agreement §388
Parol evidence may be admissible if the alleged parol agreement is collateral to
(i.e., related to the subject matter but not part of the primary promise), and does
not conflict with, the written integration.
c. “Naturally omitted” terms §389
Under the Restatement, a term that would be naturally omitted from the writing
is admissible. A term will be treated as naturally omitted if it does not conflict
with the written integration and if it concerns a subject that similarly situated
parties would not be expected to include in the written agreement.
(1) Williston formal approach §391
Under the traditional approach, courts determine whether an abstract
reasonable person would naturally have omitted the term from the writing.
(2) Corbin individualized approach §392
Under the modern approach, courts determine whether the actual parties
under the particular circumstances of their case might have naturally omitted
the term from the writing.
(3) Application of competing approaches §393
More terms are found to be naturally omitted under the Corbin
individualized approach. Therefore, parol evidence is admitted

XXV

more frequently under that approach than under the Williston formal
approach.
(4) U.C.C. test §394
The U.C.C. is even more liberal than the Restatement, as parol evidence is
admissible in contracts for the sale of goods unless the parol agreement
would “certainly have been included.”
(5) Inconsistent terms §395
 Parol evidence that is inconsistent with a written agreement is not within the
parameters of the “might naturally be omitted test” and thus will be
excluded.
d. “Partial” integration §398
A partial integration is an integration of the subjects actually covered in the
writing, but parol evidence is admissible on subjects not covered.
e. Lack of consideration §399
Parol evidence is admissible to show a lack of consideration.
f. Fraud, duress, or mistake §400
Parol evidence is admissible to show fraud, duress, or mistake.
g. Existence of a condition precedent §401
Parol evidence is admissible to prove there was an oral or written condition
precedent to the legal effectiveness of a written agreement, but normally it is not
admissible to add a condition under a legally effective written contract.
h. Evidence to explain or interpret terms of the written agreement §402
Such evidence may be used to show what the parties meant by the words in the
written agreement.
(1) Plain meaning rule §403
This rule will bar explanatory or interpretive evidence if there is no
ambiguity on the face of the writing and no special meaning attached to
the words by custom or usage. However, under the modern approach,
there is an increasing tendency to allow such evidence. Nevertheless, even
under the modern approach, the process of interpretation cannot be used to
contradict the written terms.
(2) Course of performance, course of dealing, and usage §405
Extrinsic evidence is admissible to show special meanings of words derived
from course of performance, course of dealing, and usage, sometimes even
if the meaning is contradictory.
(3) Filling in gaps §406
If a contract term is missing, extrinsic evidence is admissible to show what a
reasonable term would be and, under the modern approach, what the
parties actually agreed to concerning the term (as long as the agreement
does not contradict the written contract).

XXVI

i. Modifications §408
A later oral agreement modifying an existing written contract does not fall under
the parol evidence rule since it is a subsequent writing. However, to be
 enforceable, the agreement needs consideration (except in contracts for the sale
of goods) and must comply with any applicable provision of the Statute of
Frauds (infra, §§525 et seq.).
(1) Contractual requirements §411
A provision in a contract requiring all modifications to be in writing will
normally not be enforced. This principle does not apply to modifications of
sale of goods contracts under the U.C.C. If a contract for the sale of goods
includes such a provision, modifications must be in a signed writing.
(a) Waiver §413
However, the U.C.C. also provides that an oral modification of a sale of
goods contract can operate as a waiver of a writing requirement.

III. DEFENSES

A. INDEFINITENESS
1. General Rule—Certainty of Terms Required §415
An apparent agreement will not be enforced if (i) the court finds that the incomplete
terms indicate that the parties did not regard the contract as being complete, or (ii)
the court cannot determine the terms of a contract with reasonable certainty or
fashion an appropriate remedy for breach.
a. Filling gaps by implication §416
A court can fill in gaps in an agreement through the process of implication.
However, there must be a basis for the implication. (For example, a court will
hold that there is an implied promise to convey marketable title in a simple
promise to convey title, based on community practice and reasonable
expectations, but it will probably hold that a promise to erect a “house” is too
indefinite without any plans.) Note that a court may enforce an otherwise
indefinite contract if the contract has been partly performed.
2. Examples of Recurring Types of Omissions
a. Price §418
Many modern cases and the U.C.C. hold that where the contract is totally silent
as to the price, a reasonable price can be implied provided the court is satisfied
the parties intended to conclude a contract and there is some objective standard
for determining a reasonable price.
(1) Indefinite standard §420
If the parties attempt to define the price through an indefinite standard,
such as the parties’ further agreement, traditionally the courts refused
enforcement because it could not be inferred

XXVII
 that the parties intended a “reasonable price.” Today the U.C.C. (and some
courts in non-U.C.C. cases) would probably enforce such an agreement
using the standard of “a reasonable price at the time of delivery.”
b. Time for performance §422
Generally, the courts will fill a gap as to time of performance by holding that a
reasonable time was implied. What is considered a reasonable time will depend
on the nature of the contract, custom and usage in the community, and prior
dealings between the parties.
(1) Special cases
(a) Employment contracts §424
In an employment contract with no specified duration, the usual rule is
that the contract is terminable at will by either party, even if the
contract describes a pay period. Even an agreement for permanent
employment (e.g., “for life”) is usually terminable at will by either
party, unless the agreement specifically limits the employer’s power to
terminate (e.g., “only for good cause”) or the circumstances clearly
indicate permanent employment was intended by the parties. The
majority of courts enforce an employer’s promises contained in an
employee handbook (e.g., no discharge without good cause).
Furthermore, evidence of express oral promises or implications from
other factors (e.g., longevity of service) may be used to overcome the
at will doctrine.
(b) Distributorship and franchise contracts §429
Where the duration is left open, the law implies that such contracts will
last a reasonable time (e.g., the time it will take the distributor to
recover her investment).
3. U.C.C. Provisions §430
“Even though one or more terms are left open, a contract for the sale of goods does
not fail for indefiniteness if the parties have intended to make a contract and there is
a reasonably certain basis for giving an appropriate remedy.” [U.C.C. §2-204]
a. Gap fillers §431
Gap filler provisions of the U.C.C. provide designated terms in various
circumstances (i.e., reasonable price; delivery at seller’s place of business;
reasonable time for delivery and shipment; and payment when and where buyer
receives goods). Thus a bargain may be enforceable under the U.C.C. despite
the omission of such terms. Note: The U.C.C. does not contain a gap filler for
quantity.
4. Modern Trend Toward Liberalization §438
Modern authorities have begun to apply the U.C.C. approach to contracts generally,
 rather than only to sale-of-goods contracts. Thus, if a court is

XXVIII

convinced that the parties intended to make a contract, it is more willing to supply
reasonable terms to fill in gaps.
5. Indefiniteness Cured by Part Performance §439
An agreement otherwise unenforceable as too indefinite may be enforceable if the
parties have begun performance.
6. Bargains Capable of Being Made Certain §440
A bargain lacking an essential term is nevertheless enforceable if it makes reference
to an objective standard to be used to fill in the missing term (e.g., output and
requirements contracts, custom or usage).
7. “Agreements to Agree” §444
Agreements to agree are bargains in which the parties explicitly reserve some term to
be agreed on in the future. Such agreements traditionally were unenforceable, but
the modern trend (U.C.C., Rest. 2d) is to enforce them if the parties manifested an
intent to conclude a contract. Under modern law, an agreement to agree may also
give rise to an enforceable obligation to negotiate in good faith. Moreover, under the
U.C.C., even if the parties fail to reach an agreement as to price, the price is the
reasonable price at the time of delivery.
8. Bargains Subject to Power of One Party Concerning Performance
a. Unrestricted option
(1) Common law rule §451
If either party retains an unlimited option or right to decide the nature or
extent of her performance, her promise is too indefinite to be enforced.
(2) U.C.C. and Restatement Second rule §452
Under the U.C.C., as long as the parties intended to be bound, an agreement
for the sale of goods at a price to be fixed by the seller or buyer is
enforceable if done in good faith. The Rest. 2d takes the same position as
the U.C.C.
b. Alternative promises §454
A bargain is not too indefinite because it reserves to the promisor the right to
choose which of two or more performances will be rendered, provided each
performance constitutes consideration. A bargain reserving to the promisee the
right to choose between performances is enforceable if any of the performances
constitutes consideration.
c. Promise dependent on ability to pay §457
A bargain in which a party agrees to pay “as soon as he is able” is enforceable
 because the party’s ability to pay is capable of objective determination.
9. Bargains Where Written Contract Contemplated §458
Where parties enter into a bargain on the understanding that a formal contract will be
executed and such execution does not occur, the issue then arises as to what function
the parties intended the writing to serve.
 XXIX

a. Writing as evidentiary memorial §459

If it appears that the parties intended the writing only as an evidentiary memorial
of the terms of their agreement, and the agreement was complete, the oral
agreement is enforceable.
b. Writing as consummation of agreement §460
The oral agreement is not enforceable if it appears that the parties intended not
to be bound unless and until a writing was executed.
c. Determining intent §461
Important factors for determining the parties’ intent include: (i) whether the
contract is of a type usually put in writing; (ii) whether there are few or many
details; (iii) whether the amount involved is large or small; and (iv) whether a
formal writing is necessary for full expression.
10. Preliminary Agreements §462
Courts distinguish between two kinds of agreements made in contemplation of a
future final contract.
a. Agreement contemplating formalization §463
If the parties reach agreement on the negotiated issues but intend to later
formalize the agreement as an evidentiary memorial, their agreement is binding
as a contract at the time it is made.
b. Agreement contemplating further good faith negotiations §464
This is a preliminary agreement that expresses a mutual commitment to a
contract on agreed major terms, while recognizing the existence of open terms
that will be negotiated in good faith in the future (e.g., letter of intent
containing general terms and demonstrating an intent to negotiate further).
Modern cases recognize that an express agreement to negotiate in good faith is
enforceable. Even without an express agreement, courts may find an implied
mutual commitment to negotiate in good faith so that a final agreement can be
executed.
11. Reliance on Indefinite Contract §468
Even where an agreement is too indefinite to enforce, if (i) the agreement was one
on which the promisor should have realized the promisee would rely, (ii) the
agreement induced such reliance, (iii) the promisee suffered a loss, and (iv) injustice
could be avoided only by compensating the promisee, the promisee may recover
reliance damages on the basis of promissory estoppel (Red Owl case). Note: If the
promisee has begun to perform, rather than merely preparing to perform, the court
may allow recovery of expectation damages instead of reliance damages.
a. Alternative doctrine §470
 The duty of good faith negotiation (supra, §464) may be a better alternative to
handle cases in the above situation.

B. MISTAKE
1. Mutual Mistake §473
The modern rule is that where parties enter into a contract under a mutual

XXX

mistake as to a basic assumption of fact, and the mistake has a material effect on
the agreed exchange, the contract is voidable by the adversely affected party.
a. Where a party assumes risk of mistake §476
Mutual mistake is not a defense where the adversely affected party bore the risk
that the assumption was mistaken (e.g., both parties knew their assumption was
doubtful).
b. Mistake in judgment no defense §477
Mutual mistake is also not a defense if the mistake concerns prediction or
judgment.
2. Unilateral Mistake §478
In contract law, a unilateral mistake refers to a mechanical error of computation,
perception, etc., concerning a basic assumption on which the contract was made,
that is made by only one of the parties to a contract.
a. Nonmistaken party aware of error §479
If the nonmistaken party knows or should know that the other party has made a
unilateral mistake, the mistake is known as a palpable unilateral mistake. A
palpable unilateral mistake makes the contract voidable by the mistaken party.
(1) Errors in judgment §482
The rule of palpable mistake applies only to mechanical errors. It does not
apply to errors in judgment as to the value or quality of the work done or
goods contracted for.
b. Nonmistaken party unaware of error §483
If the nonmistaken party neither knew nor had reason to know of the error, the
traditional rule is that there is a binding contract on the terms proposed by the
mistaken party. If the mistaken party refuses to perform, he is liable for
expectation damages.
(1) Modern trend §485
Under the modern trend, if the mistaken party notifies the other party of a
unilateral mistake before the other party has changed her position in
reliance, the mistaken party can rescind the contract. Some cases hold that
 even if the nonmistaken party has changed her position, her recovery is
limited to reliance damages.
3. Mistranscription §486
Mistranscription occurs where, because of mistake, the written agreement does not
correctly embody the oral agreement. The aggrieved party is entitled to the equitable
remedy of reformation (correction of the writing) if he proves his case by “clear and
convincing” evidence.
4. Misunderstanding §487
This occurs where the parties’ expressions are susceptible of two different but
equally reasonable interpretations, and each party subjectively intends a different
meaning (see supra, §366). In such a case, there is no contract.

XXXI

But if one meaning is more reasonable than the other, a contract is formed on the
more reasonable interpretation.
5. Mistakes in Transmission by Intermediary §488
These are cases where an intermediary used by the offeror to transmit the offer
makes a mistake in transmitting it to the offeree (in theory, such cases could also
involve an acceptance).
a. Offeree aware of mistake §489
If the offeree knew or should have known of the mistake (e.g., because of a
large discrepancy between the market price and the offer), there is no contract.
b. Offeree unaware of mistake §490
If the offeree neither knows nor should have known of the mistake, the
authorities are split. The majority view is that a contract is formed on the terms
conveyed by the intermediary. The minority view holds that there is no
contract.
(1) Intermediary’s liability §493
Under either view, the intermediary may be liable for negligence for any
loss suffered by either party.

C. CONTRACTS INDUCED BY MISREPRESENTATION, NONDISCLOSURE,

DURESS, OR UNDUE INFLUENCE
1. Fraudulent Misrepresentation §495
A misrepresentation (i.e., a statement that is not in accord with the facts) is
fraudulent if a party makes it with the intent to induce the other party to enter an
agreement and she either (i) knows or believes the assertion is untrue; (ii) lacks
confidence in the truth of the assertion but presents it as fact; or (iii) says or implies
that there is a basis for the assertion when there is not. Contracts based on fraudulent
 misrepresentations are voidable by the innocent party.
2. Material Misrepresentation §496
Whether or not it is fraudulent, a contract based on a material misrepresentation is
voidable by the innocent party. A misrepresentation is material if it will induce a
reasonable person to agree to a contract or the misrepresenting party knows that the
assertion probably will make a particular person agree.
3. Nondisclosure §497
The general rule is that a party who proposes a contract does not have an obligation
to affirmatively disclose material facts concerning the subject matter of the contract.
But if the prospective parties are in a fiduciary relationship or one party knows
material facts by virtue of her special position (e.g., seller of home), disclosure may
be required.
4. Duress §498
If consent was induced by wrongful threats, the contract is voidable on grounds of
duress.

XXXII

a. Economic duress §499

Economic duress is a defense only where (i) one party threatens (or commits) a
wrongful act that seriously threatens the other party’s property or finances, and
(ii) no adequate means are available to prevent the loss other than entering the
contract.
5. Undue Influence §500
Undue influence is unfair persuasion of a party, A, who is under the domination of
the person exercising the persuasion, B, or who by virtue of the relation between
them is justified in assuming that B will not act in a manner inconsistent with A’s
welfare. The contract is voidable by the victim.

D. UNCONSCIONABILITY
1. Development of Doctrine—U.C.C. §502
U.C.C. section 2-302 provides that “if a court as a matter of law finds a contract or
any clause of the contract to have been unconscionable at the time it was made, the
court may refuse to enforce the contract, or it may enforce the remainder of the
contract without the unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result.” This principle also
applies to non-sale-of-goods contracts and is embodied in Rest. 2d section 208.
2. Meaning and Scope of Doctrine §505
The scope of the growing doctrine of unconscionability is still uncertain. The
doctrine is applied primarily to invalidate contractual clauses in contracts involving
 “procedural” unconscionability (i.e., an unconscionable bargaining process).
a. Procedural unconscionability—unfair surprise §506
Many cases of unconscionability involve unfair surprise—i.e., the disputed term
is not one that a reasonable person would expect to find in the type of contract in
question, and the drafting person, who has reason to know this, nevertheless fails
to call it to the other party’s attention.
(1) Adhesion contracts §507
Unfair surprise is particularly prevalent in printed form adhesion contracts
—i.e., agreements in which one party is in an inferior bargaining position
and is forced to “adhere” to the preset terms dictated by the other party
(e.g., life insurance policies, loan agreements).
(2) Party’s lack of knowledge of provisions in contract §508
Modern cases hold that in form adhesion contracts, a party is bound only by
provisions that are not unfairly surprising. The harsher the provision, the
more scrupulous the courts usually are in making certain that the weaker
party had knowledge.
b. Substantive unconscionability §510
Whether the courts can apply a doctrine of substantive unconscionability (i.e.,
unconscionability of contract terms themselves) is still

XXXIII

unresolved. The U.C.C. suggests that unconscionability is limited to prevention

of oppression and unfair surprise; the Rest. 2d says substantive unconscionability
is possible but ordinarily unconscionability involves other factors. A few cases
have invalidated unconscionable price terms.
3. Types of Unconscionable Provisions
a. Exculpatory clauses §515
An exculpatory clause releases a party from liability for injury caused by her
actions. Clauses relieving one of liability for her own intentional or reckless
wrongs causing personal injuries are not upheld.
b. Disclaimers and limitations of warranty liability
(1) Disclaimers §521
A seller may disclaim (i.e., negate) liability under an implied warranty. To
disclaim an implied warranty of merchantability (i.e., a warranty by a
merchant that goods are fit for their ordinary purposes), the word
“merchantability” must be mentioned and the disclaimer must be
conspicuous. Disclaimer of the implied warranty of fitness (i.e., a warranty
by a seller who knows the buyer is relying on her skill or judgment that
 goods are fit for the particular purpose the buyer has for the goods) must
be in writing and conspicuous.
(2) Limitation of remedies §522
The U.C.C. provides that agreements for the sale of goods may limit
damages (e.g., limiting the buyer’s remedies to repair and replacement).
There are two major exceptions to this rule.
(a) Where exclusive remedy fails its purpose §523
Where circumstances cause the limited remedy to fail its purpose, other
appropriate U.C.C. remedies may be applied. This provision is
frequently invoked where the remedy is limited to repair and
replacement, and the seller does not comply within a reasonable time.
(b) Where there is personal injury §524
The U.C.C. provides that a limitation on consequential damages for
injury to the person resulting from consumer goods is prima facie
unconscionable. Limitation of damages for commercial losses is not
prima facie unconscionable.

E. STATUTE OF FRAUDS
1. In General §525
The Statute of Frauds requires that certain types of contracts be memorialized in
writing, or at least evidenced by a signed, written memorandum of essential terms.
2. Purpose §526
The basic purpose of the Statute is to prevent fraud and perjury.

XXXIV

3. Types of Contracts that Must Be Memorialized in Writing

a. Contracts for the sale of land §528
A contract for the sale of an interest in land must be memoralized in writing.
(1) Part performance doctrine §531
A seller who conveys her interest in land to the purchaser can recover the
contract price from the purchaser even if the contract is oral. Certain kinds
of part performance by the purchaser of an interest in land may take the
contract out of the Statute where equitable relief (i.e., specific
performance) is sought.
(a) Reliance doctrine §533
Traditionally, only certain types of part performance by a purchaser
would take a contract for the sale of land out of the Statute of Frauds.
Under modern law, part performance that does not meet the traditional
 test, but that constitutes reliance, may estop the other party from
pleading the Statute of Frauds.
b. Contracts for the sale of goods §534
Contracts for the sale of goods priced at $500 or more must be memorialized in
writing.
(1) Exceptions §536
An oral contract for the sale of goods priced at $500 or more will be
enforced if:
(a) The buyer accepts and receives all or part of the goods (whereupon
the contract becomes enforceable as to the goods accepted and
received);
(b) The buyer makes part payment for the goods (in which case the
contract is enforceable as to the goods for which payment has been
made);
(c) The contract calls for manufacture of special goods for the buyer,
and the goods are not suitable for sale to others in the ordinary course
of the seller’s business. The seller must also have made a substantial
beginning in the manufacture of the goods or commitments for their
procurement;
(d) The contract is between merchants and within a reasonable time a
written confirmation (which satisfies the Statute as to the sender) is
sent and the receiving party does not dispatch a written objection within
10 days; or
(e) The contract is admitted by the party against whom enforcement is
sought “in his pleadings or testimony in court.”

XXXV

(2) Modifications §542

A modification of a contract for the sale of goods is within the Statute if the
contract as modified is within the Statute.
(3) Sale of goods vs. contract for services §547
When a contract requires both the supplying of goods and the rendering of
services (e.g., providing parts to repair a television), the predominant factor
of the contract determines whether it falls within the U.C.C. Statute of
Frauds.
c. Contracts in consideration of marriage §548
Marriage settlement contracts must be memorialized in writing.
d. Contracts that cannot be performed within one year of making §549
 Contracts that by their terms cannot be performed within one year of making
must be memorialized in writing.
(1) Performance possible but unlikely §550
Even if it is unlikely that a contract will be performed within a year, if the
contract is capable of being performed within the year, it is not within the
Statute and is enforceable even if it is oral. For example, a contract to take
care of another person until she dies is capable of being performed within a
year because the person could die within a year.
(2) Exception for performance §551
If a contract is impossible to perform within one year but is fully executed
on one side, most courts hold that the contract is taken out of the Statute
and is enforceable even if it is oral.
e. Suretyship contracts §552
Promises made to another person’s creditor to “answer for” (be responsible for)
that person’s debt must be memorialized in writing. However, if an oral
suretyship promise is made to the debtor, it is enforceable.
(1) Primary debt by promisor §554
The Statute applies only to promises to be secondarily liable for a third
party’s obligation (e.g., “I will pay for the vacuum John is buying from you
if John doesn’t pay for it”), not to promises to be primarily liable (e.g.,
“Send a vacuum cleaner to John and bill it to me”).
(2) Main purpose rule §555
A suretyship promise is enforceable, although oral, if it appears that the
promisor’s main purpose in guaranteeing the obligation of another was to
secure an advantage or pecuniary benefit for himself (e.g., Homeowner
prevents unpaid Subcontractor from walking off her building project by
guaranteeing General Contractor’s payment of Subcontractor).
4. Type of Writing Required

XXXVI

a. Memorandum of essential terms §556

A writing will satisfy the Statute if it is signed by the party to be charged and
contains: (i) the identity of the contracting parties; (ii) a description of the
contractual subject matter; (iii) the terms and conditions of the agreement; and
(iv) in many states, a recital of the consideration.
b. U.C.C. provisions §559
In the sale of goods, the writing need only be “sufficient to indicate that a
contract for sale has been made” and specify the quantity term. Written
confirmations sent by one merchant to another merchant in a form sufficient to
 bind the sender bind the recipient absent an objection.
c. Signatures §561
Signatures may be handwritten, typed, or printed, and if so intended, a party’s
initials will suffice.
(1) Agent’s signature §562
Under the original Statute of Frauds, a memorandum was sufficient if signed
by an authorized agent of the party to be charged. However, some states
have equal dignity statutes requiring the agent’s authority to be in writing to
bind the principal if the underlying contract is required to be in writing.
(2) Party to be charged must sign §564
Only the signature of the party sought to be held liable must appear.
Normally, the signature can appear anywhere on the instrument.
d. Integration of several documents §566
The required writing may consist of several documents, provided each document
refers to or incorporates the others, or they are otherwise integrated (e.g., by
being physically attached).
e. Auction sales §567
In auction sales, the auctioneer’s memorandum of terms of sale, signed only by
the auctioneer, is a sufficient writing to bind both parties.
5. Effect of Noncompliance with the Statute of Frauds
a. Majority view—contract voidable §568
Failure to comply with the Statute renders the contract voidable (i.e.,
unenforceable against a party who has not signed the requisite writing), but not
void.
(1) Effect §569
Although suit cannot be brought on an oral contract that is within the
Statute, the contract is valid for all other purposes. For example, if an oral
contract is confirmed in a later writing, the contract becomes enforceable
against the signing party, even though no new consideration is given.
Similarly, once a

XXXVII

contract has been performed on both sides, neither party is entitled to

recover what he has given based merely on the fact that the Statute of
Frauds was not satisfied.
(2) No third party defense §570
Generally, the Statute may be raised only by a party to the contract, not by
a third party.
 b. Minority view—contract void §571
In a few states, failure to comply with the Statute renders a contract void.
6. Recovery in Restitution §572
Normally, courts grant restitution for benefits conferred pursuant to a contract that is
unenforceable under the Statute, even where such a contract is deemed to be “void.”
7. Reliance on Contracts Within the Statute of Frauds §574
In increasing numbers, modern courts will estop one party from asserting the Statute
as a defense if the other party has detrimentally relied on the contract.

F. LACK OF CONTRACTUAL CAPACITY

1. Minors §576
A minor’s contracts are voidable at the option of the minor, although the minor may
enforce the contract against the adult. However, a minor is always liable in restitution
for the reasonable value of any necessaries (e.g., food, shelter) furnished to her.
2. Mental Incapacity §578
Under the traditional (and majority) view, mental incapacity to contract exists only
if a person’s mental processes are so deficient that he lacks understanding of the
nature, purpose, and effect of the transaction. The Rest. 2d, adds a more liberal
view, under which a party lacks capacity if he is unable to act in a reasonable
manner, and the other party has reason to know of this condition.
a. Effect of incapacity §580
The contract is voidable by the incompetent or a guardian acting on his behalf,
but not by the other contracting party. However, if the person has been
adjudicated insane or incompetent, his contracts are entirely void in many states.
b. Restitutional liability for necessaries §581
Whether the contract is void or voidable, the estate of an incompetent is still
liable in restitution for the value of any necessaries furnished to him.
3. Drunken or Drugged Persons §582
The test for this temporary incapacity defense is whether the person was so
intoxicated as to be unable to understand the nature, purpose, and effect of what he
was doing.

XXXVIII

G. ILLEGAL CONTRACTS
1. In General §583
If the subject matter of a contract was legal when the offer was made but became
illegal before acceptance, the offer is terminated as a matter of law. If the contract
was legal at the time it was made but became illegal afterwards, the contract is
 discharged (see infra, §847).
2. What Constitutes “Illegality” §584
If the contract’s consideration or object is illegal, the contract is treated as illegal. An
otherwise valid contract is not illegal merely because its performance will indirectly
aid the accomplishment of an illegal object, provided it does not involve a serious
crime or great moral turpitude.
3. Effects of Illegality §586
The general rule is that if a contract is illegal, the courts will not intercede (even by
restitution) to aid either wrongdoer. However, there are several important exceptions
to this rule:
a. Severable portion may be enforced §587
To be severable, an agreement must expressly require performance in distinct
installments or portions, and a separable consideration must be given for each
portion. In such cases, where the illegal portion does not go to the “essence of
the bargain,” the legal portion may be enforced.
b. “Locus penitentiae” doctrine §588
Some decisions hold that where one party to an illegal contract repents and
repudiates the contract, he may obtain restitutionary recovery for the value he
gave in performance.
c. Not “in pari delicto” §589
A party who is not guilty of serious moral turpitude and is not as blameworthy as
the other party may be able to bring a suit in restitution for the value of the
benefit conferred. However, this exception is inapplicable if the contract is
malum in se (i.e., against good morals).
(1) Member of a protected class §590
Where one party is a member of a class for whose benefit a statute is
enacted, he is usually not considered in pari delicto and may recover in
restitution.
d. Malum prohibitum §591
If the contract is only malum prohibitum (i.e., contrary to statute or regulation
but not involving any offense to good morals), restitutionary recovery may be
available to the relatively innocent party.
e. Licensing requirements §592
If an unlicensed person contracts to perform services, whether the contract is
enforceable depends upon whether the licensing statute’s

XXXIX

purpose is for protection of the public (contract unenforceable) or for fiscal

 regulation or taxation (contract enforceable).

IV. THIRD-PARTY RIGHTS AND OBLIGATIONS

A. THIRD-PARTY BENEFICIARIES
1. In General §595
A third-party beneficiary contract exists when two parties (the promisor and the
promisee) contract for a performance that will benefit a third party (the third-party
beneficiary).
a. Common law rule—promise unenforceable §596
The common law required a person to give consideration to, and be in privity of
contract with, the party to be charged in order to enforce the contract. Thus, a
third-party beneficiary could not enforce the contract.
b. Modern law §597
Under modern law, a third-party beneficiary may sue and recover in appropriate
cases.
2. Traditional Modern Law Test—Third Party Must Be Donee or Creditor
Beneficiary §598
Under the traditional modern law test, popularized by Rest. 1st, “creditor” and
“donee” beneficiaries can sue under the contract; “incidental” beneficiaries cannot.
a. Creditor beneficiary §599
If the promisee’s primary intent was to discharge a duty owed to the third
party, the third party is a creditor beneficiary and can directly sue the promisor
under the contract. It is not necessary that the promisee owe an actual duty to
the third party, but only that she believe she owes such a duty.
b. Donee beneficiary §604
If the promisee’s primary intent in contracting was to confer a gift or to confer a
right to performance against the promisor upon the third party, the third party is
a donee beneficiary and can sue the promisor.
c. Incidental beneficiary §607
This is a third-party beneficiary who is neither a creditor nor a donee beneficiary.
An incidental beneficiary cannot bring suit under the contract.
3. Restatement Second Terminology §608
Rest. 2d substitutes the term “intended beneficiary” for Rest. 1st’s terms “creditor”
and “donee” beneficiary, and it retains the term “incidental beneficiary.” Although
the terminology is different, the tests are largely the same. A party is an intended
beneficiary if recognition to a right to performance in the beneficiary is appropriate
to effectuate the intention of the parties and either (i) performance of the promise
will fulfill an obligation of
 XL

the promisee to pay the beneficiary, or (ii) circumstances indicate that the promisee
intends to give the beneficiary the benefit of the promised performance. An
incidental beneficiary is a party who is not an intended beneficiary.
4. Recurring Third-Party Beneficiary Cases
a. Assumption of a mortgage §610
An assumption agreement occurs where the promisor undertakes to perform the
duties already owed by the promisee to a third person. The third person in an
assumption agreement is a creditor beneficiary. A common type of assumption
agreement involves mortgages. A person who sells property that is subject to a
mortgage often requires the purchaser to assume (promise to pay) the mortgage
debt.
(1) Purchaser “assumes” mortgage debt §611
If the purchaser assumes the mortgage, the mortgagee (creditor) becomes a
third-party beneficiary. As such, the mortgagee has an additional remedy in
the event of default. He can foreclose on the property and, in most states,
can sue not only the original mortgagor (debtor), but also all subsequent
purchasers who have assumed the mortgage for any deficiency owing after
the property is sold.
(2) Purchaser takes “subject to” mortgage §612
In this case, there is no assumption agreement and the mortgagee has no
direct action against the purchaser. His remedy is to foreclose and then sue
the original mortgagor for any deficit.
b. Would-be legatees §614
When a party takes nothing under a will because an attorney failed to properly
draft a will or to draft it in accordance with the decedent’s wishes, most courts
hold that the party has a right to sue the attorney as an intended third-party
beneficiary of the attorney-client contract. Some courts reach the same result by
allowing a negligence action.
c. Government contracts §615
As a general rule, a member of the public who would benefit, directly or
indirectly, from a promise to render performance to a governmental entity
cannot sue to enforce the promise.
(1) Restatement First exception §616
Under Rest. 1st, members of the public can sue the promisor if an intention
to compensate the public is manifested in the contract.
(2) Restatement Second exception §617
Under Rest. 2d, members of the public can sue the promisor if either (i) the
 contract terms provide for public liability, or (ii) the government is subject
to damages liability to the members of the public and a direct action against
the promisor is consistent with the contract and with public policy.

XLI

d. Subcontractor suits against sureties of prime contractors §618

Prime contractors often are required to post (i) a performance bond, under
which a surety guarantees the owner that the contractor will perform its contract;
(ii) a payment bond, under which the surety specifically guarantees the owner
that subcontractors’ claims will be paid; or (iii) both.
(1) Payment bonds §619
Traditionally, subcontractors could recover against sureties as third-party
beneficiaries of payment bonds running to public owners, but not those
running to private owners. Modern courts usually allow recovery against
sureties under payment bonds running to either public or private owners.
(2) Performance bonds §625
If an owner requires only a performance bond, unpaid subcontractors
cannot recover against the sureties as third-party beneficiaries.
5. Defenses Assertable by the Promisor Against the Beneficiary §626
The promisor can assert against a third-party beneficiary any of the defenses that he
could have asserted against the promisee in connection with formation or
performance of the contract.
a. Defenses promisee could have asserted against beneficiary §628
These defenses are likely to arise only in a creditor beneficiary context. If the
promisor’s promise is interpreted to be a promise to pay whatever liability the
promisee was under to the beneficiary, the promisor can raise any defense the
promisee could raise. However, if the promisor’s promise is interpreted to be a
promise to pay a given amount of money to the beneficiary, the promisor
cannot raise any of the promisee’s defenses.
b. Rights of beneficiary against promisee and promisee’s rights against
promisor
(1) Donee beneficiary §631
A donee beneficiary cannot sue the promisee because the promisee owes
the beneficiary no obligation. Such a promisee also has no cause of action
against the promisor for breach of contract or any other action at law
because he has no damages. However, the modern trend is that the
promisee can seek equitable relief (i.e., specific performance of the
promisor’s promise).
(2) Creditor beneficiary §632
 If the promisor fails to pay a creditor beneficiary, the beneficiary can sue
the promisee on the original (preexisting) obligation. Also, the promisee can
sue the promisor for failure to perform because the promisee’s obligation to
the beneficiary remains outstanding due to the promisor’s failure to perform.

XLII

6. Termination or Variation of Third-Party Beneficiary Rights §633

Until a donee or creditor beneficiary’s rights vest, they can be cut off or varied by
mutual agreement of the promisor and promisee. Once the third party’s rights vest,
no agreement between the contracting parties can impair or vary these rights.
a. Restatement First view §634
A donee beneficiary’s rights vest automatically upon the making of the contract.
A creditor beneficiary’s rights vest only where he has detrimentally relied or
brought suit on the contract.
b. Restatement Second view §635
The rights of any intended beneficiary (creditor or donee) vest only when the
beneficiary manifests assent in the requested manner, brings suit to enforce the
promise, or materially changes position in justifiable reliance on the contract.
Most modern courts follow this approach.

B. ASSIGNMENT OF RIGHTS AND DELEGATION OF DUTIES

1. In General
a. Nature of an assignment §637
An assignment is the transfer of a right under an original contract which operates
to extinguish the right in the transferor (assignor), and to set it up exclusively in
the transferee (assignee). The nonassigning party to the original contract is the
obligor.
(1) Effect of assignment §639
Under modern law, the assignee is the real owner of the transferred right,
and he alone may enforce the contract against the obligor without joining
the assignor, whose contractual right has been extinguished.
(2) Governing law §640
Today, Article 9 of the U.C.C. is the most important source of law
governing assignments. It applies to almost any transaction intended to
create a security interest in personal property.
2. Rules Governing Assignability of Rights
a. General rule §649
The general rule is that all contract rights are assignable.
 b. Exceptions—nonassignable rights
(1) Rights whose assignment would materially change the obligor’s
duty §651
Rights cannot be assigned where the obligor would be required to perform
personal services to the assignee (e.g., contract with artist to paint portrait).
Similarly, requirements and output contracts generally cannot be assigned
because the assignee’s requirements could materially change the obligor’s
duty.

XLIII

(2) Rights whose assignment would materially increase the burden or risk
of the obligor §654
Assignments requiring the obligor to assume a materially increased burden or
risk from that originally contemplated are also not permitted (e.g., insurance
policies, personal loans, purchase money mortgages).
(3) Assignments that would materially change contract terms §659
An assignment will not be allowed to alter the material terms of the contract.
3. Partial Assignments §660
Today, an assignor may transfer assignable rights to several assignees. Alternatively,
the assignor may transfer some rights and retain the rest.
4. General Requirements for Effective Assignment §663
Any manifested intention by a party to a contract to make a present transfer of rights
to another will constitute an assignment. The right assigned must be adequately
described and present words of assignment must be used (e.g., “I transfer” rather
than “I will transfer”). Consideration is not required for an effective assignment.
a. Gratuitous assignments generally revocable §666
Gratuitous assignments are generally effective but revocable, subject to the
following exceptions:
(1) Delivery of tangible token §667
If a chose (i.e., claim or right) is represented by a tangible token (e.g., a
stock certificate), delivery of the token makes even a gratuitous assignment
irrevocable.
(2) Writing §670
A gratuitous assignment is irrevocable if the assignment is made in a writing
that is delivered to the assignee.
(3) Estoppel §672
If the assignee detrimentally relies on the gratuitous assignment, the
assignor may be estopped from revoking.
 (4) Novation §673
Irrevocability results if the assignee, assignor, and obligor all mutually agree
that the assignor should be substituted for the assignee; such a three-way
agreement is a novation.
b. How revoked §674
A gratuitous assignment not made irrevocable by an exception is effectively
revoked by:
(1) A notice of revocation given by the assignor to either the assignee or the
obligor;
(2) The assignor’s later assignment of the same right to another;
(3) The assignor’s death;
(4) The assignor’s bankruptcy; or

XLIV

(5) An acceptance by the assignor of payment or performance directly from

the obligor.
c. U.C.C. requirements §675
For an assignment to be effective under Article 9 of the U.C.C., the debtor must
have either signed or otherwise authenticated a security agreement describing
the assigned collateral, or the assigned collateral must already be in the assignee’s
possession. Assignments not covered by Article 9 are governed by the U.C.C.
general Statute of Frauds provision. Under this provision, a contract for the sale
of general intangibles is not enforceable beyond $5,000 in amount or value of
remedy unless there is a writing, signed by the party against whom enforcement
is sought, that indicates that a contract has been made and that states the subject
matter and the price.
5. Effectiveness of Assignments of Future Rights §677
At common law, future rights under an existing contract are generally freely
assignable. Some common law authorities allow assignment of the right to payments
expected from a continuing business relationship, even without an existing
contract. Rights under a future contract or business relationship are not assignable at
common law (but equitable relief may be possible if the assignment was given for
consideration).
a. U.C.C. §682
Future rights covered by U.C.C. Article 9 are assignable whether or not they
arise under an existing contract or business relationship.
6. Effect of Contractual Provisions Prohibiting Assignment §683
At common law, provisions against assignment of contract rights in any kind of
 contract are in principle valid, both between the parties and as to any assignee with
notice of the assignment. In practice, however, the courts narrowly construe such
prohibitions so as to drastically limit their effectiveness.
a. Form of prohibition §684
A contract containing a promise not to assign destroys the right, but not the
power, to make an assignment. However, if the prohibition is stated as a
condition, it destroys the obligee’s right and power to assign, so that an
assignment is unenforceable.
b. Restatement approach §686
Under the Restatement, a contract provision that prohibits assignment of the
contract is construed to bar only the delegation of the assignor’s duties, not the
assignment of her rights.
c. U.C.C. approach §689
Contractual prohibitions on assignments of most types of rights to payment that
are covered by U.C.C. Article 9 are ineffective. Similarly, Article 2 provides that
a right to damages for breach of a sales contract is assignable, even if the
contract contains an express prohibition against assignment.

XLV

7. Wage Assignments §691

An assignment of wages to be earned in the future under an existing contract of
employment is effective, even where the employment contract is terminable at will.
However, many states have statutory restrictions on the assignment of future wages.
8. Rights, Liabilities, and Defenses After an Effective Assignment §695
An effective assignment extinguishes the assigned right in the assignor and sets it up
in the assignee. Thereafter, the assignee alone is entitled to performance from the
obligor.
a. Rights of assignee against obligor §696
An assignee can enforce her rights by direct action against the obligor. Once the
obligor has notice of the assignment, he must render performance to or pay the
assignee.
b. Defenses available to the obligor §698
Under U.C.C. Article 9 and the common law, defenses can be asserted against
the assignee whether they arise before or after notice of the assignment is given
if they (i) assert that the underlying contract was not validly formed, or (ii) arise
under the contract or the transaction that gave rise to the contract.
(1) Holder in due course and waiver of defenses §699
If a claim is embodied in a negotiable instrument (e.g., a promissory note),
 the claim is assigned by transferring or assigning the instrument. If the
instrument is transferred or assigned to an assignee who is a holder in due
course (generally, a person who purchases the instrument for value, in good
faith, and without notice of any defenses), the obligor cannot assert against
the holder any contract-related defenses (except limited defenses, such as
duress or incapacity). With nonnegotiable instruments, a similar result can be
achieved with waiver-of-defense clauses (i.e., clauses stating that the
obligor will not assert against the assignee any defenses that she may have
against the assignor).
(a) F.T.C. rule §702
The F.T.C. effectively limits both waiver-of-defense clauses and the
holder in due course rule in consumer credit sales. Persons who sell
consumer goods or services on credit are required to include a notice in
consumer credit contracts or promissory notes that the assignee of the
contract takes subject to all claims or defenses that the consumer
debtor could assert against the seller.
(b) Consumer protection statutes §703
Many states have consumer protection statutes that also prohibit such
waivers in retail installment contracts, so that no assignee can take free
of defenses assertable against the seller.
(2) Modification after assignment §704
If the assignor and obligor in good faith modify the contract after

XLVI

the obligor has been given notice of the assignment, the traditional view is
that the modification does not affect the rights of the assignee. (The U.C.C.
is contra as to modifications of assignments of rights to payment that (i) are
made in good faith and in accordance with reasonable commercial
standards, and (ii) have not yet been earned by performance).
(3) Unrelated defenses §707
A defense unrelated to the contract can be asserted against the assignee only
if it accrued before the assignee gave the obligor notice of the assignment.
c. Rights of assignee against assignor—warranties §709
The law reads into every assignment for consideration four implied warranties by
the assignor:
(1) That the right assigned actually exists and is subject to no limitations or
defenses other than those stated or apparent at the time of the assignment;
(2) That any document or paper regarding the assignment is genuine and
what it purports to be;
 (3) That the assignor has the right to assign (i.e., no prior assignment of the
same right); and
(4) That the assignor will do nothing in the future to defeat the assigned
right; i.e., she will not attempt a subsequent assignment of the same right.
9. Priority of Competing Assignees §710
Successive assignments of the same right raise the question as to which assignee is
entitled to the obligor’s performance.
a. Common law §711
Where the first assignment is revocable, any subsequent assignment revokes
the first assignment and the subsequent assignee prevails. If the assigned claim is
represented by a tangible token, and the first assignee leaves the token in the
assignor’s possession, the second assignee prevails.
(1) Other cases §714
Other cases are governed by three competing rules:
(a) “New York” rule §715
Under this rule, the first assignee in point of time prevails.
(b) “English” rule §716
Under this rule, the first assignee to give notice to the obligor prevails if
she paid value for the assignment and did not have notice of the prior
assignment.
(c) “Massachusetts” rule §717
Under this rule, the first assignee prevails unless the second assignee
acquired the assignment in good faith and

XLVII

for value, and (i) took from the assignor a tangible token; or (ii)
collected the claim from the obligor; or (iii) got a judgment against the
obligor; or (iv) secured a novation from the obligor.
b. U.C.C. §718
U.C.C. section 9-322 provides for the public filing of a financing statement by
any person claiming an assignment of a contract right in order to give all other
persons constructive notice of the interest claimed. The basic rule is that
assignments are protected in order of their filing or perfection.
10. Delegation of Duties
a. Nature of a delegation §723
A delegation of a contractual duty is an appointment, by a party to a contract
(delegor or obligor), of another person (delegee) to perform the delegor’s
 contractual duties. (Note: Distinguish this from a novation, which is a substitution
of parties to the contract).
b. What duties are delegable §726
Any contractual duty may be delegated unless the obligee has a substantial
interest in having the original obligor perform personally (e.g., personal services
contracts). Contractual restrictions on delegation are normally enforced.
c. Effect of valid delegation of duties §729
A valid delegation does not excuse the delegor from his duty to perform, but
merely places primary responsibility to perform on the delegee (who becomes
the principal debtor), and secondary liability (as surety) on the delegor.
d. Effect of attempt to delegate nondelegable duty §732
The mere attempt to delegate a nondelegable duty does not amount to a contract
breach. However, if the original obligor indicates to the obligee that he will not
perform personally, this may constitute an anticipatory breach of contract
(infra, §832) or give the obligee a right to demand assurance of performance.
e. Rights of the obligee against the delegee
(1) Promise to assume duties §733
This situation constitutes a typical assumption agreement (supra, §610).
The obligee is a creditor beneficiary of the contract between the delegor and
the delegee and thus may sue the delegee for nonperformance.
(2) Implied assumption of duties §734
In some cases, one party simply “assigns” a contract to another who does
not expressly agree to perform the assignor’s duties. Traditionally, the mere
acceptance of contractual benefits was not sufficient to imply a promise to
bear the contractual burdens. The modern view, however, is that where a
contract that

XLVIII

is wholly or partially executory on both sides is assigned, the assignment is

construed as a delegation, and acceptance is construed as an acceptance of
the delegation (with the possible exception of assignments of contracts for
the sale of land).
(3) Effect of tender by delegee §738
If a delegee makes a satisfactory tender of performance to the obligee, the
obligee must accept it or the duty is discharged.

V. PERFORMANCE AND BREACH

A. OBLIGATION TO PERFORM IN GOOD FAITH §739

 Under modern contract law, each party has an obligation to perform in good faith.

B. EXPRESS CONDITIONS
1. In General §743
In contract law, the term “express condition” normally refers to an explicit
contractual provision providing that either (i) a party to the contract is not obliged
to perform his duties unless some event or state of the world occurs (or fails to
occur), or (ii) if some event or state of the world occurs or fails to occur, the
performing party’s obligation to perform is suspended or terminated.
2. Conditions and Promises Distinguished
a. In general §745
A promise is an undertaking to perform (or refrain from performing) some act.
The fulfillment of a condition creates or extinguishes a duty to perform by the
promisor.
b. Differences in legal effect of promises and conditions §746
An unexcused failure to perform a promise is always a breach of contract and
always gives rise to liability; nonfulfillment of a condition is not a breach of
contract and does not give rise to liability. Breach of a promise by one party may
or may not excuse the other party’s duty to perform under the contract;
nonfulfillment of a condition normally will excuse a duty to perform that was
subject to the condition.
3. Interpretation of a Provision as Condition or Promise
a. Parties’ intent controls §751
Where the contract language is ambiguous, the court construes the words used to
determine whether the parties intended the provisions to be a promise or
condition.
b. Where parties’ intent unclear §752
Several factors are considered in determining the parties’ intent. Words such as
“provided,” “if,” etc. usually indicate a condition; the words “promises,”
“agrees,” etc. generally indicate a promise. In case of doubt, contractual
provisions ordinarily will be construed as promises.

XLIX

4. Implication of a Promise from a Condition §755

In some cases, a contractual term that operates as a condition also gives rise to a
promise by implication (e.g., condition of third party’s approval gives rise to promise
to seek third party’s approval).
5. Provision Both Promise and Express Condition §756
 In this situation, a party may promise to bring about a given state of events and the
contract pertaining to that promise may also expressly state that the other party’s
duty to perform is conditioned on the occurrence of the state of events.
6. Conditions Precedent and Conditions Subsequent
a. Conditions precedent §757
A condition precedent is a condition under which some state of affairs must
occur before a party has a duty to perform.
b. Conditions subsequent §758
A condition subsequent is a condition under which the occurrence or
nonoccurrence of a state of affairs extinguishes or terminates a previously
absolute duty to perform. True conditions subsequent are rare. Many provisions
are worded as conditions subsequent in form, but are conditions precedent in
substance.
c. Procedural effect of condition subsequent §760
The burden of proof as to the occurrence of conditions precedent is generally on
the plaintiff. However, the burden of proof of the occurrence of a condition
subsequent is generally on the defendant.
7. Conditions of Satisfaction
a. Performance to satisfaction of promisor as condition precedent to
promisor’s duty to perform §761
Where “personal satisfaction” is not expressly specified, modern courts construe
a provision requiring the promisor’s satisfaction as described below.
(1) Subject matter involves mechanical fitness, utility, or
marketability §762
Where the subject matter involves mechanical fitness, utility, or
marketability, “satisfaction” means performance that would satisfy a
reasonable person.
(2) Subject matter personal §763
Where the contract involves personal taste or personal judgment, the
condition of satisfaction is fulfilled only if the promisor is personally
satisfied. However, the dissatisfaction must be honest and in good faith,
or the condition of satisfaction will be excused.
b. Performance to the satisfaction of a third party §765
If the contract requires satisfaction of a third party, most courts hold that the
third party must personally be satisfied. However, the dissatisfaction must be
honest and in good faith, or the condition of satisfaction will be excused.

L
 8. Conditions Relating to Time of Payment §766
If a court interprets a provision as a promise to pay only if a condition has
occurred, the promise to pay is unenforceable unless the condition occurs.
However, if a court interprets a provision as an unconditional promise to pay with
payment postponed until the stated condition occurs, the payment must occur within
a reasonable time, even if the condition does not occur.
9. Excuse of Conditions §767
Generally, no duty to perform arises until all conditions have been fulfilled.
However, a duty may arise in some cases where the condition has been excused.
a. Excuse by prevention or hindrance §768
A condition will be excused if the party favored by the condition wrongfully
prevents or hinders its fulfillment. Wrongfulness means that under the
circumstances, the other party would not have reasonably anticipated the type
of prevention or hindrance that occurred (e.g., termination of a seller’s business
in an output contract).
b. Waiver §773
Fulfillment of a condition may be waived (see supra, §§110 et seq.).
c. Impossibility §774
Impossibility or impracticability may excuse performance of a condition if it is
not a material part of the agreement and forfeiture would otherwise result (see
infra, §§845 et seq.).
d. Forfeiture §775
If nonfulfillment of a condition would result in a disproportionate forfeiture, the
condition may be excused unless fulfillment was a material factor.

C. IMPLIED CONDITIONS
1. In General §776
Often, even though a condition is not expressed in a contract, it is nevertheless clear
that the obligation to perform is subject to a condition. In such cases, the condition is
said to be an “implied” or “constructive” condition.
2. Implied Conditions of Performance §777
The most important type of implied condition to the duty of each party to perform is
the performance (or tender of performance) of the other party.
3. Implied Conditions of Cooperation and Notice §778
A party’s duty to perform may be conditional on the other party’s cooperation or
giving of notice that performance is due.

D. ORDER OF PERFORMANCE
1. Protracted Performance Is Condition to Performance of Single Act §782
 If one party’s performance will take some period of time, while the other’s

LI

may be performed in a moment, completion of the performance that will take time is
an implied condition to the duty to render the momentary performance.
2. Earlier Performance Is Condition to Later Performance §783
If one party promises to perform prior to the time the other party promises to
perform, the first party’s performance is an implied condition to the other’s later duty
to perform.
3. Simultaneous Performances Are Conditions Concurrent §784
If a contract fixes the same time for the performance of both promises, and both are
capable of simultaneous or nearly simultaneous performance, each party’s
performance is an implied condition concurrent to the other’s performance; i.e.,
each must tender his performance as a condition to the other party’s duty to
perform.
4. No Time Set for Either Performance §785
Conditions concurrent will also be implied if no time is set for performance and the
promises are capable of nearly simultaneous performance.
5. Time Set for One Performance But Not Other §786
In this situation, conditions concurrent will be implied if both promises are capable
of nearly simultaneous performance.
6. Anticipatory Repudiation §787
A performance or tender that normally would be an implied condition to the other
party’s performance or tender will be excused if the other party repudiates the
contract prior to the time when performance was to occur. In addition to being
excused from holding himself ready to perform and from tendering performance, the
nonrepudiating party can normally sue the repudiating party for breach even before
the scheduled time for performance.
7. Prospective Inability to Perform §790
This occurs when circumstances make it appear that one party will be unable to
perform (e.g., a seller’s encumbrance of property after she contracts to sell it to
another). Prospective inability to perform excuses the other party’s duty to perform.
If prospective inability to perform arises from voluntary conduct, it may also
constitute anticipatory breach.
a. U.C.C. §797
Under the U.C.C., either party can demand assurances if reasonable grounds for
insecurity exist and may suspend performance until assurances are given.
Unjustified failure to give assurances within 30 days constitutes a repudiation.
E. DOCTRINE OF SUBSTANTIAL PERFORMANCE §799
Where one party’s performance is an implied condition to the other party’s duty of
counterperformance, the implied condition will normally be satisfied by substantial
performance. Thus, if the doctrine of substantial performance is applicable and one
party renders substantial performance, the other party comes under a

LII

duty of counterperformance, although she can deduct any damages suffered because the
first party’s performance was less than complete.
1. What Constitutes “Substantial” Performance §800
This is a question of fact, to be governed by the circumstances of each case. The
test used is whether the performance meets the essential purpose of the contract.
2. Application §802
The doctrine is applied primarily to construction contracts, where it would be unjust
to allow an owner to retain the value of a building free of charge just because the
builder deviated somewhat from the agreed specifications.
a. U.C.C. §803
In theory, the U.C.C. adopts the “perfect tender” rule, thus not recognizing the
doctrine of substantial performance in sale of goods contracts. In practice,
exceptions to the rule (e.g., seller’s right to cure a defect) have left little of the
general rule.
3. Damages §808
A party receiving substantial performance may deduct from the payment due any
damages suffered from the defective performance. The usual measure of damages is
the cost of completion. However, if this would result in substantial economic waste,
diminution in value is used as a measure of damages.
4. Remedy in Restitution §811
Even if substantial performance is not found, a party still may recover in restitution
for the reasonable value of benefits conferred by her. In practice, the measure of
recovery when performance is incomplete but readily remedial is usually the unpaid
contract price less the cost of completion, up to the value of the benefit received by
the defendant.

F. DIVISIBLE CONTRACTS §812

A contract is said to be divisible if the parties’ performances can be apportioned into
pairs of matching or corresponding parts that the parties treat as equivalents.
1. Significance §813
If a contract is divisible, a party who has performed one or more parts is entitled to
collect the contract price for those parts even though she is in breach as to the other
 parts. However, since there is still one contract, the right to collect is subject to an
offset for damages resulting from breach of the other parts.
2. “Entire” Contract §814
A contract that is not divisible is said to be “entire.”
3. Employment Contracts §815
If an employment contract (or state law) requires periodic salary payments (e.g.,
$1,000 per month), courts usually hold the contract to be divisible.

LIII

G. MATERIAL VS. MINOR BREACH §816

An actual breach of contract at the time performance is due gives rise to an immediate
cause of action for damages. Whether a breach also excuses the duty of
counterperformance depends on whether it is material or minor.
1. Distinguishing Material from Minor Breach §817
The following six factors are relevant in determining whether a breach is material or
minor:
(i) The extent to which the breaching party has already performed (a breach
at the outset is more likely to be material);
(ii) Whether the breach was willful, negligent, or the result of purely innocent
behavior;
(iii) The extent of uncertainty that the breaching party will perform the
remainder of the contract;
(iv) The extent to which the nonbreaching party will obtain (or has obtained)
the substantial benefit he bargained for;
(v) The extent to which the nonbreaching party can be adequately
compensated for the defective or incomplete performance; and
(vi) The degree of hardship imposed on the breaching party by holding the
breach material and terminating all his contractual rights.
a. Repudiation §819
A repudiation consists of words or conduct by a party that a reasonable person
would interpret as an expression of refusal to perform further. An act
considered to be a minor breach will be treated as a material breach if
accompanied by an express repudiation.
b. Effect of parties’ agreement §820
The contract, either expressly or impliedly, may make the time, manner, or other
details of performance material, in which case the specified deviations normally
will be considered material (e.g., “time is of the essence” clause).
 2. Effect of Material Breach §823
A material breach always gives rise to an immediate cause of action for breach of
the entire contract. It also excuses further performance by the innocent party.
3. Effect of Minor Breach §824
A minor breach gives rise to an immediate cause of action for whatever damages
were caused by the breach, but not a cause of action on the entire contract. The
minor breach may suspend, but does not excuse, the duty of counterperformance.
4. Response to Breach §825
If the breach is material, the innocent party may sue for damages and let the
contract continue, or terminate the contract and sue for total breach. A minor
breach permits a suit for damages but not termination.

LIV

5. Material Breach vs. Substantial Performance §828

Material breach and substantial performance are similar in that both distinguish
between major or important breaches and minor or less important breaches. But the
two are used differently. Substantial performance usually is invoked by a party who
has breached but seeks the contract price minus a setoff for damages, whereas
material breach usually is invoked where one party has breached in a minor way,
the other party terminates the contract as a result, and the first party wants to argue
that there was no right to terminate because his breach was not material.
a. Substantial performance §829
This doctrine involves the question: When can a party who has breached bring
suit for damages rather than unjust enrichment?
b. Material breach §830
This doctrine involves the question whether a victim of a breach can terminate
the contract and be entitled to damages for the whole contract, or cannot
terminate the contract and is entitled only to damages for partial breach.

H. ANTICIPATORY BREACH §832

If either party to a contract repudiates the contract prior to the time set for
performance, the other party may treat the anticipatory repudiation as a present,
material breach of contract and bring an immediate action for the entire value of the
promised performance.
1. Acts Sufficient §833
The repudiation can be by words or by a voluntary act that disables the promisor
from performing.
2. Insistence on Terms Not Part of the Contract §834
This type of insistence constitutes an anticipatory breach.
 3. Requirement of Unequivocal Repudiation §835
An anticipatory repudiation requires a positive, unconditional refusal to perform as
promised in the contract. Ambiguous expressions (e.g., “I doubt”) are insufficient.
They may, however, constitute a prospective inability to perform whereupon the
other party may suspend counterperformance.
4. Exception Where Nonrepudiating Party Has Completed Performance §836
The doctrine of anticipatory repudiation does not apply where the only remaining
duty of performance is a unilateral duty of the repudiating party, especially a duty to
pay money in installments. Usually, in such a case the innocent party must wait to
sue until an actual breach occurs at the time set for the other party’s performance.
5. Retraction §838
Generally, the repudiator may retract his repudiation at any time prior to the date set
for his performance, unless the innocent party has either accepted the repudiation or
has changed his position in detrimental reliance thereon.

LV

6. Determining Damages §839

Generally, the injured party must act promptly to mitigate damages after learning of
the repudiation.
a. U.C.C. §840
Under the U.C.C., the measure of damages for a buyer’s anticipatory repudiation
of a contract for the sale of goods is the difference between the contract price
and the market price at the time and place for tender. If the seller anticipatorily
repudiates, the buyer may either cover or recover damages equal to the
difference between the market price at the time the buyer learned of the breach
and the contract price.
7. Mitigation of Damages §841
The innocent party owes a duty to mitigate (e.g., to stop performance), and if he
fails to do so, he is not entitled to recover damages he could have otherwise avoided.
8. Prospective Inability to Perform §842
If the prospective inability is caused by voluntary conduct, it may constitute an
anticipatory breach (see supra, §§832 et seq.).

I. CHANGED CIRCUMSTANCES—IMPOSSIBILITY AND FRUSTRATION

1. General Rule §845
Performance of a contract will normally be excused when it has been made
impossible—more accurately, impracticable—by the occurrence of an event the
nonoccurrence of which was a basic assumption on which the contract was made,
unless the adversely affected party has assumed (expressly or impliedly) the risk
 that the event might occur.
2. Recurring Types of Impracticability Cases
a. Supervening illegality §847
Where performance of a contract has become illegal due to changes in the law
or through some other act of government after the time of contracting (e.g., new
zoning ordinances are enacted), performance is excused.
b. Supervening destruction or nonexistence of subject matter §848
Where this situation occurs through no fault of the promisor (e.g.,., a concert hall
in which a singer was to perform is destroyed), the promisor’s duty is excused.
c. Specific source of supply contemplated §849
The seller’s duty to furnish goods under a contract of sale may be excused on
the failure of a particular source of supply specified or contemplated by both
parties (e.g., failure of a particular crop specified by the parties).
d. Construction contracts §851
Generally, a contractor’s duty to construct a building is not excused by
destruction of the work in progress since the building can be rebuilt.

LVI

e. Repair contracts §852

However, a contractor’s duty to repair or renovate an existing building is
excused if the building is accidentally destroyed without fault by either party.
The contractor may recover in quasi-contract the reasonable value of work done
prior to the destruction.
f. Land sale contracts §853
Traditionally, the purchaser, as the equitable owner from the time of contracting,
bears the risk of loss due to destruction of improvements. However, the
modern trend, absent a contrary agreement, is to place the risk on the seller
until closing or a change in possession so that destruction of improvements
excuses payment by the buyer.
g. Sale of goods §854
Under the U.C.C., if contracted-for goods are identified when the contract was
made and are destroyed without the fault of either party before the risk of loss
passes, the contract is avoided. If goods are to be shipped to the buyer, the risk
of loss passes to the buyer when the seller delivers them to the carrier, unless the
contract requires delivery to a particular destination, in which case the risk of loss
passes when the goods are tendered at the destination. If no shipment is
involved, the risk of loss passes to the buyer upon his receipt of the goods if the
seller is a merchant; if seller is not a merchant, the risk of loss passes on tender.
 h. Death or illness §855
Death or incapacitating illness of a specific person necessary for the performance
of a promise (personal service contract) excuses the duty to perform. A service
is “personal” if the right to command the services cannot be validly assigned or
the duty to perform cannot be validly delegated.
3. Temporary Impracticability §857
Temporary impracticability (e.g., being drafted into the Army while performing a
personal services contract) merely suspends (rather than excuses) the promisor’s
duty. After the impracticability ceases, the duty reattaches, but only if performance
thereafter would not substantially increase or make different the burden on either
party.
4. Partial Impracticability §858
If there is partial impracticability, the promisor is still bound to perform the
practicable remainder of performance if she is able to render substantial performance
and the remainder is not made materially more difficult or disadvantageous. The
promisee is bound to accept the modified performance with an appropriate offset.
5. Recovery in Restitution for Part Performance §860
Either party may recover in restitution for the reasonable value of her performance
prior to a contract’s being discharged for changed circumstances. A few cases allow
recovery for reliance damages.
6. Frustration §862
Even if a bargained-for performance is still possible, a contract is discharged

LVII

under the doctrine of frustration where the purpose or value of the contract has
been destroyed by some supervening event that was not reasonably foreseeable at
the time of contracting.

J. DISCHARGE
1. Discharge by Mutual Rescission §864
A contract still executory on both sides may be discharged by an express agreement
between the parties to rescind or call off their deal. Such an agreement is itself a
binding contract; i.e., each party is giving up the right to performance by the other,
so no other consideration is necessary.
a. Formalities §867
The rescission may be oral, unless it would cause a transfer of an interest in land
or a sale of goods within the Statute of Frauds.
2. Release §869
A contract may be discharged by the execution and delivery of a release in which the
 maker expresses an intention to extinguish contractual rights existing in her favor,
providing there is consideration for the release. However, a number of states and the
U.C.C. have abolished the consideration requirement if the release is in writing.
3. Accord and Satisfaction §872
A contract may be discharged by an accord and satisfaction, in which one contract or
performance is substituted for another (see supra, §§97 et seq.).
4. Payment-in-Full Check §873
A contract may be discharged by such a check, even if for less than the amount
claimed due, if the payee cashes it, provided certain conditions are met (see supra,
§93).

VI. REMEDIES

A. BASIC MEASURES OF DAMAGES

1. Damage Measures
a. Expectation damages §876
These are based on the contract price and have the purpose of putting the victim
of breach in the position he would have been in if the promise had been
performed; i.e., they give the victim the benefit of the bargain.
(1) Incidental damages §877
These include expenses such as the seller’s costs of shipping goods to and
from a buyer who has breached or a buyer’s costs of finding substitute
goods after a seller breaches. Incidental damages are normally added to the
general damage award.
b. Reliance damages §878
These are based on the nonbreaching party’s costs and have the

LVIII

purpose of putting the nonbreaching party in the position she would have been in
had the promise not been made.
c. Restitutionary (or quasi-contract) damages §879
These are based on the reasonable value of a benefit conferred by the promisee
on the promisor and are available in a variety of circumstances—for example,
where:
(1) The benefit was conferred under a contract that turned out to be
unenforceable;
(2) The promisor is in material breach; or
(3) No contract was formed but a benefit was conferred in a precontractual
 stage when the parties believed they had concluded or would conclude a
contract.

B. LIMITATIONS ON EXPECTATION DAMAGES

1. Principle of Hadley v. Baxendale §882
A party injured by breach can recover only those damages that (i) should reasonably
be considered as arising naturally (i.e., in the usual course of things) from the breach
or (ii) might reasonably have been contemplated by the parties at the time the
contract was made.
a. General damages §884
These are damages that flow from a given type of breach regardless of the
breach victim’s particular circumstances and are always recoverable. For
example, if a seller breaches by not delivering contracted-for goods, the buyer
may recover either the market price minus the contract price or the cost of
substitute goods minus the contract price.
b. Consequential damages §885
These are damages above and beyond general damages that result from the
buyer’s particular circumstances (e.g., a factory’s loss of profits if a needed
assembly-line part is not delivered on time). They are recoverable only if the
seller had reason to foresee the damages as a probable result of the breach.
However, today “probable” is often interpreted as a “significant likelihood” that
the damages would result.
2. Certainty §888
Only damages that are reasonably certain of computation are recoverable;
speculative damages cannot be recovered. Thus, lost profits from an existing
business can be awarded, but lost profits from a new business are trickier. However,
even lost profits from a new business may be awarded based on the profits of similar
existing businesses. The modern trend is not to cut off remedies unless the
uncertainty is severe.
3. Duty to Mitigate §893
An injured party cannot recover damages that could have been avoided by
reasonable efforts.

LIX

a. Contracts for the sale of goods §894

If a buyer fails to cover (buy substitute goods) when she could have, she will not
be permitted to recover consequential damages that could have been avoided by
covering. Similarly, if the buyer repudiates, the seller cannot run up charges by
packing, shipping, etc. and must cease manufacturing goods contracted for unless
the completion would facilitate resale and thereby reduce the buyer’s damages.
 b. Employment contracts §895
If an employer wrongfully terminates employment, the employee must look for a
comparable job (see infra, §926).
c. Construction contracts §896
A contractor cannot continue to work after the owner breaches, but generally is
not under a duty to find an alternative construction job during the period he
would have been working on the canceled contract.
d. Expenses recoverable §898
The nonbreaching party may recover the reasonable costs of mitigation efforts,
even if the efforts are unsuccessful.

C. SPECIFIC PERFORMANCE §899

Specific performance (i.e., an order from a court to a contracting party to perform as
promised) is an equitable remedy that is available only if the remedy at law is
inadequate. This includes cases where the subject matter is unique, including all
contracts for interests in land and contracts for the sale of unique goods. Specific
performance will not be awarded to force someone to work under a service contract,
even if the services are unique, but courts might issue an injunction against the
breaching party to prevent her from working for competitors.

D. EXPECTATION DAMAGES AND SPECIFIC PERFORMANCE IN CERTAIN

CONTEXTS
1. Contracts for the Sale of Goods
a. Breach by seller
(1) General damages for breach as to accepted goods §902
If the buyer accepted goods that do not conform to the contract (usually
giving rise to a breach of warranty action), the buyer’s general damages
normally are measured by the value the goods would have had had they
been conforming minus the value of the accepted goods. This difference in
value may be measured by the cost of repairing the goods.
(2) General damages where seller fails to deliver or buyer rightfully
rejects or revokes acceptance §903
The buyer can recover either (i) the market price at the time he learned of
the breach minus the contract price or (ii) the cost of cover (i.e., the cost of
substitute goods) minus the contract price.

LX

(3) Specific performance and replevin §905

The U.C.C. permits a buyer to get specific performance “where the goods
 are unique or in other proper circumstances.”
(4) Buyer’s incidental and consequential damages §907
Incidental damages generally include reasonable expenses incident to the
seller’s delay or other breach, such as inspection costs, expenses relating to
cover, etc. Consequential damages include any loss resulting from the
requirements of the buyer of which the seller was aware at the time the
contract was made and that could not have been prevented by cover.
(5) Damages for late performance §910
If the seller breaches by late performance and she knew or had reason to
know that the goods would be resold by the buyer, the buyer can recover
the reduction in market value of the goods between the time performance
was due and the time performance was rendered.
b. Breach by buyer
(1) General damage measures
(a) Market damages §911
If a buyer refuses to purchase the goods, the seller can recover the
contract price minus the market price at the time and place for tender.
(b) Lost profits §912
If the market price formula above will not put the seller in as good a
position as performance would have (e.g., cases where the seller has
lost the volume of sales he otherwise could have made but for the
breach), the seller can recover lost profits—i.e., the contract price
minus either the seller’s cost of purchasing the goods (where the seller
is a dealer) or the costs of manufacture (where the seller is a
manufacturer).
(c) Resale §915
Alternatively, the seller can resell the goods in good faith and in a
commercially reasonable manner and recover the contract price minus
the resale price.
(2) Action for price §916
A seller can maintain an action for the full price (an equivalent to specific
performance) if the buyer refuses goods that have been identified to the
contract and the seller is unable to resell the goods after reasonable efforts,
or such efforts would be unavailing (e.g., where the seller has specially
manufactured goods for the buyer that are unsuitable for sale to others, such
as calendars imprinted with the buyer’s name).
(3) Incidental damages §918
In a proper case, the seller may also be able to recover expenses
 LXI

incurred as a result of buyer’s breach, such as extra transportation, sales,

and commission costs.
2. Contracts for the Sale of Realty
a. Breach by seller
(1) Damages §919
Many states limit a buyer’s damages for a seller’s refusal to convey real
property to the buyer’s out-of-pocket expenses unless the breach is in bad
faith, in which case the buyer can recover the market price minus the
contract price.
(2) Specific performance §922
Alternatively, the buyer is entitled to specific performance in the form of a
decree ordering the seller to convey.
b. Breach by buyer
(1) Damages §923
If the buyer refuses to purchase, the seller is entitled to recover the contract
price minus the fair market value of the land.
(2) Specific performance §925
Alternatively, the seller can obtain a decree of specific performance, which
will usually provide that if the buyer does not pay by a specified date, the
seller can resell and collect any deficiency between the resale price and the
contract price from the buyer.
3. Employment Contracts
a. Breach by employer §926
The employee is entitled to the remainder of her wages minus wages actually
received from substitute employment or that would have been received had
substitute employment been sought. Note that the duty to mitigate is only to find
work of the same type and in the same locale.
b. Breach by employee §928
The employer is entitled to recover the wages that must be paid to a
replacement minus the employee’s wages.
c. Specific performance §929
This remedy is not available, but a court may issue an injunction barring the
employee from working for a competitor.
4. Construction Contracts and Other Contracts for Services
a. Breach by owner §932
 The contractor is entitled to recover the contract price minus out-ofpocket costs
to be incurred, with an offset for amounts already paid by the owner.
Alternatively, the contractor can recover lost profits plus out-of-pocket costs
prior to breach, with an offset for amounts already paid by the owner.

LXII

b. Breach by contractor
(1) Cost of completion §934
If the contractor breaches materially, the owner normally is entitled to
recover the difference between the contract price and the cost of completing
the contract by hiring a substitute contractor.
(2) Diminished value damages §935
If the above measure would lead to waste or would be disproportionate to
the owner’s gain, the owner will recover the value of what she received
minus the value of what she would have received had the contract been
performed in full.
(3) Damages for minor breach §936
For minor breach, the owner is entitled to recover either (i) the cost of
correcting the defect (i.e., the cost of completion) or (ii) the value of the
performance promised minus the value of the performance rendered, as
appropriate.
c. Specific performance §937
Generally, a contract for construction will not be specifically enforced.
5. Contracts for Carriage §938
If the subject matter of a contract for carriage consists of goods to be sold by the
shipper (and this was reasonably foreseeable), the shipper can recover for the
reduction in market value between the time performance should have been rendered
and the time it was performed. Alternatively, the shipper’s damages are often
measured by the reasonable daily rental value of the shipped goods during the delay.

E. NOMINAL DAMAGES §939

If a victim of breach cannot prove a loss, she is entitled to at least nominal damages
(normally $1).

F. LIQUIDATED DAMAGES §940

A liquidated damages provision will not be enforceable if the court determines the
provision is a penalty. The name the parties give to the provision is not controlling.
1. Requirements §942
For a liquidated damages provision to be enforceable:
 a. Damages that would result from breach must have been impracticable or
extremely difficult to assess at the time the contract was made; and
b. The amount of damages fixed must be a reasonable estimate of the damages
that would result from breach.
2. Subsequent Events §945
In the past, the courts enforced an otherwise enforceable liquidated damages

LXIII

provision even if subsequent conditions made actual damages ascertainable or it was

clear that actual damages were substantially different from the liquidated amount.
However, under an emerging view, a liquidated damages clause may be ruled
unenforceable, even if it was a reasonable forecast at the time of drafting, if it turns
out to be completely disproportionate to actual damages suffered. Some courts
following this view apply the doctrine of unconscionability to reach this result.
3. Deposits §948
Deposits may serve the same purpose as liquidated damages provisions, and a
deposit that was made by a party in breach often may be recovered to the extent that
it exceeds the innocent party’s actual damages unless the deposit is also a valid
liquidated damages provision.

G. PUNITIVE DAMAGES §949

Punitive damages generally are not available in contract actions.
1. Tort §950
Punitive damages may be available if the breach also constitutes a tort, has tortious
elements, or (sometimes) is fraudulent or outrageous.
2. Good Faith §951
Punitive damages may also be available where there is a breach of the duty of good
faith, in particular by insurers against their insureds.

H. DAMAGES FOR EMOTIONAL DISTRESS §952

Contract damages may be awarded for emotional distress if the distress accompanies
bodily injury or the contract involved personal, rather than strictly financial, interests.

I. RESTITUTIONARY DAMAGES
1. Unenforceable Contracts §955
Restitutionary damages are available to recover the value of a benefit conferred
under a contract that is unenforceable because of the Statute of Frauds, impossibility,
etc.
2. Breach of Contract §956
 Restitutionary damages may also be awarded as an alternative to expectation
damages against a party who has materially breached. The remedy usually is sought
where the nonbreaching party has made a losing contract. In such a case,
restitutionary damages usually are not limited by the contract price.
3. Plaintiff in Default §960
Even a party who has materially breached may be able to bring an action for
restitution, such as where a deposit exceeds the innocent party’s damages.
 (i)

Approach to Exams
Just about any Contracts exam question can be answered by analyzing five basic issues. Of
course, not all Contracts questions will require a thorough discussion of all five issues, but
you should consider each of them at least briefly before writing your answer.
1. Was a contract made between the parties? (Formation problems—offer and
acceptance, consideration.)
2. Are there any reasons why the contract should not be enforced as agreed? (Defenses
to formation—indefiniteness, mistake, Statute of Frauds, etc.)
3. Who has enforceable rights and/or duties under the contract? (Problems of third-party
beneficiaries, assignees, and delegees.)
4. Is there an absolute duty to perform? (Problems of conditions, changed circumstances,
discharge.)
5. If the contract has been broken, what remedies are available to the innocent party?
These issues are analyzed more fully below. For study purposes, be sure to review the more
detailed approaches to specific topics in the chapter approach sections at the beginning of
each chapter.
A. Has a Valid Contract Been Formed?
To establish an enforceable contract there must be a showing of (i) consideration, and
(ii) mutual assent, usually manifested by an offer and an acceptance.
1. Was There Legally Sufficient Consideration?
Look for a bargain or other consideration.
a. Bargain
Did the parties make a bargain? (§§6-10)
(1) Is the promised consideration more than nominal? (§§12-18)
(2) If the agreement was based on a promise to forbear from asserting a legal
right, did the promisor have an honest or reasonable belief in the validity of
his claim? (§§19-26)
(3) Did the agreement involve an illusory promise? If the promisor has
reserved some right, option, or alternative limiting his obligation, consider
whether this right is unqualified (if so, the promise may be illusory). (§§27-
59)

(ii)
 (4) Did the agreement involve a promise merely to perform some act that the
promisor is already obliged to do? (§§60-96)
(5) Was the agreement an accord? (§§97-109)
b. Other types of consideration
If the parties did not make a bargain, was there some other factor that made
their agreement enforceable?
(1) Was there foreseeable reliance on the promise? (§§123-130)
(2) Was there a waiver of some nonmaterial condition to the bargain? (§§110-
112)
(3) Was there an enforceable promise to pay based on moral or past
consideration (e.g., a promise to pay a debt barred by bankruptcy or the
statute of limitations, a promise to pay a voidable obligation, etc.)? (§§131-
153)
(4) Was the promise in some special form (e.g., under seal) that makes it
enforceable? (§§115-119)
2. Was There an Effective Offer?
Consider the following:
a. Bargaining intent
Does it appear that the offeror intended to create present contractual rights and
duties, or was he merely negotiating or inviting the other party to make an offer?
(§§160-165)
b. Definiteness
Does the proposal cover, expressly or impliedly, certain essential factors (such
as subject matter, price, and quantity) so that the court can determine what in
fact the offeror intended and whether he intended that a contract would be
concluded by acceptance of his proposal? (§§166-167)
3. Was There an Effective Acceptance?
Consider:
a. Intent and manner
Did the offeree apparently intend, by her words or conduct in response to the
offer, to create a contractual relationship between herself and the offeror? And,
did the offeree manifest her assent to the offeror’s proposal in the manner
required by the offer—i.e., by the doing of an act. or by the giving of a promise?
(This raises the distinction between unilateral and bilateral contracts; §§253 et
seq.) Special problems arise where:

(iii)
 (1) The offeree remains silent, intending thereby to accept (§§299-313); and
(2) The offeree purports to “accept” the offer in a manner different from that
requested by the offeror (§§324-335).
b. Timeliness
Did the acceptance become effective prior to the termination of the offer
(termination may occur by revocation of the offer, lapse of time, rejection of the
offer, or counteroffer)? (§§181-257)
(1) Where the parties are dealing at a distance, special rules (e.g., the
“mailbox rule”) must be considered as to when an offer, acceptance,
repudiation of acceptance, revocation, or rejection becomes effective.
(§§314-362)
(2) If the offeror has attempted to revoke, special rules must be considered as
to whether the offer was revocable. (§§225-252)
c. Unconditional
Has the offeree given unqualified assent to the proposal? If not, “acceptance”
may operate as a rejection of the proposal and as a counteroffer. (§§197-224)
B. Are There any Reasons Not to Enforce the Contract?
Assuming that a contract has been formed, consider whether there are any defenses to
the enforcement of the contract:
— Indefiniteness (§§415-471)
— Mistake (§§472-494)
— Misrepresentation, nondisclosure, duress, or undue influence (§§495-500)
— Unconscionability (§§501-524)
— Lack of a writing (required by Statute of Frauds) (§§525-575)
— Lack of contractual capacity (minors, mental incompetents) (§§576-582)
— Illegality of contract purpose or consideration (§§583-594)
C. Do Any Third Parties Have Enforceable Rights and/or Obligations Under the
Contract?
1. Third-Party Beneficiary
The “reasonable expectations” induced by the making of the contract may be those
of some third party. If so, the third party (as well as the original promisee)

(iv)

may be entitled to enforce the bargain promise made in her favor. (§597) In
determining the rights of such third parties, consider the following:
 a. Status
Is the third party more than incidentally benefited by the promises made?
Consider the distinction between “intended beneficiaries” (which include
“donee” and “creditor beneficiaries”) and “incidental beneficiaries.” (§§598-
608)
b. Vesting
Have the rights of the third party vested, so that they may not be terminated or
varied by an agreement between the promisor and the promisee? (§§633-635)
c. Defenses
What defenses or offsets may be asserted against the third party? (§§626-632)
2. Assignees and Delegees
Where, subsequent to the original contract, either party seeks to transfer to a third
party some right and/or duty provided under the contract, several matters should be
considered:
a. Assignment of rights
(1) Are the rights assignable? (§§649-662)
(2) What is the effect of the assignment (what rights does the assignee have
against the obligor, what rights does the obligor have against the assignor,
and what defenses may be asserted by the obligor)? (§§695-709)
(3) If the rights have been assigned successively to several assignees, which
one of them has priority? (§§710-722)
b. Delegation of duties
(1) Is the duty capable of being delegated? (§§726-728)
(2) What is the effect of the delegation (what are the liabilities of the delegee to
the obligee and the obligor)? (§§729-738)
D. Is There a Duty to Perform?
Once you have determined that a contract has been made, determine whether the
reasonable expectations induced by the contract have been fulfilled. If not, think about
whether performance has somehow been excused by events occurring after formation
of the contract. Consider:

(v)

1. Condition vs. Promise

Is the contractual provision a condition or a promise? (§§745-756) In addition to any
express conditions, was there any implied condition? (§§776-780) If there is a
condition (express or implied), ask:
 a. Has the condition been met?
b. If the condition has not occurred, has it been excused so that there is a duty to
perform despite the fact that the condition did not occur? (§§767-775)
2. Present Duty to Perform
a. Conditions precedent
Have all conditions precedent been performed or excused (e.g., by anticipatory
repudiation, prospective inability to perform, or substantial performance)?
(§§781-844)
b. Changed circumstances
Did the circumstances change so that performance was impossible or highly
impracticable? (§§845-860)
c. Frustration
Did the purpose or value of the contract become totally frustrated by a
supervening event? (§862)
3. Discharge of Contract
Has the contract been discharged by full performance or some other ground such as
rescission, release, accord and satisfaction, or a payment-in-full check? (§§863-873)
E. What Remedies Are Available to the Innocent Party?
Which remedy will best effectuate the innocent party’s reasonable expectations under
the contract (damages, restitution, or specific performance)?
1. Damages
a. Measure of damages
Remember that damages are the most common remedy. If they are sought, what
measure of damages best protects the expectations of the parties? (§§875-879)
b. Expectation damages
What is required to put the injured party into the position he would have been in
had the promise been performed? (This depends on the nature of the contract
and the position of the injured party). (§§900-938)

(vi)

c. Liquidated damages
What is the effect of any agreed measure of damages or any limitation on the
measure of damages? (§§940-948)
2. Specific Performance
Is the legal remedy (i.e., damages) adequate? If not, consider whether specific
performance of the contract would better remedy the breach of contract. (§899)
3. Restitution
Would this alternative to damages be a more appropriate remedy (e.g., if the contract
is a losing one or if it is unenforceable)? (Plaintiff may recover the reasonable value
of the benefit conferred.) (§§955-963)
(vii)
Introduction—Sources of Contract Law

Common Law
Contracts is largely a common law subject; i.e., the law of Contracts is largely case law
(judge-made). One of the advantages of judge-made law is that it is adaptable to the
changing norms and changing needs of society.
Statutes
Certain statutes are relevant to contracts.
Uniform Commercial Code—The major exception to the common law nature of
Contracts is that contracts for the sale of goods are covered by Article 2 of the Uniform
Commercial Code (“U.C.C.”). The U.C.C. is a model statute that covers a variety of
commercial subjects. The purpose of the U.C.C. is to make commercial law uniform
among the states. The U.C.C. was drafted, and is periodically revised, by the National
Conference of Commissioners on Uniform State Laws and the American Law Institute
(“A.L.I.”). It has been adopted by every state except Louisiana (although Louisiana has
adopted portions of the U.C.C.). Even in the case of contracts for the sale of goods, the
common law remains important. Article 2 of the U.C.C. does not cover every Contract
law issue that may arise in such contracts (e.g., Article 2 does not address the issue of
mistake). Where Article 2 does not cover a Contract law issue, the common law governs
that issue. Although the major impact of the U.C.C. on Contract law concerns Article 2,
other Articles are also relevant, especially Article 1, which sets forth general provisions
that apply to all of the U.C.C., and Article 9, which governs most assignments.
Statute of Frauds—Another statute that is central to Contract law, and that is adopted
by all the states, is the Statute of Frauds, which governs the issue of when a contract
must be in writing.
State and Federal Statutes—In addition to the U.C.C. and the Statute of Frauds,
various state and federal statutes have been adopted that relate to isolated issues of
Contract law.
The Restatements
The A.L.I. issues “Restatements” of various areas of law, including Contracts. The
Restatements of Contract law are the Restatement of Contracts (“Restatement First”) and its
revision, the Restatement (Second) of Contracts (“Restatement Second”). Unlike statutes or
case law, Restatements do not have the force of law. They are basically intended to set
forth the law of the subjects they cover and to reconcile conflicting state rules by adopting
the best of the rules. Often, however, the Restatements reach out somewhat to push the law
in a desirable direction.
Chapter One:
Consideration

CONTENTS

Chapter Approach
A. Introduction §1
B. Bargain Promises §6
C. Accord and Satisfaction §97
D. Waiver §110
E. Unrelied-Upon Donative Promises §113
F. Relied-Upon Donative Promises—Doctrine of Promissory Estoppel §123
G. Moral or Past Consideration §131

Chapter Approach
Not every promise is legally enforceable. Those promises that are legally enforceable are
called “contracts.” Formation of a contract requires two basic elements: mutual assent and
consideration. Mutual assent will be discussed in the next chapter. This chapter will focus on
the element of consideration.
The concept of consideration in contract law concerns what kinds of promises are legally
enforceable and what kinds are not. The term “consideration” has two related but somewhat
different meanings. Traditionally, the term was used only to refer to a “bargain”—an
exchange of promises (e.g., Tom promises to give Becky $500 if Becky promises to paint
Tom’s fence) or the exchange of a promise for performance (Tom promises to give Becky
$500 for actually painting the fence). Today, however, the term “consideration” may also be
used more broadly to refer to any factor that makes a contract enforceable (e.g., justifiable
reliance on the promise).
Typical Contracts examination questions involve a broken promise. Therefore, your analysis
of the typical Contracts question should begin with an analysis of whether the promise that
was broken was legally enforceable—in other words, whether there was consideration.
Because the basic kind of consideration is a bargain, you should begin your analysis by
determining whether the broken promise was given as part of a bargain. The answer to that
question determines how you should then proceed.
1. If the promise was apparently given as part of a bargain, you should ask yourself the
following questions:
a. Was the bargain merely nominal—i.e., a bargain in form but not in substance? If
so, the promise may be unenforceable as essentially a donative promise.
b. Was the bargain based on a promise to surrender or forbear from asserting a legal
claim? If so, usually it is enforceable only if the claim was reasonable or held in good
faith.
c. Did the bargain involve an illusory promise—i.e., a statement that appeared to be a
real promise, but in fact did not commit the promisor to any more than what he
might later desire to do, or gave him a free way out of his apparent commitment? If
so, the promise may be unenforceable for lack of mutuality.

d. Did the bargain involve a promise merely to take an action that the promisor was
already legally obliged to take? If so, the bargain may be unenforceable under the
legal duty rule.
2. If the promise was not given as part of a bargain, it is unenforceable unless there is
some other factor that makes it enforceable. Possibilities include:
a. Reliance—did the promisee rely on the promise to his detriment?
b. Past or moral consideration—was the promise given in recognition of a material
benefit previously conferred on the promisor by the promisee that gave rise to an
obligation to compensate the promisee?
c. Waiver—did the promise merely waive a nonmaterial condition under a bargain?
d. Form—was the promise in some special legal form, such as under seal in a state
that still recognizes the binding force of the seal?
If any of these factors is present, the promise may be enforceable even though there was
no bargain.

A. Introduction
1. Importance of Consideration [§1]
The concept of “consideration” is very important in the law of contracts, because
consideration is required to make a promise or contract enforceable.

2. What Is Consideration?
a. “Benefit/detriment” approach [§2]
At an early stage in contract law, consideration was defined as either a benefit
received by the party promising to perform (i.e., the promisor) or a detriment
incurred by the party to whom performance was promised (i.e., the promisee).
(Each party was (and still is) both a promisor and a promisee.)
Example: Sue promises to pay Christy $100 for her television set. Sue as
promisor will receive a benefit (i.e., receiving the television set) and Christy as
promisee will incur a detriment (i.e., delivering the television set). Conversely,
Christy as promisor will receive a benefit (i.e., receiving money

for the television set) and Sue as promisee will incur a detriment (i.e., paying $100
for the television set).
(1) Comment
In practice, the benefit/detriment definition was not very helpful. First, the
definition is overbroad, because some promises not generally found to constitute
consideration fit the definition. For example, a promise to make a gift that
imposes a condition (detriment) on the receiver of the gift (the promisee) would
fit the definition, but conditional gifts are held to lack consideration (see infra,
§§121-122). Second, there are many cases where the definition does not really
explain the results, because the law gives a special meaning to the terms
“benefit” and “detriment.” For example, if Uncle promises to pay Nephew
$5,000 if he will refrain from smoking, drinking, swearing, and gambling until he
reaches the age of 21, although one might say Nephew received a moral or
physical benefit from his abstinence, Nephew incurred a legal detriment
because he gave up the right to drink, smoke, swear, or gamble. [Hamer v.
Sidway, 124 N.Y. 538 (1891)]

b. “Bargain” approach [§3]

Because of the weaknesses of the early approach to consideration, the next stage of
development was to treat consideration as equivalent to bargain. A bargain is an
exchange of promises, acts, or both, in which each party views what she gives as the
price of what she gets. This bargained-for price may include not only promises and
acts, but also promises to forbear and actual forbearance from performing acts one is
legally entitled to perform. The concept that equates consideration and bargain is
called the bargain theory of consideration.
Example: Becky promises to paint Tom’s fence in exchange for Tom’s promise
to pay her $500. Becky and Tom each have bargained for the other’s promise as the
price of the promise he or she made. This exchange of promises constitutes
consideration.
 Compare: Becky paints Tom’s fence with no expectation of payment. One year
later, Tom tells Becky he will pay her $500 for the work she did. There is no
consideration for Tom’s promise because Tom did not bargain for Becky’s painting
the fence.

Example: Sue offers a reward of $50 to anyone who returns her lost dog. Joe
sees the reward offer and then finds and returns Sue’s lost dog. The exchange of
Sue’s promise to pay for Joe’s act of returning the dog is a bargain and therefore
constitutes consideration.

Example: Bob and Sally get into a car accident. Sally promises to pay Bob $500
if he promises not to sue her for damage to his car. There is consideration for this
agreement. In giving up his right to sue, Bob gave up a legal right as a bargain for
Sally’s promise of payment.

c. “Enforceable factor” approach [§4]

The bargain theory of consideration has certain limits. First, not all bargain promises
are enforceable (see infra, §§11 et seq.). Second, some promises are enforceable
even though they are not bargains. Therefore, some authorities treat consideration as
equivalent to any factor—including but not limited to bargains—that will make a
promise or contract enforceable. Factors other than bargain that make a promise
enforceable include: reliance on a promise by the other party (see infra, §§123 et
seq.), certain promises given in return for nonbargained-for acts or promises (i.e.,
past or moral consideration; see infra, §§131 et seq.), waiver of nonmaterial
conditions of the bargain (see infra, §§110-111), and promises made in special legally
recognized forms, such as promises under seal (see infra, §115).
Example: Lydia promises to give Kay $500,000 as a gift to buy a house. In
reliance on Lydia’s promise, Kay buys a house, intending to use the promised money
to cover the purchase price. Later, Lydia refuses to give the money to Kay. While
Lydia’s promise to pay Kay $500,000 is not consideration under the bargain
approach, Kay’s reliance on the promise does constitute consideration under the
enforceable factor approach.

3. Kinds of Promises that Raise Consideration Issues [§5]

With the above background in mind, this chapter will examine the kinds of promises that
may raise problems of consideration or enforceability. For this purpose, promises can be
divided into six broad categories:
 a. Bargain promises;
b. Promises involving an accord and satisfaction;
c. Promises to waive conditions;
d. Unrelied-upon donative promises;
e. Relied-upon donative promises; and
f. Promises based on past or moral consideration.

B. Bargain Promises
1. General Rule—Bargain Constitutes Consideration [§6]
A bargain is an exchange in which each party views his promise or performance as the
price of the other’s promise or performance. As a general rule, a bargain constitutes
consideration—i.e., a bargained-for promise is enforceable.

a. Equal value not required [§7]

In most cases, the law does not examine whether a bargained-for promise or
performance is commensurate in value with the counterpromise or performance, as
long as the contract is not “unconscionable” (i.e., so unfair as to shock the court’s
conscience; see infra, §§501-524). [Batsakis v. Demotsis, 226 S.W.2d 673 (Tex.
1949); Restatement Second (“Rest. 2d”) §§71, 72, 79] The theory is that the parties
to a bargain are the best judges of its desirability for each of them. The traditional
way in which this approach is formulated is that “adequacy of consideration will not
be reviewed,” and that “a bargain will be enforced according to its terms.”
(1) Gross disparity as evidence [§8]
However, gross disparity between the value of what is done or to be done by
each party may be used as evidence to support certain defenses—e.g.,
incapacity, fraud, duress, etc. (infra, §§495 et seq.).
(2) Unconscionability [§9]
Furthermore, under the modern doctrine of unconscionability, courts may
directly examine a disparity in value to determine whether the disparity is so
great as to be unconscionable. Normally this doctrine is applied to determine
whether the process that led to the bargain was unconscionable—e.g., because
terms in a form contract were unfairly surprising, or because one party
improperly exploited the other’s ignorance. In some cases, however, the courts
use the doctrine to upset contracts that appear to be so imbalanced as to be
oppressive without regard to defects in the bargaining process. (See infra,
§§510-513.)
(3) Equitable remedies [§10]
Historically, courts were divided into law courts and equity courts, each with
differing rules and remedies. Vestiges of this division remain today. While
adequacy of consideration generally is not reviewed when a party sues at law
for damages, adequacy of consideration may be reviewed by the courts when a
party seeks an equitable remedy such as specific performance (under which a
court orders a party to perform rather than merely to pay damages). Unlike law,
equity normally requires a showing of fairness and substantial equivalence in
value as a condition to granting relief.

6
 7

2. Exceptions—Bargains that Are Not Consideration [§11]

Although bargains normally constitute consideration and are therefore legally
enforceable, there are several types of cases in which bargains or apparent bargains do
not constitute consideration (or “lack consideration”) and are therefore unenforceable.
These cases fall into four major categories:
(i) Nominal consideration (transactions that are bargains in form but not in
substance);
(ii) Promises to surrender or forbear from asserting a legal claim that is
unreasonable (or, under some authorities, that is neither reasonable nor held in good
faith);
(iii) Apparent bargains involving an illusory promise; and
(iv) Bargains in which one party promises to do only what she is already legally
obliged to do.

a. Nominal consideration [§12]

A transaction is said to involve nominal consideration when a promisor falsely casts
her promise in the form of a bargain with the promisee in an attempt to make the
promise enforceable, but the transaction lacks the substance of a bargain because
neither party views each promised performance as the price of the other. To put this
differently, nominal consideration exists when there is a recital of a bargain, but no
real bargain.
Example: Father promises to give Daughter a house in exchange for one dollar.
It is clear that neither Father nor Daughter views the dollar as the price of the house.
Rather, the transaction has only the form of a bargain—a form adopted for the
obvious purpose of making Father’s donative promise legally enforceable. The
purported consideration—i.e., the bargain—is not real; it is only nominal.
(1) Enforceability of promises given for nominal consideration

(a) Donative promises [§13]

Although the authorities are not in complete accord, the prevailing view is
that nominal consideration normally will not make a donative promise
enforceable. [Schnell v. Nell, supra, §6; Rest. 2d §71]
(b) Options and guaranties [§14]
However, nominal consideration will make options and guaranties
enforceable if certain conditions are met.
1) Options [§15]
An option is a promise to hold an offer open for a fixed amount of time.
Although the cases are split, most courts hold that nominal
consideration makes an option binding, at least if the option is in writing
and proposes an exchange on fair terms. [Real Estate Co. of
Pittsburgh v. Rudolph, 153 A. 438 (Pa. 1930); Rest. 2d §87; and see
infra, §196]
a) Distinguish—U.C.C. “firm offers” [§16]
The U.C.C., which governs contracts for the sale of goods, is even
more lenient here. Under the U.C.C., a written “firm offer” by a
merchant to buy or sell goods is irrevocable for the period of time
stated in the offer (or if no time is stated, for a reasonable time)
without the necessity of any consideration or even a recital of
consideration. [U.C.C. §2-205; and see infra, §§239-244]
2) Guaranties [§17]
A guaranty is a promise to answer for another party’s debt or for her
performance of a contractual obligation. As with options, most courts
hold that nominal consideration will make a guaranty binding, at least if
the promise is in writing. [Rest. 2d §88]
3) Rationale—serve commercial purposes [§18]
Options and guaranties usually are not true donative promises, in the
sense that they are not promises to make a gift. Rather, they are
promises designed to facilitate or further a proposed bargain.
Accordingly, they serve important commercial purposes and are likely
to be relied on. Therefore, it is not surprising that the law would be
ready to enforce such promises even if they are not bargained for.
(Note, however, that if an option or a guaranty lacks both real and
nominal consideration—i.e., if it is neither a real bargain nor in the form
of a bargain—it will normally be unenforceable unless either (i) it is
 relied upon, or (ii) a statute, such as U.C.C. section 2-205, provides for
its enforcement; see infra, §§239-244.)

b. Promises to surrender or forbear from asserting a legal claim [§19]

A bargained-for promise to surrender or forbear from asserting a claim that is
reasonable and held in good faith constitutes consideration. A problem arises,
however, when the claim is (i) not reasonable, (ii) not held in good faith, or (iii)
neither reasonable nor held in good faith.
(1) Former rule—honest and reasonable belief required [§20]
At one time, the courts held that a bargained-for promise to surrender or forbear
from asserting a legal claim would constitute consideration only if there was an
honest and reasonable basis for believing the claim to be valid. [Springstead v.
Nees, 125 App. Div. 230 (1908)] This rule was adopted in Restatement First
section 76, which provided that “[t]he surrender of, or forbearance to assert, an
invalid claim or defense by one who has not an honest and reasonable belief in
its possible validity” is not consideration. (Emphasis added.)
(2) Modern rule—honest or reasonable belief suffices [§21]
The modern rule is that a promise to surrender or forbear from asserting a claim
is consideration if the promisor’s belief in the validity of the claim is either
reasonable or held in good faith. [Kossick v. United Fruit Co., 365 U.S. 731
(1961); Dyer v. National By-Products, Inc., 380 N.W.2d 732 (Iowa 1986)]
(a) Restatement Second [§22]
This rule has been adopted in Restatement Second section 74, which
changes the rule of Restatement First section 76 by providing that
“forbearance to assert, or the surrender of, an invalid claim or defense is
not consideration unless (i) the claim or defense is in fact doubtful because
of uncertainty as to the facts or law, or (ii) the forbearing or surrendering
party honestly believes that his claim or defense is just and may be
determined to be valid.” (Emphasis added.)
(b) Minimum validity [§23]
Under a pure good faith test, forbearance to press a claim held in good faith
could be consideration even if the claim is completely illfounded. However,
a claim that lacks any validity at all might not be treated as made in good
faith under this rule. For example, in Duncan v. Black, 324 S.W.2d 483
(Mo. 1959), the court said that “if the claimant, in good faith, makes a
mountain out of a mole hill, the claim is ‘doubtful’ [so that forbearance will
constitute consideration]. But if there is no discernible mole hill in the
beginning, then the claim has no substance” and forbearance to assert the
claim will not be consideration.
 10

(3) Actual surrender or forbearance [§24]

The rules that govern a bargained-for promise to surrender or forbear from
asserting a claim also govern a bargained-for act of surrendering or forbearing to
assert a claim. That is, a bargain for the actual surrender of or actual
forbearance to assert a claim (as opposed to a bargain for a promise to surrender
or forbear) will constitute consideration only where the claim is reasonable or
held in good faith.
(4) Written release [§25]
Some authorities take the position that execution of a written release may
constitute consideration even if there is neither a reasonable basis for the claim
released nor a good faith belief in its validity. [Mullen v. Hawkins, 40 N.E. 797
(Ind. 1895); Rest. 2d §74]
Example: Steven Surrender, while a passenger in Nora Negligent’s car, is
involved in a minor accident resulting from Negligent’s lack of care. Surrender,
believing he has suffered no injury, makes no claim against Negligent or
Negligent’s insurer. However, Negligent’s insurer is eager to close the file on the
case. The insurer therefore approaches Surrender and offers him $200 if he will
sign a release. Some authorities hold that Surrender’s execution of the release
constitutes consideration even though Surrender does not believe he has a claim.
(5) Forbearance where no specific period stated [§26]
Suppose a person agrees, as part of a bargain, to forbear from asserting a legal
claim, but no specific period of time is stated during which she must forbear. In
such cases, the court will interpret the promise as one to forbear for a
reasonable time.
Example: Josh requests Heather to forbear from asserting a claim that she
has against Mike, and promises to pay her if she forbears and Mike does not
pay. Heather agrees, and forbears for 11 months. At the end of 11 months,
Heather sues Mike or otherwise asserts her claim. When Mike does not pay,
Heather sues Josh. Josh defends on the ground that because Heather asserted
her claim against Mike, she did not keep her part of the bargain. In such a
situation, most courts hold that Heather’s promise should not be interpreted as a
promise to forbear forever, but only as a promise to forbear for a reasonable
time. [See Strong v. Sheffield, 144 N.Y. 392 (1895)] Therefore, if 11 months
was a reasonable time, Heather will prevail in her action against Josh.

c. Illusory promises

11
(1) General rule—mutuality of obligation required in bilateral contract [§27]
A bilateral contract is a bargain contract in which the parties exchange a promise
for a promise (e.g., A promises to pay B $100 for B’s used television set, to be
delivered in one week, and B promises to deliver the set in one week for $100).
A unilateral contract is a contract in which the parties exchange a promise for an
act (e.g., A promises B that A will pay B $100 to paint A’s fence, but makes
clear that he does not want B’s promise to paint the fence; only the act of
painting the fence will do). The general rule is that for a bilateral contract to be
enforceable, it must have mutuality of obligation—i.e., both parties must be
bound. If both parties to a bilateral contract are not bound, neither will be
bound. The major impact of the mutuality rule is that an illusory promise is not
consideration.
(a) “Illusory promise” defined [§28]
An illusory promise is a statement that has the form of a promise, but is not
a real promise in substance. A real promise is a commitment that limits
one’s future options as compared to one’s options immediately before the
promise was made. An illusory promise does not limit one’s future options.
Rather, an illusory promise is an apparent commitment that actually leaves
a “free way out” (e.g., “I will buy wheat from you at $10/bushel insofar as
I want to buy wheat from you at that price,” or “I will buy all my
requirements of wheat from you at $10/bushel but I may terminate my
obligation at any time”).
(2) Effect of illusory promise [§29]
Under the mutuality rule, if one party makes an illusory promise in exchange for
another’s real promise, neither party is bound. The first party is not bound
simply because he has not made a real promise—nothing he has said limits his
future options. The second party is not bound because all she received in
exchange for her real promise was an illusory promise, which is not
consideration, and a promise without consideration is unenforceable.
(a) Common types of illusory promises
1) Promise to do an act “if I want to” [§30]
One common type of illusory promise is a promise to do a certain act
“if I want to.” The “promise” is illusory because after making the
statement, the “promisor” has not limited her options. She is just as free
to do whatever she wants after she makes the statement as she was
before she made the statement. She has a free way out by simply
deciding that she does not want to do the act.

12

Example: On January 1, Seller agrees to sell to Buyer, at $100/ton,

 all the steel that Buyer orders from Seller until December 31. In
exchange, Buyer agrees to buy from Seller, at $100/ton, “all the steel
that she decides to order from Seller” until December 31. Seller then
refuses to fill Buyer’s orders, and Buyer sues. Seller wins. Buyer’s
“promise” is illusory. All Buyer has said is that she will buy from Seller
as much steel as she decides to order from Seller. After making this
statement, Buyer is just as free to buy (or refuse to buy) from Seller as
she was before she made the statement; she can buy the steel she needs
from Seller or anyone else. Because Buyer’s promise is illusory, there is
no consideration for Seller’s promise, and it is therefore unenforceable.

Compare: In the example above, if Buyer had promised to buy

from Seller “all the steel she requires,” rather than “all the steel she
decides to order from Seller,” she might be deemed to have made a real
promise—a promise to purchase her steel requirements from Seller.
(See infra, §§53-59.) In that case, Buyer would be bound because she
would have made a commitment that did limit her future options. And
if Buyer would be bound, Seller would be bound, because the
agreement would not lack mutuality.

2) Right to terminate at will without notice [§31]

Another common type of illusory promise is a real promise that is
coupled with a power to terminate the obligation under the promise at
will and without notice. Such a power gives a free way out and
therefore renders the promise illusory. [Miami Coca-Cola Bottling
Co. v. Orange Crush Co., 296 F. 693 (5th Cir. 1924); Bernstein v.
W.B. Manufacturing Co., 131 N.E. 200 (Mass. 1921)]

13
 Example: Orange Crush, a soft-drink company, entered into an
agreement with Miami Coca-Cola Bottling Co. (“Coke”), a soft-drink
bottler. Under the agreement, Orange Crush granted Coke a license to
manufacture the drink Orange Crush and use the Orange Crush
trademark. In return, Coke agreed to buy a certain amount of Orange
Crush concentrate, maintain a bottling plant, solicit orders, advertise the
product, and increase the product’s sales. This license was perpetual,
but it allowed Coke to cancel the agreement at any time. About one
year later, Orange Crush asserted that it no longer wished to be bound
by the agreement and Coke sued to enforce the contract. The court
held that the contract was void for lack of mutuality because it could be
terminated by Coke at any time. [Miami Coca-Cola Bottling Co. v.
Orange Crush Co., supra]
a) U.C.C. section 2-309 [§32]
U.C.C. section 2-309(3) provides that “termination of a contract by
one party except on the happening of an agreed event requires that
reasonable notification be received by the other party, and an
agreement dispensing with notification is invalid if its operation
would be unconscionable.” (Emphasis added.) Under this section, a
contractual provision that gives one party to a sale-of-goods
contract the right to cancel or terminate may be held subject to an
implied requirement of reasonable notification. Such a contract
therefore might not be illusory, because the promise would be
binding during the period between the time when notice was given
and the reasonable time thereafter until the notice would be
effective. Similarly, an agreement dispensing with the necessity of
notice for termination may be held invalid under section 2-209(3)
and therefore might not render the promise illusory. If a right to
cancel at any time is in fact limited under section 2-209(3), and the
promise that is subject to the right to cancel therefore is not
illusory, the contract would have consideration and could be
enforced by either party.
(b) Exceptions to mutuality rule
1) Unilateral contracts [§33]
The doctrine of mutuality is applicable only to bilateral contracts (i.e.,
contracts in which a promise is given in exchange

14

for a promise). It is not applicable to unilateral contracts. In a unilateral

contract, A makes a promise in exchange for B’s act. B is not bound to
 perform the act, but if she does, A’s promise becomes enforceable.
Thus in a unilateral contract, one party, B, is never bound. B is not
bound before she does the act, because she did not promise to do the
act. She is not bound after she does the act, because no promise
accompanies the act. Nevertheless, A’s promise is enforceable.
Rationale: Unlike the bilateral contract case, where the person who
makes the real promise does not get anything in return (except a
“meaningless” illusory promise), in the unilateral contract case, the
promisee does get something in return—the act she bargained for.
Example: Wilma promises to pay Barney $200 if Barney cuts
down a tree in Wilma’s yard. Wilma makes it clear that she wants
Barney’s performance, not merely his promise. Barney never promises
to cut down the tree, but he does so. Wilma must pay Barney $200,
even though Barney was never bound.

2) Limited promises [§34]

If a real promise is made, lack of mutuality is not a defense, no matter
how limited the promise may be. [Lindner v. Mid-Continent Oil
Corp., 252 S.W.2d 631 (Ark. 1952); Gurfein v. Werbelovsky, 118 A.
32 (Conn. 1922)]
Example: Lindner leased a filling station to Mid-Continent for three
years, also giving Mid-Continent an option to renew for two more
years. Although Lindner was therefore bound for up to five years, Mid-
Continent had the right to terminate the lease at any time on 10 days’
notice. Lindner claimed the lease lacked mutuality. The court held for
Mid-Continent. At the very least, Mid-Continent bound itself to pay
rent for 10 days, and therefore Mid-Continent had made a real promise.
[Lindner v. Mid-Continent Oil Corp., supra]

15

Example: Buyer promises to buy 20 tons of steel per month from

Seller at $100/ton, subject to cancellation by Buyer without notice at
any time. As discussed above, Buyer’s promise is illusory. However, if
 Buyer also had agreed to purchase a minimum of 50 tons, or to cancel
only on 30 days’ notice, Buyer would have limited her future options,
and her promise therefore would constitute consideration.
3) Voidable promises [§35]
A real promise is not rendered illusory merely because the contract is
voidable by one party as a matter of law. [Atwell v. Jenkins, 40 N.E.
178 (Mass. 1895); Rest. 2d §78]
Example: Teen, who is 17 years old, agrees to buy a two-carat
diamond ring from Seller for $5,000, and Seller agrees to sell the ring to
Teen for that price. The contract is voidable by Teen on the ground of
infancy (see infra, §576), and is therefore unenforceable against her.
Nevertheless, Seller is bound. Although the contract is not enforceable
against Teen, Teen has made a real promise. The bargain can therefore
be enforced by Teen despite the fact that it cannot be enforced against
her. The same result would follow if the contract was voidable by Teen
(and therefore unenforceable against her) for some other legal reason,
such as the Statute of Frauds (see infra, §§525 et seq.).
a) Distinguish—void promises [§36]
It is sometimes said that a promise that is unenforceable by reason
of law is illusory if the promise is not merely voidable, but void.
[See Rest. 2d §75] However, this distinction between void and
voidable promises is questionable, both in terms of the doctrine and
the cases, and in any event very few contracts are completely void
(see infra, §§580, 586).
4) Conditional promises [§37]
A conditional promise is a promise that the promisor need only perform
if a specified condition occurs. Such a promise is a real commitment:
The promisor has limited his future options because if the condition
does occur, the promisor must perform. Therefore, a conditional
promise is not illusory and constitutes valid consideration. This is true
even if the condition is within the promisor’s control. [Scott v.
Moragues Lumber Co., 80 So. 394 (Ala. 1918)]

16

Example: Roseanne and Jackie agree that if Roseanne acquires a

Chevrolet dealership, she will hire Jackie as her sales manager for one
year at a salary of $80,000, and Jackie will so act. Although the
occurrence of the condition is within Roseanne’s control (because she
need not acquire the dealership), Roseanne has nevertheless limited her
 options. Before Roseanne made the agreement, she had the option of
acquiring the dealership and hiring anyone she wanted as sales manager.
After she made the agreement, if she acquires the dealership, she is
bound to hire Jackie as her sales manager. Roseanne’s promise is
therefore not illusory and is consideration for Jackie’s promise.
5) Alternative promises [§38]
An alternative promise is one in which the promisor can discharge his
obligation by choosing between two or more alternatives (e.g., A
promises B that he will paint either B’s porch or B’s garage for $500).
a) General rule—each alternative must constitute consideration
[§39]
A contract involving alternative promises will be enforceable only if
each of the performances would have been consideration if
bargained for alone.
Example: Reader promises Bookseller that if Bookseller gives
Reader $100, Reader will either give Bookseller a rare copy of Tom
Sawyer or straighten out Bookseller’s shelves, at Reader’s choice.
Reader’s promise constitutes consideration, because either
performance would be consideration.

Compare: Reader promises Bookseller that if Bookseller gives

Reader $100, Reader will either give Bookseller a rare copy of Tom
Sawyer or serve on a jury if called to jury duty, at Reader’s choice.
Reader’s promise does not constitute consideration. Because
serving on a jury is a legal duty, the performance of a legal duty is
not consideration (see infra, §§60-67), and therefore each of the
alternatives would not constitute consideration.
b) Distinguish—contracts giving promisee the right to choose
between alternatives [§40]
If, on the other hand, the promisee has the right to demand

17

one of several alternative performances from the promisor, a

promise to render alternative performances is consideration if any
one of the alternative performances would be consideration.
Example: Reader promises Bookseller that if Bookseller gives
Reader $100, Bookseller may choose to have Reader either give
Bookseller a rare copy of Tom Sawyer or serve on a jury. Because
the promisee, Bookseller, could choose to receive the book,
 Reader’s promise is consideration.

6) Agreements allowing one party to supply or determine a material

term [§41]
An agreement may leave open a certain term (e.g., price or quantity)
and provide that one of the parties has the unilateral right to supply or
determine the term in the future.
a) Common law rule—promise illusory [§42]
At common law, the general rule is that if the omitted term is
material, the promise is illusory.
Example: Farmer agrees to sell Buyer wheat at a designated
price, and the contract provides that Farmer can determine how
much wheat he will sell. Under the common law rule, Farmer’s
promise is illusory, on the theory that Farmer has undertaken no
more of an obligation than he might decide to impose on himself at
some later date. As a result, under the doctrine of mutuality neither
Farmer nor Buyer would be bound. [See Washington Chocolate
Co. v. Canterbury Candy Makers, 138 P.2d 195 (Wash. 1943)]
b) Exceptions

18

1/ Power to alter or modify terms [§43]

A number of decisions hold that if a term is fixed in the
contract, but one party is given the power to alter or modify
the term, the power does not make that party’s promise illusory.
These cases construe such a power as subject to the obligation
to perform in good faith. Therefore, the party with the power
to alter or modify the term does not have a free way out,
because her power to alter or modify the term is not completely
free, but must be exercised in good faith. [Automatic Vending
Co. v. Wisdom, 182 Cal. App. 2d 354 (1960)]
 2/ Objective standard for establishing terms [§44]
Even the power to set (rather than merely to alter or modify) a
term does not necessarily render illusory the promise of the
party who has the power to set the term, if the term must be set
in relation to an objective measure. For example, a power in a
seller to set the price would not render the seller’s promise
illusory where: (i) the same price must be charged by the seller
to all other buyers; or (ii) the contract price is “four cents less
than the market price at Town A,” or the “posted price charged
by the seller” in a given area. [Moore v. Shell Oil Co., 6 P.2d
216 (Or. 1931)]
3/ Material term omitted and neither party given power to
supply or determine the term [§45]
In the basic case (supra, §41) a material term is omitted, and
the contract gives one of the parties the power to supply or
determine the term. Often, however, a material term is omitted,
but neither party is given the power to supply it or determine it.
In that case, the law will imply a reasonable term unless the
contract is too indefinite to enforce. (See infra, §§415-471.)
Because the implied term is imposed by law, not by the will of
one of the parties, the parties’ promises are not illusory and the
contract will not present a problem of consideration—although,
to repeat, it may present a problem of indefiniteness.
c) U.C.C. provisions [§46]
The U.C.C. potentially affects the common law rule in several
ways.

19

1/ General obligation of good faith [§47]

U.C.C. section 1-203 imposes an obligation of good faith on
every party with respect to their performance of contractual
obligations. Thus, a party who has the right to set a term in a
contract for the sale of goods is limited by the duty to act in
good faith in setting the term. Although section 1-203 does not
specifically provide that an agreement permitting a party to set a
contract term satisfies the requirement of consideration, this
result could be reached on the following theory: Because of the
good faith requirement, a party with the right to set a term does
not have unlimited discretion, and therefore the party’s promise
is not illusory.
 2/ Setting price [§48]
The U.C.C. has a special rule—beyond section 1-203’s general
obligation of good faith—if a party is given the right to set the
price term in a contract for the sale of goods. U.C.C. section 2-
305(1) explicitly changes the common law rule by providing
that such contracts are enforceable if the parties so intend.
Under U.C.C. section 2-305(2), the party setting the price has a
duty to exercise the power in good faith, whether or not the
contract explicitly so provides.
7) Implied promises [§49]
The principle of mutuality is satisfied where, although a party does not
seem to have made a promise if regard is had only for the party’s
explicit words, a promise nevertheless is implied (in fact or in law)
from the party’s words or actions. In such cases, the implied promise
serves as consideration just as if it were an explicit promise.
a) Implied promise to use reasonable or best efforts [§50]
A common type of implied promise is an implied promise to use
“reasonable efforts” or “best efforts.” For example, suppose
Designer promises to give Retailer an exclusive right to market
Designer’s services and products, but Retailer does not explicitly
promise to market those services and products. Designer then
claims that the contract is unenforceable because it lacks
consideration, since Retailer made no promise.

20

1/ Landmark case [§51]

In the landmark case of Wood v. Lucy, Lady Duff-Gordon,
222 N.Y. 88 (1917), Judge Cardozo held that Retailer could
enforce a contract of this sort, on the ground that Retailer had
made an implied promise to use reasonable efforts to market
Designer’s services and products.
2/ U.C.C. section 2-306(2) [§52]
In cases involving the sale of goods, U.C.C. section 2-306(2)
codifies the rule in Wood by providing that unless the parties
agree otherwise, a lawful agreement for exclusive dealing in
goods imposes an obligation “by the seller to use best efforts to
supply the goods and by the buyer to use best efforts to
promote their sale.”
a/ Note
Because the U.C.C. rule applies only to the sale of goods,
 Wood remains an important precedent in cases involving
other types of contracts, such as contracts for services or
real estate.
8) Requirements and output contracts [§53]
In a requirements contract, the buyer agrees to buy all of his
requirements of a given commodity from the seller, and the seller agrees
to sell that amount to the buyer. In an output contract, the seller agrees
to sell all of his output of a commodity to the buyer, and the buyer
agrees to buy that amount from the seller.
a) Former rule—agreement illusory [§54]
At one time, some courts treated requirements and output contracts
as illusory, on the ground that the buyer in a requirements contract
was not obliged to have any requirements and the seller in an
output contract was not obliged to produce any output. However,
such contracts were enforceable if the promisor had an established
business at the time the contract was made. [Pessin v. Fox Head
Waukesha Corp., 282 N.W. 582 (Wis. 1938)]
b) Modern rule [§55]
Today, the courts normally enforce requirements and

21

output contracts, regardless of whether the promisor had an

established business at the time the contract was made, because the
parties really have limited their options. If the buyer in a
requirements contract wants to buy any of the commodity during
the term of the contract, he must buy it all from the seller. If the
seller in an output contract wants to produce any of the commodity
during the term of the contract, he must sell it all to the buyer.
[McMichael v. Price, 57 P.2d 549 (Okla. 1936)]
Example: If Buyer promises to buy from Seller “such coal as I
may wish to order from you,” Buyer has actually promised nothing
because he is still free to buy from anyone else he chooses. His
promise is illusory and does not constitute consideration.
[Wickham & Burton Coal Co. v. Farmers’ Lumber Co., 179
N.W. 417 (Iowa 1920)]

Compare: However, if Buyer promises to buy from Seller “all

the coal that I will need” or “all the coal that I require in my
business,” Buyer’s promise is consideration. Buyer has restricted
his freedom of action because if Buyer needs any coal, he must
 buy it from Seller and no one else.
c) U.C.C. rule [§56]
A requirements or output contract that involves the sale of goods
(as most such contracts do) is governed by U.C.C. section 2-
306(1). This section assumes the enforceability of such contracts,
and goes on to provide rules governing the performance of such
contracts.
1/ Obligation of good faith [§57]
The U.C.C. provides that “a term which measures the quantity
by the output of the seller or the requirements of the buyer
means such actual output or requirements as may occur in
good faith.” (Emphasis added.) Thus, the party who
determines the quantity of requirements or output under such a
contract must conduct business in good faith and according to
commercial standards of fair dealing in

22

the trade, so that output or requirements will approximate a

reasonably foreseeable figure. Since the party has a real
obligation—the obligation to act in good faith—his promise is
not illusory. [U.C.C. §2-306(1), comment 2]
2/ Limitations on quantity [§58]
In addition to the limit imposed by the principle of good faith,
U.C.C. section 2-306(1) provides an objective limit: The
quantity tendered under an output contract or demanded under
a requirements contract cannot be “unreasonably
disproportionate to any stated estimate, or in the absence of a
stated estimate to any normal or otherwise comparable prior
output or requirement.” The Official Comment adds that if an
estimate of requirements or output is included in the agreement,
it will be treated as “a center around which the parties intend
[any] variation to occur.” [U.C.C. §2-306(1), comment 3]
3/ Implied promise to remain in business [§59]
It might be thought that a seller could avoid the obligation of an
output contract, and a buyer could avoid the obligation of a
requirements contract, by going out of business, in which event
the seller would have no output and the buyer would have no
requirements. However, going out of business is itself
detrimental. [Brightwater Paper Co. v. Monadnock Paper
Mills, 161 F.2d 869 (1st Cir. 1947); McMichael v. Price,
supra] Furthermore, the freedom to go out of business may be
limited by the obligation to perform in good faith. As a general
rule, if a party to an output or requirements contract goes out of
business for reasons other than the profitability of the contract
in question, there is no breach of the duty to perform in good
faith. However, a shutdown motivated by the unprofitability of
the contract in question may violate the duty. Thus, a shutdown
by a requirements buyer for lack of orders might be
permissible, whereas a shutdown merely to curtail losses under
the contract in question might not be. [See U.C.C. §2-306(1),
comment 2]
 23

d. Legal duty rule—promise to perform act promisor already obliged to perform

(1) General rule [§60]
Another exception to the principle that bargains are consideration is that a
promise to perform an act that the promisor has a preexisting legal duty to
perform (i.e., a legal duty that existed before the new promise) does not
constitute consideration, even if bargained for. This is often referred to as the
legal duty rule. The same rule applies to the actual performance of such a duty.
[Rest. 2d §73]
 Example: Contractor agrees to construct a factory for Manufacturer for $5
million. When the factory is 75% completed, Contractor

24

tells Manufacturer that he will not complete the job unless Manufacturer agrees
to pay $6 million. At this point, getting a substitute contractor would be very
time-consuming, and the resulting delay in the completion of the plant would
cause a significant loss of profits to Manufacturer. Therefore Manufacturer
agrees to pay $6 million rather than $5 million. Manufacturer’s promise is
unenforceable.
(a) Party asserting the rule [§61]
Note that usually the legal duty rule is asserted as a defense, not by the
person who has made the promise to perform the preexisting legal duty, but
rather by the party to whom the promise was made. Thus, in the example
above, Manufacturer argues that his new promise is unenforceable because
all that he received in exchange for the promise to pay $6 million was
Contractor’s promise to perform (or Contractor’s actual performance of) a
preexisting legal duty, and that because such a promise (or performance) is
not consideration, Manufacturer’s new promise is not enforceable.
(2) Types of preexisting legal duties [§62]
There are two principal types of preexisting legal duties: public duties (e.g., the
duty of a judge to preside fairly or the duty of a witness to testify truthfully) and
contractual duties. Application of the legal duty rule differs somewhat between
the two categories.
(a) Public duties
1) Official duties [§63]
Under the legal duty rule, the promise of an official to perform an act
that falls within the scope of the official’s duties is not consideration,
and neither is the actual performance of such an act. [Gray v.
Martino, 103 A. 24 (N.J. 1918)]
Example: Pauline, a police officer, promises Mark, a merchant
who owns a store within Pauline’s beat patrol, that she will keep an eye
on Mark’s store in exchange for Mark’s promise to pay her $50 a
month. Mark’s promise is unenforceable because the promised
performance is within the scope of Pauline’s official duties.
a) Scope test [§64]
Note that the legal duty rule is applicable to a promise by an official
whenever the action is within the scope of the official’s duties, even
 though performance of the specific act is not legally required. For
example, in the police officer

25

illustration Pauline does not have the specific duty to watch Mark’s
store: She may properly choose to walk her beat on some days
down streets other than the one on which the store is located.
However, the legal duty rule is applicable to Pauline because
watching Mark’s store is within the scope of Pauline’s duties as a
police officer.
b) Action not within scope of official duties [§65]
The legal duty rule is not applicable if the act performed by the
official is not within the scope of her official duties, even though it
is similar to those duties. [Harris v. More, 70 Cal. 502 (1886);
Rest. 2d §73]
Example: Sally, a San Francisco police officer, is on vacation
in Arizona, staying at Owner’s hotel. Sally agrees with Owner to
spend three hours a day watching the hotel lobby in exchange for a
free room. Since the promised performance is not within the scope
of Sally’s official duties (because those duties do not apply in
Arizona), Owner’s promise is enforceable.
c) Pretense of bargain not sufficient [§66]
The legal duty rule cannot be avoided by a bargain that merely
pretends to call for a performance outside the scope of an official’s
duties. The difference between the official duty and the promised
performance must be real and material, not a slight difference
contrived to make the contract enforceable. [Rest. 2d §73]
Example: In the police officer example above, if Pauline
promises that she will keep an eye on Mark’s store and also check
the windows each night to make sure they are properly locked, the
bargain will not be enforceable as a result of the legal duty rule.
Even though checking the window locks is not part of Pauline’s
official duty, the slight deviation is not enough to make the contract
enforceable.
2) Other public duties [§67]
Performance of a public duty required by law, other than an official
duty, is treated in the same way as is performance of an official duty.
[Van Boskerck v. Aronson, 197 N.Y.S. 809 (1923); Rest. 2d §73,
comment b]
 26

Example: Witness and Plaintiff make an agreement under which

Witness promises to tell the truth as a witness in a suit that Plaintiff has
brought against Defendant, and Plaintiff promises to pay Witness
$1,000 in exchange. Witness tells the truth in the suit, but Plaintiff
refuses to pay. Witness sues Plaintiff for the $1,000. Plaintiff prevails
because every citizen has a public duty to tell the truth as a witness,
and so Witness’s promise to tell the truth is not consideration under the
legal duty rule.

(b) Contractual duties [§68]

The general rule is that a promise to perform, or the actual performance of,
a preexisting contractual (as opposed to public) duty that is owed to the
promisee is not consideration. The cases covered by this branch of the legal
duty rule tend to fall into two patterns: (i) those in which one party is under
a contractual duty to render some performance to another, who agrees to
pay the party more for the very same performance, and (ii) those in which
a debtor owes some amount to a creditor, and the creditor agrees to accept
less than that amount in full discharge of the debtor’s obligation to the
creditor.
1) Performance of preexisting contractual duty for increased
payment—no consideration [§69]
Assume two parties, Architect and Brewery, have a contract

27

under which Architect is under a duty to design and supervise the

building of a new plant for Brewery. Architect and Brewery then agree
to a modification of the contract under which Architect promises only
to render the same performance, but Brewery agrees to pay more than
the amount it originally agreed to pay. Under the legal duty rule,
Architect’s new promise is not consideration for the promise by
Brewery to pay a greater amount than was set out in the original
contract, and Architect therefore cannot enforce the modification
against Brewery. [Lingenfelder v. Wainwright Brewery Co., 15 S.W.
844 (Mo. 1891)] The same rule would also apply to Architect’s actual
performance, as opposed to Architect’s promise to perform. That is,
under the legal duty rule, neither Architect’s promise to perform a
preexisting contractual duty to Brewery, nor Architect’s actual
performance of this duty, is consideration for Brewery’s promise to pay
more for the same performance.
a) Exceptions [§70]
The legal duty rule is often not in accord with generally accepted
commercial practice, at least when the preexisting legal duty is a
contractual duty rather than a public duty. Therefore, the courts
have recognized a number of exceptions to the rule as it applies to a
modification of a contract.
1/ Promise of different performance [§71]
If the modification involves the performance of an act that is
similar to, but different from, the performance required under
the preexisting contract, there is consideration; i.e., the legal
duty rule does not apply. Furthermore, because the courts do
not favor the legal duty rule as it applies to preexisting
contractual duties, even a relatively small difference between
the performance required under the modification and the
performance required under the preexisting contract may suffice
to constitute consideration.
Example: Builder agrees to construct a house for Owner
for $430,000. Under the contract, the house is to have pine
doors. Builder and Owner then modify the contract so that the
doors will be made of redwood, and Owner will pay $470,000.
The
 28

modification is enforceable, even if the increased cost to Builder

is only $15,000, rather than the $40,000 increased price to
Owner, because the performance required by the modification
differed from that required by the original contract.
2/ Preexisting duty owed to third party [§72]
The legal duty rule is also usually inapplicable if the preexisting
contractual duty is owed to someone other than the person
who makes the new promise to induce performance of the
duty. [Joseph Lande & Sons, Inc. v. Wellsco Realty, Inc., 34
A.2d 418 (N.J. 1943); Rest. 2d §74]
Example: Constructco contracts with Lessor to construct a
commercial building by July 31. Toyco, a prospective tenant in
the building, is eager to ensure that the building is completed on
schedule. Accordingly, Toyco promises to pay Constructco
$5,000 if it completes construction by July 31. Constructco
completes the building by July 31, but Toyco refuses to pay.
The contract is enforceable, because at the time Toyco made
the promise to Constructco, Constructco was under a
contractual duty to Lessor, not to Toyco.
a/ Minority position
A few authorities do not recognize an exception to the legal
duty rule in such a case, on the ground that when
Constructco made the promise to Toyco, Constructco was
under a preexisting legal duty to perform, even though the
duty did not run to Toyco. [De Cicco v. Schweizer, 221
N.Y. 431 (1917)] However, even this minority view
recognizes an exception to the legal duty rule where Toyco
makes a promise to Constructco and Lessor jointly—i.e.,
where Toyco promises something to Constructco and
Lessor in return for their joint promise to perform the
contract. [De Cicco v. Schweizer, supra] The rationale is
that Constructco and Lessor had a legal right to mutually
rescind their preexisting contract. Therefore, by jointly
agreeing to perform a contract, they promised

29

to do something they were not previously obliged to do

—i.e., to refrain from mutually rescinding their contract.
3/ Availability of a defense under original contract [§73]
The legal duty rule is also inapplicable if a party who promises
to do no more than was required under the original contract had
a valid defense under the original contract (e.g., mutual
mistake). In such a case, that party was not legally obliged to
render any performance because of the defense. Therefore, her
promise is enforceable because it is not simply a promise to
perform a preexisting legal duty.
Example: Buyer and Seller enter into an oral agreement
under which Seller agrees to sell Buyer a parcel of land for
$450,000. The agreement is unenforceable against either party
under the Statute of Frauds because a contract to sell land must
be evidenced by a writing to be enforceable. Seller later states
that she will not sell the parcel for $450,000, but she will sell it
for $500,000. Buyer agrees, and the agreement is put into
writing. Buyer’s promise is enforceable because, as a result of
the Statute of Frauds, Seller was not under a preexisting legal
duty to sell the parcel.
4/ Fair and equitable modification in light of unanticipated
circumstances [§74]
Some courts now also hold that the legal duty rule is
inapplicable to a modification of an ongoing contract if the
modification is based on unanticipated circumstances and is
fair and equitable in view of the circumstances. This exception
is applicable even if the unanticipated circumstances would not
provide a defense of “impossibility” or “changed
circumstances” under the preexisting contract. [Angel v.
Murray, 322 A.2d 630 (R.I. 1974); Rest. 2d §89]
Example: Builder agrees to excavate a cellar for Owner for
$6,000. Builder unexpectedly encounters subsoil hard-pan, and
so notifies Owner. The unanticipated subsoil conditions do not
give

30

Builder a defense for nonperformance of the contract. (See

infra, §§845 et seq. for a discussion of the doctrine of
impracticability.) Nevertheless, in view of the unanticipated
circumstances, which significantly increase Builder’s costs,
Owner agrees to pay Builder an additional $2,000 for the
excavation. This increase is fair and equitable in view of the
 unanticipated greater difficulty of performance. Owner’s new
promise is therefore enforceable.

5/ Modification of contract for the sale of goods [§75]

Under the U.C.C., an agreement modifying a contract for the
sale of goods is binding without consideration. [U.C.C. §2-
209(1)] Thus, the legal duty rule is inapplicable to contracts for
the sale of goods.
a/ Fairness not explicitly required [§76]
Unlike the common law exception for modifications (supra,
§74), U.C.C. section 2-209 is not explicitly limited to
agreements that are fair and equitable in view of
unanticipated circumstances. However, the modification
must meet the general test of “good faith” under U.C.C.
section 1-203 (supra, §47), so that a modification that is not
fair and equitable would probably not be binding. [U.C.C.
§2-209, comment]
b/ Distinguish—waivers [§77]
Although a modification of a contract is enforceable
without consideration under U.C.C. section 2-209, a waiver
of a right under a contract is enforceable without
consideration only if the waiver is not validly withdrawn.
(The

31

distinction between a waiver and a modification, and the

circumstances under which a waiver may be validly
withdrawn, are discussed infra, §§110-112.)
6/ Writing as substitute for consideration [§78]
In a few states, a contract may be enforceably modified by a
writing even if no new consideration is given. [See Cal. Civ.
 Code §1697]
7/ “Mutual rescission” [§79]
A few courts have gotten around the legal duty rule by
concluding that the new promise constitutes a mutual rescission
of the preexisting contract and the formation of a new contract.
[Schwartzreich v. Bauman-Basch, Inc., 231 N.Y. 196 (1921);
Watkins & Son v. Carrig, 21 A.2d 591 (N.H. 1941)]
However, the finding of a mutual rescission is usually fictional.
In effect, courts that adopt this reasoning simply undercut the
legal duty rule.
8/ Effect of performance [§80]
Once a contract has been fully performed, the legal duty rule
has no application, and the promisor cannot recover the extra
money paid unless she paid under duress (see below).
a/ Preexisting legal duty coupled with economic duress
[§81]
However, if a party’s new promise not only lacks
consideration under the legal duty rule, but also is made
under economic duress, the party who was under duress
usually can recover any payment in excess of that promised
in the original contract. A contract is made under economic
duress if a promisor’s assent is induced by an improper
threat by the promisee that leaves the promisor no
reasonable alternative. Although a threat to break a contract
is improper, such a threat does not constitute economic
duress unless it leaves the promisor with no reasonable
alternative.
Example: Builder has a contractual duty to construct an
addition to Manufacturer’s

32

factory for $10,000. Before performance begins, Builder

says that he will render the performance only if
Manufacturer will pay Builder $12,000. At this point, there
are other contractors who could take Builder’s place
without undue delay or increased cost to Manufacturer.
Manufacturer agrees to Builder’s terms. Builder renders the
performance, and Manufacturer pays Builder $12,000.
Because other contractors were available at the time
Manufacturer made the new agreement, and Builder had
 completed performance at the time Manufacturer paid,
Manufacturer was not under economic duress either at the
time she made the new agreement, or at the time of the
payment. Even after she made the new agreement,
Manufacturer could have refused to pay $12,000 under the
legal duty rule unless an exception to the rule was
applicable. However, once she paid the $12,000, she could
not recover the $2,000 difference in price.

Compare: Same facts as above, but after performance

has begun, Builder threatens to walk off the job unless he is
paid $12,000 on the spot, Builder cannot be readily replaced
by another contractor, and Manufacturer will lose a
substantial amount of money if the addition to the factory is
delayed. Under these circumstances, the new agreement
and the payment are made under economic duress, and
Manufacturer can recover the extra $2,000 that she paid to
Builder.
2) Payment of lesser amount as discharge of debtor’s full obligation
—no consideration [§82]
The second common type of case to which the legal duty rule applies is
the case in which a debtor owes a certain amount of money to a
creditor who agrees to accept payment of a lesser amount in full
satisfaction or discharge of the debt. The same general rule applies to
this case as to the case in which one party promises to pay the other
party more for rendering a performance that the other party is already
contractually

33

obliged to perform: Under the legal duty rule, the debtor’s payment of
the lesser amount is not consideration because the debtor is doing only
what he has a preexisting legal duty to do. Therefore, the creditor’s
promise to accept the lesser amount as full payment is not enforceable.
As a result, after the debtor has paid the lesser amount, the creditor can
sue for the balance despite the fact that the creditor agreed to accept the
lesser amount in full discharge of the debtor’s obligation. [Foakes v.
Beer, 9 App. Cas. 605 (1884)]
Example: Debtor owes Creditor $100,000, which was due on
January 1. On January 15, Debtor offers to pay Creditor $90,000 if
Creditor will agree to accept that amount in full satisfaction of the
$100,000 debt. Creditor agrees, and Debtor pays $90,000 to Creditor.
Creditor then sues Debtor for $10,000 (the difference between the
$100,000 owed and the $90,000 paid). Debtor defends on the ground
that the debt has been discharged. Creditor wins. Since Debtor owed
Creditor $100,000, Debtor’s payment of $90,000 did not constitute
consideration for Creditor’s promise to accept that amount in full
satisfaction of Debtor’s debt. The promise therefore is not binding.
a) Exceptions
1/ Different performance [§83]
The general rule is inapplicable if the debtor does something
different from that which she is obliged to do, e.g., if the
debtor pays a lesser sum before the full obligation is due or
renders a service in lieu of paying money. [Jaffray v. Davis,
124 N.Y. 164 (1891)]
2/ Honest dispute [§84]
If there is an honest dispute whether the debtor owes the
creditor an obligation, payment by the debtor of a lesser amount
than that claimed by the creditor is consideration for a promise
to discharge in full. [Rest. 2d §73; and see supra, §§21-23]
3/ Unliquidated obligations [§85]
Furthermore, even where there is no honest dispute whether the
debtor owes the creditor an obligation, if the amount of the
obligation is unliquidated (i.e., uncertain), payment of an
amount that is less than

34

the creditor claims is consideration for a discharge of the debt in

full. [Rest. 2d §74]
a/ Payment of amount admittedly due [§86]
When the full obligation is unliquidated, even if the debtor
only pays the amount she admittedly owes to the creditor,
the payment is consideration for discharge of the full debt.
[Flambeau Products Corp. v. Honeywell Information
Systems, Inc., 341 N.W.2d 655 (1984)]
Example: Plumber performs plumbing services for
Customer. Customer requested Plumber to perform these
services, but the parties did not discuss Plumber’s charges
in advance. Plumber claims that on the basis of her standard
charges, Customer owes $500. Customer admits that he
must pay for Plumber’s services and that he should pay at
 least $200. Customer offers to pay $200 if Plumber will
accept that amount in full satisfaction of her entire claim.
Plumber argues, but accepts, and Customer pays the $200.
Plumber then sues for the $300 balance that she claims is
due. Customer wins. Since the debt was unliquidated, the
payment of $200 was consideration for Plumber’s
agreement to accept that amount in full satisfaction of
Customer’s obligation, even though Customer did not
dispute that he owed at least that much.
b/ Separate obligations [§87]
If the debtor owes the creditor two separate obligations,
one liquidated and one not, payment of the liquidated
obligation will not serve as consideration for the creditor’s
agreement to discharge the unliquidated obligation. [Rest. 2d
§74]
c/ Comment
In practice, it is frequently difficult to differentiate between
cases involving two separate obligations and cases involving
one obligation, part

35

of which is admittedly due and part of which is contested.

The best guideline is whether the two obligations arose out
of one contract or transaction, or more than one. If the two
obligations arose out of one contract or transaction, they are
likely not to be treated as separate; if they arose out of more
than one contract or transaction, they are likely to be treated
as separate. However, even separate transactions may be
closely related (as in the case of a series of sales in the
course of an ongoing relationship between the buyer and the
seller). In such a case, the total debt arising out of the
related transactions may be considered as one debt, rather
than as separate debts, for purposes of applying the rule
concerning the settlement of unliquidated obligations.
4/ Composition of creditors [§88]
A composition of creditors is an agreement among creditors to
settle with a debtor on certain terms. Where a composition of
creditors releases the debtor in full in exchange for part
payment (e.g., the creditors agree that each will accept 60% of
the debt owed to them by the debtor), consideration may be
 found in the creditors’ mutual agreement to accept lesser
amounts than those actually due. Thus, the creditors have a
separate contract among themselves in which each promises to
sue the debtor only for the agreed amount. In this situation,
even though the debtor is not a party to the composition
agreement, she may be able to enforce the contract as a third-
party beneficiary. [Massey v. Del-Valley Corp., 134 A.2d 602
(N.J. 1957); and see infra, §§595-601]
5/ Agreement not to file a bankruptcy petition [§89]
Payment by the debtor of a lesser amount than that owing may
constitute consideration for a promise to give a discharge in full
if the creditor’s purpose in agreeing to give a full discharge is to
induce the debtor not to declare bankruptcy. In such a case, the
debtor has forgone the exercise of a legal right—the right to
declare bankruptcy. [Melroy v. Kemmerer, 67 A. 699 (Pa.
1907)]

36

6/ Written release [§90]

Statutes in several states provide that a written release by a
creditor will operate to extinguish the original debt. [See, e.g.,
Cal. Civ. Code §§1524, 1541]
7/ Executory contracts [§91]
There is a split of authority concerning the effect of payment of
a lesser amount than is due in the case of a contract that
involves ongoing periodic payments (e.g., payments of reduced
rentals under an ongoing lease). Some authorities hold that in
such cases, an agreement to accept lesser payments in full
satisfaction of the payments already due is enforceable to the
extent that it is executed (i.e., as to those periodic payments
made and accepted). [See, e.g., Julian v. Gold, 214 Cal. 74
(1931)] Other authorities hold that because performance of a
preexisting legal duty is no more consideration than a promise to
perform, the shortfalls in payments already made can be
recovered. [See, e.g., Levine v. Blumenthal, 186 A. 457 (N.J.
1936)]
8/ Full-payment checks [§92]
A special problem occurs where the debtor, who owes the
creditor an unliquidated obligation, tenders a check to the
creditor that purports to be in full payment of the debtor’s
obligation to the creditor, but that is for an amount less than the
creditor claims. For example, Cathy may claim that Dan owes
her $10,000, while Dan claims he owes only $8,000. Dan
writes on the check that the check is in full payment of all
obligations owed by Dan to Cathy. Such checks are known as
full-payment checks. Suppose that Cathy cashes the check, but
then sues to recover the balance of the claim.
a/ Common law [§93]
The common law rule was that cashing a fullpayment check
constituted an accord and satisfaction (see infra, §§97-109)
that discharged the entire debt, provided there was a good
faith dispute concerning the obligation and the creditor had
reasonable notice that the check was a full-payment check.
This was true even if the check was for no more than the
amount the debtor admittedly owed.

37

b/ U.C.C. rule [§94]

U.C.C. section 3-311 (“Accord and Satisfaction by Use of
an Instrument”) explicitly deals with full-payment checks.
The general rule of section 3-311 is that if a creditor cashes
a full-payment check, his entire claim is discharged,
provided that (i) the check is tendered in good faith as full
satisfaction of a claim; (ii) the check or an accompanying
writing contains a conspicuous statement to the effect that
the check is so tendered; and (iii) the amount of the claim
that the check concerns is unliquidated or the subject of a
bona fide dispute.
1] Exception—check not sent to prescribed person,
office, or address [§95]
The general rule does not apply (and the cashing of a
full-payment check therefore does not discharge the
creditor’s claim) if (i) the creditor is an organization; (ii)
within a reasonable time before the check was tendered,
the creditor sent a conspicuous statement to the debtor
that checks tendered in full satisfaction of debts are to
be sent to a designated person, office, or address; (iii)
the check was not sent to that person, office, or
address; and (iv) the creditor did not know, within a
reasonable time before initiating collection of the check,
that the check was tendered in full satisfaction of the
creditor’s claim.
a] Rationale
Because it would be difficult for a company
receiving large amounts of checks to scrutinize each
check for full-payment language, this rule allows the
company to create a special department for dealing
with full-payment checks, make its customers aware
of that department, and have liability only to those
customers notifying the special department that the
check is a full payment of their debt.
 38

39

2] Exception—repayment tendered [§96]

The general rule also does not apply (and the cashing of
a full-payment check therefore does not discharge the
 creditor’s claim) if (i) the creditor tenders a repayment
of the amount of the check within 90 days after the
check has been paid; (ii) the creditor (if it is an
organization) did not send to the debtor, within a
reasonable time before the debtor tendered her own
check, a conspicuous statement that full-payment
checks were to be sent to a designated person, office, or
address; and (iii) the creditor did not know, within a
reasonable time before initiating collection of the check,
that the check was tendered in full satisfaction of the
creditor’s claim.

C. Accord and Satisfaction

1. “Accord” Defined [§97]
An “accord” is an agreement in which one party to an existing contract agrees to accept,
in lieu of the performance that she is supposed to receive from the other party to the
existing contract, some other, different performance.
Example: Mel owes Alice $1,000 under a contract. Mel promises to give his car to
Alice in settlement of the debt, and Alice agrees to accept the car in settlement of the
debt. This agreement is an accord.

a. Type of obligation
If the new performance promised under an accord is no more than what the
promisor was already obliged to do under the original contract, the accord will be
unenforceable under the legal duty rule, unless it comes within some exception to
that rule. Typically, however, as in the example above, both parties agree to do
something that they were not obliged to do. (In the example above, Mel was not
obliged to give Alice his car, and Alice was not obliged to accept the car in lieu of the
$1,000 debt.)

2. “Satisfaction” Defined [§98]

A “satisfaction” is the performance of the accord by the promisor. Therefore, if an
accord is performed (i.e., if the promisor tenders the performance he promised to render
under the accord and the promisee accepts the performance), there is said to be a
“satisfaction” of the accord.
 40

41

a. Effect of satisfaction [§99]

The satisfaction of an accord discharges both the accord and the original contractual
duty. Thus, in the example above, if Mel tenders his car to Alice and Alice accepts it,
the accord is discharged and so is Mel’s original duty to pay Alice $1,000.

3. “Executory Accord” Defined [§100]

An accord that has not yet been performed (i.e., that has not yet been executed or
“satisfied”) is referred to as an “executory accord.”

a. Effect of executory accord [§101]

It might be thought that even before satisfaction, an accord is a fully enforceable
modification of the original contract, because if each party to a contract agrees to do
something different from what he was obliged to do, the parties have made a bargain
and the legal duty rule normally would not apply. For purely historical reasons,
however, that is not the law.
(1) Traditional rule [§102]
The traditional rule is that an executory accord is unenforceable. This rule is
 inconsistent with the bargain principle, because an executory accord is a bargain,
and bargains are normally enforceable.
(2) Modern rules [§103]
Although in theory the traditional rule above is still the law, the rule is hedged
with a number of exceptions and distinctions, so that in practice the rule has
little bite.
(a) “Substituted contract” [§104]
In some cases, an executory accord is treated as a “substituted contract.” If
an accord is treated as a substituted contract, the accord immediately
discharges the original contract. (To put this differently, a “substituted
contract” is simultaneously an accord and a satisfaction.) Accordingly, if
there is a substituted contract, and it is breached by either party, the other
party can bring suit for that breach, but neither party can bring suit for
breach of the original contract, since that contract has been discharged.
Whether an accord is a substituted contract is a question of the parties’
intent. The courts are likely to find that an accord is a substituted contract if
the duty under the original contract was disputed, unliquidated, had not
matured, and involved a performance other than the payment of money.
Correspondingly, the courts are likely to find that an accord is not a
substituted contract if the above factors are not met. [Rest. 2d §281,
comment e]

42

Example: Ethel agrees to perform agricultural services for Fred in

March, and Fred agrees to pay Ethel on June 30. On June 1, the parties
disagree over what payment is due. Ethel claims that Fred is obliged to
deliver three cows to her. Fred claims that his obligation is to deliver one
cow. Ethel and Fred later agree that Fred will deliver two sheep and that
Ethel will accept the two sheep as full payment of Fred’s obligation. The
accord is likely to be treated as a substituted contract, and therefore itself a
satisfaction, because the duty under the original contract was not to pay
money, was disputed, was unliquidated, and had not matured.

Compare: Same facts as above, except that admittedly Fred’s

obligation under the original contract is to pay Ethel $900, and the new
agreement (under which Fred will deliver two sheep, in lieu of paying $900)
is made on July 2. The accord (to deliver two sheep) is not likely to be
treated as a substituted contract, because the duty under the original
contract was to pay money, was not disputed, was liquidated, and had
matured.
(b) Where executory accord is not a substituted contract [§105]
Even where an executory accord is not a substituted contract, so that the
original contract is not discharged, the accord nevertheless has several
significant effects:
1) Suspension of rights under original contract [§106]
Under the modern rule, an executory accord operates to suspend the
promisee’s rights under the original contract (i.e., the promisee cannot
sue the promisor on the original contract) during the period in which the
promisor is supposed to perform the accord.
2) Suit against promisor [§107]
If the promisor fails to tender performance under the executory accord,
the promisee can sue the promisor under either the old contract or the
accord. [Rest. 2d §281]
3) Suit against promisee [§108]
Some authorities take the position that if the promisor tenders
performance under an executory accord, and the promisee refuses to
accept the performance (i.e., insists on performance under the original
contract), the promisor can either permanently enjoin the promisee
from bringing suit or can sue the promisee for damages for breach of
the executory accord. [See Rest. 2d §281, comment c] It is not clear
that this position

43

would be widely accepted, because under this position, almost nothing

is left of the traditional rule concerning executory accords.
4) Application [§109]
Natasha owes Boris $1,000, payable on May 1. On May 5, the parties
agree that in settlement of the $1,000 obligation, Natasha will give Boris
her car on June 1. Because the original performance was an undisputed
obligation to pay a fixed sum of money, the accord will probably not be
treated as a substituted contract, and Natasha’s duty to pay the $1,000
therefore will not be discharged unless there is evidence that the parties
intended it to be. However, Natasha’s duty is suspended until June 1.
Thus:
a) If Boris breaches the executory accord by bringing an action to
recover the $1,000 prior to June 1, Natasha may go into equity to
enjoin Boris’s proceeding until June 1. [Union Central Life
Insurance Co. v. Imsland, 91 F.2d 365 (8th Cir. 1937)]
b) If Natasha breaches the executory accord by failing to deliver
 the car, Boris may recover a judgment for the $1,000 or, at his
option, may seek damages for the failure to deliver the car.
c) If Boris breaches the executory accord by refusing to accept the
car when it is tendered on June 1 and bringing an action for the
$1,000 thereafter, Natasha may also be able to bring an action for
breach of the accord, or to sue for specific performance or an
injunction to block Boris’s suit on the ground that the original
contract is suspended even after June 1. [Dobias v. White, 80
S.E.2d 23 (N.C. 1954)]

D. Waiver
1. Definition [§110]
A waiver is often defined as the intentional relinquishment of a known right. However, in
contract law the term is better confined to cases where a party excuses the
nonoccurrence or delay in fulfillment of a condition to her duty to perform under the
contract.

44

2. Enforceability [§111]
A waiver is enforceable if it is given in exchange for separate consideration. It is also
enforceable (subject to the possibility of retraction, see infra, §130) without separate
consideration if (i) the waived condition was not a material part of the agreed-upon
exchange, and (ii) uncertainty of the occurrence of the condition was not an element of
the risk assumed by the party who gave the waiver. [Rest. 2d §84(1)]
Example: Owner employs Builder to build a house by December 1 for $400,000,
payable upon the production by December 10 of an architect’s certificate, signed by
Owner’s architect, Xaviar, that the house has been completed according to contract
specifications. Builder builds the house, but Xaviar rightfully refuses to give the
certificate because the house is defective in several respects. Owner says to Builder, “My
architect, Xaviar, rightfully refused to give you a certificate, but because the defects are
not serious, I will pay you the full $400,000.” Owner’s waiver is enforceable because
production of the architect’s certificate was neither a material part of the agreed-upon
exchange nor an element of the risk assumed by Owner.

Example: Acme Insurance Company insures Roger for $100,000 against Roger’s
becoming disabled while traveling. The policy is payable only if Roger or his beneficiary
gives Acme written notice of loss within 30 days after the loss occurs. Roger is disabled
in an auto accident but does not give Acme notice until 34 days after the accident. Acme
informs Roger that this notice is sufficient, thereby waiving the 30-day condition. Acme’s
 waiver is enforceable, even though Roger gave no consideration for the waiver, because
the provision concerning notice was not a material part of the agreed-upon exchange, and
uncertainty about receiving notice was not an element of the risk assumed by Acme.

Compare: Same facts as in the example above, but Roger is disabled while working
at home. Acme waives the requirement that the accident occur while traveling. Acme’s
waiver is unenforceable, because the condition that the disablement occur while traveling
was a significant element of the risk assumed by Acme.

3. Retraction [§112]
Even though a waiver is otherwise enforceable, it can be retracted if each of four
conditions is met:
(i) The waiver was not given for separate consideration;
(ii) The other party has not changed position in reliance on the waiver;
(iii) The waiver relates to a condition to be fulfilled by the other party to the
contract, rather than by a third party; and

45

(iv) The retraction occurs before the time that the waived condition was supposed to
occur and the party who gave the waiver either (a) gives notice of her intention to
retract while there is still a reasonable time for fulfilling the condition, or (b)
provides a reasonable extension of the time in which to perform.
[Rest. 2d §84(2)]
Example: Assume that in the example concerning the architect’s certificate (supra,
§111), Owner attempts to retract the waiver. The retraction would be ineffective for two
reasons: (i) the waiver did not relate to a condition that was to be fulfilled by the other
party to the contract (Builder) but rather by a third person—Xaviar, Owner’s architect;
and (ii) at the time the waiver was given, the time for fulfilling the condition (i.e., the
time for producing the certificate) had already passed.

Compare: Assume in the Acme insurance policy example (supra, §111), that four
days after the accident Acme waived the requirement that written notice be given within
30 days after loss occurs and then attempted to retract its waiver the day after the waiver
was given but before Roger changed his position. Here, the retraction is effective
because: (i) the waiver was not given for separate consideration, (ii) the waiver was not
relied upon, (iii) the waiver related to a condition to be fulfilled by Roger, and (iv) the
retraction occurred before the time the waived condition was supposed to occur and
while there was still a reasonable time for fulfilling the condition.
E. Unrelied-Upon Donative Promises
1. General Rule [§113]
A donative (or gratuitous) promise is a promise to make a gift (e.g., A promises to give B
a car). The general rule is that a simple donative promise is unenforceable because there
is a lack of consideration. [Schnell v. Nell, 17 Ind. 29 (1861)]

a. Exceptions [§114]
A donative promise may be enforceable if it is relied on (see infra, §124), or, at early
common law and still in some states, if it is under seal (see infra, §115). In addition,
under an emerging rule of modern contract law, a promise to compensate for a
material benefit that was previously received by the promisor and that gave rise to a
moral (although not a legal) obligation to make compensation is enforceable (see
infra, §§131 et seq.). For example, if Joey’s horse escapes and Monica cares for the
horse until it is returned to Joey, Joey’s subsequent promise to pay Monica the cost
of the horse’s care is enforceable under this emerging rule. [Rest. 2d §86]

46

2. Effect of a Seal [§115]

A seal is a piece of wax (or a paper wafer or some other substance similar to a piece of
wax) affixed to a written contract, or an indented impression resembling a seal (made
with an embossing tool) on a written contract. By statute or decision in many states, a
seal may also be written or printed, or may consist of the word “seal,” or a pen scrawl
(or “scroll”), or some other sign to represent a seal (including the letters “L.S.,” which
stands for “locus sigilli,” meaning “place of the seal” in Latin). At common law, any
promise under seal, even a donative promise, is legally enforceable. This rule still holds
true where not changed by statute.

a. Statutory modification [§116]

A large number of states have enacted statutes that either abolish the binding effect
of a seal or provide that a seal raises only a presumption of consideration. [See, e.g.,
Wis. Stat. Ann. §328.57]
(1) Presumption statutes—promisor must show lack of consideration [§117]
A statute providing that a seal only raises a presumption of consideration is
usually interpreted to mean that if a promisee brings an action on a promise that
is under seal, the promisor has the burden of proving the absence of
consideration. (Normally, a promisee has the burden of proving the presence of
consideration.)

3. Effect of Writing [§118]

Absent a statute to the contrary, a donative promise is not enforceable merely because it
 is in writing. [Hill v. Corbett, 204 P.2d 485 (Wash. 1949)]

a. Statutory modifications [§119]

A few states have statutes providing that a promise in writing is presumed to have
been given for consideration. [See, e.g., N.M. Stat. Ann. §20.2-8; Cal. Civ. Code
§1614] However, this presumption is rebuttable.

4. Nominal Consideration [§120]

Nominal consideration exists when a donative promise is falsely put by the parties into
the form of a bargain (e.g., A, who wants to promise to make a gift of a car to B, agrees
to “sell” B a new car for $1; this is called “nominal” consideration because there is
consideration—a bargain—in name only). Although the authorities are not in accord, the
prevailing view today is that nominal consideration will not make a donative promise
enforceable (see supra, §13).

5. Conditional Donative Promise [§121]

A donative promise is conditional if the promisor intends to confer a gift on the promisee,
but the nature of the gift is such that some condition must be fulfilled before the gift is
made (e.g., A tells B that she will give B her television if he comes

47

over to her house to get it). A conditional donative promise is no more enforceable than
any other donative promise. This is true even if the condition has been fulfilled, except to
the extent that fulfillment of the condition constitutes foreseeable reliance (see infra,
§§124-130).

a. Conditional donative promise vs. bargain promise [§122]

A conditional donative promise sometimes looks like a bargain. The difference
between a conditional donative promise and a bargain is that in a conditional donative
promise, fulfillment of the condition is not the price of the promisor’s performance.
It is sometimes difficult to distinguish a conditional donative promise from a bargain
promise. The test is how the parties view the condition. If the condition is viewed as
simply a necessary part of making the gift, the promise is donative. But if the parties
view performance of the condition as the price of the promise, there is a bargain, and
the rules applicable to bargains apply.
Example: Will telephones Grace and says, “I have a gift for you. If you come
over to my house, you can have it now.” Grace comes over, but Will does not give
her the gift. Will’s promise is not enforceable because coming over to Will’s house
was not the “price” of the gift, but simply was the means of effectuating the promise.

Compare: Uncle promises to pay Nephew $5,000 if Nephew will abstain from
smoking and drinking until he reaches age 21. Nephew agrees and abstains. Uncle
 must pay the $5,000. Even if Uncle’s motive was altruistic, it was understood that
$5,000 was the price Uncle was willing to pay for Nephew’s abstinence. [Hamer v.
Sidway, supra, §2]

48

F. Relied-Upon Donative Promises—Doctrine of

Promissory Estoppel
1. Former Rule—Reliance Irrelevant [§123]
Often, a donative promise is relied upon by the promisee. The rule at one time was that
reliance was irrelevant; a donative promise was unenforceable even if it was relied upon.
[Kirksey v. Kirksey, 8 Ala. 131 (1845)]

2. Modern Rule [§124]

Today, however, the rule is that if a donative promise induces reliance by the promisee in
a manner that the promisor should reasonably have expected, the promise will be legally
enforceable, at least to the extent of the reliance. [Feinberg v. Pfeiffer Co., 322 S.W.2d
163 (Mo. 1959)]

a. Restatement First section 90 [§125]

The modern rule stems from section 90 of the Restatement First, which provides
that “a promise which the promisor should reasonably expect to induce action or
forbearance of a definite and substantial character 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.”
 (1) Principle of “promissory estoppel” [§126]
The principle of section 90 is sometimes known as the principle of “promissory
estoppel.” This terminology reflects the idea that if a promisee has relied on a
donative promise, for reasons of justice the promisor should be estopped
(prevented) from pleading lack of consideration. Under modern law and
practice, reliance is viewed as either a substitute for consideration (when the
term “consideration” is used to mean a bargain) or as consideration itself (when
the term “consideration” is used to mean any factor that makes a promise
enforceable). The term “promissory estoppel” nevertheless remains in wide use
as a description of the principle that reliance may make a promise enforceable.

b. Restatement Second section 90 [§127]

Section 90 of Restatement Second perpetuates Restatement First section 90, with
certain changes:
(1) Remedy may be limited to extent of reliance [§128]
Under Restatement First, some authorities argued that if a relied-upon donative
promise was enforceable at all, it was enforceable to its full extent (i.e., the
amount promised, or “expectation damages”). [Williston, Treatise on the Law of
Contracts (“Williston”) (3d ed. 1979) §1338, n. 7] However, Restatement
Second section 90 makes it clear that damages

49

may be limited to the extent of the reliance (i.e., “reliance damages”), by

stating that “the remedy granted for breach may be limited as justice requires.”
[Rest. 2d §90]
Example: Aunt promises to reimburse Nephew $1,000 for opera tickets that
Nephew will purchase for his own use. Nephew purchases tickets for $500, and
Aunt refuses to pay Nephew. Under Williston’s view, Nephew might have been
entitled to the full extent of the promised sum—$1,000. Under Restatement
Second section 90, however, Nephew would be entitled to enforce Aunt’s
promise only to the extent that the promise was relied upon—$500.
(2) Substantial reliance not required [§129]
Restatement First section 90 required that the reliance be of “a definite and
substantial character.” Under Restatement Second section 90, it is enough that
the promisor should have reasonably expected that the promise would induce
reliance.
3. Reliance as Consideration [§130]
Some authorities, including the Restatements, limit the term “consideration” to bargains.
According to these authorities, a relied-upon donative promise is enforceable despite the
absence of consideration—i.e., despite the absence of bargain. However, other
authorities treat promissory estoppel as simply a type of consideration. [Feinberg v.
Pfeiffer Co., supra, §124]

a. Comment
This difference in approach is basically a question of nomenclature. The result in any
given case is the same under either view—the promise is enforceable.

G. Moral or Past Consideration

1. Definition [§131]
A promise is said to be given for “moral” or “past” consideration when the promisor’s
motivation for making the promise is a past benefit to the promisor or detriment to the
promisee that gave rise to a moral obligation, but no legal obligation,

50

to make compensation. Such a promise is similar to a pure donative promise (supra,

§113) in that the promise is not bargained for and is altruistic. However, such a promise
differs from other donative promises, insofar as it is rooted in the motive to make
compensation on the basis of a past transaction that gave rise to a moral obligation to
make compensation.

2. Traditional Rule [§132]

The traditional rule is that a promise based on moral or past consideration is simply a
donative promise and is therefore unenforceable. [Mills v. Wyman, 3 Pick. 207 (Mass.
1825)]

3. Core Exceptions [§133]

There are three core exceptions to the traditional rule. These exceptions concern a
promise to pay a debt barred by the statute of limitations, a promise to perform a
voidable obligation, and a promise to pay a debt discharged by bankruptcy.
a. Promise to pay debt barred by statute of limitations [§134]
A statute of limitations is a statute that sets a maximum amount of time in which a
particular type of lawsuit may be brought. In other words, after the statutory period
is over, the lawsuit can no longer be brought. A promise to pay a debt barred by the
statute of limitations is enforceable even if no new consideration is given by the
promisee. [Rest. 2d §82]
(1) Action is on new promise [§135]
In such cases, it is the new promise, not the old debt, that is enforceable.
Therefore, if the debtor promises to pay less than the amount of the barred
debt, or promises to repay the debt only in installments or only under stated
conditions, that is all she is obliged to do. [Brown v. Hebb, 175 A. 602 (Md.
1934); Rest. 2d §82]
Example: Tony owes Maria a debt of $1,000, but the statute of limitations
has run on the debt. Tony then writes Maria, “I realize I still owe you $1,000,
and I will pay it.” The promise is enforceable.

Example: After the statute has run, Tony writes to Maria, “I realize I owe
you $1,000, and I will pay it to you if I am promoted to a better job.” The
promise is enforceable, but Tony need only perform if he is promoted because it
is the new promise, not the old debt, that is enforceable.

Example: After the statute has run, Tony writes to Maria, “I realize I owe
you $1,000, and I will pay you $800.” The promise is enforceable, but Maria
can recover only $800 because it is the new promise, not the old debt, that is
enforceable.

51

(2) Effect of acknowledgment or part payment [§136]

The new promise need not be explicit. A promise to pay a debt barred by the
statute of limitations will normally be implied from an unqualified
acknowledgment that the debt is owing, or from a part payment of the debt.
[Rest. 2d §82; Corbin §216]
(a) Implication from acknowledgment or part payment not
determinative [§137]
In such a case, it is not the acknowledgment or part payment that is
decisive, but the implication of a promise from the acknowledgment or part
payment. Therefore, if such an implication cannot fairly be drawn, no
action will lie.
Example: Margaret owes Brandy $5,000, but the debt is barred by the
 statute of limitations. Brandy asks Margaret to pay, and Margaret writes, “I
acknowledge that I owe you that money, and I should pay it to you by all
rights, but you’ll never get a cent.” Brandy has no cause of action, because
although Margaret acknowledged the debt, a promise to pay cannot be
implied from the acknowledgment. [Rest. 2d §82]

Compare: Same facts as above, except that Margaret writes, “I’m

sorry I haven’t paid, but I had no extra money last year.” The court might
treat this statement as an unqualified acknowledgment of the debt that will
give rise to an implied promise. [Buescher v. Lastar, 61 Cal. App. 3d 73
(1976)]
(3) Requirement of a writing [§138]
A promise to pay a debt barred by the statute of limitations does not fall within
the Statute of Frauds as originally enacted. (The Statute of Frauds requires
some contracts to be evidenced by a writing to be enforceable; see infra, §§525
et seq.) However, most states have now adopted special Statute of Frauds
provisions, known as “Lord Tenterden’s Acts,” which provide that a promise to
pay a debt barred by the statute of limitations is not enforceable unless the
promise is in writing or a part payment has been made. [See, e.g., Mass. Gen.
Laws ch. 260, §§13, 14]
(4) New promise made before statute of limitations has run [§139]
The rules set forth above are also generally applicable to a new promise, an
acknowledgment, or a part payment that is made before (rather than after) the
statute of limitations has run on the old debt. In such a case, the statute of
limitations on the new promise will begin to run from the date of the new
promise, acknowledgment, or part payment.

b. Promise to perform a voidable obligation [§140]

A promise to perform a voidable obligation (known as a ratification) is

52

enforceable despite the absence of new consideration if the new promise is not
subject to the same defense that made the original obligation voidable. [Rest. 2d §85]
Example—infancy: Pam and Elizabeth reside in a state where the age of
majority is 18. Just before Pam turns 18, she enters into a contract with Elizabeth.
Two weeks after Pam turns 18, she promises Elizabeth that she will perform the
contract. The contract is enforceable against Pam even though there is no
consideration for Pam’s new promise. [See Rest. 2d §85]

Example—fraud: Linda is defrauded by Bill into entering into a contract to

 purchase Redacre. Linda learns of the fraud but still wants Redacre, so she promises
Bill that she will perform. The contract is enforceable against Linda even though
there is no consideration for Linda’s new promise. [See Rest. 2d §85]

c. Promise to pay a debt discharged by bankruptcy

(1) Under contract law [§141]
As a matter of contract law, a promise to pay a debt discharged by bankruptcy
is enforceable. Such a promise is given the same treatment as a promise to pay a
debt barred by the statute of limitations, with certain exceptions:
(a) Acknowledgment and part payment [§142]
Although a promise to pay a debt barred by the statute of limitations may
be implied from an acknowledgment or part payment, in most states a
promise to pay a debt discharged by bankruptcy will not be implied from a
mere acknowledgment or part payment—i.e., a promise to pay a debt
discharged by bankruptcy will be enforceable only if it is express. [Rest. 2d
§83]
(b) Requirement of a writing [§143]
Although a promise to pay a debt barred by the statute of limitations
normally must be in writing, as a matter of contract law most states do not
require that a promise to pay a debt discharged by bankruptcy be in writing
to be enforceable. [See Zabella v. Pakel, 242 F.2d 452 (7th Cir. 1957)]
However, such a requirement is statutorily imposed in a few states.
(2) Under bankruptcy law [§144]
The Bankruptcy Code has severely changed the contract law rules concerning a
promise to pay a debt discharged by bankruptcy. The reasons for these changes
were the unequal bargaining position of debtors and creditors, and the creditors’
superior experience in bankruptcy matters.

53

Under the Bankruptcy Code, a promise to pay a debt that has been discharged
by bankruptcy is normally enforceable only if a number of very stringent
conditions are met. These conditions are highly detailed. Generally speaking,
they are intended to assure that the debtor is fully informed; that the new
agreement does not impose an undue hardship on the debtor; and that either the
debtor is represented by counsel, the court holds a hearing on whether the
requirements of the Bankruptcy Code have been satisfied, or both. [See 11
U.S.C. §524 (c), (d)]

4. Modern Rule—Promise to Pay Moral Obligation Arising Out of Past Economic

Benefit to Promisor
a. In general [§145]
Beyond these three core cases, the principles that govern past or moral consideration
are still in the process of development. The emerging modern rule is that a promise
based on a moral obligation is enforceable, even if it does not fall within one of the
three core exceptions, if the promise is based on a material benefit (usually meaning
an economic benefit) that was previously conferred by the promisee upon the
promisor, provided the benefit gave rise to an obligation—even if only a moral
obligation—to make compensation.
Example: Webb saves the life of McGowin, but sustains serious injuries during
the rescue. McGowin promises to pay Webb a bimonthly stipend for the rest of
Webb’s life. McGowin pays Webb the stipend for more than eight years, but on
McGowin’s death, his estate refuses to continue the payments to Webb. McGowin’s
promise is binding because the promise to pay was based on a material benefit to the
promisor that constituted valid consideration. [Webb v. McGowin, 168 So. 196
(Ala. 1935)]
(1) Restatement position [§146]
This position is adopted by Restatement Second, which provides that “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,” but is
not binding “to the extent that its value is disproportionate to the benefit.” [Rest.
2d §86]
(2) Status of modern rule [§147]
Because the modern rule adopted in the Restatement Second is still emerging,
some courts may continue to follow the traditional rule and hold that a promise
based on moral or past consideration is unenforceable unless it is a promise to
pay a debt barred by either the statute of limitations or a discharge in
bankruptcy or a promise to perform a voidable obligation.

54

(3) State statutes [§148]

The issue of past or moral consideration is affected by statute in some states.
For example, a New York statute provides that past consideration is valid to
support a written promise if the consideration is expressed in writing, is proved
to have been given or performed, and would have been valid consideration if it
were present rather than past consideration. [N.Y. Gen. Oblig. Law §5-1105]
And a California statute provides that “a moral obligation originating in some
benefit conferred upon the promisor … is … a good consideration for a
promise, to an extent corresponding with the extent of the obligation, but no
further or otherwise.” [Cal. Civ. Code §1606]
 b. Benefits conferred gratuitously [§149]
Even under the modern view, a promise to make compensation for a past benefit
conferred will not be enforceable if that benefit was conferred as a gift, because
there is no moral obligation to repay the value of a gift. [Rest. 2d §86]
Example: Juan’s wealthy elder sister, Julia, gives Juan a new car for his 21st
birthday. Later, Juan promises to pay Julia the value of the car. Juan’s promise is
unenforceable.

c. Promise based on expense incurred by promisee [§150]

Even under the modern view, a promise based on a moral obligation will normally
not be enforced where the promisor did not receive a material (i.e., economic)
benefit—even if the promisee incurred expenses. [Old American Life Insurance
Co. v. Biggers, 172 F.2d 495 (10th Cir. 1949); Mills v. Wyman, supra, §132]
Example: Wyman’s adult son, Levi, becomes ill while away from home.
Without having been requested to do so by Wyman, Mills takes care of Levi, but
Levi dies. Wyman then writes to Mills, promising to pay the expenses for his son’s
care. Wyman’s promise is unenforceable, because he did not receive a “material”
(i.e., economic) benefit from Mills’s action. But note: This is a borderline case.
Contract law has given increasing recognition to the reliance interest, and may come
to recognize it in this situation too. Also, in some cases an expense of the promisee
may be treated as a benefit to the promisor so as to make the promise enforceable.

5. Promise to Pay Fixed Amount in Liquidation of a Legal Obligation [§151]

If a promisor promises to pay a certain amount for a benefit she received in the past that
gave rise to a legal obligation to pay (e.g., I promise to pay you $500 for painting my
fence pursuant to our earlier enforceable contract in which the price term was
undecided), can the promisee sue for the amount promised, or can he sue only for
restitution?

55

a. Acceptance by promisee constitutes bargain [§152]

If the promisee accepts the promisor’s promise, there is a bargain between the
parties to substitute a liquidated amount for an unliquidated obligation, and there is
consideration.

b. Split of authority where no acceptance [§153]

If, however, the promisee does not specifically accept the promisor’s promise, the
courts are divided:
(1) Some cases hold that the new promise is merely evidence of what is
 reasonable compensation. [Old American Life Insurance Co. v. Biggers,
supra; Conant v. Evans, 88 N.E. 438 (Mass. 1909)]
(2) However, other cases hold that the promise defines the extent of the
promisor’s implied-in-fact duty. Under this view, the promise may be
enforceable without regard to the actual value of the services rendered. [In re
Bradbury, 105 App. Div. 250 (1905); Estate of Hatten, 288 N.W. 278 (Wis.
1940)]
56
Chapter Two:
Mutual Assent—Offer and Acceptance

CONTENTS

Chapter Approach
A. Mutual Assent §154
B. Offers §158
C. Acceptance §258
D. Time at Which Communications Between Offeror and Offeree Become
Effective §314
E. Interpretation §363
F. The Parol Evidence Rule §378

57

Chapter Approach
Unless a Contracts question specifically states that the parties made a contract, the answer to
the question should address whether a contract was formed. This usually requires a
determination of whether there was consideration (as discussed in Chapter I) and whether
there was an offer and acceptance. This Chapter discusses offer and acceptance. You should
watch for the following five situations:

1. The question sets out the texts of two or more communications

In that case, consider whether each communication was an invitation to bid, an offer, a
revocation, an acceptance, an inquiry, a conditional acceptance, a counteroffer, or a
rejection. When considering the category of each communication, keep in mind that:
a. Frequently there is ambiguity as to what legal category a communication falls into.
If that is the case, the ambiguity must be explored in your answer.
b. The interpretation of each item in a series of communications is related to the
interpretation of earlier items in that series. For example, if you determine that the
first communication in a series is an invitation to bid, the question you should ask
about the second communication is whether it is an offer or another invitation to bid.
If, however, you determine that the first communication in a series is an offer, the
question you should ask about the second communication is whether it is an
 acceptance, a conditional acceptance, a counteroffer, an inquiry, or a rejection.
c. A response to an offer that purports to be an acceptance must be examined to
determine whether it (i) is timely; (ii) is in the proper form (e.g., does the offer
require acceptance by a promise or by an act?); and (iii) deviates from the offer in
any way. If a response that purports to be an acceptance deviates from the offer in
any way, it is normally not an acceptance unless (i) it simply spells out an implication
of the offer or (ii) the transaction involves a contract for the sale of goods, in which
case the response may be an acceptance, even though it differs from the offer, by
virtue of U.C.C. section 2-207.
d. After determining the category into which each communication falls, you should
determine the legal effect of each communication. For example, an offer creates a
power of acceptance in the offeree; a rejection terminates the power of acceptance;
a conditional acceptance normally terminates the power of acceptance (except under
the U.C.C.); a counteroffer terminates the offeree’s power of acceptance, but
creates a new power of acceptance in the original offeror; and an acceptance
concludes a bargain if the acceptance is timely and in proper form.

2. The question sets out the dates on which two or more communications were sent
between the parties
In that case, be sure to consider (i) whether a purported acceptance was timely

58

according to the period for acceptance, if any, expressly required under the offer, or (ii)
if no period was expressly required under the offer, whether the acceptance was within
a reasonable time.

3. The question states that a party made an offer that was then revoked
In that case, the question will normally raise the issue of whether the revocation was
effective:
a. If the revocation crosses paths with an acceptance, you must determine whether
the acceptance was sent in a timely manner and by an appropriate medium. If so,
the acceptance is effective on dispatch but the revocation is effective only on
receipt.
b. Alternatively, the problem may be whether the offeror had the right to revoke. The
general rule is that an offer is revocable, but there are important exceptions:
(1) If the offer is for a unilateral contract, it is not revocable if the offeree began
performance prior to the revocation.
(2) If the offer is for a bilateral contract, it may not be revocable if (i) the offeree
gave consideration (i.e., if the offer was an option); (ii) the offer is in writing
and recites at least nominal consideration; (iii) the offeree has relied upon the
 offer in a foreseeable way; or (iv) the offer was for the sale of goods and
therefore fell within the U.C.C.

4. The question involves an offer by one party but no explicit acceptance by the
other
In that case, be sure to consider the issue of silence as acceptance.

5. The question states that an offer or acceptance was lost or delayed in the mail
In that case, the question will normally raise the issue of the effect of the loss or delay.
Generally, an acceptance is effective on dispatch, but all other communications are
effective only on receipt.
Finally, if you determine that a contract was formed, you might find that the contract raises
problems of interpretation. Also, if the agreement has been reduced to a written form,
watch for parol evidence rule problems. If the contract has not been reduced to written
form, watch for Statute of Frauds problems.

A. Mutual Assent
1. Existence of Mutual Assent Determined Under Objective Theory of Contracts
[§154]
For a contract to be formed, there must be mutual assent. In determining whether

59

mutual assent has been achieved for contract law purposes, one should generally use the
objective theory of contracts (i.e., what a reasonable person to whom an expression—
words or conduct—has been addressed would understand the expression to mean).
Therefore, an expression is not interpreted according to what the person making the
expression subjectively meant the expression to convey or what the person to whom the
expression was addressed subjectively understood the expression to mean. (Note: A
court may enforce a party’s subjective interpretation of a promise in certain limited
circumstances; see infra, §§365-368.)

a. Rationale—protection of parties’ reasonable expectations

At one time, contract theory seems to have required an actual “meeting of the
minds” to form a contract. This term implies that there is a subjective element to
contract formation. Modern contract law has rejected the concept that an actual,
subjective meeting of the minds is necessary to form a contract. Rather, the
importance of protecting the parties’ reasonable expectations in relying on a promise,
and the need for security and certainty in business transactions, make it imperative
that each contracting party be able to rely on the other party’s manifested intentions,
 without regard to her thoughts or mental reservations. [Rest. 2d §18; Brant v.
California Dairies, Inc., 4 Cal. 2d 128 (1935)]
(1) Note
Notwithstanding the rise of the objective theory of contracts, courts often
continue to speak of a “meeting of the minds.” When modern courts use that
term, however, it is simply a shorthand phrase for the formation of a contract,
and does not require an actual subjective meeting of the minds.

b. Application
There is a sufficient manifestation of assent whenever a party uses an expression that
he knows, or has reason to know, the other party would reasonably interpret as an
offer or acceptance, and the other party does so interpret it. [Rest. 2d §19]
Example: Lucy offers to buy Zehmer’s farm for $50,000 cash. Zehmer accepts
the offer in jest, believing Lucy does not have the money. The two parties work out
the terms of the contract, Zehmer writes out the contract on a restaurant check, and
Zehmer and his wife sign it. Lucy takes the writing and attempts to enforce it. Even
if Zehmer did not subjectively intend to sell the farm, the contract is binding because
Lucy actually and reasonably believed it to be a serious transaction. [Lucy v.
Zehmer, 84 S.E.2d 516 (Va. 1954)]

2. Express and Implied Contracts

a. Express contracts [§155]

If mutual assent is explicitly manifested in oral or written words of agreement, the
resulting contract is said to be express.

60

b. Implied contracts
(1) Implied-in-fact contracts [§156]
If the promises of the parties are inferred from their acts or conduct, or from
words that are not explicitly words of agreement, the contract is said to be
implied in fact. Although implied, such contracts are true contracts. The mutual
assent is inferred, but it is real, not fictional. [Rest. 2d §4]
Example: Auctioneer conducts a “Dutch auction” of a vase. (In a Dutch
auction, the auctioneer starts with a high price, and reduces the price step-by-
step until a member of the audience bids by raising a hand. That bidder “wins”
the auction.) When the price for the vase falls to $190, Bidder raises her hand,
and Auctioneer knocks down the hammer. Auctioneer and Bidder have an
implied-in-fact contract for the sale of the vase at $190.
 Example: Fred asks Barney, a plumber, to repair Fred’s sink. Barney does
so. There is an implied-in-fact contract under which Fred must pay Barney his
usual rates for such a job, provided the rates are reasonable.

(2) Implied-in-law contracts [§157]

To be carefully distinguished from contracts implied in fact are contracts
implied in law. A contract is said to be implied in law where one party is
required to compensate another for a benefit conferred in order to avoid unjust
enrichment, rather than because there has been an actual or implied-in-fact
promise to pay for the benefit. Unlike implied-in-fact contracts, implied-in-law
contracts are not real contracts. The basis for implied-in-law contracts is unjust
enrichment, not assent. The term “contract” is used only because, for purely
technical reasons, the English courts historically classified these cases under a
contract heading, by fictionally implying a promise to pay for benefits or
services rendered, to prevent unjust enrichment. (See infra, §879.)
Example: Doctor sees Pedestrian lying in the street unconscious and
renders medical services. When Pedestrian recovers, Doctor bills Pedestrian.
Pedestrian is liable for the reasonable value of Doctor’s services under an
implied-in-law contract.

B. Offers
1. Introduction [§158]
Most contracts are formed by offer and acceptance. Therefore, the first step in

61

analyzing a contracts problem often is to determine whether an offer has been made.

2. Legal Significance of an Offer [§159]

The legal significance of determining that a particular expression is an offer is that an
offer creates a power of acceptance in the person to whom the expression was
addressed. Therefore, if an expression constitutes an offer, the addressee has the power
to conclude a bargain (and thereby enter into a contract and bind the offeror) merely
by giving assent in the appropriate manner (see infra, §§258 et seq.).

3. What Constitutes an Offer? [§160]

An offer is an expression of present willingness to enter into a bargain, made in such a
way that a reasonable person in the shoes of the person to whom the expression is
addressed would believe that she could conclude a bargain merely by giving assent in
the manner required by the expression. [Rest. 2d §24]
a. Two essential elements [§161]
To be sufficient as an offer, an expression must meet two criteria, each of which is
discussed in detail below: (i) intent to enter into a bargain; and (ii) definiteness of
terms.
(1) Intent to enter into a bargain
(a) Offer vs. invitation to deal [§162]
The fact that an expression looks toward a bargain does not make the
expression an offer if it is clear from the language or circumstances that the
expression reflects merely an intent to begin negotiation. Such expressions
are called “preliminary negotiations” or “invitations to negotiate” or
“invitations to deal,” rather than offers.
1) Words suggesting negotiations [§163]
Typically, words such as “Are you interested …?,” “Would you give
…?,” “I quote …,” or “I would consider …” suggest only preliminary
negotiations or invitations to deal. [Elkhorn-Hazard Coal Co. v.
Kentucky River Corp., 20 F.2d 67 (6th Cir. 1927)]
Example: Buyer asks Seller whether Seller would sell a certain
store property for $30,000. This is not an offer. Seller replies, “I would
not be selling for under $40,000.” This is also not an offer, but merely
an invitation to Buyer to negotiate.
2) Words suggesting an offer [§164]
On the other hand, words such as “I will sell (or buy)” or “I offer”
suggest that an offer is intended.

62

3) Words not conclusive [§165]

However, the words used in an expression are not conclusive by
themselves. Depending on the circumstances, an expression using the
word “offer” may be construed as an invitation to deal, and an
expression using the word “quote” may be an offer. (See infra, §172.)

(2) Definiteness of terms [§166]

Another index to whether an expression constitutes an offer is whether its terms
 are sufficiently definite. Although what constitutes sufficient definiteness varies
considerably with the circumstances, and although an offer need not cover all
possible contingencies, generally speaking an expression will not be considered
an offer unless it makes clear: (i) the subject matter of the proposed bargain; (ii)
the price; and (iii) the quantity involved.
(a) Intent determinative [§167]
Even the omission of one of the above terms does not necessarily preclude
an expression from being an offer if: (i) the expression otherwise evidences
an intent to conclude a bargain, (ii) the omission does not indicate a lack of
such intent, and (iii) the court can fill in the omitted term by implication.
(See discussion on definiteness of terms, infra, §§415 et seq.)
Example: Manufacturer proposes to sell Farmer a tractor for $3,000,
with $1,000 down and the remainder to be paid in “regular installments.”
Farmer accepts. Although the size and timing of the installment payments is
undecided, if the facts indicate that both parties intended to conclude a
bargain, the court may enforce the contract. [Rest. 2d §33, comment b, ill.
1]

b. Special rules [§168]

Some types of statements are governed by special rules.

63

(1) Advertisements [§169]

The general rule is that advertisements are normally deemed to be invitations to
deal rather than offers. [Craft v. Elder & Johnston Co., 38 N.E.2d 416 (Ohio
1941)]
Example: Department Store advertised that belts were on sale for $10 each.
Customer went to Department Store to buy a belt, but all of the belts were
already sold. Customer cannot accept the offer and demand damages because
this advertisement was a mere invitation to deal rather than an offer.
(a) Rationale
 The general rule governing advertisements is usually based on one or more
of the following three grounds:
1) Advertisements are usually indefinite as to quantity and other terms;
2) Sellers ought to be able to choose with whom they will deal; and
3) Advertisements are typically addressed to the general public, so that
if an advertisement was considered to be an offer, a seller might find
the offer “overaccepted”—i.e., the number of persons who “accepted”
might exceed the number of items that the advertiser had available for
sale.
(b) Exceptions [§170]
Although the general rule is that advertisements are normally deemed to be
only invitations to deal, a particular advertisement may be construed as an
offer. Such a construction is most likely if the advertisement is definite in its
terms, and either (i) the circumstances clearly indicate an intention to make
a bargain, (ii) the advertisement invites those to whom it is addressed to
take a specific action without further communication, or (iii)
overacceptance is unlikely. [Lefkowitz v. Great Minneapolis Surplus
Store, 86 N.W.2d 689 (Minn. 1957)]
Example: Rare Books, Inc. publishes the following advertisement in
The New York Times Book Review: “Rare Books, Inc. will pay $100 for
every copy of the first edition of Sinclair Lewis’s Main Street sent to us by
January 1, 1983.” This advertisement is an offer. It is definite in its terms
and invites those to whom

64

it is addressed to take a specific action (sending in the book) without further

communication. Since Rare Books has signified an intention to buy any and
all of the first editions, there is no significant problem of overacceptance.

Example: A department store runs the following advertisement in the

newspapers: “Saturday, 9 A.M. Sharp, 3 Brand New Fur Coats Worth Up
to $1,000, $100 each, First Come, First Served.” This is also an offer.
Again, it is definite in its terms, and invites those to whom it is addressed to
take an action (being first in line) without further communication. Since the
number of available coats is specified, there is no significant problem of
overacceptance. [Lefkowitz v. Great Minneapolis Surplus Store, supra]
1) Rewards [§171]
An advertisement that a reward will be paid (e.g., a reward for the
return of lost property or for the capture of a criminal) is normally
 construed as an offer. (Compare infra, §282.) The act is specified;
there is a clear intention that those who see the advertisement will rely
on it; and since only one person normally can claim a reward, there is
no significant problem of overacceptance.

(2) Offering circulars [§172]

“Offering circulars” are general mailings sent out by merchants to a number of
potential customers, setting forth the terms on which a merchant

65

is ready to deal. Offering circulars are treated like advertisements; i.e., they are
normally construed as invitations to deal, but they may be construed as offers in
a given case. The usual test is whether a reasonable person in the shoes of the
addressee would think the communication had been addressed to him
individually (in which case it will be treated as an offer), or only as one of a
number of recipients (in which case it will be treated as an invitation to deal).
Use of the word “offer” usually, but not always, suggests an offer. Use of the
word “quote” usually, but not always, suggests an invitation to deal.
Example: Buyer receives a printed letter from Seller stating, “We are
authorized to offer Michigan fine salt in full car load lots of 80 to 95 barrels,
delivered at your city at 85 cents per barrel.” Because the letter does not appear
to be directed at Buyer individually, it is merely an invitation to deal, despite use
of the word “offer.” [Moulton v. Kershaw, 18 N.W. 172 (Wis. 1884)]
 Example: Buyer sends an inquiry to Seller asking Seller’s price for Mason
jars. Seller replies, “We quote you Mason fruit jars, pints $4.50, quarts $5.00,
half gallons $6.50 per gross, for immediate acceptance.” Because the response
was directed to Buyer individually, it is an offer despite use of the word
“quote.” [Fairmount Glass Works v. Grunden-Martin Woodenware Co., 51
S.W. 196 (Ky. 1899)]
(3) Auctions
(a) Auction with reserve [§173]
The usual auction (sometimes called an auction “with reserve”) is subject to
the following rules:
1) Putting an item on the block [§174]
The act of an auctioneer in putting an item “on the block” (i.e., calling
for bids on the item) is not an offer. Rather, putting an item on the
block is considered an invitation to make offers. Because putting an
item on the block is not an offer, a bid by a member of the audience is
not an acceptance, but rather, an offer. Therefore, the auctioneer may
withdraw the item even after the bidding has begun, unless and until the
auctioneer has actually “hammered down” (i.e., accepted) a particular
bid. [U.C.C. §2-328(3)]
2) Bids [§175]
A bid by a member of the audience is an offer, which is accepted if the
auctioneer “hammers it down.”

66

a) Because an offer is normally revocable (see infra, §§225 et seq.),

until a bid is accepted by being hammered down, the bid may be
withdrawn (revoked).
b) Each new bid (offer) automatically discharges all earlier bids.
[U.C.C. §2-328(2), (3); Payne v. Cave, 3 Term R. (I.B.) 148
(1789)] Thus, if a bid is withdrawn before it is hammered down,
the auctioneer is not free to accept earlier bids.
(b) Auction without reserve [§176]
Certain different rules apply to an auction that is announced to be “without
reserve.” In such an auction, once the auctioneer puts an item on the block
(i.e., calls for bids on an item) the item cannot be withdrawn unless no bid
is made within a reasonable time. [U.C.C. §2-328(3)] However, bids in an
auction “without reserve” are treated the same way as bids in a normal
auction (i.e., the bids can be withdrawn at any time before being hammered
down).
 (c) Determining whether auction is “with” or “without” reserve [§177]
An auction is deemed to be “with reserve,” and therefore subject to the
normal rules, unless the terms of the auction state that it is to be without
reserve. [U.C.C. §2-328] Thus, the usual auction is with reserve, and the
auctioneer may reject any and all bids, and withdraw any item from sale, at
any time before the hammer has fallen.
(4) Putting contracts out for bid [§178]
A government agency or a private firm may put a contract “out for bid”—i.e.,
the agency or firm may let it be known, by formal publication or otherwise, that
it contemplates entering into a contract for a certain performance, such as
building a warehouse or purchasing office equipment. The agency or firm
typically publishes or otherwise makes available the contract specifications, and
asks potential contractors or suppliers to submit bids that state the price at which
the contractor or supplier would render the performance. (Individuals may also
put contracts out for bid, such as a contract to build a private residence.)
Similarly, contractors who plan to submit bids may themselves request bids
from subcontractors on defined portions of the work (e.g., on the carpentry
portion of a construction contract).
(a) Legal status [§179]
Putting a contract out for bid usually is not deemed to be an offer.
However, the bids submitted in response usually are considered offers.
 67

68

Example: Builder, a general contractor who wants to make a bid on a

 school construction job, requests plumbing subcontractors to give her bids
on the plumbing part of the job. This request is not an offer to the
subcontractors. Builder is therefore free to decline all of the subcontractors’
bids, or to accept a bid other than the lowest bid. However, bids by the
subcontractors are offers to Builder. [Drennan v. Star Paving Co., 51 Cal.
2d 409 (1958); and see infra, §234]
(b) Interpretation [§180]
As in the case of advertisements and offering circulars, the rules governing
contract bidding involve matters of interpretation. Therefore, depending on
the language and circumstances, putting a contract out for bid might be
interpreted as an offer [see, e.g., Jenkins Towel Service, Inc. v. Fidelity-
Philadelphia Trust Co., 161 A.2d 334 (Pa. 1960)], while a bid might be
interpreted as only an invitation to deal [see Leo F. Piazza Paving Co. v.
Bebek & Brkich, 141 Cal. App. 2d 226 (1956)]. However, such
interpretations are very exceptional.

4. Termination of Power of Acceptance—In General [§181]

An offeree can conclude a bargain by giving assent only if his power of acceptance has
not been terminated. Termination of the offeree’s power of acceptance may result from
any of the following causes:
(i) Expiration or lapse of the offer;
(ii) A rejection by the offeree;
(iii) A counteroffer by the offeree;
(iv) A qualified or conditional acceptance by the offeree;
(v) A valid revocation of the offer by the offeror; or
(vi) By operation of law.

a. Termination of power of acceptance by expiration or lapse of the offer [§182]

Perhaps the most common manner in which the power of acceptance is terminated is
through expiration or lapse. The rules governing this method of termination depend
in part on whether a time period is fixed in the offer itself.
(1) Where time for acceptance is fixed in the offer [§183]
If the offer states that it will be “held open,” or “is good,” or the like, for a
certain period of time, the offeree’s power of acceptance expires or lapses at the
end of that period without any further action by the offeror. [Rest. 2d §41]

69
 (a) Interpretation of stated time period [§184]
Suppose an offer sent through the mail or by telegram states that it will be
held open for 10 days. Does this mean 10 days after the offer was sent, or
10 days after it was received? There is sparse authority on this issue, but
what little case law exists indicates that unless the offer otherwise provides,
the time runs from the day of receipt, at least if the offer was not obviously
delayed in transmission. [Caldwell v. Cline, 156 S.E. 55 (W. Va. 1930)]
1) Delay in transmission [§185]
Suppose the offer was delayed in transmission. If the offeree had no
reason to know of the delay, the same rule applies. However, if the
offeree knew or should have known of the delay (as where an offer
dated March 1 is received on March 19), the time period begins to run
from the day on which the offeree would have received the offer if the
delay had not occurred. [Rest. 2d §49] This is true even though the
delay in transmission was the offeror’s fault (as where the offeror
carelessly misaddressed the letter).
(2) Where no time for acceptance is fixed in offer [§186]
If the offer does not state a period of time during which it will remain open, the
offeree’s power of acceptance expires or lapses after the expiration of a
reasonable time. [Loring v. City of Boston, 48 Mass. (7 Metc.) 409 (1844)]
(a) What constitutes a reasonable time? [§187]
What constitutes a reasonable time depends on the circumstances: e.g., the
nature of the subject matter of the offer, the rapidity of price fluctuation for
that subject matter, the medium through which the offer is made (face-to-
face, letter, telegram, and so forth), and business custom. [Rest. 2d §41]
1) Face-to-face and telephonic bargaining [§188]
When the parties bargain face-to-face or by telephone, the time for
acceptance ordinarily does not extend beyond the end of the
conversation, unless a contrary intention is indicated (e.g., if the offeror
says, “Well, think it over …”). [Rest. 2d §41]
2) Offer sent by mail [§189]
When an offer is sent by mail, an acceptance mailed by midnight on
the day of receipt is timely, unless the circumstances indicate otherwise.
[Rest. 2d §41] However, an acceptance may be timely even if it is sent
later, provided it is sent within a reasonable time under the
circumstances and the offer does

70

not restrict the time, such as by requiring an answer by return mail. But
 remember that a special rule might apply where the offer is delayed in
transmission and the offeree knows or should know of the delay. (See
supra, §185.)

b. Termination of offer through rejection by offeree [§190]

A rejection is a statement by an offeree that he does not intend to accept the offer.
An offeree’s power of acceptance is terminated by a rejection, even though the
power of acceptance would not otherwise have lapsed. [Goodwin v. Hidalgo
County Water Control & Improvement District No. 1, 58 S.W.2d 1092 (Tex.
1933)]
Example: On January 2, Leonardo offers to paint Lisa’s portrait in February for
$10,000, the offer to be held open until January 11. On January 5, Lisa rejects the
offer. On January 7, Lisa changes her mind and accepts the offer. The acceptance is
ineffective because Lisa’s power of acceptance was terminated on January 5 by her
rejection.
(1) Rationale—protection of offeror
When an offeree rejects the offer, the offeror is likely to believe the offeree is
no longer interested and may therefore take actions that he would not have
taken if he thought the offeree might accept. For instance, in the example above,
after Lisa rejected the offer, Leonardo might have contracted to paint someone
else’s portrait in February.
(2) Exception for options [§191]
Some authorities take the position that in the case of an option, a rejection
during the option period does not terminate the offeree’s power of acceptance,
i.e., his right to “exercise the option.” [Ryder v. Wescoat, 535 S.W.2d 269
(Mo. 1976)] The rationale is that the offeree has a contractual right to have the
offer held open during its term (see infra, §232). However, even under these
authorities, the offeror would be protected if he relied on the rejection.

c. Termination of power of acceptance by counteroffer [§192]

A counteroffer is an offer made by an offeree to an offeror that concerns the same
subject matter as the original offer, but differs in its terms. A counteroffer terminates
the offeree’s power of acceptance, on the same rationale that applies to rejections.
[Livingston v. Evans, [1925] 4 D.L.R. 769 (Can.); Rest. 2d §39]
Example: Same facts as in the portrait example above, except that on January 5,
Lisa responds, “I will give you $2,000.” This is a counteroffer and terminates Lisa’s
power of acceptance.

71
 (1) Status as offer [§193]
As already mentioned, one legal effect of the counteroffer is that it terminates
the offeree’s power of acceptance. However, the counteroffer also has a second
legal effect: Because a counteroffer is an offer, it creates a new power of
acceptance in the original offeror.
(2) Inquiries and requests [§194]
The offeree’s power of acceptance is not terminated by an inquiry concerning
the offer or by a request for different terms. [Stevenson, Jaques & Co. v.
McLean, 5 Q.B.D. 346 (1880)]
Example: Assume the same facts as in the portrait example above, except
that on January 5, Lisa responds, “Does the price you quote include framing?”
This is an inquiry, not a counteroffer, and does not terminate Lisa’s power of
acceptance.
(a) Test [§195]
A test for distinguishing between a counteroffer and an inquiry is whether a
reasonable person in the offeror’s shoes would think that the
communication from the offeree was itself an offer that could be accepted.
For example, Lisa’s question about framing is obviously not itself an offer.

(3) Exception for options [§196]

In the case of an option, a counteroffer made during the option period does not
terminate the offeree’s power of acceptance—i.e., his right to “exercise the
option.” [Humble Oil & Refining Co. v. Westside Investment Corp., 428
S.W.2d 92 (Tex. 1968)]
(a) Rationale
The offeree has a contractual right to have the offer held open during its
term (see infra, §232).

d. Termination of power of acceptance by conditional or qualified acceptance

[§197]
A purported acceptance that adds to or changes the terms of the offer is known as a
conditional or qualified acceptance.

72

(1) Legal effect—general rule [§198]

Except in the case of contracts for the sale of goods (infra, §207), a conditional
or qualified acceptance generally terminates the offeree’s power of acceptance,
on the same rationale as that applicable to counteroffers. [Minneapolis & St.
Louis Railway v. Columbus Rolling-Mill, 119 U.S. 149 (1886)]
Example: On January 2, Kyle makes a written offer to Wendy to sell his
house, Amberacre, for $50,000, the offer to be held open until January 11. On
January 5, Wendy replies in writing, “I accept your offer on the condition that
you install a new front door at Amberacre.” Wendy’s reply constitutes a
conditional or qualified acceptance and therefore terminates her power of
acceptance.
(2) Status as offer [§199]
A conditional or qualified acceptance, like a counteroffer, is itself an offer, which
can be accepted by the original offeror.
(3) Exceptions to general rule
(a) Acceptance coupled with request [§200]
An unconditional acceptance coupled with a request is a valid acceptance
and forms a contract. [Culton v. Gilchrist, 61 N.W. 384 (Iowa 1894)]
Example: Same facts as the Amberacre example, above, except that on
January 5, Wendy replies, “I accept your offer gladly. I do hope that you
will install a new front door before I take possession.” Wendy’s response is
an acceptance, because in this example the installation of a new front door
is merely a request, not a condition.
(b) “Grumbling” acceptances [§201]
A “grumbling” acceptance is an acceptance accompanied by an expression
of dissatisfaction. (For example, “Send the goods on, but I sure wish you
could give us a better price.”) A grumbling acceptance is a valid acceptance
and forms a contract as long as the expression of dissatisfaction stops short
of actual dissent. [Johnson v. Federal Union Surety Co., 153 N.W. 788
(Mich. 1915)]
(c) Implied terms [§202]
An offeree’s power of acceptance is not terminated by an acceptance that is
conditional or qualified in form, but in substance merely spells out an
 implied term of the offer. [Rest. 2d §59]

73

Example: Same facts as the Amberacre example, above, except that on

January 5, Wendy replies, “I accept your offer on condition that you
convey marketable title.” Wendy’s reply is not a conditional acceptance
because in the absence of a disclaimer of title, a promise to convey
marketable title is implied in every contract for the sale of land, and
Wendy’s reply merely spells out that implication.
(d) U.C.C. provision [§203]
In the case of a contract for the sale of goods, U.C.C. section 2-207(1)
changes the common law rule by providing that “a definite and seasonable
expression of acceptance … operates as an acceptance even though it
states terms additional to or different from those offered or agreed upon,
unless acceptance is expressly made conditional on assent to the additional
or different terms.” (Emphasis added.) This provision is discussed at length
infra, §§207 et seq.
(4) The mirror image rule [§204]
At common law, an acceptance had to be a “mirror image” of the offer. In
other words, if a purported acceptance deviated from the offer in any way
—even in an immaterial way—it was deemed a qualified or conditional
acceptance and did not form a contract; instead, it had the legal effect of a
counteroffer. [Poel v. Brunswick-Balke-Collender Co., 216 N.Y. 310
(1915); see supra, §197]
(a) Form contracts and the last shot rule
1) The problem [§205]
The mirror image rule had a particularly strong bite in the case of form
contracts. Typically, merchant sellers and merchant buyers transact by
exchanging preprinted forms, usually called Sales Orders, Purchase
Orders, Confirmations, or Acknowledgments. The most important
terms of a transaction—such as the description of the subject matter,
the quantity, the price, the delivery date, and the terms of payment—
normally are individualized (e.g., typed in or handwritten) onto each
form and normally correspond. However, other terms—such as
warranties or disclaimers of warranties—will typically be preprinted on
each form in fine print. Invariably, the printed terms of a seller’s form
will differ from the printed terms of the buyer’s form because each
form is drafted to favor the party who prepared it. Nevertheless, if the
individualized terms on the forms agree, the seller will normally ship the
 goods described and the buyer will normally accept the goods, even
though the preprinted terms of the forms differ.

74

2) Common law last shot rule [§206]

On the facts described above, under the common law mirror image
rule, there is no contract at the time the goods are shipped because the
two forms differ. Since no contract was formed, the seller is under no
obligation to ship any goods. However, if the seller does ship the goods,
he is deemed to have shipped them pursuant to the last form sent.
Similarly, the buyer is under no obligation to accept the goods that were
shipped. However, if the buyer does accept the goods, she is deemed to
have accepted them pursuant to the last form sent. Thus at common
law, where the seller’s form and the buyer’s form differ, the last form
sent is deemed to be a conditional acceptance and therefore a
counteroffer. Shipment and acceptance of the goods is deemed to be an
acceptance of that counteroffer. This approach is known as the last shot
rule because under this approach the terms of the contract are those set
out in the last form sent, which could be either the seller’s form (if the
transaction was initiated by the buyer’s Purchase Order) or the buyer’s
form (if the transaction was initiated by the seller’s Sales Order).
Example: Buyer sends Seller a Purchase Order for 1,000 desk
chairs. Seller sends back a Sales Order. The typed terms of the
Purchase Order and the Sales Order agree, but the printed terms differ.
Seller then ships the chairs, and Buyer accepts them. Under the
common law mirror image rule, a contract was not formed by
exchanging the Sales Order and Purchase Order because the Sales
Order would be deemed a conditional acceptance. However, a
conditional acceptance, like a counteroffer, creates a power of
acceptance in the original offeror (here, Buyer). Therefore, if the chairs
were shipped and accepted, Buyer, the original offeror, was deemed to
have accepted Seller’s conditional acceptance/counteroffer by his act of
accepting the chairs. The terms of the contract would be those set out
in the Sales Order (the last form sent) because Seller would be deemed
to have shipped the goods on the terms of the Sales Order and Buyer
would be deemed to have accepted the goods on those terms.

Compare: Same facts as in the example above, except that the

transaction is initiated by a Sales Order sent by Seller, followed by a
Purchase Order sent by Buyer. On these facts, under the last shot rule
of the common law, the shipment and acceptance of the goods would
 form a contract on the basis of the terms in the Purchase Order.

75

Compare: Same facts as in either the example or the comparison

above, except that Seller never sends the goods, or Seller sends the
goods and Buyer rejects them. Under these facts, no contract is
formed. The Sales Order in the example is an offer, but if the goods
were not shipped, or shipped and rejected, there is no acceptance. The
same is true of the Purchase Order offer in the comparison.
(5) U.C.C. rule [§207]
The U.C.C. has changed the mirror image rule regarding contracts for the sale
of goods, so that for such contracts “a definite and seasonable [i.e., timely—see
supra, §§181-189] expression of acceptance … operates as an acceptance even
though it states terms additional to or different from those offered or agreed
upon, unless acceptance is expressly made conditional on assent to the
additional or different terms.” [U.C.C. §2-207(1)]
(a) Sale of goods [§208]
As indicated above, U.C.C. section 2-207 is applicable only to contracts for
the sale of goods (although some courts might apply it to other contracts by
analogy). [See In re Doughboy Industries, Inc., 17 App. Div. 2d 216
(1962)]
(b) Form contracts [§209]
Although in theory U.C.C. section 2-207 is applicable to all contracts for
the sale of goods, the section was really designed to deal with the problem
raised by form contracts. Therefore, as a practical matter, in determining
whether section 2-207 is applicable in a given case, the courts may take into
account whether a form contract is involved (see infra, §507).
(c) “Definite expression of acceptance” [§210]
U.C.C. section 2-207(1) leaves open the issue of what constitutes a definite
expression of acceptance, and the cases have not definitively settled the
issue. It is clear that the offeree’s response must purport to be an
acceptance. It is also clear that since the very purpose of section 2-207 is to
change the mirror image rule, just because a response to an offer diverges
from the offer in some way—even a material way—does not mean the
response is not a definite expression of acceptance within the meaning of
section 2-207. However, if an offeree’s response diverges from the offer in
its individualized terms—such as the description of the subject matter,
price, or quantity—the response probably will not be considered a definite
expression of acceptance within the meaning of section 2-207.
 76

77

Example: On January 2, Buyer sends Seller a form Purchase Order for

 1,000 barrels of nails at $20/barrel, delivery on February 1, payment in 30
days. Seller replies by sending Buyer a form Sales Order which confirms all
the principal terms of Buyer’s offer. However, on the reverse side of the
Sales Order are various printed terms, one of which provides that “any
claims arising under this Sales Order must be submitted to arbitration under
the rules of the American Arbitration Association.” Buyer’s Purchase Order
did not include such a provision. Despite the fact that Seller’s Sales Order
varies from Buyer’s offer in this way, there is a contract under U.C.C.
section 2-207. (For the effect of the added provision, see infra, §219).

Compare: Same facts as in the example above, except that the

typewritten terms on the face of Seller’s Sales Order provide for delivery
on April 1, not February 1, as stated in the Purchase Order. There is no
contract. Although Seller has purported to accept Buyer’s offer, Seller’s
response cannot be fairly characterized as a “definite expression of
acceptance.”
1) “Written confirmation” [§211]
Under U.C.C. section 2-207(1), the rules applicable to a definite
expression of acceptance are also applicable to a written confirmation
of a prior agreement.
(d) Acceptance “expressly made conditional” [§212]
U.C.C. section 2-207(1) is inapplicable by its terms if an acceptance is
“expressly made conditional on the offeror’s assent to the additional or
different terms in the acceptance.”
Example: Same facts as in the example above (supra, §210), except
that Seller’s Sales Order states, “This Sales Order is expressly made
conditional on the buyer’s assent to additional and different terms contained
herein.” There is no contract under U.C.C. section 2-207(1) unless Seller
gives such assent (which rarely happens).
1) Initial effect on contract formation [§213]
The initial effect of a conditional assent clause is dramatic. If a
responsive form contains such a clause, no contract results from the
offeree’s sending the form to the offeror, even though under U.C.C.
section 2-207(1) a contract would result from sending the same form
without a conditional assent clause.

78

2) Effect if performance occurs [§214]

Assume that a conditional assent clause, in what would otherwise be an
acceptance under U.C.C. section 2-207(1), prevents a contract from
resulting from the exchange of forms. In many or most cases, the
parties pay little or no attention to the preprinted terms of a form, and
they perform as if they had a contract—i.e., the seller sends out goods
and the buyer accepts them. In such a case, even though a contract
does not result under U.C.C. section 2-207(1), there is a contract under
U.C.C. section 2-207(3). That section provides, “Conduct by both
parties which recognizes the existence of a contract is sufficient to
establish a contract for sale although the writings of the parties do not
otherwise establish a contract.”
a) Contract terms [§215]
Under U.C.C. section 2-207(3), when the offeree uses a
conditional assent clause but the parties nevertheless go on to
perform, the terms of the contract consist of the written terms to
which the parties agreed, plus any supplementary terms
incorporated under other provisions of the Code. Typically, when
the parties simply fill in printed forms, only the individualized
provisions of each form will agree. As a result, the pre-printed
provisions of both forms will drop out.
Example: Buyco sends Sellco a Purchase Order for 100
widgets to be delivered on April 1 at $5 per widget. Sellco then
sends Buyco a Sales Order promising to deliver 100 widgets on
April 1 at $5 per widget, but containing different warranty
provisions than the Purchase Order. The Sales Order further states
that Sellco’s acceptance of the Purchase Order is conditional on
Buyco’s assent to any additional or different terms in the Sales
Order. At this point, there is no contract because of the conditional
acceptance clause. However, if Sellco ships the widgets and Buyco
accepts the widgets in spite of the lack of a binding contract, a
contract is formed under U.C.C. section 2-207(3). The terms of
the contract consist only of those terms on the Purchase Order and
the Sales Order that agree (100 widgets to be delivered on April 1
at $5 per widget), and any terms that do not agree (the liability
provisions) will drop out.
b) Interpretation [§216]
Because the effects of a conditional assent clause are relatively
drastic, the courts have been reluctant to interpret language in a
form as a conditional assent clause unless it

79
 tracks the language of the conditional assent exception in U.C.C.
section 2-207(1). An example of such tracking is, “Metal-Matic,
Inc.’s acceptance … is hereby expressly made conditional to
purchaser’s acceptance of the terms and provisions of the
acknowledgment form.” [Diamond Fruit Growers, Inc. v. Krack
Corp., 794 F.2d 1440 (9th Cir. 1986)] In contrast, a seller’s
acknowledgment form providing that acceptance of orders was
subject to the terms and conditions of the seller’s form has been
held not to contain a conditional assent clause. It was not enough,
the court said, to make acceptance expressly conditional on the
offeror’s terms. Instead, the acceptance must be made expressly
conditional on the offeror’s assent to those terms. [Dorton v.
Colins & Aikman Corp., 453 F.2d 1161 (6th Cir. 1972)]
1/ Note
Although courts are reluctant to find that a provision is a
conditional assent clause unless it tracks the language of U.C.C.
section 2-207(1), in principle exact tracking is not required. One
court has said that whether an acceptance is expressly
conditional on the offeror’s assent is dependent on the
commercial context of the transaction—in particular, whether a
proposed deal has been closed in commercial understanding.
[Gardner Zemke Co. v. Dunham Bush, Inc., 850 P.2d 319
(N.M. 1993)]
(e) Contract formed by conduct of the parties [§217]
As just pointed out, under U.C.C. section 2-207(3), conduct by both parties
that recognizes the existence of a contract is sufficient to establish a
contract for sale even though the writings of the parties do not otherwise
establish a contract. Application of section 2-207(3) is not limited to those
cases where no contract is formed because the purported acceptance
contains a conditional assent clause. Section 2-207(3) also applies where no
contract is formed by the writings because, for example, the offeree’s
response is not a “definite and seasonable expression of acceptance” within
the meaning of U.C.C. section 2-207(1), but the seller nevertheless ships
the goods and the buyer accepts them.

80
(f) Effect of additional or different terms [§218]
Assume there is a definite and seasonable expression of acceptance that is
not expressly conditional on the offeror’s assent to additional or different
terms. Under U.C.C. section 2-207(1), a contract is formed despite the
presence of the additional or different terms in the acceptance. The next
question is the effect of such additional or different terms. In determining
that effect, U.C.C. section 2-207 draws a distinction between “additional”
terms (i.e., terms that add to the offer but do not contradict it) and
“different” terms (i.e., terms that contradict the terms of the offer).
[U.C.C. §2-207(2)]
1) Additional terms [§219]
Under U.C.C. section 2-207(2), additional terms contained in the
acceptance are to be construed as proposals for additions to the
contract. If the parties are both merchants, these proposed additional
terms become part of the contract, unless:
(i) The offer expressly limits acceptance to the terms of the offer;
(ii) The additional terms would materially alter the contract; or
(iii) The offeror either notifies the offeree within a reasonable time
that he objects to the additional terms or has already notified the
offeree of his objection.
a) Merchant [§220]
Under the U.C.C., a “merchant” is a person who deals in the kind
of goods involved in the transaction or who otherwise holds herself
out as having knowledge or skill peculiar to the practices or goods
involved in the transaction. [U.C.C. §2-104(1)]
Example: Ann, a nonmerchant, sends an offer to Widgetco, a
merchant, offering to buy widgets. Widgetco replies with a Sales Order
agreeing to the terms of the offer but adding, “Any complaints
concerning the widgets must be made in writing within 12 months after
the widgets have been received.” A contract is formed, but because
Ann is a nonmerchant, the terms of the contract are limited to those
contained in Ann’s offer. The Sales Order’s additional terms are
deemed to be proposals that Ann may accept or reject.

Example: Same facts as above, except Ann is a merchant. If Ann

does not notify Widgetco that she objects to this

81

term, it would probably become part of the contract. Both Ann and
 Widgetco are merchants; Ann’s offer did not expressly limit acceptance
to the terms of the offer; and the additional term would probably not
materially alter the contract.

Compare: Same facts as in the example above, except that

Widgetco’s Sales Order contains a term on the reverse side disclaiming
all warranties. There is a contract under section 2-207(1). However, the
disclaimer does not become part of the contract under section 2-207(2)
because it would materially alter the contract.
2) Different terms [§221]
U.C.C. section 2-207(2) does not provide any guidance about the effect
of different (rather than additional) terms. Courts and commentators
have struggled to decide what effect should be given to different terms
in the acceptance, in light of the fact that section 2-207(2) refers to
additional terms, but not to different terms. Three broad views have
emerged.
a) Knockout rule [§222]
The majority rule is that different terms do not become part of the
agreement, but they negate—knock out—those terms in the offer
from which they differ. This rule has some modest support in
Comment 6 to U.C.C. section 2-207, which provides,
Where clauses on confirming forms sent by both parties
conflict each party must be assumed to object to a clause of
the other conflicting with the one on the confirmation sent
by himself. As a result the requirement that there be a
notice of objection which is found in subsection (2) is
satisfied and the conflicting terms do not become part of the
contract. The contract then consists of the terms originally
expressly agreed to, terms on which the confirmations
agree, and terms supplied by this Act ….
The support given to the knockout rule by Comment 6 is limited,
because Comment 6 refers only to “confirming forms.” This seems
to mean cases in which the parties have already made an oral
contract and sent writings to confirm it. In contrast, in the typical
case covered by section 2-207, the contract, if any, consists of an
offer and the form sent by the other party in response to the offer.

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Moreover, the reference in Comment 6 to subsection (2) implies

that the comment deals only with additional terms, because only
 additional terms are referred to in subsection (2). Nevertheless, the
knockout rule is supported very strongly by the purpose of section
2-207 because under this rule, neither party gets the unfair
advantage of having its preprinted terms prevail. Instead, the
contract is on fair terms: those terms that the parties have both
agreed to, and those terms that the U.C.C. supplies in the absence
of agreement.
b) Different terms treated like additional terms [§223]
Standing in opposition to the knockout rule are two minority views.
Under one minority view, different terms are treated like additional
terms. [See Steiner v. Mobil Oil Corp., 20 Cal. 3d 90 (1997)]
This view finds support in Comment 3 to U.C.C. section 2-207,
which states that “[w]hether or not additional or different terms
will become part of the agreement depends upon the provisions of
subsection (2).” (Emphasis added.) In theory, under this view
different terms might in some cases become part of the agreement
under section 2-207(2) if (i) the offer has not expressly limited
acceptance to the terms of the offer, (ii) the different terms do not
materially alter the offer, and (iii) the offeror has not given notice of
objection to the different terms or does not object within a
reasonable time. In practice, however, different terms will usually
drop out under this view, because generally they will materially
alter the terms of the offer.
c) Different terms always drop out [§224]
Under another minority view, different terms in the acceptance
always drop out. [Air Products & Chemicals, Inc. v. Fairbanks
Morse, Inc., 206 N.W.2d 414 (Wis. 1973)] This view finds
support in the language of section 2-207(2), which provides that
under defined circumstances additional terms become part of the
contract, but does not provide that different terms become part of
the contract. Therefore, under this view, the contract will contain
any additional terms in the acceptance that meet the section 2-
207(2) test, but not any different terms in the acceptance.
However, the result under this view is in conflict with the purpose
of section 2-207, which is to get away from giving one party (here,
the offeror) an unfair advantage by having her preprinted terms
automatically control.

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e. Termination of power of acceptance by revocation [§225]

A revocation is a retraction of an offer by the offeror. The general rule is that a
revocation terminates the offeree’s power of acceptance, provided of course that the
offer has not already been accepted.
(1) When revocation is effective [§226]
Under the great weight of authority, a revocation is effective only when received
by the offeree. [Rest. 2d §42] (In contrast, an acceptance is usually effective on
dispatch.)
(a) Minority view [§227]
By statute, California and a few other states follow a minority view under
which a revocation is effective on dispatch.
(2) Communication of revocation [§228]
To be effective, a revocation must normally be communicated by the offeror to
the offeree (unless a statute, like that of California, provides otherwise).
(a) Exception—offer to the public [§229]
An offer made to the public at large, such as a reward, can normally be
revoked by publishing the revocation in the same medium as that in which
the offer was made. Such publication terminates the power of acceptance
even of those persons who saw the offer but did not see the revocation.
[Shuey v. United States, 92 U.S. 73 (1875)]
(b) Exception—indirect revocation [§230]
An offer is also deemed revoked, despite the absence of direct
communication between the offeror and the offeree, if the offeree obtains
reliable information that the offeror has taken action showing that he has
changed his mind. (This is often known as an “indirect revocation,” or “the
rule of Dickinson v. Dodds.”) [Dickinson v. Dodds, 2 Ch. D. 463
(1876)]
Example: On June 10, Dodds offers to sell real property to Dickinson
for £800, the offer to be held open until June 12. On June 11, Dickinson
learns from his own agent that Dodds has sold the property to a third party.
On June 12, Dickinson hands Dodds a written acceptance of Dodds’s offer.
The acceptance is ineffective. The fact that Dickinson obtained reliable
information that Dodds changed his mind has the same effect as a
revocation. [Dickinson v. Dodds, supra; Rest. 2d §43]
 84

85

(3) Revocability of “firm offers” [§231]

A firm offer is an offer that by its express or implied terms is to remain open for
a certain period (e.g., “This offer is good until January 10,” or “You have two
weeks to decide whether to accept”). The general rule is that a revocation of a
firm offer, prior to the expiration of the period during which it was to remain
open, has the same effect as the revocation of an ordinary offer—i.e., such a
revocation terminates the power of acceptance despite the fact that the offer by
its terms was to remain open. [See, e.g., Dickinson v. Dodds, supra] However,
this rule is subject to some important exceptions.
Example: Under the facts of the example above, (supra, §230), Dickinson’s
June 12 acceptance is ineffective, even though Dodds promised to hold his offer
open until that date, because Dodds’s earlier revocation terminated Dickinson’s
power of acceptance.

(a) Rationale—no consideration

The rationale of the firm offer rule is as follows: The term of the offer that
states that the offer will be held open for a certain period is, in effect, a
promise by the offeror to hold the offer open for the designated period. As
discussed previously, a promise without consideration is not binding. (See
supra, §1.) Therefore, the promise to hold the offer open for a fixed period
is not binding, and the offer is just as revocable as it would have been if the
offeror had not promised to hold it open for a certain period.
(b) Exceptions
1) Options [§232]
Because the firm offer rule is based on the rationale that there is no
consideration for the offeror’s promise to hold the offer open for a
certain period, if the offeree gives consideration for the promise, the
offer is irrevocable for the stated period. [Humble Oil & Refining
Co. v. Westside Investment Corp., 428 S.W.2d 92 (Tex. 1968)] A
firm offer in which consideration has been given for the promise to hold
the offer open for a certain period is called an “option.”
2) Nominal consideration [§233]
Even if there is no true consideration for a firm offer, under the
majority rule the offer is irrevocable if it recites a purported or nominal
consideration—at least if the offer is in writing and proposes an
exchange on fair terms within a reasonable time. [Rest. 2d §87(1)(a)]

86

3) Reliance [§234]
A firm offer is also irrevocable if the offeror should have reasonably
foreseen that the offer would induce reliance by the offeree prior to
acceptance, and such reliance occurs. [Drennan v. Star Paving Co.,
supra, §179]
Example: Contractor Cathy plans to bid on a contract to construct
a school building for School Board. Bids are to be submitted to School
Board by 5:00 p.m. on February 1, and will be opened that evening.
Before making up her own bid, Cathy asks various subcontractors,
including Steve, to give her sub-bids for paving the schoolyard. On
January 31, Steve gives Cathy a written bid to do the paving for
$24,000, and states that this bid will be held open for acceptance by
Cathy until February 3. Cathy uses Steve’s paving bid in making up her
own bid, and early on February 1, Cathy submits her bid to School
Board. When the bids are opened at 5:00 p.m. on February 1, Cathy’s
bid is the lowest, and Cathy is immediately awarded the contract by
School Board. At 9:00 a.m. the next day, before Cathy has accepted
Steve’s sub-bid, Steve calls Cathy and attempts to revoke the sub-bid.
The attempted revocation is ineffective. Steve should have reasonably
foreseen that Cathy would rely on Steve’s paving bid in making up the
terms of Cathy’s own bid. Therefore, Steve’s promise to hold open his
sub-bid until February 3 is enforceable, and the subbid is irrevocable
until that date.
a) Implied promise to hold offer open [§235]
A promise to hold an offer open may be implied rather than
express. Thus, in the above example, even if Steve had not
explicitly promised to hold his paving bid open until February 3,
there would be an implied promise to hold it open until a reasonable
time after School Board awarded the contract.
b) One-sided effect of rule [§236]
Note that under the foregoing rule, subcontractor Steve is bound to
perform if general contractor Cathy gets the contract, but normally
Cathy would not be bound to give the subcontract to Steve even if
Cathy uses Steve’s bid in making her bid and is awarded the
contract. This has been criticized as “commercial imbalance.” [See
19 U. Chi. L. Rev. 237 (1952)]

87

1/ Note
In certain limited cases, however, Cathy may be bound to
Steve. (See infra, §§288-289.)
c) Older view [§237]
 Some cases have allowed an offeror to revoke a firm offer
notwithstanding the offeree’s reliance. However, most of these are
older cases and probably would not be followed today. [See, e.g.,
James Baird Co. v. Gimbel Bros., 64 F.2d 344 (2d Cir. 1933)]
d) Restatement view [§238]
Restatement Second has explicitly adopted the rule that reliance on
a firm offer makes the offer irrevocable, at least to the extent
necessary to avoid injustice. Under Restatement Second section 87,
“an offer which the offeror should reasonably expect to induce
action or forbearance of a substantial character on the part of the
offeree before acceptance and which does induce such action or
forbearance is binding as an option contract to the extent necessary
to avoid injustice.” [Rest. 2d §87]
4) Contracts for the sale of goods—U.C.C. section 2-205 [§239]
Under U.C.C. section 2-205, a signed, written offer by a merchant to
buy or sell goods, which gives assurance that it will be held open, is not
revocable for lack of consideration during the time stated (or if no time
is stated, for a reasonable time). This period of irrevocability cannot
exceed three months.
a) Operation of U.C.C. section 2-205 [§240]
For U.C.C. section 2-205 to be applicable, the following conditions
must be satisfied:
1/ Written and signed [§241]
The offer must be in writing, and must be signed by the
offeror-merchant. Furthermore, if the offer is on a form
prepared by the offeree, the provision to hold the offer open
must be separately signed by the offeror.
2/ Irrevocability [§242]
The offer must state that it is irrevocable. However, the offer
need not state the time during which it is irrevocable. If no time
is stated and all the other requirements of section 2-205 are
met, the offer will be irrevocable for a reasonable time, not to
exceed three months.

88

3/ Sale of goods [§243]

Like all other provisions of U.C.C. Article 2, section 2-205
relates only to contracts for the sale of goods.
4/ Merchant offeror [§244]
 Unlike most provisions of Article 2, section 2-205 is limited to
offers by merchants.
Example: On January 2, Liz, the owner of a textile
company, makes a written offer to sell her personal grand piano
to Donna for $3,000. The offer provides that it will be held
open until January 10. On January 4, Liz revokes her offer.
The revocation is effective. In selling her personal piano, Liz is
not a merchant within the meaning of section 2-104. (See
supra, §220.) Therefore, section 2-205 is inapplicable and,
assuming that Donna has not foreseeably relied on Liz’s offer,
the offer is revocable under the general common law rule.
(4) Revocability of offers for unilateral contracts [§245]
An offer that is to be accepted by performance of an act is known as an offer
for a unilateral contract. (In contrast, an offer that is to be accepted by a
promise is known as an offer for a bilateral contract.) Special problems arise
when a person who has made an offer for a unilateral contract attempts to
revoke the offer after performance has begun but before performance has been
completed.
(a) Old rule—offer revocable until performance is complete [§246]
Under the old rule, an offer for a unilateral contract was revocable until the
offeree had completed performance of the act specified in the offer. Under
this rule, an offer for a unilateral contract was deemed revocable even
though the offeree had begun performance of the act in reliance on the
offer, as long as performance had not yet been completed. [Petterson v.
Pattberg, 248 N.Y. 86 (1928)]
Example: Under this rule, at least in theory, if A offered B $50 to cross
the Brooklyn Bridge, A could revoke when B was halfway across. [26 Yale
L.J. 136 (1916)]
1) Rationale
The rationale of the old rule was that an offer for a unilateral contract
can be accepted only by performance of an act, and because an offer is
revocable until accepted, until the act was

89

completed there was no acceptance and therefore the offer was

revocable.
2) Note
Not all courts followed this rule. [See, e.g., Brackenbury v. Hodgkin,
 102 A. 106 (Me. 1917)—once performance had begun, the offeror was
not allowed to revoke her promise to leave her farm to her daughter
and son-in-law if they would care for her during her life]
(b) Modern rule—offer for unilateral contract not revocable after
performance has begun [§247]
Modern courts reject the old rule. Under the modern rule, an offer for a
unilateral contract cannot be revoked once performance has begun, unless
the performance is not completed within a reasonable time.
1) Rationale
The rationale of the modern rule is as follows: An offer for a unilateral
contract includes an implied promise to hold the offer open for a
reasonable time if the offeree makes a substantial beginning of
performance prior to revocation. The beginning of performance in
reliance on this implied promise renders the offer irrevocable.
(c) Restatement Second section 45 [§248]
The modern rule is embodied in Restatement Second section 45, which
provides that:
(1) Where an offer invites an offeree to accept by rendering a
performance and does not invite a promissory acceptance, an
option contract is created when the offeree tenders or begins the
invited performance or tenders a beginning of it. (2) The offeror’s
duty of performance under any option contract so created is
conditional on completion or tender of the invited performance in
accordance with the terms of the offer.
Section 45 is widely followed by the courts. The following three aspects of
the rule embodied in section 45 are noteworthy:
1) Offer open for reasonable time [§249]
Under section 45, the offeror impliedly promises that once performance
has begun, she will hold the offer open for the time stated in the offer,
or if no time is stated, for a reasonable time. Thus the offeror can
revoke before the offeree begins

90

performance (subject to a possible exception in case of reliance by the

offeree other than performance; see supra, §238). Furthermore, the
offeror can revoke even after the offeree begins performance if the
offeree does not complete performance within the time given or a
reasonable time.
2) Preparation vs. performance [§250]
A problem may arise when the offeror revokes after the offeree has
begun preparing to perform, but before the offeree has actually begun
performing. For example, suppose the offer is for building a shed.
Under the preparation/performance distinction, if the offeree has only
purchased lumber, but has not begun to put up the shed, it might be
said that the offeree has begun preparing to perform, but has not begun
to perform.
a) Restatement First [§251]
The Comment to Restatement First section 45 stated that
preparation, as opposed to the beginning of performance, was not
sufficient to make an offer for a unilateral contract irrevocable.
1/ Comment
The preparation/performance distinction is often simpler to state
than it is to apply. Furthermore, it is not clear that courts will
always make the distinction.
b) Restatement Second [§252]
Although the Comment to Restatement Second section 45
continues to draw a distinction between preparation and
performance, the Comment also recognizes that the offeree’s
preparation may constitute reliance of a type that contract law
should protect. Such reliance may prevent revocation under the
principle reflected in Restatement Second section 87 (see supra,
§238), even if section 45 is inapplicable because performance has
not begun.
1/ Significance
Since preparation to perform is likely to constitute reliance that
may make the offer irrevocable under section 87, why does
Restatement Second draw a distinction between preparation and
performance under section 45? The answer seems to be a
difference in the measure for damages. Under Restatement
Second, if the offeree in a unilateral contract has begun
performance, so that the rule embodied in section 45 is
applicable, the offeree should normally

91

be entitled to expectation damages if the offeror revokes.

However, if the offeree has simply begun preparation, so that
the case falls under the principle of Restatement Second section
87, the offeree may be entitled only to reliance damages. (On
these two measures of damages, see infra, §§876-878.)
f. Termination of power of acceptance by operation of law [§253]
An offeree’s power of acceptance may also be terminated by operation of law
through the death or incapacity of the offeror or as a result of changed
circumstances.
(1) Death or incapacity of offeror [§254]
An offeree’s power of acceptance is terminated by the offeror’s death or
incapacity, whether or not the offeree knows of the death or incapacity. [Rest.
2d §48]
Example: On January 2, Fred sends Ginger a written offer to buy Ginger’s
property, Orangeacre, for $50,000, the offer to be held open until January 11.
On January 5, Fred dies. On January 7, Ginger, unaware of Fred’s death, mails
an acceptance of Fred’s offer. The acceptance is ineffective, because Ginger’s
power of acceptance was terminated on January 5 by Fred’s death.

Example: Same facts as in the example above, except that on January 5,

Fred becomes incompetent by reason of a stroke. Again, Ginger’s acceptance is
ineffective.
(a) Options [§255]
Note, however, that death or incapacity of the offeror does not terminate
the offeree’s power of acceptance under an option (i.e., an offer in which
the offeree has given the offeror consideration to hold the offer open for a
fixed period of time), at least where individual performance by the decedent
was not an essential part of the proposed contract. So, for example, the
grant of an option to purchase property is binding on a decedent’s estate.
[Rest. 2d §37]
1) Unilateral contracts [§256]
As to unilateral contracts, the rule, embodied in Restatement

92

Second section 45, is that the offeree’s power of acceptance is not

terminated by the offeror’s death or incapacity once the offeree has
begun performance.
 Example: On January 2, Owner writes to Painter, “If you paint my
country house dark green by January 15, I will pay you $500.” On
January 3, Painter begins painting the house. On January 4, Owner
dies, unbeknownst to Painter. Painter’s power of acceptance is not
terminated by Owner’s death. Owner’s offer was for a unilateral
contract, and when Painter began performance, the offer became
irrevocable under the principle embodied in section 45.

Compare: Same facts as in the example above, except that Owner

writes to Painter, “If you promise to paint my country house dark green
by January 15, I will pay you $2,000. Let me know your answer by
January 10.” Again, on January 4, Owner dies, unbeknownst to
Painter. On January 5, Painter sends a letter accepting Owner’s offer.
Painter’s acceptance is not effective. Owner’s offer was for a bilateral
contract, and Painter’s power of acceptance was therefore terminated
by Owner’s death.
a) Rationale
An option is not terminated by the offeror’s death or incapacity,
and under Restatement Second section 45, once performance has
begun an offer for a unilateral contract is treated like an option.
(2) Changed circumstances [§257]
The offeree’s power of acceptance may also be terminated by operation of law
as a result of certain very limited types of changed circumstances, such as
supervening illegality of the proposed contract or destruction of its subject
matter. (See the discussion of changed circumstances infra, §§845-862.)

C. Acceptance
1. Introduction [§258]
Assuming there is an offer and the offeree’s power of acceptance is still open, the next
question is whether the offer has been accepted. Three major issues are raised in
connection with this question:

93

(i) What kind of acceptance is required (promise or act);

(ii) When can silence operate as an acceptance; and
(iii) What is the effect of a purported acceptance that deviates from the terms of the
offer?
2. Is Offer for Unilateral or Bilateral Contract? [§259]
An offer may require acceptance by either a promise or an act.

a. Acceptance of offer for bilateral contract [§260]

An offer that requires acceptance by a promise is called an offer for a bilateral
contract.
(1) General rule—promissory acceptance required [§261]
The general rule is that an offer that requires acceptance by a promise can be
accepted only by a promise, not by an act. [See White v. Corlies, 46 N.Y. 467
(1871)] (Note, however, that the required promise may be either express or
implied, and in some cases a promise can be implied from an act (see infra,
§266).) As it is sometimes put, the offeror is master of her offer.
Example: On January 2, Owner says to Painter, “I promise to pay you
$500 if you promise to paint my garage dark green and to finish the job by
January 10. I must have your promise by January 5.” Painter makes no
promise, but on January 4, while Owner is away for the weekend, Painter
begins painting Owner’s garage. On January 5, Owner (who is unaware that
Painter has begun painting) calls Painter and revokes the offer. There is no
contract even though Painter has begun to perform. Owner’s offer was for a
bilateral contract and could be accepted only by Painter’s promise. Because
Painter had made no promise prior to the revocation, the revocation was
effective. (Painter’s reliance does not limit Owner’s power to revoke, because it
was unreasonable for Painter to begin painting Owner’s garage before accepting
Owner’s offer, and only reasonable reliance prevents an offeror from revoking.)

Compare: While Owner and Painter are next to Owner’s fence, Owner
says to Painter, “I will give you $200 if you agree to paint this fence.” Painter
immediately picks up a paint brush and begins to paint the fence. A contract is
formed. Owner’s offer required an acceptance by promise, but under the
circumstances a promise can be implied from Painter’s act.
(a) Possible exception—tender of full performance [§262]
Despite the general rule that an offer for a bilateral contract can be

94

accepted only by a promise, it is sometimes said that such an offer can be

accepted, without a promise, by full performance prior to termination of
the offeree’s power of acceptance.
1) Two views
a) Restatement First [§263]
 The major support for this exception was Restatement First section
63, which provided that a contract was formed where an offer
called for acceptance by a promise and the offeree (i) fully
performed, or tendered full performance, before his power of
acceptance had terminated; and (ii) notified the offeror of that fact
within the time allowed for accepting by promise.
Example: Farmer writes to Worker, “I will pay you $100 for
plowing Flodden Field if you will promise by the end of Monday to
plow the field by a week from Monday.” Worker makes no
promise, but begins and completes plowing Flodden Field on
Sunday and notifies Farmer on Monday that the plowing has been
completed. Restatement First section 63 took the position that on
these facts, a contract was formed.
1/ Rationale
In such a case, the offeror is not prejudiced by getting the
“wrong” kind of acceptance, because she gets more than, or at
least as much as, she bargained for.
b) Restatement Second [§264]
Restatement Second has dropped Restatement First section 63 on
the theory that the rule in section 63 involved a departure from the
basic principle that the offeror is master of his offer. [Rest. 2d §62]
Thus, the status of the rule embodied in Restatement First section
63 is now uncertain.
(2) Modes of promissory acceptance [§265]
Note that even though an offer for a bilateral contract can be accepted only by a
promise, the promise need not necessarily be verbal.
(a) Promise implied from offeree’s conduct [§266]
As discussed above, in some cases, a promise may be implied in fact from
the offeree’s conduct (see supra, §156).

95

Example: Owner says to Painter, “I promise to pay you $500 if you

promise to paint my garage dark green.” Painter nods her head yes. Under these
circumstances, there is a contract. Painter’s nodding of her head is a promise to
perform the painting job and constitutes an acceptance of Owner’s offer.

Example: Same facts as in the example above, except that when Owner
makes his offer, Painter does not nod her head. Instead, she immediately (and in
 sight of Owner) picks up a paintbrush and begins painting Owner’s garage dark
green. Again, there is a contract. Under the circumstances, Painter’s act of
beginning to paint is equivalent to nodding her head yes. It constitutes a promise
to perform the painting job and is therefore an acceptance of Owner’s offer.
(b) Act designated by offer to signify a promise [§267]
A comparable case is that in which the offer provides that the offeree can
do some act to signify her promise. In that case, performance of the act
constitutes a promissory acceptance.
Example: Buyer sends Seller a written offer to buy Seller’s car for
$900. The offer states, “If you want to accept my offer, let me know by
leaving your car in my driveway on Thursday.” Seller can accept by leaving
her car in Buyer’s driveway on Thursday. If Seller does so, a bilateral
contract is formed.
1) Note
In such cases, doing the act specified for signifying acceptance is not
the bargained-for consideration. It merely signifies the return promise
(e.g., in the example above, to sell the car for $900).
2) Limitation
The offer cannot designate as an act signifying acceptance an act that
the offeree might very well do anyway. Thus, in the example above, if
Buyer had written, “If you want to accept my offer, let me know by
parking your car in your own garage on Thursday,” and Seller goes
home Thursday evening and parks her car in her own garage with no
intent to accept Buyer’s offer, there is no contract.
(c) Silence as acceptance [§268]
In some situations, a promissory acceptance may even be inferred from the
offeree’s silence (see infra, §§300-313).

96

(3) Communication of acceptance of offer for bilateral contract [§269]

The problem of whether an offeree must communicate acceptance normally
does not arise in the case of an offer for a bilateral contract, because normally
such an offer can be accepted only by a communicated promise. However,
there are several instances in which this is not true:
(a) Mailbox rule [§270]
Under the so-called mailbox rule (discussed infra, §315), where use of the
mail, telegrams, or the like is a reasonable method of communicating an
acceptance, the acceptance normally is effective when dispatched. This is
 true even though the acceptance does not actually reach the offeror
because it is lost in the mail. [Rest. 2d §56]
(b) Waiver of communication [§271]
In some cases, the offer provides that the offeree must “accept” or
“approve” the offer, but expressly waives communication of the
acceptance or approval. In such cases, a contract is formed when the
offeree accepts or approves, even before he communicates the acceptance.
[International Filter Co. v. Conroe Gin, Ice & Light Co., 277 S.W. 631
(Tex. 1925); Rest. 2d §56]
Example: On November 1, Ice Manufacturer makes an offer, in the
form of a purchase order, to Filter Company’s traveling sales representative
for a water purifying machine, shipment to be made on or about December
1. The order provides, “This order becomes a contract when approved by
an executive officer of Filter Company at its home office.” On November
3, an executive officer of Filter Company enters a notation of approval on
the order. On November 4, before Filter Company has given notice of its
approval, Ice Manufacturer calls Filter Company and attempts to revoke
the offer. The revocation is ineffective because a contract was formed on
November 3, when the notation was made. [International Filter Co. v.
Conroe Gin, Ice & Light Co., supra]
1) Implied condition of notice [§272]
Even though a contract is formed in such cases when the offeree
accepts, it may be an implied condition that notice of the acceptance be
sent by the offeree within a reasonable time after the acceptance is
effective, so that the offeror knows that the contract is on. If such a
condition is implied, a contract would be formed when the offeree
approves the offer, so that the offer would no longer be revocable.
However, the contract would not be enforceable unless the offeree
gave notice of the acceptance within a reasonable time thereafter.

97

2) Implied waiver [§273]

Communication of an acceptance may be impliedly waived in cases
where silence may constitute acceptance (see infra, §§300-313).

b. Acceptance of offer for unilateral contract [§274]

An offer that calls for acceptance by performance of an act is known as an offer for
a unilateral contract. Such an offer can be accepted only by performance—not by a
promise.
 Example: Owner says to Painter, “I am going away until next Friday. If you
have painted my garage dark green by the time I return, I will pay you $500. Don’t
bother to promise or not promise that you will do it: I am just telling you that if you
do it, I will pay.” Painter replies, “It’s no bother to promise—I promise to paint the
garage.” An hour later (and before Painter begins to paint), Owner revokes the offer.
The revocation is effective. No contract was formed by Painter’s promise, because
Owner’s offer could be accepted only by an act. Restatement Second sections 45
and 87 (supra, §§238, 248) do not prevent Owner from revoking because Painter
had not begun to perform and had not otherwise relied on the offer.
(1) Notice of acceptance [§275]
Recall that in an offer for a bilateral contract, a promissory acceptance is
normally required—subject to the limited exceptions discussed supra (§§262-
264)—and the acceptance itself will therefore normally be a notice of
acceptance. In an offer for a unilateral contract, however, a contract may be
formed by beginning or completing performance, even though the offeror does
not immediately know that performance has begun or been completed.
Therefore, a problem of notice to the offeror may arise in unilateral contract
cases.
(a) Notice of completed performance required [§276]
The general rule is that although a unilateral contract is formed when the
offeree completes performance, the offeror’s obligation under the contract
is subject to the implied condition that he receive notice of the offeree’s
performance within a reasonable time thereafter. Thus, if an offeree under
a unilateral contract performs in full, but fails to notify the offeror within a
reasonable time after completion that she has completed performance, a
contract will be formed by the performance, but the offeror’s obligation
under the contract will be discharged by the failure to give notice. [Bishop
v. Eaton, 37 N.E. 665 (Mass. 1894)]
Example: On April 1, Susan writes to Joe as follows: “If you guarantee
any debt of my brother Chris, I will reimburse you

98

for any losses you suffer as a result of the guarantee.” On March 1, Joe
guarantees to Megastore, a creditor of Chris, a debt that Chris incurs. On
March 3, before Joe has given Susan notice of the guarantee, Susan
telephones Joe and revokes the offer. The revocation is ineffective. A
contract was formed when Joe completed performance by making the
guarantee. Although Joe was obliged to notify Susan that he had made the
guarantee within a reasonable time after doing so, a reasonable time had not
elapsed before Susan tried to revoke.
 Compare: Same facts as in the example above, except that Joe does
not give Susan notice of the guarantee until he is sued by Megastore two
years later. Susan is not bound. A contract between Susan and Joe was
formed when Joe gave the guarantee, but Susan’s obligation under the
contract was discharged by Joe’s failure to give notice within a reasonable
time.
1) Diligence in giving notice [§277]
It is sufficient that the offeree uses reasonable diligence to give notice of
completed performance. If the offeree uses such diligence, the offeror
will be bound even though for some fortuitous reason (such as loss of a
letter in the mail), the notice does not actually reach the offeror.
[Bishop v. Eaton, supra]
2) Exceptions [§278]
An offeree under a unilateral contract who has completed performance
is not required to give notice of that fact to the offeror if either:
(i) The offeror expressly or impliedly waives notice;
(ii) The performance would come to the offeror’s attention within a
reasonable time in the normal course of things and the offeror has
not explicitly required notice; or
(iii) The performance actually comes to the offeror’s attention within
a reasonable time.
[Midland National Bank v. Security Elevator Co., 200 N.W. 851
(Minn. 1924); Rest. 2d §54]
(b) Contracts for the sale of goods [§279]
In most cases, the offeree under a unilateral contract need only notify

99

the offeror that performance has been completed—not that performance

has begun. However, in the case of a contract for the sale of goods, U.C.C.
section 2-206(2) provides that “where the beginning of a requested
performance is a reasonable mode of acceptance, an offeror who is not
notified of [such beginning of performance] within a reasonable time may
treat the offer as having lapsed before acceptance.”
(2) Subjective intent of offeree [§280]
An offer for a unilateral contract contemplates acceptance by performance of an
act. Suppose the act called for by an offer is performed by either (i) a person
who has no knowledge of the offer or (ii) a person who knows of the offer but
who is principally motivated to perform by some reason other than the offer.
The two situations are treated differently.
(a) Performance without knowledge of offer
1) General rule [§281]
The general rule is that in the case of an offer for a unilateral contract,
performance of the requested act by a person who had no knowledge
of the offer at the time she performed the act does not form a
contract. [Broadnax v. Ledbetter, 99 S.W. 1111 (Tex. 1907)]
Example: A offers a reward of $50 for his lost wallet. Without
knowing of the reward, B finds A’s wallet and returns it to A. B cannot
collect the reward.
2) Minority rule [§282]
A few cases have held that in the case of a reward offer, a contract is
formed even though the offeree had no knowledge of the offer, on the
theory that persons should be encouraged to take virtuous action in
hope of receiving a reward. [Dawkins v. Sappington, 26 Ind. 199
(1866)]
a) Statutory rewards [§283]
Also, it is sometimes held that knowledge is not required in the case
of a reward that is offered by statute, on the ground that liability in
such a case is statutory rather than contractual. [Choice v. Dallas,
210 S.W. 753 (Tex. 1919)]
(b) Offer not the principal motive for performance
1) General rule [§284]
If an actor knows of an offer for a unilateral contract at the

100

time he performs the act called for by the offer, the general rule is that a
contract is formed even though the offer was not the principal motive
for performing the act. [Klockner v. Green, 254 A.2d 782 (N.J.
1969)]
Example: Same facts as in the example at §281, except that B
knew of the reward but returned the wallet principally because of
ethical considerations. B is entitled to collect the reward.
2) Exception—involuntary acceptance [§285]
Performance of the act requested by an offer for a unilateral contract
might not form a contract if the act is done involuntarily. [Vitty v.
 Eley, 51 App. Div. 44 (1900)]
Example: Store Owner offers a reward for information leading to
the arrest of the person who burglarized her store. Buddy, a friend of
the criminal, knows of the reward and is interrogated by the police.
During the interrogation, Buddy is forced by threat of prosecution into
giving information that leads to the arrest of the true perpetrator. Buddy
might not be able to collect the reward.
(3) Obligation of offeree [§286]
As stated previously, an offeree’s acceptance of an offer for a bilateral contract
binds the offeree as well as the offeror. However, if the offer is for a unilateral
contract, the offeree’s beginning of performance obliges the offeror to hold the
offer open (see supra, §247), but does not ordinarily oblige the offeree to
complete performance, because the offeree has never promised anything.
(a) Exception [§287]
In some cases, an offeree who has begun to perform under an offer for a
unilateral contract should know that the beginning of performance is likely
to come to the offeror’s notice, and that the offeror is likely to treat the
beginning of performance as an implied promise by the offeree to complete
the performance. This is most likely to be true where the offeree’s failure to
complete performance will make the offeror worse off than he would have
been if the offeree had not begun. For example, if the performance consists
of transporting goods, and the offeree begins to transport the goods, there is
an implied promise that he will not abandon the goods midway.

101

Because the offer is for a unilateral contract and therefore can be accepted
only by an act, an implied promise to complete once performance has
begun will not create a bilateral contract. However, if the offeror relies on
such an implied promise by the offeree, the reliance might make the implied
promise enforceable under the reliance principle. [Rest. 2d §90]
(4) Use of subcontractor’s bid [§288]
Suppose a general contractor uses a specific subcontractor’s sub-bid in making
up his own bid. Does the general contractor’s conduct in using the sub-bid
constitute an acceptance of the sub-bid, so that a contract is formed in which
the general contractor’s obligation to perform is conditioned on the award of the
contract to the general contractor? As a matter of contract law, the answer is
no, because the contemplated mode of accepting the sub-bid is assent by the
general contractor, not the act of using the bid. [Southern California
Acoustics Co. v. C.V. Holder, Inc., 71 Cal. 2d 719 (1969); Williams v.
Favret, 161 F.2d 822 (5th Cir. 1947)]
 (a) Statutory approaches [§289]
However, in some states, statutes provide that a general contractor who
bids on a government job must include with his bid a list of all
subcontractors whose sub-bids he has used, and that except under
designated circumstances, the general contractor may not substitute any
subcontractors for those he has listed. If the general contractor makes an
impermissible substitution, the subcontractor whose sub-bid was used can
bring suit against the general contractor under the statute. [Southern
California Acoustics Co. v. C.V. Holder, Inc., supra]

c. Summary of consequences of unilateral vs. bilateral contract offer [§290]

As a practical matter, there are two particularly important consequences of whether
an offer is for a unilateral or a bilateral contract.
(1) Mode of acceptance [§291]
The first consequence concerns whether the mode of acceptance used by an
offeree was proper. If an offer is for a bilateral contract and the offeree
performs an act without having made a promise, the offeror can justifiably take
the position that no contract was formed, on the ground that the offer required
acceptance by promise, not by performance. Similarly, if an offer is for a
unilateral contract and the offeree makes a promise without having begun to
perform, the offeror can justifiably take the position that no contract was
formed, on the ground that the offer required acceptance by performance, not
by promise.
 102

(2) Revocability [§292]

The second consequence concerns whether an offeree who has begun
performance without having made a promise is protected against termination of
his power of acceptance by revocation or death of the offeror. If the offer was
for a unilateral contract, such an offeree will be protected under the rule of
Restatement section 45 (i.e., the offer is irrevocable after the start of
performance). However, such an offeree may not be protected if the offer was
for a bilateral contract. Although reasonable reliance on an offer might make the
offer irrevocable even if the offer is for a bilateral contract, beginning to perform
before making a required promissory acceptance might not constitute reasonable
reliance.
(a) Note
In many cases, these problems do not arise, either because acts can often
 be interpreted as promises (see supra, §267), or because offers can often
be accepted by either a promise or an act (see infra, §§293-298).

103

d. Offers calling for acceptance by either a promise or an act [§293]

The analysis until now has assumed that an offer is for either a bilateral or a
unilateral contract. However, in many cases the offer is ambiguous as to whether it
requires acceptance by a promise or by an act.
Example: Owner says to Painter, “I will give you $500 to paint my house.” It is
ambiguous whether this is an offer for a bilateral contract to be accepted by a
promise (“I accept”), or for a unilateral contract to be accepted by performance
(painting the house).
(1) Restatement First rule [§294]
Restatement First provided that in case of doubt whether an offer called for
acceptance by a promise or by an act, it was to be presumed that the offer
invited the formation of a bilateral contract by a promissory acceptance. [Davis
v. Jacoby, 1 Cal. 2d 370 (1934)]
(a) Criticism
The Restatement First rule created a problem where there was doubt about
what kind of acceptance was required and the offeree interpreted the offer
as calling for acceptance by an act and began performance. Under the
Restatement First rule, where there was doubt about what type of
acceptance was required, an offer was presumed to require acceptance by a
promise. Therefore, the beginning of performance by the offeree had no
legal significance, and the offeror would therefore be free to revoke even
after performance had begun.
(2) Restatement Second rule [§295]
Because of the unfairness of this result, Restatement Second adopts a different
rule: In case of doubt, an offer is interpreted as inviting acceptance by either a
promise or performance. Under this rule, if there is doubt about whether the
offer requires acceptance by a promise or by performance, the offeree is
protected no matter which interpretation he places upon the offer.
(a) U.C.C. in accord [§296]
Similarly, in the case of contracts for the sale of goods, U.C.C. section 2-
206(1)(a) provides that “unless otherwise unambiguously indicated by the
language or circumstances … an offer to make a contract shall be construed
as inviting acceptance in any manner … reasonable in the circumstances.”
1) Orders for prompt shipment [§297]
 The general rule of U.C.C. section 2-206(1)(a) is applied in section 2-
206(1)(b) to the specific case of “an order or other

104

offer to buy goods for prompt or current shipment.” Under section 2-

206(1)(b), such an order is construed as inviting acceptance either by a
prompt promise to ship or by the prompt or current shipment of the
goods. (However, if the offeree chooses to accept by shipping the
goods, and the offeror is not notified within a reasonable time that
shipment has begun, the offeror may treat his offer as having lapsed
before acceptance.) [U.C.C. §2-206(1)(b); see Sale & Lease of Goods
Summary]
a) Shipment of nonconforming goods [§298]
The seller’s shipment of goods will be deemed an acceptance even
if the goods shipped are “nonconforming” (i.e., they do not meet
the specifications set forth in the buyer’s offer). In such a case, the
shipment is simultaneously an acceptance of the buyer’s offer and
a breach of the resulting contract. However, if the shipper
“seasonably notifies the buyer that the shipment is offered only as
an accommodation to the buyer,” then there is no breach if the
goods are nonconforming. In such cases, the shipment of
nonconforming goods is not construed as an acceptance, but rather
as a counteroffer. [U.C.C. §2-206(1)(b); see Sale & Lease of
Goods Summary]

3. Silence as Acceptance

a. General rule [§299]

The general rule is that the silence of an offeree does not constitute acceptance.
[McGlone v. Lacey, 288 F. Supp. 662 (D.S.D. 1968)]
(1) Rationale
The purpose of this rule is to prevent an offeror from placing an offeree
involuntarily in a situation where the offeree must either take an affirmative
action to reject the offer or else become liable on a contract.

b. Exceptions [§300]
There are a number of exceptions to the general rule. In most of these exceptions,
the offeree is not involuntarily put into a situation where she must either take an
affirmative action to reject the offer or else become liable on a contract.
(1) Offeree leads offeror to believe that silence will constitute acceptance
[§301]
 Silence will constitute acceptance where the offeree, by her own prior words or
conduct, gave the offeror reason to interpret her silence as an acceptance.
[Hobbs v. Massasoit Whip Co., 33 N.E. 495 (Mass. 1893); National Union
Fire Insurance Co. v. Ehrlich, 122 Misc. 682 (1924); Rest. 2d §69]

105

Example: Buyer, a rare book collector, tells Seller, a rare book dealer, “You
know what kind of books interest me. If you run across any, send them to me
with a proposed price. If I do not return the book promptly, you may deem it
accepted at the price you state.” Seller sends a book with a stated price of $300.
Buyer receives it, does not return it promptly, and says nothing. As a result of
her earlier statement, Buyer’s inaction constitutes acceptance, and she is
contractually bound to pay Seller $300.
(2) Silence coupled with subjective intent to accept [§302]
Silence will constitute acceptance where the offeror has said that silence will
constitute acceptance and the offeree remains silent, subjectively intending to
accept. [Rest. 2d §69; see International Filter Co. v. Conroe Gin, Ice &
Light Co., supra, §271]
Example: On January 2, Seller writes to Buyer, “I will send you lithographs
by messenger from time to time, with a stated price. If I do not hear from you
within five days, I will deem the lithographs accepted at that price.” Buyer does
not reply. On February 1, Seller sends Buyer a lithograph by messenger with a
stated price of $300. Buyer inspects the lithograph and forms a subjective intent
to accept Seller’s offer in accordance with Seller’s letter of January 2. Buyer’s
subjective intent constitutes acceptance of Seller’s offer, and Buyer is
contractually bound to pay Seller the stated price. If Buyer had not formed a
subjective intent to accept, she would not be bound, provided she did not
exercise dominion over the lithograph. (See infra, §303.)

(3) Exercise of dominion [§303]

An offeree who improperly exercises dominion over goods sent to him for
 approval, inspection, or the like is contractually bound to purchase the goods at
the proffered price, unless that price is manifestly unreasonable—even if the
offeree does not have a subjective intent to accept. [Louisville Tin & Stove
Co. v. Lay, 65 S.W.2d 1002 (Ky. 1933); Indiana Manufacturing Co. v.
Hayes, 26 A. 6 (Pa. 1893); Rest. 2d §69]

106

Example: Same facts as in the lithograph example above, except that Buyer
does not form a subjective intent to accept Seller’s offer of the lithograph.
Nevertheless, Buyer sends the lithograph to her son at college, telling him to
hang it in his dormitory room. Buyer is contractually bound to pay Seller $300.

(a) Note
If goods are sent for inspection, mere inspection does not constitute an
improper exercise of dominion.
(b) Statutory exceptions [§304]
A federal statute now provides, “Except for free samples clearly and
conspicuously marked as such, and merchandise mailed by a charitable
organization soliciting contributions, the mailing of unordered merchandise
… constitutes an unfair method of competition and an unfair trade
practice.” Any merchandise mailed in violation of this statute “may be
treated as a gift by the recipient, who shall have the right to retain, use,
discard, or dispose of it in any manner he sees fit without any obligation
whatsoever to the sender.” [39 U.S.C. §3009] Similar statutes have been
enacted in several states. [See, e.g., Cal. Civ. Code §1584.5] These statutes
in effect overturn the “exercise of dominion” rule in the cases to which they
apply.
(4) Solicitation of offer by offeree [§305]
Silence may also result in the formation of a contract where (i) the offeree has
solicited the offer and drafted its terms; (ii) the offer, as drafted by the offeree,
is so worded that a reasonable person in the offeror’s position would believe
that the offer was to be deemed accepted unless the offeree notifies the offeror
that the offer is rejected; and (iii) the offeror relies or is likely to have relied on
the reasonable belief that lack of a prompt rejection constituted an acceptance.
(a) Solicitation of orders for goods [§306]
For example, where a seller sends out traveling salespersons to take
“orders” by customers (which are technically offers by the customers) on
order forms prepared by the seller, and the order is so worded that the
customer would reasonably believe that she can deem the order accepted
unless notified otherwise, the seller may be under a duty to fill the order
 unless he specifically rejects it within a reasonable time. [Cole-McIntyre-
Norfleet Co. v. Holloway, 214 S.W. 817 (Tenn. 1919); Ammons v.
Wilson & Co., 170 So. 227 (Miss. 1936)]

107

(b) Applications for insurance [§307]

A comparable case arises where an applicant applies for an insurance policy
on a form provided by the insurer, the insurer holds the application for an
unreasonably long time without making a decision, and the applicant suffers
a loss while the insurer is holding the application. Here the applicant is
technically the offeror, but many cases hold that the insurer is liable if it
fails to reject the application in a timely manner—at least if the application
was in good order and the loss occurred after the expiration of a reasonable
time in which the insurer should have made a decision. [Kukuska v. Home
Mutual Hail-Tornado Insurance Co., 235 N.W. 403 (Wis. 1931)]
1) Rationale
The insurer should know that the applicant will rely on reasonably
expeditious processing. While the applicant is waiting to hear from the
insurer, as a practical matter he usually cannot make application to
other insurers because more than one insurer might accept.
(5) Late acceptance [§308]
A late acceptance has the legal effect of a counteroffer—i.e., a late acceptance
does not conclude a bargain, but is treated as an offer that can be accepted by
the original offeror. (See infra, §322.) In addition, however, if an offeree sends
an acceptance after a reasonable time for acceptance has elapsed (so that it is
late), but within a period that the offeree might plausibly regard as reasonable,
courts have held that good faith and fair dealing require the original offeror to
notify the original offeree that the acceptance was too late. If the original offeror
does not give such notice, the offeree’s late acceptance/counteroffer will be
deemed accepted by the original offeror’s silence. [Phillips v. Moor, 71 Me. 78
(1880); Rest. 2d §70]
(6) Implied-in-fact contracts [§309]
In the context of the general rule that silence does not constitute acceptance,
“silence” means inaction. (See supra, §266.) Accordingly, the general rule does
not apply to communicated action, even if the action is nonverbal.
Example: Buyer bids $150 for a painting at an auction. After waiting a few
seconds, the auctioneer says, “Do I hear more?” and then knocks the hammer
down. Buyer’s bid is an offer, and the auctioneer’s action of knocking down the
hammer is an implied-in-fact acceptance of that offer.
 108

Example: Owner writes a note to Plumber, requesting Plumber to repair

Owner’s leaky faucet. Plumber comes the next day while Owner is home and
proceeds to make the repair. Owner’s request is an offer to pay Plumber’s usual
rates, provided they are not unreasonable. Plumber’s action of making the repair
is an implied-in-fact acceptance of that offer.
(a) Implied-in-fact offer and acceptance [§310]
In some cases, both the offer and the acceptance may be implied in fact
from nonverbal actions.
Example: Neighbor often mows Homeowner’s lawn for $25. One
week, as Homeowner is backing out of his driveway to leave for work,
Neighbor arrives to mow Homeowner’s lawn. Neighbor points to the lawn,
and Homeowner nods as he is driving away. The conduct of Neighbor and
Homeowner results in an implied-infact contract for Neighbor to mow
Homeowner’s lawn for $25.
1) U.C.C. [§311]
Likewise, under the U.C.C., conduct by both parties that recognizes the
existence of a contract for the sale of goods is sufficient to establish a
contract, even though the writings of the parties do not otherwise
establish a contract. [U.C.C. §2-207(3); see supra, §217]
(7) Unjust enrichment or quasi-contract [§312]
Under the principle of unjust enrichment or quasi-contract, in a variety of
cases liability may be imposed on a person who receives a benefit from another,
even in the absence of a promise to pay for the benefit. A plaintiff can recover
in restitution or quasi-contract if he can show that:
(i) He has conferred a benefit on the defendant;
(ii) He conferred the benefit with the expectation that he would be paid its
value;
(iii) The defendant knew or had reason to know of the plaintiff’s expectation;
and
(iv) The defendant would be unjustly enriched if he were allowed to retain the
benefit without paying its value.
Example: Tim begins to build a party wall (i.e., a wall that straddles the
boundary between two properties) on the boundary between his property and
Al’s property. A reasonable person in Al’s position would
 109

know that because Al will have legal ownership of half the wall (since the wall is
partly on Al’s side of the boundary line), Tim expects Al to pay for half the
value of the wall. Al says nothing and lets Tim continue to work. Al is liable for
half the value of the wall. [Day v. Caton, 119 Mass. 513 (1876)]
(a) Failed express contract [§313]
Note that the four requirements discussed above need not be proved where
a quasi-contract remedy is sought because an express contract has failed
(e.g., because of noncompliance with the Statute of Frauds). All that must
be proved is the express contract and unjust enrichment that would result
absent the quasi-contractual remedy.

D. Time at Which Communications Between Offeror and

Offeree Become Effective
1. In General [§314]
When parties are not negotiating orally, it often becomes important to determine when a
communication, such as an acceptance, a revocation, or a rejection, takes effect. The
rules vary according to what type of communication is involved. In general, and subject
to the exceptions described below, all communications except an acceptance are effective
on receipt. An acceptance is effective on dispatch.

2. Acceptance—“Mailbox Rule” [§315]

Although a promise normally must be communicated to be effective, for policy reasons
the general rule is that an acceptance is effective on dispatch, i.e., even before it has
been received. This rule is known as the “mailbox rule” or the rule of Adams v.
Lindsell. [Adams v. Lindsell, 106 Eng. Rep. 250 (1818)]

a. Rationale
The mailbox rule (i) encourages contracting by parties at a distance from each other
by making the offeree just as secure as if the contract were made faceto-face and (ii)
creates a contract at the earliest possible moment.

b. Exception for options [§316]

Some authorities, including the Restatement, take the position that in the case of an
option, an acceptance (or “exercise” of the option) is not effective until received.
[Cities Service Oil Co. v. National Shawmut Bank, 172 N.E.2d 104 (Mass.
1961); Scott-Burr Stores Corp. v. Wilcox, 194 F.2d 989 (5th Cir.

110
 1952); Rest. 2d §63] However, other courts apply the mailbox rule even to the
exercise of options. [Palo Alto Town & Country Village v. BBTC Co., 11 Cal. 3d
494 (1974); Shubert Theatrical Co. v. Rath, 271 F. 827 (2d Cir. 1921)]

c. Requirements necessary to satisfy the mailbox rule [§317]

To be effective upon dispatch, the acceptance must be dispatched in a timely and
proper manner. [Rest. 2d §63]
(1) Timely dispatch [§318]
Whether dispatch is timely depends in part on whether the offer specifies a
period of time for acceptance.
(a) No time specified for acceptance [§319]
If no period of time for acceptance is specified in the offer, the offeree
must accept within a reasonable time (see supra, §§186-189).
(b) Specified period for acceptance [§320]
If a period of time is specified in the offer, unless otherwise specified, the
time period begins running when the offer is received, and the acceptance
must be dispatched within that time period. [Caldwell v. Cline, supra,
§184]
(c) Time of dispatch, not receipt, important [§321]
If the acceptance is dispatched within the specified time period, it is timely
even if in the normal course of delivery it will be (and is) received by the
offeree after the specified period. [Falconer v. Mazess, 168 A.2d 558 (Pa.
1961)]
Example: A lives in Atlanta and B lives in New York. The course of
post between Atlanta and New York is two days. On January 2, A mails a
written offer to B. The offer states that it will remain open for 10 days. A’s
letter arrives on January 4. The 10-day time period begins running on
January 4. B’s acceptance will be timely if it is dispatched by mail on or
prior to January 14.
(d) Consequences of late dispatch [§322]
If an acceptance is not dispatched in a timely manner and arrives too late, it
is ineffective as an acceptance. However, it does serve as a counteroffer
and therefore creates a power of acceptance in the original offeror.
1) Note
Under certain circumstances, the original offeror’s failure to reject the
late acceptance/counteroffer will operate as an acceptance by silence
(see supra, §308).

111
 (e) Options [§323]
Remember that some authorities do not apply the mailbox rule if the offer is
an option. According to those authorities, if the offeree has a specified
period of time in which to exercise the option, the acceptance must be
received (not merely dispatched) within that period.
(2) Proper manner [§324]
Assuming an acceptance has been dispatched in a timely fashion, the next
question is whether it has been dispatched in a proper manner.
(a) Appropriate care [§325]
To begin with, the acceptance must be dispatched with appropriate care
—e.g., correctly addressed. [Rest. 2d §66; Shubert Theatrical Co. v.
Rath, supra, §316]
(b) Medium of communication [§326]
The offeree must also dispatch the acceptance by an appropriate medium
of communication. What constitutes an appropriate medium depends in part
on whether the offeror has suggested or prescribed a medium of
acceptance.
1) Where offeror does not suggest or prescribe medium of
acceptance
a) Traditional rule [§327]
The traditional rule was that where the offeror did not prescribe or
suggest the medium of acceptance, an acceptance would be
effective on dispatch only if the offeree used a medium of
communication that the offeror had at least impliedly authorized.
For example, the offeror was deemed to impliedly authorize the
medium by which he sent the offer. [Henthorn v. Fraser, [1892] 2
Ch. 27]
b) Modern rule [§328]
The modern rule is that unless otherwise specified an offer is
deemed to invite acceptance by any medium “reasonable in the
circumstances.” [Rest. 2d §30; U.C.C. §2-206(1)(a)]
1/ “Reasonable” medium [§329]
A medium of communication normally is reasonable if it is the
one used by the offeror (unless the offer specifies otherwise),
or if it is customary in similar transactions at the time and place
the offer is received. [Rest. 2d §65]

112

2/ Other factors [§330]

 If the medium does not meet one of these two tests it may still
be reasonable, depending on the speed and reliability of the
medium, the prior course of dealing between the parties (see
infra, §374), and usage of trade (see infra, §376). [Rest. 2d
§65]
3/ Use of mail [§331]
Acceptance by mail is ordinarily reasonable when the parties are
negotiating at a distance, even if the offer is not made by mail,
unless there is a special reason for speed, such as rapid price
changes.
Example: Employer lives in Los Angeles and Applicant
lives in San Francisco. Employer makes a face-to-face offer of
employment to Applicant in Los Angeles, and gives Applicant
two days to consider the offer. Applicant says she will go back
to San Francisco and think about it. That evening, Applicant
posts an acceptance by mail from San Francisco. The
acceptance is effective on dispatch. Since the parties live in
different cities, Employer should have contemplated that
Applicant would use the mails. In any event, except in unusual
situations, such as those involving a subject matter whose price
fluctuates rapidly, the mails are a customary means of
conducting business negotiations.
a/ Note
Today, acceptance by fax or E-mail would probably be
deemed reasonable in the ordinary case, at least if the
offeree’s fax or E-mail system confirms or indicates that the
message was successfully transmitted.
2) Where offeror suggests medium of acceptance [§332]
If the offeror explicitly suggests a medium of acceptance, use of that
medium is always appropriate. Failure to use a suggested medium may
(but does not necessarily) mean that the medium that was used is
unreasonable.
3) Consequence of unreasonable medium or lack of reasonable care
[§333]
Unless the offer prescribes the medium of communication (see infra,
§334), a contract may be formed even if the offeree failed to use a
reasonable medium or reasonable care in dispatching

113
 an acceptance. However, if the medium employed is not a reasonable
one, or if reasonable care was not employed in dispatching the
acceptance, the acceptance will not be effective unless it actually
arrives. Note: If an acceptance is dispatched on time through an
unreasonable medium or without reasonable care, but it arrives on
time, it is treated as operative on dispatch, just as if it were properly
sent. [Rest. 2d §67]
4) Where offeror prescribes medium of communication [§334]
If the offeror prescribes a medium of communication, no contract will
be formed unless that medium is used.
Example: Seller offers to sell her land to Buyer on certain terms,
and states, “You must accept this offer, if at all, in person at my office
at noon, tomorrow.” Buyer’s power of acceptance can be exercised
only in the manner Seller has designated. Acceptance in any other
manner is a mere counteroffer. [Rest. 2d §60]
a) Interpretation [§335]
Language that appears to prescribe a medium of acceptance may
be interpreted only to suggest that medium. In such cases, the
offeree can use some other medium, but if that other medium is not
reasonable under the circumstances, the acceptance will be
effective only if it arrives no later than would an acceptance that
had been sent through the suggested medium. [Rest. 2d §60]
Example: A mails an offer to B in which A says, “Accept by
return mail.” Because there ordinarily is no reason why an offeror
would insist on use of the mails to the exclusion of all other media,
the offer would probably be interpreted: (i) to suggest rather than
require use of the mails; (ii) to require that an acceptance by any
other medium arrive as soon as a letter would have arrived; and (iii)
to require that the acceptance be in writing. Therefore, a written
acceptance sent on time by any other means would create a
contract on dispatch if the means of communication was
reasonable. If the means of communication was not reasonable, the
acceptance would be effective if it arrived as soon as a letter sent
by return mail would have arrived. [Rest. 2d §60] Furthermore, if
such an acceptance is sent on time and arrives on time, it will be
deemed effective on dispatch.

114
d. Significance of mailbox rule [§336]
Assuming that an acceptance is properly dispatched, so that the mailbox rule is
applicable, a number of consequences may follow, depending on the context:
(1) Crossed acceptance and revocation [§337]
In most states, a revocation is effective only on receipt. (See infra, §343.)
Therefore, under the mailbox rule if an acceptance is dispatched before a
revocation is received, a contract is formed. This is true even though the
acceptance is dispatched after the revocation is dispatched and received after the
revocation is received.
(a) Minority view [§338]
Statutes in a few states, including California, provide that a revocation is
effective on dispatch. In such states, a contract is formed if the acceptance
is dispatched first, but not if the revocation is dispatched first. [Cal. Civ.
Code §1587]
(2) Lost or delayed acceptance [§339]
Suppose a properly dispatched acceptance is lost or delayed by the carrier, so
that it does not arrive at all or arrives late. Under the mailbox rule, the
acceptance is nevertheless effective and a contract is formed. In other words,
under the mailbox rule the risk of loss or delay in transmission of a properly
dispatched acceptance is on the offeror.
(a) Note
There is authority for the proposition that even though a contract is formed
despite the fact that the acceptance does not arrive, the offeror’s duty to
perform under the contract is conditional on receipt of notice that he is
obliged to perform and must begin performance. Under these authorities,
even though a contract is formed, the offeror’s failure to perform will not
be a breach unless and until he receives such a notice. [Haas v. Myers, 111
Ill. 421 (1884); Rest. 2d §63]
(3) What law governs? [§340]
The general choice-of-law rule is that a contract is governed by the law of the
state in which the contract was formed. Under the mailbox rule, a contract is
formed when the acceptance is dispatched. Therefore, under
 115

the mailbox rule a contract will be governed by the law of the state in which
the acceptance was dispatched. [Perry v. Mt. Hope Iron Co., 5 A. 632 (R.I.
1886)]
(4) Effective date of obligation to perform [§341]
In some cases, it is important to determine when the parties’ obligation to
perform becomes effective. Under the mailbox rule, the obligation to perform
becomes effective when the acceptance is dispatched. [Taylor v. Merchant’s
Fire Insurance Co., 50 U.S. (9 How.) 390 (1850)]
Example: On January 2, Applicant, a resident of Atlanta, Georgia, mails an
application for life insurance to Insurance Company in Hartford, Connecticut.
Applicant’s application constitutes an offer. The course of post between Atlanta
and Hartford is two days. On January 5, Insurance Company accepts
Applicant’s application by mailing a policy to her. Applicant dies on January 6,
before receiving the policy. Applicant was covered by the policy at the time of
her death: The dispatch of the policy constituted an acceptance. Therefore,
under the mailbox rule a contract was formed on January 5, prior to Applicant’s
death.

e. Offeror’s power to negate the mailbox rule [§342]

An offeror can negate the mailbox rule by providing in the offer that the acceptance
will be effective only on receipt. However, the offeror must use clear language to
achieve that result.
Example: Lewis lives in California and Browning lives in Massachusetts. Lewis
makes a written offer to Browning by mail, which concludes, “If you agree to this
offer and will telegraph me on receipt of this, I will order my agent in Boston to
begin performance. Telegraph me ‘Yes’ or ‘No.’ If ‘No,’ I will go to Boston and
make other arrangements. If a telegram from you is not in my hands within 12 days,
I shall conclude ‘No.’ ” Browning sends a properly dispatched telegraphic
acceptance, but it fails to arrive. There is no contract, because the language of the
offer negates the mailbox rule. [See Lewis v. Browning, 130 Mass. 173 (1881)]

3. Revocation [§343]
As noted above, the general rule is that a revocation is effective only upon receipt,
subject to statutory exceptions in a few cases. [Stevenson, Jaques & Co. v. McLean,
supra, §194]

a. Crossed acceptance and revocation [§344]

Because an acceptance is effective on dispatch, but a revocation is effective only on
 receipt, if an offeree dispatches an acceptance after the offeror dispatches a
revocation but before the revocation arrives, a contract is formed.

116

[Stevenson, Jaques & Co. v. McLean, supra; Henthorn v. Fraser, supra, §327;
and see supra, §337]

4. Rejection [§345]
The general rule is that a rejection of an offer is effective only upon receipt. [Rest. 2d
§40]

a. Where offeree sends both rejection and acceptance [§346]

Special problems arise when an offeree first dispatches a rejection, and later changes
his mind and dispatches an acceptance, or vice versa.
(1) Acceptance mailed before rejection [§347]
Because an acceptance is effective on dispatch and a rejection is effective on
receipt, if an acceptance is mailed before a rejection, a contract is formed on
dispatch of the acceptance, regardless of whether the offeror receives the
acceptance or the rejection first.
(a) Exception—detrimental reliance [§348]
If the offeror receives the offeree’s rejection before her acceptance, and
then the offeree detrimentally relies on the rejection, the offeree is estopped
from enforcing the contract. [Rest. 2d §63]
(2) Rejection mailed before acceptance [§349]
When the offeree’s rejection is mailed before her acceptance, the result depends
partly on which communication was received first by the offeror.
(a) Rejection arrives first [§350]
If the rejection arrives before the acceptance arrives, there is no contract,
even if the acceptance was dispatched before the rejection arrives. In other
words, the mailbox rule does not apply in this case. [Rest. 2d §40]
1) Rationale [§351]
When the offeror receives the rejection without having yet received the
acceptance, his expectation is that negotiations have terminated. That
expectation should be protected.
2) Effect of later-arriving acceptance [§352]
Although the later-arriving acceptance in such a case will not be
effective as an acceptance, it will be effective as a counteroffer,
creating a power of acceptance in the original offeror.
(b) Acceptance arrives first [§353]
 If the rejection arrives after the acceptance arrives, a contract is formed.

117

1) Rationale
When the offeror receives the acceptance without having yet received
the rejection, his expectation is that a contract is formed. Again, that
expectation should be protected.
2) Effect of later-arriving rejection [§354]
The later-arriving rejection in such a case is not effective as a rejection
and does not relieve the offeree of liability under the contract.
However, the offeror may regard the rejection as a repudiation of the
contract. If the offeror does so regard the rejection, and relies on his
belief that the contract has been repudiated, the offeree will be estopped
from enforcing the contract.

5. Repudiation of Acceptance [§355]

A repudiation of an acceptance is a communication by an offeree who has previously
dispatched an acceptance, stating that the offeree does not intend to be bound by the
acceptance. That is, the offeree first dispatches an acceptance and then changes his mind
and dispatches a repudiation. A repudiation therefore differs from a rejection. In a
rejection, the offeree turns down the offer. In a repudiation, the offeree “turns down” his
own earlier acceptance. By its nature a repudiation therefore can be dispatched only after
an acceptance is dispatched, because before the acceptance is dispatched there is nothing
to repudiate. When an offeree sends both a repudiation and an acceptance, the governing
rules are comparable to the rules that govern the case in which an offeree sends both a
rejection and an acceptance. In both cases, the result turns in large part on which
communication arrives first.

a. Acceptance arrives first [§356]

If an acceptance arrives before a repudiation of an acceptance arrives, a contract is
formed.
(1) Rationale
When the acceptance arrives, the offeror’s expectation is that a contract is
formed. That expectation should be protected.
(2) Effect of later-arriving repudiation [§357]
The later-arriving repudiation in such a case is not effective to relieve the
offeree of liability under the contract. However, the offeror may regard the
offeree’s repudiation of the acceptance as a repudiation of the contract. If the
offeror does so regard the repudiation, and relies on his belief that the contract
has been repudiated, the offeree will be estopped from enforcing the contract.
 b. Repudiation arrives first [§358]
Suppose now that the acceptance is dispatched first, but the repudiation arrives

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first. Under a strict application of the mailbox rule, a contract would still be formed,
because under the mailbox rule an acceptance is effective on dispatch, and the
acceptance was dispatched before the repudiation arrived. The Restatement takes
just this position. [Rest. 2d §63] However, the cases are split. [Compare Morrison
v. Thoelke, 155 So. 2d 889 (Fla. 1963)—contract formed, with Dick v. United
States, 82 F. Supp. 326 (Ct. Cl. 1949)—contract not formed]
(1) Rationale of Restatement rule
Because the offeror receives the repudiation first, her expectation is probably
that no contract is formed. If that were the rule, however, an offeree could
speculate at the offeror’s expense by mailing an acceptance and then watching
the market while the letter traveled through the mail. If the market moved in the
offeree’s favor, she could let the acceptance ride, so that a contract would be
formed. If the market moved against her, she could send a repudiation by an
overtaking (faster) means of communication. The Restatement rule, that a
contract is formed even when the repudiation arrives first, is intended to prevent
such speculation by binding the offeree as soon as she dispatches her
acceptance.
(2) Effect of repudiation [§359]
At least under the Restatement rule, the earlier-arriving repudiation does not
prevent formation of a contract. However, because the offeror receives the
repudiation first, he may regard it as a rejection, and rely on it. If he does, the
offeree will be estopped from asserting that a contract was formed.

6. Withdrawal of Acceptance [§360]

A withdrawal of an acceptance occurs when the offeree dispatches an acceptance and
then manages to retrieve the acceptance before it reaches the offeror. For example, the
offeree might retrieve a mailed letter of acceptance from the post office. There is very
little law on this issue, but the Restatement takes the position that the mailbox rule is still
applicable in such a case—i.e., a contract is formed when the acceptance is dispatched,
and the withdrawal is therefore ineffective. [Rest. 2d §63; see G.C. Casebolt Co. v.
United States, 421 F.2d 710 (Ct. Cl. 1970)]

a. Note
There is a practical problem in such cases: Because the offeror never receives the
acceptance, he may never learn that the offeree had dispatched the offer and then
withdrawn it.
7. Crossed Offers [§361]
Suppose A writes to B on January 2 that she will sell Orangeacre to B for $40,000, and
coincidentally on the same day B writes to A that he will buy Orangeacre for $40,000. Is
there a contract? This kind of situation is called “crossed offers” or “crossed offer and
acceptance.” The general rule is that a contract is not formed

119

by crossed offers, on the theory that an offer is not effective until received, and cannot
be accepted until it is effective. [Tinn v. Hoffman, 29 L.T.R. (n.s.) 271 (1873)]

a. Previous agreement [§362]

However, a different result may follow where the parties had previously agreed upon
all but one minor point, and then in crossed letters they each propose identical terms
on that point. [Asinof v. Freudenthal, 195 App. Div. 79 (1921)]

E. Interpretation
1. General Rule [§363]
A contract can be based on either words or conduct. Words or conduct that are
addressed by one party (the addressor) to another (the addressee) can be called an
“expression.” The general rule of interpretation in contract law is that where the
interpretation of an expression is in issue, the expression should be given an objective
interpretation. This means that the expression should be given the interpretation that a
reasonable person standing in the addressee’s shoes would put upon it, rather than the
interpretation that the addressor subjectively intends.
Example: Employee is employed by Employer under a 10-month contract expiring
on December 31. On December 15, Employee asks Employer to renew the contract for
another 10 months, stating that if Employer does not renew, Employee will immediately
take steps to find a new job. Employer replies, “Don’t worry, you’re all right,” and
Employee says, “O.K.” Employee subjectively interprets the conversation to be an
agreement on a new contract. Employer does not. Employee’s interpretation is more
reasonable than Employer’s; consequently, there is a contract. [Embry v. Hargadine-
McKittrick Dry Goods Co., 105 S.W. 777 (Mo. 1907)]

a. Application—reasonable person knowing what addressee knows [§364]

In applying the objective test, the question should be not simply how a generalized
reasonable person in the addressee’s shoes would interpret the relevant expression,
but what interpretation would be given by a reasonable person knowing all that the
addressee knew. Accordingly, if the parties are in a special trade, the interpretation
must include the usages of the trade. Similarly, if the addressee knows special
circumstances that would give the expression a different meaning than it would
 normally be given, those circumstances would be relevant in an objective
interpretation.

2. Exceptions [§365]
There are several major exceptions to the normal rule of objective interpretation.

120

a. The Peerless rule [§366]

One exception occurs where an expression is susceptible of two equally reasonable
meanings, and each party understands the expression differently. This was the
famous Peerless Case. In that case, both parties used the term “ex ship Peerless,”
each thinking there was only one ship Peerless. In fact there were two ships
Peerless, and each party subjectively intended a different Peerless. The rule in such
cases is that if both parties subjectively attach different, equally reasonable,
interpretations to their expressions, no contract is formed. [Raffles v. Wichelhaus,
159 Eng. Rep. 375 (1864)]
(1) Note
The Peerless rule is limited to cases where two or more meanings are equally
reasonable. If an expression is susceptible of two or more meanings, but only
one meaning is reasonable, or one meaning is more reasonable than the other,
the objective theory of contracts prevails and the interpretation is based on the
reasonable (or more reasonable) meaning, provided that that is the meaning one
of the parties intended.

b. Both parties have same subjective interpretation [§367]

If both parties subjectively attach the same meaning to a term, that meaning will
govern even if it is not the reasonable meaning of the term. Note: This exception is
largely theoretical, because normally when there is a dispute about interpretation,
each party asserts a different meaning, and the question is which of those different
meanings is reasonable, or at least more reasonable. [Rest. 2d §201(2)]

c. One party knows of the other’s different interpretation [§368]

If one party, A, knows or has reason to know that another party, B, attaches a
certain meaning to an expression, and B does not know or have reason to know that
A attaches a different meaning to the expression, the meaning that B attaches to the
expression will prevail, even though under a strictly objective test A’s meaning is
more reasonable. [Rest. 2d §201(2)]

3. Extrinsic Evidence [§369]

Questions often arise whether “extrinsic evidence”—i.e., evidence outside the contract
itself, such as conversations between the parties and surrounding circumstances—may
be admitted in aid of interpreting a written contract.
 a. Traditional rule [§370]
The traditional rule was that if there was no ambiguity in a written contract on its
face, and no special meaning attached to the words of a written contract by custom
or usage, the terms of the contract were to be interpreted only according to their
“plain meaning,” and extrinsic evidence was inadmissible. [Rowe v. Chesapeake
Mineral Co., 156 F.2d 752 (6th Cir. 1946)]

b. Modern rule [§371]

Today, however, there is an increasing tendency to be more liberal, and allow

121

extrinsic evidence to show what the parties intended by their words, without regard
to their “plain” meaning or a prior showing of ambiguity.
(1) Rationale
No language is infallible; what is “plain” to the judge may not have been “plain”
to the parties. Furthermore, whether a contract is ambiguous cannot be
determined unless and until all the relevant circumstances have been considered.
[Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69
Cal. 2d 33 (1968)]

4. Course of Performance, Course of Dealing, Usage, and Usage of Trade [§372]

Course of performance, course of dealing, usage, and usage of trade are all relevant in
issues of interpretation.

a. Course of performance [§373]

Where a contract involves repeated occasions for performance by either party, with
knowledge of the nature of the performance and opportunity for objection to it by
the other party, a course of performance of the contract that is accepted or
acquiesced in without objection is relevant to determine the meaning of the
agreement. The parties themselves know best what they meant by the words of their
agreement, and their actions under that agreement are the best indication of what that
meaning was.

b. Course of dealing [§374]

A course of dealing is a sequence of conduct between the parties prior to the
contract (e.g., a sequence of earlier contracts between the parties) that is fairly to be
regarded as establishing a common basis of understanding for interpreting their
expressions. Unless otherwise agreed, a course of dealing between the parties may
give meaning to, supplement, or qualify their contract.

c. Usage [§375]
A usage is a habitual or customary practice. An agreement is interpreted in
 accordance with, supplemented by, or qualified by a relevant usage if each party
knew or had reason to know of the usage.
Example: Rabbi is employed by Congregation, an orthodox Jewish congregation,
to officiate as cantor at specified religious services. At the time the contract is made,
it is the practice of such congregations not to use music, and a contrary practice
would violate Rabbi’s religious beliefs. At a time when it is too late for Rabbi to
obtain substitute employment, Congregation adopts a contrary practice. Rabbi
refuses to officiate. The practice is part of the contract, and Rabbi is entitled to the
agreed compensation.

d. Usage of trade [§376]

A usage of trade is a usage regularly observed in a vocation or trade. Unless

122

otherwise agreed, a usage of trade in the vocation in which the parties are engaged
gives meaning to, supplements, or qualifies their agreement.
Example: Seller contracts to sell Buyer 10,000 shingles. By usage of the shingle
trade, in which both Seller and Buyer are engaged, two packs of a certain size
constitute 1,000 shingles, although the packs do not actually contain 1,000 shingles.
Unless otherwise agreed, “1,000” in the contract means two packs.

e. Priorities [§377]
Express terms are given greater weight than course of performance, course of
dealing, usage, and usage of trade. Course of performance is given greater weight
than course of dealing, usage, and usage of trade. Course of dealing is given greater
weight than usage and usage of trade.

F. The Parol Evidence Rule

1. The Problem [§378]
Often, although an agreement has been put in writing, one party claims there was also an
earlier oral or written agreement, or a contemporaneous oral agreement, that was not
included in the writing but was intended to be part of the contract. In such cases, the
admissibility of the alleged additional agreement turns on the applicability of the parol
evidence rule.

2. The Rule [§379]

Stated simply, the parol evidence rule provides that parol evidence will not be admitted
to vary, add to, or contradict a written contract that constitutes an integration. That
formulation leaves open what constitutes an integration, and what constitutes parol
evidence. [Hayden v. Hoadley, 111 A. 343 (Vt. 1920)]

a. What constitutes an “integration”? [§380]

A written contract constitutes an “integration” if the parties to the contract intended
the writing to be the final and complete expression of their agreement—i.e., if the
parties intended to integrate their agreement into the writing. There is substantial
disagreement on how the courts should determine whether the parties had such an
intention.
(1) Formal intent test [§381]
The traditional view was that a writing would be treated as an integration if
taken as a whole and on its face the writing appears to be an instrument that
completely expresses the parties’ agreement. “Intent” under this test is
essentially a matter of form—i.e., the question is whether the writing has the
form of a complete instrument. [70 A.L.R.

123

752; Gianni v. R. Russel & Co., 126 A. 791 (Pa. 1924)] This view was
associated with Professor Williston.
(2) Actual intent test [§382]
Today, many or most courts follow a competing test that is associated with
Professor Corbin. Under this test, a writing is deemed to be an integration only
if the parties actually intended it to be an integration. The court will consider
any relevant evidence to determine the parties’ intent. [Masterson v. Sine, 68
Cal. 2d 222 (1968); Rest. 2d §209]
(3) Application of competing theories [§383]
The Williston “formal” test is a standardized and objective test based on the
terms of the written contractual documents as understood by a reasonably
intelligent person. This leads to a broad application of the parol evidence rule,
and consequently leads to the frequent exclusion of parol evidence. The Corbin
“actual intent” test is an individualized test that requires the judge to determine
the legal relations of the parties in accordance with their actual intentions, even
when the forms—i.e., writings—they employed suggest otherwise. This leads to
a narrower application of the parol evidence rule, and consequently leads to the
more frequent admission of parol evidence. As stated above, the tendency is to
follow the Corbin view, but many cases still follow the Williston view.
(4) Merger clauses [§384]
Many written contracts contain provisions stating that the written contract is the
entire contract between the parties, or is the final, complete, and exclusive
statement of all the terms the parties have agreed upon, or the like. These kinds
of provisions are known as “merger” clauses, because they say, in effect, that all
 agreements between the parties have been merged into the writing. The
traditional approach to merger clauses, like the traditional (Williston) approach to
the parol evidence rule itself, was that the presence of such a clause was
determinative on the question of whether a writing was an integration—unless
the clause was itself the result of fraud, mistake, or some comparable defense.
This is probably still the majority rule, but modern courts sometimes say that a
merger clause is only one factor in determining whether a writing was an
integration.

b. What constitutes parol evidence? [§385]

If there is a writing that is an integration, evidence of an alleged earlier oral or
written agreement that is within the scope of the writing, or evidence of an alleged
contemporaneous oral agreement that is within the scope of the writing, constitutes
parol evidence. The alleged agreement that the parol evidence concerns may be
referred to as the parol agreement. Parol evidence will be excluded if it would add to,
vary, or contradict the written agreement.

124

3. Exceptions [§386]
The parol evidence rule is subject to a number of exceptions.

a. Separate consideration [§387]

Even if a writing is determined to be an integration, parol evidence is admissible if
the written integration and the alleged parol agreement are each supported by
separate consideration.

b. Collateral agreement [§388]

Parol evidence is often said to be admissible if the alleged parol agreement is
“collateral” to (i.e., related to the subject matter but not part of the primary
promise) the written integration and does not conflict with the integrated writing.
This test is not very helpful, because a determination whether the agreement was
“collateral” is conclusory.

c. “Naturally omitted” terms [§389]

A widely accepted modern rule, adopted in the Restatement, is that parol evidence is
admissible if it concerns a term that would naturally be omitted from the written
agreement. Under the Restatement, a term will be treated as naturally omitted if:
(i) The term does not conflict with the written integration; and
(ii) The term concerns a subject that similarly situated parties would not
ordinarily be expected to include in the written agreement.
[Rest. 1st §240; and see Rest. 2d §216]
(1) Two approaches [§390]
The same approaches that are used to determine whether a writing is an
integration (see supra, §§381-383) are used to determine whether a parol
agreement concerns a subject that would be naturally omitted from the writing.
(a) Williston formal approach [§391]
Under the Williston formal approach, the court does not give much weight
to the individual circumstances of each particular case, but instead treats
cases generically to determine whether an abstract reasonable person would
naturally have omitted the term in question from the writing.

125

Example: The Mitchills and the Laths entered into a written agreement
under which the Mitchills agreed to purchase the Laths’ farm, which the
Mitchills planned to make into a summer residence. The Laths also agreed,
orally, that in connection with the purchase, and with no additional
consideration, they would tear down an unsightly structure across the road
from the farm. The court took the Williston approach and held that
evidence of the oral agreement was inadmissible because reasonable
persons who made a written contract of the kind entered into by the
Mitchills and the Laths, and who also made an oral agreement of the kind
made by the Mitchills and the Laths, would not have naturally omitted the
oral agreement from the writing. The court deemed it irrelevant that Mrs.
Mitchill made the written contract while Mr. Mitchill made the oral
agreement. [Mitchill v. Lath, 247 N.Y. 377 (1928)]
(b) Corbin individualized approach [§392]
Many modern courts follow the Corbin approach, and give an expansive
reading to the Restatement rule by taking into account all of the
circumstances of the individual case in determining whether the actual
parties (as opposed to abstract reasonable persons) might naturally have
omitted the parol agreement from the writing.
Example: Dallas and Rebecca Masterson conveyed their ranch to Lu
and Medora Sine by a written deed. Medora was Dallas’s sister. The deed
provided that the Mastersons had an option to repurchase the ranch at a
 designated price. The parties orally agreed that the option was personal to
the Mastersons (i.e., the option could not be assigned or transferred to a
third party). The court took the Corbin approach and held that evidence of
this oral agreement was not barred by the parol evidence rule. In reaching
this conclusion, the court took account of the particular circumstances of
the case, rather than simply looking to what abstract reasonable persons
would have done. For example, the court pointed to the difficulty of
accommodating oral agreements to the framework of a deed, and to the
facts that the transaction was between members of a family and that
nothing indicated the parties were aware of the dangers of not putting the
oral agreement into the deed. [Masterson v. Sine, supra, §382]
(c) Application of competing approaches [§393]
As in the case of determining whether a written instrument constitutes an
integration, application of the Williston approach to the question of whether
terms might naturally be omitted leads to

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broad application of the parol evidence rule, and it consequently frequently

leads to exclusion of parol evidence. Application of the Corbin approach
leads to more liberal admission of parol evidence because the party who
seeks to have the parol evidence admitted can often point to some special
feature of her case that explains why, given all the particular circumstances,
it was natural for the actual parties to have made a separate parol
agreement, even though abstract reasonable parties would not have done
so. Just as the tendency of modern courts is to focus on the parties’ actual
intent in determining whether a writing is an integration (see supra, §382),
so too the tendency of modern courts is to take into account all of the
circumstances of a particular case to determine whether a parol agreement
is one whose terms would naturally be omitted.
(2) Comment
The modern views concerning the “might naturally be omitted” test and the test
to determine what constitutes an integrated contract result in courts being more
ready to admit parol evidence than were courts in the past. However, even if the
parol evidence rule is given very liberal treatment, it still has a bite because
under the rule, the judge, rather than the jury, determines whether parties
situated like the actual parties might naturally have made the parol agreement.
Furthermore, even though the long-run tendency may be toward liberalization in
the application of the parol evidence rule, the courts still regard the rule as
important, and apply it to bar parol evidence in many cases.
(3) U.C.C. test [§394]
 The U.C.C. is even more liberal than the Restatement. Under the U.C.C., in the
case of contracts for the sale of goods, parol evidence is admissible unless the
matter covered in the alleged parol agreement “certainly would have been
included” in the written agreement. [U.C.C. §2-202, Comment 3 (emphasis
added)]
(4) Inconsistent terms [§395]
An oral agreement that is inconsistent with a written agreement does not fall
within the “might naturally be omitted” test, and therefore will be excluded
(assuming that the writing is an integration). However, there are two views on
what “inconsistent” means for these purposes.
(a) Logically inconsistent terms [§396]
Some courts essentially treat parol evidence as inconsistent only if it
logically contradicts the written agreement that constitutes an integration.
A way to test whether the oral agreement is logically inconsistent with the
writing is to ask whether the writing would have been internally inconsistent
if the oral agreement had been included in the writing. For example, if
parties enter into a written unconditional

127

option, but make an oral agreement imposing a condition on the exercise of

the option, the oral agreement would not be logically inconsistent with the
writing, because if the condition had been specified in the writing, the
writing would not have been internally inconsistent. [Hunt Foods and
Industries, Inc. v. Doliner, 270 N.Y.S.2d 937 (1966)]
(b) Reasonably harmonious terms [§397]
Other courts, however, treat parol evidence as inconsistent with a written
agreement if the parol evidence is not reasonably harmonious with the
writing. Under this view, if a written contract gives a party a right of final
approval of the price under the contract, and an oral agreement limits the
party’s right of approval, evidence of the oral agreement might be barred on
the ground that it is not reasonably harmonious with the writing. [Alaska
Northern Development, Inc. v. Alyeska Pipeline Service Co., 666 P.2d
33 (Alaska 1983)]

d. “Partial” integration [§398]

Even where a writing is not a complete integration, it may be a “partial” integration
—i.e., an integration of the subjects actually covered in the writing. A partial
integration is controlling on those subjects that it covers, but it does not bar parol
evidence on subjects that it does not cover.

e. Lack of consideration [§399]

 Parol evidence is always admissible to show a lack of consideration.
Example: Uncle and Nephew execute a written agreement stating that Uncle
agrees to deliver his almost-new Toyota Camry to Nephew in exchange for $15,000,
which Nephew has paid to Uncle. In fact, Nephew did not pay $15,000 to Uncle; the
writing was only a way in which Uncle tried to make a binding donative promise to
give Nephew the car. Uncle is allowed to show that the recital of consideration was
false.

f. Fraud, duress, or mistake [§400]

Parol evidence is also admissible to show fraud, duress, or mistake. Furthermore,
under the law of misrepresentation, a person who makes a promise that he has no
intention of performing commits “promissory fraud.” Applying this concept to the
parol evidence rule, under the fraud exception it is usually permissible to introduce
evidence that one of the parties entered into the parol agreement with no intention to
perform it, as a means to induce the other party to enter into the written agreement.

g. Existence of a condition precedent to legal effectiveness of written agreement

[§401]
Parol evidence is admissible to prove that there was a condition precedent

128

(written or oral) to the legal effectiveness of a written agreement. [Hicks v. Bush,

10 N.Y.2d 488 (1962)] Note, however, that parol evidence is not admissible to add a
condition to an obligation to render performance under a legally effective written
contract.
Example: Hicks and shareholders of Clinton G. Bush Co. (“Shareholders”) sign
a written instrument whereby they will merge their respective corporations into a
single new holding company. The written instrument provides that Hicks will
subscribe for 425,000 shares of stock in the new holding corporation, and
Shareholders will subscribe for over 1 million shares. Shareholders do not perform,
and Hicks brings suit. In response, Shareholders claim that the parties orally agreed
that the written instrument was not to be legally effective as a contract until “equity
expansion funds” of $675,000 had first been procured from third parties. The
evidence is admissible because it concerns a condition to the legal effectiveness of
the contract. [Hicks v. Bush, supra]

Compare: Same facts as in the last example, except that Shareholders do not
allege that the instrument was not a legally effective contract, but instead allege only
that the parties orally agreed that Shareholders’ duty to perform under the contract
was conditioned on third parties’ contribution of $675,000 in new equity funds. This
 parol evidence is inadmissible. It does not fall within the legal effectiveness exception
because the alleged parol agreement modifies an admitted legally effective contract
by adding a condition to performance under the contract, rather than by showing that
there was a condition to the writing becoming a legally effective contract.
(1) Comment
As these two examples suggest, the legal effectiveness exception is very tenuous
because there is only a narrow and unclear line between (i) evidence of an
agreement that a written instrument will not become legally effective unless a
certain condition is fulfilled (which falls within the exception and is admissible)
and (ii) evidence of an agreement that performance under an admittedly
effective contract is subject to a condition (which does not fall within the
exception and is not admissible).

h. Evidence to explain or interpret terms of written agreement [§402]

The parol evidence rule does not bar admission of extrinsic evidence to show what
the parties meant by the words used in their written agreement. The rationale of this
exception is that such evidence explains the written agreement rather than adding to,
varying, or contradicting the written agreement. To qualify under the exception, the
evidence may not be in the form of a promise or agreement, but rather must be in
the form of background discussion, surrounding circumstances, or the like.

129

(1) “Plain meaning” rule [§403]

Technically, extrinsic evidence concerning interpretation is not parol evidence at
all, because it does not concern alleged parol agreements, but rather only
extrinsic evidence other than agreements. However, such extrinsic evidence
may be barred by the “plain meaning” rule. Under the plain meaning rule, if
there is no ambiguity in a written contract on its face, and no special meaning
attached to the words of a written contract by custom or usage, the terms of the
contract are to be interpreted only according to their “plain meaning,” and
extrinsic evidence is inadmissible either to interpret the contract or to establish
that the contract is ambiguous so that extrinsic evidence should be admitted to
clarify its meaning. The courts often lump together the plain meaning rule and
the parol evidence rule, because both rules concern evidence that is outside a
written agreement. (See supra, §385.)
(a) Modern approach [§404]
Today, there is an increasing tendency to be more liberal and allow extrinsic
evidence to show what the parties intended by their words, without regard
to the “plain meaning” of the words. (See supra, §382.)
Example: Repair Company agrees to indemnify Electric Company
 against “any injury to property,” caused while Repair Company is repairing
Electric Company’s machinery. Extrinsic evidence is admissible to show
that this term means injury to the property of third persons, not injury to
Electric Company’s own property. [Pacific Gas & Electric Co. v. G.W.
Thomas Drayage & Rigging Co., supra, §371]
1) Limitation
The process of “interpretation” cannot be used to contradict the terms
of the written instrument. Accordingly, parol evidence bearing on
interpretation is admissible only if the interpretation does not contradict
the words in the writing or, to put it differently, is an interpretation that
the words in the writing will bear. However, what constitutes a
contradiction is itself ambiguous. (See supra, §§394-396.)
(2) Course of performance, course of dealing, and usage [§405]
Extrinsic evidence is also admissible to show any special meanings attached to
words used in the written agreement deriving from course of performance,
course of dealing, or usage. Courts are becoming increasingly liberal in admitting
such evidence, even if it contradicts the implications that would otherwise be
drawn from the writing, and sometimes even if the evidence seems to contradict
the writing itself.

130

Example: Columbia and Royster formed a contract in which Royster agreed

to sell phosphate to Columbia for fertilizer at a stated price and minimum
quantity throughout the following three years. During that three year period,
phosphate prices plunged, and Columbia refused to buy the designated tonnage
of phosphate from Royster. In a suit for breach, Columbia may introduce
evidence of course of dealing and usage to show that the price and quantity
terms were merely projections to be adjusted according to market forces.
[Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971); but
see Southern Concrete Services, Inc. v. Mableton Contractors, Inc., 407 F.
Supp. 581 (N.D. Ga. 1975)]
(a) Comment
Strictly speaking, evidence of course of dealing, course of performance, or
trade usage is not parol evidence, because it does not concern agreements
between the parties. Furthermore, in contracts for the sale of goods, U.C.C.
section 1-201(3) defines “agreement” to mean “the bargain of the parties in
fact as found in their language or by implication from other circumstances
including course of dealing or usage of trade or course of performance as
provided in this Act.” Literally, therefore, under the U.C.C. course of
dealing, course of performance, and trade usage are not parol evidence
 outside the agreement, but are part of the agreement. On this view, course
of dealing, course of performance, and trade usage are admissible even if
they contradict the writing. Courts are increasingly tending toward this
view by admitting such evidence, at least if the evidence is not logically
inconsistent with the explicit language of the agreement. However, some
courts still view the admissibility of such evidence as a parol evidence rule
issue, and exclude such evidence on that ground if there is a lack of
reasonable harmony between the course of dealing, course of performance,
or trade usage on the one hand, and the writing on the other.
(3) Filling in gaps
(a) Traditional approach [§406]
Under the traditional approach, if a written contract left a gap as to some
term (e.g., time of performance), evidence would be admitted on the issue
of what was a reasonable term for the court to imply, but parol evidence
was not admissible to show that the parties had actually reached an
agreement concerning the subject matter of the gap. [Hayden v. Hoadley,
supra, §379]
(b) Modern approach [§407]
Modern courts are increasingly disposed to admit parol evidence of

131

agreements concerning gaps under the “interpretation” exception to the

parol evidence rule as long as the evidence does not squarely contradict the
contract language. Some cases admit parol evidence even though the
evidence contradicts the implication of law that would be drawn in the
absence of the parol evidence. For example, in Masterson v. Sine, supra,
§382, parol evidence was held admissible to show that the parties had made
an agreement that an option was intended to be exercised only by the
optionee, although in the absence of such evidence the normal rule is that
the right to exercise an option is freely assignable.

i. Modifications [§408]
A later oral agreement that modifies a previously existing written contract does not
fall within the parol evidence rule, because the modification is subsequent to, rather
than prior to or contemporaneous with, the written agreement. Therefore, the fact
that a modification is oral does not make it unenforceable under the parol evidence
rule.
(1) Consideration [§409]
Of course, such an agreement still needs consideration to be enforceable (except
in contracts for the sale of goods; see supra, §75).
(2) Statute of Frauds [§410]
Furthermore, even if a modification is not invalid for lack of consideration, it
must still comply with any applicable provision of the Statute of Frauds (see
infra, §§525 et seq.).
(3) Contractual requirement of a writing [§411]
In some cases, a written contract contains a provision requiring that any
modification of the contract be in writing. Under common law, such provisions
are not normally given effect; that is, an oral modification of a contract
containing such a provision is normally enforceable at common law if the
modification is otherwise legally enforceable (i.e., if the modification has
consideration, need not be in writing under the Statute of Frauds, is not made
under duress, etc.). [Teer v. George A. Fuller Co., 30 F.2d 30 (4th Cir. 1929)]
(a) Rationale
The rationale for not giving effect to such a provision at common law is
that if the modification has consideration, it is a new contract, and the new
contract implicitly includes a mutual agreement to abandon the requirement
of a writing set out in the old contract.
(b) U.C.C. [§412]
Under U.C.C. section 2-209(2), in the case of a contract for the sale of
goods, if the original contract excludes modification or rescission

132
 133

except by a signed writing, then a modification or rescission must be in

writing. [U.C.C. §2-209(2)]
1) Waiver [§413]
However, U.C.C. section 2-209(4) provides that an oral modification of
a contract for the sale of goods that is unenforceable because it is
required to be in writing, either under the Statute of Frauds or under a
provision of the original contract, can “operate as a waiver.”
2) Retraction [§414]
The issue of whether the waiver can be retracted then arises.
According to U.C.C. section 2-209(5), a party who has made a waiver
affecting an executory (i.e., not yet performed) portion of a contract
may retract the waiver if she reasonably notifies the other party that
strict performance of the waived terms is required. However, the party
may not retract her waiver if it would be unjust in view of a material
change of position in reliance on the waiver by the other party. U.C.C.
section 2-209(5) does not explicitly address whether a waiver that
concerns an executed (i.e., previously performed) portion of a contract
can be retracted. The courts have divided on that issue. [Compare
Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280
(7th Cir. 1986)—a waiver can be retracted under U.C.C. section 2-209
unless it has been relied upon; with Getty Terminals Corp. v. Coastal
Oil New England, Inc., 995 F.2d 372 (2d Cir. 1993)—a waiver can be
retracted under U.C.C. section 2-209 only insofar as the waiver affects
the unperformed portion of a contract, and even then only on timely
notice of retraction]
134
Chapter Three:
Defenses

CONTENTS

Chapter Approach
A. Indefiniteness §415
B. Mistake §472
C. Contracts Induced by Misrepresentation, Nondisclosure, Duress, or Undue
Influence §495
D. Unconscionability §501
E. Statute of Frauds §525
F. Lack of Contractual Capacity §576
G. Illegal Contracts §583

135

Chapter Approach
After you determine that a contract has been formed, you must next determine whether the
contract is unenforceable by reason of some defense related to the formation of the
contract. (Defenses concerning the performance of the contract will be considered in
Chapter V.) The most important of these defenses are indefiniteness, mistake,
misrepresentation, nondisclosure, duress, undue influence, unconscionability, the Statute of
Frauds, lack of capacity, and illegality.

1. Indefiniteness
For a bargain to be enforceable, its terms must be sufficiently definite to: (i) evidence
that the parties have concluded a deal (rather than that they merely engaged in
preliminary negotiations), and (ii) enable the court to determine the terms of the bargain
with sufficient certainty to fashion a remedy for breach. If you see a question that
involves a bargain in which the parties have failed to specify price, quantity, or payment
terms, or have stated that a formal contract will follow, you should always consider the
defense of indefiniteness. You must also be aware, however, that often courts will fill in
gaps by implication. Thus a contract that has gaps will not necessarily fail on the ground
that it is too indefinite. If the contract is for the sale of goods, it will fall within the
 U.C.C., which includes a number of “gap filler” provisions.

2. Mistake
Whenever a question involves a promise that is made under some kind of false
impression, other than one induced by misrepresentation or nondisclosure, there is likely
to be an issue of mistake. These issues fall into five categories:
a. A mutual mistake occurs where the parties made a contract under a shared mistake
concerning a basic assumption of fact on which the contract was made. In such
cases, the adversely affected party is normally entitled to rescission unless he bore
the risk of the mistake.
b. A unilateral mistake occurs when something goes wrong with the mental
machinery of one of the parties, as where one of the parties makes a mistake in
computation. Such a mistake is a ground for rescission by the mistaken party if the
nonmistaken party knew or should have known of the mistake, so that the mistake
was “palpable.” Some courts hold that even if a unilateral mistake is not palpable,
the mistaken party is liable only for reliance (rather than expectation) damages.
c. A mistranscription occurs where an error was made in transcribing an oral
agreement into writing. In such cases, either party is entitled to have the writing
corrected through the remedy of reformation.
d. A misunderstanding occurs where (i) the parties made a contract under the
mistaken impression that their language was unambiguous, when in fact it

136

was ambiguous; (ii) each party gave the language a different interpretation; and (iii) each
party’s interpretation was equally reasonable. In such cases, the general rule is that
neither party is liable.
e. A mistake in transmission occurs where an intermediary, such as a telegraph
company, makes an error in transmitting an offer or acceptance. Normally, if the
party receiving the message knew or should have known of the error, there is no
contract. If the party did not know of the error (nor reasonably should have known),
under the majority rule, a contract is formed using the intermediary’s terms.

3. Misrepresentation, Nondisclosure, Duress, Undue Influence

In some cases, a party acts under a mistaken impression as a result of the other party’s
fraud or nondisclosure. Fraudulent or material misrepresentation is always a defense.
Nondisclosure is normally not a defense, unless the parties were in a relation of trust or
confidence or under certain other limited circumstances. A contract is voidable on the
basis of duress if consent was induced by wrongful threats. Undue influence is unfair
persuasion of a party who is under the domination of the person exercising the
persuasion, or who by virtue of the relation between them is justified in assuming that
 that person will not act in a manner inconsistent with his welfare. If a party’s assent is
induced by undue influence by the other party, the contract is voidable by the victim.

4. Unconscionability
A contract may also be unenforceable on the ground of unconscionability. Although a
contract may be deemed unconscionable because it is grossly lopsided, most
unconscionability problems involve unfairness in the bargaining process, such as the
use of a form contract that contains unfairly surprising terms (terms that a reasonable
person would not expect, or that are not written clearly). Be especially aware of
unconscionability issues in any question that involves a standard form contract.

5. Statute of Frauds
Always note whether the contract in question is in writing. If the contract is in writing,
the question may raise a parol evidence rule problem. (See supra, §§378 et seq.) If the
contract is not in writing, you must ask yourself whether the contract falls within the
Statute of Frauds. In particular:
a. Is the contract for the sale of an interest in land?
b. Is the contract for the sale of goods at a price of $500 or more?
c. Is the contract in consideration of marriage?
d. By its terms, can the contract not be performed within one year of the making of
the contract?
e. Is the contract one of suretyship?

137

If the contract falls into one of these categories and is not in writing, it is unenforceable
unless it is “taken out” of the Statute by an appropriate written memorandum signed by
the party against whom suit is brought, by part performance, or by reliance.

6. Lack of Capacity
If a party to an agreement lacks capacity to contract, the resulting agreement may be
voidable. Capacity issues may arise in contracts with either a minor or a person who is
suffering under a permanent or temporary mental incapacity.

7. Illegality
A contract is unenforceable if it is illegal.

A. Indefiniteness
1. General Rule [§415]
An apparent bargain will not be enforced if it is found to be too indefinite. An apparent
bargain will be found to be too indefinite if either: (i) its terms are so incomplete or
uncertain that they show that the parties did not regard themselves as having completed
a contract, or (ii) even if it seems that the parties regarded themselves as having
completed a contract, it is so indefinite that a court cannot determine its material terms
with reasonable certainty or fashion an appropriate remedy for breach.

a. Implication of terms [§416]

The mere fact that an agreement leaves gaps does not render it fatally indefinite;
almost all contracts leave some gaps that the court can fill through the process of
implication.
Example: An agreement to convey title to a specific parcel of land is not too
indefinite, even though no mention is made as to quality of title. The courts will hold
that there was an implied promise to convey “marketable” title.

Example: Similarly, an agreement to paint a house normally will not be rendered

too indefinite merely because it sets no time for completion—a “reasonable time” for
completion is implied.

Compare: However, an agreement to build “a house,” where no plans or

specifications are given, normally would be too indefinite to be enforced:
“Reasonable” plans cannot be implied. [See Stanton v. Dennis, 116 P. 650 (Wash.
1911)] Therefore, the courts normally would not have a sound basis for determining
what constitutes a “house” for purposes of a given contract.

138

(Even here, however, the result might be different if there were a basis for such a
determination; e.g., if the house was to be one of a number of tract houses that are
all virtually identical.) [See City Stores Co. v. Ammerman, 266 F. Supp. 766
(D.D.C. 1967), aff ’d, 394 F.2d 950 (D.C. Cir. 1968)]

b. Part performance [§417]

As a practical matter, what constitutes sufficient definiteness is a question of
judgment. One factor that often affects this judgment is whether the contract has
been partly performed. Generally speaking, a court might enforce a contract that has
been partly performed even though the court might have held the same contract too
indefinite if the contract had not been partly performed. (See infra, §439.)

2. Examples of Recurring Types of Omissions

a. Price
(1) Omission of price [§418]
Under the older cases, a gap as to price was usually fatal, on the theory that
courts could not infer what price the parties intended. However, under many
modern cases and the U.C.C. (see infra, §432), if the contract is totally silent
as to price, a reasonable price can be supplied by the court if the court is
satisfied that the parties intended to conclude a contract and there is some
objective standard (e.g., fair market value) for determining a reasonable price.
[Bendalin v. Delgado, 406 S.W.2d 897 (Tex. 1966); see infra, §§440 et seq.]
(a) Intent to conclude a contract [§419]
Even under the more liberal modern trend, a court will not enforce the
bargain unless the court determines that the parties intended to conclude a
contract. The omission of price may be deemed evidence that the parties
were still in preliminary negotiation. [Western Homes, Inc. v. Herbert
Ketell, Inc., 236 Cal. App. 2d 142 (1965)]
(2) Indefinite standard provided by parties [§420]
If the parties attempt to define the price through a standard that is itself
indefinite, the traditional approach is to refuse enforcement on the ground that in
such cases it cannot be inferred that the parties intended a “reasonable price.”
[Walker v. Keith, 382 S.W.2d 198 (Ky. 1964)]
Example: A proposal to furnish services at cost “plus a fair profit” would be
unenforceable for indefiniteness under the traditional approach, because a court
cannot determine either what is an objectively fair profit or what profit the
parties would have intended as fair. [Gaines & Sea v. R.J. Reynolds Tobacco
Co., 174 S.W. 482 (Ky. 1915)]

139

(a) Modern trend [§421]

Under the U.C.C., such an agreement would probably be enforced using
the standard of “a reasonable price at the time of delivery.” [U.C.C. §2-
305(1); see infra §§432, 448] Furthermore, at least some modern courts
might be willing to enforce such an agreement, even if it does not fall under
the U.C.C., if the parties had intended to conclude a contract (see infra
§449).

b. Time for performance

(1) General rule—reasonable time implied [§422]
A gap as to time of performance is rarely fatal. Instead, the courts will usually
fill the gap by holding that performance of the contract within a reasonable time
 was implied. [Automatic Sprinkler Co. v. Sherman, 294 F. 533 (5th Cir.
1923)]
(a) Test of reasonableness [§423]
What is a reasonable time will depend on the nature of the contract, custom
and usage in the community, and prior dealings between the parties.
(2) Special cases
(a) Employment contracts [§424]
In an employment contract whose duration is not specified, the usual rule
(perhaps more accurately, the presumption) is that the contract is
terminable at will by either party. [Atchison, Topeka & Santa Fe
Railway v. Andrews, 211 F.2d 264 (10th Cir. 1954)]
1) Rationale
Employment involves personal relationships, and it would be
objectionable to force either party to continue in such a relationship
against his will, unless the parties have so provided.
2) Stated pay period not controlling [§425]
A statement of pay period does not change the usual rule; i.e., the fact
that the employee’s salary or other compensation is payable weekly,
monthly, or annually does not mean that the employment is to last that
long. Instead, such a statement is deemed only to set the employee’s
rate of pay while the employment continues.
3) Agreement for “permanent” employment [§426]
Even agreements for a “permanent” job or employment “for life” or
employment “for so long as the employee chooses” are usually
interpreted to be terminable at the will of either

140

party. [35 A.L.R. 1432; Ruinello v. Murray, 36 Cal. 2d 687 (1951)]

a) Note
There are cases in which an agreement for “permanent”
employment (or any other indefinite period) will be interpreted
literally. These are usually cases in which either (i) the agreement
specifically limits the employer’s power to fire the employee (e.g.,
“permanent employment except in case of improper performance
by employee”), or (ii) the circumstances clearly indicate that the
parties really did have permanent employment in mind (e.g., the
employee takes a very low salary in early years, with promise of a
significant share of the profits in later years if the business is
successful, or the employee releases a claim against the employer in
 exchange for the promise of permanent employment). [Drzewiecki
v. H & R Block, Inc., 24 Cal. App. 3d 695 (1972)]
b) Employee handbooks [§427]
Large employers often issue employee handbooks that include
material on employment security. For example, a handbook may
provide that employees will not be discharged without good cause,
or will only be discharged for cause if they have been previously
reprimanded or if certain grievance procedures have been followed.
The majority rule is that statements of this sort in employee
handbooks are enforceable promises, and therefore overcome the
presumption that employment is at will in the absence of a contract
for a specific term. [See, e.g., Pine River State Bank v. Mettille,
333 N.W.2d 622 (Minn. 1983)] However, courts in some states
have held that employee handbooks will not be accorded this kind
of contractual status. [See, e.g., Heideck v. Kent General
Hospital, Inc., 446 A.2d 1095 (Del. 1982)]
c) Other factors [§428]
Even in the absence of an employee handbook, the doctrine that
employment is at will in the absence of a contract for a specific
term can be overcome by evidence of contrary intent. This
evidence may take the form of an express oral promise by the
employer (e.g., an express promise that employment will be
terminated only for cause). Alternatively, the at will doctrine may
be overcome by implication from other factors, including the
personnel policies or practices of the employer, the

141

employee’s longevity of service, actions or communications by the

employer reflecting assurances of continued employment, and the
practices of the industry in which the employee is engaged. [Foley
v. Interactive Data Corp., 47 Cal. 3d 654 (1988)]
1/ Comment
Because the at will doctrine is relatively entrenched, not all
courts may be ready to find that the doctrine is overcome by an
implied, as opposed to an express, promise. Indeed, as pointed
out above, traditionally agreements that expressly provided that
employment would be “permanent,” or “for life,” or the like,
were usually interpreted to be terminable at will.
(b) Distributorship and franchise contracts [§429]
Where the duration of a distributorship or franchise contract is left open
 (e.g., Manufacturer A appoints B to be its exclusive sales representative,
but no period of time is specified or indicated), the law implies that the
contract will last a “reasonable” time, which is often interpreted to be the
time it will take the distributor to recover her investment. [Allied
Equipment Co. v. Weber Engineered Products, 237 F.2d 879 (4th Cir.
1956)]

3. U.C.C. Provisions [§430]

The U.C.C. contains very liberal rules on indefiniteness in contracts for the sale of
goods, and also includes a number of “gap filler” provisions. To begin with, U.C.C.
section 2-204 provides that “even though one or more terms are left open, a contract for
the sale of goods does not fail for indefiniteness if the parties have intended to make a
contract and there is a reasonably certain basis for giving an appropriate remedy.”

a. Gap fillers [§431]

Other sections of the U.C.C. fill gaps by providing designated terms that govern if
there is a certain type of gap, or by providing how a certain kind of gap should be
filled. Note: The U.C.C. does not contain a gap filler on quantity.
(1) Price [§432]
Under U.C.C. section 2-305(1), if the parties so intend they can conclude a
contract for sale even though the price is not settled. In such a case, the price is
a reasonable price at the time for delivery if: (i) nothing has been said as to
price, (ii) the price is left to be agreed upon by the parties and they fail to agree,
or (iii) the price is to be fixed in terms of some standard that is set by a third
person or agency (such as a market), and it is not so set.

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(a) Note
If the parties intend not to be bound unless the price is fixed or agreed
upon, and the price is not fixed or agreed upon, then there is no contract. In
such cases: (i) the buyer must return any goods already received or, if
unable to do so, must pay the reasonable value of the goods at the time of
delivery, and (ii) the seller must return any portion of the price paid on
account. [U.C.C. §2-305(4)]
Example: Joe agrees to buy from Marilyn a rare sculpture of ancient
Greek origin, with Arturo, the preeminent expert on ancient Greek
sculptures, to set the price. Arturo refuses to do so. The parties probably
intended to be bound only if Arturo fixed the price; thus, there is no
contract after Arturo’s refusal.
(2) Place of delivery [§433]
 Under U.C.C. section 2-308, if the place of delivery for goods is not specified,
the place of delivery is the seller’s place of business. (However, in the case of
identified goods that the parties know are in some other place, that other place is
the place of delivery.)
(3) Time for shipment or delivery [§434]
Under U.C.C. section 2-309, if the time for shipment or delivery is not
specified, delivery is due in a reasonable time.
(4) Time for payment [§435]
Under U.C.C. section 2-310, if the time for payment is not specified, payment
is due at the time and place at which the buyer is to receive the goods.
(5) Duration of contract [§436]
Under U.C.C. section 2-309, if a contract provides for successive
performances, but is indefinite in duration, the contract is valid for a reasonable
time, but either party may terminate the contract at any time unless otherwise
agreed.
(6) Effect of gap filler provisions [§437]
In summary, under the U.C.C., in theory a bargain may be enforceable even
though it omits the price, the place of delivery, the time for shipment or delivery,
the time for payment, and the duration of the contract. Remember, however,
that the U.C.C. gap filler provisions are applicable only “if the parties have
intended to make a contract and there is a reasonably certain basis for giving an
appropriate remedy” (supra, §430). Where too many terms are missing, the
court may conclude that the parties did not intend to make a contract, but rather
they were only engaged in preliminary negotiations.
 143

4. Modern Trend Toward Liberalization [§438]

Modern authorities are beginning to apply the above U.C.C. approach to contracts
generally (rather than only to contracts for the sale of goods). Under this trend, courts
that believe the parties intended to make a contract are generally more willing to supply
reasonable terms to fill the gaps than they were in the past. The trend is reflected in
Restatement Second, which provides: “As a standard of reasonable certainty, it is enough
if the terms provide a basis for determining the existence of a breach and for giving an
appropriate remedy.” [Rest. 2d §33]
5. Indefiniteness Cured by Part Performance [§439]
An agreement that would otherwise not be enforced because it is too indefinite

144

may be enforced if the parties have begun performance. [Bettancourt v. Gilroy

Theatre Co., 120 Cal. App. 2d 364 (1953)]
Example: An agreement between Seller and Buyer that Seller will sell Buyer 500
bushels of beans per month at $2 a bushel for 12 months may be fatally indefinite where
Seller has many types of beans for sale, because there is no indication of grade, type,
and quality. But if Seller subsequently sends, and Buyer accepts, several deliveries of
No. 4 red pinto beans, this part performance identifies the subject matter of the contract
and therefore supplies the requisite degree of certainty. [See Brown-Crummer
Investment Co. v. Arkansas City, 266 P. 60 (Kan. 1928)]

a. Rationale
Enforcement of indefinite agreements on the basis of part performance is generally
grounded on one or more of the following theories:
(1) Part performance pursuant to the agreement shows that the parties believed
they had completed a contract and were not still in preliminary negotiations;
(2) The greater the extent to which performance has already occurred, the more
unjust it is to let one of the parties off the hook, and therefore the more ready
the court will be to supply missing terms; and
(3) Performance may fill a gap left in the contract by showing what the parties
believed the relevant term was.

6. Bargains Capable of Being Made Certain [§440]

In some cases, the parties do not fix a material term in the contract, but do set a method
for fixing the term. Such a bargain is enforceable if it makes reference to an objective
standard that is to be used to fix the missing term.

a. Standards for determining price [§441]

For example, bargains in which A agrees to sell to B at a price “as then quoted on the
grain exchange,” or “the same as that in the Ajax Co. contract” are enforceable.
 [Kladivo v. Melberg, 227 N.W. 833 (Iowa 1930)]

b. Output and requirements contracts [§442]

A bargain in which A agrees to supply B with “all your requirements of coal” or to
sell B “the entire output of my plant” is sufficiently certain. Both “requirements” and
“output” may be objectively determined. [Twin City Pipe Line Co. v. Harding
Glass Co., 283 U.S. 353 (1931)]
(1) Caveat
See supra, §§56-59, concerning the interpretation of such a contract.

145

c. Custom or usage [§443]

Terms may also be rendered certain by reference to local custom or usage. For
example, an offer to execute a conveyance “in the usual form” is sufficiently certain.
In such a case, the standard is the type of conveyance that is usual in the
community. [Bondy v. Harvey, 62 F.2d 521 (2d Cir. 1933)]

7. “Agreements to Agree” [§444]

Frequently, parties make an agreement in which they explicitly reserve some essential
term to be determined in the future, not by reference to an objective standard, but by
their future agreement. Such an agreement is known as “an agreement to agree.” If the
term involved is material, the traditional rule is that the agreement is unenforceable; i.e.,
such an agreement does not give rise to a legal obligation unless and until the parties
actually reach agreement on the relevant term. [Joseph Martin, Jr., Delicatessen, Inc.
v. Schumacher, 52 N.Y.2d 105 (1981)]

a. Rationale—the courts will not make a contract for the parties [§445]
The rationale of the traditional rule is that the courts can neither force the parties to
agree nor determine what they would agree upon. Furthermore, in such cases it is
said that there is no room to supply a “reasonable” term because the parties have not
simply left a gap but have provided a specific gapfilling mechanism (their agreement),
which has failed.

b. Complete omission vs. “agreement to agree” [§446]

The result under the traditional rule is that if the parties make no provision at all for a
material term, such as price, the courts might supply a reasonable term and uphold
the contract (supra, §432). However, if the parties provide that the term is “to be
agreed upon,” under the traditional rule the agreement usually will not be enforced.

c. Minor terms reserved [§447]

If the term “to be agreed upon” is a minor one, the contract generally will not be
rendered unenforceable. For example, a construction contract for a large office
 building that is otherwise sufficiently certain as to its terms will not be rendered
fatally indefinite because some relatively minor architectural detail is “to be agreed
upon.” [Rest. 2d §33]

d. U.C.C. provision [§448]

As in cases where the parties simply leave a gap, the U.C.C. is very liberal as to the
effect of an agreement to agree. Under U.C.C. section 2-305, in a contract for the
sale of goods an agreement to agree on price does not render a bargain
unenforceable, provided the court finds that the parties intended to conclude a
contract. In such a case, if the parties fail to reach an agreement as to price, then the
price is “a reasonable price at the time of delivery.”

e. Future trend [§449]

The Restatement takes the same position as the U.C.C. regarding enforcement

146

of agreements to agree on price [see Rest. 2d §33, ill. 8], and so do some modern
courts [see, e.g., Drees Farming Association v. Thompson, 246 N.W.2d 883
(N.D. 1976)]. The trend among modern courts will probably be to depart from the
traditional rule and enforce a contract that leaves a material term to future
agreement, provided the parties have manifested an intent to conclude a contract.

8. Bargains Subject to Power of One Party Concerning Performance [§450]

Questions frequently arise as to whether a bargain is sufficiently definite where one party
has reserved some power concerning performance.

a. Unrestricted option
(1) Common law [§451]
At common law, if either party retains an unlimited power to decide the nature
or extent of his performance, his promise is considered “illusory,” and thus fails
as adequate consideration for a counterpromise. (See supra, §27.)
Example: A makes an employment agreement with B under which A will
pay B “such wages as I wish” [Gulf Colorado & San Francisco Railway v.
Winton, 7 Tex. Civ. App. 57 (1894)], or A agrees to buy services from B at a
price “solely within our discretion” [Davis v. General Foods Corp., 21 F.
Supp. 445 (S.D.N.Y. 1937)]. Under the traditional rule, these contracts would
be unenforceable as illusory.
(2) U.C.C. position [§452]
Under the U.C.C., if it appears that the parties intended to be bound, an
agreement for the sale of goods at a price to be fixed by the seller or by the
buyer is enforceable. [U.C.C. §2-305; supra, §48] The U.C.C. provides that
 the party who is to fix the price does not have unlimited discretion; the price
must be fixed in good faith. Otherwise, the other party can either cancel the
contract or set a reasonable price himself. Furthermore, if the parties leave the
price to be fixed otherwise than by their agreement (e.g., a third party will
decide the price) and no price is set as a result of one of the parties’ fault, the
other party may either cancel the contract or set a reasonable price himself.
Example: Seller sells 10 tons of coal to Buyer for delivery next winter, the
price to be fixed by a third party. Seller convinces the third party not to fix a
price. Under the U.C.C., Buyer can cancel the contract or enforce the contract
at a reasonable price.
(3) Future trend [§453]
As in the case of agreements to agree, the Restatement takes the same

147

position as the U.C.C. on a power to set a term [Rest. 2d §34], and it is likely
that modern courts will begin to hold that an apparently unrestricted power to
set price is not illusory, because it is limited by the general obligation to perform
contracts in good faith.

b. Alternative promises [§454]

Generally, a bargain is not too indefinite merely because it reserves to a party the
right to choose which of two or more performances will be rendered, provided that
each performance would constitute consideration when taken alone (supra, §§38-
40).
(1) Promisor’s option [§455]
Thus, a bargain in which A agrees to sell “my horse or my cow, whichever I
choose, for $100” is enforceable. If the seller refuses to deliver either, the buyer
is entitled to damages based on the less valuable animal. [Rest. 2d §34]
However, if the promisor has an option to take an action that would not
constitute consideration, the contract is unenforceable. Thus where A agrees
that if B pays her $100, A will either sell B her horse or serve on a jury the next
time she is called, the contract is unenforceable. Since service on a jury is
simply performance of a legal obligation, it does not constitute consideration
under the legal duty rule, and a bargain that reserves in the promisor the right to
perform alternatives is not enforceable unless each of the alternatives constitutes
consideration. (See supra, §§38-39.)
(2) Promisee’s option [§456]
A bargain in which A agrees to sell B “my horse or my cow, whichever you
choose, for $100” is also enforceable. However, unlike an alternative promise at
the promisor’s option, an alternative promise at the promisee’s option is
 enforceable even if only one of the alternatives is supported by consideration.
Therefore, if A agrees to either sell B her horse or serve on a jury, at B’s option,
for $100, the contract is enforceable because one choice is supported by
consideration. (See supra, §40.)

c. Promise dependent on ability to perform [§457]

A bargain in which one party agrees to pay another “as soon as I am able” is
enforceable because the party’s financial ability to pay is capable of objective
determination. [Van Buskirk v. Kuhns, 164 Cal. 472 (1913)]

9. Agreement Contemplating Future Written Contract [§458]

A special problem that is related to indefiniteness occurs where parties enter into an
agreement on the understanding that a formal written contract will be executed, and that
does not occur. The question then arises, what was the parties’ intent in providing for the
written instrument?

a. Writing as evidentiary memorial [§459]

If it appears that the parties intended the writing only as an evidentiary memorial

148

of the terms of their agreement, and that the agreement, although not yet formally
memorialized, is complete, then the agreement is enforceable. [Saunders v.
Pottlitzer Bros. Fruit Co., 144 N.Y. 209 (1894); Goad v. Rogers, 103 Cal. App.
2d 294 (1951)]

b. Writing as consummation of agreement [§460]

If, however, it appears that the parties intended not to be bound unless and until a
writing was executed (i.e., if it appears that the writing was intended to be the
consummation of the negotiations), then the agreement is not enforceable unless
and until the formal written contract is executed. [Stanton v. Dennis, supra, §416;
Rest. 2d §27; 165 A.L.R. 752]

c. Determining intent [§461]

In determining whether the parties intended the written contract to be a memorial of
their agreement or a consummation of their negotiations, important factors to
consider are: (i) whether the contract is of a type usually put in writing; (ii) whether
there are few or many details; (iii) whether the amount involved is large or small; and
(iv) whether a formal writing is necessary for full expression of the type of
agreement in question. [Mississippi & Dominion Steamship Co. v. Swift, 29 A.
1063 (Me. 1894); Rest. 2d §27]
(1) Note
Sometimes there are special circumstances indicating that the primary intention
 was simply to memorialize the bargain—e.g., where the negotiations consisted
of a series of letters, and the purpose of the proposed writing appeared to be
simply to collect all the terms together in one instrument.

10. Preliminary Agreements [§462]

Another problem related to indefiniteness occurs when parties reach a preliminary
agreement in contemplation of a future final contract. The question arises whether the
parties intended this preliminary agreement to be binding, and if so, the extent to which
the parties intended to be bound. In a leading case, Teachers Insurance & Annuity
Association of America v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987), the court
distinguished between two kinds of preliminary agreements:

a. Agreement contemplating formalization [§463]

The first kind of preliminary agreement is one in which the parties have reached
agreement on the issues they considered to require negotiation, but they have
expressed an intention to formalize the agreement as an evidentiary memorial. This
type of preliminary agreement is binding as a contract at the time it is made. It is
“preliminary” only in the sense that it remains to be formalized in the way the parties
contemplated. (See supra, §459.)

b. Agreement contemplating further good faith negotiations [§464]

The second kind of preliminary agreement is one that expresses a mutual

149

commitment to a contract on agreed major terms, while recognizing the existence of

open terms that will be negotiated in good faith in the future. The most common
(although not the only) case in which this type of agreement arises is that in which
the parties have signed a letter of intent or commitment containing general terms and
providing that the parties intend to negotiate toward a final contract. Although the
existence of explicitly open terms in the preliminary agreement generally suggests that
a binding agreement has not been reached, that is not necessarily so. Within the last
15 or 20 years, courts have begun to recognize that parties can bind themselves to a
concededly incomplete agreement in the sense that they accept a mutual commitment
to negotiate together in good faith in an effort to reach final agreement within the
scope of the terms that have been settled in the preliminary, concededly incomplete
agreement.
(1) Express preliminary agreement to negotiate in good faith [§465]
Under the modern cases, an express agreement between A and B to negotiate in
good faith is enforceable, as is an agreement by A that for a designated period
she will not negotiate with anyone other than B about the subject of a proposed
contract with B. [Channel Home Centers v. Grossman, 795 F.2d 291 (3d Cir.
1986)]
 (2) Implied agreement to negotiate in good faith [§466]
Even without an express agreement to negotiate in good faith, there is an
implication in many preliminary agreements that the parties are mutually
committed to negotiate in good faith on those terms that have not been covered
in the preliminary agreement so that the final agreement can be executed.
(3) Content of obligation to negotiate in good faith [§467]
The obligation to negotiate in good faith generally has been described as
preventing a party from: (i) renouncing the agreed upon terms of a deal without
trying to negotiate the unresolved terms, (ii) abandoning the negotiations without
having made a good faith effort to consummate them, or (iii) insisting on terms
that are either inconsistent with or do not carry out the intent of those terms that
have been agreed upon. [A/S Apothekernes Laboratorium for
Specialpraeparater v. I.M.C. Chemical Group, Inc., 873 F.2d 155 (7th Cir.
1989)]

150

11. Reliance on Indefinite Contract [§468]

In the well-known case of Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (Wis.
1965), an agent of Red Owl Stores, Inc. promised Joseph Hoffman and his wife that he
would sell the Hoffmans a supermarket franchise for $18,000. This price was later raised
to $26,000. The Hoffmans made several expenditures and sold their bakery in reliance
on this promise. However, the agent later required Mrs. Hoffman’s father to sign an
agreement stating that his $13,000 loan to his son-inlaw and daughter for the purchase of
the franchise was in fact a gift, and the price of the franchise was again increased to
$34,000. Negotiations failed and the Hoffmans sued Red Owl. The court held that
although the agreement was too indefinite to enforce, the Hoffmans’ reliance on the
agreement entitled them to reliance damages because the conditions for promissory
estoppel were satisfied (i.e., the agreement was one on which Red Owl should have
realized the Hoffmans would rely, the agreement induced such reliance, the Hoffmans
suffered a loss, and injustice could be avoided only by compensating the Hoffmans for
their loss). The court said that section 90 of Restatement First, which embodies the
reliance principle (i.e., principle of promissory estoppel; see supra, §§123 et seq.) “does
not impose the requirement that the promise giving rise to the cause of action must be so
 comprehensive in scope as to meet the requirements of an offer that would ripen into a
contract if accepted by the promisee.”

a. Part performance as alternative [§469]

Reliance on an indefinite contract often takes the form of part performance. In such
cases, the traditional rule that part performance may make an otherwise indefinite
contract enforceable may make it unnecessary to resort to a reliance analysis.
Accordingly, the Red Owl doctrine is most likely to be invoked where one party to an
indefinite agreement has relied by preparing to perform rather than by beginning to
perform.
(1) Note
If part performance makes an otherwise indefinite contract enforceable, the
party who partly performs may be able to bring suit for expectation damages,
not merely reliance damages, to which he would normally be limited under the
Red Owl doctrine. (See supra, §128.)

b. Duty of good faith negotiation as alternative [§470]

Red Owl was decided at a time when the duty to negotiate in good faith had not yet
been fully developed. That duty may be a better fit for a given fact situation than the
reliance approach of Red Owl.

c. Application of Red Owl doctrine [§471]

As a practical matter, therefore, the Red Owl doctrine would be most readily applied
where the parties have not entered into a preliminary written agreement or begun
performance, but one party has nevertheless begun preparing to perform. In Red
Owl itself, the defendant seems to have led the plaintiff on by constantly dangling the
prospect of a final contract before the plaintiff,

151

knowing or having reason to know that the plaintiff would rely on that prospect.
Although the Red Owl opinion did not explicitly turn on the defendant’s leading-on,
conduct of this kind presents the strongest case for applying the Red Owl doctrine.

B. Mistake
1. In General [§472]
Mistake in contract law falls into five categories, known as “mutual mistake,” “unilateral
mistake,” “mistake in transcription,” “misunderstanding,” and “mistake in transmission.”

2. Mutual Mistake [§473]

In ordinary language, the term “mutual mistake” means a shared mistake made by both
of the parties to a contract. As used in contract law, however, the term normally refers to
a special kind of mutual mistake, namely, a mistaken assumption shared by both parties
as to the conditions of the outside world.

a. Older test [§474]

At one time, courts held that the test for whether mutual mistake constituted a
defense was whether the mistake concerned the “substance” or “identity” of the
contract’s subject matter (in which case the contract would be voidable), or only its
“accidents” or “collateral attributes” (in which case the contract would not be
voidable). [See, e.g., Sherwood v. Walker, 33 N.W. 919 (Mich. 1887)] Such
distinctions were neither very illuminating nor easily workable, and few if any courts
would now use this test.
Example: Walker contracted to sell Sherwood a cow that both parties believed
was barren. Before delivery of the cow, Walker discovered the cow was pregnant,
and thus more valuable. Under the older test, the contract could be rescinded
because the parties made a mutual mistake as to the substance of the contract’s
subject matter (i.e., the cow was a breeding cow rather than a barren cow).
[Sherwood v. Walker, supra]

b. Modern rule [§475]

The modern rule is that where parties enter into a contract under a mutual mistake
concerning a basic assumption of fact on which the contract was made, the contract
is voidable by the adversely affected party if the mistake has a material effect on the
agreed exchange and the adversely affected party did not bear the risk that the
assumption was mistaken. [Rest. 2d §152]
Example: On May 5, April contracts to sell her famous race horse, Apex, to
Mae. Unbeknownst to either party, Apex had died on the night of May 4. The
contract is voidable by Mae, because both parties were mistaken

152

as to a basic assumption on which the contract was made (i.e., that Apex was alive),
the mistake is material, and the mistaken assumption was not one as to which Mae,
the adversely affected party, bore the risk of mistake.

Example: Liz leases Silverlake to a band, “The Lads,” for one day for the
purpose of conducting a rock concert on the property. Unbeknownst to either party,
a municipal ordinance had just been enacted that effectively prevents such use of
Silverlake. The lease is voidable by The Lads because both parties were mistaken as
to a basic assumption on which the contract was made (i.e., that concerts could be
held on Silverlake), the mistake is material, and the assumption was not one as to
which The Lads, the adversely affected party, bore the risk of mistake.
 c. Where a party assumes risk of mistake [§476]
Under the modern rule, mutual mistake is not a defense where the adversely affected
party bore the risk that the assumption in question might be mistaken. [Rest. 2d
§154] A common instance of this type of case occurs where the parties knew that the
relevant assumption was doubtful. According to Restatement First, “where the
parties know that there is doubt in regard to a certain matter and contract on that
assumption, the contract is not rendered voidable because one is disappointed in the
hope that the facts accord with the wishes. The risk of the doubtful fact is then
assumed as one of the elements of the bargain.” [Rest. 1st §502, comment]
Example: Buyer agrees to buy from Seller a tract of land situated in a remote
desert area. Seller states that she believes, but is not positive that, she has good title
to the land. She makes no representation that she has good title, and the contract
provides only that Seller will convey such title as she has. Buyer believes that Seller
has good title to the land, and Buyer makes no title search, as Seller knows. It turns
out that Seller does not have good title. Buyer does not have a defense of mutual
mistake, because he knew that there was an element of doubt concerning the
assumption that Seller owned the land. [Rest. 2d §154, ill. 1]

d. Mistake in judgment no defense [§477]

Similarly, a contract is not voidable on the ground of mutual mistake if the mistake
concerns prediction or judgment—for example, if both parties erroneously think the
market price of potatoes will go down, or that a horse one is buying from the other is
not fast enough to race successfully.

3. Unilateral Mistake [§478]

A second type of mistake in contract law is unilateral mistake. In ordinary language, the
term “unilateral mistake” means a mistake made by one, rather than both, of the parties
to a contract. As used in contract law, however, the term normally refers to a special
kind of unilateral mistake, namely, a mechanical error of

153

computation, perception, or the like concerning a basic assumption on which the contract
was made. For example, where one party submits a bid to the other based on an error in
addition, so that the bid is unintentionally low, there has been a mechanical error in
computation. Similarly, if A says, “I will buy that box for $16,” and B accepts thinking A
has offered $60, there has been a mechanical error in perception. Most unilateral mistake
cases concern errors in computation.

a. Nonmistaken party aware of error [§479]

If the nonmistaken party either knew or should have known of the other party’s
mechanical mistake, the mistake is said to be a “palpable” unilateral mistake. A
 palpable unilateral mistake makes the contract voidable by the mistaken party. “One
cannot snap up an offer or bid knowing that it was made in mistake.” [Tyra v.
Cheney, 152 N.W. 835 (Minn. 1915); and see Peerless Glass Co. v. Pacific
Crockery & Tinware Co., 121 Cal. 641 (1898)]
(1) Actual knowledge not necessary [§480]
It is sufficient that the nonmistaken party should have known of the mistake, as
where one bid is substantially and inexplicably lower than all others.
Example: Contractor bids $700,000 on a construction project. The next
lowest bid is $1,700,000. This substantial difference in price is sufficient to
charge the nonmistaken party with knowledge that Contractor’s bid reflected an
error in computation. Therefore, the contract is voidable by Contractor. [See
M.F. Kemper Construction Co. v. City of Los Angeles, 37 Cal. 2d 696
(1951)]
(2) Analysis [§481]
The rule that a palpable unilateral mistake of computation, or the like, prevents
contract formation is often said to be an exception to the objective theory of
contracts, because the mistake is subjective. However, the purpose of the
objective theory is to protect the promisee’s reasonable expectations. If the
promisee knew or should have known that the promisor made a unilateral
mistake of computation or the like, she does not have a reasonable expectation
that a contract was formed.
(3) Errors in judgment [§482]
The rule concerning palpable unilateral mistake applies only to mechanical
errors, such as errors in computation or the like. It does not apply to errors in
judgment as to the value or quality of the work done or goods contracted for.
Example: Seller offers to sell her car to Buyer for $500, and Buyer accepts.
Buyer knows that Seller’s car has a market value of $1,500 and that this fact is
unknown to Seller. The contract is enforceable.

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b. Nonmistaken party unaware of error [§483]

If the nonmistaken party neither knew nor had reason to know of the other party’s
unilateral mistake, the traditional rule is that there is a binding contract.
(1) Damages [§484]
Under this rule, if the mistaken party discovers the mistake and refuses to
perform, the nonmistaken party is entitled to expectation damages (see infra,
§876). [Crenshaw County Hospital Board v. St. Paul Fire & Marine
Insurance Co., 411 F.2d 213 (5th Cir. 1969)]
 (2) Modern trend [§485]
However, a number of modern cases hold that if the mistaken party notifies the
other party of a unilateral mistake before the nonmistaken party has changed her
position in reliance, the mistaken party can rescind the contract. [St. Nicholas
Church v. Kropp, 160 N.W. 500 (Minn. 1916)] Furthermore, some of the
modern cases hold that even if the nonmistaken party has changed her position,
her recovery will be limited to damages required to compensate her for her
reliance. Although these cases are in the minority, they appear to represent the
trend of decision.

4. Mistranscription [§486]
The third type of mistake, mistranscription, occurs where the parties make an oral
agreement which they reduce to a signed writing, but through some clerical mistake the
writing does not correctly embody the oral agreement. In such cases, the aggrieved party
is entitled to the equitable remedy of reformation. Under this remedy, the writing is
reformed by the court so that it corresponds to the oral agreement. However, to obtain
reformation the aggrieved party must prove his case not merely by the usual
“preponderance of the evidence” but by “clear and convincing” evidence. [Goode v.
Riley, 28 N.E. 228 (Mass. 1891); and see Remedies Summary] Also, because
reformation is an equitable remedy, such cases are tried by a judge rather than by a jury.

5. Misunderstanding [§487]
The fourth kind of mistake, misunderstanding, arises where an expression (consisting of
words or conduct) is susceptible of two different but equally reasonable interpretations,
and each party’s subjective intention concerning the expression differs from that of the
other party. In such a case, no contract is formed. (See supra, §366.) Note that this rule
is inapplicable where one party’s interpretation is more reasonable than the other’s. In
such cases, the fact that the two parties subjectively intend two different meanings does
not prevent contract formation. Instead, a contract is formed, and its meaning is the
meaning intended by the party whose interpretation is more reasonable.

6. Mistakes in Transmission by Intermediary [§488]

The fifth kind of mistake concerns cases in which an offeror uses an intermediary—such
as the telegraph company or an interpreter—to transmit a communication,

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and the intermediary makes a mistake in transmitting the communication. Normally this
type of mistake involves a mistransmitted offer.

a. Offeree aware of mistake [§489]

As in the case of a unilateral mistake, if the offeree knew or should have known of
the mistake—for example, because of the magnitude of the discrepancy between an
 offered price and the market price—he cannot “snap up” what he knows to be an
erroneous price. Accordingly, if he attempts to accept, a contract will not be formed.
[Germain Fruit Co. v. Western Union, 137 Cal. 598 (1902)]

b. Offeree unaware of mistake [§490]

Where the offeree neither knows nor should know of the mistake, there is a split of
authority:
(1) Majority view [§491]
The majority view is that a contract is formed on the terms conveyed to the
offeree by the intermediary. Some courts rationalize this result on the theory
that the intermediary acts as the agent of the offeror, and the offeror is liable for
the acts of the agent. [Des Arc Oil Mill v. Western Union Telegraph Co., 201
S.W. 273 (Ark. 1918)] The problem with this rationale is that the intermediary is
usually an independent contractor, not an agent. Other courts adopt the rationale
that the offeror chose the intermediary who caused the error; where one of two
innocent parties must suffer, the one who caused the loss should bear the
burden thereof; and that by choosing the intermediary, the offeror caused the
loss. [Ayer v. Western Union, 10 A. 495 (Me. 1887)] This rationale, however,
breaks down where the offeree was the first to use the particular intermediary
(e.g., by telegraphing an inquiry to the offeror). Besides, using a particular
intermediary is often a reasonable thing to do.
(2) Minority view [§492]
Under the minority view, no contract results where there is an error in
transmission, on the ground that the parties have neither objectively nor
subjectively reached an agreement. [Strong v. Western Union, 109 P. 910
(Idaho 1910)]
(3) Intermediary’s liability [§493]
Under either view, the intermediary may be liable for negligence (and perhaps
also for breach of its contract of transmission) for any loss suffered by either
party. Thus, the primary effect of either the majority or minority view may
simply be to determine which party must sue the intermediary. However, a
remedy against an intermediary is not always satisfactory. Intermediaries, such
as telegraph companies, usually limit their liability for error as part of the
transmission contract, and such limitations on liability have generally been
upheld. [54 A.L.R. 1363]
 156

157

c. Practical significance [§494]

The practical significance of mistakes in transmission by an intermediary has been
much reduced by changes in modes of communication. Most of the intermediary
cases involve telegrams that are incorrectly typed by the telegraph company. With
the advent of overnight mail, fax, and E-mail, the use of telegraph companies or
other intermediaries who must type out a message seems to have drastically declined.
Most mistakes in transmission today are therefore likely to involve either clerical
 errors by the offeror or a failure of the offeror’s or offeree’s equipment. The rules
concerning such errors have not yet emerged, but it is likely that each party will be
responsible for its own clerical errors and for errors caused by its own equipment.

C. Contracts Induced by Misrepresentation, Nondisclosure,

Duress, or Undue Influence
1. Misrepresentation

a. Fraudulent misrepresentation [§495]

A misrepresentation is a statement that is not in accord with the facts. [Rest. 2d
§159] A misrepresentation is fraudulent if the misrepresenting party intends her
assertion to induce another party to enter an agreement and she either: (i) knows or
believes the assertion is untrue, (ii) lacks confidence in the truth of the assertion but
presents it as fact, or (iii) says or implies there is a basis for the assertion, such as
personal knowledge or investigation, when in fact the basis does not exist. [Rest. 2d
§162] If a party justifiably relies on a fraudulent misrepresentation made by another
and enters a contract as a result of that misrepresentation, the contract is voidable by
the innocent party. [Rest. 2d §164]
Example: Buyer asks Salesman if he sells any waterproof shoes. Salesman tells
Buyer that a certain pair of shoes is waterproof. Salesman actually does not know
whether the shoes are waterproof, and the shoes in fact are not waterproof. Buyer
buys the shoes because she thinks they are waterproof. The sale is voidable by
Buyer.

b. Material misrepresentation [§496]

Whether or not it is fraudulent, a material misrepresentation is also voidable by a
party who justifiably relies on it and agrees to a contract as a result of it. [Rest. 2d
§164] A misrepresentation is material if: (i) the assertion probably

158

will induce a reasonable person to agree, or (ii) the misrepresenting party knows the
assertion probably will make a particular person agree. [Rest. 2d §162]
Example: Same facts as in the example above, except Salesman truly believes
the shoes are waterproof. Although Salesman’s misrepresentation is no longer
fraudulent, it is still material because the assertion that the shoes were waterproof
would probably induce a reasonable person in Buyer’s position to buy the shoes.
Therefore, the sale is voidable by Buyer.
2. Nondisclosure [§497]
The general rule is that a party who proposes a contract does not have an obligation to
affirmatively disclose facts concerning the subject matter of the contract. However,
disclosure of material facts is required if the prospective parties are in a fiduciary
relationship or a relationship of trust or confidence. Disclosure may also be required,
even in the absence of such a relationship, where a material fact is known to one party
by virtue of his special position and could not be readily determined by the other party in
the exercise of normal diligence. For example, if a seller of a house, by virtue of his
special position as owner of the house, knows of a nonapparent termite infestation, the
seller may be obliged to disclose the infestation to a prospective buyer, especially if the
parties reside in an area in which buyers normally do not commission termite inspections
before purchasing homes.

3. Duress [§498]
A contract is voidable on the ground of duress where consent was induced by wrongful
threats. [Rest. 1st §§492-495]

a. Economic duress [§499]

A threat to withhold something another party badly needs or wants is not in itself
duress, because it is not wrongful to refuse to contract or to agree to contract only on
very favorable terms. But economic duress is a valid defense to the enforcement of a
contract where:
(i) One party commits or threatens to commit a wrongful act, including a breach
of contract, that would place the other in a position that would seriously threaten
his property or finances unless the other party enters into a contract; and
(ii) No adequate means are available to avoid or prevent the threatened loss,
other than entering into the contract.
Example: Client engages Attorney as tax counsel to resist a large tax deficiency
assessed against him by the Internal Revenue Department. Attorney waits until just
before the deadline for filing a reply with the Department, and then forces Client to
sign a very high contingency fee agreement by

159

threatening that unless Client agrees to the fee, Attorney will not file the necessary
papers, and Client would thus be liable for the full assessment. At this point, it is too
late for Client to find another lawyer who would make a timely filing. The agreement
is unenforceable on the ground of economic duress. [Thompson Crane & Trucking
Co. v. Eyman, 123 Cal. App. 2d 904 (1954)]

4. Undue Influence [§500]

 Undue influence is unfair persuasion of a party, A, who is under the domination of the
person exercising the persuasion, B, or who by virtue of the relation between them is
justified in assuming that B will not act in a manner inconsistent with A’s welfare. If a
party’s assent is induced by the other party’s undue influence, the contract is voidable by
the victim.
Example: Elderly Aunt is cared for by Nephew. Nephew pressures Aunt to sell him
some of her personal property at an unfairly low price. An undue influence defense will
likely succeed here, since by virtue of the relationship, Aunt was justified in assuming
that Nephew would not act in a manner inconsistent with her welfare.

D. Unconscionability
1. Introduction [§501]
The principle of unconscionability is a very important doctrine whose precise scope is
still somewhat uncertain.

2. Development of Doctrine—U.C.C. [§502]

Although traces of a doctrine of unconscionability can be found at early common law,
the doctrine in its modern form was introduced into contract law by U.C.C. section 2-
302.

a. U.C.C. section 2-302 [§503]

U.C.C. section 2-302 provides that “if a court as a matter of law finds a contract or
any clause of the contract to have been unconscionable at the time it was made, the
court may refuse to enforce the contract, or it may enforce the remainder of the
contract without the unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result.” (Note that under
section 2-302 it is normally up to the trial judge, rather than the jury, to decide
whether a contract or provision is unconscionable.)

b. Extension [§504]
Strictly speaking, U.C.C. section 2-302 is applicable only to contracts for the

160

sale of goods. However, since the original promulgation of the U.C.C., courts have
generally held that the principle of unconscionability is applicable to all contracts, and
the principle is now also embodied in Restatement Second section 208.

3. Meaning and Scope of Doctrine [§505]

Despite the general acceptance of the principle of unconscionability, its meaning and
scope are still uncertain. Many commentators draw a distinction between “procedural”
unconscionability (i.e., an unconscionable bargaining process) and “substantive”
unconscionability (i.e., contract terms that are unconscionable without regard to the
process by which those terms were reached, because they are lopsided). [113 U. Pa. L.
Rev. 435 (1965)]

a. Comment
This distinction is very helpful, because most cases in which the doctrine of
unconscionability is applied to invalidate a contractual clause involve procedural
unconscionability.

b. Procedural unconscionability—unfair surprise [§506]

Many (and perhaps most) cases of unconscionability involve “unfair surprise.”
Unfair surprise occurs where the party who drafts the contract includes a term in the
contract, having reason to know that the term does not accord with the other party’s
fair expectations and that the other party will not notice the term. This is an example
of procedural unconscionability, since inclusion of such a term without calling it to
the other party’s attention involves an unfair bargaining process. [U.C.C. §2-302,
comment]
(1) Adhesion contracts [§507]
Unfair surprise is particularly likely in printed form adhesion contracts—i.e.,
contracts in which the parties occupy substantially unequal bargaining positions,
and the party in the inferior bargaining position is forced to “adhere” to the
terms in the other’s printed form on a “take it or leave it” basis, rather than
having terms dickered out. [Wheeler v. St. Joseph Hospital, 63 Cal. App. 3d
345 (1977); 16 Kans. L. Rev. 303 (1968)] Typical examples of form adhesion
contracts include life insurance policies, consumer loan agreements, and
residential leases. Unfair surprise may result because a given term in the form is
contrary to reasonable expectations as to what provisions a contract of the
general type would involve and the term is not pointed out and explained, or is
written in obscure language.
(2) Party’s lack of knowledge of provisions in contract
(a) Traditional view [§508]
The traditional rule was that each party to a contract was charged with
knowledge of its provisions; i.e., each was bound by what he

161

signed, whether or not he read, understood, or even knew of the provisions

in question. Under this rule, there was no doctrine of unfair surprise. This
rule was known as “the duty to read.”
(b) Modern rule [§509]
 Modern cases, however, tend to hold that, at least when a form adhesion
contract is involved, a contracting party is bound only by those provisions
that are not unfairly surprising. [California State Auto Association v.
Barrett Garages, Inc., 257 Cal. App. 2d 71 (1967)]
Example: Sonnenberg, the owner of a department store, requests
Travelers Insurance Company to issue a liability insurance policy covering
Sonnenberg’s premises. Travelers agrees to do so. The policy, as issued,
includes a provision that excludes liability arising out of the use of elevators,
although Travelers knows that Sonnenberg’s store has elevators. A
reasonable person in Sonnenberg’s position would expect a premises
liability policy to include liability for all accidents on the premises, including
elevator accidents. Travelers does not call Sonnenberg’s attention to the
exclusion. The exclusion is unconscionable as unfairly surprising and will
not be enforced. [Portella v. Sonnenberg, 181 A.2d 385 (N.J. 1962)]

Example: Burns Insurance Company insures Homer’s residential

property, including homeowner’s liability. A provision of the policy excludes
liability to domestic employees, but the wording of the provision is so
obscure that its effect would not be understood by a reasonable person in
Homer’s position and is not in fact understood by Homer. The exclusion is
unconscionable as unfairly surprising and will not be enforced.
(c) Comment—protection of weaker party
The harsher or more one-sided the provision in question, the more
scrupulous the courts usually are in requiring that the weaker party had
actual knowledge of the provisions.

c. Substantive unconscionability [§510]

The extent to which the courts will apply a doctrine of substantive unconscionability
—unconscionability based on lopsided terms, without regard to defects in the
bargaining process—is still unresolved.
(1) U.C.C. [§511]
The Comment to U.C.C. section 2-302 states that “[t]he principle [of
unconscionability] is one of prevention of oppression and unfair surprise … and
not of disturbance of allocation of risks because of superior bargaining power.”

162

(2) Restatement Second [§512]

The Comment to Restatement Second section 208 takes the position that it is
possible for a contract to be oppressive taken as a whole, despite the fact that
there is no weakness in the bargaining process, but adds that unconscionability
 ordinarily involves other factors as well as overall imbalance. [Rest. 2d §208,
comment]
(3) Cases [§513]
Although most unconscionability cases have involved an unfair bargaining
process, a few cases have invalidated the price term of a contract on the basis
that the price charged was unconscionable—i.e., that the buyers were being
charged far more for goods than the goods were actually worth. [American
Home Improvement, Inc. v. MacIver, 201 A.2d 886 (N.H. 1964)]
Example: A contract for encyclopedias sold door-to-door (with sales largely
directed toward consumers of limited education and economic means) was held
unconscionable where it was shown that the price charged was roughly two and
one-half times the reasonable market price of the books. [Kugler v. Romain,
279 A.2d 640 (N.J. 1971)]

4. Types of Unconscionable Provisions [§514]

The following types of provisions have been attacked as unconscionable in various
settings:

a. Exculpatory clauses [§515]

An exculpatory clause is a clause releasing a party from liability for injury caused by
his actions. Such clauses often raise problems of unconscionability.
(1) Intentional wrongs [§516]
An exculpatory clause relieving a party from liability for his own intentional
wrongs is usually held violative of public policy and hence illegal. [See, e.g., Cal.
Civ. Code §1688]
(2) Negligence [§517]
Provisions relieving a party from liability for his own negligence raise greater
difficulty.

163

(a) Injuries to the person [§518]

 In theory, a disclaimer of liability for harm to the person caused by
negligence is enforceable unless it is unconscionable. In practice, however,
such disclaimers are commonly, although not invariably, held to be
unconscionable—either because the disclaimer is contained in a form
contract of adhesion and is unreasonably surprising, or because the
agreement that contains the disclaimer affects the public interest and the
injured party is a member of a protected class. [See, e.g., Tunkl v. Regents
of the University of California, 60 Cal. 2d 92 (1963)] Nevertheless, some
cases do enforce disclaimers of liability for harm to the person caused by
negligence, especially where the contract concerns activities that are known
to be hazardous. [Garretson v. United States, 456 F.2d 1017 (9th Cir.
1972)—experienced ski-jumper signed entry blank for a ski-jumping
tournament that contained a clear and prominent clause releasing sponsors
of the tournament from liability for injuries the ski-jumper might sustain]
(b) Injuries to property [§519]
Provisions that relieve a party from liability for lost profits or injury to
property caused by the party’s negligence are frequently upheld, provided
the injured party had some choice and no unfair surprise was involved (see
infra, §§522-524). [Mayfair Fabrics v. Henley, 222 A.2d 602 (N.J. 1967);
Sweeney Gasoline & Oil Co. v. Toledo, Peoria & Western Railroad,
247 N.E.2d 603 (Ill. 1969)] For example, the courts have tended to uphold
exculpatory clauses in contracts between advertisers and the telephone
company for ads in the Yellow Pages, where the clause limits the
advertisers’ damages for the telephone company’s errors and omissions to
an amount equal to the cost of the advertisement. [Gas House, Inc. v.
Southern Bell Telephone Co., 221 S.E.2d 499 (N.C. 1976); Willie v.
Southwestern Bell Telephone & Telegraph Co., 549 P.2d 903 (Kan.
1976); but see Allen v. Michigan Bell Telephone Co., 171 N.W.2d 689
(Mich. 1969)]

b. Disclaimers and limitations of warranty liability [§520]

There is in every contract for the sale of goods a warranty that the seller has good
title to the goods. [U.C.C. §2-312] In addition, a merchant seller impliedly warrants
that goods sold are merchantable (i.e., the goods meet certain basic standards,
including fitness for their ordinary purposes). [U.C.C. §2-314] Furthermore, any
seller who has reason to know that the buyer intends to use the goods purchased for
a particular purpose and that the buyer is relying on the seller’s skill or judgment in
selection of suitable goods impliedly warrants that the goods are fit for the
particular purpose. [U.C.C. §2-315] A seller may try to limit implied warranty
liability in two different ways, and such limitations are not necessarily
unconscionable.

164
 (1) Disclaimers [§521]
First, the seller may attempt to disclaim (i.e., negate) the warranty altogether.
U.C.C. section 2-316 provides that to exclude or modify the implied warranty of
merchantability, the language must mention merchantability and, in the case
of a writing, the disclaimer must be conspicuous. To exclude the implied
warranty of fitness, the language must be in writing and conspicuous.
However, the U.C.C. also provides that all implied warranties may be excluded
by expressions calling the buyer’s attention to the exclusion of warranties and
making it clear that implied warranties are excluded (e.g., “as is” or “with all
faults”).
(2) Limitation of remedies [§522]
U.C.C. section 2-719(1)(a) provides that agreements for the sale of goods may
limit the buyer’s remedies. Thus, instead of disclaiming a certain warranty, the
seller may limit liability for breach of warranty. For example, agreements often
may limit the buyer’s remedies for breach of warranty to repair and replacement
of defective goods. U.C.C. section 2-719(1)(a) is subject to two major
exceptions:
(a) Where exclusive remedy fails of its purpose [§523]
First, U.C.C. section 2-719(2) provides that “where circumstances cause an
exclusive or limited remedy to fail of its essential purpose, remedy may be
had as provided in this Act.” This provision is most commonly invoked
where the contract limits remedy to repair and replacement, and the seller
neither repairs nor replaces within a reasonable period of time.
(b) Where there is personal injury [§524]
Second, U.C.C. section 2-719(3) provides that consequential damages may
be limited or excluded unless the limitation or exclusion is unconscionable,
but that “limitation of consequential damages for injury to the person
[resulting from] consumer goods is prima facie unconscionable.” (U.C.C.
section 2-719(3) adds that limitation of damages where the loss is
commercial is not prima facie unconscionable.)
1) Application
Although U.C.C. section 2-719(3) provides that a limitation on
consequential damages for injury to the person resulting from consumer
goods is only “prima facie” unconscionable, in practice such a limitation
is almost invariably viewed as unconscionable by the courts. [See, e.g.,
Collins v. Uniroyal, Inc., 315 A.2d 15 (N.J. 1974)]

165

E. Statute of Frauds
1. In General [§525]
Absent a statute that provides otherwise, oral contracts are enforceable. However, a
universal statute, called the Statute of Frauds, requires certain types of contracts to be
memorialized in a writing signed by “the party to be charged” (i.e., by the party against
whom enforcement of the contract is sought). This universal statute stems from the
English Statute of Frauds of 1677. If an oral contract falls within one of the categories of
contracts that must be memorialized in a writing under the Statute of Frauds, the
contract is said to be “within the Statute”—i.e., the Statute of Frauds is a defense to
enforcement of the contract unless some exception (e.g., part performance) to the
Statute applies. If an exception does apply, it is said that the contract is “taken out of the
Statute”—i.e., the Statute is then not a defense, by virtue of the exception. In short, if a
contract is “within the Statute” it is unenforceable against a party who has not signed a
written memorandum containing the contract’s material terms, unless some exception
takes the contract “out of the Statute,” in which case the contract is enforceable.

2. Purpose [§526]
The basic purpose of the Statute of Frauds is to prevent fraud and perjury by persons
who might falsely claim that a contract was made, when it was not.

3. Types of Contracts that Must Be Memorialized in Writing [§527]

Following the original English Statute of Frauds, modern American Statutes of Frauds
commonly require at least five categories of contracts to be memorialized in a writing: (i)
contracts for the sale of an interest in land; (ii) contracts for the sale of goods (now
covered by the U.C.C.); (iii) contracts in consideration of marriage; (iv) contracts not to
be performed within one year from the making thereof; and (v) contracts of suretyship.

a. Contracts for sale of interest in land [§528]

Under the Statute of Frauds, a contract for the sale of land or of any interest therein
must be memorialized in a writing.
(1) Leases [§529]
Leases are covered by the sale-of-an-interest-in-land provision of the Statute,
unless explicitly excepted. However, many Statutes of Frauds provide that leases
for one year or less do not have to be memorialized in a writing. [See, e.g., Cal.
Civ. Proc. Code §1971]
(2) What constitutes “interest in land”? [§530]
It is often difficult to determine just what constitutes an “interest in land” within
the meaning of the Statute of Frauds. In general, what constitutes an interest in
land is determined by property law.

166

(a) Note
 A contract to share the profits or proceeds from the purchase or sale of
land is not within the Statute, because it is not a contract for sale and does
not promise to convey an interest in land.
(3) Part performance doctrine [§531]
Part performance of an oral contract for the sale of an interest in land operates
somewhat differently on sellers and purchasers.
(a) Sellers [§532]
A seller who has performed her side of an oral contract for the sale of an
interest in land by conveying the interest to the buyer can recover the
purchase price even though the contract is not in writing.
(b) Purchasers [§533]
Part performance by the purchaser of an interest in land may take a
contract out of the Statute for purposes of an action in equity—i.e., a suit
for specific performance (which seeks an order from a court to a party to
perform under a contract). However, the traditional part performance
exception to the Statute of Frauds does not apply to an action against the
seller at law—i.e., an action for damages.
1) Requirements under traditional rule
Under the traditional rule, the exception to the sale-of-land provision for
part performance by a purchaser is applicable only if the purchaser,
with the consent of the seller, either: (i) made a valuable improvement
on the land, or (ii) took or retained possession and paid a part of the
purchase price.
a) Note
Under some cases, taking possession, even without part payment,
suffices.
2) Reliance doctrine
Under modern law, as an aspect of the development of the reliance
principle in the Statute of Frauds area (see infra, §§573-575), part
performance that does not meet the traditional test, but that constitutes
reliance, may be sufficient to estop the other party from pleading the
Statute of Frauds. On this theory, part performance may be relevant
even where the action is at law; i.e., for damages.

b. Contracts for the sale of goods—U.C.C. section 2-201 [§534]

The modern Statute of Frauds provision applicable to sales of goods is set forth in
U.C.C. section 2-201. Under section 2-201, a contract for the sale of any goods for
the price of $500 or more must be supported by a writing.

167
(1) “Goods” defined [§535]
“Goods” includes all tangible movable property. It does not include intangible
securities or services.
(2) Exceptions [§536]
Certain exceptions are recognized in U.C.C. section 2-201. Under these
exceptions, an oral contract for the sale of goods for $500 or more will be
enforced under the following circumstances:
(a) Receipt and acceptance of goods [§537]
The buyer receives and accepts all or part of the goods (in which case the
contract becomes enforceable as to the goods accepted and received)
[U.C.C. §2-201(3)(c)];
(b) Part payment [§538]
The buyer makes part payment for the goods (in which case the contract is
enforceable as to the goods for which payment has been made) [U.C.C.
§2-201(3)(c)];
(c) Special manufacture [§539]
The contract calls for the manufacture of special goods for the buyer not
suitable for sale to others in the ordinary course of the seller’s business, and
the seller makes either a “substantial beginning” in the manufacture of the
goods or commitments for their procurement [U.C.C. §2-201(3)(a)];
(d) No objection to confirmation [§540]
The contract is between merchants; within a reasonable time a written
confirmation, which satisfies the Statute of Frauds as to the sender, is sent;
and the party receiving the confirmation does not dispatch a written
objection thereto within 10 days [U.C.C. §2-201(2)]; or
(e) Admission [§541]
The contract is admitted by the party against whom enforcement is sought
“in his pleadings or testimony in court” [U.C.C. §2-201(3)(b)—not in
effect in California].

(3) Modifications [§542]

A modification of a contract for the sale of goods is within the Statute of
 168

Frauds if the new agreement that results from putting together the original
contract and the modification is within the Statute.
Example: Seller orally agrees to sell Buyer two used cars for $900. Before
the time for delivery, Seller and Buyer orally modify the contract so that Seller
will sell only one of the cars for $450. The modification is not within the Statute
of Frauds.

Compare: In the example above, if the original contract was to sell one car
for $450, and the contract was then orally modified to cover two cars for $900,
the modification would be within the Statute of Frauds.
(4) Other U.C.C. provisions [§543]
U.C.C. section 2-201, above, is limited solely to contracts for the sale of goods.
However, other U.C.C. provisions provide that a writing is needed for other
types of transactions.
(a) Assignments—“authentication” required [§544]
U.C.C. section 9-203 provides that, with certain exceptions, assignments
of interests in certain types of personal property for value are unenforceable
unless the assignor either has possession of the property or has signed or
otherwise authenticated a security agreement describing the assigned debt.
(See infra, §670.)
(b) Securities—no writing required [§545]
U.C.C. section 8-113 provides that contracts for the sale of securities do
not have to be in writing to be enforceable. [U.C.C. §8-113]
(c) Certain general intangibles—writing required [§546]
U.C.C. section 1-206, a residual Statute of Frauds provision, covers
transactions for the sale of personal property that are not covered by
specific U.C.C. provisions, such as sections 2-201, 8-113, and 9-203, supra
—e.g., the sale of “general intangibles” such as royalties or copyrights.
Under section 1-206, absent a sufficient writing, a contract for the sale of
such property is not enforceable beyond $5,000 (in amount or value of
remedy).
(5) Sale of goods vs. contract for services [§547]
Often a contract requires the supplying of goods as well as a rendering of
services. For Statute of Frauds purposes, it must then be determined whether
the contract is primarily for the sale of goods or primarily for the rendering of a
service. A contract does not come within the sale-ofgoods provision of the
Statute merely because it involves an incidental supply of goods, like a contract
 to repair a television set in which the repairer also furnishes parts. Conversely, a
contract does not fall outside

169

the sale-of-goods provision merely because it requires an incidental furnishing of

services, like a contract to sell an air conditioner in which the seller also does
installation. In doubtful cases, the issue is what is the “predominant factor” of
the contract.

c. Contracts in consideration of marriage [§548]

Under the Statute of Frauds, contracts in consideration of marriage must be
memorialized in a writing. This provision of the Statute is interpreted to refer to
marriage settlement contracts and prenuptial contracts that include financial
provisions. The provision is not interpreted to apply to simple mutual promises
between prospective spouses to marry. These contracts are (somewhat arbitrarily)
considered to be “contracts to marry” rather than “contracts in consideration of
marriage.” (Note, however, that in many or most states suit can no longer be brought
by one fiance against another for breach of a promise to marry.)
Example: Mother orally promises Daughter that if Daughter marries John, she
(Mother) will give the couple $10,000 after the wedding. John and Daughter marry.
The promise is not enforceable under the Statute of Frauds because it was not in
writing.

Compare: A and B orally agree to marry. The agreement is not within the
Statute of Frauds because each promise to marry is deemed to be in consideration of
the other promise to marry, not in consideration of marriage itself.

Compare: The father of the prospective groom and the mother of the
prospective bride orally agree that if the marriage takes place they will each give
$5,000 to the couple. The agreement is not within the Statute of Frauds because
each promise is deemed to be given in consideration of the other promise, not in
consideration of marriage.

d. Contracts that cannot be performed within one year of making [§549]

Under the “one-year provision” of the Statute of Frauds, contracts that by their
terms cannot be performed within one year from the making thereof must be
memorialized in a writing. The one-year period begins at the date the contract is
made, not when performance is promised. [2 Corbin §444]
(1) Statute not applicable if performance within one year is possible although
unlikely [§550]
 A contract that will probably take more than one year to perform, or that seems
to envision performance over more than one year, may nonetheless be capable
of being fully performed within one year. Such a contract is not within the
Statute, and therefore is enforceable even though oral.

170

Examples: The following oral contracts would not be within the one-year
provision (subject to the caveat below) because they are capable, although
unlikely, of being performed in one year:
• A promise to take care of another person until she dies.
• A promise to pay a pension until death. [Leonard v. Rose, 65 Cal. 2d 589
(1967)]
• A promise to service and maintain equipment “as long as you need it.”
[Warner v. Texas Railway, 164 U.S. 418 (1896)]
• A promise of “lifetime” employment. Caveat: Some statutes require
“lifetime” contracts to be in writing. [See, e.g., N.Y. Gen. Oblig. Law §5-701]

(2) Exception for performance [§551]

Even if a contract cannot be performed within one year, the great weight of
authority holds that once the contract has been fully performed on one side, it
will be enforceable even though oral.
Example: By an oral agreement, Landscaper promises to maintain Owner’s
property for two years, and Owner promises to pay Landscaper $5,000 at the
end of that time. Landscaper fully performs. Owner’s promise to pay $5,000
can be enforced.
(a) Rationale
Even if the contract was not enforceable, the party who performed could
sue in restitution for the benefit conferred. (See infra, §572.) Allowing suit
on the contract itself avoids the difficulty of measuring the value of the
benefit conferred.

e. Suretyship contracts [§552]

Under the suretyship provision of the Statute of Frauds, promises made to a creditor
of another person—a debtor—to “answer for” (i.e., to be responsible for or
guarantee) the debtor’s obligation must be memorialized in a writing. The original
English Statute of Frauds also provided that promises by an executor or administrator
of an estate to pay the decedent’s debts out of her own funds must be memorialized
in a writing. However, this requirement falls within the suretyship provision, so the
same rules apply. The suretyship provision is subject to some important exceptions:
(1) Promise to debtor [§553]
If the promise is made to the debtor (e.g., “I promise to pay your obligation to
your creditor”), the promise does not fall within the suretyship

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section of the Statute of Frauds. Such a promise is therefore enforceable even

though oral, assuming there is consideration. [Rest. 2d §123]
(2) Promisor is primary obligor [§554]
The Statute of Frauds also does not apply to a contract in which the promisor
promises to be primarily liable for a third person’s obligation (e.g., “Send a
vacuum cleaner to John and bill it to me”). It applies only to contracts in which
the promisor promises to be secondarily liable (e.g., “I will pay for the vacuum
John is buying from you if John doesn’t pay for it”).
(3) Main purpose rule [§555]
A suretyship promise is enforceable, even though oral, if it appears that the
promisor’s main purpose in guaranteeing the obligation of another was to
secure an advantage or pecuniary benefit for himself. [Rest. 2d §116]
Example: Subcontractor refuses to furnish further labor and materials in the
construction of Owner’s house because the credit of Owner’s principal
contractor, Principal, is bad. To get her house completed, Owner orally
guarantees Subcontractor that she will pay all amounts owed by Principal to
Subcontractor if Principal does not pay. Owner’s promise is enforceable. Her
main purpose was not to aid Subcontractor, but to get her own house
completed. [Kampman v. Pittsburgh Contracting & Engineering Co., 175
A. 396 (Pa. 1934)]
4. Type of Writing Required [§556]
Normally, the Statute of Frauds can be satisfied by any sort of writing signed by the
party to be charged. Even a letter will do; a formal contract is not required.

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However, the writing must constitute a “memorandum” of the essential terms of the
agreement and must be signed by the “party to be charged.” Accordingly, even if an oral
agreement is of a type that is required to be in writing under the Statute of Frauds, and is
therefore “within” the Statute, the existence of a sufficient memorandum signed by the
party to be charged will take the contract “out of” the statute.

a. Essential terms [§557]

To satisfy the Statute, a memorandum normally must include:
(1) The identity of the contracting parties;
(2) A description of the subject matter of the contract; and
(3) The terms and conditions of the agreement.

b. Recital of consideration [§558]

Many states provide that a writing will not satisfy the Statute of Frauds unless it
states “the consideration.” Normally this requirement has little meaning, because a
writing that fails to state what each party was to do would probably be insufficient to
satisfy the Statute of Frauds in any event. The major application of this requirement
is to contracts of suretyship, where the writing often states the surety’s promise
without stating the consideration for that promise.

c. U.C.C. provisions [§559]

 In contracts for the sale of goods, which are governed by the U.C.C., a writing can
satisfy the Statute of Frauds even though it is less complete than is usually required.
Under the U.C.C., there need only be “some writing sufficient to indicate that a
contract for sale has been made” and specifying the quantity term. Such a writing
will suffice even though it omits or incorrectly states the price, time and place of
payment, and quality of the goods, and even if the quantity term is incorrectly stated.
However, the contract will not be enforceable beyond the quantity of goods specified
in the writing. [U.C.C. §2-201; and see Sale & Lease of Goods Summary]
(1) Written confirmations [§560]
The U.C.C. also provides that if one merchant sends a written confirmation of a
contract to another merchant in a form sufficient to bind the sender, the
recipient is bound unless he objects within 10 days following receipt—even
though the recipient merchant never signed anything. [U.C.C. §2-201(2); see
supra, §§509 et seq.]

d. Signature [§561]
The signature on a requisite writing need not be handwritten to satisfy the Statute of
Frauds; it can be typed or printed. A party’s initials may also be a sufficient signature
if so intended.

173

(1) Agents’ signature [§562]

The original Statute of Frauds expressly provided that a memorandum was
sufficient if signed by an authorized agent of the party to be charged. It was not
required that the agent’s authority to sign also be in writing. Thus, if A orally
authorized B to buy land on her behalf, and B signed a land purchase contract,
“A, by her agent B,” A was bound.
(a) Equal dignity statutes [§563]
However, some states have “equal dignity” statutes. Under such statutes, if
a contract is required by law to be in writing under the Statute of Frauds, a
principal is bound to a contract signed by the agent only if the agent’s
authority is also in writing. [See, e.g., Cal. Civ. Code §2309]
(2) Party to be charged must sign [§564]
Only the party to be charged (i.e., sought to be held liable) must have signed a
writing. The fact that the party seeking to enforce the contract has not signed a
writing (so that although she can enforce the contract, the contract cannot be
enforced against her) is immaterial.
Example: Vendor and Purchaser make an oral agreement for the sale of
land. Purchaser signs a memorandum that satisfies the Statute of Frauds, but
Vendor does not. Vendor can enforce the contract, even though Purchaser
 cannot.

(3) Location of signature [§565]

Normally, the signature (however made) can appear anywhere on the relevant
instrument. However, a few statutes say that the writing must be “subscribed.”
Some courts applying such statutes have required a signature at the bottom of
the writing.

e. Integration of several documents [§566]

The requisite writing or memorandum may be composed of several documents,
provided each document refers to or incorporates the others, or the documents are
otherwise integrated (e.g., by being physically attached).

f. Sales at auction [§567]

Sales at auction are usually oral. However, the auctioneer’s written memorandum of
the terms of a sale is held to be a sufficient writing against both the buyer and the
seller, on the theory that in making the memorandum the auctioneer is the agent of
both the buyer and the seller. [Rest. 2d §135]

174

5. Effect of Noncompliance with the Statute of Frauds

a. Majority view—contract unenforceable but not void [§568]

In most states, failure to comply with the Statute of Frauds renders a contract
voidable—i.e., unenforceable against a party who has not signed the requisite writing
—but not void. [U.C.C. §2-201; Rest. 2d §138; Walter H. Leimert Co. v.
Woodson, 125 Cal. App. 2d 186 (1954)]
(1) Effect [§569]
Under this view, although a suit cannot be brought on an oral contract that is
within the Statute, the contract is valid for all other purposes. For example, if
the oral contract is confirmed in a later memorandum, the contract becomes
enforceable against a party who signed the later memorandum even though no
new consideration is given (supra, §94). Similarly, once a contract that falls
within the Statute of Frauds has been performed on both sides, neither party is
 entitled to recover back what he has given. [Rest. 2d §145]
(2) Third party cannot raise defense of Statute of Frauds [§570]
The Statute of Frauds normally may be asserted only by a party to the contract,
not by a third person. Thus, if Seller orally promises to convey Blackacre to
Buyer, and gives Buyer immediate possession of the property, including the right
to rents payable from Tenant, Tenant cannot refuse to pay the rent to Buyer on
the ground that Buyer’s contract was oral.

b. Minority view—contract void [§571]

In a few states, the Statute provides that failure to comply with the Statute renders a
contract void. Under this view, the Statute of Frauds might be a defense to the
formation, not merely the enforcement, of a contract. [Ward v. Ward, 30 P.2d 853
(Colo. 1934)] In general, however, the courts have not put much weight on whether
a given Statute of Frauds provides that contracts that fail to comply with the Statute
are “void.”

6. Recovery in Restitution [§572]

Normally, a party who has conferred a benefit pursuant to a contract that falls within the
Statute of Frauds can recover in restitution for the value of the benefit, even if she
cannot enforce the contract.

175

a. Rationale
A suit to recover the benefit is not technically within the Statute of Frauds. The
Statute says that no action shall lie to enforce contracts that fall within it. A suit to
recover the value of a benefit is technically not an action to enforce the contract, but
an action in restitution or quasi-contract. Moreover, it would be unjust to permit a
party to retain benefits received under the contract without paying for them.

b. Distinguish part performance exceptions [§573]

In certain cases, part performance (or full performance on one side) creates an
exception to the Statute of Frauds, and makes a contract enforceable—either in full,
as in sale-of-land cases (see supra, §531) or in part, as in sale-of-goods cases (see
supra, §536). As just pointed out, even if the law did not recognize these part
performance exceptions, a party who had rendered performance could recover the
value of the benefit conferred in restitution. The significance of the part performance
exceptions is that where such an exception is applicable, it allows the performing
party to sue on the contract for expectation damages, rather than merely in
restitution or quasi-contract for the value of the benefit conferred.
(1) Caveat
Remember that only certain kinds of part performance result in the
 enforceability of a contract that falls within the Statute (see supra, §§531, 537).
If part performance does not make a contract enforceable, the remedy remains
a suit in restitution for the value of the benefit conferred.

7. Reliance on Contracts Within the Statute of Frauds

a. Reliance on the contract [§574]

The traditional rule was that reliance on a contract that is within the Statute of
Frauds does not create an exception to the Statute—i.e., reliance does not take a
contract out of the Statute—except insofar as the reliance involved part performance
of the kind that takes a contract out of the Statute. However, a growing number of
modern cases hold that reliance by one party may estop (preclude) the other from
asserting the Statute of Frauds as a defense, even if the reliance does not consist of
part performance of a kind that satisfies the Statute.
Example: Buyer orally agrees to buy a group of used cars from Seller, and Seller
transports the cars across the country to deliver them to Buyer. Buyer then refuses
to proceed with the purchase. During the interim, the used car market has fallen
sharply. Buyer is estopped to rely on the Statute as a defense, because if the contract
is not enforced, Seller would suffer an unconscionable loss as a result of her reliance.
[Goldstein v. McNeil, 122 Cal. App. 2d 608 (1954)]

176

b. Restatement in accord [§575]

Restatement Second adopts the position that reliance by one party on a contract that
is within the Statute of Frauds may estop the other party from pleading the Statute as
a defense. In particular, Restatement Second section 139 provides that where a
contract is within the Statute of Frauds, but the promisor has induced action or
forbearance by the promisee so that “injustice can be avoided only by enforcement
of the promise,” the promise is enforceable. [Rest. 2d §139] Under the Restatement
rule, whether a promise that falls within the Statute of Frauds should be enforced
because of reliance depends upon the availability and adequacy of other remedies,
particularly restitution; the extent to which the promisee’s detrimental reliance was
substantial, reasonable, and foreseeable; and the extent to which the oral agreement
is corroborated by the reliance or other evidence.

F. Lack of Contractual Capacity

1. Minors [§576]
A contract made by a minor (an “infant”—in most states, a person younger than 18) is
voidable at the minor’s option, although the minor may enforce the contract against the
adult.
 a. Restitution [§577]
In general, a minor is not even liable for the value of benefits she has received under
the contract, although if she disaffirms the contract she must return anything that she
received under the contract and still retains at the time of disaffirmance. However a
minor is liable in restitution for the reasonable value of necessaries furnished to her.
(1) “Necessaries”
“Necessaries” includes food, clothing, shelter, and whatever else is needed for
the minor’s subsistence, health, comfort, or education, taking into consideration
the minor’s age, status, and condition in life.
(a) Note
In some states, a minor is liable for the reasonable value of necessaries
furnished to her or purchased by her only if she is emancipated from her
parents, or if her parents are unable to provide the necessaries. [See, e.g.,
Cal. Civ. Code §36]

2. Mental Incapacity

a. Traditional rule [§578]

The traditional rule is that a person lacks the mental capacity to contract only if his
mental processes are so deficient that he lacks understanding of the nature,

177

purpose, and effect of the transaction. [95 A.L.R. 1442] This is sometimes referred
to as the “cognitive test.” Under this test, which is the majority rule, psychological or
emotional problems that affect a party’s judgment or reason do not in themselves
constitute mental incapacity for contract law purposes. Rather, the psychological
condition must actually deprive the party of an understanding of what he is doing.
[Smalley v. Baker, 262 Cal. App. 2d 824 (1968)—manic depressive person held
competent]

b. Restatement rule [§579]

The Restatement adopts a more liberal rule. Under the Restatement, a party lacks
capacity if he is “unable to act in a reasonable manner, and the other party has
reason to know of his condition.” [Rest. 2d §15] This is sometimes referred to as
the “affective test.”

c. Effect of incapacity [§580]

A contract entered into by a person lacking mental capacity is voidable by him (or a
guardian acting on his behalf), but not by the other contracting party.
(1) Note
In many states, if the person has been adjudicated insane or mentally
 incompetent his contracts are void, rather than merely voidable. [See, e.g., Cal.
Civ. Code §40]

d. Restitutional liability for necessaries [§581]

A person who lacks mental capacity (or his estate) is liable in restitution for the value
of any necessaries furnished to him.

3. Drunken or Drugged Persons [§582]

Drunkenness and drugs raise problems of temporary incapacity. Each case must be
judged on its own facts. The test, however, remains the same—whether the person was
so intoxicated or drugged as to be unable to understand the nature, purpose, and effect
of what he was doing. [Rest. 2d §16; Backus v. Sessions, 17 Cal. 2d 380 (1941)]

G. Illegal Contracts
1. In General [§583]
If a proposed contract is legal at the time an offer is made but becomes illegal before
acceptance of the offer, the intervening illegality terminates the offer as a matter of law.
If a contract is made, and is legal when made, but becomes illegal thereafter, the contract
is discharged (see infra, §847).

2. What Constitutes Illegality? [§584]

A contract is illegal if either the consideration or the object of the contract is illegal.

178

Some contracts are illegal because they are expressly prohibited by statute (e.g.,
gambling contracts and contracts in restraint of trade). Other contracts are illegal because
they violate public policy (e.g., contracts to defraud or injure third parties).

a. Indirect aid in accomplishment of an illegal act [§585]

An otherwise valid contract is not illegal merely because its performance will
indirectly aid in the accomplishment of an illegal act, provided the illegal act does not
involve a serious crime or great moral turpitude. For example, a seller can recover
the price of furniture even though she knows the furniture was purchased for an
illegal gambling casino, provided the seller herself does nothing in furtherance of the
unlawful design. Similarly, a lender can recover money loaned even though he knew
the borrower intended to use the money for illegal gambling, provided the lender
takes no part in the gambling.

3. Effects of Illegality [§586]

An illegal contract is void, and the general rule is that if a contract is illegal the courts will
not intercede to aid either party. Therefore, if the contract is executory, neither party can
enforce it. If the contract is partly performed, neither party can recover in restitution for
benefits conferred. The rationale is that the public importance of discouraging such
transactions outweighs considerations of possible injustice between the private parties.
[Rest. 1st §598] However, there are some important exceptions to this rule:

a. Severable portion may be enforced [§587]

First, if the agreement is “severable” into legal and illegal portions, and the illegal
portion does not go to the “essence of the bargain,” the legal portion may be
enforced. [Rest. 1st §606] An agreement is severable for these purposes only where
it expressly requires performance in distinct installments or portions and a separable
consideration is provided for each such portion (see infra, §§812 et seq.).

b. “Locus penitentiae” doctrine [§588]

Second, some decisions hold that where one party to an illegal contract repents and
repudiates the contract before any part of the illegal purpose is carried out, that party
may obtain restitutionary recovery for the value of what he gave in performance
prior to repenting and repudiating. [Rest. 1st §605; Wasserman v. Sloss, 117 Cal.
425 (1897)]

c. Not “in pari delicto” [§589]

Third, a party who has conferred a benefit under an illegal contract may be entitled
to bring suit in restitution for the value of the benefit conferred if that party is not
guilty of serious moral turpitude and is not as blameworthy as the other party. In
such cases, the relatively innocent party is said to not be “in pari delicto.” This
exception is inapplicable if the contract is malum in se (against good morals).
[Smith v. Bach, 183 Cal. 259 (1920)]

179

(1) Where one party is member of protected class [§590]

If one party to a contract that is illegal by reason of statute is a member of the
class for whose benefit the statute was enacted, that party is usually not
considered in pari delicto. Thus, an employee who works a greater number of
hours than permitted by statute is not in pari delicto with his employer and can
recover for his extra services. Similarly, an investor who purchases stock that is
issued in violation of the “blue sky law” (i.e., state securities statutes) is not in
pari delicto with the corporation and may recover the purchase price paid for the
stock. [Randal v. Beber, 107 Cal. App. 2d 692 (1951)]

d. Contract only malum prohibitum [§591]

Restitutionary recovery may also be available if the contract is only malum
prohibitum (against some statute or regulation but not involving any offense to good
morals). In such cases, the courts will not enforce the illegal contract, but they may
 permit a party to obtain restitution for benefits conferred. [Rest. 1st §604]
Example: Television Station hires Fireman to do part-time work as a television
baseball game announcer, knowing that Fireman is a city employee and that a city
ordinance prohibits city employees from accepting parttime jobs. Fireman may
recover from Television Station in restitution for the value of his services because
violation of the ordinance does not involve an affront to public morals. [Vick v.
Patterson, 158 Cal. App. 2d 414 (1958)]

Example: A usurious contract is also only malum prohibitum. The lender

therefore can usually recover the principal sum loaned, but not the usurious interest.
[Haines v. Commercial Mortgage Co., 200 Cal. 609 (1927)]

e. Licensing requirements [§592]

Statutes frequently require persons to obtain a license or permit from an appropriate
governmental authority in order to engage in a specified business or occupation (such
as doctor, attorney, contractor, or stockbroker). If an unlicensed person contracts to
perform services, whether the contract is enforceable depends upon the purpose of
the licensing statute.
(1) License for protection of public [§593]
If the purpose of the licensing requirement is to protect the public from
unqualified persons (i.e., to assure that license holders have certain minimum
qualifications), a contract negotiated by an unlicensed person relating to the
business is usually held illegal, and the unlicensed person will be denied recovery
in restitution for the value of the services.
(a) Note
Even in this kind of case, if a party has substantially complied with

180

the licensing laws, that compliance will generally be held sufficient. Courts
will not allow the other party to the contract to avoid obligations under the
contract merely because of technical violations (e.g., late renewal of
permit), as long as the public has received substantially the protection
contemplated by the licensing law. [Latipac v. Superior Court, 64 Cal. 2d
278 (1966)]
(2) License for fiscal regulation or taxation [§594]
In contrast, if a licensing requirement is imposed primarily for purposes of fiscal
regulation or taxation, rather than to protect the public from unqualified persons,
contracts entered into by the unlicensed person are usually held enforceable
notwithstanding the lack of a license.
 Example: Cities usually require that a business license be obtained by
persons engaged in business in the city, but such licensing is normally for
revenue raising purposes, and the cities do not pass on the qualification of the
licensees. Failure to obtain such a license is generally held not to render
contracts entered into by the unlicensed person unenforceable.
Chapter Four:
Third-Party Rights and Obligations

CONTENTS

Chapter Approach
A. Third-Party Beneficiaries §595
B. Assignment of Rights and Delegation of Duties §636

181

Chapter Approach
Once you have established that an enforceable contract has been formed, you should next
consider whether any third parties (i.e., persons not parties to the contract) have any rights
or duties under the contract. The types of third parties who may have rights or duties under
a contract are third-party beneficiaries, assignees of contractual rights, and persons to whom
contractual duties have been delegated.

1. Third-Party Beneficiaries
If a question sets out a contract that provides for performance to be rendered to
someone or to benefit someone who is not a party, you have a third-party beneficiary
situation. To decide whether this third party has the right to enforce the contract, you
must:
— Classify the third party as an “incidental” or an “intended” beneficiary (or, under
the older terminology, as an “incidental,” “donee,” or “creditor” beneficiary);
— Consider whether any defenses may be available to the promisor; and
— If the promisor and the promisee have attempted to modify the contract,
determine whether, if the third party has a right to enforce the contract, the rights
of the third party have vested.

2. Assignment/Delegation
If a question sets out a situation where one of the original parties to the contract has
transferred rights or delegated duties under the contract to a third person, you have an
assignments problem. In that case, consider:
— Whether the rights may be assigned or the duties delegated; and
 — The effect of the assignment or delegation on the various parties.

A. Third-Party Beneficiaries
1. In General [§595]
The question often arises whether a person who was not a party to the bargain, and who
gave no consideration, can enforce the contract if he would have been benefited by the
contract’s performance. This type of person is called a “thirdparty beneficiary.”

182

Example: Peter contracts to paint Penny’s building for $10,000, using paint sold by
Theo. Can Theo enforce Peter’s promise? (Under the conventional terminology used in
such cases, Penny is the promisee, Peter is the promisor, and Theo is the third-party
beneficiary.)

a. Original common law rule—promise unenforceable by third-party beneficiary

[§596]
The original common law rule was that in order to maintain an action on a contract,
a person must have given consideration to, and be in privity of contract with, the
party against whom he is seeking to enforce the contract. Hence, a third-party
beneficiary could not enforce a contract.

b. Modern law [§597]

Under modern law, a third-party beneficiary may sue and recover in appropriate
cases. [Lawrence v. Fox, 20 N.Y. 268 (1859); 81 A.L.R. 1289] The problem is,
what kinds of cases are appropriate?

2. Traditional Modern Law Test—Third Party Must Be Donee Beneficiary or

Creditor Beneficiary [§598]
Even under modern law, not every person who would benefit by performance of a
contract can bring suit on it as a third-party beneficiary. Under the traditional test,
popularized by Restatement First, third-party beneficiaries are divided into three classes:
(i) creditor beneficiaries, (ii) donee beneficiaries, and (iii) incidental beneficiaries.
Creditor and donee beneficiaries can bring suit under the contract; incidental beneficiaries
cannot.

a. Creditor beneficiary [§599]

A third party is a “creditor beneficiary,” and can enforce the contract, if the
promisee’s primary intent was to discharge an obligation he owed to the third party.
[Rest. 2d §302]
 Example: Holly owes $300 to Lawrence. Holly then makes a contract with Fox.
Under this contract, Holly loans Fox $300, and in exchange Fox (the promisor)
promises to pay Lawrence (the third-party beneficiary) the $300 owed by Holly (the
promisee) to Lawrence. Lawrence is a creditor beneficiary and can bring suit against
Fox if Fox fails to pay him the $300. [Lawrence v. Fox, supra]
(1) Rationale
Permitting a creditor beneficiary to enforce a contract is justified for two
reasons.
(a) Prevents unjust enrichment [§600]
First, permitting a creditor beneficiary to enforce the contract prevents
unjust enrichment of the promisor. The promisor has received consideration
for his promise to perform for the benefit of the third

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party, and he should not be permitted to retain the consideration and not
perform.
(b) Prevents excessive litigation [§601]
Permitting a creditor beneficiary to sue also saves unnecessary litigation.
Even if a creditor beneficiary could not sue the promisor, he could still sue
the promisee on the obligation the promisee owes him. The promisee could
then turn around and sue the promisor for not discharging the promisee’s
promise to the creditor beneficiary. Allowing the creditor beneficiary to sue
the promisor directly therefore collapses two suits into one.
(2) Must there be an actual obligation owed to the third party? [§602]
Is it necessary, to establish creditor beneficiary status, that the promisee owed
an actual obligation to the third party, or is it sufficient that the promisee
believed she owed such an obligation?
(a) General rule—promisee’s intent determinative [§603]
The general rule is that a third-party beneficiary is a creditor beneficiary if
the promisee, in making the bargain with the promisor, intended to satisfy
an obligation she believed she owed the third-party beneficiary, whether or
not she actually owed such an obligation. Under this rule, it is sufficient if
there is a supposed or asserted obligation owing to the third party. [Hamill
v. Maryland Casualty Co., 209 F.2d 338 (10th Cir. 1954)]
Example: Theo asserts a claim of $1,000 against Penny. Penny
believes the claim is valid. Shortly thereafter, Peter buys goods from Penny.
As consideration for the goods, Peter agrees to pay $1,000 to Theo. It
subsequently develops that Theo’s claim against Penny was in fact invalid.
 Under the general rule, Theo is a creditor beneficiary and can enforce
Peter’s promise, regardless of whether his claim had actual merit.

b. Donee beneficiary [§604]

Restatement First defined two types of donee beneficiaries. Either type can enforce
the contract.
(1) Intent to confer a gift [§605]
Under Restatement First, a third-party beneficiary is a “donee beneficiary” if the
promisee’s primary intent in contracting is to confer a gift on the beneficiary.
[Rest. 1st §133]
Example: Mrs. Beman, who is dying, wishes to give her house to her niece
Marion. To achieve this objective, Mrs. Beman makes a

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contract with her husband, Judge Beman. By the terms of the contract, Mrs.
Beman agrees not to change her will, under which her husband is the principal
legatee and will inherit a life estate in the house. In exchange, Judge Beman
agrees that on his death he will leave the value of the house to Marion. Marion
is a donee beneficiary, and she can enforce the contract against Judge Beman.
[Seaver v. Ransom, 224 N.Y. 233 (1918)]
(2) Intent to confer a right to performance [§606]
A third-party beneficiary is also a donee beneficiary under Restatement First if
the promisee intended to confer on the beneficiary a right against the promisor
to some performance, other than as a gift.
Example: Dealer contracts with Insurance Company that Insurance
Company will indemnify anyone who purchases an auto from Dealer for loss
due to fire or theft within one year after the purchase. Buyer purchases a car
from Dealer, on Dealer’s assurance that Buyer is insured by Insurance
Company. Buyer is a donee beneficiary, because Dealer intended to confer on
Buyer a right against Insurance Company, other than as a gift.

c. Incidental beneficiary [§607]

Under the Restatement First terminology, a third party who would be benefited by
the performance of a contract, but who is neither a creditor beneficiary nor a donee
beneficiary, is an “incidental” beneficiary and cannot bring suit under the contract.
Example: Peter contracts with Penny to build a house on Penny’s land.
Construction will greatly enhance the value of neighboring property owned by Theo.
If Peter breaches the contract and Theo brings suit against Peter, Theo will lose
 because he is only an incidental beneficiary. Peter was not discharging a debt to
Theo, and it was clearly not Penny’s intent to confer a gift on Theo or a right against
Peter.

3. Restatement Second Terminology [§608]

Restatement Second substitutes the term “intended beneficiary” for the terms “creditor”
and “donee” beneficiary, and it retains the term “incidental beneficiary.” Thus, under the
terminology of Restatement First, a donee or creditor beneficiary can bring suit to
enforce a contract but an incidental beneficiary cannot, while under the terminology of
Restatement Second, an intended beneficiary can bring suit but an incidental beneficiary
cannot. However, although the terminology has changed, the tests remain largely the
same. Under Restatement Second section 302(1), “a beneficiary of a promise is an
intended beneficiary if recognition of

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a right to performance in the beneficiary is appropriate to effectuate the intention of the

parties and either (a) the performance of the promise will satisfy an obligation of the
promisee to pay money to the beneficiary; or (b) the circumstances indicate that the
promisee intends to give the beneficiary the benefit of the promised performance.”
Essentially, the test in section 302(1)(a) is equivalent to the Restatement First test for
creditor beneficiaries, and the test in section 302(1)(b) is equivalent to the Restatement
First test for donee beneficiaries.
Example: Testator employs Attorney to draft a will leaving all of Testator’s estate to
Legatee. Legatee is an intended beneficiary of Attorney’s promise to draft such a will,
because allowing Legatee to sue Attorney is appropriate to effectuate Testator’s intent
that her estate (or its value) end up in Legatee’s hands and Testator intended to benefit
Legatee. [Lucas v. Hamm, 56 Cal. 2d 583 (1961)]

Compare: Peter contracts with Penny to build a house on Penny’s land. The
contract requires Peter to use roofing materials manufactured and sold by Theo. If Peter
breaches the contract, Theo cannot bring suit aginst Peter. Recognition of Theo’s right to
performance was not necessary to effectuate the contract between Peter and Penny,
performance would not satisfy an obligation of Peter to Penny, and Peter did not intend
to benefit Theo. Therefore, Theo is only an incidental beneficiary.

a. Problem
It is easy to see why with creditor beneficiaries and true gift beneficiaries (i.e.,
beneficiaries toward whom the promisee had a donative intent), the thirdparty
beneficiary should be able to sue on the contract. The hard cases are those that do
not fall into these two categories. Restatement First dealt with this problem by
allowing a third party who was neither a creditor beneficiary nor a true gift
 beneficiary to bring suit as a “donee beneficiary” if the promisee intended to confer
upon the beneficiary a right against the promisor to some performance, other than as
a gift. However, this formulation was not very helpful in solving the hard cases,
because the promisee’s intent in these cases is seldom clear. The introductory part of
Restatement Second section 302(1) adopts a more useful test to deal with the
noncreditor, nongift cases—i.e., whether recognition of a right in the beneficiary is
appropriate to effectuate the intention of the parties. However, section 302(1)(b)
then adds to that test a requirement that the circumstances indicate that the promisee
intended to give the beneficiary the benefit of the required performance. The
Restatement Second therefore also uses an intent test in such cases, despite the fact
that intent in the noncreditor, nongift cases is seldom clear.
(1) Comment
A better principle to deal with the noncreditor, nongift cases is as follows: A
third-party beneficiary should have power to enforce a contract

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if (i) allowing the beneficiary to enforce the contract is a necessary or important

means of effecting the contracting parties’ performance objectives, as
manifested in the contract read in the light of surrounding circumstances, or (ii)
allowing the beneficiary to enforce the contract is supported by reasons of
policy or morality independent of contract law and would not conflict with the
parties’ performance objectives. This principle is comparable to the general,
introductory part of the Restatement Second principle—whether recognition of a
right is appropriate to effectuate the intention of the parties—but does not
include, as does the Restatement Second, a requirement that the promisee
intended to give the beneficiary the benefit of the promised performance,
because intent in such cases is difficult to determine.

4. Recurring Third-Party Beneficiary Cases [§609]

Many third-party beneficiary cases fall into recurring patterns. Four of these will be
discussed here: assumption agreements, agreements between testators and attorneys that
would benefit would-be legatees, government contracts, and surety bonds.

a. Assumption of a mortgage [§610]

An assumption agreement is an agreement under which one person (the promisor)
assumes (i.e., undertakes to perform) the obligations already owed by another (the
promisee) to a third party. The third party in an assumption agreement is a creditor
beneficiary because, by definition, the promisor has assumed an obligation that the
promisee owed to the third party. A common type of assumption agreement involves
mortgages. A mortgage is an interest in real property (e.g., real estate) that secures a
debt owed by the mortgagor (the debtor) to the mortgagee (the creditor). A person
who sells property that is subject to a mortgage often requires the purchaser to
assume the mortgage debt.
(1) Purchaser “assumes” mortgage debt [§611]
Suppose a purchaser of real estate “assumes” (i.e., agrees to pay) an existing
mortgage on the real estate as part of the purchase transaction. In that case, the
mortgagee is a creditor beneficiary of the purchaser’s promise. Therefore, in the
event of default, both the assuming purchaser and the original mortgagor are
personally liable for the full mortgage debt. The mortgagee may be able to
foreclose her lien on the property and, in most states, sue the mortgagor and/or
the purchaser for any deficiency owing after the property is sold. [Corning v.
Burton, 62 N.W. 1040 (Mich. 1894)]
(2) Purchaser takes “subject to” mortgage [§612]
In some cases, a purchaser of mortgaged property merely takes the property
“subject to” the mortgage, rather than assuming the mortgage. In such cases,
there is no assumption agreement, and the mortgagee therefore

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has no action against the purchaser for payment of the mortgage debt. In the
event of default, only the mortgagor is personally liable for the full mortgage
debt. The mortgagee can foreclose her lien on the property and, depending on
applicable state law, the mortgagee may be able to sue the mortgagor for any
deficiency owing after the property is sold.
(3) Purchaser assumes a mortgage from seller who only took subject to the
mortgage [§613]
Suppose A owns mortgaged real property and sells it to B. B buys subject to the
mortgage rather than assuming the mortgage. B then sells the property to P, who
assumes the mortgage. Is P liable to the mortgagee?
(a) Majority view
The majority view is that P is not liable, on the ground that B did not intend
to confer an unconditional right on the mortgagee, but either acted under
the mistaken impression that he was liable, or intended to make P liable
only if B was liable.
(b) Minority view
There is, however, a minority view that holds P liable in such a case. The
theory is that B must at least have supposed he owed a

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duty to the mortgagee, or he would not have gotten P to assume the

mortgage. This supposed duty is sufficient to make the mortgagee a creditor
 beneficiary because a person is a creditor beneficiary if the promisor agrees
to pay either an actual or an asserted or supposed obligation of the
promisee (supra, §603).

b. Would-be legatees [§614]

Another recurring kind of case is that in which a client retains an attorney to draw a
will that would benefit a third party. The attorney fails to draw the will in accordance
with the client’s wishes or fails to draw the will properly. The client dies, and the
third party does not take anything under the client’s estate because of the attorney’s
failure. Most modern courts hold that the third party has a right against the attorney
as an intended third-party beneficiary of the contract between the client (the
promisee) and the attorney (the promisor). [See, e.g., Guy v. Liederbach, 459 A.2d
744 (Pa. 1983)] This makes sense because unless the third party is given the right to
sue the attorney, an important objective of the contract between the client and the
attorney—making the third party a beneficiary of the client’s estate—will not be
fulfilled.
(1) Negligence
Some courts reach pretty much the same result by allowing the client to sue the
attorney in tort for negligence. [See, e.g., Heyer v. Flaig, 70 Cal. 2d 223
(1969)] Both theories were adopted in Hale v. Groce, 744 P.2d 1289 (Or.
1987).

c. Government contracts [§615]

Contracts with the government often benefit either the public generally or a specific
class of members of the public. The general rule is that a member of the public who
would benefit from a promise to render a performance to a federal, state, or local
government is not deemed an intended beneficiary of the promise, and cannot bring
suit to enforce the promise, even if the performance was to be rendered directly to
that member and like members of the public.
Example: Rensselaer Water Co. contracted with a city to, among other things,
supply the city with fire hydrant water. Moch, whose property was destroyed by fire
because the fire hydrants did not have a sufficient head of water, could not recover
damages from Rensselaer. [Moch v. Rensselaer Water Co., 247 N.Y. 160 (1928)]
(1) Restatement First exception [§616]
Under Restatement First, the general rule is subject to an exception where an
intention is manifested in the contract, as interpreted in the light of the
circumstances surrounding its formation, that the promisor

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will compensate members of the public for injurious consequences arising from
 breach. [Rest. 1st §133]
Example: City enters a contract with Builder in which Builder promises to
build a subway for City and pay damages to anyone who is injured by the
construction work. Homeowner’s house is damaged when the land settles
beneath it due to the subway construction. Homeowner can sue Builder under
the Restatement First because Builder’s intention to compensate members of the
public was manifested in the contract.
(2) Restatement Second exceptions [§617]
Under Restatement Second, the general rule is subject to an exception where
either: (i) the terms of the contract provide for liability to the members of the
public in question, or (ii) the government is subject to liability to the members of
the public for the damages they suffer because the performance was not
rendered, and a direct action against the promisor is consistent with the terms of
the contract and with the policy of the law authorizing the contract and
prescribing remedies for its breach. [Rest. 2d §313]
Example: Same facts as in the above example. Homeowner can sue Builder
under Restatement Second because the terms of the contract provide for liability
to members of the public injured by the construction work. [Rest. 2d §313, ill.
3]

Example: Municipality owes a duty to the public to keep its streets in repair.
Construction Company contracts with Municipality to repair certain streets.
However, one street is not repaired and Citizen, a member of the public, is
injured. Citizen can sue Construction Company for damages under Restatement
Second because the government is liable to Citizen for her injuries, and a direct
action against Construction Company is consistent with the terms of the contract
and the policy of the law authorizing the contract and prescribing remedies for
its breach. [Rest. 2d §313, ill. 5]
(3) Comment
As a practical matter, it is often very difficult to determine whether a
government contract falls within the general rule or within an exception.
Members of the public are much more likely to be deemed intended
beneficiaries if: (i) they are part of a small and relatively well defined group
(e.g., a small group of home buyers or tenants) who would benefit by the
performance of contracts entered into specifically to protect their interests, and
(ii) the government suffers no compensable damages from the

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breach, so that if the members of the public are not allowed to bring suit, there
 is no practicable sanction for nonperformance.
Example: Contractor breached a contract with the government under which
it agreed to build homes with certain specifications for veterans. The court held
that 12 veterans who purchased homes that did not meet the specifications
could sue Contractor as intended beneficiaries. [Shell v. Schmidt, 126 Cal.
App. 2d 279 (1954)]

Example: Developer breached a contract with the government under which

it agreed not to charge more than specified rents. Tenants of an apartment
building to which the contract applies can sue Developer as intended
beneficiaries. [Zigas v. Superior Court, 120 Cal. App. 3d 827 (1981)]

d. Suits by subcontractors against sureties of prime contractors [§618]

In the typical construction setting, a private or public entity—an owner—makes a
contract with a prime contractor who agrees to perform specified construction. The
prime contractor, in turn, contracts with various subcontractors, who agree to
perform portions of the construction. Because contractors are typically thinly
capitalized, an owner often requires a prime contractor to provide either a
performance bond, under which a surety guarantees the owner that the contractor
will perform its contract with the owner; a payment bond, under which the surety
specifically guarantees the owner that the claims of subcontractors will be paid; or
both. Can an unpaid subcontractor sue the surety as a third-party beneficiary under a
payment bond or a performance bond between the surety and the owner?
(1) Payment bonds—traditional analysis [§619]
Traditionally, the courts distinguished between payment bonds running to public
owners and payment bonds running to private owners. Subcontractors were
allowed to recover under payment bonds running to public owners, but not
under payment bonds running to private owners. The distinction rested on an
application of the intent-to-benefit test found in Restatement Second section 302
(see supra, §608) to the assumed motivations of public and private owners in
requiring the prime contractor’s payment obligations to be bonded. The analysis
was as follows:
(a) Private owners [§620]
A subcontractor usually has a right to file a lien on a private owner’s
property for the value of the work it has performed. As a result, if the
prime contractor fails to pay a subcontractor, a private owner may be
required either to pay the subcontractor itself or to bear the impact of a
foreclosure under the lien. Accordingly, the courts

191
 reasoned, when a private owner requires a prime contractor to bond its
payment obligation to subcontractors, the private owner’s intent must not
be to benefit the subcontractors, but rather to benefit itself by ensuring that
it will not suffer economic injury as a result of liens filed by unpaid
subcontractors. Under the intent-to-benefit test, therefore, the
subcontractors could not sue the surety in a private construction case
because the owner did not intend to benefit them.
(b) Public owners [§621]
On the other hand, the lien laws typically do not extend to public
construction. Therefore, a public owner will typically suffer no economic
injury if subcontractors are not paid. Accordingly, if a public owner requires
a prime contractor to bond its payment obligation, the owner’s intent must
be to benefit not itself, but the subcontractors, and under the intent-to-
benefit test, the subcontractors could sue the surety in a public construction
case.
(2) Payment bonds—modern analysis [§622]
The modern tendency is to allow subcontractors to recover against the sureties
of payment bonds in both private and public cases. Modern courts recognize
that both public and private owners have self-regarding objectives that are best
effectuated by allowing subcontractors to sue a surety on a payment bond.
(a) Rationale—public owners [§623]
Public owners may reasonably believe that the cost of construction will be
lower if subcontractors are afforded assurance of payment. Subcontractors
will make lower bids to prime contractors if they need not impound the risk
of nonpayment into their costs, and if subcontractors’ bids are lower, prime
contractors’ bids will also be lower.
(b) Rationale—private owners [§624]
Essentially the same analysis applies to private construction. It is true that in
the case of private construction, unpaid subcontractors often will not lose
out completely, because they will be protected under the lien laws. Despite
the lien laws, however, some risk will remain: The lien laws are not always
easy to comply with, enforcing a lien can be complex and expensive, and
the private owner’s equity may be less than the total claims of lienholders.
Even in the case of private construction, therefore, a subcontractor who is
not afforded assurance of payment is likely to bid more than he otherwise
would. A private owner may also want to afford subcontractors assurance
of payment to avoid the transaction costs involved when liens are filed.

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(3) Performance bonds [§625]

 If an owner requires a performance bond, but not a payment bond, an unpaid
subcontractor should not be able to enforce the contract against the surety as a
third-party beneficiary. Unlike a payment bond, a performance bond does not
explicitly provide that subcontractors will be paid. Given the wide availability
and frequent use of payment bonds, the decision of an owner to obtain only a
performance bond reveals that the contracting parties’ performance objectives
do not include affording subcontractors assurance of payment, so
subcontractors should not be allowed to enforce a performance bond.

5. Defenses That Can Be Asserted by Promisor Against Beneficiary [§626]

Assuming that a third-party beneficiary is one who can bring suit under a contract, the
question arises, what kinds of defenses can the promisor assert against the beneficiary in
such a suit?

a. Defenses that promisor could have asserted against promisee [§627]

The promisor can assert against a third-party beneficiary any defense that the
promisor could have asserted against the promisee concerning formation or
performance of the contract. [Williams v. Paxson Coal Co., 31 A.2d 69 (Pa.
1943)]
Example: Penny agrees to paint Peter’s house in exchange for Peter’s promise
to pay $5,000 to Theo to satisfy a claim that Theo has against Penny. Theo is a
creditor beneficiary and can bring suit against Peter. However, if, for example, in
entering into the contract, Penny was guilty of fraud, or failed to paint Peter’s house,
Peter could assert these matters as a defense in an action by Theo against Peter for
nonpayment.

b. Defenses that promisee could have asserted against beneficiary [§628]

Suppose the promisee could have had a defense against the beneficiary. For
example, suppose that in the last example Penny could have asserted a defense
against Theo if he had sued her on his preexisting claim against her. Can the
promisor assert such a defense against the third-party beneficiary?
(1) Creditor beneficiary cases [§629]
As a practical matter, the issue whether the promisor can assert a defense that
the promisee has against the beneficiary is likely to arise only in a creditor
beneficiary context, like the last example. Unless there was a preexisting
relationship between the promisee and the beneficiary, such that the promisee
owed or appeared to owe an obligation to the beneficiary, there would not be
much likelihood that the promisee would have a defense against the beneficiary.
The concept of a defense implies that there is a claim against which the defense
can be asserted. Only in the creditor beneficiary context will the beneficiary
normally have a claim against the promisee prior to the contract at issue.
 193

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(2) Problem of interpretation [§630]

The issue whether the promisor can raise a defense of the promisee against the
beneficiary is to some extent a problem of interpretation. If the promisor’s
 promise is interpreted as a promise to pay whatever liability that the promisee
was under to the beneficiary, then the promisor could raise any defense the
promisee could raise. If, however, the promisor’s promise is interpreted as a
promise to pay a given amount of money to the beneficiary, then the promisor
cannot raise such a defense. The courts normally tend to give the latter
interpretation, and therefore generally do not allow a promisor to raise against a
beneficiary a defense that the promisee could have asserted against the
beneficiary. [See Rouse v. United States, 215 F.2d 872 (D.C. Cir. 1953)]

c. Rights of beneficiary against promisee; rights of promisee against promisor

(1) Donee beneficiary contracts [§631]
If a third-party beneficiary is a donee beneficiary, then by definition the
promisee did not owe the beneficiary a preexisting obligation. Accordingly, if the
promisor fails to perform, the beneficiary cannot sue the promisee, because the
promisee owed the beneficiary no obligation. Correspondingly, the promisee
cannot recover damages against the promisor for failure to perform, because
the promisee has suffered no loss, since the performance of the contract would
have benefited the beneficiary, but not the promisee. However, under the
modern trend of authority, the promisee can seek specific performance of the
promisor’s promise for the very reason that the legal remedy is inadequate.
[Croker v. New York Trust Co., 245 N.Y. 17 (1927)]
Example: Peter and Penny contract with each other to share the costs of
supporting their aged uncle, Theo. If Peter refuses to pay his share, Penny
cannot recover damages from Peter, but may seek specific performance of
Peter’s promise.
(2) Creditor beneficiary contracts [§632]
If a third-party beneficiary is a creditor beneficiary, then by definition, the
promisee owed the third party a preexisting obligation. Therefore, if the
promisor fails to pay the beneficiary, the beneficiary can sue the promisee on
the original (preexisting) obligation. Correspondingly, the promisee can sue the
promisor for a failure to perform because as a result of such a failure, the
promisee’s obligation to the beneficiary, which the promisor agreed to discharge,
instead remains outstanding.

6. Termination or Variation of Third-Party Beneficiary’s Rights [§633]

Even though a third-party beneficiary is a donee or creditor—or intended—beneficiary,
until the beneficiary’s rights vest they can be cut off or varied by a modification of

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the contract entered into by the promisor and the promisee. On the other hand, once a
third-party beneficiary’s rights vest, an agreement between the contracting parties cannot
impair or vary the beneficiary’s rights under the contract. There are several different
approaches to the issue of when vesting occurs.

a. Restatement First view [§634]

Under one approach, adopted in the Restatement First, a distinction is drawn
between creditor and donee beneficiaries. Under this approach, a donee
beneficiary’s rights vest upon the making of the contract. [Rest. 1st §§142, 135,
comment a] In contrast, a creditor beneficiary’s rights vest only when he
detrimentally relies or brings suit on the contract. [Rest. 1st §143]

b. Restatement Second view [§635]

Under a second approach, adopted in Restatement Second, the rights of any
intended beneficiary, whether creditor or donee, vest only when the beneficiary
either: (i) manifests assent to the promise in a manner invited or requested by the
parties; (ii) brings suit to enforce the promise; or (iii) materially changes position in
justifiable reliance thereon. [Rest. 2d §311] Most modern courts would probably go
along with this approach.
Example: Harold contracts to purchase Lydia’s painting for $200,000, and it is
agreed that Harold will pay the $200,000 to Lydia’s favorite Niece, Sara, rather than
to Lydia. Lydia tells Sara of the arrangement, and Sara then signs a contract to
purchase a house with the money she will receive from Harold. Lydia later decides
that she no longer likes Sara, and Lydia and Harold modify their contract so that
Harold will pay Lydia instead of Sara. Sara can enforce the original contract; under
Restatement Second, her rights vested because she materially changed her position in
detrimental reliance on the contract.

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B. Assignment of Rights and Delegation of Duties
1. In General [§636]
This section deals with problems that arise when a party to a contract seeks either to
assign (transfer) a right arising under the contract to a third party or to delegate a duty
imposed under the contract to a third party.

a. Nature of an assignment [§637]

In general, an assignment is the transfer of an intangible right. In particular, in
contract law an assignment is a transfer of a contract right.
(1) Terminology [§638]
In the law of assignments, the transferor of rights under an original contract is
known as the assignor; the other (nonassigning) party to the original contract is
known as the obligor; and the transferee of the rights is known as the assignee.
(2) Effect of assignment [§639]
An assignment of a contractual right operates to extinguish the right in the
assignor and set the right up exclusively in the assignee. [Rest. 2d §317] Thus,
as a result of an assignment, the assignee has a direct right against the obligor.
Under modern law, all jurisdictions recognize that an assignee is the real owner
of the right transferred to her, and that she alone may enforce the assigned right
against the obligor. The assignee is the “real party in interest,” insofar as that
right is concerned, and may sue directly on the contract in her own name
without joining the assignor.
(3) Governing law [§640]
Today, Article 9 of the U.C.C. is the most important source of law governing
assignments. Article 9 covers almost all assignments, subject to specific
exceptions. Article 9 applies (subject to the exceptions) to any transaction that is
intended to create a security interest in personal property. Sales of certain types
of claims, including accounts and chattel paper (as opposed to the creation of
security interests in such claims) are brought within Article 9 to avoid difficult
problems of distinguishing between those transactions that are intended for
security and those that are not so intended. Accordingly, under Article 9 persons
who purchase most types of claims are treated the same way as persons who
take such claims as security for a debt.

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(a) Definitions [§641]

Among the key terms used in U.C.C. Article 9 are “account,” “chattel
paper,” “general intangibles,” and “account debtor.”
1) Account [§642]
 An “account” is a right to payment of a monetary obligation for such
things as property or services, whether or not the right has yet been
earned by performance, that is not evidenced by chattel paper or an
instrument. The term covers most types of choses in action (i.e., claims
or rights to receive payments that can be enforced at law).
2) Chattel paper [§643]
The term “chattel paper” means a record or records that evidence both
a monetary obligation and a security interest in specific goods. A
“record” is information that is inscribed on a tangible medium or stored
electronically or in some other medium and is retrievable in perceivable
form.
3) General intangibles [§644]
The term “general intangibles” covers miscellaneous types of
contractual rights and other personal property other than chattel paper,
instruments, and certain other items. Examples are goodwill (i.e., the
favor a business wins from the public), literary rights, and rights to
performance.
4) Account debtor [§645]
An “account debtor” is the person who is obligated on an account,
chattel paper, or general intangible.
(b) Exclusions
1) Types of claims [§646]
Article 9 of the U.C.C. does not apply to certain types of claims, such
as wage claims, nonagricultural liens created by state statute or other
law for services or materials (e.g., materialmen’s liens), and most
insurance benefits.
2) Types of assignments [§647]
Article 9 also does not apply to certain types of assignments, such as:
a) Assignments of accounts or contract rights as part of the sale of
the business out of which the accounts or contract rights arose;

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b) Assignments of a right to payment under a contract to a person

who is also to render performance under the contract (i.e., to a
delegee; see infra, §723);
c) Assignments for collection purposes only;
d) Donative assignments;
e) A transfer of a single account to an assignee in whole or partial
 satisfaction of an existing indebtedness.
(4) Common law [§648]
Many of the common law rules governing the assignment of contract rights have
been drastically altered by Article 9 of the U.C.C. However, the common law
rules are still important, partly as a background to understand the U.C.C.
provisions, and partly because the common law rules still generally govern
assignments that are expressly excluded from Article 9.

2. Rules Governing the Assignability of Rights

a. General rule [§649]

The general rule is that all contract rights are assignable.

b. Exceptions—nonassignable rights [§650]

A right may not be assigned if an assignment would “materially change the duty of
the obligor, or materially increase the burden or risk imposed on him by his
contract, or materially impair his chance of obtaining return performance or
materially reduce its value to him.” [Rest. 2d §317; and see similar provision in
U.C.C. §2-210(2)—applicable to assignments of contracts for the sale of goods]
(1) Rights whose assignment would materially change the obligor’s duty
(a) Personal service contracts [§651]
Rights may not be assigned where the effect would be to require the obligor
to perform personal services to the assignee. [Davis v. Basalt Rock Co.,
107 Cal. App. 2d 436 (1951)]

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Example: Amber employs Omar to paint her portrait. Later, Amber

(the assignor) attempts to assign her rights under the contract to her aunt
Amy (the assignee). Amy may not compel Omar (the obligor) to paint her
portrait.
1) Rationale
The performance of personal services for anyone other than the original
obligee could materially change the nature of the obligor’s duties.
 Wherever such services are involved, the law implies that the personal
relationship between the obligor and the obligee is important. Therefore,
the obligee cannot transfer her rights to another.
2) What constitutes personal services? [§652]
The test of what constitutes personal services, for these purposes, is
whether the performance so involves the personality or personal
characteristics of the obligor that it would be unfair to require the
obligor to render the performance to a third person.
Examples: Examples of contracts for personal services, rights
under which cannot be assigned, include contracts for the services of a
portrait painter, a lawyer, a physician, an architect, or the like. On the
other hand, repair or construction contracts usually are not interpreted
as involving personal services. Therefore, a construction contractor
normally can be required to render his performance to an assignee of
the person for whom the contractor originally agreed to perform the
work.
(b) “Requirements” and “output” contracts [§653]
A contract in which one party, A, has the right to compel the other party, B,
to buy all the goods A can produce (i.e., an “output” contract), or to
provide all the goods A needs in his business (i.e., a “requirements”
contract), is generally not assignable by A. Because the assignee might have
far different output or far different requirements than A, the assignment
could materially change the duty of B. [34 A.L.R. 1184]
(2) Rights whose assignment would materially increase the burden or risk of
the obligor [§654]
Rights under a contract cannot be assigned if the assignment would materially
increase the burden or risk of the obligor.

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(a) Insurance [§655]

The most obvious application of this principle is to insurance policies. Such
policies are contracts predicated on a designated risk assumed by the
insurer in connection with a named insured. Because the risk assumed in
insuring one person necessarily differs from the risk assumed in insuring
any other person, the right to be insured under a specific policy is generally
not assignable. This is true not only as to life insurance, but also as to
liability and casualty insurance. The risks created by one person’s conduct,
or ownership or operation of property or a business, are different from
another’s.
 1) Right to insurance proceeds [§656]
While the right to be insured may not be assignable, the right to
benefits under an insurance contract—i.e., the right to payment of
money on the happening of the contingency that is insured against (such
as the death of the insured or the destruction of insured property)—
generally can be assigned. Requiring the payment of money to an
assignee, rather than to the named insured, does not materially increase
the insurer’s burden or risk.
(b) Credit [§657]
Where personal credit is involved, a substitution of debtors may materially
increase the obligor’s risk. Therefore, a right to the extension of credit
generally cannot be assigned.
Example: Oliver agrees to loan money to Betty in one month, the loan
to be secured by Betty’s promissory note. Betty decides she does not want
the loan, and she attempts to assign Oliver’s promise to make the loan to
her needy friend, Cathy. Cathy cannot compel Oliver to take her
promissory note in place of Betty’s, because Cathy’s credit may not be as
good as Betty’s.

1) Purchase money mortgages [§658]

The same principle applies where a seller of real estate has agreed to
accept a mortgage on the property as part of the

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purchase price and the buyer attempts to assign his rights under the
contract of sale.
Example: John agrees to sell Blackacre to Margaret for $50,000,
payable $20,000 in cash and the balance in installments that will be
secured by a mortgage on Blackacre executed by Margaret. Prior to the
 closing, Margaret attempts to assign all of her rights under the contract
to Charles. Most authorities would hold that the assignment is
ineffective, on the ground that Charles’s credit is not the same as
Margaret’s. Although the property that is to serve as security for the
debt remains unchanged, the personal obligation of Charles on a
mortgage note is different from the personal obligation of Margaret.
[American Lithographic Co. v. Ziegler, 103 N.E. 909 (Mass. 1914)]
(Of course, Margaret could go through with the purchase, execute the
mortgage herself, and then transfer title to Charles. However, in that
event, Margaret would remain subject to personal liability to John.)
(3) Assignment that would materially change contract terms [§659]
Even if an assignment will not materially change the duties of the obligor,
materially increase the burden or risk imposed on him by the contract, or
materially impair his chance of obtaining return performance or materially
reduce the value of that performance to him, so that rights under the contract
are assignable, an assignment will not be allowed to alter the material terms of
the contract.
Example: Brian contracts to deliver goods to Lucy at Lucy’s place of
business. Lucy assigns her rights under the contract to Cindy, whose place of
business is across town. The assignment is not effective to change the place of
delivery. If Cindy wants the goods, she must accept delivery at Lucy’s place of
business.

3. Partial Assignments [§660]

Assignable rights under a contract may be transferred to one assignee or divided up
among several assignees. Alternatively, the assignor may assign only some rights and
retain the balance.

a. Early rule [§661]

At early common law, a partial assignment was held to be ineffective, on the theory
that it increased the burden on the obligor because she would have several persons to
pay instead of one and would face the possibility of increased litigation. However, a
partial assignment was enforceable in equity if the partial assignee joined in her suit
all other partial assignees and the assignor (if he retained any rights under the
contract).

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b. Present rule [§662]

Today, partial assignments are generally enforced even at law. However, it is still
usually necessary to join all of the other partial assignees as parties (and also to join
 the assignor if he retained any rights under the contract), unless joinder is not feasible
and it is otherwise equitable to proceed without joinder. [Rest. 2d §326; see Civil
Procedure Summary]

4. General Requirements for an Effective Assignment [§663]

Any manifested intention by a party to a contract to make a present transfer of rights
(i.e., a transfer of rights that does not require further action) under the contract to
another person will constitute an assignment. [Rest. 2d §324] A manifested intention by a
party to make a future transfer of rights to another person is not an assignment, but it
may form a contract to assign. (Note, however, that an assignor may make a present
transfer of a right that is to arise in the future; see infra, §678.) The right that is assigned
must be adequately described, and present words of assignment must be used.

a. Test [§664]
The test for whether “present words of assignment” are used is whether the language
manifests an intent by the assignor to divest himself completely and immediately of
the right in question and transfer the right to the assignee. The word “assign” need
not be used. Words such as “sell,” “transfer,” “convey,” and “give” will usually
suffice.

b. Consideration [§665]
Consideration is not required for an assignment; a gratuitous assignment is effective.

c. Gratuitous assignments generally revocable [§666]

Although consideration is not required for an assignment to be effective, a gratuitous
assignment is revocable subject to the following exceptions:
(1) Delivery of tangible token [§667]
If a “chose” (i.e., a claim or a right) is represented by a “tangible token,”
delivery of the tangible token makes even a gratuitous assignment irrevocable.
(a) Traditional approach [§668]
Under the traditional approach, a right is represented by a tangible token if
the right normally can be enforced only by surrender, or proof of
possession, of a document that represents the right (e.g., a savings account
passbook, a negotiable instrument, or a stock certificate).
(b) Restatement approach [§669]
Under the Restatement, a tangible token is defined more broadly to include
any document or thing “of a type customarily accepted as a symbol or as
evidence of the right assigned.” [Rest. 2d §332]
 203

204

(2) Writing [§670]

 The general rule is that a gratuitous assignment is also irrevocable if the
assignment is made in a writing that is delivered to the assignee.
(3) Estoppel [§671]
If the assignee of a gratuitous assignment detrimentally relies on the
assignment, the assignor may be estopped to revoke the assignment.
(4) Performance [§672]
A gratuitous assignment becomes irrevocable if, prior to revocation, the assignee
receives payment or performance from the obligor, or obtains a judgment
against the obligor by enforcing the assigned right.
(5) Novation [§673]
A gratuitous assignment is irrevocable if the assignee, the assignor, and the
obligor all mutually agree that the assignor should be substituted for the
assignee, so that the assignor’s rights and duties under the contract are
discharged. Such a three-way agreement is known as a “novation.”

d. How revoked [§674]

A gratuitous assignment that has not been made irrevocable by delivery of a tangible
token, a writing, estoppel, performance, or novation is effectively revoked by any of
the following:
(1) A notice of revocation given by the assignor to either the assignee or the
obligor;
(2) The assignor’s later assignment of the same right to another (whether or not
consideration was paid for later);
(3) The death of the assignor;
(4) The bankruptcy of the assignor; or
(5) An acceptance by the assignor of payment or performance directly from the
obligor.

e. Requirements for effective assignment under U.C.C. [§675]

U.C.C. section 9-203 provides that, with certain exceptions, a security interest is not
enforceable against the debtor or third parties unless either the debtor has signed or
otherwise authenticated a security agreement describing the assigned collateral, or the
assigned collateral is already in the assignee’s possession—for example, where the
collateral consists of a claim embodied in a negotiable instrument that has been
transferred to the assignee.
(1) General U.C.C. Statute of Frauds provision [§676]
Assignments not covered by U.C.C. section 9-203 are governed by the

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 general Statute of Frauds provision contained in U.C.C. section 1-206. That
section provides that except in the cases described in section 9-203, in contracts
for the sale of goods (which are covered by another, more specific U.C.C.
Statute of Frauds provision [U.C.C. §2-201]), and in contracts for the sale of
securities (which do not have to be in writing [U.C.C. §8-113]), a contract for
the sale of personal property is not enforceable by way of action or defense
beyond $5,000 in amount or value of remedy, unless there is some writing
which: (i) indicates that a contract for sale has been made between the parties at
a defined or stated price, (ii) reasonably identifies the subject matter, and (iii) is
signed by the party against whom enforcement is sought or by his authorized
agent.

5. Effectiveness of Assignments of Future Rights [§677]

As used in the law of assignments, “future rights” refers to rights that are expected to
arise under either: (i) an existing contract or a continuing business relationship, or (ii) a
future contract or business relationship. At common law, there is a marked difference in
the assignability of these two types of future rights.

a. Future rights under an existing contract [§678]

At common law, rights expected to arise in the future under an existing contract are
generally freely assignable, even though the right is conditional on such matters as
the assignor’s performance under the contract. [Rest. 2d §321]

b. Future rights under a continuing business relationship [§679]

Furthermore, some authorities at common law allow the assignment of a right to
payments that are expected to arise out of a continuing business relationship, even
though there is no existing contract. (For example, Farmer assigns to Creditor
payments he expects to receive for his crop from a granary with which he has been
doing business.) [Rest. 2d §321]

c. Future rights under a future contract or business relationship [§680]

At common law, rights under a future contract or a future business relationship are
not assignable. The theory is that an assignment is a transfer, and a person cannot
transfer something that she does not have. [Herbert v. Bronson, 125 Mass. 475
(1878)]
(1) Equitable relief possible [§681]
Even at common law, however, although an attempted assignment of rights
under a future contract or a future business relationship is ineffective as an
assignment, if it is given for consideration, the attempted assignment is treated
as a contract to assign the right if and when it does arise. Therefore, if the right
does arise, equity may grant specific performance of the contract by compelling
the assignment to be made at that point. [Holt v. American Woolen Co., 150
A. 382 (Me. 1930)] However,
 206

because such an assignment is enforceable only in equity, equitable

considerations govern. Thus the assignment will not be enforced if a subsequent
bona fide purchaser acquired the right after it came into existence, provided the
purchaser took without notice of the prior assignment. Nor will such an
assignment be enforced against creditors of the assignor who attach the assigned
rights without having notice of the prior attempted assignment. [Stokely Bros.
v. Conklin, 26 A.2d 147 (N.J. 1942)]

d. U.C.C. [§682]
For the most part, the common law rules concerning the assignment of future rights
have been changed by the U.C.C. Article 9 explicitly recognizes the validity of an
assignment of future rights and gives the assignee of such rights priority over most
competing claimants, provided a financing statement describing the assignment is
properly filed. [U.C.C. §9-204; see infra, §720] Recall, however, that Article 9 does
not apply to all assignments. (See supra, §§646-647.)

6. Effect of Contractual Provisions Prohibiting Assignment

a. Traditional view [§683]

At common law, a contractual provision prohibiting the assignment of rights under a
contract is valid, both as to the parties and as to any assignee with notice thereof.
[Rest. 2d §319; and see Rest. 2d §317] However, such provisions are not favored,
because they interfere with free alienability. Accordingly, although the general
common law principle is that such provisions are valid, the courts have adopted a
number of rules that effectively reduce the force of the common law principle.
(1) Prohibitions on assignments are construed as promissory in nature [§684]
If a contract contains only a promise not to assign the contract (e.g., a provision
that “No assignment hereof shall be made,” or that “A agrees not to assign this
contract without the prior consent of B”), the promise is said to destroy the
right, but not the power, to make an assignment. Accordingly, although the
obligor (the nonassigning party) will have an action against the assignor for
breach of the contractual provision prohibiting assignment, the assignment will
be valid as between the assignee and the obligor. Furthermore, unless the
assignment causes special injury to the obligor, the obligor normally can only
recover nominal damages in her suit against the assignor.
(2) Contractual prohibitions in the form of a condition [§685]
If a prohibition against assignment is phrased as a condition, rather than as a
promise (e.g., “any assignment hereof shall be void,” or “in the event of an
assignment, this contract shall terminate”), at common law the provision is
generally given full force and effect. Such a provision is said to destroy not only
 the obligee’s right, but also his power, to assign, so that an assignment in
violation of the provision is unenforceable.

207

b. Restatement approach [§686]

The Restatement nominally retains the principle that contractual prohibitions on
assignment are enforceable, but adopts strong rules of construction against such
provisions, as follows [Rest. 2d §322]:
(1) Contract term that prohibits assignment of “the contract” [§687]
A contractual provision that prohibits an assignment of “the contract” is to be
construed to bar only the delegation by the assignor of her duties or conditions,
not an assignment of rights under the contract (see infra, §§723 et seq. for
discussion of delegation).
(2) Contract term that prohibits assignment of rights under the contract
[§688]
A contractual provision that prohibits an assignment of rights under the contract
(as opposed to prohibiting an assignment of “the contract”) is to be interpreted:
(a) To give the obligor a right to damages in the event of a prohibited
assignment, but not to render the assignment ineffective;
(b) Not to forbid the assignment of a right to damages for breach of the
whole contract or the assignment of a right arising out of the assignor’s due
performance of his entire obligation; and
(c) To be for the benefit of the obligor, and not to prevent the assignee from
acquiring rights against the assignor, nor to prevent the obligor from
rendering performance to the assignee as if there were no such prohibition.

c. U.C.C. approach
(1) Contractual prohibition ineffective [§689]
U.C.C. section 9-406(d), which is applicable to most commercial assignments,
provides that a term in any contract between an account debtor and an assignor
is ineffective if it prohibits, restricts, or requires the account debtor’s consent to
the assignment or transfer of, or the creation of a security interest in, an
account, chattel paper, payment intangible (i.e., a general intangible under
which the debtor’s principal obligation is a monetary obligation), or promissory
note. (Note: This section does not apply to the sale of a payment intangible or a
promissory note. [U.C.C. §9-406(e)]) Broadly speaking, therefore, U.C.C.
section 9-406(d) denies the enforceability of contractual prohibitions and
restrictions of, and requirements for the debtor’s consent to, the assignment of
most types of rights to payment if Article 9 is applicable to the assignment.
 (2) Right to damages assignable [§690]
Similarly, U.C.C. section 2-210(2) provides that the right to damages for

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breach of a sales contract is assignable, even in the face of an express

contractual prohibition on assignment thereof.

7. Wage Assignments [§691]

An assignment of wages to be earned in the future under an existing contract of
employment is effective, under the principle that future rights expected to arise under an
existing contract are assignable. (See supra, §678.) [McDonald v. Hudspeth, 129 F.2d
196 (10th Cir. 1942)]

a. Employment terminable at will [§692]

This is true even where the existing employment contract is terminable at will by the
employer or employee, so that there is no assurance that assigned wages will be
earned under the contract. [Duluth S.S. & A. Railway v. Wilson, 167 N.W. 55
(Mich. 1918)]

b. Statutory restrictions [§693]

However, many states have statutory restrictions on the assignability of future wages.
For example, California Labor Code section 300 permits such an assignment only if a
separate written instrument containing the consent of the employee’s spouse (or the
employee’s parent, if the employee is a minor) has been filed with the employer.
Even then, under the statute such an assignment is valid only to cover “necessaries
of life” furnished to the employee by the assignee.

c. Constitutional issue [§694]

Wages are usually assigned as security for a loan. If the debtor-employee fails to
repay the loan, the creditor can go directly to the employer and force the employer to
pay the assigned wages to the creditor rather than to the employee. In effect,
therefore, the wage assignment is a substitute for suing the employee and garnishing
her wages if she fails to pay a judgment, but without the protection of a judicial
hearing. A constitutional question has arisen whether such a practice constitutes a
“taking” of the employee’s property (her wages) without due process of law in
violation of the Fourteenth Amendment—i.e., whether the employee must be
afforded some sort of notice and judicial hearing before the creditor is permitted to
enforce the wage assignment. [See Sniadach v. Family Finance Corp., 395 U.S.
337 (1969)—notice and hearing required before garnishment of an employee’s
wages] To date, the courts have upheld private enforcement of wage assignments, on
the ground that no “state action” is involved, and the procedural safeguards of the
Fourteenth Amendment therefore do not apply. [Bond v. Dentzer, 494 F.2d 302 (2d
 Cir. 1974)]

8. Rights, Liabilities, and Defenses After Effective Assignment [§695]

An effective assignment extinguishes the assigned right in the assignor and sets it up in
the assignee. Thereafter, only the assignee is entitled to performance from the obligor
(supra, §639).

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a. Rights of the assignee against the obligor

(1) Right of direct action [§696]
An assignee can enforce her rights by a direct action against the obligor. Suit
may be maintained by the assignee in her own name.
(2) Effect of notice to obligor [§697]
Once the obligor has knowledge of the assignment, he must render performance
to or pay the assignee. If the obligor renders performance to or pays the
assignor, he does so at his own risk. [Nelson v. Fernando Nelson & Sons, 5
Cal. 2d 511 (1936)]

b. Defenses available to the obligor against the assignee

(1) General rule [§698]
The general rule concerning defenses that the obligor may assert against an
assignee is set out in U.C.C. section 9-404, which for the most part reflects the
common law. Under section 9-404, a defense can be asserted by the obligor
against the assignee, whether the defense arises before or after notice of the
assignment is given, if: (i) the defense asserts that the contract under which
rights were assigned was not validly formed (e.g., a defense that the original
contract lacked consideration), or (ii) the defense arises under the contract or
the transaction that gave rise to the contract (e.g., a claim that the assignor or
the assignee has performed defectively).
(2) Holder in due course and waiver of defenses [§699]
The general rule that an obligor can assert contract-related defenses against the
assignee is modified if (i) the assigned claim is represented by a negotiable
instrument and the assignee is a holder in due course, or (ii) the assigned claim
arose under a contract in which the obligor waived his right to assert, against an
assignee, defenses he might have against the assignor.
(a) Holder in due course [§700]
If a claim is embodied in a negotiable instrument, the claim is assigned by
assigning or transferring the instrument. A negotiable instrument is one that,
among other things, contains an unconditional promise or order to pay a
sum certain in money, and no other promise, order, obligation, or power.
 The most common examples of negotiable instruments are promissory
notes and checks. An assignment or transfer of a negotiable instrument to a
holder in due course is called a “negotiation.” A holder in due course is an
assignee who takes the claim for value, in good faith, and without notice of
any defense. If a negotiable instrument is negotiated (i.e., transferred) to an
assignee who is a holder in due course, the obligor cannot assert even
contract-related defenses against the holder, except for certain limited
defenses relating to contract formation, such as incapacity and duress.

210

(b) Waiver-of-defense clauses [§701]

A similar result can be achieved, even in an assignment of a claim that is
not embodied in a negotiable instrument, by a waiver-of-defense clause.
This is a clause in a contract under which rights are assigned, which
provides that the obligor agrees that he will not assert against an assignee
any defenses that he may have against the assignor.
(c) FTC rule [§702]
A Federal Trade Commission rule now effectively limits both the holder-in-
due-course doctrine and waiver-of-defense clauses in consumer credit sales.
Under this rule, a person who sells consumer goods or services on credit
must include a notice in any consumer credit contract or note that any
assignee (including any holder) of the contract takes subject to all claims
and defenses that the consumer-debtor could assert against the seller. The
language of this notice deprives the instrument of its negotiability by
rendering it conditional. The rule also makes it unlawful for such a seller to
accept, as payment from a consumer, the proceeds of a loan made to the
consumer by a creditor to whom the buyer was referred by the seller, or
who is affiliated with the seller through a contract, business arrangement, or
common control, unless an equivalent notice is contained in the contract or
note given by the buyer to the creditor. The language becomes part of the
contract between the creditor and the buyer-debtor and thereby grants the
defenses to the buyer-debtor. [16 C.F.R. §§433.1, 433.2]
1) Rationale
The purpose of the FTC rule is to reallocate the burden of any loss
resulting from seller misconduct in the consumer market from the
innocent consumer-purchaser to the seller or to a creditor/lender who
finances the transaction by purchasing the consumer’s note or lending
on the security of such a note. Such a creditor/lender is likely to be in a
better position than the consumer to police the seller.
(d) Consumer protection statutes [§703]
 Some statutes governing retail installment contracts provide that an assignee
of such a contract takes subject to all “equities or defenses” of the buyer
against the seller-assignor—even defenses that did not exist at the time of
the assignment. [See, e.g., Cal. Civ. Code §1804.2]
(e) Modification after notice of assignment [§704]
Suppose an assignor assigns certain rights under the contract, such as a
right to one or more payments, but otherwise continues to perform

211

the contract. After the assignment has been made, and after the obligor has
been given notice of the assignment, the assignor and the obligor modify the
contract in good faith. Does the modification affect the rights of the
assignee?
1) Traditional view [§705]
The traditional view is that the modification does not affect the
assignee’s rights, because an obligor who has received notice of an
assignment deals with the assignor at his peril (see supra, §697).
2) Modern trend [§706]
However, U.C.C. section 9-405, recognizing commercial realities,
provides that in the case of commercial assignments a modification of
or a substitution for a right to payment that has not yet been fully
earned by performance is effective against the assignee if made in
good faith. [See also Rest. 2d §338] A modification of or a substitution
for a right to payment that has been fully earned by performance is
effective against the assignee if made in good faith and if no notice of
the assignment was given to the obligor. [U.C.C. §9-405]
(3) Unrelated defenses [§707]
Unlike contract-related defenses, defenses that are unrelated to the contract
under which the rights were assigned (e.g., a claim by the obligor against the
assignor under another contract) can be asserted against the assignee if, but
only if, the defense accrued before the assignee gave the obligor notice of the
assignment.
(a) Definition of “accrue” [§708]
The term “accrue,” in this context, is ambiguous. A claim might be deemed
to accrue, for this purpose, either when the obligation that gives rise to the
claim is incurred or when the obligation is actually due and payable. One
court has held that a claim does not accrue, for this purpose, until it is
actually due and payable. [Bank of Kansas v. Hutchison Health
Services, Inc., 785 P.2d 1349 (Kan. 1990)] Under that court’s holding, a
claim by an obligor against an assignor that is not contract-related cannot be
 raised by the obligor against the assignee unless the obligation on which the
claim is based was not only incurred before the assignment, but also
became due and payable before the assignment.

c. Rights of assignee against assignor—warranties of assignor [§709]

In every assignment for consideration the assignor impliedly makes the following
warranties:

212

(i) That the assigned right actually exists, and is subject to no limitations or
defenses other than those stated or apparent at the time of assignment;
(ii) That any document or paper with regard to the assignment is genuine and
what it purports to be;
(iii) That she has the right to assign the assigned right—i.e., that she has made no
prior assignment of the same right; and
(iv) That she will do nothing in the future to defeat the assigned right; i.e., she will
not attempt a subsequent assignment of the same right.
[Rest. 2d §333]

9. Priority of Competing Assignees [§710]

Suppose an assignor assigns the same right to two or more assignees. In a contest
between the prior and the subsequent assignee, which assignee prevails?

a. Common law [§711]

The common law is relatively well-settled in two kinds of cases—those in which the
prior assignment is revocable and those in which the assigned claim is embodied in a
tangible token.
(1) If prior assignment revocable [§712]
Under common law, if the prior assignment is revocable—because, for example,
it is gratuitous and oral—a subsequent assignment revokes the prior assignment,
and the subsequent assignee therefore prevails over the prior assignee. [Rest. 2d
§342]
(2) Tangible token [§713]
The subsequent assignment also prevails under common law if the assigned
claim is represented by a tangible token and the prior assignee left the token in
the assignor’s possession—at least if the subsequent assignee gave value and
took possession of the token. The rationale of this rule is that an assignee who
leaves a tangible token in the assignor’s possession should be estopped from
claiming priority over a subsequent assignee, because by leaving the token in the
 assignor’s hands the prior assignee allowed the impression to be created that the
assignor still owned the claim.
(3) Other cases [§714]
If the first assignment is not revocable and the claim is not represented by a
tangible token left in the assignor’s hands, there are three competing rules at
common law: the “New York rule,” the “English rule,” and the “Massachusetts
rule.”

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(a) “New York rule” [§715]

Under the New York rule, as between successive assignees of the same
right, the first in time (i.e., the prior assignee) prevails. The rationale of the
New York rule is that once an irrevocable assignment is made, the assignor
has no further interest left to assign. The subsequent assignee therefore gets
nothing, because there is nothing to get. [Salem Trust Co. v.
Manufacturers’ Finance Co., 264 U.S. 182 (1923)]
(b) “English rule” [§716]
Under the English rule, as between successive assignees of the same right,
the first assignee to give notice to the obligor prevails—provided that the
assignee who first gave notice to the obligor paid value and did not have
notice of the prior assignment. [Haupt v. Charlie’s Kosher Market, 17
Cal. 2d 843 (1941); 110 A.L.R. 774]
1) Rationale
The rationale of the English rule is that it is easy for an assignee to give
notice to the obligor, and if the prior assignee does give such notice, a
person who is offered an assignment of the same claim has an
opportunity to find out that the claim has already been assigned by
checking with the obligor, who in effect functions as a sort of private
recording office. In the absence of an official recording system, unless
an assignee gives such notice to the obligor, a subsequent assignee will
have no way of finding out that the claim was already assigned. (A
dishonest assignor who wants to assign the same claim twice is not
likely to advise the subsequent assignee that the claim has already been
assigned.) The English rule provides an incentive to give such a notice.
(c) “Massachusetts rule” [§717]
Under the Massachusetts rule, if the prior assignment is revocable, it is
revoked by the subsequent assignment. If the prior assignment is not
revocable, the prior assignee prevails unless the subsequent assignee
acquires the assignment in good faith and for value, and either:
1) Takes from the assignor a tangible token representing the claim;
 2) Collects the claim from the obligor;
3) Obtains a judgment against the obligor; or
4) Secures a novation from the obligor.

214

b. U.C.C. [§718]
Article 9 of the U.C.C. has radically changed the rules on priority between competing
assignees of contract rights subject to the U.C.C. Under the U.C.C., most
assignments are protected in order of their filing or perfection. [U.C.C. §9-322] To
achieve that result, Article 9 employs two basic concepts: attachment and perfection.
(1) Attachment [§719]
A security interest under Article 9 normally attaches when the creditor enters
into a security agreement with the debtor that gives the creditor a security
interest in collateral, and (i) the debtor has rights in the collateral or the power to
transfer rights in the collateral to a secured party; (ii) the creditor gives value;
and (iii) either the debtor signs or otherwise authenticates a security agreement
describing the collateral or the creditor has or takes possession of the collateral
pursuant to the agreement. [U.C.C. §9-203] When the security interest attaches,
it becomes enforceable against the debtor. [U.C.C. §§9-201(a), 9-203(a), (b)] In
theory, it is also enforceable against third parties, such as competing assignees,
but in practice it is often or even typically enforceable against third parties only
if it is “perfected.”
(2) Perfection [§720]
In most cases, an Article 9 security interest that has attached is perfected only
by filing, in a designated state office, a financing statement that describes the
collateral and sets forth the parties’ names and addresses. A very few security
interests are perfected “automatically” upon attachment (i.e., upon creation of
the security agreement in the manner specified by Article 9). For example,
purchase-money security interests in most consumer goods are perfected in this
way. [U.C.C. §9-309(1)] In addition, filing is not required to perfect an
assignment of accounts or payment intangibles that does not alone or in
conjunction with other assignments to the same assignee transfer a significant
part of the outstanding accounts or payment intangibles of the assignor. [U.C.C.
9-309(2)] (Note, however, that a number of states, including California, have
rejected this last exclusion.) Furthermore, in certain cases, a secured party can
perfect his security interest without filing by taking possession of the collateral.
[U.C.C. §§9-310, 9-313]
(a) First to file or perfect [§721]
Among competing assignees, the first assignee to file or perfect prevails,
even if that assignee’s security interest was created after the security
 interest of another assignee, and even if she knew of the other assignee’s
security interest when she filed or perfected. [U.C.C. §9-322(a)]

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(3) Transactions covered [§722]

The U.C.C. provisions apply both to outright sales of claims such as accounts
and chattel paper and to assignments for security purposes. However, recall that
Article 9 does not apply to certain types of claims and certain types of
transactions. (See supra, §§646-647.) Where there are successive assignments
of a claim that is not covered by Article 9, priority between the successive
assignees continues to be governed by the common law.

10. Delegation of Duties

a. Nature of a delegation [§723]

A delegation of a contractual duty is an appointment by a party to a contract of
another person to perform the party’s contractual duties.
(1) Terminology [§724]
The party who delegates a duty is called the “obligor” or the “delegor.” The
other original party to the original contract, to whom the delegated duty is owed,
is called the “obligee.” The party to whom the duty is delegated is called the
“delegee.” [Rest. 2d §318]
(2) Novation [§725]
A delegation should be distinguished from a novation. A novation is a three-
party agreement under which the obligee agrees to completely discharge the
original obligor and accept another in the obligor’s place. Thus, a novation is a
substitution of parties to the contract. A delegation does not have this
substitutional effect. The original obligor remains liable for the performance of
all obligations, although the delegee is also liable—both to the obligor, with
whom the delegee has directly contracted, and to the obligee, who is a creditor
beneficiary of the delegee’s promise to perform the obligor’s duty under the
original contract.
Example: Bob contracts with Stephanie to mow her lawn once a week. Bob
later delegates his duty to mow Stephanie’s lawn to Mary. Bob (the delegor) is
still liable to Stephanie (the obligee) if the contract is breached by Mary (the
delegee). Mary is liable both to Bob under the delegation contract and to
Stephanie as a creditor beneficiary of the delegation contract.

Compare: Same facts as in the above example, except that rather than
delegating his duty to Mary, Bob agreed with Mary and Stephanie that Mary
 should be substituted for Bob in the original contract and Bob’s duty should be
discharged. In this case, Bob is no longer liable to Stephanie under the original
contract, and Mary only is liable to Stephanie under the new novation contract.

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b. What duties are delegable [§726]

Any contractual duty can be delegated unless the obligee has a substantial interest in
having the original obligor perform the duty personally. Thus, except where
performance by a delegee would vary materially from the performance promised by
the obligor, a contractual duty may be performed by a delegee without constituting a
breach of contract. [Rest. 2d §318; U.C.C. §2-210(1)]
(1) Application
(a) Personal services [§727]
The principal example of a nondelegable duty is a duty to perform personal
services. If the contract requires performance by, for example, a portrait
painter, an author, a teacher, or a lawyer, the duty to render this
performance cannot be delegated to another—no matter how competent—
without the obligee’s consent.
(b) Other contracts
Most other contractual duties are delegable—for example—most duties to
manufacture or deliver goods, or to construct or repair buildings.
(2) Effect of contractual restriction on delegation [§728]
Provisions in a contract that limit either party’s right to delegate duties are
normally enforced. Such provisions evidence the parties’ intent that the services
involved are personal, so that performance by another would not constitute the
bargained-for consideration. Unlike restrictions on assignment, restrictions on
delegation do not clash with the policy in favor of free alienability.

c. Effect of valid delegation of duties [§729]

A valid delegation of duties does not excuse the delegor from his duty to perform.
However, as between the delegor and the delegee, the delegation places the primary
responsibility to perform on the delegee. The delegor becomes secondarily liable—
as surety—for performance of the duty. [Crane Ice Cream Co. v. Terminal
Freezing & Heating Co., 128 A. 280 (Md. 1925)]
(1) Distinguish—assignment of rights [§730]
Contrast this rule with the effect of a valid assignment of rights, which operates
to extinguish the rights of the assignor and set those rights up entirely in the
assignee.
(2) U.C.C.—right of obligee to demand assurance [§731]
 In contracts for the sale of goods, a delegation of performance entitles the
obligee to demand assurances of performance from the delegee. [U.C.C. §2-
210(5); and see Sale & Lease of Goods Summary]

217

d. Effect of attempt to delegate nondelegable duty [§732]

An attempt to delegate a nondelegable duty is not a breach of contract, because the
original obligor (the delegor) remains liable for performance in any event. However,
if in such a case the original obligor indicates to the obligee that he will not perform
personally, that may be a sufficient repudiation of the obligor’s duties under the
contract to constitute an anticipatory breach of contract (see further discussion,
infra, §§832 et seq.).

e. Rights of the obligee against the delegee

(1) Promise to assume duties [§733]
Usually, as part of a delegation of duties, the delegee expressly or impliedly
promises the delegor that he will perform the duties owed by the obligor/delegor
to the obligee. Such a promise constitutes an assumption agreement (see supra,
§610), in which the obligee is a creditor beneficiary of the delegee’s promise,
and therefore may sue the delegee for nonperformance.
(2) Implied assumption of duties [§734]
In some cases, one party to a contract simply “assigns” the contract to another,
who does not expressly agree to perform the assignor’s duties under the
contract. The question then arises whether the courts should imply a promise by
the assignee of the contract to perform the assignor’s duties from the fact that
the assignee has accepted benefits under the contract.
(a) Traditional view [§735]
The traditional view, associated with Langel v. Betz, 250 N.Y. 159 (1928),
which involved the assignment of a contract for the sale of land, was that
the mere acceptance by an assignee of the assignor’s rights under the
assigned contract was not sufficient to imply a promise by the assignee that
he would perform the assignor’s duties under the contract.
(b) Modern view [§736]
The trend of modern authority is the reverse. A growing number of courts
and the Restatement hold that where a contract that is wholly or partially
executory on both sides is assigned, the assignment is normally to be
construed as a delegation, and acceptance of the assignment is normally to
be construed as acceptance of the delegation, i.e., as an assumption of
duties under the contract. The result is the same, therefore, as if the
assignee had expressly assumed the duties; i.e., she is liable to both the
assignor and the obligee in the event of nonperformance.

218

219

1) Rationale
Absent evidence to the contrary, it is the probable intent of the assignor
and assignee in such cases that the assignee bear the burdens, as well as
receive the benefits, of the contract. [Rest. 2d §328; Imperial Refining
Co. v. Kanotex Refining Co., 29 F.2d 193 (8th Cir. 1928)]
a) Note
In deference to Langel v. Betz, supra, §735, Restatement Second
 provides that the ALI expresses no opinion as to whether the
general rule Restatement Second adopts (that an assignee of a
contract who accepts the assignment impliedly promises to perform
the duties thereunder) applies to land-sale contracts. [Rest. 2d
§328]
2) U.C.C. [§737]
The modern view is adopted in the U.C.C. Section 2-210(4) provides
that an assignment of “the contract,” or of “all my rights under the
contract,” or an assignment in similar general terms, is an assignment of
rights and, unless the language or the circumstances indicate the
contrary—as where the assignment is for security—is also a delegation
of performance of the duties of the assignor. Section 2-210(4) also
provides that acceptance of the assignment by the assignee constitutes a
promise by the assignee to perform those duties. This promise is
enforceable either by the obligee under the original contract or by the
assignor.
(3) Effect of tender by delegee [§738]
If a duty is delegable, and a delegee makes a satisfactory tender of performance
to the obligee, the latter must accept the tender or the duty is discharged.
220
Chapter Five:
Performance and Breach

CONTENTS

Chapter Approach
A. Obligation to Perform in Good Faith §739
B. Express Conditions §741
C. Implied Conditions §776
D. Order of Performance §781
E. Doctrine of Substantial Performance §799
F. Divisible Contracts §812
G. Material vs. Minor Breach §816
H. Anticipatory Breach §832
I. Changed Circumstances—Impossibility and Frustration §845
J. Discharge §863

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Chapter Approach
If a contract has been formed and has consideration, and there are no defenses to formation,
you should ask:
1. Did a party fail to perform in good faith, even though she did not violate the literal
terms of the contract?
2. If one party failed to perform, was there an express condition to that party’s
performance? If so, was the condition fulfilled or was fulfillment of the condition
excused?
3. If one party failed to perform, was there an implied condition to that party’s
performance? In particular, was the other party required to have rendered performance,
or to have made a tender of performance, before the nonperforming party came under a
duty to perform?
4. If a party who was required to perform first did not perform perfectly, did he
nevertheless perform substantially? If so, he may be able to sue on the contract.
5. If a party to the contract who was required to perform first did not perform
substantially, was the contract divisible? If so, performance of part of the contract may
allow recovery as to that part.
6. If both parties failed to perform, was one party’s failure to perform justified because the
other party had committed a material breach?
7. Did a party repudiate the contract, even though the time for that party’s performance
had not yet arrived? If so, the other party might be able to bring suit under the doctrine
of anticipatory breach.
8. Did it appear that a party would be unable to perform, even though the time for
performance had not arrived and that party had not repudiated? If so, the other party
might be entitled to assurances that performance would occur.
9. Was a failure to perform excused by impossibility or frustration?
10. Was the contract discharged by a mutual rescission, a release, an accord and
satisfaction, or acceptance of a full-payment check?

A. Obligation to Perform in Good Faith

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1. In General [§739]
Under modern contract law, each party has an obligation to perform in good faith. For
example, U.C.C. section 1-203 provides: “Every contract or duty within this Act imposes
an obligation of good faith in its performance or enforcement.” This concept permeates
the entire U.C.C. Similarly, Restatement Second section 205 provides: “Every contract
imposes upon each party a duty of good faith and fair dealing in its performance and its
enforcement.” Under the obligation to perform in good faith, a party who does not
breach any explicit provision of an agreement may nevertheless have breached the duty
of good faith.

2. What Constitutes Good Faith? [§740]

Exactly what constitutes good faith is not always clear. U.C.C. Article 1 (“General
Provisions”), section 1-201(19), defines good faith as honesty in fact. However, U.C.C.
Article 2 (“Sales”), section 2-103(1)(b), provides that for merchants (see supra, §220
for definition of “merchant”), good faith requires both honesty in fact and the
observance of reasonable commercial standards of fair dealing in the trade. The
Comment to Restatement Second section 205 describes good faith as “faithfulness to an
agreed common purpose and consistency with the justified expectations of the other
party.” The Comment also excludes “bad faith” conduct violating community standards
of decency, fairness, or reasonableness from its definition of good faith. Courts have
found bad faith to include “evasion of the spirit of the bargain, lack of diligence and
slacking off, willful rendering of imperfect performance, abuse of power to specify
terms, and interference with or failure to cooperate in the other party’s performance.”
[Rest. 2d §205, comment]
Example: Seller agreed to sell four houses to Buyer for $800,000. As Buyer knew,
Seller did not own the houses, but instead intended to purchase them at a foreclosure
sale. Buyer then attended the foreclosure sale herself and outbid Seller for the houses,
acquiring them for $780,000. By entering into the contract with Seller to purchase
property that Buyer knew Seller would have to purchase at the foreclosure sale, Buyer
impliedly agreed that she would do nothing to prevent Seller from acquiring the property
at the sale. Presumably, if Buyer had not interfered, Seller could have purchased the
houses for the same price that Buyer paid. Seller would then have been able to sell the
houses to Buyer under the contract. Buyer has not acted in good faith, and Seller is
entitled to damages of $20,000, representing the difference between the contract price
and the amount Buyer paid at the foreclosure sale, which is the amount Seller would
presumptively have paid if Buyer had not outbid him.

Compare: Wilkoff promises to sell 2,600 tons of iron rail to Iron Trade Products,
delivery to be made on a later date. Wilkoff contemplates obtaining the rails on the open
market. During the interim, Iron Trade Products buys large amounts of rails from other
sources. Iron Trade Products’s large purchases drive up the market price and make it
difficult for Wilkoff to obtain the 2,600 tons ordered. Iron Trade Products has not acted
in bad faith, because it is reasonably to

223

be anticipated that a purchaser of standard goods will buy from various sources of
supply. [Iron Trade Products Co. v. Wilkoff Co., 116 A. 150 (Pa. 1922)]

a. Comment
The Comment to Restatement Second section 205 described above reflects the
“excluder” theory, a leading theory of the meaning of good faith. Under this theory,
good faith is understood as the absence of bad faith; i.e., the inquiry is not whether a
performance was in good faith, but rather whether it was in bad faith. The theory is
known as the “excluder” theory, because under the theory good faith has no meaning
of its own, but instead excludes, as impermissible, various forms of conduct that
constitute bad faith. Under a second theory, good faith limits a party’s discretion
when performing under a contract by preventing the party from using that discretion
to recapture opportunities that she had forgone by making the contract. Under a third
theory, good faith simply serves as a way for the court to supply missing contract
terms through the process of implication.
B. Express Conditions
1. In General [§741]
A contract may expressly provide that a party does not have a duty to perform unless
some condition is fulfilled. In such a case, the party’s failure to perform will normally be
justified if the condition was not fulfilled.

2. Definitions

a. Condition [§742]
To understand conditions, it is important to understand that there is a difference
between (i) whether a party is bound under a contract and (ii) whether a party who is
bound under a contract has come under a duty to perform. A party is bound under a
contract if the contract has consideration and is not subject to any defense (e.g.,
fraud). However, a party who is bound under a contract may not come under a duty
to perform unless and until some specified event or state of the world occurs. An
event or state of the world that must occur before a party to a contract has a duty to
perform is known as a condition. More accurately, for contract-law purposes the
term “condition” normally means either:
(i) An event or state of the world that must occur or fail to occur before a party
has a duty to perform under a contract; or
(ii) An event or state of the world the occurrence or nonoccurrence of which
releases a party from its duty to perform under a contract.
Example: A contract between Joe and Lucy provides that Joe will employ Lucy,
on specified terms, as manager of an auto dealership if Joe is

224

awarded the dealership, and that Lucy will accept such employment. Both parties are
bound under the contract, but neither party comes under a duty to perform unless
and until Joe is awarded the dealership. Joe’s being awarded the dealership is a
condition.

b. Express condition [§743]

The term “express condition” normally refers to an explicit contractual provision
which in substance provides that either (i) a described event or state of the world
must occur or fail to occur before a party has a duty to perform, or (ii) if a described
event or state of the world occurs or fails to occur a party will be released from a
duty to perform. To put this differently, an express condition is an express statement
in the contract which provides that either (i) a party to the contract does not have a
duty to perform unless some event or state of the world occurs or fails to occur; or
 (ii) if some event or state of the world occurs or fails to occur, the obligation of a
party to perform one or more of his duties under the contract is suspended or
terminated.

c. Strict usage [§744]

In strict usage, the term “condition” refers only to events and states of the world,
and the term “express condition” refers to contractual provisions. In general legal
usage, however, the term “condition” is often used to refer to contractual provisions
as well as states of the world, and this latter usage will be followed in this book.

3. Conditions and Promises Distinguished

a. In general [§745]
A promise is an undertaking to perform or refrain from performing some designated
act. A condition or express condition is a provision the fulfillment of which creates
or extinguishes a duty to perform under a contract.

b. Differences in legal effect of promises and conditions

(1) Breach and liability [§746]
An unexcused failure to perform a promise is always a breach of contract and
always gives rise to liability, however minimal. On the other hand, nonfulfillment
of a condition is not a breach of contract and does not give rise to liability.
(a) Comment
In a few cases a provision in a contract is both a promise and a condition.
(See infra, §756.) And in a few other cases, a promise can be implied from
a condition. (See infra, §755.) However, these cases do not represent a
departure from the basic principle that nonfulfillment of a condition is not a
breach of contract and does not give rise to liability. What gives rise to
breach and liability in such cases is that the provision is either a promise as
well as a condition or

225

gives rise to a promise by implication. In its role as a condition, the

provision does not give rise to either breach or liability.
(2) Excuse of performance [§747]
Breach of a promise by one party may or may not excuse the other party’s duty
to perform under the contract. Nonfulfillment of a condition normally will
excuse a duty to perform that was subject to the condition.
(3) Interrelation of conditions and promises [§748]
If a party’s promise to perform is subject to a condition, there can be no breach
of contract by that party until the condition has been fulfilled.
 Example: Anne contracts to loan Bob $50,000 on June 1 if the market
value of Bob’s gold-mine stock equals $100,000 on that date. The attainment by
the stock of a market value of $100,000 on June 1 is a condition to Anne’s duty
to loan the money. If the state of affairs specified in the condition occurs (i.e., if
the stock has a market value of $100,000 on June 1), Anne’s duty to perform
comes due, so that if Anne fails to loan the money, she will be liable for breach.
If the state of affairs specified in the condition does not occur, Anne’s duty to
perform does not come due and will never arise; i.e., unless the gold-mine stock
has a market value of $100,000 on June 1, Anne is under no duty to loan Bob
any money. But because the provision concerning the value of Bob’s stock was
a condition and not a promise, the failure of Bob’s stock to have a market value
of $100,000 on June 1 is not a breach of contract and does not give rise to
liability.

226

4. Reasons for Using Express Conditions [§749]

Why would parties use an express condition rather than a promise? In some cases, it is
because the relevant party is not willing to promise that the state of events in question
will occur. For example, in the last example, neither Anne nor Bob may be willing to
promise that the stock will have a value of $100,000 on June 1. Another possible reason
for using express conditions rather than promises is to avoid the doctrine of substantial
performance. (See infra, §§799-811.) Under that doctrine, if Jeff promises some
performance to Karen, Jeff can sue Karen even if Jeff has performed his promise only
 substantially (rather than perfectly). A slight deviation from the promise renders Jeff
liable to Karen for damages, but might not prevent Jeff from insisting on Karen’s
performance. On the other hand, if the contract states expressly that Karen shall incur no
obligation to Jeff unless Jeff’s performance is perfect or meets some other stated
criterion, then Karen will not be liable under the contract if Jeff performs only
substantially, unless the condition is excused. (See infra, §§767-775.)

5. Interpretation of a Provision as Condition or Promise [§750]

The determination whether a particular contractual provision is a condition or a promise
—or both—is of far-reaching importance. Such a determination may control whether
one of the parties is in breach of contract, and will fix the rights and duties of the parties
under the contract.

a. Parties’ intent controls [§751]

Ordinarily, it is not difficult to determine whether a particular provision is a promise
or a condition. The issue depends on the parties’ intent, and the words used by the
parties will indicate that intent. However, cases may arise where the contract
language is ambiguous and the court must interpret a provision to determine whether
the parties intended a specified state of affairs in the contract to be (i) a state of
affairs that one party undertakes to bring about, so that the provision is a promise, or
(ii) a state of affairs that must exist before some other provisions of the agreement,
that are clearly promises, give rise to a duty of performance, so that the provision is
a condition.
Example: Buyer enters into a contract to buy Seller’s car. The contract
provides, “it being understood that the car must be capable of a speed of 125 miles
per hour.” Seller’s car cannot attain that speed. The parties’ intent will control the
court’s interpretation of this ambiguous provision. If the speed term is interpreted to
be a condition, the failure of the car to reach 125 miles per hour discharges Buyer’s
duty to buy the car, but does not give rise to any cause of action against Seller. If the
speed term is interpreted to be a promise by Seller, the failure of the car to reach 125
miles per hour affords Buyer an action against Seller for breach of contract.

b. Where parties’ intent unclear [§752]

There is no stock formula to resolve ambiguities concerning whether a given

227

provision is a promise or a condition. The ultimate test is the intention of the

contracting parties, and each case therefore must be decided on its own facts.
However, the following factors should be considered:
(1) Words used [§753]
Words such as “provided,” “if,” and “when” usually indicate that an express
 condition rather than a promise was intended. Words such as “promise” and
“agree” usually indicate a promise.
(a) Note
Words by themselves might not be determinative.
Example: Suppose Acme Insurance Company issues a policy to Owen,
insuring Owen’s house against fire, and one of the policy provisions reads:
“Insured agrees not to keep gasoline on the premises.” Although phrased in
terms of a promise, the provision is really a condition of the insurance.
Acme would have no cause of action against Owen for breach of contract
because Owen kept gasoline on the premises, but Owen’s doing so would
excuse Acme’s duty to pay in the event of a loss by fire attributable to the
gasoline.

Compare: Conversely, a contract provision that “all obligations

hereunder are conditional upon submitting the matter to arbitration in the
event of a dispute” might be interpreted as an enforceable promise by each
party to arbitrate. [See Hamilton v. Home Insurance Co., 137 U.S. 370
(1890)]
(2) In case of doubt, construe provisions as promises [§754]
In case of doubt, contractual provisions will ordinarily be construed to be
promises rather than conditions. Such a construction generally operates to give
effect to the parties’ expectations. First, failure to perform a promise will entitle
the other party to damages, while failure to fulfill a condition imposes no
liability. Second, failure to fulfill a condition normally excuses performance by
the party whose performance is subject to the condition, and therefore
effectively terminates the contract, which is a relatively drastic outcome. Thus if
a contractual provision is a condition, one party may lose his right to an agreed
exchange after he has relied substantially on the expectation of that exchange by
preparation or performance. In contrast, a breach of promise may give rise only
to an action for damages, without terminating the obligation to perform. [Green
County v. Quinlan, 211 U.S. 582 (1909)] When it is doubtful whether an
agreement makes an event a condition of an obligor’s duty, an interpretation is
preferred that will reduce the risk of forfeiture. Interpreting a contractual
provision as a promise decreases the risk of forfeiture;

228

interpreting a contractual provision as a condition increases the risk of forfeiture.

Example: In the car-sale example supra, §751 (“it being understood that the
car must be capable of a speed of 125 miles per hour”), the provision would
 probably be interpreted as a promise rather than as a condition. Therefore, if
Seller fails to deliver a car that is capable of 125 miles per hour, Buyer would be
entitled to sue for breach of promise.

Example: On May 29, Brenda contracts with Trucker to transport certain

merchandise. Brenda agrees to pay Trucker $1,000 “provided Trucker leaves
Los Angeles with the goods immediately and delivers the goods to Brenda’s
agent in New Orleans on June 1.” Trucker delays leaving Los Angeles, but is
still able to deliver the goods to Brenda’s agent in New Orleans on June 1. Is
Brenda’s obligation to pay the freight to Trucker conditional on Trucker’s
having left immediately on May 29? Unless it was shown that Trucker’s leaving
“immediately” had some special importance to Brenda, the provision would
probably be construed as a promise, the nonperformance of which would entitle
Brenda to damages (if any) but would not excuse Brenda’s duty to pay the
freight. A contrary interpretation might be appropriate if it appeared that
Trucker’s leaving immediately had some special significance to Brenda.

6. Implication of a Promise from a Condition [§755]

In some cases, a contractual term that operates as a condition also gives rise, by
implication, to a promise relating to the condition.
Example: On June 1, Robert agrees to assign a lease on government-owned land to
Vita for $13,000, payable that day. The assignment is “subject to approval by the
Secretary of Interior.” Robert promises to return the $13,000 if the Secretary does not
give Vita approval by December 31. The Secretary does not approve the assignment by
that date, but Vita did not seek such approval. Vita sues for return of the $13,000. Vita is
not entitled to the $13,000. Although the Secretary’s approval is a condition, it also gives
rise, by implication, to a promise by Vita that she will seek the Secretary’s approval in
good faith.

7. Provision Both Promise and Express Condition [§756]

In some cases, a provision may be both a promise and a condition—i.e., a party may
commit (promise) to bring about a given state of events, and the contract containing that
commitment may also expressly state that the other party’s duty to perform under the
contract is conditioned on the occurrence of the state of events.

229

Example: Trucker promises to get Brenda’s goods to New Orleans by June 1, and
the contract expressly provides that Brenda will have no duty to pay Trucker unless the
goods arrive by that time. Getting the goods to New Orleans by June 1 is both a promise
by Trucker and a condition to Brenda’s liability.
8. Conditions Precedent and Conditions Subsequent

a. Conditions precedent [§757]

A “condition precedent” is a condition under which some state of affairs must occur
before a party has a duty to render performance under a contract.

b. Conditions subsequent [§758]

A “condition subsequent” is a condition under which occurrence or nonoccurrence of
a state of affairs extinguishes or terminates a duty to perform that had previously
arisen. For example, assume Fran agrees to work for Pizza Barn for a specified
period unless Fran is admitted to law school during that period. Fran’s duty to remain
in Pizza Barn’s employ is subject to the condition subsequent that she not be
admitted to law school. [See Hartman v. San Pedro Commercial Co., 66 Cal.
App. 2d 935 (1944)]

c. True conditions subsequent vs. conditions subsequent in form only [§759]

True conditions subsequent are rare. Many provisions are worded as conditions
subsequent in form, but are conditions precedent in substance.
Example: Insurance Company insures Customer against loss by fire. The policy
provides, “any liability of the insurer under this policy is discharged if either (i) proof
of loss is not submitted within 30 days after the accident, or (ii) suit is not brought
against the insurer for the claimed loss within 12 months from the date of accident.”
The first provision (the proofof-loss provision) is a condition subsequent in form, but
in substance it is a condition precedent to the insurer’s duty to pay because that duty
does not arise unless and until a proof of loss is filed within 30 days after the
accident. In contrast, the second provision, requiring suit within 12 months, is a true
condition subsequent. This condition has the effect of a private statute of limitations.
The insurer’s duty to pay arises when the proof of loss is submitted, but if the suit is
not brought within 12 months from the date of the accident, the duty is effectively
discharged. [Brandyce v. Globe & Rutgers Fire Insurance Co., 252 N.Y. 69
(1929)]

d. Procedural effect of condition subsequent [§760]

A plaintiff is normally required to allege in his complaint, and to prove, that all
conditions precedent to the defendant’s duties have occurred or that there is some
excuse for the nonoccurrence of such conditions. That is, the burden of pleading and
burden of proof of the occurrence of conditions precedent is

230

generally on the plaintiff. In contrast, the burden of pleading and the burden of proof
of the occurrence of conditions subsequent is generally on the defendant.
 (1) Note
Statutes in many jurisdictions provide that in pleading the occurrence of
conditions precedent, it is sufficient to allege generally that all such conditions
have occurred. The defendant then has the burden of denying, specifically and
with particularity, any condition precedent that he alleges has not occurred. [See,
e.g., Fed. R. Civ. P. 9(c)]

9. Conditions of Satisfaction

a. Performance to satisfaction of promisor as condition precedent to promisor’s

duty to perform [§761]
Assume Painter promises to paint Owner’s house, and Owner promises to pay
Painter $1,000 provided Owner is “satisfied with the work done.” Because Owner’s
satisfaction is a condition, Owner is not under a duty to pay unless she is satisfied.
The problem is how Owner’s satisfaction is to be measured. In particular, the
problem is whether the performance must meet with Owner’s actual personal
satisfaction, or must only be a performance that would meet with the satisfaction of
a reasonable person. The modern trend is to construe a provision requiring the
promisor’s satisfaction according to the subject matter of the contract.
(1) Subject matter involves mechanical fitness, utility, or marketability [§762]
In contracts involving mechanical fitness, utility, or marketability (e.g.,
construction or manufacturing contracts), a condition of satisfaction is
interpreted to be fulfilled by a performance that would satisfy a reasonable
person. It is therefore immaterial that the promisor was not personally satisfied
if a reasonable person would have accepted and approved the performance
tendered. [Duplex Safety Boiler Co. v. Garden, 101 N.Y. 387 (1886)]
(2) Subject matter involves personal taste or judgment [§763]
On the other hand, where the contract involves personal taste or personal
judgment, a condition of satisfaction is interpreted to be fulfilled only if the
promisor is personally satisfied. For example, contracts for portraits, for dental
work, or for tailoring all require the promisor’s personal satisfaction. [Mattei v.
Hopper, 51 Cal. 2d 119 (1958)]
(a) Lack of satisfaction must be honest and in good faith [§764]
Even where a condition requires personal satisfaction, the condition will fail
to be fulfilled only if the promisor’s lack of satisfaction is honest and in
good faith. Therefore, if the promisor refused to examine the promisee’s
performance, or otherwise rejected the performance in bad faith, the
condition of satisfaction will be excused. [Williams v. Hirshorn, 103 A.
989 (N.J. 1918)]

231
 1) Comment
Although technically the reasonableness, as opposed to the honesty, of
the promisor’s dissatisfaction is irrelevant if the subject matter of the
contract involves personal taste or judgment, a lack of reasonability is
evidence that the promisor’s dissatisfaction was not in good faith.
[Mattei v. Hopper, supra]

b. Performance to the satisfaction of a third person [§765]

In many contracts, an express condition requires the satisfaction of a third person
rather than a party to the contract. In particular, construction contracts often include
a condition requiring the satisfaction of the owner’s architect or engineer. When the
satisfaction of a third person is a condition, most courts take the position that the
condition requires the actual personal satisfaction of the third person. As in the case
where a party’s personal satisfaction is required, however, a condition that requires a
third person’s personal satisfaction will be excused if the third person’s dissatisfaction
is not honest and in good faith. [Thompson-Starrett Co. v. La Belle Iron Works,
17 F.2d 536 (2d Cir. 1927)] Moreover, under a minority view, such a condition is
excused if the third person acted under a gross mistake. [Rest. 2d §227]

10. Conditions Relating to Time of Payment [§766]

Frequently a contract provides that payment is to be made upon the occurrence of a
certain event. For example, Contractor agrees to pay Subcontractor for Subcontractor’s
work “five days after Owner shall have paid Contractor therefor.” This kind of provision
appears on its face to make the occurrence of the designated event (in the example,
payment by Owner) a condition to payment by the promisor. However, the courts
distinguish, in such cases, between (i) provisions that should be interpreted as a promise
to pay that is enforceable only if the condition has occurred and (ii) provisions that
should be interpreted as an unconditional promise to pay, with payment postponed until
occurrence of the event designating the time of payment. If the second interpretation is
given, the courts hold that if the event designating the time of payment does not occur,
payment must nevertheless be made within a reasonable time.
Example: Contractor agrees to pay Subcontractor “as funds are received by
Contractor from Owner.” Most courts hold that such a provision falls into the second
category, so that Contractor must pay Subcontractor even if Owner becomes insolvent.
[See, e.g., J. Dyer Co. v. Bishop International Engineering Co., 303 F.2d 655 (6th
Cir. 1962); but see Mascioni v. Miller, Inc., 261 N.Y. 1 (1933)—contra] The rationale
for this outcome is that in the absence of a special contractual provision, the insolvency
of an owner would not be a defense to a claim by a subcontractor against a contractor.
The parties can change that result by contract, but the court will not construe a
contractual provision to change the result unless the provision does so very explicitly.
 232

233

11. Excuse of Conditions [§767]

Normally, there is no obligation to perform a contractual duty unless all applicable
conditions have been fulfilled. In some cases, however, a condition may be excused, so
that a duty must be performed despite the fact that the condition has not been fulfilled.

a. Excuse of condition by prevention or hindrance [§768]

A condition will be excused if the party favored by the condition wrongfully prevents
or hinders the fulfillment of the condition. A party to a contract cannot take
advantage of his own wrongful conduct to escape liability under the contract.
Example: Contractor contracts to build a house for Owner, and Owner promises
to pay Contractor $100,000 for the house “on presentation of a certificate of
completion from my architect, Alfonse.” Presentation of the certificate is a condition
to Owner’s duty to pay. Contractor finishes the house, but Owner improperly bribes
Alfonse not to give the certificate of completion. The condition is excused.

Example: Seller has given Buyer an option. It is a condition to the exercise of

the option that Buyer “tender the purchase price to Seller at Seller’s office during
business hours on January 15.” If Seller goes into hiding or otherwise refuses to see
Buyer on the date set, the condition is excused. [Unatin 7-Up Co. v. Solomon, 39
A.2d 835 (Pa. 1944)]
(1) Element of wrongfulness [§769]
To excuse a condition, the prevention or hindrance must be wrongful. This does
not require a showing of bad faith or malice. Rather, it essentially means that in
light of the terms of the contract, the objective of the contract, and the
circumstances, the other party would not have reasonably anticipated the type
of prevention or hindrance that occurred.
Example: In the option example above, even if Seller merely forgot about
the option and was not in his office on January 15, the condition is excused
because Buyer would not have reasonably anticipated that Seller would be out
of the office on January 15.
(2) Termination of a business [§770]
Many contracts are conditioned on the continued operation of a business. In
such a case, whether closing down the business constitutes wrongful prevention,
and therefore excuses the condition, depends on the type of contract involved
and the reason for the closing.
(a) Requirements and output contracts [§771]
Assume that Seller contracts to sell the output of her furniture factory

234
 to Buyer for the next five years. It is then a condition to Seller’s duty to
perform that her factory has output. Suppose that one year after the
contract is made, Seller closes down the factory. Is the condition that
Seller’s factory have output excused, so that Buyer can sue Seller for
failure to deliver any furniture, despite the nonoccurrence of the condition?
Most courts hold that the answer depends on whether Seller had valid
economic reasons for the closing other than losses resulting from her
contract with Buyer. [Neofotistos v. Harvard Brewing Co., 171 N.E.2d
865 (Mass. 1961)] The Comment to U.C.C. section 2-306 states, “A shut-
down by a requirements buyer for lack of orders might be permissible when
a shut-down merely to curtail losses would not.”
(b) Agreements conditioned on “profits” [§772]
Similarly, if a contract between two parties requires one party to pay the
other a designated share of the profits from her business, the existence of
profits from the business is a condition to the party’s obligation. What if the
party sells her business?
Example: Seller sells his factory to Buyer for $100,000 plus an
additional $25,000 if Buyer makes any profit from the business in the first
year of operation. Prior to the expiration of one year, Buyer sells the
business. The condition of having made a profit during the year is excused,
so that Seller can sue Buyer despite the nonoccurrence of the condition.
Buyer is liable for the additional $25,000 if Seller can show that the value
of the business was $25,000 greater than the amount Buyer paid for it. [Du
Pont de Nemours Powder Co. v. Schlottman, 218 F. 353 (2d Cir. 1914)]

b. Waiver [§773]
A party by words or conduct may waive his right to insist on the fulfillment of a
condition upon which his duty of performance depends. This subject is discussed
supra, at §§110-112.

c. Impossibility [§774]
Impossibility or impracticability excuses the fulfillment of a condition if fulfillment of
the condition is not a material part of the agreed exchange and forfeiture would
otherwise result. (For further discussion of the doctrine of
impossibility/impracticability, see infra, §§845-861.)
Example: Insurance Company issues Roger an accidental injury insurance
policy, which provides that notice within 14 days of an accident is a condition of
Insurance Company’s duty. Roger is injured as a result of an accident covered by the
policy, but is in a coma as a result of the accident and is unable to give notice for 20
days. Roger gives notice as soon as he is able.
 235

Since the giving of notice within 14 days was impossible and was not a material part
of the agreed exchange, and forfeiture would result if the condition is not excused,
the nonoccurrence of the condition is excused, and Roger has a claim against
Insurance Company under the policy. [Rest. 2d §271, ill. 2]

d. Forfeiture [§775]
If the nonfulfillment of a condition would cause a disproportionate forfeiture,
fulfillment of the condition may be excused unless the fulfillment of the condition
was a material part of the agreed exchange.
Example: Hudson Lines, an ocean carrier, carries Widgetco’s goods under a
contract providing that it is a condition of Hudson Lines’s liability for damages to
cargo that “written notice of claim for loss or damage must be given within 10 days
after removal of goods.” Widgetco’s cargo is damaged during carriage, and Hudson
Lines knows of this. On removal of the goods, Widgetco notes in writing on the
delivery record that the cargo is damaged. Five days later, Widgetco informs Hudson
Lines over the telephone of a claim for that damage and invites Hudson Lines to
participate in an inspection within the 10-day period. Hudson Lines inspects the
goods within the period, but Widgetco does not give written notice of its claim until
25 days after removal of the goods. Since the purpose of requiring the condition of
written notice is to alert the carrier and enable it to make a prompt investigation, and
since this purpose had been served by the written notice of damage and the oral
notice of claim, the court may excuse the nonoccurrence of the condition to the
extent required to allow recovery by Widgetco. [Rest. 2d §229, ill. 2]

C. Implied Conditions
1. In General [§776]
Recall that for contract law purposes, a “condition” means either (i) an event or state of
the world that must occur or fail to occur before a party’s performance under a contract
comes due or (ii) an event or state of the world the occurrence or nonoccurrence of
which releases a party from its duty to render performance under a contract. The term
“express condition” normally refers to an explicit contractual
 236

provision providing that a described event or state of the world must occur or fail to
occur before a party’s performance under a contract comes due, or an explicit
contractual provision providing that if a described event or state of the world occurs or
fails to occur, a party will be released from its duty to render performance under a
contract. Often, however, it can be implied that the duty to render performance under a
contract is conditional upon the occurrence of some event or state of the world, even
though the contract does not explicitly so state. In that case, there is said to be an
“implied” or “constructive” condition that the relevant event or state of the world must
occur before the performance of one or both parties comes due.

2. Implied Conditions of Performance [§777]

By far the most important and common type of implied condition to the duty of each
party to a contract to render performance is that the other party has either rendered its
performance or made a tender of its performance. For example, suppose Steve and Jim
make a contract under which Jim will paint Steve’s house by May 30, and Steve will pay
Jim $3,000 on June 1. It is then an implied condition to Steve’s duty to pay $3,000 that
Jim shall have painted the house.

a. Dual effect
Note the dual legal effect of Jim’s failure to paint Steve’s house by June 1: (i) The
failure is a breach of contract, for which Jim will be liable in damages. (ii) The
failure is nonfulfillment of an implied condition to Steve’s duty to pay on June 1, so
that Steve does not come under that duty.

3. Implied Conditions of Cooperation and Notice [§778]

Conditions other than performance or tender by the other party may also be implied
conditions. For example, implied conditions of cooperation and notice are common.

a. Implied condition of cooperation [§779]

Under an implied condition of cooperation, the obligation of one party to render
performance is impliedly conditioned on the other party’s cooperation in that
performance.
Example: Seller promises to deliver certain goods to the “No. 2 loading dock” of
Buyer’s factory. It is an implied condition to Seller’s duty to deliver the goods that
such a loading dock exists, that the dock is reasonably accessible for making a
delivery, and that Buyer permits Seller to make the delivery at the dock.

b. Implied condition of notice [§780]

Often, it is a condition to one party’s performance of a duty under a contract that the
other party give him notice that the performance is due. A condition
 237

of notice is most commonly applied where a party could not reasonably be expected
to know a fact that triggered the duty to perform unless such notice was given.
Example: Jennifer leases a building to David and promises to maintain and repair
the interior of the building as necessary. It is an implied condition to Jennifer’s
promise to repair that David will give her reasonable notification of the need for
repairs and will permit her to enter to make the repairs. David therefore cannot sue
Jennifer for failure to make a needed repair unless he has first notified Jennifer that
the repair is required, and given Jennifer an opportunity to make the repair.

D. Order of Performance
1. Introduction [§781]
As pointed out above, in many cases one party to a contract is not obliged to perform
unless and until the other party has completed or tendered her performance. This leaves
open the question, “In what order are the parties to perform?” Sometimes, a contract
explicitly provides for the relative order, or sequence, of the parties’ performances, so
that it is clear which party’s performance is an implied condition to the other’s
performance. Often, however, a contract does not explicitly provide for the order or
sequence in which the performances are to occur. Contract law has developed a number
of rules governing the issue of order of performance when a contract is not explicit on
the subject. These rules are phrased in the language of conditions because they address
the issue: Under what circumstance is the duty of performance of one party impliedly
conditional on the actual performance or tender of performance by the other party?

2. Performance that Takes Time Is a Condition to Performance that Will Not Take
Time [§782]
If one party’s performance will take some period of time, while the other’s performance
can be accomplished in a moment of time, it is implied that the performance that takes
time must occur first. Accordingly, completion of the performance that will take time is
an implied condition to the duty to render the performance that will not take time.
Example: Tiffany promises to paint Bob’s house in consideration of Bob’s promise
to pay $3,000. The completion of Tiffany’s performance (which will take time) is an
implied condition to Bob’s duty to pay (which will not take time).

Example: Pat promises to serve as Jane’s assistant. Jane promises to pay $2,000 a
month for Pat’s services. The completion of Pat’s performance each month is an implied
condition to Jane’s duty to pay Pat each month.

238
3. Earlier Performance Is Condition to Later Performance [§783]
If one party promises to perform at a date prior to that on which the other party
promises to perform, the first party’s performance is an implied condition to the other’s
duty to perform.
Example: Joe promises to deliver a horse to Lucy on March 1, in return for Lucy’s
promise to pay Joe $1,000 on April 1. Joe’s delivery of the horse is an implied condition
to Lucy’s duty to pay.

4. Performances to Occur Simultaneously at Fixed Time—Conditions Concurrent

[§784]
If both performances can be rendered simultaneously or nearly simultaneously, and the
contract fixes the same time for both performances, tender of performance by each
party is an implied condition to the other party’s duty to perform; i.e., neither party is
obliged to perform unless and until the other party tenders performance. In such cases,
each party’s performance is said to be an implied condition concurrent to performance
by the other.
Example: Vikki contracts to sell her car to Jake for $10,000. The contract states that
both the purchase price and the car are to be exchanged on July 1. Tender of each
performance by each party is an implied condition concurrent to the other party’s
obligation to perform. If Jake fails to tender the purchase price on July 1, Vikki’s duty to
deliver the car does not arise. If Vikki fails to tender the car on July 1, Jake’s duty to pay
does not arise.

a. Effect
The legal effect of conditions concurrent is much the same as that of other implied
conditions. If the condition concurrent is fulfilled (i.e., if tender is made by one
party) the other party’s duty to perform arises. If the condition concurrent is not
fulfilled (i.e., if tender is not made) the other party’s duty does not arise.
Accordingly, in a sales contract that does not involve a credit term, there is ordinarily
no breach of contract by the seller until the buyer tenders payment, and no breach of
contract by the buyer until the seller tenders delivery. Tender by either party is
sufficient to make the other party’s duty to perform absolute; lack of tender means
that the other party’s duty does not arise.

5. No Time Set for Either Performance and Performances Can Occur

Simultaneously [§785]
The same rule applies if no time is set for performance of either promise and the
promises are capable of being performed simultaneously or nearly simultaneously. In
such a case, tender of each performance by each party is an implied condition
concurrent to the other party’s duty to perform.
 239

Example: Alice contracts to sell her car to Mike for $10,000. No time is specified.
Payment and delivery are conditions concurrent to each other.

6. Time Set for One Performance but Not Other [§786]

The same rule also applies if both promises can be rendered simultaneously or nearly
simultaneously and a time is set for one party’s performance but not for the other’s.
Example: On May 15, Debbie promises to sell her car to Stacy for delivery on June
1 in consideration of Stacy’s promise to pay $2,000 for the car. No time is set for
Stacy’s performance. Payment and delivery on June 1 are implied conditions concurrent
to each other.

7. Anticipatory Repudiation [§787]

A performance or tender that would normally be an implied condition to the other party’s
performance or tender will be excused if the other party repudiates the contract prior to
the time when performance was to occur.

a. Rationale
One purpose of this rule is to avoid forcing the innocent party to remain futilely in
readiness to perform, and to tender performance, on the date set in the contract.

b. Ability to perform [§788]

Although a party who is the victim of a repudiation does not have to make a tender,
or hold himself ready to make a tender, he may be required to show that, but for the
repudiation, he had the ability to perform.
Example: Christy agrees to sell stock to Kevin, delivery on July 1. On June 1,
Christy repudiates. Kevin can sue Christy without making a tender of payment, but
Kevin may be required to show that he had the financial ability to tender payment.

c. Anticipatory repudiation as a breach [§789]

In addition to excusing the nonrepudiating party from holding himself ready to
perform and from tendering performance, the nonrepudiating party can normally sue
the repudiating party for breach even if the time for performance has not yet arrived.
This aspect of the doctrine of anticipatory repudiation (or “anticipatory breach”), as
well as further details of the doctrine, are discussed infra, at §§832-844.

8. Prospective Inability to Perform [§790]

Sometimes it becomes apparent, prior to the scheduled time of performance, that one
party to a contract will be unable to perform when the time comes for her performance.
 240

This is known as “prospective inability to perform” or “prospective failure of

performance.” The prospective inability to perform of one party excuses the other party
from holding himself ready to perform, rendering performance, or tendering
performance, as an implied condition to the first party’s duty to perform. (If a party’s
prospective inability to perform is caused by her voluntary conduct, it may also
constitute an anticipatory breach, with an attendant immediate right of action for the
party. See infra, §832.)
Example: Louisa enters into a contract to sell Blackacre to Richard on June 1 for
$100,000. On May 25, Louisa conveys the property to Stan. By her conduct in
conveying Blackacre to Stan, Louisa has made it appear that she will be unable to
perform her promise to convey Blackacre to Richard on June 1. Louisa’s prospective
inability to perform excuses the condition that Richard hold himself ready to perform, or
make an actual tender, on June 1, in order to put Louisa in breach of contract.

a. Facts constituting prospective inability to perform [§791]

The following recurring fact patterns are illustrative of a prospective inability to
perform.
(1) Vendor’s conveyance or encumbrance of contracted-for property [§792]
After contracting to sell land or specific goods to one party, the vendor conveys
or mortgages the property to another party, retaining no apparent right to
reacquire the property before the date set for conveyance. The vendor’s
conduct constitutes a prospective inability to perform. [Rest. 2d §264; James v.
Burchell, 82 N.Y. 108 (1880)]
(2) Promisor’s making of an inconsistent contract with another [§793]
The same result follows if the promisor makes a contract with another that is
inconsistent with his contractual obligation to the promisee. [Rest. 1st §318(c)]
Example: On June 1, Mary hires Sam as a sales representative, and Sam
agrees to report to work on July 1. However, on June 2, Sam goes to work for
another company under a one-year contract. By accepting such employment,
Sam has made it appear that he will be unable to work for Mary. Sam’s
prospective inability to perform excuses Mary from holding herself ready to
employ him.
(a) Contracts not inconsistent [§794]
Where it is possible to render service to both the promisee and another,
the fact that the promisor has entered into a contract with another is not a
prospective inability to perform his contract with the promisee.
 241

(3) Insolvency [§795]

Insolvency or bankruptcy of a party to whom credit is to be extended under a
contract does not constitute prospective inability to perform so as to excuse the
solvent party’s duty of performance. However, insolvency or bankruptcy may
justify the solvent party in suspending performance until he has received either
the remaining performance or an adequate assurance that the remaining
performance will occur.
Example: Craig promises to paint Jennifer’s house on August 1, and
Jennifer promises to pay Craig $1,000 on September 1. On July 15, Craig
discovers that Jennifer is insolvent. Craig’s duty to paint Jennifer’s house on
August 1 is not discharged, but Craig has the right to insist on either payment in
cash on the date of performance or an adequate bond securing payment on
September 1. [Hanna v. Florence Iron Co., 222 N.Y. 290 (1918)]
(a) Goods [§796]
The U.C.C. specifically provides that in contracts for the sale of goods,
insolvency of either party gives the other the right to demand assurances
of performance before proceeding further with his own performance under
the contract. [U.C.C. §2-609; see below]
(4) U.C.C. [§797]
Under the U.C.C., either party to a contract for the sale of goods has the right
to demand “adequate assurance of performance” from the other party if
reasonable grounds exist for believing the other party’s performance may not be
tendered. Until such assurance is given, the first party has the right to suspend
any performance due by him. An unjustified failure to comply with a reasonable
demand for assurance within 30 days constitutes a repudiation of the contract
as a matter of law. [U.C.C. §2-609]
(a) Restatement [§798]
The Restatement takes the position that a comparable principle should
apply to all contracts, not just contracts for the sale of goods. [Rest. 2d
§251]

E. Doctrine of Substantial Performance

1. Introduction [§799]
As shown above, normally the occurrence of performance or tender by one of the
parties to a contract, or by each party in the case of conditions concurrent, is an

242
 implied condition to the other party’s duty to render performance. In other words, if A’s
performance is to come first, B does not come under a duty to perform until A has
performed; if A and B are to perform simultaneously, neither A nor B comes under a
duty to perform until the other tenders. However, an implied condition of prior or
simultaneous performance will usually be satisfied by substantial performance, as
opposed to perfect performance. In other words, if A’s performance is an implied
condition to B’s performance, the condition will usually be satisfied by A’s substantial
performance. If substantial performance has occurred, B will come under a duty to
perform even though A’s performance is not perfect, unless perfect performance either is
an express condition (see supra, §§741-744), or is required by some exception to the
substantial performance doctrine. (Note also that if A has substantially but not perfectly
performed, B can sue A for the damages resulting from the fact that A’s performance
was not perfect. See infra, §808.)

2. Significance
The significance of the substantial performance doctrine is that in cases where the
doctrine is applicable, a party can bring suit on the contract as a plaintiff, for expectation
damages (see infra, §876), even though he has breached the contract by not rendering a
perfect performance.

a. Offset
However, the defendant is entitled to offset any remedy against him by the amount
of damages he incurred as a result of the plaintiff’s breach.

3. Rationale
If Builder promises to build a house for Owner, and Owner promises to pay $100,000
for the house, the law implies that Builder’s performance is a condition to Owner’s duty
to pay the contract price. But if Builder has done everything except to install three
doorknobs or one light switch, it seems unfair—and not a necessary implication—to
deny Builder contractual recovery, subject to an offset for damages.

4. What Constitutes “Substantial” Performance? [§800]

Whether a less than perfect performance is nevertheless “substantial,” within the
meaning of the substantial performance doctrine, is a question of fact, to be governed by
the circumstances of each case. The test is whether the performance meets the essential
purpose of the contract. [Plante v. Jacobs, 103 N.W.2d 296 (Wis. 1960)] Among the
factors to be considered are the extent of the contracted-for benefits that the innocent
party has received, the extent to which damages will be an adequate compensation for
the breach, the extent to which a forfeiture will occur if the doctrine is not applied, and
the extent to which the breach was wrongful or in bad faith.

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a. Willfulness [§801]
 At one time, it was often stated that the doctrine of substantial performance was
inapplicable if the plaintiff was guilty of a willful or intentional breach of contract.
The modern view, however, is that even a conscious and intentional departure from
the contract will not necessarily defeat recovery. Rather, willfulness is to be
considered as one of several factors involved in deciding whether there has been
substantial performance.

5. Application

a. Construction contracts [§802]

The doctrine of substantial performance has been applied primarily in cases involving
construction contracts, where it would be unjust to allow an owner to retain the
value of a building free of charge just because the contractor made some small
deviation from the agreed specifications.

b. Contracts for the sale of goods—U.C.C. [§803]

In theory, the U.C.C. adopts a “perfect tender” rule, rather than the substantial
performance doctrine, in cases involving contracts for the sale of goods. Under the
perfect tender rule, substantial performance is insufficient for a seller of goods.
Instead, under this rule, the seller must make a tender of goods that conform
“perfectly,” rather than merely substantially, to the contract specifications in order to
put the buyer under an obligation to take and pay for the goods. [U.C.C. §2-601]
(1) Exceptions [§804]
However, the U.C.C. makes a number of exceptions to the perfect tender rule—
so many, in fact, that when all is said and done there is little left to the rule.
(a) Time for performance not yet expired [§805]
Under U.C.C. section 2-508(1), where a tender of goods is rejected
because the goods do not conform to the contract, and the time for
performance has not yet expired, the seller has the right to notify the buyer
of an intention to cure, and then has the right to make a conforming
delivery within the contract time.
Example: Seller contracts to deliver 500 Brand X widgets to Buyer for
$500 on July 1. Seller delivers Brand Y widgets on June 15 and Buyer
rejects them as nonconforming. Even though Seller has not made a perfect
tender, she has the right to notify Buyer of her intention to cure and to
deliver Brand X widgets by July 1.
(b) Installment contracts [§806]
Under U.C.C. section 2-612, if a contract for the sale of goods is an

244
 installment contract (i.e., a contract calling for periodic deliveries and
payments), the buyer cannot reject an installment, even though the
installment does not conform to the contract, if: (i) the nonconformity of
the installment does not substantially impair the value of the whole
contract; (ii) the nonconformity can be cured; and (iii) the seller gives
adequate assurance of cure.
Example: Seller contracts to deliver 500 Brand X widgets in
installments of 100 widgets per month for $500. If Seller delivers 85 Brand
X widgets and 15 Brand Y widgets in the third installment, Buyer cannot
reject the installment if the nonconformity does not impair the value of the
whole contract, the nonconformity can be cured by delivery of 15 Brand X
widgets, and Seller gives Buyer adequate notice of cure.
(c) Reasonable grounds for believing tender conforms [§807]
Under U.C.C. section 2-508(2), even if the defect in goods cannot be cured
within the contract time, and the contract is not an installment contract, the
perfect tender rule is not applicable if the seller had reasonable grounds to
believe the tender would be acceptable, despite the defect, with or without
a money allowance. In such a case, the buyer can reject a nonconforming
tender, but the seller can then notify the buyer of his intention to cure the
defect, and if the seller retenders a conforming delivery within a reasonable
time, the buyer must accept it.
Example: Seller contracts to deliver 500 Brand X widgets to Buyer for
$500 on July 1. In the past, Buyer has accepted Brand Y widgets in place
of Brand X widgets. Seller delivers 500 Brand Y widgets on July 1 and
Buyer rejects them as nonconforming. Because Seller had reasonable
grounds to believe the Brand Y widgets would be acceptable, he can cure
by notifying Buyer of his intention to cure and delivering Brand X widgets
within a reasonable time after the July 1 due date.

6. Damages [§808]
As noted above, under the substantial performance doctrine, a party who has

245
 substantially performed is entitled to enforce the contract—that is, to sue for expectation
damages (see infra, §876). However, the other party is entitled to an offset for damages
resulting from the fact that the performance was not perfect. [Plante v. Jacobs, supra,
§800]

a. Cost of completion [§809]

Normally, the measure of damages for the failure to perform perfectly is the amount
it would cost to repair the deficiency in the performance, or to make the work
conform to the contract. This measure is known as “cost of completion” damages.
[23 A.L.R. 1436]

b. Diminution in value [§810]

However, if repair or reconstruction would involve “substantial economic waste,”
or if cost-of-completion damages would be disproportionate to the end to be served,
the measure of damages will be the amount by which the deficiency in the
performance diminishes the value of the performance.
Example: Builder and Owner make a contract under which Builder will
construct a house for Owner for $350,000. One of the specifications of the contract
is that Builder will use Acme plumbing pipes. Instead, Builder uses Baker plumbing
pipes, which are functionally identical to Acme pipes. The problem does not come to
light until construction is completed. The cost of completion (i.e., the cost to remedy
the defect) would be $200,000: $50,000 to tear apart the house to get at the pipes,
and $150,000 to replace the pipes and repair the house. That measure of damage will
not be awarded. Instead, damages will be the amount by which the use of Baker pipe
diminishes the value of the building as compared to its value if Acme pipe had been
used. [Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239 (1921)]

7. Remedy in Restitution [§811]

Even if the breaching party has not rendered substantial performance, he may have a
right to recover in restitution for the value of performance rendered to and retained by
the innocent party. In theory, the recovery in restitution is measured by the benefit
conferred, minus an offset for damages. In practice, however, the measure of
restitutionary recovery where the performance is incomplete but readily remedial is
usually the unpaid contract price less the cost of completion, up to the value of the
benefit actually received by the defendant. This formula may often result in the same
recovery as would be granted if there had been substantial performance.

F. Divisible Contracts
1. General Rule [§812]
A contract is said to be divisible if it is possible to apportion the parties’ performances
into matching or corresponding pairs that the parties treat as equivalents.
 246

Example: Contractor promises to build a garage for Owner for $10,000, a pool for
$18,000, and a tennis court for $7,000, for a total price of $35,000. Unless
circumstances indicate otherwise, the contract is divisible into three pairs of matched
parts: building the garage and paying $10,000; building the pool and paying $18,000; and
building the tennis court and paying $7,000.

2. Significance [§813]
If a contract is divisible, a party who has performed one or more parts is entitled to
collect the contract price for those parts, even though he breaches other parts.

a. Note
Because there is still one contract (even though it is divisible), the right to collect the
contract price for the parts performed is subject to an offset for damages resulting
from breach on the other parts.

3. “Entire” Contract [§814]

A contract that is not divisible is said to be “entire.” To say that a contract is “entire”
means only that the need to show substantial performance of the whole contract is a
condition to bringing suit on the contract and cannot be avoided by bringing suit on
individual parts of the contract.

4. Employment Contracts [§815]

If an employment contract or a statute requires periodic salary payments (e.g., $1,000
per month), courts usually hold the contract to be divisible. Therefore, if an employee
breaches the contract, he may nevertheless recover wages for each period he has
completed, minus an offset for damages resulting from his breach. [Clark-Rice Corp. v.
Waltham Bleachery & Dye Works, 166 N.E. 867 (Mass. 1929)]

G. Material vs. Minor Breach

1. Introduction [§816]
An actual breach of contract, at the time performance is due, always gives rise to an
immediate cause of action for damages. However, not every breach also excuses the
other party’s duty of performance. For example, if Contractor has contracted to build a
$100 million commercial building for Owner, and Contractor puts the wrong doorknobs
on some doors, Contractor will be liable for damages, but Owner will not be excused
from performing. Whether a breach by one party excuses the other party’s duty of
performance depends on whether the breach is “material” or “minor.”
2. Distinguishing Material from Minor Breach [§817]
There is no hard-and-fast line between what constitutes a material breach and what
constitutes only a minor breach. Every case must be decided on its own facts.

247

a. Relevant factors [§818]

The following six factors are normally relevant to determining whether a breach is
material or minor:
(1) The extent to which the breaching party has already performed. A breach at
the outset (“in limine”) is more likely to be considered a material breach.
(2) Whether the breach was willful, negligent, or the result of purely innocent
behavior. A willful breach is much more likely to be held material.
(3) The extent of uncertainty that the breaching party will perform the remainder
of the contract.
(4) The extent to which, despite the breach, the nonbreaching party will obtain
(or has obtained) the substantial benefit he bargained for.
(5) The extent to which the nonbreaching party can be adequately compensated
for the defective or incomplete performance through his right to damages.
(6) The degree of hardship that would be imposed on the breaching party if it
were held that the breach was material and that he therefore had no further
rights under the contract.

b. Repudiation [§819]
A repudiation consists of words or conduct by a party to a contract that a reasonable
person would interpret as an expression of refusal to render any further
performance. An act that would otherwise constitute only a minor breach will be
treated as a material breach if accompanied by a repudiation. For example, if Painter
is under a contractual duty to paint Owner’s factory for eight hours a day for 10
days, and Painter only paints for 7½ hours on the third day, that would probably in
itself be only a minor breach. However, if Painter’s action was coupled with an
express repudiation of the balance of the contract, it would be treated as a material
breach.

c. Effect of parties’ agreement [§820]

The contract itself may expressly or impliedly make the time, manner, or other detail
of performance a matter of bargained-for importance as to one party or the other.
If so, deviations from the agreed performance that otherwise would be regarded as
only minor breaches will instead be considered material.
Example: Owner promises to pay Painter $1,000 to paint Owner’s house by
June 1, it being understood that Owner has planned a wedding in the house for June
8. Under these circumstances, any delay past June 1 could be considered a material
 breach.

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(1) “Time is of the essence” provision [§821]

Traditionally, the courts held that where a contract contains a provision that
“time is of the essence,” even a slight delay in performance would constitute a
material breach.
(a) Liberal view [§822]
Today, to avoid forfeitures some courts hold that if the overall
circumstances indicate that the date set for performance was not of great
importance to the parties, a minor delay will not constitute a material
breach even though the contract contains a provision that time is of the
essence, at least in the absence of more explicit language concerning the
effect of a delay. [Katemis v. Westerlind, 120 Cal. App. 2d 537 (1953)]

3. Effect of Material Breach [§823]

A material breach has two effects. First, it gives rise to an immediate cause of action for
breach of the entire contract. Second, it excuses further performance by the innocent
party.

4. Effect of a Minor Breach [§824]

A minor breach of contract also gives rise to an immediate cause of action for whatever
damages were caused by the breach. However, a minor breach does not give rise to a
cause of action on the entire contract. A minor breach may suspend, but it does not
excuse, the other party’s duty of further performance. Therefore, if a breach is minor,
the breaching party is still entitled to enforce the contract, subject to an offset for
whatever damages resulted from the minor breach.
Example: Painter agrees to paint Owner’s factory for eight hours a day for 10 days.
On the third day, Painter only paints for 7½ hours, but does not repudiate the contract.
Painter would be liable for whatever damages Owner sustained as a result of the breach,
but the breach would not give Owner the right to sue for breach of the entire contract or
to terminate the contract, nor would it excuse Owner’s duty to pay Painter subject to an
offset for damages resulting from the breach.

5. Response to Breach [§825]

Suppose that A and B have an ongoing contract. In the midst of the contract, B commits
a breach but does not repudiate; on the contrary, B wants to continue performing. How
may A respond?

a. Material breach [§826]

If B’s breach is material, A may (i) sue B for damages resulting from the breach but
 let the contract continue, or (ii) terminate the contract and sue B for breach of the
whole contract (“total breach”).

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b. Minor breach [§827]

If B’s breach is not material, A can sue B for damages resulting from the breach.
However, A cannot terminate the contract. In fact, if A terminates the contract, A
himself will be in total breach, and B can sue A. Therefore, a decision by A as to
whether a breach by B is material or minor is fraught with danger, because if A
guesses wrongly that the breach is material and terminates the contract, A may end
up owing substantial damages to B.

6. Material Breach vs. Substantial Performance [§828]

The doctrine of material breach bears an obvious relationship to the doctrine of
substantial performance. Both doctrines ordinarily distinguish between what could
colloquially be called “major” or “very important” breaches, on the one hand, and
“minor” or “less important” breaches on the other. It is sometimes said that material
breach and substantial performance are mirror-image doctrines: If a party has
substantially performed, then any breach he may have committed is not material; if a
party has committed a material breach, his performance cannot be substantial. Although
the view of material breach and substantial performance as mirror-image doctrines may
hold true in many cases, it is not true in all cases, and it masks an important difference
between the two concepts. This difference can be seen in the following example:
Example: Luke and Laura are parties to a contract that Luke has breached in some
way. If Luke has largely, but not perfectly, completed his performance and Laura refuses
to pay the contract price on the ground that Luke has committed some breach, Luke
would try to invoke the doctrine of substantial performance. Luke’s purpose in invoking
the doctrine would be to enable him to sue Laura on the contract for the contract price
(minus damages resulting from his breach), rather than being remitted to a suit based on
benefit conferred. In contrast, suppose that while Luke is still attempting to perform after
committing some breach, Laura orders Luke to stop performing and terminates the
contract on the ground of Luke’s breach. Luke may then argue that although he
breached, the breach was not sufficiently serious to justify Laura’s response (i.e., the
breach was not material). As a corollary, Luke would argue that because his breach was
minor, Laura herself has committed material breach in terminating the contract. Laura, of
course, would argue just the opposite: that Luke’s breach was material and allowed
Laura not only to terminate the contract but to sue Luke for total breach.

a. Summary
In short, the doctrine of substantial performance is usually invoked by a party who
has breached the contract in some way but nevertheless has and wants to sue for the
 entire contract price—subject to an offset for damages—despite his own breach. In
contrast, the concept of material breach is usually invoked when one party has
breached; the other party has terminated on the ground of the party’s breach; and the
party argues that the other party had no

250

right to terminate (and that the other party is himself in breach for terminating). Of
course, in such cases the other party will argue that he did have a right to terminate,
and furthermore that he can sue for total breach.
(1) Substantial performance [§829]
To put this more generally, the doctrine of substantial performance concerns the
question: When can a party who has breached a contract nevertheless bring suit
under the contract to recover damages for nonpayment for the work that he has
performed, and when is he instead limited to an action based on the other
party’s unjust enrichment?
(2) Material breach [§830]
In comparison, the concept of material breach concerns the questions: Can the
victim of a given breach (i) invoke the sanction of terminating the contract and
(ii) bring suit for damages for breach of the whole contract (“total breach”)? Or
is the victim of breach (i) not permitted to invoke the sanction of termination,
(ii) limited to an action for damages for “partial breach,” and (iii) himself in
breach if he tries to terminate the contract?
(3) Significance [§831]
As a consequence of the difference between substantial performance and
material breach, the concept of material breach may arise in cases where the
doctrine of substantial performance would not. For example, suppose a party
commits a breach very early in his performance. If the other party terminates
the contract, the breaching party could not invoke the doctrine of substantial
performance because he has hardly performed at all. However, he may be able
to invoke the concept of material breach and claim that his breach was
insufficiently material to justify the other party’s response of terminating the
contract. Accordingly, a breach may be immaterial even if there is no substantial
performance.

H. Anticipatory Breach
1. In General [§832]
As described above, if either party to a contract, in advance of the time set for
performance, repudiates the contract, the repudiation excuses the other party from
holding himself ready to perform, rendering performance, or tendering performance. In
 addition, the innocent party may generally treat anticipatory repudiation as a present
material breach of contract (i.e., an “anticipatory breach”), and bring an immediate
action for the entire value of the promised performance. [U.C.C. §2-610]

2. Acts Sufficient [§833]

The repudiation need not be by words. A voluntary act that disables the promisor

251

from performing will also constitute a repudiation (for example, the promisor’s making
inconsistent contracts with another; see supra, §793).

3. Insistence on Terms Not Part of the Contract [§834]

Insistence upon terms that are not contained in a contract constitutes an anticipatory
breach. Similarly, there is an anticipatory breach if a party to a contract demands a
performance to which he has no right under the contract and states that unless his
demand is complied with he will not render his promised performance.

4. Requirement of Unequivocal Repudiation [§835]

Only an express or implied unconditional refusal to perform as promised in the contract
will constitute an anticipatory repudiation. A mere expression by the promisor of “doubt”
that he will be able to perform is not sufficient to constitute a repudiation. However, such
an expression may constitute a prospective inability to perform, which would permit the
other party to suspend her performance (see supra, §§790-798) and to demand adequate
assurance of performance (see infra, §842).
Example: Buyer is under a contractual duty to buy 100 tons of coal per week from
Seller for one year, beginning June 1. In August, Buyer says to Seller, “Unless the
demand for steel increases, I may stop buying coal under our contract after October.”
This is not a sufficient repudiation to constitute an anticipatory breach.

5. Exception Where Nonrepudiating Party Has Completed Performance [§836]

The doctrine of anticipatory breach does not apply where, at the time of repudiation, the
only remaining duty of performance is the duty of the repudiating party. These are
referred to as cases where only a unilateral obligation remains. In such cases, an
anticipatory repudiation does not give rise to an immediate cause of action for breach,
and the innocent party must wait to sue until there is an actual breach at the time set for
the other party’s performance.
Example: Tammy offers to pay Jim $1,000 in three installments, beginning on
December 1, if Jim can increase Tammy’s sales 50% by June 1. Jim does so. On
September 1, Tammy says, “I’m not going to pay you under that contract.” Jim has no
immediate cause of action against Tammy; he must wait until the installments become
due.
 Example: Sonja promises to pay Stacy $1,000 on July 1 in consideration of Stacy’s
promise to paint Sonja’s house by June 15. Stacy promises and completes the painting
on time, but Sonja repudiates on June 17. Stacy has no cause of action until the payment
is due.

Compare: Richard agrees to convey title to Blackacre to Rudy on November 1, and

Rudy agrees to pay $5,000 upon receipt of the deed. On October 1, Rudy

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repudiates. Here, Richard has an immediate cause of action for damages because, at the
time of the repudiation, duties were owed by Richard as well as by Rudy.

a. Exception usually applies to unperformed duty to pay money in installments

[§837]
As a practical matter, the exception to the anticipatory breach rule for cases where
only a unilateral obligation remains almost always arises in cases where the only
unperformed duty is to pay money in installments. In many (though by no means all)
of these cases, even though the promisee has no duties left to perform, the
promisor’s continuing duty remains subject to some condition or contingency. For
example, the promise may be to make fixed payments to the plaintiff during his life
or while he is totally disabled. In such cases, the exception can be explained on the
ground that it may not be possible to know, at the time of the repudiation, how many
installments must eventually be paid, because it may not be known how long the
relevant condition will persist. An obvious problem caused by the exception is that
the plaintiff may end up having to bring a series of lawsuits. In most cases, however,
the defendant will probably conform its conduct to the court’s initial decision, and
thereafter make payments voluntarily. If the defendant does continue to withhold
installments even after an adverse judgment on the earlier installments, the courts are
unlikely to require the plaintiff to keep bringing suits. For example, in such a case the
court could issue a decree for specific performance ordering future installments to be
paid as they fall due.

6. Retraction [§838]
The general rule is that a repudiating party may retract his repudiation at any time prior
to the date set for his performance, unless the innocent party has either accepted the
repudiation or has changed her position in detrimental reliance thereon. [U.C.C. §2-
611(2); Clavan v. Herman, 131 A. 705 (Pa. 1926)]
Example: Allie repudiates her executory land sale contract with Ling. In reliance
thereon, Ling sells the property to John. Allie cannot subsequently retract her repudiation
and sue Ling for damages for nonperformance because Ling’s reliance bars the
retraction. [Rayburn v. Comstock, 45 N.W. 378 (Mich. 1890)]
7. Determining Damages

a. General rule [§839]

The general rule in cases of anticipatory repudiation is that the injured party must act
promptly to mitigate damages after learning of the repudiation, although there is
some law, mostly old, to the contrary.

b. U.C.C. [§840]
In the case of contracts for the sale of goods, which are governed by the U.C.C.,
there is some ambiguity as to how damages are measured for anticipatory breach.
Under U.C.C. section 2-708, the measure of damages for repudiation

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by the buyer is the difference between the contract price and “the market price at
the time and place for tender.” (Emphasis added.) In the case of breach by the
seller, the buyer may either “cover” (i.e., make a good faith purchase of, or a
contract to purchase, replacement goods within a reasonable time) or recover
damages equal to “the difference between the market price at the time the buyer
learned of the breach and the contract price.” [U.C.C. §§2-712(1), 2-713(1)]
Although there is some support for a rule that the buyer learns of the breach when
performance is due, most cases adopt the rule that the buyer learns of the breach
when she learns of the repudiation or, at most, within a reasonable time thereafter.
A “reasonable time,” in this context, would be the time required for the buyer to find
an alternative source of supply in the market. In a rapidly changing market, this
might be almost the same as the time at which the buyer learns of the repudiation.

8. Duty of Innocent Party to Mitigate Damages [§841]

The innocent party in the case of an anticipatory repudiation owes a duty to mitigate the
damages arising from the repudiation. If she fails to do so, she is not entitled to recover
the damages she could have otherwise avoided. If the innocent party is in the midst of
rendering performance when the other party repudiates, she must stop unless doing so
would involve greater damages than completing the performance (as where leaving goods
half-manufactured would result in total waste). If the innocent party is supposed to
receive performance, she must look elsewhere for the performance that was due under
the contract if failing to do so would increase her damages.

9. Prospective Inability to Perform [§842]

If one party’s prospective inability to perform (see supra, §§790-798) is caused by her
voluntary conduct, it may constitute an anticipatory breach, with an attendant immediate
right of action for the other party.

a. U.C.C. [§843]
 Under the U.C.C., either party to a contract for the sale of goods has the right to
demand “adequate assurance of performance” from the other party if reasonable
grounds exist for believing the other party’s performance might not be tendered. This
rule applies even where the prospective inability to perform is not the result of the
promisor’s voluntary act (for example, if a buyer learns that the seller’s source of
supply is on strike). Until such assurance is given, the first party has the right to
suspend any performance due by him. Accordingly, in the coal example (supra,
§835) where Buyer says, “Unless the demand for steel increases, I may stop buying
coal under our contract after October,” even though Buyer’s statement is not an
anticipatory breach, it may give Seller grounds for suspending performance and
demanding assurance. An unjustified failure to provide adequate assurances within
30 days after the demand constitutes a repudiation of the contract as a matter of law.
[U.C.C. §2-609]

254

b. Restatement [§844]
The Restatement takes the position that comparable rules should apply to all
contracts, not just contracts for the sale of goods. [Rest. 2d §251]

I. Changed Circumstances—Impossibility and Frustration

1. General Rule [§845]
Performance of a contract will normally be excused if the performance has been made
“impossible”—more accurately, impracticable—by the occurrence of an event whose
nonoccurrence was a basic assumption on which the contract was made, unless the
adversely affected party has explicitly or implicitly assumed the risk that the contingency
might occur.

a. What constitutes “impossibility”? [§846]

At one time, it was commonly said that for a performance to be excused by changed
circumstances the change had to be such as to render the performance “impossible.”
In practice, however, the courts have normally only required that the performance be
rendered impracticable, and that the other elements of the general rule were
fulfilled. The U.C.C. has explicitly adopted the impracticability test for contracts for
the sale of goods [U.C.C. §2-615], and modern cases now tend to adopt that
approach. Therefore, the term “impossibility,” for purposes of contract law,
includes impracticability, and should be so understood. Remember, however, that
not every type of impossibility/impracticability is an excuse for nonperformance. The
impracticability must involve the occurrence of an event whose nonoccurrence was a
basic assumption on which the contract was made, and the adversely affected
party must not have assumed the risk of that event occurring.
2. Recurring Types of Impracticability Cases

a. Supervening illegality or act of government [§847]

A promisor’s performance is excused if performance has become illegal due to a
supervening change in the law after the time of contracting or due to some other act
of government. [Rest. 1st §458]
Examples: Examples of such supervening changes include new zoning
ordinances or building laws [Cordes v. Miller, 39 Mich. 581 (1878)], and
governmental embargoes on certain exports [Millar & Co. Ltd. v. Taylor & Co.
Ltd., [1916] 1 K.B. 402].

b. Supervening destruction or nonexistence of subject matter [§848]

A promisor’s duty to perform is excused if the subject matter of the contract

255

or the specified means for performance is destroyed or becomes nonexistent after the
contract is entered into, without fault of the promisor. [Rest. 1st §460; and see
U.C.C. §§2-613, 2-614]
Examples: A contract to use an auditorium for entertainment purposes is
discharged by the destruction of the auditorium. [Taylor v. Caldwell, [1863] 3 Best
& S. 826] A contract to drive logs downstream is discharged if the river is too low to
drive logs on. [Clarksville Land Co. v. Harriman, 44 A. 527 (N.H. 1895)]

c. Specific source of supply contemplated [§849]

A seller’s duty to furnish goods under a contract of sale may be excused by the
failure of a particular source of supply that was contemplated or specified by both
parties to the contract.
Example: A contract to sell potatoes to be grown on specified land is discharged
by failure of the crop. [Anderson v. May, 52 N.W. 530 (Minn. 1892)]

Compare: If, in a contract for the sale of potatoes, no particular land was either
specified or contemplated by the parties, the promisor’s duty to supply potatoes
would not be excused, even though the promisor subjectively intended to fulfill the
contract from the crop which failed. [Anderson v. May, supra]
(1) Where seller is a middleman [§850]
Failure of a middleman’s source of supply generally will not be a defense,
because ordinarily no particular source of supply is contemplated by both the
middleman and the buyer. That is, the middleman may be counting on a
 particular source of supply, but the middleman’s buyer usually will count on the
middleman only. However, failure of a middleman’s source of supply may
excuse the middleman if: (i) the source of supply is shown to have been
contemplated or assumed by the parties at the time of contracting as the
exclusive source of supply; and (ii) the middleman has taken all due measures to
assure himself that the supply will not fail. [U.C.C. §2-615, comment 5;
Canadian Industrial Alcohol Co. v. Dunbar Molasses Co., 258 N.Y. 194
(1932)]
Example: Alcohol Co. contracted with Dunbar, a middleman, to purchase
1.5 million gallons of molasses in several shipments from National Sugar
Refinery. Dunbar did not make a contract with the refinery assuring the
necessary supply of molasses. During the course of the contract, the refinery
was unable to supply enough molasses to fill Alcohol Co.’s needs. Dunbar
cannot claim a discharge due to impracticability

256

because, although the parties contemplated a certain source of supply, Dunbar

did not take all due measures to assure himself the supply would not fail when
he failed to secure a contract with the refinery. [Canadian Industrial Alcohol
Co. v. Dunbar Molasses Co., supra]

d. Construction contracts—destruction of work in process [§851]

Suppose a party engages a contractor to build a house on her property at a
designated location, and after the contractor has performed most of the work, the
building is accidentally destroyed by fire due to the fault of neither party. The general
rule is that the contractor’s duty to construct a building is not excused by destruction
of the work in progress. Construction is not rendered impracticable because the
contractor can still rebuild. If the contractor fails to rebuild, she will therefore be in
breach of contract. Furthermore, she will not be permitted any recovery in
restitution for the work that was destroyed, because no benefit has been conferred
on the owner. [School District v. Dauchy, 25 Conn. 530 (1857)]
(1) Note
The duty of the contractor to perform on time may be excused by destruction
of the building. Thus, for example, a provision requiring the contractor to pay
liquidated damages for delay (see infra, §§940-948) may be inoperative for
whatever period is reasonably required to rebuild. [U.S. Fidelity & Guaranty
Co. v. Parson, 112 So. 469 (Miss. 1927)]

e. Contracts to repair—destruction of the premises to be repaired [§852]

The result is different where a contractor is hired to renovate or repair an existing
building, rather than to build a new one. In such cases, where the building is
 destroyed by fire or other calamity, the contractor’s duty to continue performance is
excused, and to the extent that the contractor has already performed, it is allowed to
recover in restitution for the reasonable value of the work done prior to the
destruction of the building. [28 A.L.R.3d 788]

f. Land sale contracts—destruction of improvements [§853]

Under property law, a purchaser of real property is deemed to be the equitable
owner of the property from the time the contract to sell the property is executed,
even before the closing and passage of title. Under the traditional rule of contract
law, the purchaser was deemed to bear the risk of damage to or destruction of
improvements on the real property between the time of the contract’s execution and
the time of the closing, on the theory that the purchaser is the equitable owner during
that period. Under this rule, such damage or destruction does not excuse the
purchaser’s obligation to pay the full contract price for the property at the closing.
However, a number of modern jurisdictions have changed the rule, so that the risk
of such loss is on the seller until the closing or until passage of title. In these
jurisdictions, material damage to or destruction of the improvements prior to closing
or passage of title excuses performance.

257

g. Sale of goods—destruction of the goods [§854]

Under the U.C.C., if a contract involves goods that were identified when the
contract was made, then if the goods are destroyed without fault of either party and
before the risk of loss passed, the contract is avoided. [U.C.C. §2613] If goods are
to be shipped to the buyer, the risk of loss passes to the buyer when the seller duly
delivers the goods to the carrier, unless the contract requires the seller to deliver the
goods at a particular destination, in which case the risk of loss passes when the goods
are tendered to the buyer at that destination. If no shipment is involved, the risk of
loss passes upon the buyer’s receipt of the goods if the seller is a merchant;
otherwise, the risk of loss passes to the buyer upon tender of delivery. [U.C.C. §2-
509]

h. Death or illness in personal service contracts [§855]

In the case of a contract to render or receive personal services, death or
incapacitating illness of the person who was to render or receive the personal
services excuses both parties from the duty to perform. For example, if one party
promises to paint another party’s portrait, either party’s incapacitating illness would
excuse both parties.
(1) What constitutes “personal services”? [§856]
The best test for whether services are “personal,” within the meaning of this
rule, is whether the right to receive the services could be validly assigned or the
duty to perform the services could be validly delegated. (See supra, §§726-
 727.)

3. Temporary Impracticability [§857]

Impracticability that is temporary rather than permanent merely suspends (rather than
excuses) the promisor’s duty while the impracticability continues. After the
impracticability ceases, the duty reattaches only if performance thereafter would not
substantially increase the burden on either party or make the performance different from
that which was promised.
Example: The leading case on this point is Autry v. Republic Productions, 30 Cal.
2d 144 (1947). Here the court first held that the drafting of an actor into the Army to
serve from 1942 to 1945 rendered the actor’s performance of a motion-picture contract,
which was to expire in 1943, temporarily impossible to perform. The court then
concluded that the actor’s duty to perform did not reattach upon his discharge from the
Army, because in the interim there had been substantial changes in the value of the dollar
and in tax laws, which would have imposed a material detriment on the actor that was
not contemplated by either party when the contract was signed in 1938.

4. Partial Impracticability [§858]

If (i) the promisor’s performance is rendered only partially impracticable, (ii) the
remainder of performance is not made materially more difficult or disadvantageous

258

thereby, and (iii) the promisor is still able to render substantial performance, the
promisor remains bound to render the performance as so modified, and the promisee
remains bound to accept it with an appropriate offset.
Example: Contractor agrees to build a house for Owner, using Acme pipe. After the
contract is made, Acme Pipe Company goes out of business, and Acme pipe therefore
cannot be obtained. The contractor’s duty to use Acme pipe is excused, but the
contractor remains under a duty to construct the house and use substituted pipe, and the
owner is under a duty to pay for the house, subject to an offset for the change in pipe.

a. U.C.C. [§859]
The U.C.C. adopts a counterpart of this principle in section 2-614(1): “Where
without fault of either party the agreed berthing, loading, or unloading facilities fail or
an agreed type of carrier becomes unavailable or the agreed manner of delivery
otherwise becomes commercially impracticable but a commercially reasonable
substitute is available, such substitute performance must be tendered and accepted.”

5. Recovery in Restitution for Part Performance [§860]

If either party has rendered part performance prior to the circumstances that excuse
 completion of performance, that party may recover in restitution for the reasonable
value of the part performance. [McGillicuddy v. Los Verjels Land & Water Co., 213
Cal. 145 (1913)]

a. Reliance [§861]
A few cases suggest that if two parties have a contract, and one party’s performance
is excused by impracticability, the other party can recover the value of her reliance,
even though the reliance did not result in a benefit to the original party, if justice so
requires. [See, e.g., Albre Marble & Tile Co. v. John Bowen Co., 155 N.E.2d
437 (Mass. 1959)]

6. Frustration [§862]
Even if performance of a contract is not made impracticable by changed circumstances,
performance may be excused under the doctrine of frustration where the purpose or
value of the contract has been destroyed by a supervening event that was not reasonably
foreseeable at the time the contract was entered into. This doctrine arose from the
famous Coronation Case [Krell v. Henry, [1903] 2 K.B. 720] in which the English
court held that performance of a contract for licensing rooms from which to view a
coronation procession was excused by the unexpected cancellation of the procession.
Clearly, the parties’ performances were not impracticable—the rooms could still be
licensed and paid for—but the whole value of the contract had been destroyed by
cancellation of the coronation.
Example: Jackie promises to pay Dennis a certain sum for advertising Jackie’s hotel
in a souvenir program, and Dennis promises to print and sell the program

259

as a souvenir of a yachting race. The outbreak of war forces indefinite postponement of

the race, but Dennis nevertheless publishes the program. Jackie’s duty to pay is excused
by the doctrine of frustration, because cancellation of the race totally destroyed the value
of advertising in the program.

Example: Hotel Co. promises to pay a monthly sum to Golf Club for permitting
hotel guests to play on Golf Club’s course. The hotel then burns down. Hotel Co.’s duty
to pay is excused under the doctrine of frustration. [LaCumbre Golf & Country Club
v. Santa Barbara Hotel Co., 205 Cal. 422 (1928)]

Compare: Tenant leases a building in which to sell cars. Due to a war, new cars are
no longer available. Tenant’s duty to pay is not excused by the doctrine of frustration.
The value of the lease is not totally destroyed, because the tenant can either sell used
cars or sublet the building to someone else to use for a different purpose. [Lloyd v.
Murphy, 25 Cal. 2d 48 (1944)]
J. Discharge
1. Introduction [§863]
This section considers problems that may arise under certain methods by which
contracts can be discharged—in particular, mutual rescission, release, accord and
satisfaction, and full-payment checks.

2. Discharge by Mutual Rescission [§864]

If a contract is still executory on both sides, it can be discharged by an express
agreement between the parties to rescind or “call off” the contract. Such an agreement
is itself a binding contract that is adequately supported by consideration because each
party surrenders its right to require performance by the other.

a. Executory duties on both sides [§865]

A contract can be discharged by mutual rescission only if the duties are executory

260

on both sides. If one of the parties has completed performance, a mutual rescission
is no longer possible, because a mutual rescission involves both parties giving up a
right to the remainder of a performance owing under a contract. (However, in such
cases, the contract might still be discharged by other means.)

b. Modification [§866]
A mutual rescission should be distinguished from a modification. In a mutual
rescission, each party gives up the right to require further performance by the other.
In a modification, either the contract continues, with modified duties on one or both
sides, or only one party gives up a right. The latter case often raises a problem of
consideration under the legal duty rule. (See supra, §§60-96.)
 c. Formalities [§867]
A mutual rescission need not be in writing unless the agreement to rescind would
effect a retransfer or reconveyance of an interest in land or a sale of goods within the
Statute of Frauds. For example, an agreement to rescind a contract for the sale of
land, where title has already passed, would operate as a sale of the land, and
therefore would have to be in writing under the “interest in land” provision of the
Statute of Frauds. (See supra, §528.)

d. Third-party beneficiary contracts [§868]

Recall that if a third-party beneficiary’s rights have “vested,” a mutual rescission is
not effective to vary the obligation to the third party. (See supra, §§633-635.)

3. Release [§869]
A contract may be discharged by the execution and delivery of a release in which the
maker expresses his intention to extinguish contractual rights existing in his favor,
provided the release is supported by adequate consideration.

a. Some statutes abolish consideration requirement if release is in writing [§870]

By statute in a number of states, a written release is effective to discharge a contract
even without new consideration. The writing is accepted as a substitute for
consideration. [See, e.g., Cal. Civ. Code §1541]
(1) U.C.C. [§871]
U.C.C. section 1-107 provides that any claim arising out of an alleged breach of
contract for the sale of goods (or any other contract falling within the U.C.C.) is
effectively discharged by a written release that is signed and delivered by the
aggrieved party even if no consideration is given.

4. Accord and Satisfaction [§872]

A contract can be discharged by an accord and satisfaction, in which one contract or
performance is substituted for another. Recall, however, that an executory (unexecuted)
accord gives rise to special problems. (See supra, §§100-109.)

261

5. Payment-in-Full Check [§873]

A contract may be discharged by a check that is marked “payment in full” or the like,
even though the check is for less than the amount claimed to be due, if the check is
cashed by the party to whom the check is sent, provided certain conditions are met. The
law of full-payment checks is discussed supra, at §§92-96.
262
Chapter Six:
Remedies

CONTENTS

Chapter Approach
A. Introduction §874
B. Basic Measures of Damages §875
C. Limitations on Expectation Damages §882
D. Specific Performance §899
E. Expectation Damages and Specific Performance in Certain Contexts §900
F. Nominal Damages §939
G. Liquidated Damages §940
H. Punitive Damages §949
I. Damages for Emotional Distress §952
J. Restitutionary Damages §955

263

Chapter Approach
If you have determined that there is a valid and enforceable contract and a breach, you need
to consider the appropriate remedies for that breach. If you have determined that a valid and
enforceable contract does not exist, you need to consider whether a party has conferred a
benefit for which he should be compensated. There are two basic types of remedies:
damages (an award of money) and specific performance (an order from a court to a party to
perform as promised).

1. Damages
There are three basic measures for damages:
— Expectation damages: This measure is the usual means of compensating the
victim of a breached bargain. Expectation damages give the victim enough money
to put him in the position he would have been in if the promise had been performed.
Remember that expectation damages are limited to reasonably foreseeable
damages, so that not all consequential damages will necessarily be recoverable. Also
 remember that there is a duty to mitigate damages.
— Reliance damages: This measure is generally used where a promise is enforceable
only because of reliance, as in the case of a relied-upon donative promise. Reliance
damages give the breach victim her costs, so that she is put back into the position
she would have been in had the promise not been made.
— Restitutionary (or quasi-contract) damages: This measure is usually awarded
when a party has conferred a benefit on another under circumstances where the
other is not contractually liable for the benefit (e.g., where the benefit has been
conferred by mistake). However, under certain conditions this measure can be used
against a party who has breached a contract, as an alternative to expectation
damages. Where the contract is a losing contract (i.e., one in which the innocent
party would have lost money if the other party had not breached), the restitution
measure will ordinarily be better for the innocent party than the expectation
measure.

2. Specific performance
Specific performance is available only where the remedy at law is inadequate. This
includes cases where the subject matter is unique, including contracts for interests in land
and contracts for the sale of unique goods. Specific performance will not be awarded to
force someone to work under a service contract, even if the services are unique, but
some courts might issue an injunction against the breaching party to prevent him from
working for others.

A. Introduction
264

1. Types of Remedies [§874]

There are two basic types of remedies in contracts: damages (i.e., an award of money)
and specific performance (i.e., an order from a court to a contracting party to perform
as promised).

B. Basic Measures of Damages

1. Damage Measures [§875]
There are three basic types of damage measures:

a. Expectation damages [§876]

Expectation damages are based on the contract price and have the purpose of
placing the victim of a breach in the position he would have been in if the promise
 had been performed. Expectation damages give the injured party the benefit of the
bargain and are usually used where the broken promise is enforceable because it
was part of a bargain (see supra, §6).
(1) Incidental damages [§877]
Incidental damages are comprised of elements such as the cost of shipping
goods to and from a buyer who has wrongfully rejected the goods, the costs of
storing and insuring goods pending resale after a buyer wrongfully rejects them,
and the cost of going to the market to purchase substitute goods or of
advertising a resale. If the injured party incurs such incidental damages, they are
normally added to the expectation damages to which he is entitled.

b. Reliance damages [§878]

Reliance damages are based on the nonbreaching party’s costs (including opportunity
costs) and have the purpose of putting the nonbreaching party in the position he
would have been in had the promise not been made. This measure usually is used
where the promise is enforceable because (and only because) it was relied upon, as
in the case of a relied-upon donative promise (see supra, §§123-130).

c. Restitutionary (or quasi-contract) damages [§879]

Restitutionary damages (sometimes referred to as “quasi-contract damages”) are
based on the reasonable value of a benefit conferred. Restitutionary damages are
often associated with the law of restitution, rather than the law of contract, and are
therefore sometimes not thought of as “contract damages.” In a contract setting, the
restitution measure of damages is most commonly used in three situations:
(1) Where a party has conferred a benefit under a contract that turns out to be
unenforceable because of some defense (e.g., because the contract is within the
Statute of Frauds and is not in writing);

265

(2) Where there was an enforceable contract and a breach, but the contract was a
losing one for the innocent party, and she is better off with restitution damages
than with expectation damages (see infra, §957); and
(3) Where no contract was formed, but a benefit was conferred in a
precontractual stage when the parties believed they had concluded or would
conclude a contract (as where a benefit was conferred during, and as part of, an
agreement to agree or preliminary negotiations that eventually broke down).

2. Other Classifications of Damages [§880]

Damages are also divided into categories other than expectation, reliance, and restitution,
such as: general vs. special damages, liquidated damages, punitive damages, and
damages for emotional distress.
3. Approach [§881]
Because most contracts (and most contracts questions) involve bargains, and expectation
damages are the normal remedy for breach of a bargain, a discussion of the limitations
placed on expectation damages (i.e., foreseeability, certainty, and mitigation) and on
specific performance will follow immediately. Then, particular expectation damage
measures and the availability of specific performance will be discussed in terms of
certain recurring types of cases (such as contracts for the sale of goods or provision of
services). Finally, damages for emotional distress, punitive damages, liquidated damages,
and restitutionary damages will be addressed.

C. Limitations on Expectation Damages

1. The Principle of Hadley v. Baxendale [§882]
In Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. Ch. 1854), a mill’s crank shaft broke,
and the owners of the mill had to send the broken crank shaft by carrier to the
manufacturer as a pattern for a new crank shaft. The mill and the carrier then entered a
contract of carriage in which the carrier promised to deliver the crank shaft to the
manufacturer by the next day. However, the carrier delivered the crank shaft several
days late. The court held that the mill could not recover the lost profits from the days it
could not operate because of the carrier’s delay. Its decision was based on the following
rules: A party injured by a breach of contract can recover only those damages that (i)
should “reasonably be considered [as] arising naturally, i.e., according to the usual
course of things,” from the breach or (ii) might “reasonably be supposed to have been in
the contemplation of both parties, at the time the contract was made, as the probable
result of the breach of it.” The two branches of the court’s holding are known as the first
and second rules of Hadley v. Baxendale.

a. General and consequential damages [§883]

On the basis of the two Hadley rules, contract law has conventionally distinguished
between general or direct damages, on the one hand, and special or consequential
damages, on the other hand.

266

(1) General damages [§884]

General or direct damages are the damages that flow from a given type of
breach without regard to the particular circumstances of the victim of the
breach. General damages are never barred by the principle of Hadley, because
by their very definition such damages should “reasonably be considered [as]
arising naturally, i.e., according to the usual course of things” from the breach.
For example, if a seller breaches a contract for the sale of goods, it follows
naturally that the buyer suffers damages equal to the difference between the
contract price and the market price or cost of cover (i.e., the cost of buying
 substitute goods). This difference can normally be recovered as general
damages.
(2) Consequential damages [§885]
Special or consequential damages are the damages, above and beyond general
damages, that flow from a breach as a result of the buyer’s particular
circumstances. Typically, consequential damages consist of lost profits (although
other kinds of consequential damages may occur). For example, suppose a seller
breaches a contract for the sale of a die press that the buyer plans to use rather
than resell. The buyer’s consequential damages are the difference between (i)
the profits he actually earned after the breach and (ii) the profits he would have
earned if the die press had been furnished as promised.
(a) Reasonable foreseeability [§886]
Today the principle of Hadley is normally restated to mean that
consequential damages can be recovered only if, at the time the contract
was made, the defendant had reason to foresee the damages as a
probable result of the breach.
Example: Seller contracts with Buyer to sell Buyer a steam boiler,
delivery to be made in 10 days. Buyer is a commercial laundry and needs
the boiler to meet rapidly expanding demand. No comparable boiler is then
available on the market. Seller breaches. If Seller knew or should have
known of the special circumstances concerning Buyer’s needs and inability
to buy a substitute boiler promptly, so that the buyer’s loss of profit if the
boiler is not delivered is reasonably foreseeable, Buyer can recover the lost
profits as consequential damages. If Seller neither knew nor should have
known of the special circumstances, Seller is liable only for Buyer’s general
damages (the difference between the contract price of the boiler and its
market price).
1) “Significant likelihood” may suffice [§887]
Despite the use of the term “probable” in the standard formulation, the
formulation would normally be interpreted to allow

267

consequential damages to be recovered if, at the time the contract was

made, there was a significant likelihood that they would result from
breach, even though the likelihood was less than 51%.

2. Certainty [§888]
Damages can be recovered only if their amount is reasonably certain of computation.
Damages that are not reasonably certain of computation are referred to as “speculative.”
Where the amount is not reasonably certain, the plaintiff can recover only nominal
 damages (see infra, §939).

a. Application to profits [§889]

The certainty limitation is encountered frequently where the damages in question are
lost profits. Courts often differentiate between lost profits for a new business and
lost profits for an existing business.
(1) Existing business [§890]
Profits for an existing business generally are not treated as speculative and are
recoverable, since future profits can generally be estimated from past profits.
(2) New business rule [§891]
If the result of a breach is to prevent the nonbreaching party from setting up a
new business (e.g., a breach by a landlord of a lease of commercial space to a
new retail business), the courts in the past were reluctant to award lost profits,
on the theory that the profits of a new business are inherently speculative.
Today, however, the tendency is to examine each case on its own merits and to
allow recovery of lost profits even in the case of a new business if the profits
can be determined with reasonable certainty—for example, by comparison with
similar businesses in the vicinity.

b. Modern trend [§892]

In general, the modern trend is not to cut off damages on the ground of uncertainty
unless the uncertainty is fairly severe. For example, the U.C.C. provides that, “the
remedies provided by this Act shall be liberally administered ….” [U.C.C. §1-106]

268

3. Duty to Mitigate [§893]

An injured party is not permitted to recover damages that could have been avoided by
reasonable efforts. This principle is often referred to as the duty to mitigate damages.
The application of this principle varies according to the type of contract involved.

a. Contracts for the sale of goods [§894]

Under the U.C.C., if the seller fails to deliver, the buyer has a right to cover (i.e.,
 buy substitute goods and recover damages; see infra, §904). If the buyer fails to
cover, she will be barred from recovering any consequential damages that she could
have prevented by covering. [U.C.C. §2-715(2)] Similarly, if the buyer repudiates
the contract prior to delivery, the seller cannot run up the damages by incurring
freight charges for packing, delivery, and so forth. If the goods are still in the process
of manufacture at the time of repudiation, the seller must stop production unless
completion would facilitate resale and thereby reduce the damages for which the
buyer is liable. [U.C.C. §2-704(2)]

b. Employment contracts [§895]

If an employer wrongfully terminates the employment, the employee is under a duty
to mitigate by looking for a comparable job. (See infra, §927.)

c. Construction contracts
(1) In general [§896]
A contractor is under a duty to not add to the owner’s damages by continuing to
work after the owner breaches the contract. In particular, a contractor cannot
recover for his expenses in continuing construction after the owner repudiates
the contract. [Rockingham v. Luten Bridge Co., 35 F.2d 301 (4th Cir. 1929)]
(2) Replacement job [§897]
A contractor is usually not under a duty to secure an alternative construction job
during the period in which he would have been working on a canceled contract,
because he is not required to take additional business risks as a result of the
owner’s breach. Even if the contractor does take on another job during that
period, his profits on that job would normally not reduce his damages, because
he probably could have taken on the other job, even if the owner had not
breached, by hiring extra workers. However, if the owner can show that the
contractor would not have been able to take on the new job but for the owner’s
breach, the profits on a new job should reduce the contractor’s damages.

d. Expenses incurred in mitigating damages are recoverable [§898]

Expenses incurred by the nonbreaching party in a reasonable effort to mitigate
damages are recoverable as incidental damages, whether or not the effort was
successful.
Example: The fees paid to an employment agency by a wrongfully discharged
employee seeking a new job are added to the employee’s damages, whether or not
the job search was successful.

269

D. Specific Performance
1. In General [§899]
Specific performance is an equitable remedy in which the court orders a breaching party
to perform. Historically, courts of equity will act only where there is no adequate remedy
at law. Thus, specific performance is available only where damages (the “legal” remedy
for breach of contract) are not an adequate remedy. There are a number of cases where
damages are not an adequate remedy—in particular, where the contract concerns a
unique subject matter or where damages cannot be measured with reasonable certainty.
Special rules concerning when specific performance (or an equivalent remedy) will or
will not be granted are discussed below in connection with recurring types of cases.

E. Expectation Damages and Specific Performance in

Certain Contexts
1. Contracts for the Sale of Goods [§900]
A number of remedies are available when a party breaches a contract for the sale of
goods. The nature of these remedies depends on whether it is the seller or the buyer who
has breached.

a. Breach by seller [§901]

In the case of a breach of contract for the sale of goods by the seller, the buyer’s
remedies fall into two major categories. One category consists of the buyer’s
remedies when the buyer has accepted goods that are defective and cannot or does
not want to rightfully revoke his acceptance. Typically, an action in this category is
for breach of warranty. The second category consists of the buyer’s remedies when
the seller fails to deliver or the buyer either properly rejects the goods or properly
revokes her acceptance.
(1) General damages for breach as to accepted goods [§902]
If the buyer has accepted goods that do not conform to the contract, there will
be a breach of warranty. For breach of warranty, the buyer may recover the loss
resulting in the ordinary course of events from the seller’s breach as determined
in any reasonable manner. Unless special circumstances show proximate
damages of a different amount, the usual measure of damages for breach of
warranty is the value that the goods would have had if they had been as
warranted minus the value of the goods accepted. This difference may be
measured either directly, by determining the value of the goods as they are and
the value of the goods as they were warranted to be, or indirectly, by
determining the cost of repairing or otherwise modifying the goods so that they
are in their warranted state.

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(2) General damages where seller fails to deliver or buyer rightfully rejects or
 revokes acceptance
(a) Difference between contract price and market price [§903]
In a contract for the sale of goods, one formula to measure damages for
breach by the seller where the seller has failed to deliver or where the buyer
has rightfully rejected or revoked his acceptance is the market price of the
goods at the time the buyer learned of the breach minus the contract price.
(b) Cover [§904]
Alternatively, the buyer can “cover”—i.e., purchase substitute goods from
other sources. If the buyer covers in good faith and in a commercially
reasonable manner, she can recover the cost of cover (i.e., the cost of the
substitute goods) minus the contract price. [U.C.C. §2-712]
(3) Specific performance and replevin [§905]
The traditional test for determining a buyer’s right to specific performance in a
contract for the sale of goods was whether the goods were “unique.” Today,
contracts for the sale of goods are governed by the U.C.C., which has expanded
the traditional rule.
(a) U.C.C. provisions [§906]
U.C.C. section 2-716(1) gives the buyer a right to specific performance
“where the goods are unique or in other proper circumstances.” In
addition, section 2-716(3) gives a buyer a right comparable to the remedy
of replevin (i.e., an action to be awarded possession of goods) “if after
reasonable effort he is unable to effect cover for the goods or the
circumstances reasonably indicate that such an effort will be unavailing,”
and the goods either were in existence when the contract was made or were
later identified to the contract.
1) Comment
The Official Comment to U.C.C. section 2-716 states that Article 2
“seeks to further a more liberal attitude than some courts have shown in
connection with specific performance of contracts of sale.”
(4) Buyer’s incidental and consequential damages [§907]
In a proper case, the buyer may also be able to recover incidental and
consequential damages.
(a) Incidental damages [§908]
Incidental damages resulting from the seller’s breach include: (i) expenses
reasonably incurred in inspection, receipt, transportation,

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and care and custody of goods rightfully rejected; (ii) any commercially
reasonable charges, expenses, or commissions in connection with effecting
 cover; and (iii) any other reasonable expense incident to the delay or other
breach.
(b) Consequential damages [§909]
Consequential damages resulting from the seller’s breach may include any
loss resulting from general or particular requirements and needs of which
the seller at the time of contracting had reason to know and which could
not reasonably be prevented by cover or otherwise, and injury to the
person or property proximately resulting from any breach of warranty.
(5) Damages for late performance [§910]
If the seller breaches by late performance, the goods were to be resold by the
buyer, and the seller knew or had reason to know that the goods would be
resold, the buyer can recover damages for reduction in the market value of the
goods between the time performance was due and the time performance was
rendered.

b. Breach by buyer
(1) General damages measures
(a) Market damages [§911]
If a buyer refuses to purchase the goods she has contracted for, the seller
can recover from the buyer the contract price of the goods minus the
market price at the time and place for tender under the contract.
(b) Lost profits [§912]
If the market price/contract price formula is inadequate to put the seller in
as good a position as performance would have (e.g., if the contract price is
equal to or less than the market price), then the measure of damages is the
profit (including reasonable overhead) that the seller would have made from
full performance by the buyer. This is called the “lost profits” or “lost
volume” measure.
1) “Profits” [§913]
If the seller is a dealer, “profits” under the above formula means
contract price minus the seller’s cost of purchasing the goods. If the
seller is a manufacturer, “profits” under the above formula means
contract price minus manufacturing costs.
2) Application [§914]
The lost profits or lost volume measure normally is available for a seller
only where the goods are relatively homogeneous and in relatively deep
supply.

272
 Example: Seller is a boat retailer, who purchases standard model
boats from Manufacturer for resale. Seller pays Manufacturer $9,000
for each boat. Buyer 1 agrees to purchase a boat from Seller for
$13,000. The boat is on Seller’s showroom floor. Later, Buyer 1
refuses to take delivery. Seller then sells the same boat to Buyer 2 for
$13,000. Seller can recover $4,000 from Buyer 1—the $13,000
contract price minus Seller’s $9,000 cost. Rationale: If Buyer 1 had
gone through with the contract, Seller would still have sold a boat to
Buyer 2, because Seller’s boats are identical. Seller would then have
had two $4,000 profits—one from Buyer 1 and one from Buyer 2.
Thus, to put Seller in as good a position as she would have been in if
Buyer 1 had not defaulted, Seller needs to recover $4,000.
(c) Resale [§915]
Alternatively, the seller can resell the goods in good faith and in a
commercially reasonable manner and then recover from the buyer the
contract price minus the resale price. [U.C.C. §2-706]
(2) Action for the price [§916]
The seller’s counterpart to a suit for specific performance is an action for the
price of the goods (as opposed to damages). A seller can maintain an action for
the price if: (i) the buyer has breached by refusing to purchase goods that have
already been “identified to the contract” and (ii) the seller is unable to resell
after reasonable efforts, or such efforts would be unavailing.
Example: Buyer orders calendars imprinted with Buyer’s name. Seller
manufactures the calendars, but before they can be shipped, Buyer repudiates
the contract. If (as is likely) Seller is unable to resell calendars with Buyer’s
name on them, Seller can bring an action for the full contract price.

(a) “Identified to the contract” [§917]

If the relevant goods are in existence when the contract is made, they are
“identified to the contract” when they are set aside as the goods to which
the contract refers. If the relevant goods are not in existence when the
contract is made, then identification to the contract occurs when the seller
ships, marks, or otherwise designates the goods as the goods covered by
the contract. [U.C.C. §2-501]
(3) Incidental damages [§918]
In a proper case, the seller can recover incidental damages resulting from the
buyer’s breach. These include any commercially reasonable charges, expenses,
or commissions incurred by the seller in the transportation, care, and custody of
the goods after the buyer’s breach that are incurred in connection with the
return or resale of the goods or otherwise result from the breach.
 273

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2. Contracts for the Sale of Realty

a. Breach by seller
(1) Damages [§919]
 Many states hold that where the seller breaches a contract for the sale of realty
by refusing to convey, the purchaser’s damages remedy is limited to out-of-
pocket costs, such as payments made on the purchase price and expenses
incurred in connection with the purchase (e.g., title charges and escrow fees),
and the purchaser is not entitled to recover the market value minus the contract
price unless the seller’s refusal to convey was in bad faith.
(a) “Bad faith” [§920]
As used in this context, “bad faith” means either that: (i) the seller knew at
the time she made the contract that she did not have good title, or (ii) the
breach involved a deliberate refusal to perform, as opposed to an inability
to convey good title due to some unknown easement or the like. [See Cal.
Civ. Code §3306]
(b) Effect [§921]
If the seller’s breach was in bad faith, the buyer can recover the market
price minus the contract price, even in states that ordinarily restrict the
buyer to recovery of out-of-pocket costs.
(2) Specific performance [§922]
Rather than seeking damages, a buyer of real estate is entitled to the remedy of
specific performance, in the form of a decree ordering the seller to execute a
deed in the buyer’s favor. Damages are considered an inadequate remedy
because every piece of land is unique to some extent and because (for that
reason) the value of land is always to some extent conjectural.

b. Breach by buyer
(1) Damages [§923]
If a contract for the sale of realty is breached by the buyer, the seller is entitled
to recover the contract price minus the fair market value of the land in
question. [68 A.L.R. 137]
(2) Specific performance [§924]
Alternatively, the seller can get specific performance in the form of a decree
ordering the buyer to take title to the land and pay the agreed price. The seller’s
right to specific performance is based on mutuality of remedy and the need for a
formal termination of the buyer’s interest in the land by foreclosure.

275

(a) Effect [§925]

The seller’s remedy of specific performance is normally not intended to
actually make the buyer specifically perform by paying the purchase price.
Rather, it is a mechanism to clear the seller’s title by cutting off the buyer’s
rights, and also to establish the seller’s damages through a resale of the
 property. To achieve these objectives, a decree of specific performance
against a buyer of property will normally provide that if the purchase price
is not paid by a given date, the right of the buyer to “redeem” the property
by paying the price is cut off or “foreclosed.” Usually, once the foreclosure
date passes the seller can resell the property and claim damages against the
buyer for the deficiency, i.e., the original contract price minus the price at
which the property was sold at the foreclosure sale.

3. Employment Contracts

a. Breach by employer [§926]

If an employer discharges an employee in breach of an employment contract or
otherwise commits a material breach, the employee is entitled to recover the
remainder of her wages minus either (i) the wages the employee actually received
in a substitute employment, or (ii) the wages she would have received had she
properly attempted to mitigate damages.
(1) Mitigation [§927]
If the employer wrongfully terminates an employment contract, the employee is
under an affirmative duty to exercise reasonable efforts to locate a position of
the same rank and type of work in the same locale. The burden usually is on
the employer to show that such other positions were available. [Copper v.
Stronge & Warner Co., 126 N.W. 541 (Minn. 1910)]
Example: An actress hired for the female lead in a musical to be filmed in
Los Angeles is not required to accept substitute employment as the lead in a
dramatic western to be produced in Australia; the latter role is not comparable to
the former role. [Parker v. 20th Century Fox, 3 Cal. 3d 176 (1970)]

b. Breach by employee [§928]

If an employee quits in breach of contract or otherwise commits a material breach,
the employer is entitled to recover the wages the employer must pay to a
replacement for the employee minus the employee’s wages.
Example: Sal contracts to work for Maria for one year at $2,000 per month, but
quits after one month to take a better job. Maria has to pay

276

$2,500 per month to get a qualified replacement. Maria’s damages are $500 per
month times 11 months, or $5,500.

c. Specific performance [§929]

Employment contracts are not specifically enforceable by either the employee or the
 employer. The objection to specific performance is that it is unwise and inappropriate
to extract from an unwilling party a performance involving personal relations.
(1) Injunction [§930]
Although the courts will not order an employee to work for the employer, in
some cases the courts will enjoin an employee from working for a competitor of
the employer. Often such an injunction would be tantamount to ordering specific
performance, because the employee may be unable to get a good job except
with a competitor. Accordingly, Restatement Second adopts the rule that a
“promise to render personal service exclusively for one employer will not be
enforced by an injunction against serving another if its probable result will be to
compel a performance involving personal relations the enforced continuance of
which is undesirable or will be to leave the employee without other reasonable
means of making a living.” [Rest. 2d §367(2)]

4. Construction Contracts and Other Contracts for Services

a. Terminology [§931]
The most common type of service contract is a construction contract, in which a
contractor provides services to an owner.

b. Breach by owner [§932]

If the owner commits a material beach of a construction contract, the contractor is
entitled to recover (i) the contract price, minus (ii) the out-of-pocket costs remaining
to be incurred by the contractor at the time of breach, with (iii) an offset for
amounts already paid by the owner.
(1) Alternative formula [§933]
Under an alternative formula, the contractor is entitled to recover (i) its lost
profits on the contract, plus (ii) its out-of-pocket costs prior to breach, again
with (iii) an offset for amounts already paid by the owner. Normally, the two
formulas, although they look very different, produce the same result, unless the
contractor has made a losing contract.

c. Breach by contractor
(1) Cost of completion [§934]
If the contractor commits a material breach, the owner can usually recover
damages based on the difference between the contract price and

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the cost of completing the contract by contracting with a substitute contractor.

[125 A.L.R. 1242]
(2) Diminished value damages [§935]
 However, if the cost-of-completion measure would lead to substantial economic
waste or would be unreasonably disproportionate to the value to be gained by
the owner, the courts will measure the owner’s damages by the diminution in
value measure—the value of what the owner would have received if the
contractor had performed the contract in full minus the value of what the
owner actually received. (See supra, §810.)
(3) Damages for minor breach [§936]
If a contract is breached by rendering a performance that is defective, but not
materially so (e.g., a house built with the wrong doorknobs), damages normally
are measured essentially in the same way as for material breach—by either: (i)
the cost of correcting the defect (cost of completion) or (ii) the value of the
performance promised minus the value of the performance rendered
(diminished value).

d. Specific performance [§937]

The general rule is that a contract for construction will not be specifically enforced.
This is partly because damages are usually an adequate remedy and partly because
of the incapacity of the courts to superintend the performance. However, the courts
can and often do grant specific performance of such contracts where they believe
damages are not an adequate remedy and the problems of administration do not
seem insurmountable.

5. Contracts for Carriage [§938]

Where a contract for carriage (transportation) is breached by late performance by the
carrier; the subject matter of the contract involves goods that were to be sold by the
shipper; and it was reasonably foreseeable to the carrier that the goods were to be sold,
the shipper can recover damages for reduction in the market value of the subject matter
between the time performance was due and the time it was rendered. Otherwise, the
damages for late performance by a carrier are often measured by the reasonable daily
rental value of the shipped goods multiplied by the days of delay, or, if that is not easily
determined, the prevailing rate of interest on the value of the shipped goods. [Wood v.
Joliet Gaslight Co., 111 F. 463 (7th Cir. 1901)]

F. Nominal Damages
1. General Rule [§939]
Any breach of contract, no matter how slight, normally entitles the aggrieved party to
some damages. If the party cannot prove any loss, the court will award “nominal” or
“token” damages—normally, $1.

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G. Liquidated Damages
1. In General [§940]
A liquidated damages provision is a provision in a contract that fixes the amount of
damages that will be recoverable in the event of a breach. The enforceability of such a
provision depends on whether the court finds it to be a valid liquidated damages
provision or a penalty. If the court determines that the provision is a penalty, it is not
enforceable, and the innocent party is limited to whatever actual damages she can prove.

2. Contract Terminology Not Controlling [§941]

The name the parties give such a provision is not controlling. A provision calling for
“$10,000 as liquidated damages in the event of breach” may be shown to be a penalty
and therefore may not be enforceable.

3. Requirements for Valid Liquidated Damages Provision [§942]

To be enforceable, a contractual provision fixing damages must meet two requirements:

a. Damages difficult to estimate [§943]

First, at the time the contract was made, the actual damages that would result in the
event of breach must be impracticable or extremely difficult to ascertain or
estimate.

b. Reasonable estimate [§944]

Second, the amount of the damages fixed in the provision must be a reasonable
forecast, at the time the contract is made, of the damages that would result from a
breach.
Example: Contractor promises to pay Owner $300 per day for any delay in
completing a building contract. It is clear that when completed, the rental value of the
building will be only $300 per week. The contractual provision is an unenforceable
penalty, because it is not a reasonable forecast of the damages that will result from
breach.

4. Subsequent Events [§945]

If a liquidated damages provision was valid when made, the traditional rule was that the
provision would be enforceable even though subsequent conditions have rendered actual
damages ascertainable, or even though it is clear from the way things turned out that
actual damages differ materially from the liquidated damages.

a. Emerging view [§946]

However, the emerging view is that a liquidated damages clause may be rendered

279
 unenforceable, even though it was a reasonable forecast of damages at the time the
contract was made, if it turns out that it is completely disproportionate to the actual
damages the plaintiff suffered. Some courts reach this result by treating a provision
that operates in this manner as unconscionable.

b. U.C.C. position [§947]

Under the U.C.C., in contracts involving the sale of goods a liquidated damages
provision is enforceable if the amount fixed is reasonable in light of the “anticipated
or actual harm caused by the breach.”

5. Deposits [§948]
A deposit may serve the same function as a liquidated damage provision if the innocent
party is allowed to retain the deposit even though the deposit exceeds the actual
damages. On the recovery of deposits in such cases, see infra, §§960-961.

a. U.C.C. rules
In contracts for the sale of goods, if the seller justifiably refuses to deliver goods
because of the buyer’s breach, the buyer is entitled to restitution of any amount by
which the sum of his prior payments (including a deposit) exceeds (i) the amount set
in a valid liquidated damages provision, or (ii) if there is no such provision, 20% of
the value of the performance, or $500, whichever is smaller. This right to restitution
is subject to an offset to the extent that the seller establishes damages other than
liquidated damages. [U.C.C. §2-718]

H. Punitive Damages
1. General Rule [§949]
As a general principle, punitive damages are not available for breach of contract, partly
on the theory that “the mere availability of such a remedy would seriously jeopardize the
stability and predictability of commercial transactions, so vital to the smooth and efficient
operation of the modern economy.” [General Motors Corp. v. Piskor, 281 Md. 627
(1977)] However, there are some important exceptions to the general principle.

2. Exceptions

a. Tort [§950]
Punitive damages are available if the conduct constituting the breach is independently
a tort, has tortious elements, or (in some cases) is fraudulent or outrageous.

b. Good faith [§951]

Punitive damages may be available for a breach of the duty of good faith, on the
theory that a breach of good faith is tortious. The only well-established
 280

line of cases in which punitive damages have been awarded for breach of contract on
the ground of bad faith consists of cases involving breaches by insurance companies
—in particular, (i) a bad faith failure to settle with a third party who brought a claim
against the insured, and (ii) in a majority of cases, a bad faith denial of liability under
the policy to the insured. Although there have been occasional cases in which the
court imposed punitive damages for bad faith breach of contract in noninsurance
contexts, the bad faith exception generally has been limited to the insurance context.

I. Damages for Emotional Distress

1. General Rule [§952]
Damages for emotional distress are ordinarily not allowed.

2. Exceptions

a. Bodily injury [§953]

Damages for emotional distress arising from breach of contract may be awarded
where the emotional distress accompanies bodily injury.

b. Personal interests involved [§954]

Damages may also be awarded for emotional distress where the contract was of a
type that involved personal, as opposed to strictly commercial financial, interests, so
that emotional distress was a particularly likely result. Common examples of such
cases are contracts of innkeepers and guests, contracts for the carriage and proper
disposition of dead bodies, and contracts for the delivery of messages concerning
death.
Example: Builder contracts to construct a house for Owner. Builder knows
when the contract is made that Owner is in delicate health and that proper
completion of the house is of great importance to Owner. Because of delays and
departures from specifications, Owner suffers nervousness and emotional distress. In
an action by Owner against Builder for breach of contract, the element of emotional
distress will not be included as a loss for which damages may be awarded because
the contract does not concern a personal interest. [Rest. 2d §353, ill. 1]

Compare: Travel Company sells Tourist a holiday travel package at a hotel in

Switzerland. The hotel is not at all as Travel Company described, and Tourist’s
vacation is ruined. Tourist can recover for his emotional distress because the contract
concerned a personal interest.

J. Restitutionary Damages
 281

1. Unenforceable Contracts [§955]

Restitutionary damages are available to recover the value of a benefit conferred on
another where the benefit was conferred under a contract that is unenforceable because
of the Statute of Frauds, the doctrine of impossibility, or other comparable excuses, such
as mutual mistake.
Example: Frank pays Liza $500 for Liza’s promise to sing at Frank’s wedding. Liza
develops laryngitis and cannot sing at the wedding. Liza will be discharged from the
contract under the doctrine of impossibility (see supra, §§855-856), but Frank can
recover the $500 in restitution.

2. Breach of Contract [§956]

Restitutionary damages may also be awarded, as an alternative to expectation damages,
against a party who has materially breached a contract. Thus, if A and B have a
contract and B commits a material breach, A can usually elect to either: (i) bring an
action on the contract to recover expectation damages, or (ii) bring an action in quasi-
contract for restitutionary damages to recover the reasonable value of the benefit
conferred on B prior to B’s breach. The restitutionary damages normally will be
measured by the market value of the plaintiff’s (A’s) performance, rather than by the
actual enrichment of the defendant (B).

a. Losing contracts [§957]

Normally, if the defendant has committed a material breach, the plaintiff will prefer
expectation damages to restitutionary damages, because expectation damages usually
are larger and easier to prove. The major exception is where the plaintiff has made a
losing contract (i.e., the market value of the goods or services that the plaintiff had
to provide to the defendant, at the time they were to be provided, was greater than
the contract price). In such cases, the plaintiff has an incentive to bring suit for
restitution, measured by the market value of the goods or services he provided,
rather than for expectation damages, which may well be zero since the contract
would have produced a loss for the plaintiff. The general rule is that a suit can be
brought for restitutionary damages where the defendant is in material breach, even if
the contract is a losing one. To put this differently, the general rule is that if one party
is in material breach, the other party can choose between expectation damages and
restitutionary damages, and if he chooses restitutionary damages the contract price
does not set a limit on the value of the benefit conferred.

b. Exception for full performance [§958]

The general rule is not applied where the innocent party has fully performed. In such
cases, the innocent party is limited to the contract price for her performance.
 c. Return of what has been received [§959]
Because restitutionary damages are based on the benefit the defendant received

282

from the plaintiff, it is a condition to a suit for restitutionary damages for breach that
the plaintiff has returned to the defendant what the plaintiff has received, so that the
plaintiff recovers only the value of the net benefit to the defendant. Alternatively, the
value of what was received will be deducted from the plaintiff’s recovery.

3. Plaintiff in Default [§960]

Under modern law, even a party who is in material breach, and therefore could not sue
on the contract, may be able to bring an action to recover the value of the benefits she
has conferred on the other party, subject to an offset for the innocent party’s damages.
Such cases are known as “plaintiff in default” cases, because the plaintiff is allowed to
bring a suit even though she is in material breach of contract.

a. Application [§961]
This kind of recovery can apply to a deposit that was made by the breaching party,
to the extent that the deposit exceeds the innocent party’s damages and to the extent
that the deposit was not also agreed upon as a valid liquidated damages provision
(see supra, §948).

b. Significance [§962]
Recall that a party who has substantially performed a contract can bring suit on the
contract even though he has not performed perfectly, subject to an offset for his
breach. Therefore, a party who has substantially performed does not need to bring
an action for restitutionary damages as a plaintiff in default. However, if the
plaintiff’s default is not minor, but is so significant that he has not even rendered
substantial performance, a suit for restitutionary damages as a plaintiff in default
would be appropriate.

c. Willful breach [§963]

At one time, the majority view was that if a breach was willful, the breaching party
could not recover restitutionary damages for the benefit conferred. Modern courts
are increasingly inclined to allow even a willfully breaching plaintiff to recover on this
theory, in order to prevent unjust enrichment of the defendant.
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335

QUESTION I
Alfred Ohner and Ted Kwik had been friends for a number of years. They had served in the
Army together during the Korean War, and Kwik had saved Ohner’s life on one occasion by
shooting a North Korean sniper who had drawn a bead on Ohner. Both lived in Denver,
Colorado. In October 1997, Ohner finished construction of a new 100-unit apartment house
in Denver called The Crescent. Ohner and Kwik then entered into a written contract under
which Kwik rented The Crescent from Ohner for 10 years, at a rental of $100,000 per year,
beginning January 1, 1998. The parties contemplated that Kwik would take on management
of The Crescent as his full-time business, and would pay all operating expenses, making a
profit on the difference between rentals and expenses.
The Crescent was scheduled to be opened in January 1998. Based on projected expenses an
annual rental of at least $2,000 per unit was necessary just to break even. The initial annual
rental was set at $2,300 per unit, giving Kwik a projected profit of approximately $30,000
per year. All the units were quickly rented by January 1 under standard two-year leases for a
term beginning January 1, 1998, and ending December 31, 1999.
By the time the 1998-99 leases were about to expire, annual operating costs for The
Crescent had risen so high that in order to maintain a $30,000 profit, annual rentals for
2000-2001 would have to be set at $2,600. However, by early 1999, several other luxury
singles apartment houses had been built in Denver and were charging lower rents. It
therefore proved extremely difficult to re-rent The Crescent’s units for $2,600. In February
2000, Ohner told Kwik that it was obvious that Kwik was going to go broke unless he could
lower his rentals to that of his competitors. To keep Kwik from going broke, Ohner told
Kwik he was lowering the rental he charged Kwik from $100,000 to $70,000/year, effective
retroactively to January 1, 2000, which would enable Kwik to make a $30,000 annual profit
by renting The Crescent’s units at $2,300/year. Kwik thanked Ohner profusely, and then
began offering the vacant units at a $2,300/year rental on standard two-year leases ending in
early 2001. Within a short time all the vacant units were leased.
In July 2000, Ohner and Kwik had a falling-out over a game of bridge. Kwik accused Ohner
of cheating. Ohner was enraged and demanded that Kwik retract the statement. Kwik
refused. Ohner then said, “That’s it for us; our friendship is over. What I did for you on The
Crescent is off, too. From now on, you pay me the regular rent.”
What are Kwik’s rights?

QUESTION II
On September 21, Prentice Farm Supplies Co. received from Dayview Seed & Grain
Company an envelope containing clover seeds. On the face of the envelope was written,

336

“No. 1 Red Clover seed, 5,000 lbs., like sample. We are asking 24 cents per pound.” No
letter accompanied the envelope.
On September 23, Prentice wrote to acknowledge receipt of the sample. In its letter Prentice
advised Dayview that it had accumulated quite a stock of clover seed and preferred to wait a
while “before operating further,” but stated that it might nevertheless be interested if
Dayview could come down somewhat on the price.
On October 4, Dayview wired Prentice: “We are now asking 23 cents per pound for the
5,000 lbs. of No. 1 Red Clover seed from which your sample was taken. We have been
made an offer of 22 and 3/4 cents per pound.”
On October 15, Prentice wired Dayview: “Your wire of October 4 is in our receipt. We
accept your offer.” At the time of this telegram the market price of No. 1 Red Clover seed
was 25 cents per pound. Dayview immediately wired back, “Re yours of October 15, we
have no deal.” Prentice then purchased 5,000 lbs. of No. 1 Red Clover seed on the market,
at 25 cents per pound.
Prentice now brings an action against Dayview based on the above facts. Discuss.

QUESTION III
On August 15, Cheshire University requested bids from Bildgood, Inc., a large construction
firm, and seven other contractors for the construction of a new dormitory for Cheshire’s
medical school. Under the terms of the bidding, the bids were to be submitted on October 5,
and Cheshire had two days to award a contract. On October 4, Bildgood computed its total
bid, which came to $1.55 million. The bid was submitted on October 5; it proved to be the
low bid, and Bildgood was awarded the contract, which was signed on October 6. The other
bids were $1.8, $1.9, $2.0, $2.1, $2.2, and $2.3 million, respectively.
In computing its bid, Bildgood had used an Addup Model 15 electronic desk calculator,
which had been delivered to Bildgood by Addup on October 2. On October 7, Addup
notified Bildgood that it had discovered a defect in the circuitry of some of its Model 15
calculators and asked Bildgood to check out its calculator in a certain manner. Upon running
this check, Bildgood discovered that the calculator was defective. It promptly reran the raw
data for the Cheshire bid on a mechanical adding machine and got a (correct) result of $1.95
million. On October 8, Bildgood notified Cheshire that its $1.55 million bid had been
erroneous because of a defective electronic calculator; that the correct bid should have been
$1.95 million; and that it would perform at this price but not for less. Cheshire insisted on
performance at the contract price; Bildgood categorically refused. On October 9, Cheshire
approached Alpha Construction, the contractor that had bid $1.8 million, but Alpha declined
to take on the job, stating that in the interim it had taken on another major commitment.
Three days later, Cheshire entered into a contract

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with Deutron Builders, which had entered a bid of $1.9 million—the third-lowest bid.
Cheshire then brought suit against Bildgood.
Discuss.

QUESTION IV
Assume the same facts as in Question III, above, except that Bildgood sues Addup. At the
trial, Bildgood shows that before purchasing the Model 15 it acquainted Addup with its
needs.
What result?

QUESTION V
John Ash was a lumber dealer in Bangor, Maine. Robert Beam was the owner of a large
construction business, based in Philadelphia, Pennsylvania. Beam bought a substantial
portion of his lumber from Ash.
On Wednesday evening, March 13, Ash gave Western Union the following message for
transmission to Beam: “Will sell 5,000M laths,* delivered Philadelphia, nineteen dollars
seventy net cash per M, late-May shipment. Answer quick.” Ash wrote out this message
personally in Western Union’s Bangor office.
The message actually delivered by Western Union to Beam was as follows: “Will sell
5,000M laths, delivered Philadelphia, nineteen dollars net cash per M, late-May shipment.
Answer quick.” This message arrived on Thursday morning, March 14. On Monday
morning, March 18, Beam sent the following telegraphic answer: “Accept your telegraphic
offer on laths.” Ash made no reply, but entered the order in his books. In late March the
parties began corresponding concerning the exact date of shipment. Further correspondence
between the parties in early April disclosed the error in the transmission of Ash’s message.
Beam then insisted he was entitled to the laths at $19 per M.
What are Beam’s rights?

QUESTION VI
Assume the same facts as in Question V, above, except that Ash sues Western Union and
that Western Union defends in part on the basis of the following provision, which was
printed at the top of the form on which Ash wrote the message: “All messages are taken
subject to the following terms: To guard against mistakes or delays, the sender of a message
should order it repeated; that is, telegraphed back to the originating office for

338

comparison. For this, one-half the regular rate is charged in addition. It is agreed between the
sender of the following message and Western Union that Western Union shall not be liable
for mistakes or delays in transmission or delivery, or for nondelivery, of any unrepeated
message, whether happening by the negligence of its agents or otherwise, beyond the amount
received for sending the same.” Ash did not ask to have the message repeated. What are
Ash’s rights against Western Union if he did not ship the laths? (Assume this matter is
governed solely by state law and not by federal statute or by the rules of any federal
agency.)

QUESTION VII
Frances Fee owned a summer home in the mountains known as “Lakerest.” Lakerest was a
pleasant house surrounded by attractive scenery, but its chief attraction was that it fronted on
the eastern side of Blue Heron Lake. This was a small artificial lake, ideal for swimming and
boating during the summer months, which had been created by construction of a dam that
retained the waters of Blue Heron Stream. The lake had been built as a reservoir and was
owned by the state. Theoretically it was open to the public, but as a practical matter it was
used almost exclusively by the owners of the houses fronting on the lake, since it was almost
completely surrounded by private property and was relatively inaccessible.
On October 1, Fee agreed to sell Lakerest to Alice Aqua for $50,000. Section 5 of the
contract of sale provided as follows:
5. Vendor acknowledges that purchaser has paid her a deposit of $10,000 on the
property at the time of the execution of this agreement. The balance of the purchase
price, $40,000, shall be payable at the closing, which shall take place on December
1. If the vendor is unable to convey good and marketable title at the closing, or if the
improvements on said property shall be destroyed or materially damaged prior to the
closing, said deposit shall be returned to purchaser, on her demand, and neither
vendor nor purchaser shall be liable for any damages. If the purchaser fails to pay
the balance of the purchase price at the closing for any other reason, said deposit
shall not be refunded.
On November 15, an earthquake tremor occurred near Lakerest. Although the tremor did no
damage to any of the lakefront houses, it destroyed the dam that had retained Blue Heron
Lake’s waters. As a result, the lake’s waters emptied out into the old bed of Blue Heron
Stream, and the lake was destroyed. There was no prospect that a new dam would be built
in the immediate future, and the stream that took its place was much too shallow for either
boating or swimming.
When Aqua learned what had happened, she called Fee to tell her that she would not
consider going through with the deal. Fee instituted an action against Aqua for breach of
contract. Aqua counterclaimed for return of her $10,000.

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On May 1, Fee sold Lakerest to David Dry for $35,000.

Discuss.

QUESTION VIII
Reflex Studios, Inc. entered into a contract with Alan Grume under which Reflex agreed to
take photographs of Grume’s wedding for $500, with a deposit of $100. Through the
negligence of Reflex, no photographer showed up at the wedding, and no pictures were
taken. You are Grume’s lawyer. He asks you what are his rights. You quickly conclude
Reflex is in breach. To what damages may Grume be entitled?

QUESTION IX
Albert Penn was a professional writer, specializing in American politics. Penn had a regular
three-times-a-week newspaper column, and also wrote magazine articles and books.
Talia Tawker was a United States Senator. In late 1997, Tawker decided to seek the
Democratic nomination for the Presidency of the United States in 2000. Tawker assembled a
small campaign staff, and in August 1998, she approached Penn and asked him to do a
“campaign” (i.e., favorable) biography, running about 300 pages, for $5,000. Penn declined.
Tawker then raised the price to $7,500, but Penn still declined, stating that he had a lot of
irons in the fire, and did not want to commit himself to a single major project. Tawker then
stated, “I really want to get you for this biography. I will tell you what. If you deliver a
completed manuscript to me by April 1, 1999, I will pay you $10,000.” Penn replied,
“Right.”
Soon after, Penn began work on the Tawker biography. On October 1, 1998, Penn had done
most of a rough draft of the book, representing about half the total needed for a completed
manuscript. On October 2, Tawker withdrew from the race, and telegraphed Penn, “Do not
begin manuscript, as no longer needed.”
What are Penn’s rights?

QUESTION X
Wolf Chemical Company was a major chemical producer. Through its Raremetals Division,
Wolf was engaged in the business of processing certain kinds of ores, including rutile, which
contains the metal titanium. Wolf’s Raremetals Division accounted for approximately 5% of
its business.

340

Andrews Mines, Inc. was the owner of a rutile mine. The process of refining rutile to extract
the maximum amount of titanium at the cheapest possible price is a highly skilled and very
expensive one. Since Andrews had no processing facilities, it approached Wolf as a possible
purchaser of its ore. On its part, Wolf was anxious to acquire a long-term assured source of
rutile, which was then in short supply and promised to remain so for a considerable period of
time.
On April 5, 1997, Andrews and Wolf entered into a contract under which Andrews agreed to
sell to Wolf, and Wolf agreed to purchase, Andrews’ entire rutile output through April 15,
2002. The price of rutile is figured per pound of unrefined titanium contained in the rutile.
Prices are quoted and paid for unrefined titanium; not for rutile. Usually the purchase price
of a batch of rutile is fixed by an assay (that is, by a scientific estimate) of the amount of
unrefined titanium it contains. However, the agreement between Wolf and Andrews provided
that promptly on delivery of rutile by Andrews, Wolf would refine the rutile to extract the
titanium, certify the amount of titanium it had extracted, and pay for that amount a price
equal to 97% of the market price for unrefined titanium on the date of the certificate. Wolf’s
certificate would be conclusive as to the amount of titanium it had extracted, but any dispute
concerning the market price of unrefined titanium on the date of the certificate would be
submitted to arbitration.
On January 15, 2000, Wolf entered into a contract with Xavier, Inc., providing for the sale to
Xavier of Wolf’s Raremetals Division for $2 million. Xavier was a major tobacco company,
which was attempting to diversify its operations.
Xavier promptly notified Andrews that the Andrews-Wolf contract had been assigned to it in
connection with its acquisition of Wolf’s Raremetals Division, and directed Andrews to
address all further shipments to it (Xavier) at the former Wolf plant. Andrews promptly
wrote to Wolf (with a copy to Xavier) that it did not recognize the validity of the assignment.
Xavier replied that Wolf would continue to accept shipment of rutile from Andrews in its
own name, and while such ore would be accepted on Xavier’s behalf, Wolf would agree to
be responsible for payment of the purchase price.
Andrews replied that it would not deliver any ore to Wolf or Xavier under such arrangements
and began selling its ore on the market.
What are Xavier’s rights against Andrews?

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 ANSWER TO QUESTION I
1. Was There Consideration for Ohner’s Modification of Kwik’s Lease? In February
2000, Ohner in effect agreed to modify the lease by promising to accept $70,000/year in
full discharge of Kwik’s obligation. The first issue is whether this modification is
enforceable.
a. Legal duty rule; donative promise: Under the legal duty rule, a promise to accept
less than one is legally entitled to in satisfaction of the full obligation is not legally
enforceable, on the ground that such a promise lacks consideration. (See, e.g.,
Foakes v. Beer.) Absent duress or unconscionability, it seems questionable whether
this rule is sound, since in the usual case the promise is given as the price for a
counterpromise, so that consideration is apparently present in the form of a bargain.
In this case, however, it is arguable that Ohner’s promise lacks consideration even if
the legal duty rule is not applied, on the theory that the promise was donative in
nature. The general rule is that a donative promise lacks consideration, i.e., such a
promise is unenforceable. (It may be that there was in fact a bargain here; that
Ohner had an economic interest in keeping The Crescent fully rented, and that in
exchange for Ohner’s modification Kwik impliedly promised to lower rentals to
$2,300/year, which he was not legally obliged to do. This construction, however,
seems strained.)
b. Moral obligation: Assuming the promise was donative, it may have been based on
moral consideration. Although the usual rule is that moral consideration is
insufficient to support a promise, there is some law that a promise based upon a
moral obligation arising out of a material benefit conferred on the promisor, or,
perhaps, an output by the promisee, will be enforced, at least to the extent of the
benefit conferred or the output. However, even under the modern view, a promise
based on a moral obligation will normally not be enforced if the promisor did not
receive a direct economic benefit. One may assume for purposes of this question
that Ohner is continuing to profit despite the modification. Here Kwik had
undoubtedly conferred a substantial benefit on Ohner—he had saved Ohner’s life.
On the other hand, it is not completely clear that Ohner was under a moral obligation
to Kwik. Kwik’s action was performed in the course of Kwik’s own duties as a
soldier, and at no apparent risk to himself. There is a difference between gratitude
and moral obligation. Moreover, Ohner’s rent concession does not seem to have
been intended as a “repayment” to Kwik.
c. Reliance: Reliance is viewed as either a substitute for consideration (bargain theory)
or as consideration itself. The term “promissory estoppel” remains in wide use as a
description of the principle that reliance may make a donative promise enforceable.
Even if Ohner’s promise was donative, under the principle of promissory estoppel, it
would be legally enforceable if relied upon in a reasonable, foreseeable way, at least
to the extent of the reliance. Certainly
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it was foreseeable that Kwik would lower the rentals on vacant apartments to
$2,300/year. Ohner’s promise should therefore be enforced at least as to those
apartments rented at $2,300 in reliance on the promise.
d. Waiver: It might be argued that rather than making a promise, in effect Ohner
“waived” payment of $30,000. However, that should not make a difference in the
result; any transaction involving the legal duty rule can be verbalized in the form of a
waiver. Additionally, a waiver may be retracted in this case as no separate
consideration was given.
e. Modification without more: Partly in recognition of the unsoundness of the legal
duty rule, the tendency of the law may be to uphold any modification of an
executory contract without the requirement of fresh consideration. Thus U.C.C.
section 2-209(1) provides that “An agreement modifying a contract within this
Article needs no consideration to be binding.” Section 2-209 is inapplicable to Kwik
and Ohner, since their transaction does not involve a sale of goods (although it might
be utilized by analogy). However, Restatement Second section 89(a) provides that
“A promise modifying a duty under a contract not fully performed on either side is
binding … if the modification is fair and equitable in view of circumstances not
anticipated when the contract was made.” To the extent this section represents the
law, it might be applicable to this case, on the premise that construction of the other
singles apartments constituted “circumstances not anticipated when the contract was
made.” However, while Kwik and Ohner may not have specifically thought about
the possibility of such construction, it was certainly a foreseeable circumstance.
f. Completed gift: Where the legal duty rule is applicable, there is a split of authority
in contracts involving an ongoing performance by both sides as to whether an
agreement to accept a lesser payment than due is enforceable to the extent that is
executed. Insofar as Ohner’s intention was donative, it is arguable that a completed
gift has been made as to that portion of the rent actually forgiven prior to the
retraction.
2. Is There a Violation of the Statute of Frauds? In addition to the defense of no
consideration, Ohner has a Statute of Frauds defense, since the transaction (i) involved a
lease of more than two years; and (ii) could not be completed within one year from the
making of the contract. Although there was part performance here, part performance
does not take a contract out of the one-year provision unless performance is completed
on one side. Some types of part performance may take a contract out of the interest-in-
land provision, but mere payment is usually insufficient. Additionally, an action for
damages may not lie, as the part performance exception to the Statute of Frauds does
not traditionally apply to actions at law insofar as interests in land are concerned. Kwik’s
reliance might take the transaction out of the Statute, but probably only to the extent of
the reliance.
 343

ANSWER TO QUESTION II
1. Formation of a contract requires an offer, an acceptance, and consideration. The
envelope received on September 21 appears to have been an invitation to bid, rather
than an offer, since no quantity was clearly specified and the envelope was apparently
unsolicited. The words, “we are asking” indicate preliminary negotiations as well.
2. The letter of September 23 was also an invitation to bid, insofar as it indicated Prentice
might be interested if Dayview came down on the price.
3. The wire of October 4 might be deemed still another invitation (i.e., an offering
circular), but it is better interpreted as an offer. As a wire, the communication seems
individualized, and it is in response to an invitation (i.e., the letter of September 23). To
be legally sufficient as an offer, a statement must meet two criteria: (i) intent to make a
bargain; and (ii) definiteness of terms. Generally speaking, a statement will not be
considered an offer unless it makes clear: (i) the subject matter of the proposed bargain;
(ii) the price; and (iii) the quantity involved. It is not absolutely clear that the entire 5,000
lbs. is being offered, but in light of the circumstances that seems to be a reasonable
inference, despite the fact that the quote is per pound. The wire does not state terms of
payment or delivery, but that does not seem fatal since reasonable terms could easily be
implied. The reference to another offer might be construed to indicate that Dayview was
only soliciting offers, but it seems at least equally reasonable to construe the reference to
mean, “Since we already have an offer for 22 and 3/4 cents, our offer at 23 cents is a
reasonable price, and in any event is not negotiable, so please do not bother to try to get
us down in price again.”
4. If the offer does not state a period of time during which it will remain open, the
offeree’s power of acceptance lapses after the expiration of a reasonable time. Thus,
under the circumstances, even assuming the October 4 wire was an offer, the answering
wire of October 15 was not effective as an acceptance because it was not dispatched
within a reasonable time, considering (i) the offer was by wire, indicating some urgency
(especially when set in the context of the original solicitation, which was by mail); (ii)
Dayview apparently had an offer in hand, which it would not want to delay acting on for
too long; and (iii) the market price of clover seed was apparently subject to serious
fluctuations. Therefore, no contract was formed between Prentice and Dayview.

ANSWER TO QUESTION III

1. Expectation Damages: Cheshire will undoubtedly claim damages for breach of
contract measured by its expectation—$.35 million, the difference between $1.55

344
million (its contract price with Bildgood), and $1.9 million (its contract price with Deutron).
Should this claim succeed?
a. Palpable mistake: Bildgood’s mistake was of the kind normally called
“unilateral”—that is, a mistake arising out of the calculations of one of the parties,
rather than a mistake in the assumptions shared by both. Such a mistake is generally
a defense when it is “palpable”—that is, when the nonmistaken party knew or
should have realized that the mistake had been made—because in such a case the
nonmistaken party’s expectation is not worthy of much protection. On the other
hand, if the mistake is “impalpable”—if the nonmistaken party neither knew nor
should have known of its existence—the cases are split on whether the mistaken
party has a defense in an action for expectation damages. The majority of the cases
hold that he does not; but a minority, particularly the more recent cases, hold that he
does.
The first question therefore is whether the mistake was palpable. The fact that
Bildgood, itself a contractor, did not realize the bid was unusually low speaks against
this. But it is arguable that Cheshire was in a better position than Bildgood to realize
that Bildgood had made a mistake because Cheshire could see the extent to which
Bildgood’s bid differed from all the others. How significant was this difference? The
seven bids put in by the other contractors ranged from $1.8 million to $2.3 million,
mostly at intervals of $.1 million. Bildgood’s bid was $1.55 million, $.25 million less
than the second lowest bid. On balance, this does not seem to be enough in itself to
put Cheshire on notice. By hypothesis the winning bid will always be the lowest, so
some interval between Bildgood’s bid and the second lowest bid must be expected.
The interval was admittedly substantial—but it was much less than the interval
between the second lowest and the highest bids ($.5 million). Of course, a difference
on the low side is frequently more striking than a difference on the high side, because
costs set a lower limit, while nothing sets an upper limit. Nevertheless, in the absence
of other evidence the range of the bids would not in itself seem enough to have put
Cheshire on notice that a mistake had been made.
b. Impalpable mistake: Assuming the mistake was impalpable, should it nevertheless
serve as a defense to an action for expectation damages? Under the majority view,
the answer is no, but certainly there is a modern trend that where the defendant has
entered into a contract only by reason of his mistake it should be sufficient if he
reimburses plaintiff for actual reliance. The rationale behind the cases rejecting this
position is two-fold: (1) the courts should not defeat the legitimate expectation
formed by the nonmistaken party as a result of the defendant’s fault; and (2)
unilateral mistakes are normally difficult or impossible to prove objectively—that is,
since they normally occur in the defendant’s own mental processes, they can
normally be established only through proof of the defendant’s subjective intent, and
the courts have been

345
 noticeably reluctant in contract cases to let a party get out of a contract on the basis of
such proof.
Cheshire v. Bildgood, however, is distinguishable from the usual unilateral mistake
case. First, the mistake did not occur in Bildgood’s subjective mental processes. It
occurred in the objective world of the calculator, and presumably is susceptible of
completely objective proof. Second, Bildgood was not at fault in the making of the
mistake: Rather, Addup had erred. In light of these factors, and since the trend of
authority is in favor of limiting damages in such cases to reliance, Bildgood’s mistake
should serve as a defense to a suit by Cheshire for expectation damages.
2. Reliance Damages: Assuming that Cheshire cannot recover expectation damages, what
damages, if any, can Cheshire collect from Bildgood? The cases are agreed that even if
unilateral mistake will serve as a defense to a suit for expectation damages, the
nonmistaken party is entitled to reimbursement for reliance. (Of course, usually the
mistaken party is at fault, while Bildgood was not; nevertheless, to the extent Cheshire
relied on Bildgood’s promise, it seems more appropriate to cast any resulting loss on
Bildgood than on Cheshire.)
Cheshire appears to have relied on Bildgood’s promise by accepting Bildgood’s bid rather
than another. If Bildgood had not made its incorrect bid, Cheshire would presumably
have accepted the second-lowest bid, which was $1.8 million, and since bids are
normally deemed offers, Alpha would have had to enter into the contract if its bid had
been accepted within the two-day period. Therefore, Cheshire should be entitled to
receive $.1 million, representing the difference between the contract price with Deutron
($1.9 million) and the price Cheshire would have had from Alpha ($1.8 million) but for
Bildgood’s mistake.

ANSWER TO QUESTION IV
1. General Damages: When Addup sold Bildgood the Model 15 there was an implied
warranty of merchantability. Under U.C.C. Article 2 (which applies here because the
Model 15 is a good), a merchant seller impliedly warrants that goods sold are
merchantable—that is, the goods are fit for their ordinary purposes. [U.C.C. §2-314] A
calculator that cannot add properly is not fit for its ordinary purpose of performing
mathematical calculations, and thus Addup breached its implied warranty of
merchantability. Therefore, Bildgood should be able to return the machine, or to collect
damages equal to the difference between the value of the Model 15 as it is, and the value
it would have if it met the implied warranty of fitness (which might be measured by the
cost of repairs necessary to correct the defect).
2. Special Damages: In addition, Bildgood may be able to collect from Addup the amount
of damages, if any, that Bildgood must pay to Cheshire. Unless Bildgood

346
 was guilty of contributory negligence (which seems rather unlikely), such amounts would be
proximately caused by Addup’s breach of implied warranty. The only question,
therefore, would be whether such damages were foreseeable within Hadley v. Baxendale
(which has not been changed by the U.C.C.). Today the principle of Hadley v.
Baxendale is normally restated to mean that consequential damages can be recovered if,
at the time the contract was made, the seller had reason to foresee that the consequential
damages were the probable result of the breach. Since Bildgood had acquainted Addup
with its needs, it was foreseeable when the contract was made that if the calculator was
defective Bildgood might enter an incorrect bid. Further, Hadley v. Baxendale is
primarily used by the courts to limit damages by cutting off claims for lost profits. A
claim by Bildgood against Addup based on the damages (if any) Bildgood must pay to
Cheshire would not be a claim for lost profits, but for out-of-pocket expenses, and would
undoubtedly be treated sympathetically.

ANSWER TO QUESTION V
1. Did Ash’s Telegram Constitute an Offer? Yes. The telegram was obviously
individualized, appeared to contemplate the conclusion of a deal upon acceptance, and
was specific as to the critical terms of price and quantity. It was somewhat vague as to
delivery date, but not fatally so (the date seemed firm enough to satisfy Ash and Beam),
and other terms (such as transportation) could be filled in by implication.
2. Was Beam’s Acceptance Timely? Where an offer does not specify a time of
acceptance, it must be accepted within a reasonable time or the power of acceptance will
be terminated. What constitutes a reasonable time depends on the subject matter of the
offer, its form, and its language. Here the subject matter of the offer was a standardized
commodity that probably fluctuated in price, the form was a telegram, and the offer
specifically stated, “Answer quick.” All these factors imply that a reasonable time was no
more than a day (unless trade practice or prior dealing indicates otherwise). While it is
true that only two business days passed before Beam sent his acceptance, without more
Beam’s acceptance was probably too late.
Here, however, there was more: (1) The acceptance was arguably sent within a
reasonable time. Therefore, if Ash did not regard the acceptance as timely, he was under
an affirmative obligation to communicate that fact to Beam. (Under this theory, Beam’s
late-arriving acceptance operated as a counteroffer, and Ash’s failure to object to the
delay operated as an acceptance of the counteroffer by silence.) (2) Furthermore, in their
correspondence, Ash and Beam acted as if a contract had been formed, and that in itself
should suffice (see U.C.C. §2-207(3)).

347

3. The Error in Transmission: As between Ash and Beam, the mistake in transmission
appears to be a Peerless type of mistake—that is, the kind of mistake usually known as
 a misunderstanding. Both parties seem to have acted reasonably: Ash reasonably thought
he had a contract at $19.70; Beam reasonably thought he had a contract at $19. (It is
possible that the market price for laths was so well established that Beam should have
realized that the $19 price was mistaken, but there is no indication that was the case.)
Conversely, Ash might have been careless in using the telegraph as a mode of
communication, or in not having the telegram repeated. But that too seems unlikely.
People use the telegraph every day. Assuming it is not customary to have telegrams
repeated, it seems stretching things to characterize Ash as having been at fault. In fact,
Beam himself used the telegraph, and there is no indication that he had the telegram
repeated.
Nevertheless, the majority view is that in cases like this a contract is formed on the terms
conveyed to the offeree by the intermediary. This view is sometimes rationalized on the
theory that the intermediary’s error may be laid to the offeror on the ground that he
selected it as a method of communication, or that it was his agent. But selection of
Western Union was not itself faulty for the reasons just discussed, and Western Union
seems to be an independent contractor rather than an agent. Therefore, a minority view
is that no contract is formed in such cases under a Peerless type analysis—i.e., the
parties have neither objectively nor subjectively intended to contract. Under either view,
the intermediary may be liable for negligence for any loss suffered by either party.

ANSWER TO QUESTION VI
Assuming first that the disclaimer is invalid, if Ash did not ship the laths, he might sue
Western Union for his lost profits. However, such a loss seems too speculative and uncertain
to recover, since there is nothing to show that Beam would have accepted the correct
($19.70) offer. Furthermore, although disclaimers are always suspect on unconscionability
grounds, the disclaimer in this case is probably valid. The clause was conspicuous (it was
printed at the top of the form on which Ash wrote his message) and was in relatively clear
language. The facts that Western Union was in a monopoly position, that the clause extended
to negligence, and that the loss was apparently caused by negligence all argue for striking the
clause down. However, Western Union’s monopoly was limited to fast communication of
written messages; other media were available for oral communication or slower
communication of writings. Furthermore, Ash had a choice: This provision was not imposed
on him. He could have obtained the same service without being subject to this provision
(albeit at a higher rate) by selecting the repeated-message alternative. Moreover, the type of
loss involved here is economic rather than physical. Finally, to prohibit Western Union from
employing its two-tier rate system would presumably increase the rates of all persons dealing
with Western Union—including those who would rather take their chances on a mistake or
delay and pay less. On balance, the clause probably should be given effect.

348
 ANSWER TO QUESTION VII
1. Fee’s Claim
a. Amount of damages: A preliminary question in Fee’s suit is the amount of her
damages. If Fee is successful, she would be entitled to contract price ($50,000)
minus market value at the time of breach. This is a general damages measure. While
the question does not state what the market value was at the time of breach, the sale
to Dry at $35,000 only two and a half months later is very strong, almost
conclusive, evidence of such value. In other words, if successful, Fee’s damages
would probably be $15,000 minus the $10,000 she already has.
b. Aqua’s defenses: This raises the question of whether Aqua has any defenses.
(1) Aqua might claim that section 5 is a liquidated damages provision applicable to
Aqua as well as to Fee. However, the provision is not a liquidated damages
provision by its terms, and since such provisions are not favored, it should not
be construed as such in the absence of clear language.
(2) A second and much stronger defense is that of frustration. (“Impossibility”
would not be applicable, because the performances of both parties are literally
possible.) The doctrine of frustration arose from the Coronation Case, Krell v.
Henry, which held that performance is excused if the purpose or value of the
contract has been destroyed by a supervening event that was not reasonably
foreseeable at the time the contract was entered into. As in Krell v. Henry,
where the plaintiff was buying not just a room, but a room with a view, so here
Aqua was buying not simply a house, but a lakeside summer house. Even the
name—Lakerest—indicates the integral significance of the lake. While
frustration is a question of fact, and opinions can differ in a given case, Aqua
should probably be excused under the defense of frustration.
However, because this is a sale of land transaction, a special problem is raised.
In many jurisdictions, the purchaser in a sale of land contract must perform
even if there has been material destruction to improvements on the property
(“rule 1”). Other jurisdictions hold that the risk of destruction is on the vendor
until title passes (“rule 2”), or is on the party in or entitled to possession (“rule
3”). If the jurisdiction in which these suits are brought follows rule 2 or 3, there
would be no special problem in this case above and beyond the ordinary
problems raised by frustration. But what if the jurisdiction follows rule 1?
Should the rule be extended to deny the defense of frustration, even if it would
be available to Aqua in any case other than one involving sale of land? Probably
not.

349

First of all, literally the rule would not apply (since the lake is not an
improvement on the property). Furthermore, since the rule is questionable in
 any event, it should not be extended—particularly in this case where the
contract shows a clear intent to repudiate it.
2. Aqua’s Counterclaim: Aqua should get her $10,000 back on grounds of frustration.
Fee might argue that some courts have distinguished between money paid before the
frustrating event and money remaining to be paid at that point. However, this distinction
seems unsound. A stronger argument in Fee’s favor is that the contract specifies that the
deposit shall be returned under only two conditions (material destruction of
improvements on the property or failure to make good title), neither of which has
occurred, and that it goes on to provide that if the named “purchaser … fails to pay the
balance of the purchase price at the closing for any other reason, said deposit will not be
refunded.” However, the purpose of that clause seems pretty clearly to give the vendor a
right to keep the deposit only if the purchaser unjustifiably fails to complete payment.
For instance, suppose the improvements on the property had not been destroyed, but a
fissure had opened up cutting the property in half; would the fact that such a condition
was not specifically mentioned in the provision be a defense to a claim for return of the
down payment? Frustration and impossibility problems arise precisely because the parties
did not specifically foresee specific kinds of events; hence, without strong proof to the
contrary, a general clause like this should not shift the risk of all unforeseen events on to
the purchaser.

ANSWER TO QUESTION VIII

Since this was a contract for services, the normal measure of damages would be the
reasonable cost of completion, minus the unpaid portion of the price. However, completion
now seems impossible—although perhaps damages might be measured by the cost of
restaging the wedding and photographing the restaged version. (It is assumed that Grume
could not have mitigated by hiring a substitute photographer in time or by getting a friend to
take pictures.)
Where cost of completion is inappropriate, damages can usually be measured by the
difference between the value of what the injured party ended up with and the value of what
he would have ended up with had the contract been performed. In this case, however, the
latter element is probably too uncertain to permit practicable measurement. A second
problem with the alternative measure, as applied in this case, is that most of the value of the
promised pictures would have been largely sentimental, and contract law normally protects
only economic interests. Nevertheless, exceptions are sometimes made, particularly where
the subject matter of the contract is a personal interest. Since that seems to have been the
case here, sentimental value might be taken into account if damages can be assessed with
certainty.

350

Grume might also seek damages for mental anguish. Again, such damages normally are not
permitted for breach of contract. But since this case specifically deals with a personal
interest, and since the mental anguish was foreseeable and resulted from Reflex’s negligence,
such tort damages might be appropriate in this case.
In any event, Grume is of course entitled to restitution of his $100, as the contract is
unenforceable in this situation.

ANSWER TO QUESTION IX
1. Bilateral vs. Unilateral Contract: The initial question is whether Tawker and Penn
entered into a bilateral contract or whether Tawker merely made an offer to enter into a
unilateral contract—that is, an offer that could be accepted only by performance of an
act. If the parties had made a bilateral contract, Tawker’s revocation is clearly
ineffective. If Tawker’s offer was for a unilateral contract, however, greater difficulties
are presented.
Tawker’s words, at least, seem to call for an act—delivery of the completed manuscript
by April 1, 1999. The words, however, are not necessarily decisive: some offers that
seem to call for acts can be interpreted as calling for promises—e.g., “I will give you
$500 to paint my house.”
Restatement Second section 32 says that if an offer is ambiguous as to whether it calls
for a promise or an act, either method of acceptance should suffice. This leaves open (i)
whether the offer was ambiguous, and (ii) whether Penn made a promise. The answer to
both questions seems to be “no.” It will be recalled that in response to Tawker’s second
offer Penn had indicated that he did not want to be committed to a single major project
—i.e., did not want to make a promise. Tawker seems to have been responding to this
reaction by setting up the transaction so that the money would serve as a lure, thus
insuring performance through incentive rather than through commitment. It is true that
Penn said, “Right,” which might evidence an exchange of promises, but the word is
equally consistent with Penn saying, in effect, “Structuring the transaction in this way, so
that I am not committed but will get $10,000 if I perform, is fine with me.”
2. Consequences If the Transaction Is Deemed to Be an Offer for a Unilateral
Contract: If the offer is for a unilateral contract, an initial problem is whether Penn was
required to give notice that he had begun performance. Probably not. Tawker indicated
that she would pay $10,000 if the manuscript was completed by April 1, and a
reasonable person in Penn’s position probably would not have felt obliged to give any
notice, on the theory that he would either produce the manuscript by April 1 and get the
$10,000, or not. Also, Penn’s statement, “Right,” might be taken to put Tawker on
notice that Penn was at least seriously interested.

351

A second problem is whether the offer was revocable. In classical theory, an offer for a
 unilateral contract was revocable at any time prior to completion of the act required.
Thus, if the Tawker-Penn transaction is deemed an offer for a unilateral contract, under
classical theory, Tawker would have no obligation to Penn since the revocation occurred
prior to completion of the act. However, it is now widely acknowledged that an offer for
a unilateral contract generally cannot be withdrawn once performance has begun, as
was the case here, because of the offeree’s reliance on the offeror’s implied promise to
hold the offer open. Thus, Tawker’s countermand would be wrongful.
3. Changed Circumstances: Tawker might argue that she was excused by virtue of
changed circumstances—specifically, her withdrawal from the race. This is not a case of
impossibility—Penn could still finish the biography and Tawker could still pay for it. If
Tawker has an excuse at all, therefore, it is under the doctrine of frustration—the book
can no longer serve its intended purpose. However, it is unlikely that the frustration
doctrine would be applied to this case. First, the book would still have some value to
Tawker, even under the changed circumstances. Second, the changed circumstance was
a result of Tawker’s own decision and does not seem to be the kind of risk Penn should
bear.
4. Statute of Frauds: The Statute of Frauds does not present a problem. The transaction
involves services rather than goods, and performance could take place within one year.

ANSWER TO QUESTION X
Rights are normally assignable unless the assignment would materially vary the other party’s
corresponding rights, or, to use the U.C.C. terminology, the obligor has a substantial interest
in the obligee’s identity. Was that the case here?
If the Andrews-Wolf contract had merely called for the purchase and sale of rutile at a price
keyed into the market, so that Wolf’s only duty was to make payment, Wolf’s rights
certainly would have been assignable. However, here there was more: Wolf also had to
refine the rutile to extract the titanium it contained, and to certify how much titanium it had
extracted. This certificate was to be conclusive. That in itself indicates that Wolf’s rights
were not assignable, because clearly the identity of the person making such a certificate
would be highly important to Andrews. Of course, despite the language of the contract, the
certificate might not really be “conclusive” in the ordinary sense of the term, since it would
probably be open to Andrews to show that more titanium had been extracted than was stated
in the certificate. On the other hand, it would not be easy for Andrews to know how much
titanium had actually been extracted, let alone prove it; in other words, Andrews had to place
a fair amount of trust and confidence in Wolf, which it would not necessarily have in Wolf’s
assignee.

352

Furthermore, we are told that “the process of refining rutile to extract the maximum amount
of titanium is a highly skilled and very expensive one.” Since Andrews’ payment depended
on the amount of rutile extracted, it is clear that this also gave it a substantial interest in the
identity of the refiner; refinement by a less skilled refiner would mean less payment for
Andrews. Furthermore, one refiner might be willing to spend extra money to extract the
maximum amount of titanium, whereas another might not. These considerations have
particular force in this case, since Wolf was a major chemical company, experienced in the
business, whereas Xavier was a newcomer.
Xavier might argue that since Wolf’s entire Raremetals Division was being bought, as a
practical matter the same organization probably would continue to run the refining operation.
Nevertheless, on balance, Andrews appears to have a substantial interest in having the
contract performed by Wolf, so that the contract would not be assignable without Andrews’
consent.
Wolf’s offer to accept shipment of the rutile is of no real significance; nor is its offer to be
ultimately responsible for the purchase price, since it would be liable in any event under
ordinary principles of contract law.
All this being so, Andrews is within its rights in declining to make further shipments under
the contract.

_______________

*Laths are long, thin strips of wood, which are used extensively in home construction. “M”
stands for thousand.
359
Index

A
ACCEPTANCE
See Offer and acceptance
ACCORD AND SATISFACTION
accord defined, §97
discharge of contractual duty by, §872
executory accord
defined, §100
effect, §§101-109
satisfaction
defined, §98
effect, §99
ANTICIPATORY BREACH
See Breach of contract
ANTICIPATORY REPUDIATION, §§787-789
See also Breach of contract, anticipatory breach
ASSIGNMENT
assignee rights
against assignor, §709
against obligor, §§696-697
assumption of duties by assignee, §§610-613, 733-737
attachment of security interest, §719
change in burden or risk assumed by obligor, §§654-658
change in duty of obligor, §§651-653
change in material term of contract, §659
defenses against assignee
consumer protection statutes, impact of on obligor’s defenses, §703
contract related defenses, §698
in general, §§698-708
modification of contract by assignor and obligor, §§704-706
delegation of duties. See Delegation of duties
direct action by assignee against obligor, §696
donative assignments, §§604-606, 665
future rights, §§677-682
in future wages, §§691-694
in nonexisting future contract, §§680-681
under existing contracts and business relationships, §§678-679
general requirements, §§663-665
holders in due course, §§699-700
in general, §§636-648
insurance, §§655-656
mortgages, §658
notice to obligor, effect of, §697
novation, compared with, §725
output contracts, §653
partial assignments, §§660-662
perfection of security interest, §§720-721
personal service contracts, §§651-652
priority among assignees, §§710-722
English rule, §716
Massachusetts rule, §717
New York rule, §715
prohibition of assignment, §§683-690
real party in interest, §639
requirements contract, §653
revocability of assignments, §§666-676
security interest, assignment as creating, §§640-647, 682
substitution of debtors, §§657-658
token chose, §§667, 713
wage assignments, §§691-694
waiver of defense, §701
warranties, implied, §709
writing, requirement of, §544
AUCTIONS, §§173-177

B
BARGAIN PROMISES
See Consideration
BILATERAL CONTRACTS
acceptance of offer for, §§260-273
unilateral contracts, distinguished from, §§27, 33, 290-292
BREACH OF CONTRACT
See also Damages; Specific performance
anticipatory breach, §§832-844
determining damages, §840
duty to mitigate damages, §839
immediate cause of action for, §832
retraction of repudiation, §838
what constitutes, §§833-837

360

excuse of condition, §§767-772

material vs. minor breach, §§816-831
parties’ agreement as determining, §§820-822
pleading and proof, burden of, §760
responses to breach, §§825-827
repudiation, what constitutes, §§819, 833

C
CAPACITY TO CONTRACT
intoxicated persons, §582
mental incapacity, §§578-581
minors, §§576-577
quasi-contractual liability for necessaries, §§576-577
CONDITIONS
See also Excuse of conditions
conditions concurrent, §784
conditions precedent, §757
conditions subsequent, §§758-760
defined, §742
distinguished from promises, §§745-748
excuse
by prevention or hindrance, §§768-772
forfeiture, §775
impossibility, §774
waiver, §773
express conditions
defined, §743
in general, §741
implied conditions, §§776-780
implying promise, §755
interpretation as condition or promise, §§750-754
order of performance, §§781-798
anticipatory repudiation, §§787-789
prospective inability to perform, §§790-798
performance to satisfaction of promisor, §§761-764
performance to satisfaction of third person, §765
pleading and proof, burden of, §760
relating to time of payment, §766
substantial performance, §§799-811. See also Substantial performance
CONSIDERATION
See also Promissory estoppel
accord and satisfaction, §§97-109. See also Accord and satisfaction
agreements allowing one party to supply material term. See also Indefiniteness; Interpretation and implication,
§§41-48
alternative promises, §§38-40
“bargain” approach, §3
bargain as consideration, §§6-10
bargain promises, §§6-94
“benefit/detriment” approach, §2
conditional promises, §§37, 121-122
donative promises
conditional, §§121-122
relied upon. See also Promissory estoppel, §§123-130
unrelied upon
in general, §§113-114
nominal consideration, effect of, §120
seal, effect of, §§115-117
writing, effect of, §§118-119
“enforceable factor” approach, §4
exclusive dealing contracts, §§51-52
forbearance on legal claim, §§19-26
guaranties, §17
illusory promises, §§27-59
implied promises, §§49-52
moral consideration. See also past consideration, below, §§131-153
mutuality of obligation, §27
nominal consideration, §§12-18, 233
options, §§14-16
output contracts, §§53-59
past consideration, promises based on
in general, §§131-153
promise based on expense incurred by promisee, §150
 promise to pay debt barred by statute of limitations, §§134-139
promise to pay debt discharged in bankruptcy, §§141-144
promise to pay fixed amount in liquidation of legal obligation, §§151-153
promise to pay moral obligation arising out of past economic benefit to promisor, §§145-150
promise to perform a voidable obligation, §140
preexisting legal duty
contractual duties, §§68-96
duty owed to third person, §72
in general, §§60-96
modification, §§74-77
waiver, compared with, §77
payment of lesser sum in discharge of greater, §§82-96
performance in exchange for promise of increased payment, §§69-81
public duties, §§63-67
rescission of contract under which duty owed, §79
unliquidated obligations, §§85-87
writing
as substitute for consideration, §78
release, §90
requirements contracts, §§53-59
seal, effect of, §§115-117
surrender of claim, §§19-26
void promises, §36
voidable promises, §§35, 140
waivers, §§77, 110-112. See also Waiver
CONSTRUCTION CONTRACTS
damages, §§896-897
impossibility of performance, §851

361

substantial performance, §802

CONSUMER PROTECTION
defenses against holders of commercial paper, §700
retail installment contracts, §702
unconscionability, §§501-524
waiver-of-defense clauses, §701
CONTRACTORS AND SUBCONTRACTORS
See Subcontractor bids
CONTRACTS CONCLUDED BY CORRESPONDENCE
See Offer and acceptance
CONTRACTS FOR SALE OF GOODS
See Sale of goods contracts
CONTRACTS FOR SALE OF LAND
See Land sale contracts
CONTRACTS IMPLIED IN FACT
See Implied in fact contracts
CONTRACTS IMPLIED IN LAW
See Implied in law contracts

D
DAMAGES
See also Quasi-contractual recovery
certainty requirement, §§888-892
consequential damages, §§885-886
construction contracts
breach by builder, §§934-936
breach by owner, §§932-933
duty to mitigate damages, §§896-897
cost-of-completion measure, §934
diminution in value measure, §935
divisible contracts, §§812-815
emotional distress, §§952-954
employment contracts
breach by employee, §928
breach by employer, §§926-927
duty to mitigate damages, §§895, 927
expectation measure, §§876-877
general damages, §884
Hadley v. Baxendale, §§882-886
in general, §§874-964
incidental damages, §877
land sale contracts, §§919-925
liquidated damages, §§940-948
mitigation of damages, §§839, 893-898
nominal damages, §939
penalty clauses, §§940-948
punitive damages, §§949-951
reliance damages, §878
restitutionary damages, §§879, 955-964
revocation of unilateral offer after performance begun, §247
sale of goods contracts
breach by buyer, §§911-918
breach by seller, §§901-910
duty to mitigate damages, §894
in general, §§900-918
profits, §§912-914
specific performance, §§899, 905-906, 922, 924-925, 929-930, 937
speculative damage limitation, §§888-892
profits, application to, §§889-891
substantial performance, §§808-811
DEFENSES RELATING TO FORMATION OF CONTRACT
Duress, §§498-499. See also Duress
Illegal contracts, §§583-594. See also Illegality
Indefiniteness, §§415-471. See also Indefiniteness
Lack of contractual capacity, §§576-582. See also Capacity to contract
Mistake, §§472-494. See also Mistake
Misrepresentation, §§495-496. See also Misrepresentation
Nondisclosure, §497. See also Nondisclosure
Statute of Frauds, §§525-575. See also Statute of Frauds
Unconscionability, §§501-524. See also Unconscionability
Undue influence, §500. See also Undue influence
DELEGATION OF DUTIES
See also Assignment
conjoined with assignment, §§734-737
delegability of duties, §§726-728
express assumption of duties, §733
in general, §§723-738
nondelegable duty, effect of attempt to assign, §732
novation distinguished, §725
restriction on delegation, §728
rights of obligee against delegee, §§733-738
tender of performance by delegee, §738
DISCHARGE OF CONTRACTUAL DUTIES, §§863-873
See also Accord and satisfaction; Conditions; Frustration of purpose; Impossibility and impracticability;
Modification; Novation; Releases; Rescission; Statute of limitations
DIVISIBLE CONTRACTS
employment contracts, §815
“entire” contract, §814
illegal contracts, §587
in general, §§812-815
DURESS
defense to enforcement of contract, §§498-499
exception to parol evidence rule, §400

E
EMPLOYMENT CONTRACTS
assignment of wages, §§691-694
damages, §§895, 926-930
divisible contracts, §815
EQUAL DIGNITY STATUTES, §563

362

EXCLUSIVE DEALING CONTRACTS, §§51-52

See also Output contracts; Conditions, excuse; Requirements contracts
EXCUSE OF CONDITIONS, §§767-772
See also Breach of contract; Conditions, excuse; Divisible contracts; Impossibility and impracticability;
Prevention of condition of other party’s performance; Repudiation; Substantial performance; Waiver
EXECUTORY ACCORD
See Accord and satisfaction

F
FIRM OFFERS
See Offer and acceptance
FORM CONTRACTS
See also Unconscionability
contract formation, problems of, §§205-224
exculpatory clauses, §§515-519
last shot rule, §§205-206
FRAUD
See Misrepresentation
FRUSTRATION OF PURPOSE, §862
See also Impossibility

GH
GAP FILLERS, §§430-438
GOOD FAITH
See Requirements contracts; Sale of goods contracts
GUARANTIES
See Suretyship, contracts of

IJK
ILLEGALITY
in general, §§583-594
in pari delicto, §§589-590
indirect aid of illegal objective, §585
licensing requirements, §§592-594
locus penitentiae, §588
malum in se, §589
malum prohibitum, §591
severable contracts, §587
supervening illegality as excuse for nonperformance, §847
ILLUSORY PROMISES, §§27-59
See also Consideration
IMPLICATION
See Interpretation and implication
IMPLIED-IN-FACT CONTRACTS, §§156, 309-310
IMPLIED-IN-LAW CONTRACTS, §157
IMPOSSIBILITY AND IMPRACTICABILITY
See also Frustration of purpose
construction contracts, §851
death or illness in personal service contracts, §§855-856
destruction
of source of supply, §§849-850
of subject matter, §§848, 852-855
discharge of duty as result of, §§845-846
excuse of condition as result of, §774
frustration of purpose distinguished, §862
impossibility includes impracticability, §846
in general, §§845-861
land sale contracts, §853
partial impracticability, §§858-859
personal service contracts, §§855-856
repair contracts, §852
sale of goods contracts, §854
supervening illegality, §847
temporary impracticability, §857
INDEFINITENESS
See also Interpretation and implication
“agreements to agree,” §§444-449
alternative promises, §§38-40, 454-457
certainty of terms required, §415
distributorship contracts, §429
employment contracts, §§424-428
in general, §§415-471
intent to contract, §419
objective standard of implication, §§44, 440-443
option re performance reserved to one party, §§450-457
part performance as cure, §439
preliminary agreements, §§462-467
price omission of, §§418-421
reliance on indefinite contract, §§468-471
time for performance, omission of, §§422-429
U.C.C. provisions, §§430-437, 448, 452
written contract contemplated, §§458-461
INFANCY
See Capacity to contract
INJUNCTIVE RELIEF
See Specific performance
INSOLVENCY, §§795-796
INSURANCE CONTRACTS
assignment of, §§655-656
silence as acceptance, §307
INTERPRETATION AND IMPLICATION
See also Rules of construction
course of dealing, §374
course of performance, §373
doubtful provision, interpretation as promise or condition, §§750-754
extrinsic evidence, §§369-371
good faith, general obligation of, §47

363
implication
of promise, §§49-52, 59
of terms, §§416-429
objective theory of interpretation, §154
exceptions to, §§365-368
parol evidence rule, exception to, §§386-414
Peerless rule, §366
standards of interpretation, §§363-377
usage, §375
usage of trade, §376

L
LAND SALE CONTRACTS
assumption of mortgage, §§610-613, 658
damages, §§919-925
destruction of premises, risk of, §853
impossibility of performance, §853
writing, requirement of. See Statute of Frauds
LIMITATION OF LIABILITY
See Unconscionability, exculpatory clauses
LIQUIDATED DAMAGES
See Damages
LIQUIDATED OBLIGATIONS
payment of lesser amount as discharge of, §§82-94, 873

M
MAILBOX RULE, §§315-342
See also Offer and acceptance, correspondence as means of
MAILING OF UNORDERED MERCHANDISE, §§303-304
MATERIAL BREACH
distinguished from minor breach factors, §§817-818
parties’ agreement, §820
“time is of essence” provision, §§821-822
repudiation, §819
effect of breach, §§823-824
relation to substantial performance, §§828-831
MENTAL INCAPACITY
See Capacity to contract
MIRROR IMAGE RULE, §§204-224
See also Offer and acceptance
MISREPRESENTATION
defense to enforcement of contract, §§495-496
exception to parol evidence rule, §400
voidable obligation, promise to perform, §140
MISTAKE
assumption of risk, §476
in general, §§472-494
judgment errors, §§477, 482
mistranscription of contract, §486
misunderstanding, §487
mutual mistake, §§473-477
parol evidence rule, exception to, §400
transmission by intermediary, §§488-494
unilateral mistake, §§478-485
MODIFICATION OF CONTRACT
assigned contract, §§704-706
in general, §§74-77
Statute of Frauds, §542
writing, requirement of, §§411-414
MORAL OR PAST CONSIDERATION, §§131-153
See also Consideration
MORTGAGES
See Land sale contracts, assumption of mortage; Third-party beneficiary contracts, recurring third-party
beneficiary cases, assumption of mortgage
MUTUAL ASSENT
express contracts, §155
implied contracts
implied in fact, §156
implied in law, §157
objective theory, §154
MUTUALITY OF OBLIGATION, §§27-59

N
NONDISCLOSURE, §497
NOVATION, §§673, 725
O
OFFER AND ACCEPTANCE
advertisements, §§169-170
auctions, §§173-177
bids by contractors and subcontractors, §§178-180, 288-289
conditional acceptance, effect of, §§197-216
conduct, contracts implied from
implied-in-fact contracts, §156
implied-in-law contracts, §157
correspondence
as means of offer and acceptance
medium of communication of, §§326-338
misdelivered, §339
timely dispatch of, §§318-323
time period stated in offer, interpretation of, §§184-185, 320
under option, §§316, 323
waiver of notice of, §§271-272
when effective, §§264, 314-316
withdrawal or repudiation of dispatched acceptance, effect of, §§355-360
crossed offers, §§361-362
in general, §§314-362

364

“mailbox rule,” §§270, 315-342

rejection, when effective, §§345-354
revocation, when effective, §§343-344
counteroffer, effect of, §§192-196
crossed acceptance and revocation, §344
crossed offers, §§361-362
death of offeror, effect of, §§254-256
firm offers, §§16, 231-238
lapse of time
no time for acceptance fixed in offer, §§186-189
time for acceptance fixed in offer, §§183-185
late acceptance, effect of, §§308, 322
“mailbox rule.” See correspondence, as means of offer and acceptance, above
mailing of unordered merchandise, §304
mirror-image rule, §§204-224
modes of acceptance. See also conduct, contracts implied from, above; silence as acceptance, below
act, §§274-289
 act substituted for promise, §267
ambiguity as to whether offer requires act or promise, §§293-298
promise, §§260-273
silence, §§299-313
tender of performance where offer requires acceptance by promise, §§262-264
use of subcontractor’s bid, §§288-289
mutual assent
express contracts, §155
implied contracts, §§156-157
objective theory of contracts, §154
notice of acceptance
act required by offer, §§275-279
promise required by offer, §§269-273
offer
advertisements, §§169-170
legal significance of, §159
offering circulars, §172
what constitutes, §§160-167
preliminary negotiations, distinguished from offers, §§162-165
qualified acceptance. See conditional acceptance, above
rejection, effect of, §§190-191
reliance on offer for bilateral contract, effect of, §§123-129
repudiation of acceptance, §§355-359
revocation. See also correspondence, as means of offer and acceptance, above; Revocation; Unilateral
contracts, revocation of offer after performance begun
assignments, §§655-656
communication, requirement of, §§228-230
firm offers, §§16, 231-238
in general, §§225-252
options, §232
sale of goods contracts, §§239-244
rewards, as motivation for act constituting acceptance, §§281-285
silence as acceptance
exercise of dominion, §303
in general, §§299-313
insurance cases, §307
late acceptance, §308
mailing of unordered merchandise, §304
previous dealings, effect of, §§310-311
solicitation by offeree, §§305-307
termination of offeree’s power of acceptance
changed circumstances, §257
 conditional or qualified acceptance, §§197-216
counteroffer, §§192-196
death of offeror, §§254-256
in general, §§181-257
inquiry as to terms of offer, §§194-195
lapse of time, §§182-189
options, §§191, 196
rejection, §§190-191
revocation. See revocation above
unilateral contracts. See Unilateral contracts
withdrawal of acceptance, §360
OPTIONS
acceptance of, when effective, §316
consideration, requirement of, §§14-17
counteroffer, effect of, §196
death or incapacity of offeror, effect of, §256
revocability of, §232
OUTPUT CONTRACTS, §§53-59
See also Requirements contracts

P
PAROL EVIDENCE RULE
any relevant evidence test, §382
exceptions to rule
collateral terms, §388
conditions precedent, §401
interpretation of contract, §§402-407
lack of consideration, §399
“naturally omitted” terms, §§389-394
separate consideration, §387
face of instrument test, §381
fraud, use of parol to show, §400
integration, what constitutes, §§380-384
modifications, §§408-414
partial integration, §398
plain meaning test, §§403-404
statement of rule, §378
PAST CONSIDERATION
See Consideration
PENALTY CLAUSES
See Damages
PREEXISTING LEGAL DUTY, §§60-96

365

See also Consideration

PRELIMINARY NEGOTIATIONS
See Indefiniteness; Offer and acceptance
PREVENTION OF CONDITION OF OTHER PARTY’S PERFORMANCE
closing down business as, §§770-772
in general, §768
wrongfulness, requirement of, §769
PROMISSORY ESTOPPEL
See also Unilateral contracts, revocation of offer after performance begun
consideration, compared with, §130
donative promises, reliance on, §§123-130
former rule, §123
modern rule, §§124-129
substantial reliance not required, §129
PROSPECTIVE INABILITY TO PERFORM, §§790-798, 842-844
See also Conditions, order of performance

Q
QUANTUM MERUIT
See Quasi-contractual recovery
QUASI-CONTRACT
See Quasi-contractual recovery
QUASI-CONTRACTUAL RECOVERY
See also Restitution
benefits conferred
under contract within Statute of Frauds, §§572-573
breach of contract, remedy for, §§956-959
implied-in-law contracts, §§157, 312-313
impossibility of performance, §§860-861
in general, §§157, 312-313

R
REAL PARTY IN INTEREST IN ASSIGNMENTS, §639
REJECTION, §§190-191
when effective, §§345-354
RELEASES
consideration, §§25, 869-871
discharge of contractual duty by use of, §§869-871
RELIANCE
See Promissory estoppel; Unilateral contracts, revocation of offer after performance begun
REMEDIES
See Breach of contract; Damages; Quasi-contractual recovery; Specific performance
REPUDIATION, §819
See also Breach of contract, anticipatory breach
REQUIREMENTS CONTRACTS
assignment of, §653
consideration, §§53-59
going out of business
as excuse by prevention, §§770-772
implied promise to stay in business, §59
good faith obligation, §57
quantity limitations, §58
RESCISSION
by mutual agreement, §§79, 864-868
contracts for benefit of third person, §§633-635, 868
writing, requirement of, §867
RESTITUTION
See also Quasi-contractual recovery
basis for, §§312-313
liability of minor for value of necessaries, §577
liability of person lacking mental capacity for value of necessaries, §581
measure of damages, §§879, 955-964
part performance prior to circumstances of impracticability, §§860-861
relative to substantial performance, §811
where contract falls within Statute of Frauds, §§572-573
REVOCATION
See also Offer and acceptance
communication of, §§228-230
firm offers, §§231-244
in general, §§225-252
offers for unilateral contracts, §§245-252
when effective, §§226-227, 343
REWARDS
See Offer and acceptance
RULES OF CONSTRUCTION
course of dealing, §374
course of performance, §373
trade usage, §376

S
SALE OF GOODS CONTRACTS
acceptance stating additional or different terms, §§203, 207-224
knockout rule, §222
adequate assurance of performance, §§797, 843
assignment, §737
duty to mitigate damages, §894
firm offer, §§16, 239-244
full-payment checks, §§92-96
general obligation of good faith, §§47, 739-740
implied promise to use best efforts, §52
impossibility of performance, §§846, 848, 854, 859
indefiniteness, §§430-438
liquidated damages, §947
modification, §§75-76, 412-414
notice of acceptance of offer for unilateral contract, §279
offer calling for acceptance by either promise or act, §§296-298

366

parol evidence rule, §397

perfect tender rule, §§803-807
price to be fixed, §432
reasonable notification of termination, §32
release, §871
remedies for breach, §§900-918
requirements and output contracts, §§56-59
retraction of repudiation, §838
Statute of Frauds, §§534-547
unconscionability, §§501-504, 506, 511, 522-524
SALE OF LAND
See Land sale contracts
SEAL, CONTRACTS UNDER, §§115-117
SEVERABLE CONTRACTS
See Divisible contracts
SILENCE AS ACCEPTANCE
See Offer and acceptance
SPECIFIC PERFORMANCE
See also Damages, specific performance
assignment of future rights, §690
consideration, adequacy of, §7
part performance of land sale contracts, §§531-533
STATUTE OF FRAUDS
auctions, §567
estoppel to plead, §§533, 570
guaranty contracts. See suretyship provision, below
intangibles, §546
investment securities, §545
land sale contracts, §§528-533
part performance of, §§531-533
main purpose rule, §555
marriage provision, §548
memorandum, requirement of, §§556-567
modification of contract within Statute, §§410, 542
noncompliance with, effect of, §§568-571
one-year provision, §§549-551
part performance, §551
part performance
land provision, §§531-533
one-year provision, §551
sale of goods, §538
promise to pay debt barred by statute of limitations, §138
promise to pay debt discharged by bankruptcy, §143
purpose of Statute, §526
reliance, effect of, §§574-575
rescission of contract within Statute, §867
restitution of benefits conferred, §§572-573
sale of goods contracts
admissions, §541
goods made specially to order, §539
in general, §§534-547
 part payment, §538
written confirmation, receipt of, §540
suretyship provision, §§552-555
STATUTE OF LIMITATIONS
promise to pay debt barred by statute, §§134-139
SUBCONTRACTOR BIDS
status as offers, §§178-180
use of as acceptance thereof, §§288-289
SUBSTANTIAL PERFORMANCE
construction contracts, §802
in general, §799
measure of damages, §§808-810
recovery in restitution, §811
relation to material breach, §§828-831
what constitutes, §§800-801
SURETYSHIP, CONTRACTS OF
consideration requirement, §17
writing requirement. See Statute of Frauds, suretyship provision

T
TENDER OF PERFORMANCE
by offeree where offer for bilateral contract, §§262-264
TERMINATION OF CONTRACT
at will without notice, §§31-32
THIRD-PARTY BENEFICIARY CONTRACTS
beneficiary’s rights
against promisee, §§631-632
against promisor, §§595-606
creditor beneficiaries, §§598-603
defenses available to promisor, §§626-627
donee beneficiaries, §§604-606
incidental beneficiaries, §607
in general, §§595-597
intended beneficiaries, §608
promisee’s rights against promisor, §§631-632
recurring third-party beneficiary cases
assumption of mortgage, §§610-613
government contracts, §§615-617
surety bonds, §§618-625
 would-be legatees, §614
termination of beneficiary’s rights, §§633-635

UV
UNCONSCIONABILITY
See also Consumer protection
adhesion contracts, §507
disclaimers and limitation of remedies, §§520-524
disparity in value, §9
exculpatory clauses, §§515-519
substantive unconscionability, §§510-513
unfair surprise, §§506-509
UNDUE INFLUENCE, §500
UNILATERAL CONTRACTS
bilateral contracts distinguished from, §§33, 245

367

notice of acceptance, requirement of, §§275-279

obligation of offeree, §§286-287
offers for
ambiguity as to whether acceptance requires act or promise, §§293-298
performance
not motivated by offer, §§284-285
preparation, compared to, §§250-252
revocation of offer after performance begun, §§247-252
UNJUST ENRICHMENT
See Quasi-contractual recovery
UNLIQUIDATED OBLIGATIONS
payment of some amount as discharge of, §§85-87

WXYZ
WAIVER
consideration for, §§77, 111
definition of, §110
enforceability, §111
excuse of condition by, §773
modification distinguished, §77
of notice of acceptance, §§271-272
retraction of, §112
waiver-of-defense clauses, §701
WARRANTIES
in assignments for consideration, §709
sale of goods contracts, §520
disclaimers, §521
limitations, §§522-524
WRITING, REQUIREMENT OF
in contract. See Modification of contract, writing, requirement of; Statute of Frauds
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