Contracts 101: Nuts & Bolts of Contracts Law

Contracts 101
Michael DeBlis III, Esq.
Partner
DeBlis Law

Introduction
• Did the parties form an agreement?
• This deals with the law of offer and
acceptance
• There can be no true contract unless the
actions and words of the traders manifest a
mutual, objective assent to be bound by the
terms of an agreement

Introduction
• Impact of ambiguity of language or mistake of the
traders as potentially precluding the formation of the
agreement

Steps
• Step 1: Can you find an offer?
• Step 2: If you can find an offer in the fact pattern, at
the time acceptance was attempted, was the offer
still outstanding (life of offer)?
• Step 3: If you find an offer and it was still open for
acceptance at the time it was the object of the
attempted acceptance, was there a defective
acceptance?

Major Truths About Law of Contracts
• Courts favor the reconstruction of events which
occur w/in the negotiation process so as to
conclude that a contract has been formed
(positive bias in favor of K formation)
• Technique for achieving positive reconstruction of
events is the objective theory of contract
formation: Ct. reviews words and actions of the
traders and evaluates them through the eyes of
the reasonable person. It is what a reasonable
person would have believed that alone has legal
significance

Step 1
• Step 1: Can you find an offer?
– Look for a stipulation that an offer is outstanding
– If offer is n/ stipulated, you must find an objective
manifestation of a present intention to form a
present contract
– That manifestation must have been
communicated to the other party

Three Elements to Every Offer
• Three elements to every offer
– Intent: There must be an objective manifestation to
form a present contract right here and right now
– Content: Offeror must set forth the essential terms of
her proposal or else a reviewing court and offeree
would never know what to accept or to enforce
– Communication: Communication of that intention
and those terms to a person in the fact pattern who is
intended by the offeror as the offeree

Intent
• State of mind Qs: Objective test: We don’t ask
Dr. Bear subjectively whether he thought
there was an offer – he has a $25K motive to
say “yes.” Instead, would a reasonable
prudent person situated as was Dr. Bear
understand that a person grabbing you and
shaking you would be making an offer?

Intent
• Preliminary negotiations: These questions call
on you to decide whether at the point one of
the parties thinks he has formed a contract,
the actual discussions had merely been a
discussion of possible future business
(preliminary negotiations) or whether the
parties had just done present business
(exchanged offer and acceptance)

Intent
• Is there a potential agreement? Has he accepted a
present offer or merely reacted enthusiastically to a
preliminary negotiation?
• How do you make the distinction? Apply objective
theory of contract formation. Place great emphasis
on facts. Look at setting – we are told this was a
business letter – that’s a neutral fact. People
negotiate and extend offer and acceptance by letter.
What if this same statement was made at a cocktail
party – far less likely that a court would find offer.

Intent
• Tip: If you are judging a particular
communication, the closer that
communication comes to spelling out all of
the essential terms of the proposed
agreement so that the only thing left for the
other party to do is to say, “I accept,” then the
more likely it is that a party that was that
specific as to the essential terms was
manifesting a present offer

Content
• Offeror must set forth the essential terms
expressly or w/in range of permissible
implication
– Identify parties to proposed K,
– Identify the subject matter of proposed exchange
– Time for performance, and
– Price

Content
• Under CL, a communication that lacked any of
these terms was too indefinite to constitute
an offer. The trend of modern decisions is to
favor reconstruction of events that happened
at formation stage so as to conclude that a
contract has been formed

Content
• CL reform: If in the fact pattern there is total
silence by traders w/ respect to one of the
essential terms of the bargain, ct. will attempt
to salvage transaction by treating the parties’
mutual, total silence as an objective
manifestation of consent to trade on a
reasonable term

Content
• What is a reasonable term? If these parties
have done business before, a reasonable term
would be inferred from their prior history. This
is called course of performance. Takes
precedent over general market custom in
determining what would be the reasonable
term for these two traders.

Content
• If these two parties have never done business
before, court would attempt to find a
commercially reasonable term in customs and
mores of market place

Content
• There must be total silence – key to cl. If parties were
subtle in addressing a disputed term but did so in an
ambiguous or half-hearted manner, then at CL no
court could imply a reasonable term b/c that would
be making a bargain other than the one the parties
sought to fashion

Content
• UCC: If both traders are merchants and goods are the subject
of their attempted exchange, code permits flexibility in
settling essential terms. First, merchant traders can adopt
term setting machinery that will fix the content of an essential
term in the future. If the manufacturing seller agrees to abide
by the same trade journal’s quotation, the parties have
formed a contract today – 11/17 – though neither of them
know the price term. Their agreement to term setting
machinery is sufficient to give them a contractual relationship
as of the exchange of offer and acceptance.

Content
• Under UCC, on 11/17, buyer can approach seller, give
all the essential terms, accept price, and then say,
“you and I will agree on price in second week of
Jan.,” If the seller consents, their agreement to agree
in the future w/ respect to filling in an essential term
is binding.

Content
• What happens if trade journal suspends publication
in late Dec.? Or what if buyer becomes disillusioned
and doesn’t agree to any price that seller assents to?
Does that defeat contract formation? No, in both
instances, the contract was formed on 11/17 and
nothing can be done subsequently to defeat
formation. If trade publication suspends w/o fault of
either party, ct. will imply a reasonable term to
salvage bargain

Communication
• Communication of that intention and those terms to
a person in the fact pattern who is intended by the
offeror as the offeree

Step 2
• If you find an offer at time acceptance was
attempted, was the offer still outstanding?

Step 2
• An offeror is in complete control of the terms
upon which she creates the power of acceptance
• If she specifies that her offer is to expire on a
certain date or on the occasion of any specified
event, the power of acceptance is explicitly
limited by those terms no matter how
unreasonable.
• No contract may ever be created after the point
fixed in time by the offeror for the expiration of
that offer

Step 2
• What if the offeror says nothing concerning the life
of the offer? This will test your understanding of the
basic elements of contract construction that fix the
life of the offer in the absence of it being set by the
offeror

Step 2
• Offer expiring under its terms: Lapse of time. Offers,
like people, die of old age. If the offer sets no
expiration date by implication of law, it is open for
acceptance for a reasonable time only. Never assume
that, “it’s open for a reasonable time.” Use facts to
flesh out what you think the reasonable time would
be.

Step 2
• If John offers to sell you a carload of ripe bananas in
an unrefrigerated railroad car in CA on 7/15 and says
nothing about the life of the offer, it’s probably open
for only one minute.
• On the other hand, what if the offer is for diamonds
and offeror says nothing about life of offer? This offer
would be open for a long time. The subject matter
(i.e., diamonds) is n/ perishable and the price is n/
volatile – this is how you analyze what is a
“reasonable time”

Step 2
• Operation of law
– Death or destruction of subject matter terminates
the offer by operation of law. John offers to sell
you his home for $80K. Fire destroys residence.
John’s offer to sell is revoked by operation of law.
Same thing happens if there is death or insanity or
illegal incapacity of the offeror or the offeree –
offer is terminated, revoked by operation of law

Step 2
– Supervening illegality of the proposed subject
matter: If subsequent to communication of offer,
but prior to acceptance, the government
intervenes and declares proposed bargain illegal,
the offer to perform it is revoked by operation of
law

Step 2
• Termination by rejection: You offer to sell John your
car for $10K. John says, “no.” John’s rejection as a
matter of law terminates your offer. John, after
spotting you shining your Porsche, can n/ form a
contract by coming back to you on his hands and
knees and begging, “I meant to say, yes!”
• Ten seconds after John said, “no,” there was no
longer anything left for him to accept. Offer died a
brutal death at hands of John’s rejection

Step 2
• Revocation by offeror: Even though offeror expressly
states that he will keep the offer open (one week to
think about buying my home), an offer is still
inherently revocable at any time prior to acceptance.
As unfair as this might be, it’s the law.

Step 2
• Can you get around this rule that an offer is
inherently revocable at any time prior to acceptance
even though the offeror gave you one week to think
about buying his home? Yes.

Step 2
• Three Exceptions:
• First, purchase an option over offeror’s offer to sell you his
home for $80K. For example, “I’ll pay you $ 500 if you will
stay by that commitment to give me a week to think about
it.”
• An option is always a contract w/ its own offer,
acceptance, and its own separate consideration (though
nominal). If you have formed an option, the offeror’s offer
to sell you his house is irrevocable under the terms of that
option. This is a creature of cl

Step 2
• Second, terminate offeror’s power of revocation under
estoppel. If offeror told you that you had a week to consider
his proposal, and you changed your position in foreseeable
reliance on that statement, courts would rule that offeror is
estopped from revoking his offer given your foreseeable
detrimental reliance. Creature of common law.

Step 2
• Third, merchant’s firm offer (creature of UCC): Only
the offeror has to be a merchant. The offeree need
n/ be a merchant.
• If goods are the subject matter of the attempted
exchange, then an offer which is in a signed writing
by a merchant trader is irrevocable according to its
terms.

Step 2
• If it says, “you have 30 days,” then you have 30 days.
There need not be an option or evidence of
detrimental reliance. Code makes merchant’s written
offer w/ representation of stability enforceable under
its terms for up to 90 days.
• Offeror doesn’t have to name a date, but be sure
that (1) the offeror is a merchant, (2) that goods are
the subject matter of the transaction, and (3) that
there is a signed writing.

Step 3
• If you have found an offer and it is still outstanding,
ask whether there was a defective acceptance

Step 3
• There are no magic words for acceptance
• Acceptance must amount to a present
unconditional, unequivocal assent to each and
every term of the offer
• If the response of the offeree bears that
quality, at what moment in time is the
contract formed?

Step 3
• Mailbox rule: If parties are operating at a distance
and communicating w/ one another, when does the
offeree form the contract?

Step 3
• The contract is formed w/ the dispatch of the offeree’s
acceptance if it is communicated in a commercially
reasonable manner – a manner that is at least as fast and
reliable as the one utilized by the offeror.
• Under the “modern version” of the mailbox rule or depositor
acceptance rule, a contract is formed the moment the offeror
places her acceptance in the mailbox even though the offeror
is unaware of it. The offeror is still bound though he doesn’t
know that formation has occurred. All risk of delay,
misdirection or nondelivery is born by the offeror under the
depositor acceptance rule!

Step 3
• What happens if the offeree unconditionally and
unequivocally assents to every term but doesn’t use
a commercially reasonable channel of
communication? A contract can still be formed but it
will be formed only upon receipt by the offeror and
in the meantime the offer remains inherently
revocable at any time prior to acceptance.

Step 3
• CL Rejection/counter-offer rule: Major problem
under common law is a rule that was developed
more than a century ago. If the offeree responds to
an offer in any way that involves tampering w/ the
terms proposed by the offeror, as a matter of law n/
only is there no contract, but the original offer is
eviscerated. Called “rejection, counter-offer rule.” It’s
a huge barrier to contract formation

Step 3
• CL gave offeree a narrow window of opportunity. If
offer created in the offeree the power to form a
contract, in order to exercise that power, he has to
make an effective acceptance.
• At CL, an effective acceptance was referred to as the
mirror image of the offer. Any attempt by offeree to
disrupt the terms of the offer was fatal to
acceptance—counter offer rule

Step 3
• Example: (1) “I offer you my home at 500 Smith Street for
$100K, 15 year mortgage at 11%.” This is a present offer.
• (2) Offeree responds, “Will give $90K, cash.”
• (3) Owner replies, “cannot reduce price.”
• (4) Offeree says, “I accept.”
• Analysis: If this is an offer, (2) is n/ an acceptance because it’s
not the mirror image of the offer. What’s worse, it’s regarded
as a rejection, counter offer. The offer is dead on arrival. If
there had never been communication number three, there is
nothing that the offeree could do to form a contract other
than becoming the source of a counter offer. But there was
communication number 3: “Cannot reduce price.”

Step 3
• Number 3 is an objective re-manifestation on the part of the
homeowner of a continued willingness notwithstanding the
rejection counter offer to trade on the initial terms. It goes
back and refers factually and incorporates by reference
everything that was included in communication number one.
• And here comes number 4: Exactly what was favored by
common law. No ifs, ands or buts about it: mirror-imaged
acceptance: “I accept.” Here is how to analyze this hypo: (1)
offer, (2) rejection, (3) counter-offer and revival of offer, and
(4) mirror-imaged acceptance

Step 3
• Are there any other limitations on the mirror-image
rule other than looking for the lucky presence of a
revival by the original offeror? Yes

Step 3
• Exception 1: A mere request by the offeree to the
offeror that the offeror consider different terms
which makes it clear that the offeree is n/ rejecting
the offeror’s offer obviously does n/ form a contract.
At the same time, it does n/ automatically trigger the
rejection-counteroffer rule.

Step 3
• Example: “I will give serious thought to your offer to purchase
your home for $100K on a 15 year mortgage. In the
meantime, would you consider an immediate transaction of
$90K in cash?”
• This does n/ form a contract, but at the same time it does n/
trigger a rejection/counteroffer. Therefore, it leaves open the
possibility that the offeree could have a change in heart one
hour later, call up the offeror, and accept the offer. In this
scenario, the offer would still be alive!

Step 3
• Exception 2: Merely making explicit that which was
contained in an offer or attached to the offer by
operation of law does n/ trigger rejection-counter-
offer rule. This arises in the case of a merchant seller
where an implied warranty of merchantability has
already been attached to the offer. If there is no
disclaimer, it is already a part of the K and the
offeree has merely made explicit a term implied in
the K by operation of law.

Step 3
• Compare UCC: If goods are the subject matter of the
attempted exchange and both parties are merchants, then
what is the fate of the terms that are articulated by the
offeree in the course of an attempted acceptance?
• Setting the scene: Offeree accepts offer and then goes on to
add terms of her own. At common law, this would trigger
rejection-counter-offer rule which insists on mirror image.
• Under UCC, there will always be a K. The only issue is the fate
of the terms originating w/ the offeree. There is no more
drastic a difference between life under the UCC for merchants
and the old cl.

Step 3
• First, there must be an acceptance—offeree must
have attempted an acceptance. If offeree does n/
wish to accept offeror’s terms but is willing to do
business on his own terms, offeree should make an
explicit rejection-counteroffer. Neither an offeree nor
an offeror has to be forced into playing this game.

Step 3
• For example, if an offeror wants to make certain that,
as a merchant, she will never be bound to any terms
other than those in her offer, she should make an
iron-clad, “take it or leave it” offer.
• If an offeree attempts to accept an iron-clad offer
while tampering w/ its terms, he’s taken the bait
hook, line, and sinker. Why? He’s bound to a contract
that contains only the terms of the ironclad offer.

Step 3
• Moral of the story. Beware of the offeror who does
n/ protect herself w/ an ironclad offer and an offeree
who surreptitiously does n/ make a rejection-
counteroffer but who tries to accept while changing
certain terms of the proposed business deal. Though
fatal under cl, there will always be a K under A II
section 207

Step 3
• Only issue is the fate of the terms originating w/ the
offeree. This rises and falls on whether the terms
originating w/ the offeree are consistent or
inconsistent w/ the offer.

Step 3
• Consequence of consistency: If the terms proposed
by the offeree are consistent w/ the terms of the
offer, a contract is immediately formed. The terms of
the K are the terms of the offer as modified by the
consistent additional terms proposed by the offeree
UNLESS the offeror speaks out and promptly rejects
the offeree’s consistent additional terms.

Step 3
• Breaking it down: Offeror is in catbird seat, but if
offeree accepts w/ consistent additional terms and
offeror does n/ promptly speak out and reject them,
a K that contains the terms from the offer as
supplemented by the acceptance has been formed
under the Code.

Step 3
• What if the terms proposed by the offeree are
inconsistent? A contract is immediately formed, but it
contains only the terms of the original offer.

Step 3
• Breaking it down: Inconsistent terms proposed by
the offeree do n/ become a part of the contract
unless the offeror expressly speaks out and assents
to them.

Step 3
• How do you know whether the terms in the fact
pattern are consistent or inconsistent?
• Start out w/ offer – look at impact of the terms on
that offer.

Step 3
• Economic impact: If the terms proposed by offeree
significantly shift the economic advantage of the proposed
transaction, they are inconsistent.
• Risk allocation: What if the terms proposed by offeree do n/
alter the economics of the transaction, but they dramatically
shift the incidence of loss? If the terms proposed by the
offeree significantly re-allocate risk from the allocation of risk
contained in the offer, the terms are inconsistent.
• Per se rule: If any term of the acceptance would impair a
remedy that would otherwise be available in event of breach
of that contract, the term is inconsistent. Ex. Offeree who
accepts and then attempts to assert an arbitration clause in
lieu of a litigation term – that is not consistent

Step 3
• Bilateral in nature
– Parties – A and B – form agreement by exchange
of promises
– A promise standing against a promise forms an
agreement

Step 3
• Unilateral formation
– A – offeror – holds forth a promise. Acceptance on
the part of the offeree takes the form of doing a
specific act

Step 3
– How do you accept an offer to bargain in the
unilateral mode? Only by total completion of the
requested act. What about the rule that an offer is
inherently revocable any time before acceptance?
– W/ just two weeks left, Andy could say, “I revoke.”
There must be some protection for Brad. It is
indecent what Andy has done. Two rules designed
to protect Brad!

Step 3
• Rule 1: Rule of construction: Whenever possible, Court
will construe the offer as inviting formation in the
bilateral mode – by acceptance in giving promise. This
is the statutory rule under the UCC. An offer to
purchase goods may be accepted either by the seller’s
prompt shipment of conforming goods (form bargain in
the unilateral mode) or the promise to promptly ship
them (forming a K in the bilateral mode). But at cl, if
Andy clearly states that he desires formation in the
unilateral mode, this rule of construction wouldn’t be
helpful to Brad b/c he never said, “I promise.” He never
tried to form bargain bilaterally.

Step 3
• Rule 2: Supplementary rule: Once the offeree
begins substantial performance of the requested
act, he does n/ form the K but he does cut off the
power of the offeror to revoke so as to give the
offeree a reasonable opportunity to complete
that which he has begun. If Brad had pulled all
but two weeds, he would clearly have
substantially performed, and the offeror would
have been prevented by cl rule from revoking the
offer giving Brad a reasonable opportunity to
complete his work.

Step 3
• Note: Offeree is under no obligation to go
forward and to complete the requested act.
The offeree who starts the act of performance
is never obliged to finish it. There is only one
way that the law permits the parties to be
bound by merely exchanging promises and
that’s to form a K in the bilateral mode.

Ambiguity & Mistake
• In appropriate circumstances, they can
preclude the formation of an agreement

Ambiguity
• When language betrays
• Two types known to CL

Ambiguity
– Latent: Hidden ambiguity
• If it effects an essential term of the bargain,
precludes the formation of an agreement
• If at the formation stage of the bargain, neither
trader recognizes that a term which is used to
describe one of the essential terms is
reasonably susceptible of more than one
meaning, and each party has subjectively
attached a different meaning to that term, their
bargain is flawed by a fatal latent, hidden
ambiguity.

Ambiguity
• There can be no K b/c there is no basis to favor the
subjective reasonable interpretation of the buyer to
the very different subjective – but equally reasonable
interpretation being given the term by the seller. If
judge has no rational basis to intervene, no remedy is
available. If latent ambiguity affects an essential
term, it precludes formation of a K

Ambiguity
– Patent: Obvious ambiguity
• If it effects an essential term of the bargain, precludes the
formation of an agreement
• At the formation stage, the traders are guilty of being sloppy
(i.e., they frame one of the essential terms of the agreement
in language that is susceptible to more than one reasonable
meaning). Ambiguity is obvious. Yet, neither party takes the
opportunity to clarify their particular understanding. If
parties are equally guilty of failing to clarify an obvious
ambiguous verbal discrepancy in their bargain, there can be
no K b/c there is no rational basis to prefer the
interpretation of the negligent seller to the different
interpretation of the equally negligent buyer

Ambiguity
• But what if one of the parties is free of fault b/c
as to him the ambiguity was hidden while the
other party is guilty of fault b/c as to him, the
ambiguity was obvious? Now the judge has a
reasonable basis to conclude that there was a
contract – to protect the interests of the
innocent party. The court gives the ambiguous
language the subjective definition intended by
the innocent party, and tells the other poor
slob that he is S.O.L. b/c he was at fault

Mistake
• The problem here is not that the words or acts
of the parties are ambiguous but that they
don’t convey the actual intention of one or
both of the traders.

Mistake
• Fact pattern one: B/c they were uttered by
one or both of the traders in the course of
their own personal mistakes (i.e., mistakes of
the traders themselves)

Mistake
• Mutual mistake fact patterns: A and B share a
common mistake
– At formation stage of bargain, both traders are
mistaken. A, owner of a canvas, promises to sell it
for $1M, each acting under the impression that it
is a work of Picasso. Both parties are mistaken –
the work is a forgery. Parties are morally innocent
but a fundamental factual assumption is
inconsistent w/ reality.

Mistake
– What is the impact of a mutual mistake upon the
terms of the agreement? Is it a contract? Probably,
yes. Each party has a remedy in equity of
rescission. Either the buyer or the seller can rely
upon the “after arising” discovery as a means to
refuse to perform on the buyer’s promise to pay
the $1M

Mistake
– First distinction: First look at the gravity of the
mistake in terms of its importance to the bargain.
If mistake goes to the heart of the transaction (i.e.
essence of exchange) this is the type of mistake
that warrants complete relief.

Mistake
– What happens if the mistake doesn’t go to the
essence of the exchange? Assume both parties are
mistaken: A promises canvas and B promises $1M,
each assuming Picasso painted it in ’31 but it turns
out – upon appraisal – to be the work of the
master in ‘32. What is the result of this mistake?
Nothing. This mistake goes to a collateral quality,
n/ the essence of the exchange and parties are n/
allowed to cancel or rescind Ks for mistakes that
don’t have that vital quality.

Mistake
– Second distinction: Where are the parties the
moment they discover they are mistaken? Before
there can be a remedy of cancellation, K must still
be executory in nature. Meaning the parties must
exchange promises to buy and sell the canvas, but
neither party has yet performed. What happens if
the seller delivers the canvas, the buyer pays the
money, and a year later the canvas is discovered
to be a forgery? Relief is unlikely. Courts don’t like
to rewrite history. Only willing to give relief if
bargain is executory and the mutual mistake goes
to its essence.

Mistake
• Unilateral mistake fact patterns: Blunder of
only one of the traders (A is mistaken, B is not)
– Only one of the traders is mistaken. Make
distinction btwn:
• Mechanical miscalculations
• Errors in business judgment

Mistake
• Mechanical miscalculations
– May provide grounds to relieve mistaken party.
Depends entirely upon SOM of the other trader –
the non-mistaken party – and whether she has
formed a commercially reasonable expectation.

Mistake
– How do you identify a mechanical miscalculation
(MM)? A MM involves a bargain that I did n/
intend to make on these terms. My intention was
betrayed by some error in math (mathematical
miscalculation) or a failure to read the fine print.
Test is whether the bargain made is the bargain
intended.

Mistake
– Can you raise it as a defense? Depends entirely on
state of mind of other party and whether he has
formed a commercially reasonable expectation. If
the other party did n/ subjectively know that I
made a miscalculation and as a reasonable person
would have had no grounds to suspect it, then I
have no basis for a defense. I must eat the deal.

Mistake
– But if the other party is n/ innocent, and
recognizes that this was an offer too good to be
true, then there is no K. Even under objective
standard, you cannot pounce upon what you
recognize to be the mechanical miscalculation of
another trader. If he belatedly discovers his
mathematical error, he may invoke in equity
cancellation or rescission to get out of K

Mistake
– If A makes a mechanical error and B forms a
commercially reasonable expectation, A is bound.
But if B has no commercially reasonable
expectation b/c he knew or should have suspected
the error, A has a defense

Mistake
• Errors in business judgment
– Courts are not sympathetic towards blundering
party and under no circumstances will they afford
that party any relief.
– Errors in business judgment are what makes the
capitalistic system work.
– Although offeror knew that he was taking offeree
for a hellacious ride, the offeree has no defense.

Mistake
• Fact pattern two: Where the intention of the
traders was betrayed b/c of some third party
making an error in communicating the terms
of the bargain.

Mistake
• Here, the offeror knew what he wanted to say,
but a TP selected as an intermediary in the
transaction made a mistake in the
transmission (i.e., dropped a “zero” off of the
price tag).

Mistake
• Rules are identical to those applied to
mechanical miscalculations. If I selected
Western Union as the offeror, and if the
message that Western Union delivers dropped
a zero from what I had written in the dispatch
paper, whether the K is predicated upon your
acceptance of the telegram that you receive
depends upon whether you had a
commercially reasonable expectation.

Mistake
• If you neither knew nor as a reasonable
person had grounds for suspecting that there
was an error in the transmission, there is no K.
• But if you knew that this was an offer too
good to be true, you have no such expectation
and I have a defense. Also, I have a cause of
action against Western Union.

Adopting a Writing (PER)
• Facts must tell you that
– Parties have formed an agreement,
– That they reduced the agreement to a written
expression,
– That the parties are now litigating the terms of
that agreement,
– One of the parties seeks to bring in evidence of
some term that is n/ found w/in the four corners
of the writing they created

This is the PE question!

• Systematic approach to response
– First, make sure all of the facts previously
discussed exist (A and B have formed a K, reduced
it to writing, they are in litigation, and that
someone’s trying to come in w/ evidence of a
term of that agreement that is n/ in that writing)

• Second, is there an integrated writing?
– PER protects only an integrated writing
– Intent of the parties: Both parties must have
intended the written instrument as the full and
final expression of the terms of their agreement
– If they did n/ create the writing w/ that intent, it is
n/ integrated and the PER has no application

–Step 1: Who decides whether the writing is
integrated? The trial judge. PER is a rule of
substantive law. It has nothing to do w/
evidence, but whether the evidence is
legally competent

• Third, judge looks at evidence that other party
is bringing in. She asks herself, “Is that
evidence parole evidence?”
–What makes evidence parole evidence is n/
whether it is written or oral; it has nothing
to do w/ the form of the evidence but w/
the time

– PE is any evidence – whether written or oral – of
any promise, representation or understanding
between the parties who have formed the
integration which was arrived at prior to or
contemporaneous w/ the formation of the
integrated writing.
– Look to time origin of the extrinsic evidence!

– What if the evidence is that a day after A and B
formed an integrated writing, they added a term?
N/ parole evidence. Instead, it’s evidence of a
subsequent modification, n/ governed by parole
evidence rule
– Who decides whether evidence is parole in
nature? The trial judge

• Fourth, if the judge rules that there was an
integrated writing, and that the evidence your
client is trying to introduce is parole evidence,
then the next question is what impact does
the parole evidence have on the integrated
writing?

–Rule: You may n/ use parole evidence to
contradict, vary, or add to the terms of an
integrated writing

–Q: What happens if the evidence doesn’t
have one of these three forbidden traits?
For example, it explains an ambiguity or it
defines a term. Evidence may freely be
admitted b/c it has no forbidden impact.
Only variation, contradiction, and addition
is forbidden parole evidence.
–Trial judge makes this determination

–If judge determines that the evidence is
presented in the veil of an integrated
writing, that it’s parole in nature, that it has
one of the three forbidden traits, the jury
will never know about it. Evidence will be
excluded unless proponent of evidence can
bring it in

• Fifth, exceptions. PE may be admitted
notwithstanding the fact that it varies,
contradicts, or adds. There are three
exceptions:

• # 1: Proof of fraud: Whatever interest society
has in the convenience of having the deal in
writing, it has a greater interest in ferreting
out an individual guilty of fraud. You may
always use parole evidence to prove fraud

• # 2: May use parole evidence on a theory of
partial integration. Party who seeks to get
evidence before jury claims that, on the day
the K was formed, the parties formed a single
K, but they intended this writing to cover
some and n/ all of the terms of that single
agreement. If judge finds this credible, then
she allows evidence to go to the jury on a
theory that it was only partially integrated.

• Two tests that judge must follow in making
this determination:

–Conservative: Four corners test. Judge
allows evidence to come in only if the
writing looks incomplete on its face. Only
then can the proponent introduce evidence
of alleged further additional terms

–Liberal view: If the party who is offering can
supply the judge w/ any credible
explanation as to why the parties left this
term out of the writing, then it might be
admissible even though the writing on its
face appears to be complete and has no
obvious omissions (CA). Scholars argue that
this is eroding the PER.

• # 3: Collateral agreement: Most dangerous
exception. On the day the parties entered the
bargain, they formed n/ one but two
agreements. One agreement is reduced to a
formal integrated writing. Lawyer wants to
prove to jury the terms of the second –
collateral agreement. This all but swallows up
the rule!

• Steps that judge must follow:
–First, judge must determine that the alleged
second agreement is of far lesser
importance than the subject matter
described in the admitted integrated
writing

–Second, no term of the alleged collateral
agreement can contradict any term of the
integrated writing. If the integrated writing
says, “this contains all of the obligations of
the seller,” then buyer would be unable to
establish by a collateral agreement that the
seller had one last obligation

–Third, the subject matter of these two
agreements must bear some similarities so
as to make it rational that the parties would
have considered them as two separate
agreements rather than being part and
parcel of a single business deal
–Who makes this decision? The judge

Step 2
• If you conclude that traders formed an
agreement, is that private bargain a K?
– Private parties form private agreements
– A K is a legal status

Step 2
• Whether a K exists depends upon two elements:
• The presence of valuable consideration –
bargained for legal detriment on both sides of the
exchange, and
– Two elements: It must be (1) bargained for and
(2) there must be legal detriment
• Absence of defenses that would preclude
formation – real defenses
– This issue organizes material on defenses to
enforcement – personal defenses that render
obligation of one of the parties null and void

Step 2
• The presence of valuable consideration –
bargained for legal detriment on both sides of
the exchange
• Four step approach toward issue-spotting

Step 2
• As you look at the fact pattern, ask yourself
whether there is a bargain
– At formation stage, offeror and offeree must have
consciously exchanged promises w/ a view toward
altering their legal rights and liabilities. Bargain is
synonymous with exchange.
– Donative transaction (including gifts) is n/a K b/c there
is no element of bargain
– Past consideration is n/ valuable b/c it lacks element
of bargain
– Moral obligation is n/ valuable b/c there is no element
of bargain

Step 2
• If “yes,” look to the terms of the bargain. Do
each of the exchanged promises or acts
involve “bargained for” legal detriment to the
pr/or or actor? (cut right to the chase to
determine if there is valuable consideration)

Step 2
• Legal detriment defined:
–(1) Bargained for promise to perform any
act which, but for this bargain, “I am not
legally obligated to perform,” OR
–(2) Bargained for promise to forbear from
pursuing a course of conduct which, but for
this bargain, “I am legally privileged to
pursue”

Step 2
• It is the bargained for change in legal position
and n/ any element of economic benefit that
imparts value to valuable consideration

Step 2
• Courts use three terms:
–Want of consideration
–Failure of consideration
–Inadequacy of consideration

Want of Consideration
• Defense to formation of a K. Involves proof at
formation stage of the offer and acceptance
that the other party incurred no legal
detriment. The party who gave a valuable
promise has an absolute defense against being
held liable to perform the K: “There was no
consideration so no K!”

• If, at day parties exchange promises, promise
that B has given has no quality of legal
detriment, A has the defense of want of
consideration. In other words, A’s promise was
legally valuable, B’s was not

• Legal detriment in a bilateral bargain
– Look to each of the promises. Ask: Did A’s promise
involve the promise to do any act which, but for
the attempted bargain w/ B, A was n/ legally
obligated to perform? If so, A’s promise is valuable
consideration

–Did B bring valuable consideration to this
bargain? Did B promise A that she would do
any act, which but for the bargain w/ A, she
was n/ legally obligated to perform? If yes,
she also incurred bargain for legal
detriment. In that case, we have an
executory bilateral K staring us in the face

• Legal detriment in a unilateral bargain
–Jack (Off/or) promises his neighbor (Ned), a
teenage boy, $25 to cut his lawn. Ned can’t
accept by promising, he can only accept by
doing the requested act. If Ned performs
the requested act and brings about
acceptance of Jack’s offer, is there a K?

–Analysis: Did Ned perform a “bargained for”
act which, but for the attempted formation
of a K w/ Jack, Ned was n/ legally obligated
to perform? Yes, Ned had no legal
obligation to mow Jack’s lawn. His act has
quality of legal detriment. Jack’s promise
has the obligation of legal detriment. But
for bargain w/ Ned, Jack had no obligation
to pay him $25.

• Economic adequacy irrelevant
–Legal detriment can be shown where the
party who brings valuable consideration to
exchange is n/ only not injured, but he may
end up advantaged!

–Hypothetical # 1: Matilda makes the
following offer to her nephew, Sam: If you
will take a summer job and save $ 500, I will
take you to the summer home in France
when you graduate from H.S. Assume Sam
gets a summer job and saves $500. Does he
have a contractual claim to have his aunt
take him to France?

– First, did Matilda make an offer? She either made
an offer of a bargain or she just made a donative
declaration.

– Second, assuming proposal was construed as offer to
bargain, Sam would have brought legal detriment to
exchange b/c children have no legal obligation to
work. The act of working is an act which but for the
bargain w/ his aunt, he was n/ legally obligated to
perform. Nor do children have any obligation to save –
i.e., the act of conserving something in a bank
account. Sam would have brought legal detriment
even though he was n/ injured in any sense. He
benefited in the old-fashioned way: by becoming
familiar w/ work. He benefited in an economic sense:
he has $500 in bank account and a contractual right to
go to France.

–Hypothetical # 2: Uncle Bob makes the
following offer to his nephew, Bill: If you will
promise and keep your promise n/ to smoke
and n/ to drink between now and your 21st
birthday, I will write you a check for $5K. Bill
makes promise thus bargaining in bilateral
mode.

– Test: Did Bill bring bargained for legal detriment to
exchange? (1) Bill promised that he would n/ drink
between now and the day he reaches legal
majority. Is that legal detriment? No, it is n/ a
promise to forbear from a course of conduct
which but for the bargain w/ Uncle Bob, Bill had
no legal right to pursue. A minor has no legal right
to consume alcoholic beverages. (2) What about
Bill’s promise that he wouldn’t smoke for the
balance of minority? It’s illegal for a minor to
purchase cigarettes. However, it is n/ illegal for a
minor to consume such things.

–RULE: So long as any element of a proposed
exchange carries the quality of bargained
for legal detriment, it is sufficient to bind
the entire promissory obligation of the
other party.

– (3) What about Bill’s argument that he restricted
his freedom of association for the balance of
minority? This has a quality of legal detriment.
– What result: Uncle isn’t liable for 1/3 of $5K, he’s
liable for $5K. COURTS ARE NOT INTERESTED IN
ECONOMICS OF EXHANGE. Rationale: Parties
should be free to make their own bargains.

• Exceptions to rule that courts are
disinterested in economics of exchange

– Transactions that involve abuse of socially
protected relationship
• Fiduciary relationship: If bargain between A and
B has the characteristic of a fiduciary
relationship, courts insist that there be more
than merely legal detriment. They will
scrutinize the pragmatic advantage of the
exchange in order to decide whether it was a
bargain fair in its terms. A fid. relationship is a
formal relationship of trust and responsibility
(example, lawyer – client)

• Confidential relationships: Chief
characteristics are trust, independence,
and influence. If A and B have a
confidential relationship, law will look
beyond issue of legal detriment on both
sides of exchange and scrutinize it for
fairness of terms

– Promises rendered non-valuable b/c one of the
parties has n/ incurred legal detriment in the
course of the bargained-for exchange. This is
known as the illusory promise
• If, at the formation stage, one of the parties
does n/ incur legal detriment b/c he retains an
unfettered election to perform or n/, his
promise is illusory

• Full performance as cure for missing
consideration
• If there is want of consideration in the
fact pattern, examine facts to see if there
is any subsequent performance on the
part of the individual who gave the
illusory promise which would cure it and
result in the formation of a K

• Hypo: Buyer writes to seller: “If I decide to
order 10,000 barrels of oil, you promise to (1)
accept the order, (2) ship w/in one week, and
(3) grant a 20% discount off of then list prices.”
Seller accepts deal. Is there a deal?

• Analysis: No. Seller has the defense of want of
consideration. Promises made by wholesale
seller are legally valuable. But what did the
buyer do? N/ a darn thing! Buyer gave an
illusory promise. Moment before buyer sent
letter, he was perfectly free to order goods
from this seller or n/, and moment after the
letter was delivered, buyer had the same
measure of freedom. Advise seller to refuse on
the basis of want of consideration.

• Rule: Full performance of the terms of an
illusory promise cures the want of
consideration and produces contractual
liability. If proposal was made on 11/20 and on
12/5 Buyer sends Seller an order for 10,000
barrels of motor oil, that would create K
liability. However, the date of formation would
n/ be 11/20 when they exchanged
communications because on that date there
was no K – it was merely an illusory
undertaking.

• But on 12/5, when there was full performance,
Seller can’t backpedal by saying, “I shouldn’t
have to ship goods b/c Buyer didn’t have to
order them.” Very simply, Buyer did. “The order
is on your desk, now ship the goods!”

• What about part performance of an illusory
promise? While full performance cures, part
performance never does. Suppose Buyer sends
Seller an order for 5,000 barrels of oil. Does
that cure the want of consideration? No. Seller
was n/ obligated to perform unless he got the
benefit of his bargain, which was that he would
receive an order for 10,000 barrels.

– Implication of a legally valuable promise to
overcome the fundamental flaw in the bargain at
the formation stage
• Sweeping reform

• Wood v. Lady Duff Gordon: A formal written agreement
was entered into in which Lady Duff made Wood her
exclusive agent for one year to market her seal of
fashion approval in North America. By the terms of the
agreement, Wood promised three things: (1) to split
any profits that he made 50/50; (2) to account to Lady
Duff once a quarter for any profits; and (3) to protect
the integrity of Lady Duff’s seal of fashion approval w/
necessary copyright protection. Lady Duff signed
agreement in NY. Wood breached agreement w/ Lady
Duff by selling her seal of fashion approval and keeping
the profits. Lady Duff brought a suit against Wood
seeking an accounting

• Argument: Wood raised defense of want of
consideration. Wood didn’t promise Lady Duff
anything – he gave an illusory undertaking: (1)
he promised to split the profits 50/50 but he
never promised there would be any profits; (2)
he promised to account for profits quarterly
but if he didn’t make any profits, there would
be no obligation to account; and (3) he
promised to protect as was necessary Lady
Duff’s seal of fashion w/ patent registration but
if he didn’t sell anything it would never be
necessary.

• Analysis: Ct. examined agreement and declared
that it was a business deal; that it was clear
that on the day the parties met and signed the
writing that they had a mutual business
objective. Both parties implicitly promised they
would exert “best efforts to accomplish that
business objective” and the alleged want of
consideration vanishes

• UCC legislates this result: In every transaction
for the sale of goods, there is a legislatively
imposed covenant of good faith dealing
between the merchants: “I will deal w/ you in
good faith seeking to bring about the
commercial objective of our relationship.”
Want of consideration under UCC is virtually
non-existent for merchants and if it arises in a
common law fact pattern, you can rely upon
the Lady Duff Gordon case and subsequent
performance.

–Promises rendered non-valuable b/c one of
the parties has n/ incurred legal detriment
in the course of the bargained for exchange
– Problems of pre-existing duty

• Example: Student enrolled in a Barbri
course approaches Instructor after class
and says, “I’ll offer you $100 if you
promise to show up tomorrow and give
another lecture on K law.” If Student
were to make such an offer, his promise
of $100 would n/ be binding.

• Analysis: The defect goes back to the very
definition of valuable consideration. Did
Instructor promise to do an act which, but for
the bargain w/ Student, he was n/ legally
obligated to perform? No, Instructor is already
contractually obligated under agreement
between himself and Barbri to give three,
three-hour lectures on K law. Student is an
intended TPB of that K. Instructor’s promise has
no element of legal detriment b/c he has
merely re-stated the tenor of an existing legal
obligation.

– How can you circumvent problem of preexisting
duty? Four solutions CL and UCC have attempted:
• # 1: Any alteration in tenor of existing duty overcomes
defense of want of consideration and brings Instructor
w/in rule of legal detriment.
– If Instructor were to change the tenor of his existing
duty – no matter how insignificant the change
might be (i.e., by promising to show up 30 seconds
earlier than the time called for under his K w/
Barbri, or by staying 15 seconds later, he would
have incurred legal detriment).

–Suppose A and B have a K and A fears that B
will refuse to perform on the day that he is
obligated to perform unless A pays B more
money. If B promises to do his contractual
duty, but only if he is paid an additional $5K,
A can promise B an additional $5K but B
won’t be able to enforce it b/c A has the
defense of want of consideration. But if
there is any alteration in the tenor of B’s
duty, the want of consideration defense is
overcome.

–Here’s what it comes down to. There
are two different kinds of contractors
who are extorting things from their Ks:
those who are intelligent enough to
make a small change in their
preexisting duty. They win! And those
who are n/ smart enough to do that.
They lose!

• # 2: Even if there is no change in the tenor of
the preexisting duty, if B encounters problems
that were neither foreseen or foreseeable at
the formation stage that substantially
interfered with or burdened B’s performance, B
might have an equity of rescission. If, in these
circumstances, A offers B $5K more if he will
tough it out in the face of this adversity and
perform, A’s promise is binding on the theory
that B has given up the right to invoke the
equity of rescission. This is a moral doctrine.

• # 3: Accord and satisfaction supporting
obligation of A to pay $5K more. B must raise a
dispute w/ A over whether he was in fact
bound to perform. If B raises such a dispute in
good faith, then that dispute could potentially
become a self-help remedy called accord and
satisfaction.

• There are three steps:
– Step 1: Good faith bona fide dispute
– Step 2: Accord: Agreement between A and B
resolving their dispute
– Step 3: Satisfaction: Carries out terms of accord
which puts an end to dispute and puts an end to
original terms of K. If there is an element of
compromise between the parties’ positions in the
accord, and each party goes forward and carries out
the terms of the accord, A’s payment of $5K and B’s
performance of the duties A wanted is called
“satisfaction.” A is prohibited from litigating the
issue of whether B was entitled to money

• # 4: UCC approach: Good faith modification.
Code is interested in reason why B won’t
perform. If B, in good faith, tells A that he can’t
perform unless A is willing to pay $5K more, A is
n/ obligated to make that payment or the
promise (A can say, “I’ll see you in court”). But
if A promises the money, his promise is binding.

• Abolishes need for dispute between parties or
any new element of valuable consideration
supporting A’s concession. UCC makes A’s
agreement to any good faith demand by B for a
modification of the terms of the original K
binding on A the moment he consents.

• What is a good faith demand that B can bring?
The good faith the code talks about is steeped
in the morals of the marketplace. If other
merchants in the same trade or calling would
recognize that there was moral legitimacy in
seeking the modification, then the modification
is being asserted in good faith.

• If goods are subject matter, handle pre-existing
duty problem under UCC by asking whether
there is a good faith modification of the K
• If subject matter is services, look for one of
three CL solutions to overcome defense of want
of consideration

Failure of Consideration
• Personal defense
• Defense to enforcement of “my” K duties
• It is assumed that a K was formed at stage of
offer and acceptance but if A can establish failure
of consideration, then he is n/ liable to perform
his K promises b/c other party (B) is already in
present material breach of his promises.
Consequence of being in present material breach
is that consideration has failed!

Inadequacy of Consideration
• Allegation n/ that there was no legal
detriment or that it failed, but that one party
made a stupid bargain
• No defense at all
• IOC is permitted as a defense to subservient
party in a fiduciary or confidential relationship

Step 2
• If the answer to the consideration question is
“no” – i.e., one of the parties didn’t incur legal
detriment – is there any substitute for
valuable consideration present in this fact
pattern? Inquiry: Is this a promissory estoppel
fact pattern?

Step 2
• If you cannot find legal detriment on the part
of one of the traders, and you cannot imply it,
and the subsequent conduct of the traders
does n/ cure the want of consideration, then
there is no contractual relationship.
• In this case, you would proceed to the third
aspect of the second issue. There may be
liability for breach of a promise on the theory
of promissory estoppel.

Step 2
• Promissory estoppel is a significant substitute
for valuable consideration in rendering a
breached promise actionable at law.

Step 2
• If P brings his cause of action on a theory of
promissory estoppel (PE), it is n/ a K claim. PE is a
separate, civil law theory of liability for breach of
promise. It is an alternative to a contractual
analysis.
• As a result of a promise that has been breached,
the promisee (person to whom K is made) alleges
that he is now unjustly impoverished (i.e., worse
off than he was before the promise was made to
him).

Step 2
• Unlike restitution interest protected in action
of quasi K, to recover on a theory of PE it is
not necessary for P to prove that D has been
unjustly enriched. Instead, P merely must
prove that he was unjustly impoverished. PE
action protects reliance interest of aggrieved
party.

Step 2
• Since PE is n/ a K claim, the action is n/
affected by the Statute of Frauds. The fact that
a promise is oral is not a hurdle b/c PE doesn’t
fall w/in SOF.

Step 2
• If, in the case of a promise to convey real
estate which is oral, which has induced the
promisee to make alterations of a substantial
and permanent nature to the property, PE
grants a decree of specific performance
quieting title in the pr/ee. In this instance,
there is no reasonable way to measure an
award through the traditional means of
reliance or money damages.

Step 2
• Elements
– (1) A promise made by one of the parties to
another individual that has the foreseeable quality
of inducing reliance on the part of the individual
to whom the promise was made (n/ sufficient to
find just a promise, promise must have had quality
of foreseeable consequence of inducing reliance)

Step 2
– (2) Detrimental reliance by promisee: In fact, the
promise must have induced reliance on the part of
the pr/ee which could be (1) in the form of actions
taken by pr/ee or (2) actions forborn but these
actions must have been in reasonable expectation
that the promise would be kept!

Step 2
–(3) Breach of promise by promisor

Step 2
–(4) As a result of that breach and as a result
of reliance, the promisee is worse off

Step 2
• If all four elements are satisfied, S 90 requires
a reviewing court to hold the breaching pr/or
bound to the terms of her K at least until the
point necessary to allow the aggrieved party
to recoup his reliance interest.

Step 2
• Hypothetical: John is walking down Main St.
when he spots Colonel Sanders. John pours
out this tail of woe and tragedy in life to the
Col. Moved by compassion, the Colonel
promises that he will grant John a KFC
franchise to promote and market. There has
been no bargain – Colonel has simply made a
promise.

Step 2
• In reliance upon Colonel’s promise, John – at
his own expense – enrolls in a course in
chicken-ology to learn how to prepare the
product. John and his wife take what little
savings they have from their antique business
and plow it into remodeling an abandoned
building in downtown Atlanta that will
function as the place of business.

Step 2
• John converts his spouse and children into
ambassadors of the product: i.e., people who
will eat nothing other than chicken. Colonel
changes his mind and breaches his promise.

Step 2
• Analysis: John could n/ bring an action for loss
of bargain for recovery of damages at law.
Why? Because there is no K (i.e., no offer), so
the element of bargain is missing. But Colonel
did make a promise and John is worse off
today than before he met him.

Step 2
• Element # 1: Would a reasonable person in the
Colonel’s position have foreseen that in order to
take advantage of his promise, John would have
had to take steps to learn how to prepare the
food? Yes. The steps that John took were
reasonable – w/in realm of what was
foreseeable. John would recover the cost of
tuition at Foul University, any expenses that he
incurred in leaving his home and taking up
temporary residence there. These all shifted as
element of loss to the Colonel.

Step 2
• What about the fact that John and wife have sunk
the diminished family fortune into the
construction and remodeling of a chicken palace
in downtown Atlanta? Was that foreseeable to a
reasonable person? Certainly, it would be
foreseeable that some structure would be
required. Assuming that John’s structure was
within the realm of reasonableness, John could
shift incidence of cost to Colonel; but he won’t
get all of the cost, just enough to allow John to
remodel structure for some other economic use.

Step 2
• Psychiatric rehabilitation of loved ones
($100K). Was this type of reliance within the
realm of what was reasonably foreseeable?
No.

Step 2
• To recover on theory of PE, object of law is n/ to
put John in the position he would have been in
had the promise been kept. Instead, it is the far
more conservative approach of putting John back
in the position he was in before the promise was
made (i.e., the position he was in on the day the
Colonel made the promise). Only protects
reliance costs that were foreseeable as a
consequence of the promise and that were
reasonable on John’s part.

Defenses
• If you have found a bargain and qualified it as
a K b/c there is bargained for legal detriment
on both sides of the exchange, before you
leap to the conclusion that a K has been
formed, ask yourself whether the facts reveal
any defenses which would preclude formation
of the K. These are the so called real defenses
which – if they exist –preclude formation of a
K!

Defenses
• There are two types of defenses:
– Real defenses
• Defenses which, if established, preclude the
formation of a K
– Personal defenses
• These defenses acknowledge that a K was
formed but, if established by the party who can
avail himself of the defense, render his K duties
voidable

Defenses
• Look for defenses under four categories
–(1) Defenses centered on form of bargain;
–(2) Centered on problem w/ capacity of one
of the parties to the bargain;
–(3) Content of the bargain; and
–(4) Defense arises b/c society takes offense
at the tactics used by one of the traders in
trying to form the bargain

Defenses Centered on Form of Bargain
• We’re talking about SOF. It is an oral bargain
when the law requires as a price tag for a
remedy that it be in writing
• Neither CL nor UCC imposes any mandatory
form on the bargain. Oral Ks are valid but this
factor may present a problem in litigation if
subject matter of oral bargain falls w/in one of
the categories of the SOF.

• If the subject matter of the oral bargain falls
w/in one of the categories of the SOF and if
there is no written memorandum of essential
terms, then there can be no remedy at law to
recover damages for breach of the K UNLESS
the result of allowing D to invoke the SOF
would be a gross injustice. In that case, courts
will equitably estop D from hiding behind the
SOF.

• Let’s begin in the simplest place: awareness of
the basic subjects which, if they are the
subject matter of the attempted bargain, fall
w/in the statute
–(1) If the subject matter of attempted
exchange is real property or any fixture
permanently attached to the land, the
agreement falls w/in SOF

– (2) Ks for sale of goods fall w/in SOF if their
price is $500 or more
• UCC exceptions – notwithstanding the fact that the
price of goods exceeds $500, an oral bargain for
their purchase and sale will be enforced.
• (1) Under UCC, an oral K for the sale of goods is
enforceable to the extent that the seller has
delivered the goods to the buyer and the buyer has
accepted delivery. The buyer’s oral promise to pay
$50M for goods that have been tendered and
accepted is perfectly binding

• (2) If both of the traders are merchants, a
written confirmation of the terms of the
bargain sent by one merchant to another
satisfies the SOF both as to the sender
and the recipient unless the recipient
objects to its content promptly

• (3) Special goods: Goods custom-tailored
or manufactured to the specific buyer’s
order or specification and n/ suitable for
ordinary resale. To the extent that the
seller has actually begun to manufacture
these goods, the buyer’s oral promise to
pay for them is completely enforceable

–(3) Any K which, by its terms, is incapable of
being performed w/in one year
• If there is ANY possibility – no matter how
remote or improbable – that the K obligations
could be fully performed w/in one year, the
subject was never w/in the SOF though in
actual experience it takes 50 years to carry out
the terms of the bargain

• Hypo: Jack makes an oral promise to support
Jill’s 3 year-old daughter w/ a $10K pay limit for
the rest of her life. This oral promise is not w/in
SOF. Jill’s daughter may die before attaining her
4th birthday. Since the possibility exists that Jack
could fully perform on this promise w/in a year,
it is n/ w/in the statute and as Jill’s daughter is
qualifying for social security, Jack would still be
obligated to make the oral promised payments!

• What’s the consequence of having one of
these subject matters pertain to this particular
transaction?

• If the subject matter of the attempted
exchange falls w/in SOF, then the statute
requires:
– A memorandum of essential terms signed by the
party to be charged

– All that is required to satisfy the SOF is written
evidence of the essential terms. The writing can
be very informal. It doesn’t have to be created w/
any intent to satisfy the statute. We’re looking for
evidence of terms, not intention. If, through
written evidence the essential terms can be
reconstructed, that evidence must relate to the
party to be charged.

–It need only bare signature or
authentication of the party to be charged. P
satisfies SOF w/ respect to the terms of the
bargain when she files the complaint
–No formal signature of the party to be
charged is required – a printed letterhead is
sufficient as is a fax transmission. All that’s
necessary is some means of tracing that
written evidence back to D.

– Any writing(s) from which the court can
reconstruct the essential terms of the bargain are
sufficient. What if that cannot be done? Then D,
whose written memorandum is missing, can avail
herself of a personal defense. K is n/ void, but her
obligations are voidable. D must raise defense in
timely manner. If there is a timely assertion of
defense and D is n/ equitably estopped, then
there can be no recovery of damages at law.

– Therefore, aggrieved party (P) has standing to sue
in equity. Equity courts are n/ historically bound
by SOF. Equity cts. are willing to regard part
performance of the terms of the oral K as an
evidentiary substitute for the missing writing. So
long as the performance points to the K that the P
is alleging, there may be equitable relief in a
decree of specific performance
– If COA is predicated on PE, SOF has no application
since PE is n/ a K claim

Centers on Problem with Capacity of
One of the Parties to the Bargain
• Concern is that one of the traders is a minor or
lacked requisite mental capacity

• Issue 1: Where one of the traders is a minor
– K obligations of minors are voidable even though
their promises do amount to valuable
consideration
– If minor doesn’t assert defense, he is deemed to
have waived it
– If minor asserts the affirmative defense that he
was under the age of legal consent on the day the
K was formed, there is no recovery under the
terms of that K by the adult

– But, if the minor has consumed the benefits of the
K and those benefits are necessaries – food,
clothing, shelter, medical attention – an exception
is made to protect the interest of the adult who
furnished the necessaries.
– P may recover in quasi K for the market value of
the necessaries which the minor received under
the K and has consumed

• Issue 2: Mental incapacity
– Renders voidable the K obligations of an individual
who permanently or temporarily lacked the
mental powers necessary in order to form a K
– If necessaries are the subject matter of the
bargain w/ the person who is mentally
incapacitated, apply same rule as Ks w/ minor.
Recovery would be on a theory of quasi K for
market value of the necessaries. If subject matter
is n/ a necessary, there is no liability at all

–What about an individual who on normal
days is fully possessed of mental faculties,
but on the day the bargain was formed, had
those faculties impaired b/c of some self-
induced difficulty?

– One view: If mental incapacity is of a temporary
nature and was self-induced by the party now
claiming it, the defense cannot be raised
– Majority view: If other person knowingly dealt w/
a person who he should have known was suffering
from the influence of alcohol or drugs, defense
can be raised.

Content of the Bargain
• Centers on some serious social objection to
content of bargain like illegality and
unconscionability

• Illegality
–Time: If the subject matter or participation
of one of the traders is declared illegal at a
time when only the offer is outstanding, it is
revoked by operation of law. If illegality is
established subsequent to formation, but
prior to performance, both parties are
discharged on a theory of impossibility.

– UCC policy on substituted performance: If a K has
been formed and is still executory and an
intervening governmental regulation comes along
(ban on religious gambling) declaring the subject
matter or the participation of one of the parties to
be illegal, then before the merchant can walk
away from the agreement claiming objective
impossibility, he must determine if some
substitute arrangement could be made which is
legal and practical.

– Assuming there is, then the merchant must
offer to perform under modified substitute
arrangement. The other party to the K is n/
obligated to accept that offer of modification.
If he does, then the agreement has been
modified in good faith. If he refuses, then
merchant is able to avoid liability on the
original terms of the K by claiming objective
legal impossibility, so long as he makes
accommodations to try and save the bargain.

–Nature of the illegality: Important b/c it will
determine whether there can be quasi
contractual relief

• Malum in se: If the SM of the bargain or the
participation of one of the parties is intrinsically
evil, then the attempted bargain is void.

• Example: Tony puts out a K on his brother-in-
law w/ a $10K down payment to the hitman.
The subject matter would be intrinsically evil.
Any person who has reached the age of reason
can detect the intrinsic wrongfulness merely by
checking his conscience. There is no K. No ct.
will assist Tony even if he attempts to withdraw
from the transaction and recover $10K. Ct.
house doors will be slammed shut in his face.

• Malum prohibitum: Subject matter is merely
offensive to some regulatory statute that has been
passed for the convenience of society. Wrong only
b/c society has prohibited it. There is no K b/c the
common law of Ks will never clash w/ criminal law.
• The party who rendered valuable services may well
recover in quasi-K for the market value of those
services if she was unaware that the subject matter
was regulated and therefore offensive. Remember:
If subject matter is MP, there is no recovery on the
K!

• Whether there can be a recovery or adjustment
between the parties in quasi-K depends upon
whether they are in pari delicto – aware of fact
that subject matter offends the law. If one of
the parties is innocent (i.e. he is n/ in pari
delicto), then he can recover in quasi-k.

• Status of member of a protected class: If
bargain is merely mp, a person for whose
protection or benefit the gov’t acted in defining
the illegality will be permitted a quasi-
contractual recovery of any performance
rendered, notwithstanding his awareness of
the illegality.

• Hypo: Paul, aged 14, takes a job w/ a local
laundry. The bargain is a clear violation of the
child labor laws of the state in which both
parties reside. The laundry owner later fires
Paul, owing him one week’s work. Paul is a
member of a protected class. As a minor, it was
for his protection that legislative restrictions on
labor were created. Notwithstanding his being
in pari delicto w/ his adult employer, Paul may
recover the FMV of his services.

• Unconscionability
– One of the parties seeks to avail himself of a
privilege which is contrary to public policy,
informing the terms of a bargain
– A seller of an inherently dangerous article
attempts to disclaim implied warranty of
merchantability. If the content of the bargain sees
one of the parties attempt to insert a term
contrary to pubic policy, it is n/ illegal but it is
unconscionable

– A reviewing court may do one of two things in
response to an unconscionable term in a K: (1)
deny relief altogether or (2) court can blue pencil
the bargain to remove or modify the
unconscionable term while enforcing the balance
of the exchange against the parties. A ct. will
exercise these inherent equitable powers to police
against unconscionability if there is no other way
to prevent oppression and surprise by the
dominant party in a transaction.

– This is especially true where at the formation
stage there was no real opportunity to bargain
over the terms of K. Classic “David v. Goliath.” A
dominant party made an adhesion K (take it or
leave it proposition) which b/c of limited ability to
satisfy oppressing need, the other party agreed
to. If the terms of that resulting bargain offend
public policy, it can be policed for
unconscionability.

Society Takes Offense at Tactics Used by One of
the Traders in Trying to Form Bargain
• Fraud
–Fraud in the factum: Any contrivance or
artifice that prevents the fraud victim from
appreciating that a K is even contemplated.
Victim didn’t even know that a K was being
contemplated. A real defense – there is no
K.

–Fraud in the inducement: A personal
defense. The victim is aware that a K has
been contemplated but his consent to enter
the K is induced by deceit or half-truths.
Gives victim the opportunity to assert the
personal defense and have his obligations
voidable.

– Fraud in the execution: The victim is aware that a K is
being formed and his consent is validly obtained.
Fraud surfaces because the bargain is oral and victim
trusts the other party to reduce their oral agreement
to a formal written expression. Other party does and
comes back and says, “here’s our deal, sign this
paper.” Victim trustingly signs paper w/o closely
examining it. Later on, it turns out that the party who
prepared the writing suffered from selective hearing
or convenient amnesia. Now, we have a V of fraud in
the execution and that is a personal defense. The
obligation expressed in the paper is voidable if V
chooses to assert the defense

• Duress (two types)
–Duress of person
–Economic duress

– Duress of person
• Mental or physical force directed against the
victim and they always render the consent
of the V voidable (literally the offer you can’s
refuse – “Your signature on the paper or
your brains on the wall!”)
• Exertion of physical force, or
–Ex. If you do n/ agree, you’ll never live to
see your 30th birthday.
• Threats of duress are treated the same as
duress

–Economic duress
• One party must have some desperate
pressing need for the subject matter,
• The other party – taking conscious
advantage of that need – insists upon
harsh and one-sided terms, and

• There is active wrongdoing on the part of
the aggressor where she (1) creates the
pressure which is driving the victim or (2)
she actively meddles to make the
pressure worse
• Elements: (1) Overwhelming pressure
created by or exacerbated by (2) the
aggressor coupled w/ (3) harsh term.

• Example:
–You roar through San Fernando valley in
your car when it runs out of gas. Nearest
gas station is “Mike’s Station” where gas
is $1K/gallon. Container rents for
$100/minute. You charge the transaction
on your credit card.
–Do you have the defense of economic
duress? No.
–Argument: “I was desperate. She drove
harsh, one-sided terms.”

–Analysis: There is no economic distress
b/c Mike didn’t create the plight that
drove you to his station. There would
be economic distress only if you
stopped for a burger next door and
while you were distracted, Mike
drained your tank. If Mike is
responsible for your circumstance,
then economic distress exists.

• Procedural Unconscionability
– One of the parties at the formation stage uses
formation tactics designed to deprive the other
trader of a fair opportunity to appreciate the
terms that she is objectively consenting to.

– This is the individual who does business in fine
print or expresses the terms of the K in
legalese and then takes the fine print
document into an area of dealing w/
consumers who would never be able to notice
the terms in which they’re waiving all the
warranties. In other words, one party prevents
the other party from having a fair opportunity
to appreciate the terms of the bargain to which
the latter appears to objectively be giving their
consent.

Review of Two Major Issues of
Contract Law
• Assume you have found an agreement
• You want to qualify that agreement as having
about it the elements of legal enforceability.
There are two ways:
– Is there a legally binding contract? or
– Promissory Estoppel

Existence of Legally-Binding Contract
• First, is there a bargain?
– If there is a bargain, it is presumed to be an executory
K
• Second, if there is a bargain, what are the terms
of this bargain on the day it was formed? Did
each of the traders incur bargained for legal
detriment?
• Third, look for defenses that would preclude
formation (real defenses) or enforcement of the
terms of the bargain (personal defenses)

Promissory Estoppel
• If there is no bargain at all, but merely a
promise that has been breached which left
the promisee worse off than on the day she
received the promise, review the fact pattern
for the elements of promissory estoppel.

Issue Spotting
• Hypo: Bob, a wealthy investor whose hobby
consists of growing orchards, wants to help
Mildred, his widowed daughter-in-law. Bob writes
her the following signed letter: “If you will come
to my estate and cultivate my orchards, you can
have room, board, and $500/month until my
death.” Mildred moves from her residence from
another state to Bob’s estate where she tends to
the orchards. One year later, Bob evicts Mildred
and terminates monthly payments of $500 w/o
reasonable provocation. Mildred files suit against
Bob.

Issue Spotting
• This question raises two of the possible issues.

Issue Spotting
• Issue # 1: Is there an agreement? Is there an
offer? There is no stipulation so you must
search for it in fact pattern. Was the letter the
offer of a bargain or a disguised gift? If Bob’s
intention was to make a gift, there is no
liability in K. But if he offered a bargain, there
may be.

Issue Spotting
• Were there any obligations imposed by this
arrangement on the other party? If there were
and if they benefited Bob in a pragmatic
sense, then that was the offer of a bargain.
Mildred has duties under arrangement
articulated by Bob – to tend to the orchards
and by Bob’s own admission, “they’re too
burdensome.” Bob benefits if Mildred does it.
Many courts would construe this offer as a
bargain.

Issue Spotting
• Issue # 2: Was the offer still alive at the time
acceptance was attempted? If there was an
offer to bargain, it was to bargain in the
unilateral mode. Bob sought no promise from
Mildred – he wanted an act. The only way to
accept an offer in the unilateral mode is to
complete the requested performance – i.e., to
tend to the orchards until Bob dies. Bob is
alive and kicking, indeed he kicked Mildred off
his estate!

Issue Spotting
• There is a revocation problem with the offer
while the offeree is merely attempting to
accept. At the time Bob attempted to revoke
the offer, Mildred had been working for 18
months. Surely she has made a substantial
commencement of the requested act that
would cut off Bob’s power to revoke, so as to
give her a reasonable opportunity to
complete.

Issue Spotting
• Was the acceptance defective? No, Bob told
Mildred what to do and she did it efficiently. She
has been discharged w/o provocation. Is the
agreement a K? Is there bargained for detriment
on the part of Mildred? But for the attempted
formation of the bargain w/ Bob, she had no legal
obligation to leave her home in another state,
relocate to Bob’s estate, and take up these duties.
• Any problems w/ defenses? No. Bob would be
estopped from revoking the offer.

Issue Spotting
• Alternative rationale in PE:
– Did Bob make a promise? Yes.
– Did Bob’s promise have foreseeable consequence
of inducing reliance on promisee’s part? Yes.

Issue Spotting
– Did it in fact induce reliance that was reasonable
in dimension and w/in the realm of the
foreseeable that Mildred would have to leave her
home in order to take up the tending of the
orchards? Yes.
– If Mildred can only recover in PE, she will n/
receive the expectation interest, only a sum of
money sufficient to put her back in the position
she was in on the day she received the letter. Any
expenses or losses that she incurred in disposing
of her home would be recoverable but that would
be all.

Step 3
• Examine fact pattern and ask: “Do the terms
of this K or the subsequent actions of either or
both of the parties who formed it confer any
rights or impose any duties upon non-
traders?”

Step 3
• If conclude that traders have formed an
agreement and you have qualified that
agreement as having the legal status of a
contractual relationship, ask: do the terms of
that K or the subsequent conduct of either of
the parties who formed it confer any rights or
impose any duties upon non-traders

Step 3
• This issue deals w/ third party beneficiaries –
persons whose rights are defined by terms of
original K
• Assignees of rights and delegates of duties
enter picture subsequent to formation of K in
consequence of an action of one of the parties
who formed it

Step 3
• A non-trader is any person who, at formation stage
of agreement, was neither the offeror nor the
offeree. Where the non-trader’s rights arise by the
initial terms of the K, the relationship involved is that
of a potential intended TPB.

Step 3
• But if the terms of the original K are silent w/
respect to any non-traders, but subsequent to
the formation of that bargain, one of the
traders takes the unilateral step of identifying
a stranger and then seeks to transfer to that
stranger the right to receive performance
owed to the party by the other trader to the
bargain, you have an attempted assignment of
K rights.

Step 3
• Another possibility: The original K makes no
reference to non-traders, but subsequent to
the formation of the bargain, one of the
traders takes the unilateral step of identifying
a non-trader and seeks to make an
arrangement w/ that non-trader under the
terms of which the non-trader will assume the
obligation to perform the duties owed by the
trader to the other party under the terms of
the K (delegation of K duties)

Summary of Steps for an Assignment
• Step 1: Is there a present assignment? Intent,
suitable steps, suitable sm
• Step 2: If yes, is the assignment operative
focusing on common law notion that you can n/
unilaterally use an assignment to materially alter
the nature of duty or risks assumed by party in
forming K. If the K provisions have been altered,
determine whether they have succeeded in
making assignment illicit or whether they have
extinguished the power

• Step 3: Look to facts to see if there is
revocation. This is appropriate when there is
evidence that the assignor has changed her
mind either by attempting to personally
reacquire dominion over subject matter or by
setting it up in rival subsequent assignees. In
the latter case, identify which of the rival
assignees possesses the prevailing claim

• Step 4: In the event that there is a present
operative assignment, the right to that sm is
exclusively in the province of the assignee. In
the event that the obligor breaches by failing,
refusing, or by defectively performing, the
cause of action at law or in equity to cure the
breach of K belongs to assignee.

• Obligor may raise any defense that could be
asserted against the assignor had there never
been an assignment. May be used to defeat
liability on grounds that K was void or obligations
voidable b/c since the assignee stands in shoes of
assignor, she could never have rights greater than
the assignor. Assignee is vulnerable to any
counterclaim and to setoffs if they accrued prior
to the date on which assignee made her presence
and demand known to the obligor

Step 4
• Step 4: Once you have determined all of the
persons who may have rights or duties on this
K, have the performance obligations created
by the K matured?

Step 4
• Fix a time and order for the performance of the
promises which the parties have exchanged
• Law of conditions
• Once you have determined the identity of all
persons – traders and nontraders – who might
have rights or duties on a K ask: “Have the
performance obligations created by the K
matured?” This q requires fixing a schedule under
which the performance should take place. This is
accomplished by applying the law of conditions.

Step 5
• Step 5: If the K obligations have matured, has
performance been excused? Canvass fact pattern
for the potential presence of doctrine of
excusable non-performance.
– We have been speaking about excuse of
conditions. We are now speaking about excusable
non-performance
– The refusal of a party to perform what is
otherwise a fully matured K promise may be a
matter of legal privilege if it has been discharged
or excused on the theory of (1) impossibility, (2)
impracticability, or (3) frustration of purpose

Step 5
• Excusable nonperformance can arise in three
fact patterns
–Objective impossibility
–Commercial impracticability
–Frustration of purpose

Objective impossibility
• If, subsequent to the formation of the bargain,
either physical or legal barriers arise so as to
render the obligor’s promised performance
objectively impossible, such an obligor is
excused by operation of law

• Critical factor: Performance must be
objectively impossible. Means that given the
circumstances as they have changed
subsequent to formation of the bargain, n/
only must the pr/or be unable to perform, but
there must be no person on the face of the
earth who could carry out the terms of the
pr/or’s obligation.

• If the only consequence of the after arising
barriers are that pr/or cannot perform, though
another person w/ greater capacity could, that
is called “subjective impossibility” and is no
excuse at all

• Example of an obligation which has become
objectively impossible: Suppose Fox has
agreed to paint the inside of Brown’s house
and midway through the work, w/o fault of
either party, Brown’s house is destroyed by
fire. This destruction would discharge Fox’s
obligation to complete the painting. N/ only
could Fox n/ paint what is now a pile of ruble,
but there is no one on the face of the earth
that could give a pile of ashes a coat of paint.

• If it’s impossible, it can’t be done

Commercial Impracticability
• If essence of objective impossibility is physics
and the barriers that physics present,
commercial impracticability has as its essence
economics

• Something is impracticable when it cannot be
accomplished except by an expenditure of
funds grossly disproportionate to the agreed-
upon stage. Party is not claiming that, “I can’t
do it.” Instead, the party is claiming that, “To
do it would cost me so much more than either
you or I anticipated at the formation date that
it is unfair to hold me to my promise.”

• To claim an excuse based on commercial
impracticability, a party must show that the
factors that arose subsequent to formation
were not foreseen by either party at the
formation stage.

• UCC makes more readily available the doctrine
of excuse premised on CI. It is sufficient if:
– I can prove that at the formation stage neither you
nor I anticipated these after-arising factors, and
– Show that these after-arising circumstances have
thrust upon me costs which are wholly
disproportionate to what we had assumed

• Then I am legally privileged n/ to perform

• If it’s impracticable, it now costs too much to
do it

Frustration of Purpose
• Does n/ involve a claim that performance is
physically impossible or legally impossible or
economically impracticable
• Subsequent to formation of bargain,
circumstances have so drastically changed that
your performance is no longer of any value or
utility to the other party. The other party asks to
be excused from having to perform his promise to
you on the grounds of “frustration.”

Frustration of Purpose
• If it’s frustrated, it’s no longer worth the
original cost

Step 6
• Step 6: Breach and its remedial consequences.
If performance obligations created by K have
matured and they have n/ been excused and
factually they have n/ been performed, you
are in the presence of breach

Step 6
• A party to a K which had a fully matured
obligation has either:
–Failed to perform,
–Refused to perform, or
–Defectively performed

Step 6
• In the face of breach, there are two critical
things to be on the lookout for:
– Affirmative obligations of the aggrieved parties:
Faced w/ a breach of the K, determine what the
impact of that breach is upon the affirmative
duties of the aggrieved party
– Everyone instinctively rushes to this point:
Remedies (remedial rights that accrue to
aggrieved party)

Contracts 101: Nuts & Bolts of Contracts Law

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