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Unit 2 Tutorials: Bases of Liability INSIDE UNIT 2

Contracts

General Perspectives on Contracts

Sources of Contract Law

Different Types of Contracts

Contract Formation

Unenforceable Contracts

Statute of Frauds

Contract Remedies

Monetary Awards

Equitable Remedies: Specific Performance and Injunction

Remedies in General Under the Uniform Commercial Code

Seller's Remedies Under the Uniform Commercial Code

Buyer's Remedies Under the Uniform Commercial Code

Limitations on Contract Remedies

Torts

Introduction to Tort Law

Intentional Torts

Negligent Torts: Liability

Negligent Torts: Damages and Defenses

Theories of Strict Tort Liability

Strict Liability

Products Liability

Negligent Products Liability

Strict Products Liability

Problems with Strict Products Liability

General Perspectives on Contracts

by Sophia Tutorial



In this lesson, you will learn about contracts as a legal concept, and the role they take in society.

Specifically, this lesson will cover:

1. Historical View of Contracts

2. Economic View of Contracts

1. Historical View of Contracts

The contract is probably the most familiar legal concept in our society because it is so central to our political,

economic, and social life. In conversation, the term is used interchangeably with agreement, bargain,

undertaking, or deal; but whatever the word, it embodies our notion of freedom to pursue our own lives

together with others.

Contracts are central because they are the means by which a free society orders what would otherwise be

disorder. So commonplace is the concept of contract - and our freedom to make contracts with each other -

that it is difficult to imagine a time when contracts were rare, an age when people’s everyday associations

with one another were not freely determined and agreed upon.

Yet in historical terms, it was not so long ago that contracts were rare, entered into if at all by very few.

IN CONTEXT

In “primitive” societies and in medieval Europe, from which our institutions sprang, the relationships

among people were largely fixed; traditions spelled out duties that each person owed to family,

tribe, or manor.

The movement toward contracts, then, went hand-in-hand with the emerging industrial order from

the fifteenth to the nineteenth centuries, as England, especially, evolved into a booming mercantile

economy with all that that implies— flourishing trade, growing cities, an expanding monetary system,

commercialization of agriculture, and mushrooming manufacturing. Contract law was created out of

necessity.

Not until the nineteenth century, in both the United States and England, did a full-fledged law of contracts

arise together with modern capitalism.

 BIG IDEA

WHAT'S COVERED

Contract law did not develop according to a conscious, intentional plan. It was a response to changing

conditions, and the judges who created it frequently resisted, preferring the quieter, imagined pastoral life of

their forefathers.

2. Economic View of Contracts

In "An Economic Analysis of Law" (1973), Judge Richard A. Posner (a former University of Chicago law

professor) suggests that contract law performs three significant economic functions:

1. It helps maintain incentives to individuals to exchange goods and services efficiently.

2. It reduces the costs of economic transactions because its very existence means that the parties need not

go to the trouble of negotiating a variety of rules and terms already spelled out.

3. The law of contracts alerts the parties to trouble spots that have arisen in the past, thus making it easier

to plan the transactions more intelligently and avoid potential pitfalls.



In this lesson, you were introduced to the historical view of contracts, learning that a contract is the

mechanism by which people in modern society make choices for themselves, as opposed to being

born or placed into a status. You also learned about the economic view of contracts, in which the

contract serves several specific economic purposes.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "General Perspectives on Contracts" tutorial.

SUMMARY

Sources of Contract Law

by Sophia Tutorial



In this lesson, you will learn more about where contract law comes from. Specifically, this lesson will

cover:

1. Case (Common) Law and the Restatement of Contracts

2. Statutory Law and the Uniform Commercial Code

a. A Brief History of the UCC

b. The Basic Framework of the UCC

3. Three Basic Contract Types

4. The Convention on Contracts for the International Sale of Goods

1. Case (Common) Law and the Restatement of Contracts

Because contract law was forged in the common law courtroom, hammered out case by case by individual

judges, it grew in the course of time to house volumes of written decisions. By the early twentieth century,

tens of thousands of contract disputes had been submitted to the courts for resolution, and the published

opinions, if collected in one place, would have filled dozens of bookshelves. Clearly this mass of case law was

too unwieldy for efficient use.

A similar problem had developed in the other leading branches of the common law. Disturbed by the

profusion of cases and the resulting uncertainty of the law, a group of prominent American judges, lawyers,

and teachers founded the American Law Institute in 1923 to attempt to clarify, simplify, and improve the law.

One of its first projects, and ultimately one of its most successful, was the drafting of the Restatement of the

Law of Contracts, completed in 1932. A revision, the Restatement (Second) of Contracts, was undertaken in

1946 and finally completed in 1979.

The Restatements (others exist in the fields of torts, agency, conflicts of laws, judgments, property, restitution,

security, and trusts) are a detailed collection of the law embodied in these decided cases. They are broken

down into various principles that have emerged from the courts, and to the maximum extent possible, the

Restatements declare the law as the courts have determined it to be.

The Restatement of Contracts won prompt respect in the courts and has been cited in innumerable cases.

The Restatements are not authoritative, in the sense that they are not statutes or actual judicial precedents,

but they are nevertheless weighty interpretive texts, and judges frequently look to them for guidance. They

are as close to “black letter” rules of law as exist anywhere in the American legal system for judge-made

(common) law.

WHAT'S COVERED

 TERM TO KNOW

Restatement of the Law of Contracts

A summary of U.S. case law regarding contracts compiled by the American Law Institute and considered to be

authoritative. It is currently in its second form as the Restatement (Second) of the Law of Contracts.

2. Statutory Law and the Uniform Commercial Code

Common law contract principles govern contracts for real estate and for services, obviously very important

areas of law. But in one area, the common law has been superseded by an important statute: the Uniform

Commercial Code (UCC), especially Article 2, which deals with the sale of goods.

 TERM TO KNOW

Uniform Commercial Code (UCC)

A uniform act relating to commercial law that has, over time, been adopted in all 50 states, the District of

Columbia, and U.S. territories. It is not a federal law, but its adoption throughout the U.S. makes interstate

commercial transactions harmonious, although not all states have adopted all parts of the UCC.

2a. A Brief History of the UCC

The UCC is a model law developed by the American Law Institute and the National Conference of

Commissioners on Uniform State Laws; it has been adopted in one form or another in all fifty states, the

District of Columbia, and the American territories. It is the only “national” law not enacted by Congress.

Before the UCC was written, commercial law varied, sometimes greatly, from state to state. This first proved a

nuisance and then a serious impediment to business as the American economy became nationwide during the

twentieth century.

Although there had been some uniform laws concerned with commercial deals - including the Uniform Sales

Act, first published in 1906 - few were widely adopted and none nationally. As a result, the law governing sales

of goods, negotiable instruments (such as a check drawn on a bank), warehouse receipts, securities, and

other matters crucial to doing business in an industrial, market economy was a crazy quilt of untidy provisions

that did not mesh well from state to state.

But in so doing, many of these states changed particular provisions. As a consequence, the Uniform

Commercial Code was no longer so uniform. Responding to this development, the American Law Institute

established a permanent editorial board to oversee future revisions of the code.

Various subcommittees went to work redrafting, and a 1962 Official Text was eventually published. Twelve

more states adopted the code, eleven of them the 1962 text. By 1966, only three states and two territories had

failed to enact any version: Arizona, Idaho, Louisiana, Guam, and Puerto Rico.

Meanwhile, non-uniform provisions continued to be enacted in various states, particularly in Article 9, Secured

Transactions, to which many amendments have been made. In 1971, a redraft of that article was readied and

the 1972 Official Text was published. By that time, Louisiana was the only holdout. Two years later, in 1974,

Louisiana made the UCC a truly national “law” when it enacted some, but not all, of the 1972 text (significantly,

Louisiana has not adopted Article 2, Sales).

Additional major changes were made in 1978 and 1994 to Article 8, Investment Securities, necessitated by the

electronics revolution that led to new ways of transferring investment securities from seller to purchaser.

Beginning in 1998, various changes have been made to Article 9, "Secured Transactions," which are like

mortgages or liens that provide security for debts and obligations.

From this brief history, it is clear that the UCC is now a basic law of relevance to every business and business

lawyer in the United States, even though it is not entirely uniform because different states have adopted it at

various stages of its evolution— an evolution that continues still.

2b. The Basic Framework of the UCC

The UCC embraces various aspects of “commercial transactions,” that may include, for example, the making

of a contract for the sale of goods, the signing of a check, the endorsement of the check, and so on. However,

the UCC presupposes that each of these transactions is a facet of one single transaction: the sale of and

payment for goods. The Code deals with phases of this transaction from start to finish.

These phases are organized according to the following “articles,” which have had to evolve quickly in recent

years due to the high impact of technology:

Sales: Article 2

Leases: Article 2A

Negotiable Instruments (formerly Commercial Paper): Article 3

Bank Deposits and Collections: Article 4

Funds Transfers: Article 4A

Letters of Credit: Article 5

Bulk Sales: Article 6

Documents of Title: Article 7

Investment Securities: Article 8

Secured Transactions: Article 9

We now turn our attention to the sale— the first facet, and the cornerstone, of the commercial transaction.

Sales law is a special type of contract law in that Article 2 applies only to the sale of goods, defined (Section

2-105) in part as “all things... which are movable at the time of identification to the contract for sale other than

the money in which the price is to be paid....” Thus, the only contracts and agreements covered by Article 2

are those relating to the present or future sale of goods (as opposed to a sale of services or real estate).

In certain cases, the courts have difficulty in determining the nature of the object of a sales contract. How can

goods and services be separated in contracts calling for the seller to deliver a combination of goods and

services?

This difficulty frequently arises in product liability cases in which the buyer sues the seller for breach of one of

the UCC warranties.

 EXAMPLE You go to the hairdresser for a permanent and the shampoo gives you a severe scalp rash.

May you recover damages on the grounds that either the hairdresser or the manufacturer breached an

implied warranty in the sale of goods?

 EXAMPLE Say a contract involves delivery of materials, such as hauling a load of stones for a construction project. In such cases, a court may have difficulty determining if the contract is actually for

services or for materials (goods). The UCC will probably not apply if labor is a significant part of the

contract.

 TERM TO KNOW

Sale of Goods

Contracts covered by Article 2 of the Uniform Commercial Code involving the sale of goods between

merchants where title passes from seller to buyer for a price.

3. Three Basic Contract Types

With this brief description of the UCC, it should now be clear that the primary sources of law for the three

basic types of contracts are:

Real estate: common law

Services: common law

Sale of goods: UCC (as interpreted by the courts)

Common law and UCC rules are often similar.

 EXAMPLE Both require good faith in the performance of a contract.

However, there are two general differences worth noting between the common law of contracts and the

UCC’s rules governing the sales of goods:

1. The UCC is more liberal than the common law in upholding the existence of a contract.

 EXAMPLE In a sales contract (covered by the UCC), “open” terms, or terms that the parties have not agreed upon, do not require a court to rule that no contract was made. However, open terms in a non-

sales contract will frequently result in a ruling that there is no contract.

2. Although the common law of contracts applies to every person equally, “merchants” sometimes receive

special treatment under the UCC, particularly where it concerns formation of a contract. By “merchants,” the

UCC means persons who have special knowledge or skill and who deal in the goods involved in the

transaction.

4. The Convention on Contracts for the International Sale of Goods

A Convention on Contracts for the International Sale of Goods (CISG) was approved in 1980 at a diplomatic

conference in Vienna. (A convention is a preliminary agreement that serves as the basis for a formal treaty.)

The Convention has been adopted by several countries, including the United States.

The Convention is significant for three reasons:

1. The Convention is a uniform law governing the sale of goods— in effect, an international Uniform

Commercial Code. The major goal of the drafters was to produce a uniform law acceptable to countries with

different legal, social, and economic systems.

2. Second, although provisions in the Convention are generally consistent with the UCC, there are significant

differences.

 EXAMPLE Under the Convention, consideration is not required to form a contract, and there is no Statute of Frauds (a requirement that some contracts be evidenced by a writing to be enforceable).

3. Finally, the Convention represents the first attempt by the U.S. Senate to reform the private law of business

through its treaty powers, for the Convention preempts the UCC if the parties to a contract elect to use the

CISG.



In this lesson, you learned that the main sources of contract law are case (common) law and the

Restatement of Contracts, statutory law via the Uniform Commercial Code for contracts involving

the sale or leasing of goods, and treaty law via the Convention on Contracts for the International

Sale of Goods.

There are three basic contract types: real estate, services, and sale of goods. Common law is the

primary source for real estate and services contracts, while the UCC is the primary source for

contracts involving the sale of goods. You also learned a brief history and the basic framework of the

UCC to gain a better understanding of how it applies to specific contracts.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "General Perspectives on Contracts" tutorial.



Restatement of the Law of Contracts

A summary of U.S. case law regarding contracts compiled by the American Law Institute and considered to

be authoritative. It is currently in its second form as the Restatement (Second) of the Law of Contracts.

Sale of Goods

Contracts covered by Article 2 of the Uniform Commercial Code involving the sale of goods between

merchants where title passes from seller to buyer for a price.

Uniform Commercial Code (UCC)

A uniform act relating to commercial law that has, over time, been adopted in all 50 states, the District of

SUMMARY

TERMS TO KNOW

Columbia, and U.S. territories. It is not a federal law, but its adoption throughout the U.S. makes interstate

commercial transactions harmonious, although not all states have adopted all parts of the UCC.

Different Types of Contracts

by Sophia Tutorial



In this lesson, you will learn about the classifications of several common types of contracts and their

functions. Specifically, this lesson will cover:

1. Contract Classifications

2. Explicitness

a. Express Contracts

b. Implied Contracts

c. Quasi-Contracts

3. Mutuality

a. Bilateral Contracts

b. Unilateral Contracts

4. Enforceability

a. Illegal Contracts

b. Voidable Contracts

c. Unenforceable Contracts

5. Degree of Completion

a. Executory Contract

1. Contract Classifications

Contracts are not all cut from the same die. Some are written, some are oral; some are explicit, some are not.

Because contracts can be formed, expressed, and enforced in a variety of ways, a taxonomy of contracts has

developed that is useful in lumping together similar legal consequences.

In general, contracts are classified along these dimensions:

Explicitness

Mutuality

Enforceability

Degree of completion

We will examine each of these concepts in turn.

2. Explicitness

WHAT'S COVERED

Explicitness is concerned with the degree to which the agreement is manifest to those not party to it.

Explicit contracts include:

Express contracts

Implied contracts

Quasi-contracts

 TERM TO KNOW

Explicitness

The requirement that a contract, whether express or implied, be clearly stated and understandable to those

not a party to it.

2a. Express Contracts

An express contract is one in which the terms are spelled out directly.

The parties to an express contract, whether written or oral, are conscious that they are making an enforceable

agreement.

 EXAMPLE An agreement to purchase your neighbor’s car for $500 and to take title next Monday is an express contract.

 TERM TO KNOW

Express Contract

A contract that is expressed in words, either oral or written, with all of its terms set forth.

2b. Implied Contracts

An implied contract is one that is inferred from the actions of the parties.

Although no discussion of terms took place, an implied contract exists if it is clear from the conduct of both

parties that they intended there be one.

 EXAMPLE A delicatessen patron who asks for a “turkey sandwich to go” has made a contract and is obligated to pay when the sandwich is made. By ordering the food, the patron is implicitly agreeing to the

price, whether posted or not.

 TERM TO KNOW

Implied Contract

A contract that is inferred from the parties’ actions demonstrating their intent to enter into a contract but

without expressing it in words. An example is ordering food in a restaurant and expecting to pay for it.

2c. Quasi-Contracts

Both express and implied contracts embody an actual agreement of the parties. A quasi-contract, by contrast,

is an obligation said to be “imposed by law” in order to avoid unjust enrichment of one person at the expense

of another.

In fact, a quasi-contract is not a contract at all; it is a fiction that the courts created to prevent injustice.

 EXAMPLE Suppose that a carpenter mistakenly believes you have hired him to repair your porch; in fact, it is your neighbor who has hired him. One Saturday morning, he arrives at your doorstep and begins

to work. Rather than stop him, you let him proceed, pleased at the prospect of having your porch fixed for

free (since you have never talked to the carpenter, you figure you need not pay his bill). Although it is true

there is no contract, the law implies a contract for the value of the work.

 TERM TO KNOW

Quasi-Contract

A legal fiction that recognizes legal obligations even when parties did not overtly agree to a contract to avoid

unjust enrichment. An example would be babysitting services provided for a parent who had to be rushed to a

hospital.

3. Mutuality

Mutuality takes into account whether promises are exchanged by two parties or only one.

 TERM TO KNOW

Mutuality

The requirement that a contract contain mutual promises or obligations.

3a. Bilateral Contracts

The garden-variety contract is a bilateral contract, in which the parties make mutual promises.

Each is both promisor and promisee; that is, each promises to do something and each is the recipient of such

a promise.

 TERM TO KNOW

Bilateral Contract

A contract where both parties have an obligation to perform, as in the sale of a house where buyer pays

money and seller conveys title to the house.

3b. Unilateral Contracts

While common, mutual promises are not necessary to constitute a contract. Unilateral contracts, in which only

one party makes a promise, are equally valid but depend upon performance of the promise to be binding.

 EXAMPLE If Charles says to Fran, “I will pay you five dollars if you wash my car,” Charles is contractually bound to pay once Fran washes the car. Fran never makes a promise, but by actually

performing, she makes Charles liable to pay.

 EXAMPLE Ella sees a sign that offers $50 for the return of a lost dog. Ella never makes a promise to

the offeror, but if she looks for the dog and finds it, she is entitled to the $50.

 TERM TO KNOW

Unilateral Contract

A contract where only one party makes a promise and is not binding on the other party until performance

occurs. An example would be a reward for a lost pet. No one is obligated to find the pet, but when someone

does, the promise of a reward becomes binding.

4. Enforceability

Enforceability is the degree to which a given contract is binding. Not every agreement between two people is

a binding contract.

 TERM TO KNOW

Enforceability

The degree to which a given contract is binding.

4a. Illegal Contracts

An agreement that is lacking one of the legal elements of a contract is said to be void— that is, not a contract

at all.

 EXAMPLE A promise to commit a crime in return for a monetary payment is an illegal agreement; therefore, it is void.

Neither party to a void “contract” may enforce it.

 TERM TO KNOW

Illegal Agreement

A contract that is not valid or enforceable since its object is illegal, as in a promise of payment for doing

something illegal. Such a contract is void.

4b. Voidable Contracts

By contrast, a voidable contract is one that is unenforceable by one party but enforceable by the other.

A minor (any person under eighteen, in most states) may "avoid" a contract with an adult; the adult may not

enforce the contract against the minor if the minor refuses to carry out the bargain. But the adult has no choice

if the minor wishes the contract to be performed. Note, however, that a contract may be voidable by both

parties if both are minors.

Ordinarily, the parties to a voidable contract are entitled to be restored to their original condition.

 EXAMPLE Suppose you agree to buy your seventeen-year-old neighbor’s car. He delivers it to you in exchange for your agreement to pay him next week. He has the legal right to terminate the deal and

recover the car, in which case you will of course have no obligation to pay him. If you have already paid

him, he still may legally demand a return to the status quo ante (previous state of affairs). You must return

the car to him; he must return the cash to you.

A voidable contract remains a valid contract until it is voided. Thus, a contract with a minor remains in force

unless the minor decides he does not wish to be bound by it. When the minor reaches his majority, he may

“ratify” the contract - that is, agree to be bound by it - in which case the contract will no longer be voidable

and will thereafter be fully enforceable.

 TERM TO KNOW

Voidable Contract

A contract that is unenforceable by one party but enforceable by the other party, as in a contract made with a

minor.

4c. Unenforceable Contracts

An unenforceable contract is one that some rule of law bars a court from enforcing.

 EXAMPLE Tom owes Pete money, but Pete has waited too long to collect it and the statute of limitations has run out. The contract for repayment is unenforceable and Pete is out of luck, unless Tom

makes a new promise to pay or actually pays part of the debt. However, if Pete is holding collateral as

security for the debt, he is entitled to keep it; not all rights are extinguished because a contract is

unenforceable.

5. Degree of Completion

Completion considers whether the contract is yet to be performed or the obligations have been fully

discharged by one or both parties.

 EXAMPLE Suppose John agrees to sell Humphrey a quantity of wheat in one month. On the appointed day, Humphrey refuses to take the wheat or to pay. The law of contracts holds that a valid

contract exists and that Humphrey is required to pay John.

5a. Executory Contract

An agreement consisting of a set of promises is called an executory contract before either promise is carried

out. Most executory contracts are enforceable.

If one promise or set of terms has been fulfilled (e.g., if John had delivered the wheat to Humphrey), the

contract is called partially executed. A contract that has been carried out fully by both parties is called an

executed contract.

 TERMS TO KNOW

Executory Contract

A contract for which performance has not yet been completed.

Executed Contract

A contract that has been carried out fully by both parties.



In this lesson, you learned that contracts are classified based on their explicitness, mutuality,

enforceability, and degree of completion. Contracts have different degrees of explicitness, or clarity

and apparentness to third parties, that range from express to implied. Quasi-contracts, however,

represent legal obligations rather than actual agreements.

Contracts also have different degrees of mutuality, because they can be either bilateral or unilateral.

Enforceability is a third dimension by which contracts are classified. Most contracts are binding unless

they are illegal, but some are voidable or unenforceable in certain circumstances. Lastly, contracts

differ based on their degree of completion, meaning whether they are executory or executed.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "General Perspectives on Contracts" tutorial.



Bilateral Contract

A contract where both parties have an obligation to perform, as in the sale of a house where buyer pays

money and seller conveys title to the house.

Enforceability

The degree to which a given contract is binding.

Executed Contract

A contract that has been carried out fully by both parties.

Executory Contract

A contract for which performance has not yet been completed.

Explicitness

The requirement that a contract, whether express or implied, be clearly stated and understandable to those

not a party to it.

Express Contract

A contract that is expressed in words, either oral or written, with all of its terms set forth.

Illegal Agreement

A contract that is not valid or enforceable since its object is illegal, as in a promise of payment for doing

something illegal. Such a contract is void.

Implied Contract

A contract that is inferred from the parties’ actions demonstrating their intent to enter into a contract but

without expressing it in words. An example is ordering food in a restaurant and expecting to pay for it.

Mutuality

The requirement that a contract contain mutual promises or obligations.

SUMMARY

TERMS TO KNOW

Quasi-Contract

A legal fiction that recognizes legal obligations even when parties did not overtly agree to a contract to

avoid unjust enrichment. An example would be babysitting services provided for a parent who had to be

rushed to a hospital.

Unilateral Contract

A contract where only one party makes a promise and is not binding on the other party until performance

occurs. An example would be a reward for a lost pet. No one is obligated to find the pet, but when someone

does, the promise of a reward becomes binding.

Voidable Contract

A contract that is unenforceable by one party but enforceable by the other party, as in a contract made with

a minor.

Contract Formation

by Sophia Tutorial



In this lesson, you will learn about how contracts are created and what makes them enforceable or

unenforceable. Specifically, this lesson will cover:

1. Requirements of Contract Formation

2. The Agreement: Offer and Acceptance

3. Consideration

a. Elements of Consideration

b. Exception to Consideration

1. Requirements of Contract Formation

Although it has countless wrinkles and nuances, contract law asks two principal questions:

Did the parties create a valid, enforceable contract?

What remedies are available when one party breaks the contract?

The answer to the first question is not always obvious; the range of factors that must be taken into account

can be large and their relationship subtle. Since people in business frequently conduct contract negotiations

without the assistance of a lawyer, it is important to attend to the nuances to avoid legal trouble at the outset.

Whether a valid enforceable contract has been formed depends in turn on whether:

1. The parties reached an agreement (offer and acceptance).

2. Consideration was present (some price was paid for what was received).

3. The agreement was legal.

4. The parties entered into the contract with capacity to make a contract.

5. The agreement is in the proper form (something in writing, if required).

2. The Agreement: Offer and Acceptance

The core of a legal contract is the agreement between the parties. That is not merely a matter of convenience;

it is at the heart of our values. Although agreements may take any form, including unspoken conduct between

the parties, they are usually structured in terms of an offer and an acceptance.

Note, however, that not every agreement, in the broadest sense of the word, need consist of an offer and

acceptance, and it is entirely possible, therefore, for two persons to reach agreement without forming a

WHAT'S COVERED

contract.

 EXAMPLE People may agree that the weather is pleasant or that it would be preferable to go out for Chinese food rather than seeing a foreign film; in neither case has a contract been formed.

One of the major functions of the law of contracts is to sort out those agreements that are legally binding -

those that are contracts - from those that are not.

IN CONTEXT

In interpreting agreements, courts generally apply an objective standard. The Restatement (Second)

of Contracts (Section 3) defines agreement as a “manifestation of mutual assent by two or more

persons to one another.”

The UCC (Section 1-201(3)) defines agreement as “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.”

The critical question is what the parties said or did, not what they thought they said or did. The distinction

between objective and subjective standards crops up occasionally when one person claims he spoke in jest,

as in the case below.

CASE STUDY: Barnes v. Treece

The vice president of a manufacturer of punchboards, used in gambling, testified to the Washington

State Game Commission that he would pay $100,000 to anyone who found a “crooked board.”

Barnes, a bartender, who had purchased two that were crooked some time before, brought one to

the company office, and demanded payment. The company refused, claiming that the statement was

made in jest (the audience before the commission had laughed when the offer was made). The court

disagreed, holding that it was reasonable to interpret the pledge of $100,000 as a means of

promoting punchboards:

"(I)f the jest is not apparent and a reasonable hearer would believe that an offer was being made,

then the speaker risks the formation of a contract which was not intended. It is the objective

manifestations of the offeror that count and not secret, unexpressed intentions. If a party’s words or

acts, judged by a reasonable standard, manifest an intention to agree in regard to the matter in

question, that agreement is established, and it is immaterial what may be the real but unexpressed

state of the party’s mind on the subject."

Barnes v. Treece, 549 P.2d 1152 (Wash. App. 1976).

An offer is a manifestation of willingness to enter into a bargain such that it would be reasonable for another

individual to conclude that assent to the offer would complete the bargain. Offers must be communicated and

must be definite; that is, they must spell out terms to which the offeree can assent.

To constitute an agreement, there must be an acceptance of the offer. The offeree must manifest his assent to

the terms of the offer in a manner invited or required by the offer. Complications arise when an offer is

accepted indirectly through correspondence. Although offers and revocations of offers are not effective until

received, an acceptance is deemed accepted when sent if the offeree accepts in the manner specified by the

offeror.

If the offeror specifies no particular mode, then acceptance is effective when transmitted as long as the

offeree uses a reasonable method of acceptance. It is implied that the offeree can use the same means used

by the offeror or a means of communication customary to the industry.

 TERMS TO KNOW

Offer

A manifestation of willingness to enter into a contract. If the terms of an offer are definite and are accepted, a

contract is formed. An offer can be withdrawn before it is accepted.

Acceptance

A manifestation of assent to all the terms of an offer, thus forming a contract.

3. Consideration

Consideration is the quid pro quo (something given or received for something else) between the contracting

parties in the absence of which the law will not enforce the promise or promises made.

 THINK ABOUT IT

Consider the following three “contracts." Which, if any, is a binding contract?

1. Betty offers to give a book to Lou. Lou accepts.

2. Betty offers Lou the book in exchange for Lou’s promise to pay $15. Lou accepts.

3. Betty offers to give Lou the book if Lou promises to pick it up at Betty’s house. Lou accepts.

In American law, only situation 2 is a binding contract, because only that contract contains a set of mutual

promises in which each party pledges to give up something to the benefit of the other. In situation 1, Lou does

not have to give up anything; the promise is merely a gift and is not enforceable due to lack of consideration.

In situation 3, Lou has not given up anything, but if Lou had to travel a great distance to Betty’s house or suffer

hardship to get there, this promise may well be enforceable.

The question of what constitutes a binding contract has been answered differently throughout history and in

other cultures.

IN CONTEXT

Under Roman law, any contract that was reduced to writing was binding, whether or not there was

consideration in our sense. Moreover, in later Roman times, certain promises of gifts were made

binding, whether written or oral; these would not be binding in the United States.

In the Anglo-American tradition, the presence of a seal was once sufficient to make a contract

binding without any other consideration. In most states, the seal is no longer a substitute for

consideration, although in some states it creates a presumption of consideration. The Uniform

Commercial Code has abolished the seal on contracts for the sale of goods.

The existence of consideration is determined by examining whether the person against whom a promise is to

be enforced (the promisor) received something in return from the person to whom he made the promise (the

promisee). That may seem a simple enough question. But as with much in the law, the complicating situations

are never very far away.

The “something” that is promised or delivered cannot just be anything: a feeling of pride, warmth, amusement,

friendship; it must be something known as a legal detriment— an act, a forbearance, or a promise of such from

the promisee. The detriment need not be an actual detriment; it may in fact be a benefit to the promisee, or at

least not a loss. At the same time, the detriment to the promisee need not confer a tangible benefit on the

promisor; the promisee can agree to forgo something without that something being given to the promisor.

Whether consideration is legally sufficient has nothing to do with whether it is morally or economically

adequate to make the bargain a fair one. Moreover, legal consideration need not even be certain; it can be a

promise contingent on an event that may never happen. Consideration is a legal concept, and it centers on

the giving up of a legal right or benefit.

 TERMS TO KNOW

Consideration

The requirement that a contract involve a quid pro quo or exchange of value. Without consideration, a

contract is not enforceable; therefore, a one-sided promise to give a person money without requiring anything

at all in return is not enforceable.

Quid Pro Quo

A Latin term representing something of value given or received in exchange for something else.

3a. Elements of Consideration

Consideration has two elements. The first, as just outlined, is whether the promisee has incurred a legal

detriment. Some courts - although a minority - take the view that a bargained-for legal benefit to the promisor

is sufficient consideration.

The second is whether the legal detriment was bargained for: Did the promisor specifically intend the act,

forbearance, or promise in return for his promise?

Applying this two-pronged test to the three scenarios involving Lou and Betty, you can easily see why only in

the second is there legally sufficient consideration.

 EXAMPLE In the first scenario, Lou incurred no legal detriment; he made no pledge to act or to forbear from acting, nor did he in fact act or forbear from acting. In the third scenario, what might appear to be

such a promise is not really so. Betty made a promise on a condition that Lou come to her house; the intent

clearly is to make a gift. Betty was not seeking to induce Lou to come to her house by promising the book.

3b. Exception to Consideration

There is a widely recognized exception to the requirement of consideration. In cases of promissory estoppel,

the courts will enforce promises without consideration. Simply stated, promissory estoppel means that the

courts will stop the promisor from claiming that there was no consideration.

The doctrine of promissory estoppel is invoked in the interests of justice when three conditions are met:

1. The promise is one that the promisor should reasonably expect to induce the promisee to take action or

forbear from taking action of a definite and substantial character.

2. The action or forbearance is taken.

3. Injustice can be avoided only by enforcing the promise.

CASE STUDY: Timko v. Oral Roberts Evangelic Association

Timko served on the board of trustees of a school. He recommended that the school purchase a

building for a substantial sum of money, and to induce the trustees to vote for the purchase, he

promised to help with the purchase and to pay, at the end of five years, the purchase price less the

down payment.

At the end of four years, Timko died. The school sued his estate, which defended on the ground that

there was no consideration for the promise. Timko was promised or given nothing in return, and the

purchase of the building was of no direct benefit to him (which would have made the promise

enforceable as a unilateral contract). The court ruled that under the three-pronged promissory

estoppel test, Timko’s estate was liable.

Estate of Timko v. Oral Roberts Evangelistic Assn., 215 N.W.2d 750 (Mich. App. 1974).

 TERM TO KNOW

Promissory Estoppel

A legal doctrine that allows a person to recover in contract when a promise has been made and that person

has detrimentally relied on the promise. An example would be a promise to convey real estate to a party in

possession who has made substantial improvements to the property in reliance on the promise.



In this lesson, you learned that there are requirements of contract formation that make a contract

legally valid and enforceable. A legal contract must have agreement, which is composed of an offer

with definite terms and an acceptance communicated between two parties. Contracts also require

consideration between parties, which involves a promise to exchange something of legal value.

The two elements of consideration are whether the promisee has incurred a legal detriment and

whether that detriment was bargained for by the promisor. There is an exception to consideration

SUMMARY

known as promissory estoppel. In some cases, courts will enforce a promise that lacks consideration

in the interest of justice for the promisee.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "Contract Formation and Unenforceable

Contracts" tutorial.



Acceptance

A manifestation of assent to all the terms of an offer, thus forming a contract.

Consideration

The requirement that a contract involve a quid pro quo or exchange of value. Without consideration, a

contract is not enforceable; therefore, a one-sided promise to give a person money without requiring

anything at all in return is not enforceable.

Offer

A manifestation of willingness to enter into a contract. If the terms of an offer are definite and are accepted,

a contract is formed. An offer can be withdrawn before it is accepted.

Promissory Estoppel

A legal doctrine that allows a person to recover in contract when a promise has been made and that person

has detrimentally relied on the promise. An example would be a promise to convey real estate to a party in

possession who has made substantial improvements to the property in reliance on the promise.

Quid Pro Quo

A Latin term representing something of value given or received in exchange for something else.

TERMS TO KNOW

Unenforceable Contracts

by Sophia Tutorial



In this lesson, you will learn about the factors that can render contracts unenforceable. Specifically,

this lesson will cover:

1. Defenses to Contract Enforcement

a. Illegality

b. Capacity

c. Contracts for Necessities

d. Duress, Fraud, and Undue Influence

e. Misrepresentation of Age

1. Defenses to Contract Enforcement

Breach of contract refers to the failure of either party to honor the contract, and the result is typically a loss to

the non-breaching party. Therefore, parties have the right to bring a court action to enforce the contract or to

request damages for breach of contract.

Later, we will be looking at how courts enforce contracts with equitable remedies, such as specific

performance or injunctions, as well as how courts (more typically) compensate the non-breaching party with

monetary awards.

For now, we will look at defenses to contract enforcement. Sometimes, a contract will be unenforceable due

to some type of insufficiency in the parties’ agreement itself.

In all of the situations that follow, a court may declare a contract either void or voidable. A void contract is

considered to be void ab initio, a Latin term that means there never was a valid contract. A voidable contract

is one that the aggrieved party may choose to void.

 TERM TO KNOW

Void

Also referred to as void ab initio, the status of a contract that is not valid from the beginning, as in illegal

contracts.

1a. Illegality

In general, illegal contracts are unenforceable.

The courts must grapple with two types of illegalities:

WHAT'S COVERED

1. Statutory violations (e.g., the practice of law by a non-lawyer is forbidden by statute)

2. Violations of public policy not expressly declared unlawful by statute, but so declared by the courts.

1b. Capacity

A contract is a meeting of minds. If someone lacks mental capacity to understand what she is assenting to - or

that she is assenting to anything - it is unreasonable to hold her to the consequences of her act.

The general rule is that persons younger than eighteen can avoid their contracts. Although eighteen-year-olds

may assent to binding contracts, not all creditors and landlords believe it, and they may require parents to

cosign. For those under twenty-one, there are also legal impediments to holding certain kinds of jobs, signing

certain kinds of contracts, and drinking alcohol. There is as yet no uniform set of rules.

The exact day on which the disability of minority vanishes also varies. The old common law rule put it on the

day before the twenty-first birthday. Many states have changed this rule so that majority commences on the

day of the eighteenth birthday.

A minor’s contract is voidable, not void. A child wishing to avoid the contract need do nothing positive to

disaffirm; the defense of minority to a lawsuit is sufficient. Although the adult cannot enforce the contract, the

child can (which is why it is said to be voidable, not void).

When the minor becomes an adult, she has two choices:

Ratify the contract

Disaffirm the contract

She may ratify explicitly; no further consideration is necessary. She may also do so by implication— for

instance, by continuing to make payments or retaining goods for an unreasonable period of time.

In some states, a court may ratify the contract before the child becomes an adult.

 EXAMPLE In California, a state statute permits a movie producer to seek court approval of a contract with a child actor in order to prevent the child from disaffirming it upon reaching majority and suing for

additional wages. As quid pro quo, the court can order the producer to pay a percentage of the wages into

a trust fund that the child’s parents or guardians cannot invade. If the child has not disaffirmed the contract

while still a minor, she may do so within a reasonable time after reaching majority.

In most cases where a minor voids a contract, the only obligation is to return the goods (if she still has them)

or repay the consideration (unless it has been dissipated). However, in two situations, a minor might incur

greater liability: contracts for necessities and misrepresentation of age.

Contracts made by an insane or intoxicated person are also said to have been made by a person lacking

capacity. In general, such contracts are voidable by the person when capacity is regained (or by the person’s

legal representative if capacity is not regained).

 TERM TO KNOW

Capacity

The requirement that individuals who enter into contracts have the legal competence to do so by age and

mental status.

1c. Contracts for Necessities

At common law, a “necessity” was defined as an essential need of a human being: food, medicine, clothing,

and shelter.

In recent years, however, the courts have expanded the concept, so that, in many states, today necessities

include property and services that will enable the minor to earn a living and to provide for those dependent on

her.

If the contract is executory, the minor can simply disaffirm. If the contract has been executed, however, the

minor must face more onerous consequences.

Although she will not be required to perform under the contract, she will be liable under a theory of “quasi-

contract” for the reasonable value of the necessities.

1d. Duress, Fraud, and Undue Influence

Duress (or coercion) refers to the exertion of undue pressure to enter into a contract. Such a contract is

unenforceable. It is important to note, however, that a court will not set aside a contract for duress unless the

pressure involves actual force or the threat of force.

 EXAMPLE It is not considered duress if a seller enters into a contract for the sale of goods at bargain basement prices merely due to financial pressure to make money.

The defense of fraud or misrepresentation is always a defense to enforcement of a contract. Fraud refers to

any type of trickery or misstating of material facts.

 EXAMPLE A seller induces a person to sign a contract for the sale of real estate the seller does not actually own.

 EXAMPLE A used car is sold with a rolled-back odometer that materially misrepresents the car’s mileage.

Undue influence is mental pressure by a stronger party over a weaker party.

 EXAMPLE A caregiver of an elderly, infirm party who takes advantage of his superior position in the relationship would be exerting undue influence by exerting control over the weaker party to make that

party sign a contract that overcompensates him for his services.

Note, however, that many relationships, such as landlord and tenant and employer and employee, include a

perceived power imbalance but do not automatically fall into the category of undue influence. In order for a

contract to be set aside for undue influence, there must be obvious control and exploitation.

 TERMS TO KNOW

Duress

Also referred to as coercion; in contract law, when a party’s assent to a contract is obtained by force or undue

pressure. It is a defense to a contract.

Fraud

The use of trickery or misrepresentation of facts to induce someone to assent to a contract. It is a defense to a

contract.

Undue Influence

The use of mental pressure to obtain a person’s assent to a contract, typically in a relationship that can be

exploited due to the weakness of one party and constituting a defense to a contract.

1e. Misrepresentation of Age

Finally, in most states, a minor may misrepresent her age and disaffirm in accordance. That the adult

reasonably believed the minor was also an adult is of no consequence in a contract suit.

But some states have enacted statutes that make the minor liable in certain situations.

 EXAMPLE A Michigan statute prohibits a minor from disaffirming if she has signed a “separate instrument containing only the statement of age, date of signing and the signature."

And some states “estop” the minor from claiming to be a minor if she falsely represented herself as an adult in

making the ·contract. Estoppel is a refusal by the courts on equitable grounds to listen to an otherwise valid

defense; unless the minor can return the consideration, the contract will be enforced.



In this lesson, you learned that contracts can be rendered unenforceable if there are certain

insufficiencies in the parties’ agreement. These defenses to contract enforcement may lead a court to

declare a contract void. You also learned that contracts are unenforceable if they involve illegal

activity, or if one party lacks the capacity to form an agreement, either by age or mental status.

A minor may choose to avoid a contract that he or she entered into or to enforce it, unless that

contract is for necessities. Duress involving force or the threat of force, fraud, and undue influence

are other factors that can void a contract. Some states, but not all, will enforce a contract if a minor

party misrepresents his or her age.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "Contract Formation and Unenforceable

Contracts" tutorial.



Capacity

The requirement that individuals who enter into contracts have the legal competence to do so by age and

mental status.

Duress

Also referred to as coercion; in contract law, when a party’s assent to a contract is obtained by force or

undue pressure. It is a defense to a contract.

SUMMARY

TERMS TO KNOW

Fraud

The use of trickery or misrepresentation of facts to induce someone to assent to a contract. It is a defense to

a contract.

Undue Influence

The use of mental pressure to obtain a person’s assent to a contract, typically in a relationship that can be

exploited due to the weakness of one party and constituting a defense to a contract.

Void

Also referred to as void ab initio, the status of a contract that is not valid from the beginning, as in illegal

contracts.

Statute of Frauds

by Sophia Tutorial



In this lesson, you will learn about a particular law that serves an important role in contract

enforcement. Specifically, this lesson will cover:

1. Purpose of the Statute of Frauds

2. Application of the Statute of Frauds

1. Purpose of the Statute of Frauds

As a general rule, a contract need not be in writing to be enforceable.

 EXAMPLE An oral agreement to pay a high-fashion model $1 million to pose for a photograph is as binding as if the language of the deal were printed on vellum and signed in the presence of twenty

bishops.

Note that an agreement that is spoken and not written is called an oral agreement, not a “verbal” agreement.

While commonly heard, this usage of "verbal" is incorrect because the word “verbal” means “of words” and

can be either written or spoken.

For centuries, however, a large exception has grown up around the Statute of Frauds, first enacted in England

in 1677 under the formal name “An Act for the Prevention of Frauds and Perjuries.”

As may be evident from the title, the purpose of the Statute of Frauds is to prevent the fraud that occurs when

one party attempts to impose upon another a contract that did not in fact exist. The law thus aims to provide

evidence, in areas of some complexity and importance, that a contract was actually made. To a lesser degree,

the law also serves to caution those about to enter a contract.

 TERMS TO KNOW

Oral Agreement

A meeting of the minds that is expressed in spoken but not written words. An oral agreement that meets the

other requirements of a contract (legality, capacity, and consideration) is legally enforceable unless it falls

under the Statute of Frauds’ requirements for a writing.

Statute of Frauds

Legislation that requires certain types of contracts to be in writing such as a contract involving real estate, a

contract in consideration of marriage, a contract that cannot be performed within one year, a contract to

answer for the debt of another, a contract to make a will, or a contract involving the sale of goods for $500 or

more. There are certain exceptions to this requirement, such as when performance has been completed or

where there has been promissory estoppel.

WHAT'S COVERED

2. Application of the Statute of Frauds

Today, all 50 states have some form of a Statute of Frauds. In general, the types of contracts that most states

require to be in writing include:

1. A contract in consideration of marriage, including prenuptial agreements.

2. A contract involving an interest in real estate, including sale or lease of land and mortgages.

3. A contract involving a particular service that cannot be fully performed within one year of the contract’s

finalization.

4. A contract to answer for the debt of another. This is called a “surety” contract, such as co-signing a loan.

5. A contract by the executor of a will to pay a debt of the estate with his or her own money.

6. A contract for the sale of goods exceeding $500 (as stated in the Uniform Commercial Code).

There are some exceptions to the Statute of Frauds where a contract will be enforced even if it falls into one

of the listed categories and is not in writing.

In the case of part performance, where a party relied on the contract and began to perform with the

knowledge of the other party (who benefitted from the performance), the contract will be enforced to avoid an

injustice.

Where a contract cannot be completed within a year but was fully performed, a court may enforce it because a

court may consider full performance to be strong evidence of a contract.

In a situation where all parties admit to the existence of the contract, it may be enforced despite the lack of a

writing. In addition, there is always promissory estoppel that acts as an exception to the Statute of Frauds.

 TERM TO KNOW

Promissory Estoppel

A legal doctrine that allows a person to recover in contract when a promise has been made and that person

has detrimentally relied on the promise. An example would be a promise to convey real estate to a party in

possession who has made substantial improvements to the property in reliance on the promise.



In this lesson, you learned that the purpose of the Statute of Frauds is to avoid the fraud that occurs

when one person attempts to impose upon another a contract that did not really exist. You also

learned that the the Statute of Frauds can be applied across several types of contracts, but that there

are notable exceptions to the law that allow the contract to be enforced.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "Contract Formation" tutorial.

SUMMARY



Oral Agreement

A meeting of the minds that is expressed in spoken but not written words. An oral agreement that meets the

other requirements of a contract (legality, capacity, and consideration) is legally enforceable unless it falls

under the Statute of Frauds’ requirements for a writing.

Promissory Estoppel

A legal doctrine that allows a person to recover in contract when a promise has been made and that person

has detrimentally relied on the promise. An example would be a promise to convey real estate to a party in

possession who has made substantial improvements to the property in reliance on the promise.

Statute of Frauds

Legislation that requires certain types of contracts to be in writing such as a contract involving real estate, a

contract in consideration of marriage, a contract that cannot be performed within one year, a contract to

answer for the debt of another, a contract to make a will, or a contract involving the sale of goods for $500

or more. There are certain exceptions to this requirement, such as when performance has been completed

or where there has been promissory estoppel.

TERMS TO KNOW

Monetary Awards

by Sophia Tutorial



In this lesson, you will take a closer look at one type of contract remedy. Specifically, this lesson will

cover:

1. Purpose of Contract Remedies

2. Types of Monetary Awards

a. Compensatory Damages

b. Consequential Damages

c. Nominal Damages

d. Incidental Damages

e. Punitive Damages

f. Restitution

3. Tort vs. Contract Remedies

1. Purpose of Contract Remedies

Since contract law places so much importance on the intention of the parties, it may be surprising to learn that

not every breach of contract results in a court order compelling one party to carry out the obligations of the

contract.

At times this is because certain duties cannot be performed after a breach: Time and circumstances will have

altered their purpose and rendered many worthless.

Still, although there are numerous occasions on which it would be theoretically possible for courts to order

the parties to carry out their contracts, the courts will seldom do it.

IN CONTEXT

In 1897, Justice Oliver Wendell Holmes, Jr., declared in a famous line that “the duty to keep a

contract at common law means a prediction that you must pay damages if you do not keep it.”

By that he meant simply that the common law looks more toward compensating the promisee for his

loss than toward compelling the promisor to perform— a person always has the power, though not

the right, to breach a contract. Indeed, the law of remedies often provides the parties with an

incentive to break the contract. In short, the promisor has a choice: to perform or pay.

The purpose of contract remedies is thus, for the most part, to compensate the non-breaching party for the

WHAT'S COVERED

losses suffered— to put the non-breaching party in the position he, she, or it would have been in had there

been no breach.

2. Types of Monetary Awards

There are three principle remedies to a breach of contract:

Monetary awards (called “damages”)

Specific performance

Restitution

We will look at specific performance and restitution in later lessons; for now, we will focus on the different

types of monetary awards.

 TERM TO KNOW

Monetary Awards

A form of damages awarded in a case where money is the only form of restitution that can be made for a

wrong, such as a tort. Even though money cannot replace a lost limb or a life, for example, it is the best a court

can do to compensate a victim.

2a. Compensatory Damages

One party has the right to damages (money) when the other party has breached the contract unless, of

course, the contract itself or other circumstances suspend or discharge that right.

Compensatory damages are the general category of damages awarded to make the non-breaching party

whole.

 TERM TO KNOW

Compensatory Damages

A form of monetary award intended to make a victim whole by compensating the victim to place him or her in

the position he or she would have been in had the damage not occurred, and nothing more.

2b. Consequential Damages

A basic principle of contract law is that a person injured by breach of contract is not entitled to compensation

unless the breaching party, at the time the contract was made, had reason to foresee the loss as a probable

result of the breach.

CASE STUDY: Hadley v. Baxendale

Perhaps the most studied case in all the common law is Hadley v. Baxendale, decided in England in

1854. Joseph and Jonah Hadley were proprietors of a flour mill in Gloucester. In May 1853, the shaft

of the milling engine broke, stopping all milling. An employee went to Pickford and Company, a

common carrier, and asked that the shaft be sent as quickly as possible to a Greenwich foundry that

would use the shaft as a model to construct a new one. The carrier’s agent promised delivery within

two days. But through an error, the shaft was shipped by canal rather than by rail and did not arrive

in Greenwich for seven days. The Hadleys sued Joseph Baxendale, managing director of Pickford,

for the profits they lost because of the delay. In ordering a new trial, the Court of Exchequer ruled

that Baxendale was not liable because he had had no notice that the mill was stopped:

"Where two parties have made a contract which one of them has broken, the damages which the

other party ought to receive in respect of such breach of contract should be such as may fairly and

reasonably be considered either arising naturally, i.e., according to the usual course of things, from

such breach of contract itself, or such as may reasonably be supposed to have been in the

contemplation of both parties, at the time they made the contract, as the probable result of the

breach of it."

This rule, it has been argued, was a subtle change from the earlier rule that permitted damages for

any consequences as long as the breach caused the injury and the plaintiff did not exacerbate it. But

the change was evidently rationalized, at least in part, by the observation that in the “usual course of

things,” a mill would have on hand a spare shaft, so that its operations would not cease.

Hadley v. Baxendale (1854), 9 Ex. 341, 354, 156 Eng.Rep. 145, 151.

This sub-set of compensatory damages is called consequential damages— damages that flow as a

foreseeable consequence of the breach.

 EXAMPLE If you hire a roofer to fix a leak in your roof and he does such a bad job that the interior of your house suffers water damage, the roofer is liable not only for the poor roofing job, but also for the

ruined drapes, damaged flooring and walls, and so on.

Many contracts expressly exclude consequential damages— something to look for in a contract because it

could limit your damages!

 TERM TO KNOW

Consequential Damages

Damages that occur from loss or injury that do not flow immediately or directly from the act of the liable party

but only from the consequences or result of the act. Typically, the law requires such damages to be

foreseeable in order to be compensable.

2c. Nominal Damages

If the breach caused no loss, the plaintiff is nevertheless entitled to a minor sum, perhaps even one dollar,

called nominal damages.

 EXAMPLE When a buyer could purchase the same commodity at the same price as that contracted for, without spending any extra time or money, there can be no real damages in the event of breach.

 TERM TO KNOW

Nominal Damages

Damages that are awarded to a plaintiff in a trifling amount where a substantial injury has not been sustained

although the law does recognize the plaintiff’s right not to have his or her rights invaded.

2d. Incidental Damages

Incidental damages are the direct costs incurred by the non-breaching party in order to avoid additional

damages.

IN CONTEXT

Suppose City College hires Professor Blake on a two-year contract, after an extensive search. After

one year, the professor quits to take a job elsewhere, in breach of her contract. If City College has to

pay $5000 more to find a replacement for the year, Blake is liable for that amount— that’s

compensatory damages.

But what if it costs City College $1200 to search for, bring to campus, and interview a replacement?

City College can claim that, too, as incidental damages which include additional costs incurred by

the non-breaching party after the breach in a reasonable attempt to avoid further loss, even if the

attempt is unsuccessful.

 TERM TO KNOW

Incidental Damages

Damages incurred in commercial shipping where a delay or breach of contract by the seller results in costs of

storage, inspection, or some other commercially foreseeable cost.

2e. Punitive Damages

Punitive damages are those awarded for the purpose of punishing a defendant in a civil action, in which

criminal sanctions may be unavailable.

They are not part of the compensation for the loss suffered; they are proper in cases in which the defendant

has acted willfully and maliciously and are thought to deter others from acting similarly. Since the purpose of

contract law is compensation, not punishment, punitive damages have not traditionally been awarded, with

one exception: when the breach of contract is also a tort for which punitive damages may be recovered.

Punitive damages are permitted in the law of torts (in most states) when the behavior is malicious or willful

(reckless conduct causing physical harm, deliberate defamation of one’s character, a knowingly unlawful

taking of someone’s property), and some kinds of contract breach are also tortious.

 EXAMPLE When a creditor holding collateral as security under a contract for a loan sells the collateral to a good-faith purchaser for value even though the debtor was not in default, he has breached the

contract and committed the tort of conversion (which means, essentially, stealing). Punitive damages may

be awarded, assuming the behavior was willful and not merely mistaken.

Punitive damages are not fixed by law. The judge or jury may award at its discretion whatever sum is believed

necessary to redress the wrong or deter like conduct in the future. This means that a richer person may be

slapped with much heavier punitive damages than a poorer one in the appropriate case because a richer

person is not deterred by a small punitive damage award. But the judge in all cases may remit (lower) some or

all of a punitive damage award if he or she considers it excessive.

Punitive damage claims have been made in cases dealing with the refusal by insurance companies to honor

their contracts. Many of these cases involve disability payments, and among the elements are charges of

tortious conduct by the company’s agents or employees.

 DID YOU KNOW

California has been the leader among the state courts in their growing willingness to uphold punitive damage

awards despite insurer complaints that the concept of punitive damages is but a device to permit plaintiffs to

extort settlements from hapless companies. Courts have also awarded punitive damages against other types

of companies for breach of contract.

 TERMS TO KNOW

Punitive Damages

Damages that are awarded to make an example of a plaintiff’s wrongdoing on an increased scale above what

is compensatory, usually requiring conduct that is violent, oppressive, malicious, or wanton and wicked to

compensate the victim for the wrong and also punish the liable party.

Collateral

Security for a debt or loan taken by the lender to ensure repayment of a debt. An example is a mortgage lien

on real estate that gives the lender an interest in the property to ensure repayment by the borrower of the

loan. If the debt or loan is not repaid, the holder of collateral may execute on the lien or mortgage and take

possession thereof.

2f. Restitution

As the word implies, restitution is a restoring to one party of what he gave to the other. Therefore, only to the

extent that the injured party conferred a benefit on the other party may the injured party be awarded

restitution.

If the claimant has given the other party a sum of money, there can be no dispute over the amount of the

restitution interest.

 EXAMPLE Tom gives Tim $100 to chop his tree into firewood. Tim repudiates. Tom’s restitution interest is $100.

But serious difficulties can arise when the benefit conferred was performance. The courts have considerable

discretion to award either the cost of hiring someone else to do the work that the injured party performed

(generally, the market price of the service) or the value that was added to the property of the party in breach

by virtue of the claimant’s performance.

IN CONTEXT

Mellors, a gardener, agrees to construct ten fences around Lady Chatterley’s flower gardens at the

market price of $2,500. After erecting three, Mellors has performed services that would cost $750,

market value. Assume that he has increased the value of the Lady’s grounds by $800.

If the contract is repudiated, there are two measures of Mellors’ restitution interest: $800, the value

by which the property was enhanced; or $750, the amount it would have cost Lady Chatterley to

hire someone else to do the work. Which measure to use depends on who repudiated the contract

and for what reason.

 TERM TO KNOW

Restitution

In torts, the measure of damages to compensate a victim who has been wronged. Also referred to as

compensatory damages.

3. Tort vs. Contract Remedies

As mentioned earlier, a contract breach may also amount to tortious conduct.

 EXAMPLE A physician warrants her treatment as perfectly safe but performs the operation negligently, scarring the patient for life. The patient could sue for malpractice (tort) or for breach of warranty (contract).

The choice involves at least four considerations:

1. Statute of limitations: Most statutes of limitations prescribe longer periods for contract than for tort

actions.

2. Allowable damages: Punitive damages are more often permitted in tort actions, and certain kinds of

injuries - such as pain and suffering - are compensable in tort but not in contract suits.

3. Expert testimony: In most cases, the use of experts would be the same in either tort or contract suits, but

in certain contract cases, the expert witness could be dispensed with, as, for example, in a contract case

charging that the physician abandoned the patient.

4. Insurance coverage: Most policies do not cover intentional torts, so a contract theory that avoids the

element of willfulness would provide the plaintiff with a surer chance of recovering monetary damages.



In this lesson, you learned that the purpose of contract remedies is, usually, to put the non-breaching

party in the position he or she would have been in had there been no breach. The types of monetary

awards available as remedies are compensatory damages (money paid to compensate the non-

breaching party for the losses caused by the breach), which also include the subcategories of

consequential damages, nominal damages, incidental damages, punitive damages (to punish the

breaching party), and restitution.

You also learned that sometimes contract breaches rise to the level of tortious conduct; in those

cases, injured parties must decide whether to pursue tort or contract remedies.

Best of luck in your learning!

SUMMARY

Source: This content has been adapted from Lumen Learning's "Remedies" tutorial.



Collateral

Security for a debt or loan taken by the lender to ensure repayment of a debt. An example is a mortgage lien

on real estate that gives the lender an interest in the property to ensure repayment by the borrower of the

loan. If the debt or loan is not repaid, the holder of collateral may execute on the lien or mortgage and take

possession thereof.

Compensatory Damages

A form of monetary award intended to make a victim whole by compensating the victim to place him or her

in the position he or she would have been in had the damage not occurred, and nothing more.

Consequential Damages

Damages that occur from loss or injury that do not flow immediately or directly from the act of the liable

party but only from the consequences or result of the act. Typically, the law requires such damages to be

foreseeable in order to be compensable.

Incidental Damages

Damages incurred in commercial shipping where a delay or breach of contract by the seller results in costs

of storage, inspection, or some other commercially foreseeable cost.

Monetary Awards

A form of damages awarded in a case where money is the only form of restitution that can be made for a

wrong, such as a tort. Even though money cannot replace a lost limb or a life, for example, it is the best a

court can do to compensate a victim.

Nominal Damages

Damages that are awarded to a plaintiff in a trifling amount where a substantial injury has not been

sustained although the law does recognize the plaintiff’s right not to have his or her rights invaded.

Punitive Damages

Damages that are awarded to make an example of a plaintiff’s wrongdoing on an increased scale above

what is compensatory, usually requiring conduct that is violent, oppressive, malicious, or wanton and wicked

to compensate the victim for the wrong and also punish the liable party.

Restitution

In torts, restitution is the measure of damages to compensate a victim who has been wronged. Also referred

to as compensatory damages.

TERMS TO KNOW

Equitable Remedies: Specific Performance and Injunction

by Sophia Tutorial



In this lesson, you will learn about additional remedies to breaches of contract. Specifically, this

lesson will cover:

1. Types of Equitable Remedies

a. Specific Performance

b. Injunction

1. Types of Equitable Remedies

Besides monetary awards, there is also equitable relief available when a contract is breached.

Equitable relief refers to a court’s powers to enforce contracts by ordering a person to do (or not do)

something, going beyond the mere payment of money.

Two types of equitable relief are:

Specific performance

Injunction

 TERM TO KNOW

Equitable Relief

A form of relief awarded to an aggrieved party by a court of equity (as opposed to a court of law). Although

modern courts do not formally have a division between courts of equity and courts of law, the old-style

terminology is still in use. A court of law applies the law more strictly and by the book than a court of equity

does. A court of equity is a court that offers more remedies than a court of law does. For example, a court of

equity can order performance of a contract rather than awarding monetary damages alone. Equity allows a

judge to use more discretion than law, which applies a strict code with only recognized exceptions.

1a. Specific Performance

Specific performance is a judicial order to the promisor that he undertake the performance to which he

obligated himself in a contract.

Specific performance is an attractive but limited remedy: It is only available for breach of contract to sell a

unique item (real estate is always unique) or where monetary damages are insufficient to make a non-

breaching party whole.

WHAT'S COVERED

 EXAMPLE Emily signs a contract to sell Charlotte a gold samovar, a Russian antique of great sentimental value because it once belonged to Charlotte’s mother. Emily then repudiates the contract

while it is still executory (meaning it has not yet been performed). A court may properly grant Charlotte an

order of specific performance against Emily, requiring her to sell the item to Charlotte.

As an alternative remedy to damages, specific performance may be issued at the discretion of the court,

subject to a number of exceptions.

 TERM TO KNOW

Specific Performance

An equitable remedy that, rather than awarding monetary damages for breach of contract, affirmatively

requires a party to fulfill the terms of a contract. Primarily used where performance involves something unique

for which monetary damages are not an adequate remedy.

Executory

In contracts, a description of the state in which a contract has still not been performed fully. For example, a car

loan that has not been paid off.

1b. Injunction

One of these exceptions is when the promisee is seeking enforcement of a contractual provision for

forbearance— a promise that the promisor will refrain from doing something .

In that case, an injunction, may be the appropriate remedy. An injunction is a judicial order not to act in a

specified manner.

 EXAMPLE Returning to the scenario above, the court may also issue an injunction that prevents Emily from selling the item to anyone other than Charlotte.

CASE STUDY: Whitmill v. Warner Brothers Entertainment, Inc.

Whitmill, the artist who designed Mike Tyson’s facial tattoo, sought to stop the movie Hangover II

from being released because he had not given permission for the copyrighted tattoo to be used in

the picture. Since Mike Tyson’s use of the tattoo was not restricted and he appeared in the first

version of the movie, it appears Warner Brothers felt it could use the tattoo in the second version

where it appears on the face of a different character played by the actor Ed Helms. Judge Catherine

Perry of the U.S. District Court for the Eastern District of Missouri was asked to decide whether or not

to grant Whitmill’s request for an injunction that would have prevented the movie from being

released.

While Judge Perry acknowledged that Whitmill’s case for copyright infringement was strong since he

had not given permission for his copyrighted work to be used in the film, she denied the request for

the injunction. Her decision was based on a “balancing” of the interests of both sides. Whitmill, she

conceded, had suffered irreparable harm because he had lost control of his protected image. Warner

Brothers, on the other hand, stood to lose millions of dollars if the movie were not released. Judge

Perry also considered the interests of the public in having the movie released as well as the effects

on theater owners and distributors. She, therefore, denied the injunction, and set a hearing date for a

determination of Whitmill’s damages.

Was this a fair decision? In fact, it may have been a very wise decision because damages for

violation of copyright and any associated contracts are based, in part, on the amount of money

earned by the copyright infringer in using the material without permission. Here, without release of

the movie, it would be hard to quantify such damages. The parties ended up settling their dispute for

an undisclosed amount of money, but the case serves as an effective example of an injunction that

would have, if granted, forbidden the release of the movie to satisfy the artist’s control over his

copyrighted property, and how a court of equity weighs the relative interests of parties (and the

public) in deciding whether to grant an injunction.

Whitmill v. Warner Brothers Entertainment, Inc., 11-cv-00752 (E.D. Mo. April 28, 2011).

 TERMS TO KNOW

Forbearance

Refraining from doing something that one has a right to do.

Injunction

An equitable remedy that forbids a party from doing something, the verb form of which is "to enjoin."



In this lesson, you learned that specific performance and injunction are types of equitable remedies.

Specific performance is a special type of remedy that orders a promisor to actually perform what was

promised, as opposed to having to merely pay monetary damages for breach of contract. This

remedy is considered appropriate when monetary damages are not sufficient relief for the promisee.

An injunction, on the other hand, is a special type of remedy that prevents a party from doing

something.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "Remedies" tutorial.



Equitable Relief

A form of relief awarded to an aggrieved party by a court of equity (as opposed to a court of law). Although

modern courts do not formally have a division between courts of equity and courts of law, the old-style

terminology is still in use. A court of law applies the law more strictly and by the book than a court of equity

does. A court of equity is a court that offers more remedies than a court of law does. For example, a court of

equity can order performance of a contract rather than awarding monetary damages alone. Equity allows a

judge to use more discretion than law, which applies a strict code with only recognized exceptions.

Executory

In contracts, a description of the state in which a contract has still not been performed fully. For example, a

SUMMARY

TERMS TO KNOW

car loan that has not been paid off.

Forbearance

Refraining from doing something that one has a right to do.

Injunction

An equitable remedy that forbids a party from doing something, the verb form of which is "to enjoin."

Specific Performance

An equitable remedy that, rather than awarding monetary damages for breach of contract, affirmatively

requires a party to fulfill the terms of a contract. Primarily used where performance involves something

unique for which monetary damages are not an adequate remedy.

Remedies in General Under the Uniform Commercial Code

by Sophia Tutorial



In this lesson, you will receive an overview of the role of the Uniform Commercial Code in contract

remedies. Specifically, this lesson will cover:

1. Specifying Remedies

a. Exemptions

2. Statute of Limitations

1. Specifying Remedies

The general policy of the Uniform Commercial Code (UCC) is to put the aggrieved party in as good of a

position as possible, as close to as if the other party had fully performed and there had been a timely delivery

of conforming goods.

The UCC provisions are to be read liberally to achieve that result if possible. Thus, the seller has a number of

potential remedies when the buyer breaches, and likewise the buyer has a number of remedies when the

seller breaches.

The UCC allows people to make almost any contract they want (as long as it’s not unconscionable). Just as

the parties may specify details of performance in the contract, so they may provide for and limit remedies in

the event of breach.

 EXAMPLE A typical limitation of remedy would be “Seller’s sole obligation in the event goods are deemed defective by the seller is to replace a like quantity of non-defective goods”

A remedy is optional unless it is expressly agreed that it is the exclusive remedy. However, parties are not free

to eliminate all remedies. The UCC requires that parties accept the legal consequences of breach of contract.

 TERM TO KNOW

Unconscionable

An adjective to describe something that is completely unfair and lacking a meaningful choice on the part of a

party. The term typically applies to very one-sided contracts where the disadvantaged party lacked bargaining

power. As a noun, the term is unconscionability.

1a. Exemptions

There are three exemptions from the general rule that parties are free to make their contract up any way they

WHAT'S COVERED

want in regards to remedies:

1. When circumstances cause the agreed-to remedy to fail or be ineffective, the default UCC remedy will

operate.

2. Consequential damages (i.e., damages that result from breach even though they may not be direct, such

as a loss of business that results from failure to timely deliver, for example, a machine part to a

manufacturing plant) may be limited or excluded unless the limitation or exclusion is unconscionable.

Limitation of consequential damages for injury to the person in the case of consumer goods is considered

to be prima facie unconscionable, but limitation of damages where the loss is commercial is not.

3. The parties may agree to liquidated damages. According to Section 2-718 of the UCC, “Damages for

breach by either party may be liquidated in the agreement but only at an amount which is reasonable in

the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the

inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably

large liquidated damages is void as a penalty.” The Code’s equivalent position on leases is interestingly

slightly different. UCC 2A-504(1) says damages may be liquidated “but only at an amount or by a formula

that is reasonable in light of the then anticipated harm caused” by the breach. It leaves out anything about

difficulties of proof or inconvenience of obtaining another adequate remedy.

 TERMS TO KNOW

Consequential Damages

Damages that occur from loss or injury that do not flow immediately or directly from the act of the liable party

but only from the consequences or result of the act. Typically, the law requires such damages to be

foreseeable in order to be compensable.

Liquidated Damages

Damages that have been reduced to an exact dollar amount by a judgment, or, more commonly, to a clause in

a contract that anticipates what the dollar amount of damages would be in the event of a breach of a

particular term.

2. Statute of Limitations

The UCC statute of limitations for breach of any sales contract is four years. The parties may “reduce the

period of limitation to not less than one year but may not extend it” (Uniform Commercial Code, Section 2-

725). Article 2A-506(1) is similar, but omits the prohibition against extending the limitation.

Article 2-725(2) goes on: “A cause of action accrues when the breach occurs, regardless of the aggrieved

party’s lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except

that where a warranty explicitly extends to future performance of the goods and discovery of the breach must

await the time of such performance the cause of action accrues when the breach is or should have been

discovered.”

This is also referred to as the discovery rule.

 TERM TO KNOW

Discovery Rule

A rule that provides an exception to a time limit for making a claim when the claimant could not have made

the claim due to lack of knowledge. In such a case, the time limit will be held to accrue when the claimant

knew or should have known of the claim. Commonly used in medical malpractice cases when a patient could

not know that medical malpractice had been committed until symptoms occur.



In this lesson, you learned that the Uniform Commercial Code (UCC) allows for a number of remedies

for both buyers and sellers in the event of a contract breach. Parties to a contract that falls under the

UCC may specify remedies or limit them at will, with three exemptions: if an agreed-upon remedy

fails, if limits on or exclusions of consequential damages are deemed unconscionable, or if the

contract specifies unreasonable liquidated damages. You also learned that there is a statute of

limitations under the UCC for breach of sales contracts.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "Remedies in General" tutorial.



Consequential Damages

Damages that occur from loss or injury that do not flow immediately or directly from the act of the liable

party but only from the consequences or result of the act. Typically, the law requires such damages to be

foreseeable in order to be compensable.

Discovery Rule

A rule that provides an exception to a time limit for making a claim when the claimant could not have made

the claim due to lack of knowledge. In such a case, the time limit will be held to accrue when the claimant

knew or should have known of the claim. Commonly used in medical malpractice cases when a patient

could not know that medical malpractice had been committed until symptoms occur.

Liquidated Damages

Damages that have been reduced to an exact dollar amount by a judgment, or, more commonly, to a clause

in a contract that anticipates what the dollar amount of damages would be in the event of a breach of a

particular term.

Unconscionable

An adjective to describe something that is completely unfair and lacking a meaningful choice on the part of

a party. The term typically applies to very one-sided contracts where the disadvantaged party lacked

bargaining power. As a noun, the term is unconscionability.

SUMMARY

TERMS TO KNOW

Seller's Remedies Under the Uniform Commercial Code

by Sophia Tutorial



In this lesson, you will learn about contract remedies for sellers under the Uniform Commercial Code.

Specifically, this lesson will cover:

1. Article 2 in General and Remedies on Breach

2. Withhold Further Delivery and Stop Delivery

3. Identify to the Contract Goods in Possession

4. Resell

5. Recover Damages

6. Recover the Price

7. Cancel the Contract

8. Remedies on Insolvency

1. Article 2 in General and Remedies on Breach

Article 2-703 of the UCC lists the four things the buyer can do by way of default, and it lists (slightly

paraphrased here) the seller’s remedies (2A-523(1) is similar for leases).

Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or

before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly

affected and, if the breach is of the whole contract, then also with respect to the whole undelivered balance,

the aggrieved seller may:

1. Withhold delivery of such goods.

2. Stop delivery by any bailee.

3. Identify to the contract conforming goods not already identified.

4. Reclaim the goods on the buyer’s insolvency.

5. Resell and recover damages.

6. Recover damages for non-acceptance or repudiation.

7. In a proper case, recover the price.

8. Cancel.

Items 1-4 address the seller’s rights to deal with the goods; items 5-7 deal with the seller’s rights as regards the

price, and item 8 deals with the continued existence of the contract.

WHAT'S COVERED

IN CONTEXT

To illustrate the UCC’s remedy provision throughout the sections that follow, we assume these facts:

Howard, of Los Angeles, enters into a contract to sell and ship one hundred prints of a Pieter

Bruegel painting, plus the original, to Bunker in Dallas. Twenty-five prints have already been

delivered to Bunker, another twenty-five are en route (having been shipped by common carrier),

another twenty-five are finished but haven’t yet been shipped, and the final twenty-five are still in

production. The original is hanging on the wall in Howard’s living room.

Bunker, the buyer, breaches the contract. He sends Howard an e-mail stating that he won’t buy and

will reject the goods if delivery is attempted. The following sections detail the cumulative remedies

available to Howard.

 TERMS TO KNOW

Bailee

The person to whom personal property is delivered under a contract of bailment. A bailment places personal

property to another in trust, such as an automobile being delivered to a parking attendant.

Insolvency

The financial inability by a debtor (individual or business) to pay debts as they come due.

2. Withhold Further Delivery and Stop Delivery

Howard may simply refuse to send the third batch of twenty-five prints that are awaiting shipment.

Howard may also stop the shipment. If Bunker is insolvent, and Howard discovers it, Howard would be

permitted to stop any shipment in the possession of a carrier or bailee.

If Bunker is not insolvent, the UCC permits Howard to stop delivery only of carload, truckload, planeload, or

larger shipment. The reason for limiting the right to bulk shipments in the case of non-insolvency is that

stopping delivery burdens the carrier, and requiring a truck to stop and the driver to find a small part of the

contents could pose a sizable burden.

3. Identify to the Contract Goods in Possession

Howard could “identify to the contract” the twenty-five prints in his possession. Section 2-704(1) of the UCC

permits the seller to denote conforming goods that were not originally specified as the exact objects of the

contract, if they are under his control or in his possession at the time of the breach.

 EXAMPLE Assume that Howard had five hundred prints of the Bruegel painting. The contract did not state which one hundred of those prints he was obligated to sell, but once Bunker breached, Howard

could declare that those particular prints were the ones contemplated by the contract. He has this right

whether or not the identified goods could be resold.

Moreover, Howard may complete production of the twenty-five unfinished prints and identify them to the

contract, too, if in his “reasonable commercial judgment” he could better avoid loss— for example, by reselling

them. If continued production would be expensive and the chances of resale slight, the seller should cease

manufacture and resell for scrap or salvage value.

4. Resell

Howard could resell the seventy-five prints still in his possession as well as the original. As long as he

proceeds in good faith and in a commercially reasonable manner, per Section 2-706(2) and Section 2A-527(3),

he is entitled to recover the difference between the resale price and the contract price, plus incidental

damages (but less any expenses saved, like shipping expenses).

Incidental damages include any reasonable charges or expenses incurred because delivery had to be

stopped, new transportation arranged, storage provided for, and resale commissions agreed on.

The seller may resell the goods in virtually any way he desires as long as he acts reasonably; he may resell

them through a public or private sale. If the resale is public (at auction), only identified goods can be sold,

unless there is a market for a public sale of futures in the goods (as there is in agricultural commodities, for

example).

In a public resale, the seller must give the buyer notice unless the goods are perishable or threaten to rapidly

decline in value. The goods must be available for inspection before the resale, and the buyer must be allowed

to bid or buy.

The seller may sell the goods item by item or as a unit. Although the goods must relate to the contract, it is not

necessary for any or all of them to have exited or to have been identified at the time of breach. The seller

does not owe the buyer anything if resale or re-lease results in a profit for the buyer, as explained in the

Uniform Commercial Code, Sections 2-706 and 2A-527.

 TERM TO KNOW

Incidental Damages

Damages incurred in commercial shipping where a delay or breach of contract by the seller results in costs of

storage, inspection, or some other commercially foreseeable cost.

5. Recover Damages

The seller may recover damages equal to the difference between the market price (measured at the time and

place for tender of delivery) and the unpaid contract price, plus incidental damages, but less any expenses

saved because of the buyer’s breach.

 EXAMPLE Suppose Howard’s contract price was $100 per print plus $10,000 for the original and that the market price on the day Howard was to deliver the seventy-five prints was $75 (plus $8,000 for the

original). Suppose too that the shipping costs (including insurance) that Howard saved when Bunker

repudiated were $2,000 and that, to resell the prints, Howard would have to spend another $750.

Howard's damages, then, would be calculated as follows: original contract price ($17,500) minus market price

($13,625) = $3,875, minus $2,000 in saved expenses = $1,875, plus $750 in additional expenses = $2,625 net

damages recoverable.

If the formula would not put the seller in as good a position as performance under the contract, then the

measure of damages is lost profits— that is, the profit that Howard would have made had Bunker taken the

original painting and prints at the contract price, again deducting expenses saved and adding additional

expenses incurred, as well as giving credit for proceeds of any resale, as per Section 2-708(2) of the Uniform

Commercial Code.

Section 2A-528(2) is similar. This provision becomes especially important for so-called lost volume sellers.

Howard may be able to sell the remaining seventy-five prints easily and at the same price that Bunker had

agreed to pay.

Then why isn’t Howard whole? The reason is that the second buyer was not a substitute buyer, but an

additional one; that is, Howard would have made that sale even if Bunker had not reneged on the contract.

So, Howard is still short a sale and is out a profit that he would have made had Bunker honored the contract.

6. Recover the Price

In certain scenarios, Howard could recover from Bunker for the price of the twenty-five prints that Bunker

holds.

 EXAMPLE Suppose they had agreed to a shipment contract, so that the risk of loss passed to Bunker when Howard placed the other prints with the trucker, and that the truck crashed en route and the cargo

destroyed. Howard could recover the price.

 EXAMPLE Or suppose there was no market for the remaining seventy-five prints and the original. Howard could identify these prints to the contract and recover the contract price.

If Howard did resell some prints, the proceeds of the sale would have to be credited to Bunker’s account and

deducted from any judgment. Unless sold, the prints must be held for Bunker and given to him upon his

payment of the judgment.

7. Cancel the Contract

When Bunker repudiated, Howard could declare the contract cancelled. This would also apply if a buyer failed

to make a payment due on or before delivery. Cancellation entitles the non-breaching party to any remedies

for the breach of the whole contract or for any unperformed balance. This is what happens when Howard

recovers damages, lost profits, or the price.

Note again that these UCC remedies are cumulative. That is, Howard could withhold future delivery and stop

delivery en route, and identify to the contract goods in his possession, and resell, and recover damages, and

cancel.

8. Remedies on Insolvency

The above remedies apply when the buyer breaches the contract. In addition to those remedies, the seller

has remedies when he learns that the buyer is insolvent, even if the buyer has not breached.

Insolvency results, for example, when the buyer has “ceased to pay his debts in the ordinary course of

business,” or the buyer “cannot pay his debts as they become due," as stated in UCC, Section 1-201(23).

 EXAMPLE Upon learning of Bunker’s insolvency, Howard could refuse to deliver the remaining prints unless Bunker pays cash not only for the remaining prints, but for those already delivered. If Howard

learned of Bunker’s insolvency within ten days of delivering the first twenty-five prints, he could make a

demand to reclaim them.

If within three months prior to delivery, Bunker had falsely represented that he was solvent, the ten-day

limitation would not cut off Howard’s right to reclaim. If he does seek to reclaim, Howard will lose the right to

any other remedy with respect to those particular items.

However, according to UCC Section 2-702 (3), Howard cannot reclaim goods already purchased from Bunker

by a customer in the ordinary course of business. The customer does not risk losing her print purchased

several weeks before Bunker has become insolvent. In a lease situation, of course, the goods belong to the

lessor, so the lessor can repossess them if the lessee defaults.



In this lesson, you learned that Article 2 in general of the Uniform Commercial Code lists the

remedies available to buyers and sellers when a contract is broken. If a buyer breaches a contract,

the seller has a number of rights related to the goods, the price, and the continued existence of the

contract.

These remedies on breach include stopping delivery or withholding further delivery of the goods,

and identifying to the contract goods in possession if the contract involved conforming goods that

were not originally specified. The seller may then resell the goods in a reasonable manner and

recover damages, including incidental damages, related to the resale and unpaid contract price. If the

goods are already in the possession of the buyer, or if there is no resale market for the goods, a seller

may recover the price. In any case, the seller may cancel the contract with the buyer. Even if a buyer

has not breached, a seller has certain remedies on insolvency as well.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "Remedies in General" tutorial.



Bailee

SUMMARY

TERMS TO KNOW

The person to whom personal property is delivered under a contract of bailment. A bailment places personal

property to another in trust, such as an automobile being delivered to a parking attendant.

Incidental Damages

Damages incurred in commercial shipping where a delay or breach of contract by the seller results in costs

of storage, inspection, or some other commercially foreseeable cost.

Insolvency

The financial inability by a debtor (individual or business) to pay debts as they come due.

Buyer's Remedies Under the Uniform Commercial Code

by Sophia Tutorial



In this lesson, you will learn about contract remedies for buyers under the Uniform Commercial Code.

Specifically, this lesson will cover:

1. Buyer's Remedies in General

2. Remedies for Goods Not Received/Accepted

a. Cancel, Recover the Price, and Cover

b. Sue for Damages for Non-Delivery

c. Recover the Goods

3. Remedies for Goods Accepted

a. Compensatory Damages

b. Consequential Damages

c. Incidental Damages

1. Buyer's Remedies in General

The seller can do the following three things by way of defaulting:

Repudiate the contract.

Fail to deliver the goods.

Deliver or tender nonconforming goods.

Section 2-711 of the UCC provides the following remedies for the buyer.

Where the seller fails to make delivery or repudiates, or the buyer rightfully rejects or justifiably revokes, then

with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract,

the buyer may:

1. Cancel the contract; and

2. recover as much of the price as has been paid; and

3. "cover" and get damages; and

4. recover damages for non-delivery.

Where the seller fails to deliver or repudiates, the buyer may also:

1. Recover the goods if they have been identified; or

WHAT'S COVERED

2. obtain specific performance (if it is a proper case); or

3. replevy the goods.

On rightful rejection or justifiable revocation of acceptance, a buyer has a security interest in goods in his

possession or control for any payments made on their price and any expenses reasonably incurred in their

inspection, receipt, transportation, care, and custody and may hold such goods and resell them in like manner

as an aggrieved seller.

If the buyer has accepted non-conforming goods and notified the seller of the non-conformity, the buyer can

recover damages for the breach, per UCC Section 2-714.

In addition, the buyer may:

1. Recover incidental damages; and

2. recover consequential damages, per UCC Section 2-715.

Thus, the buyer’s remedies can be divided into two general categories:

Remedies for goods that the buyer does not receive or accept

Remedies for goods accepted

Throughout the following sections, let's use the same scenario from the previous lesson, but now assume that

Howard, rather than Bunker, breaches, and all other circumstances are the same. That is, Howard had

delivered twenty-five prints, twenty-five more were en route, the original painting hung in Howard’s living

room, another twenty-five prints were in Howard’s factory, and the final twenty-five prints were in production.

 TERMS TO KNOW

Nonconforming Goods

When the goods ordered are not available, but similar goods are provided. In this case, the UCC gives the

buyer the right to reject the nonconforming goods or to revoke acceptance of nonconforming goods. The

buyer may also accept them.

Replevy

Refers to the action of replevying, which means redelivering goods to their rightful owner. Replevy is the verb

form whereby a possessor redelivers goods to the original possessor.

Security Interest

An interest in real or personal property that may be sold on default in order to satisfy an obligation. An

example is a mortgage on real property.

2. Remedies for Goods Not Received/Accepted

The UCC sets out buyer’s remedies if goods are not received or if they are rightfully rejected or acceptance is

rightfully revoked.

2a. Cancel, Recover the Price, and Cover

Per UCC Sections 2-711(1), 2-106, 2A-508(1)(a), and 2A-505(1), if the buyer has not yet received or accepted the

goods (or has justifiably rejected or revoked acceptance because of their nonconformity), he may cancel the

contract and - after giving notice of his cancellation - he is excused from further performance.

Whether or not the buyer cancels, he is entitled to recover the price paid above the value of what was

accepted.

In the sample case, Bunker (the buyer) may cover and have damages.

 EXAMPLE Bunker may make a good-faith, reasonable purchase of substitute goods. He may then recover damages from the seller for the difference between the cost of cover and the contract price. This

is the buyer’s equivalent of the seller’s right to resell. Thus, Bunker could try to purchase seventy-five

additional prints from some other manufacturer. But his failure or inability to do so does not bar him from

any other remedy open to him.

 TERM TO KNOW

Cover

The right of a buyer in the event of the seller’s breach to purchase substitute goods so long as such purchase

is done in good faith and without unreasonable delay. The buyer is then entitled to the difference in cost plus

other damages minus expenses saved, if any.

2b. Sue for Damages for Non-Delivery

Bunker could sue for damages for non-delivery. Under Section 2-713 of the UCC, the measure of damages is

the difference between the market price at the time when the buyer learned of the breach and the contract

price (plus incidental damages, minus expenses saved).

 EXAMPLE Suppose Bunker could have bought seventy-five prints for $125 on the day Howard called to say he would not be sending the rest of the order. Bunker would be entitled to $1,875— the market

price ($9,375) minus the contract price ($7,500). This remedy is available even if he did not in fact

purchase the substitute prints.

 EXAMPLE Suppose that at the time of breach, the original painting was worth $15,000 (Howard having just sold it to someone else at that price). Bunker would be entitled to an additional $5,000, which would

be the difference between his contract price and the market price.

For leases, Section 2A-519(1) of the UCC provides the following:

“The measure of damages for non-delivery or repudiation by the lessor or for rejection or revocation

of acceptance by the lessee is the present value, as of the date of the default, of the then market

rent minus the present value as of the same date of the original rent, computed for the remaining

lease term of the original lease agreement, together with incidental and consequential damages,

less expenses saved in consequence of the lessor’s default.”

2c. Recover the Goods

If the goods are unique, as in the case of the original Bruegel, Bunker is entitled to specific performance— that

is, recovery of the painting. This section of the UCC is designed to give the buyer rights comparable to the

seller’s right to the price, and modifies the old common-law requirement that courts will not order specific

performance except for unique goods.

It permits specific performance “in other proper circumstances,” and these might include particular goods

contemplated under output or requirements contracts or those available from one market source.

Even if the goods are not unique, the buyer is entitled to replevy them if they are identified to the contract and

he cannot recover them after good-faith effort. Replevying is the name of an ancient common-law action for

recovering goods that have been unlawfully taken; in effect, it is not different from specific performance, and

the UCC makes no particular distinction between them in Section 2-716. Section 2A-521 holds the same for

leases.

 EXAMPLE In our case, Bunker could replevy the twenty-five prints identified and held by Howard.

 EXAMPLE Bunker also has the right to recover the goods should it turn out that Howard is insolvent. Under UCC, Section 2-502, if Howard were to become insolvent within ten days of the day on which

Bunker paid the first installment of the price due, Bunker would be entitled to recover the original and the

prints, as long as he tendered any unpaid portion of the price.

For security interest in goods rightfully rejected, if the buyer rightly rejects nonconforming goods or revokes

acceptance, he is entitled to a security interest in any goods in his possession.

 EXAMPLE Bunker need not return the twenty-five prints he has already received unless Howard reimburses him for any payments made and for any expenses reasonably incurred in their inspection,

receipt, transportation, care, and custody. If Howard refuses to reimburse him, Bunker may resell the

goods and take from the proceeds the amount to which he is entitled.

3. Remedies for Goods Accepted

The buyer does not have to reject nonconforming goods. He may accept them anyway or he may effectively

accept them because the time for revocation has expired.

In such a case, the buyer is entitled to remedies as long as he notifies the seller of the breach within a

reasonable time. In our example, Bunker can receive three types of damages, all of which are outlined here.

3a. Compensatory Damages

Bunker may recover compensatory damages for any losses that in the ordinary course of events stem from

the seller’s breach.

 EXAMPLE Suppose Howard had used inferior paper that was difficult to detect, and within several weeks of acceptance, the prints deteriorated. Bunker is entitled to be reimbursed for the price he paid.

 TERM TO KNOW

Compensatory Damages

A form of monetary award intended to make a victim whole by compensating the victim to place him or her in

the position he or she would have been in had the damage not occurred, and nothing more.

3b. Consequential Damages

Bunker is also entitled to consequential damages. These are losses resulting from general or particular

requirements of the buyer’s needs, which the seller had reason to know and which the buyer could not

reasonably prevent by cover or otherwise.

 EXAMPLE Suppose Bunker is about to make a deal to resell the twenty-five prints that he has accepted, only to discover that Howard used inferior ink that faded quickly. Howard knew that Bunker was

in the business of retailing prints and therefore he knew or should have known that one requirement of the

goods was that they be printed in long-lasting ink. Because Bunker will lose the resale, he is entitled to the

profits he would have made. If Howard had not wished to take the risk of paying for consequential

damages, he could have negotiated a provision limiting or excluding this remedy.

The buyer has the burden of proving consequential damages, but the UCC does not require mathematical

precision.

 EXAMPLE Suppose customers come to Bunker’s gallery and sneer at the faded colors. If he can show that he would have sold the prints were it not for the fading ink (perhaps by showing that he had sold

Bruegels in the past), he would be entitled to recover a reasonable estimate of his lost profits.

 TERM TO KNOW

Consequential Damages

Damages that occur from loss or injury that do not flow immediately or directly from the act of the liable party

but only from the consequences or result of the act. Typically, the law requires such damages to be

foreseeable in order to be compensable.

CASE STUDY: De La Hoya v. Slim's Gun Shop

In De La Hoya v. Slim’s Gun Shop, the plaintiff purchased a handgun from the defendant, a properly

licensed dealer. While the plaintiff was using it for target shooting, he was questioned by a police

officer, who traced the serial number of the weapon and determined that - unbeknownst to either

the plaintiff or the defendant - it had been stolen.

The plaintiff was arrested for possession of stolen property and incurred, in 2010 dollars, $3,000 in

attorney fees to extricate himself from the criminal charges. He sued the defendant for breach of the

implied warranty of title and was awarded the amount of the attorney fees as consequential

damages. On appeal, the California court held it foreseeable that the plaintiff would get arrested for

possessing a stolen gun, and “once the foreseeability of the arrest is established, a natural and usual

consequence is that the [plaintiff] would incur attorney’s fees.”

De La Hoya v. Slim’s Gun Shop, 146 Cal. Rptr. 68 (Super. 1978).

3c. Incidental Damages

Section 2-715 of the UCC allows incidental damages, which are:

“damages resulting from the seller’s breach including expenses reasonably incurred in inspection,

receipt, transportation and care and custody of goods rightfully rejected, any commercially

reasonable charges, expenses or commissions in connection with effecting cover and any other

reasonable expense incident to the delay or other breach.”

Section 2A-520(1) of the UCC is similar for leases.

 TERM TO KNOW

Incidental Damages

Damages incurred in commercial shipping where a delay or breach of contract by the seller results in costs of

storage, inspection, or some other commercially foreseeable cost.



In this lesson, you learned the remedies provided to a buyer by Article 2 of the Uniform Commercial

Code if a seller defaults on a contract. Buyer’s remedies in general can be divided into remedies for

goods that the buyer does not receive or accept, and remedies for non-conforming goods that the

buyer accepts.

The remedies for goods not received/accepted include the option to cancel, recover the price, and

cover, meaning the buyer is excused from the contract, may recover the price paid, and may seek

damages for the cost of purchasing substitute goods. The buyer may also sue for damages for non-

delivery. In some cases, such as with unique or one-of-a-kind goods, the buyer is entitled to recover

the goods through specific performance. If a buyer chooses to accept non-conforming goods, the

remedies for goods accepted include the receipt of compensatory, consequential, and incidental

damages that stem from the seller’s breach.

Best of luck in your learning!

Source: This content has been adapted from Lumen Learning's "Remedies in General" tutorial.



Compensatory Damages

A form of monetary award intended to make a victim whole by compensating the victim to place him or her

in the position he or she would have been in had the damage not occurred, and nothing more.

Consequential Damages

Damages that occur from loss or injury that do not flow immediately or directly from the act of the liable

party but only from the consequences or result of the act. Typically, the law requires such damages to be

foreseeable in order to be compensable.

Cover

The right of a buyer in the event of the seller’s breach to purchase substitute goods so long as such

SUMMARY

TERMS TO KNOW

purchase is done in good faith and without unreasonable delay. The buyer is then entitled to the difference

in cost plus other damages minus expenses saved, if any.

Incidental Damages

Damages incurred in commercial shipping where a delay or breach of contract by the seller results in costs

of storage, inspection, or some other commercially foreseeable cost.

Nonconforming Goods

When the goods ordered are not available, but similar goods are provided. In this case, the UCC gives the

buyer the right to reject the nonconforming goods or to revoke acceptance of nonconforming goods. The

buyer may also accept them.

Replevy

Refers to the action of replevying, which means redelivering goods to their rightful owner. Replevy is the

verb form whereby a possessor redelivers goods to the original possessor.

Security Interest

An interest in real or personal property that may be sold on default in order to satisfy an obligation. An

example is a mortgage on real property.

Limitations on Contract Remedies

by Sophia Tutorial



In this lesson, you will learn about several limitations or restrictions affecting when a person can claim

remedies for a breach of contract. Specifically, this lesson will cover:

1. Foreseeability

2. Mitigation of Damages

3. Certainty of Damages

4. Loss of Power of Avoidance

a. Delay

b. Affirmation

c. Rights of Third Parties

5. Agreement of the Parties Limiting Remedies

6. Election of Remedies

a. At Common Law

b. Under the Uniform Commercial Code

7. Tort vs. Contract

8. Legal vs. Extralegal Remedies

1. Foreseeability

If the damages that flow from a breach of contract lack foreseeability, they will not be recoverable. Failures to

act, like acts themselves, have consequences.

To put a non-breaching party in the position he would have been in had the contract been carried out could

mean, in some cases, providing compensation for a long chain of events. In many cases, that would be unjust,

because a person who does not anticipate a particular event when making a contract will not normally take

steps to protect himself (either through limiting language in the contract or through insurance).

The law is not so rigid; a loss is not compensable to the non-breaching party unless the breaching party, at the

time the contract was made, understood the loss was foreseeable as a probable result of his breach.

Of course, the loss of the contractual benefit in the event of breach is always foreseeable.

 EXAMPLE A company that signs an employment contract with a prospective employee knows full well that if it breaches, the employee will have a legitimate claim to lost salary. But it might have no reason to

know that the employee’s holding the job for a certain length of time was a condition of his grandfather’s

gift of $1 million.

WHAT'S COVERED

CASE STUDY: Hadley v. Baxendale

Joseph and Jonah Hadley were proprietors of a flour mill in Gloucester, England. In May 1853, the

shaft of the milling engine broke, stopping all milling. An employee went to Pickford and Company, a