Real Contracts Final Master

When a party substantially performs, the other party may

not suspend performance, but may sue for damages

Substantial performance occurs when the breach is

both innocent and trivial

a party that has materially breached can revive the other party’s duty to perform by

curing the defective performance

The typical remedy for breach of contract is

Money damages. Courts generally calculate money damages based on the non-breaching party’s expectation interest.

Expectation Damages

Aim to give victims of breach the “benefit of the bargain.”

They do NOT include punitive damages or damages for pain and suffering.

The common law usually calculates expectation damages based on cost of completion.

The common law measures expectation damages by the diminution of value:

if the cost of completion would result in economic waste

True or False: All economic losses from breach of contract are recoverable

False. Limits on damages include:

1. Foreseeability

2. Mitigation

3. Reasonable Certainty

Mitigation requires that

the victim of the breach make reasonable efforts to avoid additional losses

Consequential damages are foreseeable if they arise from

1. ordinary circumstances OR

2. special circumstances that the breaching party had reason to know of.

Damages must be proved with

reasonable certainty

Alternatives to expectation damages include

1. specific performance

2. reliance-based money damages

3. restitution-based money damages

Specific performance is an appropriate remedy when the contract is for:

1. one of a kind or rare goods OR

2. land

but NOT personal services

Reliance and restitution based damages are appropriate when:

expectation damages would be inadequate

Reliance based damages

reflect expenses incurred by the victim of the breach in reliance on the contract

Restitution based damages

reflect the unjust enrichment of the breaching party

Section 241: Circumstances significant in determining whether a failure is material (5 FACTOR TEST FOR MATERIAL BREACH)

1. the extent to which the injured party will be deprived of the benefit which he reasonably expected

2. the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived

3. the extent to which the party failing to perform or to offer to perform will suffer forfeiture

4. the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances

5. the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing

Jacob & Youngs Inc v Kent

Facts: The plaintiff, Jacob & Youngs, Inc., constructed a mansion for the defendant, George Kent, but inadvertently used a different brand of pipe than the specific "Reading" brand required by the contract, leading Kent to withhold the final payment because the builder refused to incur the massive expense of tearing down walls to replace the functionally identical pipes

Rule: the New York Court of Appeals established that a party who substantially performs their contractual obligations is entitled to the contract price—minus an allowance for minor defects—if their deviation was trivial, unintentional, and did not frustrate the contract's primary purpose.

Roberts Contracting Company v. Valentine-Wooten Road Public Facility Board

facts: , the plaintiff contractor walked off a sewer construction project more than a year past the deadline due to various delays, leaving behind a non-operational system that the Arkansas Court of Appeals ultimately found did not constitute substantial performance.

rule: the court ruled that substantial performance does not exist if a contractor's failure to complete a project—such as leaving a sewer system non-operational—deprives the other party of the primary benefit and essence of the contract.

Smargon v. Grand Lodge Partners

Facts: a couple sued to rescind their contract for a $1.5 million luxury condominium after a pre-closing inspection revealed excessive noise and vibration from an adjacent mechanical room, leading to a legal dispute over whether the developer's failure to fix the issue or provide adequate assurances constituted a repudiation of the contract.

Rule: a party seeking to prove anticipatory repudiation based on a failure to provide adequate assurances must first show that they actually demanded such assurances and were ready and willing to perform their own contractual obligations.

Section 242. Circumstances Significant in Determining When Remaining Duties are Discharged

1. everything listed in Section 241

2. the extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements

3. the extent to which the agreement provides for performance without delay, but a material failure to perform or to offer to perform on a stated day does not of itself discharge the other party’s remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.

Comment to Section 242

Cure. A party’s uncured material failure to perform or to offer to perform not only has the effect of suspending the other party’s duties but, when it is too late for the performance or the offer to perform to occur, the failure also has the effect of discharging those duties. Ordinarily there is some period of time between suspension and discharge, and during this period a party may cure his failure. Even then, since any breach gives rise to a claim, a party who has cured a material breach has still committed a breach, by his delay, for which he is liable in damages. Furthermore, in some instances timely performance is so essential that any delay immediately results in discharge and there is no period of time during which the injured party’s duties are merely suspended and the other party can cure his failure.

Section 243. Effect of a breach by non-performance as giving rise to a claim for damages for total breach

With respect to performances to be exchanged under an exchange of promises, a breach by non-performance gives rise to a claim for damages for total breach only if it discharges the injured party’s remaining duties to render such performance.

Section 250. When a statement or an act is a repudiation

A repudiation is

1. a definite and unconditional statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under 243, or

2. a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

Section 253. Effect of a repudiation as a breach and on other party’s duties

1. where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.

2. Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a duty to render performance discharges the other party’s remaining duties to render performance.

Wholesale Sand and Gravel v. James Decker

Facts: a contractor hired to install a gravel driveway repeatedly delayed work due to wet ground and failed to return to the site despite multiple promises to "get right on it," leading the homeowner to terminate the contract.

Rule: anticipatory repudiation occurs when a party’s conduct—such as repeated, unexplained delays and broken promises to perform—creates a definite and unequivocal manifestation of their intent not to perform their contractual duties within a reasonable time.

Section 347. Measure of Damgs in General

Subject to the limitations stated in sections 350-353, the injured party has a right to damages based on his expectation interest as measured by

1. the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus

2. any other loss, including incidental or consequential loss, caused by the breach, less

3. any cost or other loss that he has avoided by not having to perform.

Hawkins v. McGee

Facts: famously known as the "Hairy Hand Case," a patient sued his surgeon for breach of contract after a skin graft from the patient's chest—which the doctor had "guaranteed" would result in a "100 percent perfect hand"—instead caused thick hair to grow on his palm. Because the surgeon, Dr. McGee, specifically solicited the procedure to experiment with a technique he was unfamiliar with, the court treated his "strong language" as a binding warranty rather than mere medical opinion

Rule: the proper measure of expectation damages for a breach of contract is the difference between the value of the performance as promised (a "100 percent perfect" hand) and the actual value of the performance received (the "hairy" hand).

Lyon v. Belosky Construction

Facts: a homeowner sued their builder after discovering that a custom-built roof was misaligned and centered over the wrong room, departing significantly from the specific design drawings that the owners—who were away during construction—had explicitly prioritized for aesthetic reasons. The court ultimately found that the contractor's failure to follow the plans was a substantial defect, as the aesthetic appearance was a "primary benefit" of the custom contract that the owners did not receive.

Rule: when a contractor’s deviation from a contract is substantial and intentional—particularly regarding specific aesthetic designs—the proper measure of damages is the cost of replacement or repair rather than the diminution in value, even if those repairs are expensive.

No presence of economic waste so cost of completion appropriate.

Schneberger v. Apache Corp.

Facts: the Oklahoma Supreme Court heard a dispute where landowners sued an oil company for failing to fulfill a settlement agreement to remediate water pollution on their property, after the company refused to pay for the remediation because the projected $1.3 million cost was grossly disproportionate to the actual $5,175 diminution in the land's value.

Rule: the measure of damages for a breach of contract to repair or remediate property is the diminution in value rather than the cost of performance if the cost to repair is grossly disproportionate to the actual benefit gained or the value lost.

Avoidance of economic waste that would have been caused by cost of completion

Section 348

If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on

1. the diminution in the market price of the property caused by the breach, or

2. the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him.

In re Worldcom (MITIGATION)

Facts: basketball legend Michael Jordan filed a breach-of-contract claim against the telecommunications giant WorldCom during its bankruptcy proceedings after the company rejected his endorsement agreement, leading to a dispute over whether Jordan had a duty to mitigate damages by seeking new sponsorship deals. While WorldCom argued that Jordan was an employee who failed to find "alternative employment," the bankruptcy court determined he was an independent contractor whose $2 million annual payments were owed because his unique celebrity brand could not be easily replaced.

Rule: a lost volume seller—one with the capacity to enter into multiple simultaneous contracts—is not required to mitigate damages by subtracting profits from subsequent deals, as those deals would have been made regardless of the defendant's breach.

Hadley v. Baxendale (Foreseeability)

Facts: a mill owner sued a common carrier for lost profits after the carrier delayed the delivery of a broken crankshaft for repair, unaware that the entire mill was forced to shut down until the part returned. The court ultimately found that the carrier was not liable for those specific lost profits because the mill owner had never informed them that the mill couldn't operate without the shaft.

Rule: a breaching party is only liable for damages that are reasonably foreseeable at the time the contract was made, meaning they must either arise naturally from the breach or be based on special circumstances that were specifically communicated to the defendant.

Section 351. Unforeseeability and related limitations on damages

1. damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.

2. Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know

Sunnyland Farms v Central New Mexico Electric

Facts: a commercial farm sued its utility provider for breach of contract after the cooperative disconnected power without the required notice, leaving the farm's water pumps inoperable when a fire broke out the following day and destroyed the facility. the farm's employees inadvertently started the blaze while welding, but the lack of electricity meant neither they nor arriving firefighters could access well water to contain the flames.

Rule: the New Mexico Supreme Court adopted the modern "foreseeability" rule, holding that a breaching party is liable for consequential damages if the loss was a probable—not just possible—result of the breach that a reasonable person in the defendant's position would have foreseen.

Section 352. Uncertainty as a limitation on damages

Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.

V. A. L. Floors v Westminster Communities (CERTAINTY)

Facts: a flooring contractor sued a developer for lost profits after the developer terminated their contract for a planned 55-unit residential project before construction began, leading to a legal battle over whether the contractor's estimated damages were too speculative to be recovered.

Rule: a plaintiff can recover lost profits even without absolute certainty of the amount, provided they establish a reasonable basis for calculating those damages through credible evidence like past performance or industry standards.

Section 356 Liquidated damages and penalties

Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty

Dobson Bay Club v La Sonrisa de Siena

Facts: a borrower defaulted on a $28.6 million balloon payment, leading the note holder to assess a $1.4 million late fee (5% of the principal) that the borrower challenged as an unenforceable penalty. While the note holder argued the fee was a valid liquidated damages provision to cover administrative costs and lost opportunity, the Arizona Supreme Court noted that the borrower was already paying default interest and collection costs, making the massive additional fee redundant.

Rule: a liquidated damages clause is an unenforceable penalty if the fixed amount is unreasonable in light of either the anticipated loss at the time of contracting or the actual damages sustained at the time of the breach.

Section 359 Specific Performance

Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party.

Section 360. Factors affecting adequacy of damages

1. the difficulty of proving damages with reasonable certainty

2. the difficulty of procuring a suitable substitute performance by means of money awarded as damages, and

3. the likelihood that an award of damages could not be collected.

Oliver v. Ball

Facts: a buyer sued for specific performance after a seller breached a contract to convey two tracts of land totaling 71 acres, which the buyer sought for its unique features including proximity to his home, mineral rights, and harvestable timber. The trial court originally denied the request, ruling that the buyer could be adequately compensated with money damages because he failed to prove the land's specific characteristics were "irreplaceable".

Rule: the Pennsylvania Superior Court reaffirmed that specific performance is a standard remedy for the breach of a real estate contract because land is inherently presumed unique, meaning money damages are generally inadequate to compensate a buyer for its loss.

Houseman v. Dare

Facts: an engaged couple who broke up disputed the ownership of their pedigree dog, Dexter, after the woman sued for specific performance of an oral agreement that she would keep the pet in exchange for her interest in their jointly owned house.

Rule: specific performance can be an appropriate remedy for a breach of contract involving a pet because animals, though legally classified as personal property, possess a unique sentimental value that makes money damages inadequate.

Section 349 Damages based on reliance interest

As an alternative to the measure of damages stated in section 347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.

Comment to Section 349

the injured party may, if he chooses, ignore the element of profit and recover as damages his expenditures in reliance. he may choose to do this if he cannot prove his profit with reasonable certainty. he may also choose to do this in the case of a losing contract, one under which he would have had a loss rather than a profit.

Hollywood Fantasy v. Zsa Zsa Gabor

Facts: the plaintiff sued actress Zsa Zsa Gabor for breach of contract after she cancelled her appearance at a "fantasy vacation" event two weeks before it began—causing the company to go out of business—to instead film a 14-second cameo in the movie Naked Gun 2 1/2. The dispute centered on whether Gabor's brief cameo constituted a "significant acting opportunity" allowed by the contract's cancellation clause, and whether the business could recover over $1 million in projected profits from a television series that had not yet been made.

Rule: a plaintiff cannot recover lost profits if they are considered speculative, meaning they must be proven with reasonable certainty rather than based on the hypothetical success of a new or unestablished venture.

Lancellotti v. Thomas

Facts: a buyer who breached a contract to purchase a business after failing to build a required addition sought to recover the $25,000 down payment he had already paid to the seller. The seller argued that since the buyer was the one who breached, he should forfeit the entire deposit, regardless of whether the seller actually suffered that much in damages.

Rule: a breaching party is entitled to restitution of any benefit they conferred on the non-breaching party (such as a down payment) to the extent that the amount exceeds the actual damages caused by the breach.

The timeline of a material breach

Phase 1: Partial breach- the time right after the breach. The victim may suspend performance until the breacher cures.

Phase 2: Total breach - the breacher fails to cure, victim no longer obliged to perform at all.

Repudiation defined

Refusal to perform a contractual obligation.

Anticipatory repudiation - refusal occurs before performance is due under the contract.

An express contractual term generally comes from

The parties’ words in writing

An implied contractual term generally comes from

Either the circumstances or legal default rules

The common law allows courts to fill

Small gaps

If a big gap involves a crucial issue, the common law says that

No contract was formed

The implied duty of good faith is different from other implied terms in that

Parties cannot waive it

A condition is

Either an event that triggers the duty to perform or an event that releases a party from performing

Implied or constructive conditions arise from

The context

Supplying an Omitted Term

When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.

Sun Printing v. Remington Paper

a contract is unenforceable for indefiniteness if it leaves essential terms, such as price and duration, for future negotiation without providing a definitive, objective method for determining them. GAP TOO BIG TO FILL.

Denbury Onshore v. Precision Welding

an oral service contract with no specified duration is terminable at will, provided the terminating party gives reasonable notice. GAP FILLED IN BY MAKING CONTRACT TERMINABLE AT WILL.

Vohs v. Donovan

a real estate contract contingency is neither indefinite nor illusory if extrinsic evidence establishes that both parties objectively understood the contingency referred to a specific, pending transaction rather than being left to a party's unfettered discretion.

Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

Restatement comment on bad faith examples

1. evasion of the spirit of the bargain

2. lack of diligence and slacking off

3. willful rendering of imperfect performance

4. abuse of a power to specify terms

5. interference with or failure to cooperate in the other party’s performance

6. taking advnatage of someone’s mistake or oversight after a contract has been formed with them (market street v frey) [doesn’t apply to the negotiation stage, just after a contratc has been created]

Market Street Associates v. Frey

the implied duty of good faith in every contract prohibits a party from taking opportunistic advantage of an oversight by their contract partner concerning their rights under the agreement.

Condition Defined

A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

Effects of the Non-Occurrence of a Condition

Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur.

Morrison v. Bare

a contractual "special condition" (such as providing a repair bill) is a limiting factor that must occur to activate a duty rather than a promise that creates a legal obligation to perform the act itself.

J.N.A. Realty v. Cross Bay Chelsea

a commercial tenant may be granted equitable relief for a negligent failure to timely exercise a renewal option if the tenant has made substantial improvements to the property, the landlord suffers no prejudice from the delay, and the loss of the lease would result in a disproportionate forfeiture. (majority rule on lease renewal negligence)

Utah Coal and Lumber Restaurant v Outdoor Endeavors Unlimited

a lessee's failure to strictly comply with a lease renewal option may be equitably excused only if the delay was caused by fraud, misrepresentation, duress, undue influence, mistake, or waiver, but not if it resulted from the lessee's mere negligence or inadvertence. (minority rule on lease renewal negligence)

Pisani Construction v. Krueger

a contractor cannot maintain an action to recover an unpaid contract balance if they fail to render substantial performance, which is a constructive condition to the owner's duty to pay, especially when the contractor is aware that exact compliance with specifications is required for the project's success.

Material breach

when breaches are intentional or go to the heart of the contract. AKA a failure of a constructive (implied) condition. It relieves the non-breaching party of its obligation to perform under the contract.

Substantial performance

small, unintentional breaches on minor matters. They do not result in the failure of any constructive condition and the non-breaching party is still required to perform their obligations under the contract, although they may be entitled to damages if any result from the breach.

Gaps the courts will likely fill in

Reasonable Terms. Examples:

1. time for performance (how long performance will take. example painting a house. a reasonable amount of time)/duration

2. place of delivery

3. method of delivery

4. method of payment

5. when is rent due. (example, first of the month is reasonable).

6. time and date for delivery (reasonable time, industry custom).

what courts will likely not fill in

1. Quantity (EXCEPTION: requirements clauses. “all the potatoes I require this month is ok."")

2. if, say, BOTH price AND duration are indefinite.

Promissory Condition

failure to fulfill is a brach and excuses other paty’s performance.

Example: the singer promises to perform on july 10, and the promoter’s obligation to pay $20k is conditioned on the singer performing on that date.

Excusing Failur of an Express Condition

Waiver

Disproportionate forfeiture (economic waste, ex. JNA)

JNA and Utah Coal

only apply to commercial, not residential, since usually residential tenants don’t usually make improvements.

Mailbox Rule (2nd Restatement 66-67)

a properly addressed acceptance becomes effective upon dispatch. an improperly addressed acceptance is effective upon dispatch only if it is received within the time that a properly addressed acceptance would have been received.

EXCEPTIONS TO MAILBOX RULE:

1. the offeror remains master of the offer and may specify a time other than dispatch when an acceptance becomes effective.

2. the mailbox rule does not apply to unilateral contracts, which are accepted by full performance.

3. the mailbox rule does not apply to option contracts, where acceptance is effective upon receipt.

Acceptance (2nd Restatement 59)

Mirror Image Rule requires the acceptance to be a mirror image of the offer, or an unconditional assent to the exact same terms as the offer; any change to the terms of the offer is considered a counteroffer that rejects and terminates the original offer.

*Does not apply to the sale of goods under the UCC

Offers made in jest

cannot form a contract if the offeree knows or has reason to know that the offer is a joke.

Can there be tacit acceptance of an offer by performance?

Yes. acceptance via performance of the services, even if he didn’t say “I accept.”

Option Contract

a promise that meets the requirements for contract formation and limits the offeror’s power to revoke the offer. The offeree provides consideration in exchange for the offeror’s promise to keep an offer open for a specified time. CAN APPLY TO GOODS OR SERVICES. The seller also cannot sell the thing to anybody else during the specified time (exclusivity)** Professor says exclusivity not necessarily always

Condition

a term specifying an uncertain event that must occur before one of the parties is required to perform.

Exception to Promissory Estoppel

the promisee’s reliance must be justified. For example, a promisee who relies upon a promise from a promisor with no money or ability to honor the promise, or who relies even after the promisor has made clear he will not honor the promise, does not rely justifiably. (ex: someone who you know is broke promises to buy you a car if you pass your road test)

Promissory Estoppel

(1) the promisor made a promise that the promisor should have reasonably expected would induce the promisee’s action or forbearance,

(2) the promisee actually and justifiably relied on the promise, and

(3) enforcement of the promise is necessary to avoid injustice (e.g., the promisee has suffered a substantial detriment due to relying on the promise).

In most states, the remedy provided under the doctrine of promissory estoppel is limited to what is required to prevent an injustice to the promisee, with the aim of enforcing the promise only to the extent necessary to make the promisee whole.

Illusory Promises

reserve to the promisor the choice to either perform or not perform, at the promisor’s sole discretion and with no apparent restrictions on the promisor’s discretion, so that the promisor is not bound to perform under the contract. Illusory promises do not constitute valid consideration.

Pre-Existing Duty Rule

an act or forbearance is not consideration if the party already has a legal obligation to perform the act or forbearance. DOES NOT APPLY TO GOODS/UCC.

Can parties under 18 years old enter into contracts?

if a party is under 18 years old, then the party lacks the capacity to form an enforceable contract. BUT THE MINOR HIMSELF IS THE ONLY PARTY WHO MAY ASSERT THIS DEFENSE.

A contract can be modified without additional consideration (the exception) if:

(1) it results from unforeseen circumstances that were not anticipated by the parties when the contract was formed; or (

2) the parties’ duties are altered sufficiently to constitute consideration

If an advertisement leaves room for negotiation (or best offer)

it is not a valid offer. Advertisements are generally not considered offers unless they contain a reasonably certain promise that leaves no room for negotiation.

4 Exceptions to Silence Not Being Acceptance of an Offer

(1) the offeree receives the benefit of the offered services, despite reasonable opportunity to reject those services, as well as reason to know that compensation is expected; (

2) the offeree exercises dominion over offered property by acting inconsistently with the offeror’s ownership of that property;

(3) there are prior dealings that make it reasonable for the offeror to expect to be notified of a rejection and, in the absence of a rejection, to conclude acceptance; and

(4) the offeror and offeree intend for the offeree’s silence or nonverbal conduct to constitute an acceptance.

2 Kinds of Offers that Cannot be Revoked by Offeror

1. options contracts (require consideration from offeree)

2. firm offers (but can be revoked after 3 months)

Lack of Capacity Due to Intoxication

Only applies if the other party knew that the person was drunk.

Preliminary Negotiation Examples (non-binding)

invitations to bid, price quotations, and proposals.

Promised or Provided Performance (Consideration) Examples

(1) an affirmative act;

(2) a forbearance to do something a party has a legal right to do; or

(3) the creation, modification, or termination of a legal relationship.

Contract (general def)

legally binding agreement. An agreement generally does not have to be in writing to be enforceable.

Oral agreements

technically enforceable, but as a practical matter hard to enforce due to lack of evidence of their existence.

Common Law

for most contract disputes. services, land, and anything else that is not the sale of goods.

Contract (Restatement (2d) of Contracts)

a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty.

Promise

a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.

Promisor

person manifesting the intention.

Promisee

the person to whom the manifestation is addressed.