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The US Restatement (Second) of Contracts of 1981

June 8, 2011

The Restatement (Second) of the Law of Contracts is one of the most well-recognized and frequently-cited legal treatises in all of American jurisprudence. Every first year (1L) law student in every law school in the United States is exposed to it, and it is probably the most-cited non-binding authority in all of U.S. common law in the areas of contracts and commercial transactions. It is a work without peer in terms of overall influence and recognition among the bar and bench, with the possible exception of the Restatement of Torts. The second edition was begun in 1962 and completed by the American Law Institute in 1979.
Preeminent legal scholars and jurists have commented extensively on the Restatement, both in contrasting it with aspects of the first Restatement, and in evaluating its influence and effectiveness in reaching its stated objectives. It is in this context of direct review that one can find numerous arguments both favoring and criticizing some aspects of the Restatement as an independent source of legal scholarship.
Although several sections of the Restatement contained new rules which sometimes contradicted existing law, courts citing these sections have predominantly adopted the Restatement’s view, citing them as a court would cite statute or code.
Far more common, however, is the practice of citing the Restatement to clarify generally-accepted doctrine in every major area of contract and commercial law. It is in this context of legal research that one can find the Restatement used as direct substantiation and persuasive authority, to validate the arguments and interpretations of individual legal practitioners.
Although the Restatement of Contracts is still an influential academic work, certain aspects have been superseded in everyday legal practice by the Uniform Commercial Code. Specifically, the UCC has replaced the Restatement (Second) of Contracts in regard to the sale of goods. The Restatement (Second) of Contracts remains the unofficial authority for aspects of contract law which find their genus in the common law principles of the United States and, previously, England.
Source: http://en.wikipedia.org/wiki/Restatement_(Second)_of_Contracts

THE RESTATEMENT (SECOND) OF CONTRACTS
copyright by the American Law Institute (1981
Table of Contents

§ 1 Contract Defined..

§ 2 Promise.

§17 Requirement of a Bargain..

§20 Effect of Misunderstanding…

§21 Intention to be Legally Bound….

§24 Offer Defined…

§26 Preliminary Negotiations….

§30 Form of Acceptance Invited……

§32 Invitation of Promise or Performance.

§33 Certainty…..

§34 Certainty and Choice of Terms; Effect of Performance or Reliance

§37 Option Contracts–Termination of Offer

§39 Counter-Offers

§41 Offer–Lapse of Time

§42 Revocation by Communication From Offeror Received by Offeree…

§43 Indirect Communication of Revocation

§45 Option Contract Created by Part Performance of Tender..

§54 Acceptance by Performance; Necessity of Notification to Offeror..

§56 Acceptance by Promise; Necessity of Notification to Offeror..

§59 Purported Acceptance Which Adds Qualifications..

§60 Acceptance of Offer Which States Place, Time, or Manner of Acceptance..

§62 Effect of Performance by Offeree Where Offer Invites Either Performance or Promise..

§63 Time When Acceptance Takes Effect…

§64 Acceptance by Telephone or Teletype…..

§65 Reasonableness of Medium of Acceptance……

§66 Acceptance Must Be Properly Dispatched….

§67 Effect of Receipt of Acceptance Improperly Dispatched….

§69 Acceptance by Silence or Exercise of Dominion….

§70 Effect of Receipt by Offeror of a Late or Otherwise Defective Acceptance

§71 Requirement of Exchange; Types of Exchange…

§72 Exchange of Promise for Performance…

§73 Performance of a Legal Duty

§74 Settlement of Claim.

§79 Adequacy of Consideration; Mutuality of Obligation.

§87 Option Contract……

§89 Modification of Executory Contract

§90 Promise Reasonably Inducing Action or Forbearance

§130 Contract Not to be Performed Within One Year

§139 Enforcement by Virtue of Action in Reliance

§175 When Duress by Threat Makes a Contract Voidable….

§176 When a Threat Is Improper…..

§201 Whose Meaning Prevails……

§204 Supplying an Omitted Essential Term….

§205 Duty of Good Faith and Fair Dealing

§208 Unconscionable Contract or Term

§209 Integrated Agreements….

§210 Completely and Partially Integrated Agreements….

§211 Standardized Agreements…..

§212 Interpretation of Integrated Agreement….

§213 Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)

§214 When Integration Ineffective

§215 Contradiction of Integrated Terms.

§216 Consistent Additional Terms

§219 Usage

§220 Usage Relevant to Interpretation

§221 Usage Supplementing an Agreement

§222 Usage of Trade..

§227 Standards of Preference With Regard to Conditions…..

§237 Effect on Other Party’s Duties of a Failure to Render Performance…

§344 Purposes of Remedies

§345 Judicial Remedies Available

§347 Measure of Damages in General….

§350 Avoidability as a Limitation on Damages…

§351 Unforeseeability and Related Limitations on Damages.

§352 Uncertainty as a Limitation on Damages.

§355 Punitive Damages…..

§356 Liquidated Damages and Penalties.

§359 Effect of Adequacy of Damages……..

§360 Factors Affecting Adequacy of Damages..

§364 Effect of Unfairness

§370 Requirement That Benefit Be Conferred

§371 Measure of Restitution Interest.

§1. CONTRACT DEFINED

A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.
§2. PROMISE; PROMISOR; PROMISEE…

(1) A promise is 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.

(2) The person manifesting the intention is the promisor.

(3) The person to whom the manifestation is addressed is the promisee….

Comments

b. Manifestation of intention…. The phrase “manifestation of intention” adopts an external or objective standard for interpreting conduct; it means the external expression of intention as distinguished from undisclosed intention. A promisor manifests an intention if he believes or has reason to believe that the promisee will infer that intention from his words or conduct.

e. Illusory promises; mere statements of intention. Words of promise which by their terms make performance entirely optional with the “promisor” whatever may happen, or whatever course of conduct in other respects he may pursue, do not constitute a promise….On the other hand, a promise may be made even though no duty of performance can arise unless some event occurs (see §§224, 225(1)). Such a conditional promise is no less a promise because there is small likelihood that any duty of performance will arise, as in the case of a promise to insure against fire a thoroughly fireproof building. There may be a promise in such a case even though the duty to perform depends on a state of mind of the promisor other than his own unfettered wish (see §228), or on an event within the promisor’s control.

§17. REQUIREMENT OF A BARGAIN

(1) Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

(2) Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts or under the rules stated in §§82-94.

Comments

b. Bargains….The typical contract is a bargain, and is binding without regard to form. The governing principle in the typical case is that bargains are enforceable unless some other principle conflicts. This chapter and the next deal with the two essential elements of a bargain: agreement and exchange.

c. “Meeting of the minds.” The element of agreement is sometimes referred to as a “meeting of the minds.” The parties to most contracts give actual as well as apparent assent, but it is clear that a mental reservation of a party to a bargain does not impair the obligation he purports to undertake. The phrase used here, therefore, is “manifestation of mutual assent,” as in the definition of “agreement” in §3….

e. Informal contract without bargain. There are numerous atypical cases where informal promises are binding though not made as part of a bargain. In such cases it is often said that there is consideration by virtue of reliance on the promise or by virtue of some circumstance, such as a “past consideration,” which does not involve the element of exchange….There is no requirement of agreement for such contracts. They are the subject of §§82-94.

§20. EFFECT OF MISUNDERSTANDING

(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and

(a) neither party knows or has reason to know the meaning attached by the other; or

(b) each party knows or each party has reason to know the meaning attached by the other.

(2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if

(a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or

(b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

§21. INTENTION TO BE LEGALLY BOUND

Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract.

Comments:

b. Agreement not to be legally bound. Parties to what would otherwise be a bargain and a contract sometimes agree that their legal relations are not to be affected. In the absence of any invalidating cause, such a term is respected by the law like any other term, but such an agreement may present difficult questions of interpretation: it may mean that no bargain has been reached, or that a particular manifestation of intention is not a promise; it may reserve a power to revoke or terminate a promise under certain circumstances but not others. In a written document prepared by one party it may raise a question of misrepresentation or mistake or overreaching; to avoid such questions it may be read against the party who prepared it.

The parties to such an agreement may intend to deny legal effect to their subsequent acts. But where a bargain has been fully or partly performed on one side, a failure to perform on the other side may result in unjust enrichment, and the term may then be unenforceable as a provision for a penalty or forfeiture….
§24. OFFER DEFINED

An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
§26. PRELIMINARY NEGOTIATIONS

A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

Illustration

1. A, a clothing merchant, advertises overcoats of a certain kind for sale at $50. This is not an offer, but an invitation to the public to come and purchase. The addition of the words “Out they go Saturday; First Come, First Serve” might make the advertisement an offer.
§30. FORM OF ACCEPTANCE INVITED

(1) An offer may invite or require acceptance to be made by an affirmative answer in words, or by performing or refraining from performing a specified act, or may empower the offeree to make a selection of terms in his acceptance.

(2) Unless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable in the circumstances.

Comments:

a. Required form. The offeror is the master of his offer…. The form of acceptance is less likely to affect the substance of the bargain than the identity of the offeree, and is often quite immaterial. But the offeror is entitled to insist on a particular mode of manifestation of assent….

b. Invited form. Insistence on a particular form of acceptance is unusual. Offers often make no express reference to the form of acceptance; sometimes ambiguous language is used. Language referring to a particular mode of acceptance is often intended and understood as suggestion rather than limitation; the suggested mode is then authorized, but other modes are not precluded.
§32. INVITATION OF PROMISE OR PERFORMANCE

In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses.

Comments:

a…..The offeror is often indifferent as to whether acceptance takes the form of words of promise or acts of performance, and his words literally referring to one are often intended and understood to refer to either. Where performance takes time, however, the beginning of performance may constitute a promise to complete it. See §62.

b. Offer limited to acceptance by performance only. Language or circumstances sometimes make it clear that the offeree is not to bind himself in advance of performance. His promise may be worthless to the offeror, or the circumstances may make it unreasonable for the offeror to expect a firm commitment from the offeree. In such cases, the offer does not invite a promissory acceptance, and a promise is ineffective as an acceptance. Examples are found in offers of reward or of prizes in a contest, made to a large number of people but to be accepted by only one.

§33. CERTAINTY

(1) Even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain.

(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.

(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

Comment:

a. Certainty of terms. It is sometimes said that the agreement must be capable of being given an exact meaning and that all the performances to be rendered must be certain. Such statements may be appropriate in determining whether a manifestation of intention is intended to be understood as an offer. But the actions of the parties may show conclusively that they have intended to conclude a binding agreement, even though one or more terms are missing or are left to be agreed upon. In such cases courts endeavor, if possible, to attach a sufficiently definite meaning to the bargain.

An offer which appears to be indefinite may be given precision by usage of trade or by course of dealing between the parties. Terms may be supplied by factual implication, and in recurring situations the law often supplies a term in the absence of agreement to the contrary…. Where the parties have intended to conclude a bargain, uncertainty as to incidental or collateral matters is seldom fatal to the existence of the contract. If the essential terms are so uncertain that there is no basis for deciding whether the agreement has been kept or broken, there is no contract. But even in such cases partial performance or other action in reliance on the agreement may reinforce it under §34.

c. Preliminary negotiations….Incompleteness of terms is one of the principal reasons why advertisements and price quotations are ordinarily not interpreted as offers. Similarly, if the parties to negotiations for sale manifest an intention not to be bound until the price is fixed or agreed, the law gives effect to that intention. Uniform Commercial Code §2-305(4). The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement. See Uniform Commercial Code §2-204 and Comment.

f. Other indefinite terms. Promises may be indefinite in other aspects than time and price. The more important the uncertainty, the stronger the indication is that the parties do not intend to be bound; minor items are more likely to be left to the option of one of the parties or to what is customary or reasonable. Even when the parties intend to enter into a contract, uncertainty may be so great as to frustrate their intention. Thus a promise by A to give B employment, even though consideration is paid for it, does not provide a basis for any remedy if neither the character of the employment nor the compensation therefor is stated.
§34. CERTAINTY AND CHOICE OF TERMS; EFFECT OF PERFORMANCE OR

RELIANCE

(1) The terms of a contract may be reasonably certain even though it empowers one or both parties to make a selection of terms in the course of performance.

(2) Part performance under an agreement may remove uncertainty and establish that a contract enforceable as a bargain has been formed.

(3) Action in reliance on an agreement may make a contractual remedy appropriate even though uncertainty is not removed.

Comment:

a. Choice in the course of performance. A bargain may be concluded which leaves a choice of terms to be made by one party or the other. If the agreement is otherwise sufficiently definite to be a contract, it is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Uniform Commercial Code §2-311(1). The more important the choice is, the more it is likely that the parties do not intend to be bound until the choice is made. But even on such matters as subject matter and price, one party is often given a wide choice. If the parties intend to make a contract and there is a reasonably certain basis for granting an appropriate remedy, such alternative terms do not invalidate the contract. See §33.

b. Unlimited choice; good faith and fair dealing. If one party to an agreement is given an unlimited choice, that party may not be a promisor…, and the contract may fail for want of consideration. See §79….And in any event discretionary power granted by a commercial contract must be exercised in good faith and in accordance with fair dealing. Uniform Commercial Code §§1-203, 2-103(1)(b). A price to be fixed by a seller or buyer of goods, for example, means a price for him to fix in good faith. Uniform Commercial Code §2-305(2).

c. Subsequent conduct removing uncertainty. Indefiniteness may prevent enforcement of a contract in two different ways: it may mean that a manifestation of intention is not intended to be understood as an offer; or, even though the parties intended to enter into a contract, there may be no sufficient basis for giving an appropriate remedy. Subsequent conduct of one or both parties may remove either obstacle or both….[P]art performance may give meaning to indefinite terms of an agreement, or may have the effect of eliminating indefinite alternatives by waiver or modification. Uniform Commercial Code §2-208. In such cases a bargain may be concluded, but it may be impossible to identify offer or acceptance or to determine the moment of formation. See §22(2).
§45. OPTION CONTRACT CREATED BY PART PERFORMANCE OR TENDER

(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.

(2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

Comments:

a. Offer limited to acceptance by performance only. This Section is limited to cases where the offer does not invite a promissory acceptance. Such an offer has often been referred to as an “offer for a unilateral contract.” Typical illustrations are found in offers of rewards or prizes and in non-commercial arrangements among relatives and friends….

d. Beginning to perform. If the invited performance takes time, the invitation to perform necessarily includes an invitation to begin performance. In most such cases the beginning of performance carries with it an express or implied promise to complete performance. See §62. In the less common case where the offer does not contemplate or invite a promise by the offeree, the beginning of performance nevertheless completes the manifestation of mutual assent and furnishes consideration for an option contract.

e. Completion of performance. Where part performance or tender by the offeree creates an option contract, the offeree is not bound to complete performance. The offeror alone is bound, but his duty of performance is conditional on completion of the offeree’s performance. If the offeree abandons performance, the offeror’s duty to perform never arises….

f. Preparations for performance. What is begun or tendered must be part of the actual performance invited in order to preclude revocation under this Section. Beginning preparations, though they may be essential to carrying out the contract or to accepting the offer, is not enough. Preparations to perform may, however, constitute justifiable reliance sufficient to make the offeror’s promise binding under §87(2).

In many cases what is invited depends on what is a reasonable mode of acceptance….The distinction between preparing for performance and beginning performance in such cases may turn on many factors: the extent to which the offeree’s conduct is clearly referable to the offer, the definite and substantial character of that conduct, and the extent to which it is of actual or prospective benefit to the offeror rather than the offeree, as well as the terms of the communications between the parties, their prior course of dealing, and any relevant usages of trade.

§87. OPTION CONTRACT

(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute.

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

Comment:

e. Reliance. Subsection (2) states the application of §90 to reliance on an unaccepted offer,

with qualifications which would not be appropriate in some other types of cases covered by §90. It

is important chiefly in cases of reliance that is not part performance. If the beginning of performance

is a reasonable mode of acceptance, it makes the offer fully enforceable under §45 or §62; if not, the

offeror commonly has no reason to expect part performance before acceptance. But circumstances

may be such that the offeree must undergo substantial expense, or undertake substantial

commitments, or forego alternatives, in order to put himself in a position to accept by either promise

or performance…. But the reliance must be substantial as well as foreseeable.

Full-scale enforcement of the offered contract is not necessarily appropriate in such cases.

Restitution of benefits conferred may be enough, or partial or full reimbursement of losses may be

proper. Various factors may influence the remedy: the formality of the offer, its commercial or social

context, the extent to which the offeree’s reliance was understood to be at his own risk, the relative

competence and the bargaining position of the parties, the degree of fault on the part of the offeror,

the ease and certainty of proof of particular items of damage and the likelihood that unprovable

RESTATEMENT (SECOND) OF CONTRACTS

p. 18

damages have been suffered.

§39. COUNTER-OFFERS

(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.

(2) An offeree’s power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree.

Comments:

a. Counter-offer as rejection. It is often said that a counter-offer is a rejection, and it does have the same effect in terminating the offeree’s power of acceptance. But in other respects a counter-offer differs from a rejection. A counter-offer must be capable of being accepted; it carries negotiations on rather than breaking them off. The termination of the power of acceptance by a counter-offer merely carries out the usual understanding of bargainers that one proposal is dropped when another is taken under consideration; if alternative proposals are to be under consideration at the same time, warning is expected.

Illustration:

1. A offers B to sell him a parcel of land for $5,000, stating that the offer will remain open for thirty days. B replies, “I will pay $4,800 for the parcel, ” and on A’s declining that, B writes, within the thirty day period, “I accept your offer to sell for $5,000.” There is no contract unless A’s offer was itself a contract [supported by consideration], or unless A’s reply to the counter- offer manifested an intention to renew his original offer.

b. Qualified acceptance, inquiry or separate offer….A mere inquiry regarding the possibility of different terms, a request for a better offer, or a comment upon the terms of the offer, is ordinarily not a counter-offer. Such responses to an offer may be too tentative or indefinite to be offers of any kind; or they may deal with new matters rather than a substitution for the original offer; or their language may manifest an intention to keep the original offer under consideration.

Illustration

2. A makes the same offer to B as that stated in Illustration 1, and B replies, “Won’t you take less?” A answers, “No.” An acceptance thereafter by B within the thirty-day period is effective. B’s inquiry was not a counter-offer, and A’s original offer stands.

c. Contrary statement of offeror or offeree….An offeree may state that he is holding the offer under advisement, but that if the offeror desires to close a bargain at once the offeree makes a specific counter-offer. Such an answer will not extend the time that the original offer remains open, but will not cut that time short.

Illustration:

3. A makes the same offer to B as that stated in Illustration 1. B replies, “I am keeping your offer under advisement, but if you wish to close the matter at once I will give you $4,800.” A does not reply, and within the thirty-day period B accepts the original offer. B’s acceptance is effective.
§41. LAPSE OF TIME

(1) An offeree’s power of acceptance is terminated at the time specified in the offer, or, if no time is specified, at the end of a reasonable time.

(2) What is a reasonable time is a question of fact, depending on all the circumstances existing when the offer and attempted acceptance are made.

(3) Unless otherwise indicated by the language or the circumstances, and subject to the rule stated in §49, an offer sent by mail is seasonably accepted if an acceptance is mailed at any time before midnight on the day on which the offer is received.

Comment:

b. Reasonable time. In the absence of a contrary indication, just as acceptance may be madein any manner and by any medium which is reasonable in the circumstances (§30), so it may be made at any time which is reasonable in the circumstances. The circumstances to be considered have a wide range: they include the nature of the proposed contract, the purposes of the parties, the course of dealing between them, and any relevant usages of trade….

d. Direct negotiations. Where the parties bargain face to face or over the telephone, the time for acceptance does not ordinarily extend beyond the end of the conversation unless a contrary intention is indicated…..

e. Offers made by mail or telegram. Where the parties are at a distance from each other, the normal understanding is that the time for acceptance is extended at least by the normal time for transmission of the offer and for the sending of the offeree’s reply….But in the absence of a significant speculative element in the situation, a considerably longer time may be reasonable….

f. Speculative transactions. The rule that an offer becomes irrevocable when an acceptance is mailed (§§42, 63) in effect imposes a risk of commitment on the offeror during the period required for communication of the acceptance, although during that period the offeror has no assurance that the bargain has been concluded. The rule that the power of acceptance is terminated by the lapse of a reasonable time serves to limit this risk. The more significant the risk, the greater is the need for limitation, and hence the shorter is the time which is reasonable.

Illustration

6. A sends B an offer by mail to sell a piece of farm land. B does not reply for three days and then mails an acceptance. It is a question of fact under the circumstances of the particular case whether the delay is unreasonable.

§42. REVOCATION BY COMMUNICATION FROM OFFEROR RECEIVED BY OFFEREE

An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.

§43. INDIRECT COMMUNICATION OF REVOCATION

An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect.

§45. OPTION CONTRACT CREATED BY PART PERFORMANCE OR TENDER

(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.

(2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

Comments:

a. Offer limited to acceptance by performance only. This Section is limited to cases where the offer does not invite a promissory acceptance. Such an offer has often been referred to as an “offer for a unilateral contract.” Typical illustrations are found in offers of rewards or prizes and in non-commercial arrangements among relatives and friends….

d. Beginning to perform. If the invited performance takes time, the invitation to perform necessarily includes an invitation to begin performance. In most such cases the beginning of performance carries with it an express or implied promise to complete performance. See §62. In the less common case where the offer does not contemplate or invite a promise by the offeree, the beginning of performance nevertheless completes the manifestation of mutual assent and furnishes consideration for an option contract.

e. Completion of performance. Where part performance or tender by the offeree creates an option contract, the offeree is not bound to complete performance. The offeror alone is bound, but his duty of performance is conditional on completion of the offeree’s performance. If the offeree abandons performance, the offeror’s duty to perform never arises….

f. Preparations for performance. What is begun or tendered must be part of the actual performance invited in order to preclude revocation under this Section. Beginning preparations, though they may be essential to carrying out the contract or to accepting the offer, is not enough. Preparations to perform may, however, constitute justifiable reliance sufficient to make the offeror’s promise binding under §87(2).

In many cases what is invited depends on what is a reasonable mode of acceptance….The distinction between preparing for performance and beginning performance in such cases may turn on many factors: the extent to which the offeree’s conduct is clearly referable to the offer, the definite and substantial character of that conduct, and the extent to which it is of actual or prospective benefit to the offeror rather than the offeree, as well as the terms of the communications between the parties, their prior course of dealing, and any relevant usages of trade.

§87. OPTION CONTRACT

(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute.

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

Comment:

e. Reliance. Subsection (2) states the application of §90 to reliance on an unaccepted offer,

with qualifications which would not be appropriate in some other types of cases covered by §90. It

is important chiefly in cases of reliance that is not part performance. If the beginning of performance

is a reasonable mode of acceptance, it makes the offer fully enforceable under §45 or §62; if not, the

offeror commonly has no reason to expect part performance before acceptance. But circumstances

may be such that the offeree must undergo substantial expense, or undertake substantial

commitments, or forego alternatives, in order to put himself in a position to accept by either promise

or performance…. But the reliance must be substantial as well as foreseeable.

Full-scale enforcement of the offered contract is not necessarily appropriate in such cases.

Restitution of benefits conferred may be enough, or partial or full reimbursement of losses may be

proper. Various factors may influence the remedy: the formality of the offer, its commercial or social

context, the extent to which the offeree’s reliance was understood to be at his own risk, the relative

competence and the bargaining position of the parties, the degree of fault on the part of the offeror,

the ease and certainty of proof of particular items of damage and the likelihood that unprovable

RESTATEMENT (SECOND) OF CONTRACTS

p. 18

damages have been suffered.

§54. ACCEPTANCE BY PERFORMANCE; NECESSITY OF NOTIFICATION TO OFFEROR

(1) Where an offer invites an offeree to accept by rendering a performance, no notification is necessary to make such an acceptance effective unless the offer requests such a notification.

(2) If an offeree who accepts by rendering a performance has reason to know that the offeror has no adequate means of learning of the performance with reasonable promptness and certainty, the contractual duty of the offeror is discharged unless

(a) the offeree exercises reasonable diligence to notify the offeror of acceptance, or

(b) the offeror learns of the performance within a reasonable time, or

(c) the offer indicates that notification of acceptance is not required.

§56. ACCEPTANCE BY PROMISE; NECESSITY OF NOTIFICATION TO OFFEROR

Except as stated in §69 or where the offer manifests a contrary intention, it is essential to an acceptance by promise either that the offeree exercise reasonable diligence to notify the offeror of acceptance or that the offeror receive the acceptance seasonably.

Comments:

a. Necessity of notification. Where the offeree has performed in whole or in part, notification to the offeror is not essential to acceptance, although failure to notify may discharge the offeror’s duty of performance. See §54. Similarly, where the offeror has rendered a performance and the offeree has taken the benefit of that performance, the offeree may be bound without notification to the offeror. See §69. In such cases the enforcement of the promise rests in part on a change of position in justifiable reliance on a promise, often reinforced by a corresponding benefit received by the promisor….

Illustration 2. A makes written application for life insurance through an agent for B Insurance Company, pays the first premium, and is given a receipt stating that the insurance “shall take effect as of the date of approval of the application ” at B’s home office. Approval at the home office in accordance with B’s usual practice is an acceptance of A’s offer even though no steps are taken to notify A.

§59. PURPORTED ACCEPTANCE WHICH ADDS QUALIFICATIONS

A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.

Comments:

a. Qualified acceptance. A qualified or conditional acceptance proposes an exchange different from that proposed by the original offeror. Such a proposal is a counter-offer and ordinarily terminates the power of acceptance of the original offeree. See §39….But a definite and seasonable expression of acceptance is operative despite the statement of additional or different terms if the acceptance is not made to depend on assent to the additional or different terms. See §61; Uniform Commercial Code §2-207(1). The additional or different terms are then to be construed as proposals for modification of the contract. See Uniform Commercial Code §2-207(2). Such proposals may sometimes be accepted by the silence of the original offeror. See §69.

b. Statement of conditions implied in offer. To accept, the offeree must assent unconditionally to the offer as made, but the fact that the offeree makes a conditional promise is not sufficient to show that his acceptance is conditional. The offer itself may either expressly or by implication propose that the offeree make a conditional promise as his part of the exchange. By assenting to such a proposal the offeree makes a conditional promise, but his acceptance is unconditional. The offeror’s promise may also be conditional on the same or a different fact or event.

Illustration

3. A makes a written offer to B to sell him Blackacre. By usage the offer is understood as promising a marketable title. B replies, “I accept your offer if you can convey me a marketable title.” There is a contract.

§60. ACCEPTANCE OF OFFER WHICH STATES PLACE, TIME OR MANNER OF ACCEPTANCE

If an offer prescribes the place, time or manner of acceptance its terms in this respect must be complied with in order to create a contract. If an offer merely suggests a permitted place, time or manner of acceptance, another method of acceptance is not precluded.

Comment:

a. Interpretation of offer. If the offeror prescribes the only way in which his offer may be accepted, an acceptance in any other way is a counter-offer. But frequently in regard to the details of methods of acceptance, the offeror’s language, if fairly interpreted, amounts merely to a statement of a satisfactory method of acceptance, without positive requirement that this method shall be followed.

Illustrations:

1. A mails an offer to B in which A says, “I must receive your acceptance by return mail.” An acceptance sent within a reasonable time by any other means, which reaches A as soon as a letter sent by return mail would normally arrive, creates a contract on arrival….

2. A makes an offer to B and adds, “Send your office boy around with an answer to this by twelve o’clock.” The offeree comes himself before twelve o’clock and accepts. There is a contract.

3. A offers to sell his land to B on certain terms, also saying: “You must accept this, if at all, in person at my office at ten o’clock tomorrow.” B’s power is strictly limited to one method of acceptance.

4. A offers to sell his land to B on certain terms, also saying: “You may accept by leaving word at my house.” This indicates one operative mode of acceptance; but B’s power is not limited to that mode alone. A personal statement to A would serve just as well.

5. A makes an offer to B and adds, “my address is 53 State Street.” This is a business address. B sends an acceptance to A’s home which A receives promptly. Unless the circumstances indicate that A has made a positive requirement of the place where the acceptance must be sent, there is a contract.

§63. TIME WHEN ACCEPTANCE TAKES EFFECT

Unless the offer provides otherwise,

(a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offeror; but

(b) an acceptance under an option contract is not operative until received by the offeror.

§64. ACCEPTANCE BY TELEPHONE OR TELETYPE

Acceptance given by telephone or other medium of substantially instantaneously two-way communication is governed by the principles applicable to acceptances where the parties are in the presence of each other.

§65. REASONABLENESS OF MEDIUM OF ACCEPTANCE

Unless circumstances known to the offeree indicate otherwise, a medium of acceptance is reasonable if it is the one used by the offeror or one customary in similar transactions at the time and place the offer is received.

Comments:

a. Significance of use of reasonable medium. Under §30 an offer invites acceptance by any reasonable medium unless there is contrary indication; under §63 an acceptance so invited is ordinarily effective upon dispatch. If an unreasonable medium of acceptance is used, on the other hand, the governing rule is that stated in §67. Thus if an offer is made by mail, an acceptance by mail is ordinarily effective on dispatch.

b. Circumstances relevant to reasonableness…. Among the relevant circumstances not specified in this Section may be the speed and reliability of the medium, a prior course of dealing between the parties, and a usage of trade.

§66. ACCEPTANCE MUST BE PROPERLY DISPATCHED

An acceptance sent by mail or otherwise from a distance is not operative when dispatched, unless it is properly addressed and such other precautions taken as are ordinarily observed to insure safe transmission of similar messages.

§67. EFFECT OF RECEIPT OF ACCEPTANCE IMPROPERLY DISPATCHED

Where an acceptance is seasonably dispatched but the offeree uses means of transmission not invited by the offer or fails to exercise reasonable diligence to insure safe transmission, it is treated as operative upon dispatch if received within the time in which a properly dispatched acceptance would normally have arrived.

§69. ACCEPTANCE BY SILENCE OR EXERCISE OF DOMINION

(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases only:

(a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.

(b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer.

(c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the offeror if he does not intend to accept.

(2) An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in accordance with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is an acceptance only if ratified by him.

Comments:

a. Acceptance by silence is exceptional….The exceptional cases where silence is acceptance fall into two main classes: those where the offeree silently takes offered benefits, and those where one party relies on the other party’s manifestation of intention that silence may operate as acceptance.

Even in those cases the contract may be unenforceable under the Statute of Frauds.

§70. EFFECT OF RECEIPT BY OFFEROR OF A LATE OR OTHERWISE DEFECTIVE ACCEPTANCE

A late or otherwise defective acceptance may be effective as an offer to the original offeror, but his silence operates as an acceptance in such a case only as stated in §69.
§71. REQUIREMENT OF EXCHANGE; TYPES OF EXCHANGE

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

(3) The performance may consist of

(a) an act other than a promise, or

(b) a forbearance, or

(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person.

It may be given by the promisee or by some other person.

Comments:

b. “Bargained for.” In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration. Here, as in the matter of mutual assent, the law is concerned with the external manifestation rather than the undisclosed mental state: it is enough that one party manifests an intention to induce the other’s response and to be induced by it and that the other responds in accordance with the inducement….But it is not enough that the promise induces the conduct of the promisee or that the conduct of the promisee induces the making of the promise; both elements must be present, or there is no bargain. Moreover, a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal. In such cases there is no consideration and the promise is enforced, if at all, as a promise binding without consideration under §§82-94.

c. Mixture of bargain and gift. In most commercial bargains there is a rough equivalence between the value promised and the value received as consideration. But the social functions of bargains include the provision of opportunity for free individual action and exercise of judgment and the fixing of values by private action, either generally or for purposes of the particular transaction.

Those functions would be impaired by judicial review of the values so fixed. Ordinarily, therefore, courts do not inquire into the adequacy of consideration, particularly where one or both of the values exchanged are difficult to measure. See §79…..

d. Types of consideration….Though a promise is itself an act, it is treated separately from other acts.

§72. EXCHANGE OF PROMISE FOR PERFORMANCE

Except as stated in §§73 and 74, any performance which is bargained for is consideration.

Comment:

a. Enforcement of bargains. Section 17(1) embodies the principle that bargains are enforceable unless some other principle conflicts. Chapter 3 on Formation of Contracts-Mutual Assent deals with one essential element of a bargain, agreement; this Topic on the Requirement of Consideration deals with the other essential element, exchange….

d. Unconscionable and illegal bargains. The rule stated in this Section does not require that consideration have an economic value equivalent to that of the promise. See §79. Nor does the Section require that the consideration or the promise be lawful. The problems raised by unconscionable and illegal bargains are dealt with in §208 on unconscionability, Chapter 6 on mistake, Chapter 7 on misrepresentation, duress and undue influence, and Chapter 8 on unenforceability on grounds of public policy. In addition, particular types of bargains which are likely to be unconscionable are the subject of §§73 and 74.

§73. PERFORMANCE OF LEGAL DUTY

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.

Comments:

a. Rationale. A claim that the performance of a legal duty furnished consideration for a promise often raises a suspicion that the transaction was gratuitous or mistaken or unconscionable.

If the performance was not in fact bargained for and given in exchange for the promise, the case is not within this Section: in such cases there is no consideration under the rule stated in §71(1).

Mistake, misrepresentation, duress, undue influence, or public policy may invalidate the transaction even though there is consideration….But the rule of this Section renders unnecessary any inquiry into the existence of such an invalidating cause, and denies enforcement to some promises which would otherwise be valid. Because of the likelihood that the promise was obtained by an express or implied threat to withhold performance of a legal duty, the promise does not have the presumptive social utility normally found in a bargain.

b. Public duties; torts and crimes. A legal duty may be owed to the promisor as a member of the public, as when the promisee is a public official. In such cases there is often no direct sanction available to a member of the public to compel performance of the duty, and the danger of express or implied threats to withhold performance affects public as well as private interests. A bargain by a public official to obtain private advantage for performing his duty is therefore unenforceable as against public policy…. And under this Section performance of the duty is not consideration for a promise.

The performance of legal duty is not consideration for a promise in any such case if the duty is owed to the promisor…..

. c. Contractual duty to the promisor. Legal remedies for breach of contract ordinarily involve delay and expense and rarely put the promisee in fully as good a position as voluntary performance.

It is therefore often to a promisee’s advantage to offer a bonus to a recalcitrant promisor to induce performance without legal proceedings, and an unscrupulous promisor may threaten breach in order to obtain such a bonus. In extreme cases, a bargain for additional compensation under such circumstances may be voidable for duress. See §§175-76. And the lack of social utility in such bargains provides what modern justification there is for the rule that performance of a contractual duty is not consideration for a new promise.

Slight variations of circumstance are commonly held to take a case out of the rule, particularly where the parties have made an equitable adjustment in the course of performance of a continuing contract, or where an impecunious debtor has paid part of his debt in satisfaction of the whole. See §§89, 273-77. And in some states the rule has simply been repudiated.
§79. ADEQUACY OF CONSIDERATION; MUTUALITY OF OBLIGATION

If the requirement of consideration is met, there is no additional requirement of (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or

(b) equivalence in the values exchanged; or

(c) “mutuality of obligation.”

Comments:

a. Rationale. In such typical bargains as the ordinary sale of goods each party gives up something of economic value, and the values exchanged are often roughly or exactly equivalent by standards independent of the particular bargain…. Hence it has sometimes been said that consideration must consist of a “benefit to the promisor” or a “detriment to the promisee”; it has frequently been claimed that there was no consideration because the economic value given in exchange was much less than that of the promise or the promised performance; “mutuality of obligation” has been said to be essential to a contract. But experience has shown that these are not essential elements of a bargain or of an enforceable contract….This Section makes that negation explicit.

b. Benefit and detriment. Historically, the common law action of debt was said to require a quid pro quo, and that requirement may have led to statements that consideration must be a benefit to the promisor. But contracts were enforced in the common-law action of assumpsit without any such requirement; in actions of assumpsit the emphasis was rather on the harm to the promisee, and detrimental reliance on a promise may still be the basis of contractual relief. See § 90. But reliance is not essential to the formation of a bargain, and remedies for breach have long been given in cases of exchange of promise for promise where neither party has begun to perform….

c. Exchange of unequal values. To the extent that the apportionment of productive energy and product in the economy are left to private action, the parties to transactions are free to fix their own valuations. The resolution of disputes often requires a determination of value in the more general sense of market value, and such values are commonly fixed as an approximation based on a multitude of private valuations. But in many situations there is no reliable external standard of value, or the general standard is inappropriate to the precise circumstances of the parties. Valuation is left to private action in part because the parties are thought to be better able than others to evaluate the circumstances of particular transactions. In any event, they are not ordinarily bound to follow the valuations of others.

Ordinarily, therefore, courts do not inquire into the adequacy of consideration. This is particularly so when one or both of the values exchanged are uncertain or difficult to measure….

e. Effects of gross inadequacy. Although the requirement of consideration may be met despite a great difference in the values exchanged, gross inadequacy of consideration may be relevant in the application of other rules. Inadequacy “such as shocks the conscience” is often said to be a “badge of fraud,” justifying a denial of specific performance. See §364(1)(c). Inadequacy may also help to justify rescission or cancellation on the ground of lack of capacity…, mistake, misrepresentation, duress or undue influence….

f. Mutuality….Clause (c) of this Section negates any supposed requirement of “mutuality of obligation.” Such a requirement has sometimes been asserted in the form, “Both parties must be bound or neither is bound.” That statement is obviously erroneous as applied to an exchange of promise for performance; it is equally inapplicable to contracts governed by §§82-94 ….

§87. OPTION CONTRACT

(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute.

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

Comment:

e. Reliance. Subsection (2) states the application of §90 to reliance on an unaccepted offer,

with qualifications which would not be appropriate in some other types of cases covered by §90. It

is important chiefly in cases of reliance that is not part performance. If the beginning of performance

is a reasonable mode of acceptance, it makes the offer fully enforceable under §45 or §62; if not, the

offeror commonly has no reason to expect part performance before acceptance. But circumstances

may be such that the offeree must undergo substantial expense, or undertake substantial

commitments, or forego alternatives, in order to put himself in a position to accept by either promise

or performance…. But the reliance must be substantial as well as foreseeable.

Full-scale enforcement of the offered contract is not necessarily appropriate in such cases.

Restitution of benefits conferred may be enough, or partial or full reimbursement of losses may be

proper. Various factors may influence the remedy: the formality of the offer, its commercial or social

context, the extent to which the offeree’s reliance was understood to be at his own risk, the relative

competence and the bargaining position of the parties, the degree of fault on the part of the offeror,

the ease and certainty of proof of particular items of damage and the likelihood that unprovable

RESTATEMENT (SECOND) OF CONTRACTS

p. 18

damages have been suffered.

89. MODIFICATION OF EXECUTORY CONTRACT

A promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; or

(b) to the extent provided by statute; or

(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.

Comment:

a. Rationale. This Section relates primarily to adjustments in on-going transactions. Like offers and guaranties, such adjustments are ancillary to exchanges and have some of the same presumptive utility….Indeed, paragraph (a) deals with bargains which are without consideration only because of the rule that performance of a legal duty to the promisor is not consideration. See §73.

b. Performance of legal duty. The rule of §73 finds its modern justification in cases of promises made by mistake or induced by unfair pressure. Its application to cases where those elements are absent has been much criticized and is avoided if paragraph (a) of this Section is applicable. The limitation to a modification which is “fair and equitable” goes beyond absence of coercion and requires an objectively demonstrable reason for seeking a modification. Compare Uniform Commercial Code §2-209 Comment. The reason for modification must rest in circumstances not “anticipated” as part of the context in which the contract was made, but a frustrating event may be unanticipated for this purpose if it was not adequately covered, even though it was foreseen as a remote possibility. When such a reason is present, the relative financial strength of the parties, the formality with which the modification is made, the extent to which it is performed or relied on and other circumstances may be relevant to show or negate imposition or unfair surprise.

The same result called for by paragraph (a) is sometimes reached on the ground that the original contract was “rescinded” by mutual agreement and that new promises were then made which furnished consideration for each other. That theory is rejected here because it is fictitious when the “rescission” and new agreement are simultaneous, and because if logically carried out it might uphold unfair and inequitable modifications.

Illustrations:

1. By a written contract A agrees to excavate a cellar for B for a stated price. Solid rock is unexpectedly encountered and A so notifies B. A and B then orally agree that A will remove the rock at a unit price which is reasonable but nine times that used in computing the original price, and A completes the job. B is bound to pay the increased amount.

2. A contracts with B to supply for $300 a laundry chute for a building B has contracted to build for the Government for $150,000. Later A discovers that he made an error as to the type of material to be used and should have bid $1,200. A offers to supply the chute for $1000, eliminating overhead and profit. After ascertaining that other suppliers would charge more, B agrees. The new agreement is binding.

3. A is employed by B as a designer of coats at $90 a week for a year beginning November 1 under a written contract executed September 1. A is offered $115 a week by another employer and so informs B. A and B then agree that A will be paid $100 a week and in October execute a new written contract to that effect, simultaneously tearing up the prior contract. The new contract is binding.

4. A contracts to manufacture and sell to B 2,000 steel roofs for corn cribs at $60. Before A begins manufacture a threat of a nationwide steel strike raises the cost of steel about $10 per roof, and A and B agree orally to increase the price to $70 per roof. A thereafter manufactures and delivers 1700 of the roofs, and B pays for 1,500 of them at the increased price without protest, increasing the selling price of the corn cribs by $10. The new agreement is binding.

5. A contracts to manufacture and sell to B 100,000 castings for lawn mowers at 50 cents each. After partial delivery and after B has contracted to sell a substantial number of lawn mowers at a fixed price, A notifies B that increased metal costs require that the price be increased to 75 cents.

Substitute castings are available at 55 cents, but only after several months delay. B protests but is forced to agree to the new price to keep its plant in operation. The modification is not binding.
§90. PROMISE REASONABLY INDUCING ACTION OR FORBEARANCE

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

Comments:

a. Relation to other rules…. This Section is often referred to in terms of “promissory estoppel,” a phrase suggesting an extension of the doctrine of estoppel. Estoppel prevents a person from showing the truth contrary to a representation of fact made by him after another has relied on the representation….

Certainly reliance is one of the main bases for enforcement of the half-completed exchange, and the probability of reliance lends support to the enforcement of the executory exchange. See Comments to §§72, 75. This Section thus states a basic principle which often renders inquiry unnecessary as to the precise scope of the policy of enforcing bargains. Sections 87-89 state particular applications of the same principle to promises ancillary to bargains, and it also applies in a wide variety of non-commercial situations.

b. Character of reliance protected. The principle of this Section is flexible. The promisor is

affected only by reliance which he does or should foresee, and enforcement must be necessary to

avoid injustice. Satisfaction of the latter requirement may depend on the reasonableness of the

promisee’s reliance, on its definite and substantial character in relation to the remedy sought, on the

formality with which the promise is made, on the extent to which the evidentiary, cautionary,

deterrent and channeling functions of form are met by the commercial setting or otherwise, and on

the extent to which such other policies as the enforcement of bargains and the prevention of unjust

enrichment are relevant….The force of particular factors varies in different types of cases….

Illustrations:

2. A promises B not to foreclose, for a specified time, a mortgage which A holds on B’s land.

B thereafter makes improvements on the land. A’s promise is binding and may be enforced by denial

of foreclosure before the time has elapsed.

RESTATEMENT (SECOND) OF CONTRACTS

p. 20

3. A sues B in a municipal court for damages for personal injuries caused by B’s negligence.

After the one year statute of limitations has run,B requests A to discontinue the action and start again

in the superior court where the action can be consolidated with other actions against B arising out

of the same accident. A does so. B’s implied promise that no harm to A will result bars B from

asserting the statute of limitations as a defense.

4. A has been employed by B for 40 years. B promises to pay A a pension of $200 per month

when A retires. A retires and forbears to work elsewhere for several years while B pays the pension.

B’s promise is binding.

c. Reliance by third persons. If a promise is made to one party for the benefit of another, it

is often foreseeable that the beneficiary will rely on the promise. Enforcement of the promise in such

cases rests on the same basis and depends on the same factors as in cases of reliance by the promisee.

Justifiable reliance by third persons who are not beneficiaries is less likely, but may sometimes

reinforce the claim of the promisee or beneficiary.

d. Partial enforcement. A promise binding under this section is a contract, and full-scale

enforcement by normal remedies is often appropriate. But the same factors which bear on whether

any relief should be granted also bear on the character and extent of the remedy. In particular, relief

may sometimes be limited to restitution or to damages or specific relief measured by the extent of

the promisee’s reliance rather than by the terms of the promise…. Unless there is unjust enrichment

of the promisor, damages should not put the promisee in a better position than performance of the

promise would have put him. See §§344, 349.

Illustrations:

8. A applies to B, a distributor of radios manufactured by C, for a “dealer franchise” to sell

C’s products. Such franchises are revocable at will. B erroneously informs A that C has accepted the

application and will soon award the franchise, that A can proceed to employ salesmen and solicit

orders, and that A will receive an initial delivery of at least 30 radios. A expends $1,150 in preparing

to do business, but does not receive the franchise or any radios. B is liable to A for the $1,150 but

not for the lost profit on 30 radios….

9. The facts being otherwise as stated in Illustration 8, B gives A the erroneous information

deliberately and with C’s approval and requires A to buy the assets of a deceased former dealer and

thus discharge C’s “moral obligation ” to the widow. C is liable to A not only for A’s expenses but

also for the lost profit on 30 radios.

§175. WHEN DURESS BY THREAT MAKES A CONTRACT VOIDABLE

(1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.

(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction.

Comment:

a. Improper threat…..Courts originally restricted duress to threats involving loss of life, mayhem or imprisonment, but these restrictions have been greatly relaxed and, in order to constitute duress, the threat need only be improper within the rule stated in §176.

b. No reasonable alternative. A threat, even if improper, does not amount to duress if the victim has a reasonable alternative to succumbing and fails to take advantage of it. It is sometimes said that the threat must arouse such fear as precludes a party from exercising free will and judgment or that it must be such as would induce assent on the part of a brave man or a man of ordinary firmness. The rule stated in this Section omits any such requirement because of its vagueness and impracticability. It is enough if the threat actually induces assent (see Comment c) on the part of one who has no reasonable alternative….

The standard is a practical one under which account must be taken of the exigencies in which the victim finds himself, and the mere availability of a legal remedy is not controlling if it will not afford effective relief to one in the victim’s circumstances….

c. Subjective test of inducement. In order to constitute duress, the improper threat must induce the making of the contract….A party’s manifestation of assent is induced by duress if the duress substantially contributes to his decision to manifest his assent. The test is subjective and the question is, did the threat actually induce assent on the part of the person claiming to be the victim of duress.

Threats that would suffice to induce assent by one person may not suffice to induce assent by another. All attendant circumstances must be considered, including such matters as the age, background and relationship of the parties. Persons of a weak or cowardly nature are the very ones that need protection; the courageous can usually protect themselves. Timid and inexperienced persons are particularly subject to threats, and it does not lie in the mouths of the unscrupulous to excuse their imposition on such persons on the ground of their victims’ infirmities.

§176. WHEN A THREAT IS IMPROPER

(1) A threat is improper if

(a) what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it resulted in obtaining property,

(b) what is threatened is a criminal prosecution,

(c) what is threatened is the use of civil process and the threat is made in bad faith,

or

(d) the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient.

(2) A threat is improper if the resulting exchange is not on fair terms, and

(a) the threatened act would harm the recipient and would not significantly benefit the party making the threat, or

(c) what is threatened is otherwise a use of power for illegitimate ends.

VIOLENCE
Comments:

a. Rationale. An ordinary offer to make a contract commonly involves an implied threat by one party, the offeror, not to make the contract unless his terms are accepted by the other party, the offeree. Such threats are an accepted part of the bargaining process. A threat does not amount to duress unless it is so improper as to amount to an abuse of that process. Courts first recognized as improper threats of physical violence and later included wrongful seizure or detention of goods.

Modern decisions have recognized as improper a much broader range of threats, notably those to cause economic harm.

The rules stated in this Section recognize as improper both the older categories and their modern extensions under developing notions of “economic duress” or “business compulsion.” The fairness of the resulting exchange is often a critical factor in cases involving threats.

VIOLENCE ECONOMIQUE
e. Breach of contract. A threat by a party to a contract not to perform his contractual duty is not, of itself, improper. Indeed, a modification induced by such a threat may be binding, even in the absence of consideration, if it is fair and equitable in view of unanticipated circumstances. See §89. The mere fact that the modification induced by the threat fails to meet this test does not mean that the threat is necessarily improper. However, the threat is improper if it amounts to a breach of the duty of good faith and fair dealing imposed by the contract….

f. Other improper threats. The proper limits of bargaining are difficult to define with precision.

Hard bargaining between experienced adversaries of relatively equal power ought not to be discouraged. Parties are generally held to the resulting agreement, even though one has taken advantage of the other’s adversity, as long as the contract has been dictated by general economic forces….Where, however, a party has been induced to make a contract by some power exercised by the other for illegitimate ends, the transaction is suspect.

Illustrations….

16. A, a municipal water company, seeking to induce B, a developer, to make a contract for the extension of water mains…at a price greatly in excess of that charged to those similarly situated, threatens to refuse to supply to B unless B makes the contract. B, having no reasonable alternative, make the contract. Because the threat amounts to a use for illegitimate ends of A’s power not to supply water, the contract is voidable by B.

§201. WHOSE MEANING PREVAILS

(1) Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is interpreted in accordance with that meaning.

(2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made

(a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party; or

(b) that party had no reason to know of any different meaning attached by the other, and the other had reason to know the meaning attached by the first party.

(3) Except as stated in this Section, neither party is bound by the meaning attached by the other, even though the result may be a failure of mutual assent.

§204. SUPPLYING AN OMITTED ESSENTIAL 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.

Comment:

d. Supplying a term. The process of supplying an omitted term has sometimes been disguised as a literal or a purposive reading of contract language directed to a situation other than the situation that arises. Sometimes it is said that the search is for the term the parties would have agreed to if the question had been brought to their attention. Both the meaning of the words used and the probability that a particular term would have been used if the question had been raised may be factors in determining what term is reasonable in the circumstances. But where there is in fact no agreement, the court should supply a term which comports with community standards of fairness and policy rather than analyze a hypothetical model of the bargaining process. Thus where a contract calls for a single performance such as the rendering of a service or the delivery of goods, the parties are most unlikely to agree explicitly that performance will be rendered within a “reasonable time;” but if no time is specified, a term calling for performance within a reasonable time is supplied. See Uniform Commercial Code §§1-204, 2-309(1). Similarly, where there is a contract for the sale of goods but nothing is said as to price the price is a reasonable price at the time for delivery. See Uniform Commercial Code §2-305.

§205. 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.

Comment:

a. Meanings of “good faith.” Good faith is defined in Uniform Commercial Code § 1-201(19) as “honesty in fact in the conduct or transaction concerned.” “In the case of a merchant” Uniform Commercial Code §2-103(1)(b) provides that good faith means “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” The phrase “good faith” is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving “bad faith” because they violate community standards of decency, fairness or reasonableness. The appropriate remedy for a breach of the duty of good faith also varies with the circumstances.

c. Good faith in negotiation. This Section, like Uniform Commercial Code §1- 203, does not deal with good faith in the formation of a contract. Bad faith in negotiation, although not within the scope of this Section, may be subject to sanctions….
§208. UNCONSCIONABLE CONTRACT OR TERM

If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

Comment:

c. Overall imbalance. Inadequacy of consideration does not of itself invalidate a bargain, but gross disparity in the values exchanged may be an important factor in a determination that a contract is unconscionable and may be sufficient ground, without more, for denying specific performance. See §§79, 364. Such a disparity may also corroborate indications of defects in the bargaining process, or may affect the remedy to be granted when there is a violation of a more specific rule. Theoretically it is possible for a contract to be oppressive taken as a whole, even though there is no weakness in the bargaining process and no single term which is in itself unconscionable. Ordinarily, however, an unconscionable contract involves other factors as well as overall imbalance.

Illustrations:

1. A, an individual, contracts in June to sell at a fixed price per ton to B, a large soup manufacturer, the carrots to be grown on A’s farm. The contract, written on B’s standard printed form, is obviously drawn to protect B’s interests and not A’s; it contains numerous provisions to protect B against various contingencies and none giving analogous protection to A. Each of the clauses can be read restrictively so that it is not unconscionable, but several can be read literally to give unrestricted discretion to B. In January, when the market price has risen above the contract price, A repudiates the contract, and B seeks specific performance. In the absence of justification by evidence of commercial setting, purpose, or effect, the court may determine that the contract as a whole was unconscionable when made, and may then deny specific performance.

2. A, a homeowner, executes a standard printed form used by B, a merchant, agreeing to pay $1,700 for specified home improvements. A also executes a credit application asking for payment in 60 monthly installments but specifying no rate. Four days later A is informed that the credit application has been approved and is given a payment schedule calling for finance and insurance charges amounting to $800 in addition to the $1,700. Before B does any of the work, A repudiates the agreement, and B sues A for $800 damages, claiming that a commission of $800 was paid to B’s salesman in reliance on the agreement. The court may determine that the agreement was unconscionable when made, and may then dismiss the claim.

d. Weakness in the bargaining process. A bargain is not unconscionable merely because the parties to it are unequal in bargaining position, nor even because the inequality results in an allocation of risks to the weaker party. But gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms. Factors which may contribute to a finding of unconscionability in the bargaining process include the following: belief by the stronger party that there is no reasonable probability that the weaker party will fully perform the contract; knowledge of the stronger party that the weaker party will be unable to receive substantial benefits from the contract; knowledge of the stronger party that the weaker party is unable reasonably to protect his interests by reason of physical or mental infirmities, ignorance, illiteracy or inability to understand the language of the agreement, or similar factors.
§209. INTEGRATED AGREEMENTS

(1) An integrated agreement is a writing or writings constituting a final expression of one or more terms of an agreement.

(2) Whether there is an integrated agreement is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.

(3) Where the parties reduce an agreement to a writing which in view of its completeness and specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement unless it is established by other evidence that the writing did not constitute a final expression.

Comments:

b. Form of integrated agreement. No particular form is required for an integrated agreement. Written contracts, signed by both parties, may include an explicit declaration that there are no other agreements between the parties, but such a declaration may not be conclusive….

c. Proof of integration. Whether a writing has been adopted as an integrated agreement is a question of fact to be determined in accordance with all relevant evidence. The issue is distinct from the issues whether an agreement was made and whether the document is genuine, and also from the issue whether it was intended as a complete and exclusive statement of the agreement. See §210; compare Uniform Commercial Code §2-202. Ordinarily the issue whether there is an integrated agreement is determined by the trial judge in the first instance as a question preliminary to an interpretative ruling or to the application of the parol evidence rule. See §212, 213. After the preliminary determination, such questions as whether the agreement was in fact made may remain to be decided by the trier of fact.

§210. COMPLETELY AND PARTIALLY INTEGRATED AGREEMENTS

(1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and exclusive statement of the terms of the agreement.

(2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement.

(3) Whether an agreement is completely or partially integrated is to be determined by the court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.

Comment:

a. Complete integration. The definition in Subsection (1) is to be read with the definition of integrated agreement in s 209, to reject the assumption sometimes made that because a writing has been worked out which is final on some matters, it is to be taken as including all the matters agreed upon. Even though there is an integrated agreement, consistent additional terms not reduced to writing may be shown, unless the court finds that the writing was assented to by both parties as a complete and exclusive statement of all the terms….

b. Proof of complete integration. That a writing was…adopted as a completely integrated agreement may be proved by any relevant evidence. A document in the form of a written contract, signed by both parties and apparently complete on its face, may be decisive of the issue in the absence of credible contrary evidence. But a writing cannot of itself prove its own completeness, and wide latitude must be allowed for inquiry into circumstances bearing on the intention of the parties.
§211. STANDARDIZED AGREEMENTS

(1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests assent to a writing and has reason to believe that like writings are regularly used to embody terms of agreements of the same type, he adopts the writing as an integrated agreement with respect to the terms included in the writing.

(2) Such a writing is interpreted whereever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing.

(3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

§212. INTERPRETATION OF INTEGRATED AGREEMENT

(1) The interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances, in accordance with the rules stated in this Chapter.

(2) A question of interpretation of an integrated agreement is to be determined by the trier of fact if it depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence. Otherwise a question of interpretation of an integrated agreement is to be determined as a question of law.

Comment:

a. “Objective” and “subjective” meaning. Interpretation of contracts deals with the meaning given to language and other conduct by the parties rather than with meanings established by law. But the relevant intention of a party is that manifested by him rather than any different undisclosed intention. In cases of misunderstanding, there may be a contract in accordance with the meaning of one party if the other knows or has reason to know of the misunderstanding and the first party does not. See §§200, 201.

b. Plain meaning and extrinsic evidence. It is sometimes said that extrinsic evidence cannot change the plain meaning of a writing, but meaning can almost never be plain except in a context.

Accordingly, the rule stated in Subsection (1) is not limited to cases where it is determined that the language used is ambiguous. Any determination of meaning or ambiguity should only be made in the light of the relevant evidence of the situation and relations of the parties, the subject matter of the transaction, preliminary negotiations and statements made therein, usages of trade, and the course of dealing between the parties. But after the transaction has been shown in all its length and breadth, the words of an integrated agreement remain the most important evidence of intention.

Illustrations….

4. A and B are engaged in buying and selling shares of stock…and agree orally to conceal the nature of their dealings by using the word “sell” to mean “buy” and using the word “buy” to mean “sell.” A sends a written offer to B to “sell” certain shares, and B accepts. The parties are bound in accordance with the oral agreement.

§213. EFFECT OF INTEGRATED AGREEMENT ON PRIOR AGREEMENTS (PAROL EVIDENCE RULE)

(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.

(2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its scope.

Comments:

a. Parol evidence rule. This Section states what is commonly known as the parol evidence rule…. It renders inoperative prior written agreements as well as prior oral agreements. Where writings relating to the same subject matter are assented to as parts of one transaction, both form part of the integrated agreement. Where an agreement is partly oral and partly written, the writing is at most a partially integrated agreement. See §209.

b. Inconsistent terms. Whether a binding agreement is completely integrated or partially integrated, it supersedes inconsistent terms of prior agreements. To apply this rule, the court must make preliminary determinations that there is an integrated agreement and that it is inconsistent with the term in question. See §209. Those determinations are made in accordance with all relevant evidence, and require interpretation both of the integrated agreement and of the prior agreement. The existence of the prior agreement may be a circumstance which sheds light on the meaning of the integrated agreement, but the integrated agreement must be given a meaning to which its language is reasonably susceptible when read in the light of all the circumstances. See §§212, 214.

c. Scope of a completely integrated agreement. Where the parties have adopted a writing as a complete and exclusive statement of the terms of the agreement, even consistent additional terms are superseded. See §216. But there may still be a separate agreement between the same parties which is not affected. To apply the rule of Subsection (2) the court in addition to determining that there is an integrated agreement and that it is completely integrated, must determine that the asserted prior agreement is within the scope of the integrated agreement. Those determinations are made in accordance with all relevant evidence….

§215. CONTRADICTION OF INTEGRATED TERMS

Except as stated in the preceding Section, where there is a binding agreement, either completely or partially integrated, evidence of prior or contemporaneous agreements or negotiations is not admissible in evidence to contradict a term of the writing.

Comments:

b. Interpretation and contradiction. An earlier agreement may help the interpretation of a later one, but it may not contradict a binding later integrated agreement. Whether there is contradiction depends, as is stated in §213, on whether the two are consistent or inconsistent. This is a question which often cannot be determined from the face of the writing; the writing must first be applied to its subject matter and placed in context. The question is then decided by the court as part of a question of interpretation. Where reasonable people could differ as to the credibility of the evidence offered and the evidence if believed could lead a reasonable person to interpret the writing as claimed by the proponent of the evidence, the question of credibility and the choice among reasonable inferences should be treated as questions of fact.

§216. CONSISTENT ADDITIONAL TERMS

(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.

(2) An agreement is not completely integrated if the writing omits a consistent additional agreed term which is (a) agreed to for separate consideration, or

(b) such a term as in the circumstances might naturally be omitted from the writing.

Comments:

b. Consistency. Terms of prior agreements are superseded to the extent that they are inconsistent with an integrated agreement, and evidence of them is not admissible to contradict a term of the integration. See §§213,215. The determination whether an alleged additional term is consistent or inconsistent with the integrated agreement requires interpretation of the writing in the light of all the circumstances, including the evidence of the additional term. For this purpose, the meaning of the writing includes not only the terms explicitly stated but also those fairly implied as part of the bargain of the parties in fact….

c. Separate consideration. Where there is a binding completely integrated agreement, even consistent additional terms are superseded if they are within the scope of the agreement. See § 213. A separate contract, not covered by the integrated agreement, is not superseded. The rule of Subsection (2)(a) goes further; it limits the scope of the integrated agreement by excluding a consistent additional term made for separate consideration even though the additional term and its consideration are part of the same contract. This rule may be regarded as a particular application of the rule of Subsection (2)(b).

d. Terms omitted naturally. If it is claimed that a consistent additional term was omitted from an integrated agreement and the omission seems natural in the circumstances, it is not necessary to consider further the questions whether the agreement is completely integrated and whether the omitted term is within its scope, although factual questions may remain. This situation is especially likely to arise when the writing is in a standardized form which does not lend itself to the insertion of additional terms. Thus agreements collateral to a negotiable instrument if written on the instrument might destroy its negotiability or otherwise make it less acceptable to third parties; the instrument may not have space for the additional term. Leases and conveyances are also often in a standard form which leads naturally to the omission of terms which are not standard….Even though the omission does not seem natural, evidence of the consistent additional terms is admissible unless the court finds that the writing was intended as a complete and exclusive statement of the terms of the agreement.

Illustrations:

4. A owes B $1,000. They agree orally that A will sell B Blackacre for $3,000 and that the $1,000 will be credited against the price, and then sign a written agreement, complete on its face, which does not mention the $1,000 debt or the credit. The written agreement is not completely integrated, and the oral agreement for a credit is admissible in evidence to supplement the written agreement.

5. A and B sign a written agreement, complete on its face, that A will sell B Blackacre for $3,000, conveyance and payment to be made within 60 days. It is claimed that B was about to render services for A and that the written agreement was signed on the oral understanding that B would be permitted to pay the price by rendering the services at $50 an hour. The oral understanding is admissible in evidence unless it is found that the written agreement was completely integrated.

e. Written term excluding oral terms (“merger” clause). Written agreements often contain clauses stating that there are no representations, promises or agreements between the parties except those found in the writing. Such a clause may negate the apparent authority of an agent to vary orally the written terms, and if agreed to is likely to conclude the issue whether the agreement is completely integrated. Consistent additional terms may then be excluded even though their omission would have been natural in the absence of such a clause. But such a clause does not control the question whether the writing was assented to as an integrated agreement, the scope of the writing if completely integrated, or the interpretation of the written terms.
§219. USAGE

Usage is habitual or customary practice.

§220. USAGE RELEVANT TO INTERPRETATION

Illustrations….

9. In an integrated contract, A promises to sell and B to buy a certain quantity of ‘white arsenic’ for a stated price. The parties contract with a reference to a usage of trade that ‘white arsenic’ includes arsenic colored with lamp black. The usage is part of the contract.

§221. USAGE SUPPLEMENTING AN AGREEMENT

An agreement is supplemented or qualified by a reasonable usage with respect to agreements of the same type if each party knows or has reason to know of the usage and neither party knows or has reason to know that the other party has an intention inconsistent with the usage.

Comment:

a. Agreed terms and omitted terms. Where the parties have in fact agreed to incorporate a usage into their agreement, the case is within §220. This Section extends the same principle to cases where the parties did not advert to the problem with which the usage deals, or where one or each separately foresaw the problem but failed to manifest any intention with respect to it. In such cases, in the absence of usage, the court would supply a reasonable term. See §204. But if there is a reasonable usage which supplies an omitted term and the parties know or have reason to know of the usage, it is a surer guide than the court’s own judgment of what is reasonable. Thus a usage may make it unnecessary to inquire into or prove what the actual intentions of the parties were with respect to an unstated term. Compare Uniform Commercial Code §§1-205(3), 2-202(a).

Illustrations:

1. A, a canner, and B, a wholesale grocer, contract for the sale by A to B of canned fruit products, using a standard form of contract approved by canning and wholesale grocer trade associations. By uniform usage among canners, where the standard form is used title to unshipped goods passes on billing dates specified on the form. In the absence of contrary indication, the usage is part of the contract.

2. A, an ordained rabbi, is employed by B, an orthodox Jewish congregation, to officiate as cantor at specified religious services. At the time the contract is made, it is the practice of such congregations to seat men and women separately at services, and a contrary practice would violate A’s religious beliefs. At a time when it is too late for A to obtain substitute employment, B adopts a contrary practice. A refuses to officiate. The practice is part of the contract, and A is entitled to the agreed compensation.

b. Reason to know and reasonableness. The more general and well-established a usage is, the stronger is the inference that a party knew or had reason to know of it. Similarly, the fact that a usage is reasonable may tend to show that the parties contracted with reference to it or that a particular party knew or had reason to know of it….

Illustrations….

4. A, a publisher, contracts with B to publish a two-volume work. The contract provides for binding “10,000 copies at .538,” which by usage of the publishing business refers to the number of volumes rather than the number of sets. The usage is part of the contract even though the work is B’s first and he does not know of the usage.

§222. USAGE OF TRADE

(1) A usage of trade is a usage having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to a particular agreement. It may include a system of rules regularly observed even though particular rules are changed from time to time.

(2) The existence and scope of a usage of trade are to be determined as questions of fact. If a usage is embodied in a written trade code or similar writing the interpretation of the writing is to be determined by the court as a question of law.

(3) Unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged or a usage of trade of which they know or have reason to know gives meaning to or supplements or qualifies their agreement.

Comments….

b. Regularity of observance. A usage of trade need not be “ancient or immemorial,” “universal,” or the like. Unless agreed to in fact, it must be reasonable, but commercial acceptance by regular observance makes out a prima facie case that a usage of trade is reasonable. There is no requirement that an agreement be ambiguous before evidence of a usage of trade can be shown, nor is it required that the usage of trade be consistent with the meaning the agreement would have apart from the usage.

Illustrations:

1. A contracts to sell B 10,000 shingles. By usage of the lumber trade, in which both are engaged, two packs of a certain size constitute 1,000, though not containing that exact number. Unless otherwise agreed, 1,000 in the contract means two packs.

2. A contracts to sell B 1,000 feet of San Domingo mahogany. By usage of dealers in mahogany, known to A and B, good figured mahogany of a certain density is known as San Domingo mahogany, though it does not come from San Domingo. Unless otherwise agreed, the usage is part of the contract.

3. A and B enter into a contract for the purchase and sale of “No. 1 heavy book paper guaranteed free from ground wood.” Usage in the paper trade may show that this means paper not containing over 3% ground wood.

§237. EFFECT ON OTHER PARTY’S DUTIES OF A FAILURE TO RENDER PERFORMANCE

Except as stated in §240, it is a condition of each party’s remaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time.

Comments….

d. Substantial performance. In an important category of disputes over failure of performance, one party asserts the right to payment on the ground that he has completed his performance, while the other party refuses to pay on the ground that there is an uncured material failure of performance….In such cases it is common to state the issue…in terms of whether there has been substantial performance….If there has been substantial although not full performance, the building contractor has a claim for the unpaid balance and the owner has a claim only for damages. If there has not be substantial performance, the building contractor has no claim for the unpaid balance, although he may have a claim in restitution.

§344. PURPOSES OF REMEDIES

Judicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promisee:

(a) his “expectation interest,” which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed,

(b) his “reliance interest,” which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or

(c) his “restitution interest,” which is his interest in having restored to him any benefit that he has conferred on the other party.

Comments:

a. Three interests. The law of contract remedies implements the policy in favor of allowing individuals to order their own affairs by making legally enforceable promises. Ordinarily, when a court concludes that there has been a breach of contract, it enforces the broken promise by protecting the expectation that the injured party had when he made the contract. It does this by attempting to put him in as good a position as he would have been in had the contract been performed, that is, had there been no breach. The interest protected in this way is called the “expectation interest.” It is sometimes said to give the injured party the “benefit of the bargain.”…

The promisee may have changed his position in reliance on the contract by, for example, incurring expenses in preparing to perform, in performing, or in foregoing opportunities to make other contracts. In that case, the court may recognize a claim based on his reliance rather than on his expectation. It does this by attempting to put him back in the position in which he would have been had the contract not been made. The interest protected in this way is called “reliance interest.”

Although it may be equal to the expectation interest, it is ordinarily smaller because it does not include the injured party’s lost profit.

In some situations a court will recognize yet a third interest and grant relief to prevent unjust enrichment. This may be done if a party has not only changed his own position in reliance on the contract but has also conferred a benefit on the other party by, for example, making a part payment or furnishing services under the contract. The court may then require the other party to disgorge the benefit that he has received by returning it to the party who conferred it. The interest of the claimant protected in this way is called the “restitution interest.” Although it may be equal to the expectation or reliance interest, it is ordinarily smaller because it includes neither the injured party’s lost profit nor that part of his expenditures in reliance that resulted in no benefit to the other party.

Illustrations:

1. A contracts to build a building for B on B’s land for $100,000. B repudiates the contract before either party has done anything in reliance on it. It would have cost A $90,000 to build the building. A has an expectation interest of $10,000, the difference between the $100,000 price and his savings of $90,000 in not having to do the work. Since A has done nothing in reliance, A’s reliance interest is zero. Since A has conferred no benefit on B, A’s restitution interest is zero.

2. The facts being otherwise as stated in Illustration 1, B does not repudiate until A has spent $60,000 of the $90,000. A has been paid nothing and can salvage nothing from the $60,000 that he has spent. A now has an expectation interest of $70,000, the difference between the $100,000 price and his saving of $30,000 in not having to do the work. A also has a reliance interest of $60,000, the amount that he has spent. If the benefit to B of the partly finished building is $40,000, A has a restitution interest of $40,000.

§345. JUDICIAL REMEDIES AVAILABLE

The judicial remedies available for the protection of the interests stated in §344 include a judgment or order

(a) awarding a sum of money due under the contract or as damages,

(b) requiring specific performance of a contract or enjoining its non-performance,

(c) requiring restoration of a specific thing to prevent unjust enrichment,

(d) awarding a sum of money to prevent unjust enrichment,

(e) declaring the rights of the parties, and

(f) enforcing an arbitration award.

§347. MEASURE OF DAMAGES IN GENERAL

Subject to the limitations stated in §§350-53, the injured party has a right to damages based on his expectation interest as measured by

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

(b) any other loss, including incidental or consequential loss, caused by the breach, less

(c) any cost or other loss that he has avoided by not having to perform.

Comments:

c. Other loss. [T]he injured party is entitled to recover for all loss actually suffered. Items of loss other than loss in value of the other party’s performance are often characterized as incidental or consequential. Incidental losses include costs incurred in a reasonable effort, whether successful or not, to avoid loss, as where a party pays brokerage fees in arranging or attempting to arrange a substitute transaction. Consequential losses include such items as injury to person or property resulting from defective performance.

d. Cost or other loss avoided. Sometimes the breach itself results in a saving of some cost that the injured party would have incurred if he had had to perform. Furthermore, the injured party is expected to take reasonable steps to avoid further loss. See §350. Where he does this by discontinuing his own performance, he avoids incurring additional costs of performance. See Illustrations 6 and 8. This cost avoided is subtracted from the loss in value caused by the breach in calculating his damages. If the injured party avoids further loss by making substitute arrangements for the use of his resources that are no longer needed to perform the contract, the net profit from such arrangements is also subtracted. The value to him of any salvageable materials that he has acquired for performance is also subtracted. See Illustration 7. Loss avoided is subtracted only if the saving results from the injured party not having to perform rather than from some unrelated event.

Illustrations….

6. A contracts to build a house for B for $100,000. When it is partly built, B repudiates the contract and A stops work. A would have to spend $60,000 more to finish the house. The $60,000 cost avoided by A as a result of not having to finish the house is subtracted from the $100,000 price lost in determining A’s damages. A has a right to $40,000 in damages from B, less any progresspayments that he has already received. See Illustration 2 to s 344.

7. The facts being otherwise as stated in Illustration 6, A has bought materials that are left over and that he can use for other purposes, saving him $5,000. The $5,000 cost avoided is subtracted in determining A’s damages, resulting in damages of only $35,000 rather than $40,000.

§350. AVOIDABILITY AS A LIMITATION ON DAMAGES

(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation.

(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.

§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.

(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

Comments:

a. Requirement of foreseeability….It is enough, however, that the loss was foreseeable as a probable, as distinguished from a necessary, result of his breach. Furthermore, the party in breach need not have made a “tacit agreement” to be liable for the loss. Nor must he have had the loss in mind when making the contract, for the test is an objective one based on what he had reason to foresee. There is no requirement of foreseeability with respect to the injured party….Although the recovery that is precluded by the limitation of foreseeability is usually based on the expectation interest and takes the form of lost profits (see Illustration 1), the limitation may also preclude recovery based on the reliance interest (see Illustration 2).

b. “General” and “special” damages. Loss that results from a breach in the ordinary course of events is foreseeable as the probable result of the breach. See Uniform Commercial Code §2-714(1). Such loss is sometimes said to be the “natural” result of the breach, in the sense that its occurrence accords with the common experience of ordinary persons. For example, a seller of a commodity to a wholesaler usually has reason to foresee that his failure to deliver the commodity as agreed will probably cause the wholesaler to lose a reasonable profit on it. Similarly, a seller of a machine to a manufacturer usually has reason to foresee that his delay in delivering the machine as agreed will probably cause the manufacturer to lose a reasonable profit from its use….The damages recoverable for such loss that results in the ordinary course of events are sometimes called “general” damages.

….In the case of a written agreement, foreseeability is sometimes established by the use of recitals in the agreement itself. The parol evidence rule (§213) does not, however, preclude the use of negotiations prior to the making of the contract to show for this purpose circumstances that were then known to a party. The damages recoverable for loss that results other than in the ordinary course of events are sometimes called “special” or “consequential ” damages. These terms are often misleading, however, and it is not necessary to distinguish between “general” and “special” or “consequential” damages for the purpose of the rule stated in this Section.

c. Litigation or settlement caused by breach. Sometimes a breach of contract results in claims by third persons against the injured party. The party in breach is liable for the amount of any judgment against the injured party together with his reasonable expenditures in the litigation, if the party in breach had reason to foresee such expenditures as the probable result of his breach at the time he made the contract…. In furtherance of the policy favoring private settlement of disputes, the injured party is also allowed to recover the reasonable amount of any settlement made to avoid litigation, together with the costs of settlement.

f. Other limitations on damages. It is not always in the interest of justice to require the party in breach to pay damages for all of the foreseeable loss that he has caused. There are unusual instances in which it appears from the circumstances either that the parties assumed that one of them would not bear the risk of a particular loss or that, although there was no such assumption, it would be unjust to put the risk on that party. One such circumstance is an extreme disproportion between the loss and the price charged by the party whose liability for that loss is in question. The fact that the price is relatively small suggests that it was not intended to cover the risk of such liability.

Another such circumstance is an informality of dealing, including the absence of a detailed written contract, which indicates that there was no careful attempt to allocate all of the risks. The fact that the parties did not attempt to delineate with precision all of the risks justifies a court in attempting to allocate them fairly….

Illustrations:

17. A, a private trucker, contracts with B to deliver to B’s factory a machine that has just been repaired and without which B’s factory, as A knows, cannot reopen. Delivery is delayed because A’s truck breaks down. In an action by B against A for breach of contract the court may, after taking into consideration such factors as the absence of an elaborate written contract and the extreme disproportion between B’s loss of profits during the delay and the price of the trucker’s services, exclude recovery for loss of profits.

18. A, a retail hardware dealer, contracts to sell B an inexpensive lighting attachment, which, as A knows, B needs in order to use his tractor at night on his farm. A is delayed in obtaining the attachment and, since no substitute is available, B is unable to use the tractor at night during the delay. In an action by B against A for breach of contract, the court may, after taking into consideration such factors as the absence of an elaborate written contract and the extreme disproportion between B’s loss of profits during the delay and the price of the attachment, exclude recovery for loss of profits.

§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.

Comments:

a. Requirement of certainty…. Courts have traditionally required greater certainty in the proof of damages for breach of a contract than in the proof of damages for a tort. The requirement does not mean, however, that the injured party is barred from recovery unless he establishes the total amount of his loss. It merely excludes those elements of loss that cannot be proved with reasonable certainty. The main impact of the requirement of certainty comes in connection with recovery for lost profits. Although the requirement of certainty is distinct from that of foreseeability (§351), its impact is similar in this respect. Although the requirement applies to damages based on the reliance as well as the expectation interest, there is usually little difficulty in proving the amount that the injured party has actually spent in reliance on the contract, even if it is impossible to prove the amount of profit that he would have made. In such a case, he can recover his loss based on his reliance interest instead of on his expectation interest….

Doubts are generally resolved against the party in breach. A party who has, by his breach, forced the injured party to seek compensation in damages should not be allowed to profit from his breach where it is established that a significant loss has occurred.

A court may take into account all the circumstances of the breach, including willfulness, in deciding whether to require a lesser degree of certainty, giving greater discretion to the trier of the facts. Damages need not be calculable with mathematical accuracy and are often at best approximate. See Comment 1 to Uniform Commercial Code §1-106. This is especially true for items such as loss of good will as to which great precision cannot be expected. Furthermore, increasing receptiveness on the part of courts to proof by sophisticated economic and financial data and by expert opinion has made it easier to meet the requirement of certainty.

b. Proof of profits…. If the breach prevents the injured party from carrying on a well established business, the resulting loss of profits can often be proved with sufficient certainty. Evidence of past performance will form the basis for a reasonable prediction as to the future.

However, if the business is a new one or if it is a speculative one that is subject to great fluctuations in volume, costs or prices, proof will be more difficult. Nevertheless, damages may be established with reasonable certainty with the aid of expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.
§355. PUNITIVE DAMAGES

Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.

§356. LIQUIDATED DAMAGES AND PENALTIES

(1) 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 or loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

Comments….

b. Test of penalty…..A determination whether the amount fixed is a penalty turns on a combination of these two factors. If the difficulty of proof of loss is great, considerable latitude is allowed in the approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude is allowed in that approximation..

c. Disguised penalties…..Neither the parties’ actual intention as to its validity nor their characterization of the term as one for liquidated damages or a penalty is significant in determining whether the term is valid.

d. Related types of provisions….A term that fixes as damages an amount that is unreasonably small does not come within the rule stated in this Section, but a court may refuse to enforce it as unconscionable under…§208…..

§359. EFFECT OF ADEQUACY OF DAMAGES

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

Comments:

a. Bases for requirement….During the development of the jurisdiction of courts of equity, it came to be recognized that equitable relief would not be granted if the award of damages at law was adequate to protect the interests of the injured party. There is, however, a tendency to liberalize the granting of equitable relief by enlarging the classes of cases in which damages are not regarded as an adequate remedy. This tendency has been encouraged by the adoption of the Uniform Commercial Code, which “seeks to further a more liberal attitude than some courts have shown in connection with the specific performance of contracts of sale. ” Comment 1 to Uniform Commercial Code §2-716. In accordance with this tendency, if the adequacy of the damage remedy is uncertain, the combined effect of such other factors as uncertainty of terms, insecurity as to the agreed exchange, and difficulty of enforcement should be considered. Adequacy is to some extent relative, and the modern approach is to compare remedies to determine which is more effective in serving the ends of justice. Such a comparison will often lead to the granting of equitable relief. Doubts should be resolved in favor of the granting of specific performance or injunction. Because the availability of equitable relief was historically viewed as a matter of jurisdic-tion, the parties cannot vary by agreement the requirement of inadequacy of damages, although a court may take appropriate notice of facts recited in their contract.

§360. FACTORS AFFECTING ADEQUACY OF DAMAGES

In determining whether the remedy in damages would be adequate, the following circumstances are significant:

(a) the difficulty of proving damages with reasonable certainty,

(b) the difficulty of procuring a suitable substitute performance by means of money awarded as damages, and

(c) the likelihood that an award of damages could not be collected.

Comments….

b. Difficulty in proving damages. The damage remedy may be inadequate to protect the injured party’s expectation interest because the loss caused by the breach is too difficult to estimate with reasonable certainty….Some types of interests are by their very nature incapable of being valued in money. Typical examples include heirlooms, family treasures and works of art that induce a strong sentimental attachment. Examples may also be found in contracts of a more commercial character.

The breach of a contract to transfer shares of stock may cause a loss in control over the corporation ….The breach of a covenant not to compete may cause the loss of customers of an unascertainable number or importance. The breach of a requirements contract may cut off a vital supply of raw materials. In such situations, equitable relief is often appropriate.

c. Difficulty of obtaining substitute. If the injured party can readily procure by the use of money a suitable substitute for the promised performance, the damage remedy is ordinarily adequate.

Entering into a substitute transaction is generally a more efficient way to prevent injury than is a suit for specific performance or an injunction and there is a sound economic basis for limiting the injured party to damages in such a case. Furthermore, the substitute transaction affords a basis for proving damages with reasonable certainty, eliminating the factor stated in Paragraph (a)….

e. Contracts for the sale of land. Contracts for the sale of land have traditionally been accorded a special place in the law of specific performance. A specific tract of land has long been regarded as unique and impossible of duplication by the use of any amount of money. Furthermore, the value of land is to some extent speculative. Damages have therefore been regarded as inadequate to enforce a duty to transfer an interest in land, even if it is less than a fee simple…..
364. EFFECT OF UNFAIRNESS

(1) Specific performance or an injunction will be refused if such relief would be unfair because

(a) the contract was induced by mistake or by unfair practices…or

(c) the exchange is grossly inadequate or the terms of the contract are otherwise unfair.

Comment:

a. Types of unfairness. Courts have traditionally refused equitable relief on grounds of unfairness or mistake in situations where they would not necessarily refuse to award damages. Some of these situations involve elements of mistake, misrepresentation, duress, or undue influence that fall short of what is required for avoidance under those doctrines….Still others involve elements of substantive unfairness in the exchange itself or in its terms that fall short of what is required for unenforceability on grounds of unconscionability.

Illustrations:

1. A is an aged, illiterate farmer, inexperienced in business. B is an experienced speculator in real estate who knows that a developer wants to acquire a tract of land owned by A and will probably pay a price considerably above the previous market price. B takes advantage of A’s ignorance of this fact and of his general inexperience and persuades A not to seek advice. He induces A to contract to sell the land at the previous market price, which is considerably less than the developer later agrees to pay B. A refuses to perform, and B sues A for specific performance. Specific performance may properly be refused on the ground of unfairness.

5. A, an individual, contracts in June to sell at a fixed price per ton to B, a large soup manufacturer, carrots to be grown on A’s farm. The contract, written on B’s standard printed form, is obviously drawn to protect B’s interests and not A’s; it contains numerous provisions to protect B against various contingencies and none giving analogous protection to A. Each of the clauses can be read restrictively so that it is not unconscionable, but several can be read literally to give unrestricted discretion to B. In January, when the market price has risen above the contract price, A repudiates the contract, and B seeks specific performance. In the absence of justification by evidence of commercial setting, purpose or effect, the court may determine that the contract as a whole was unconscionable when made and may properly deny specific performance on the ground of unfairness regardless of whether it would award B damages for breach.

§370. REQUIREMENT THAT BENEFIT BE CONFERRED

A party is entitled to restitution under the rules stated in this Restatement only to the extent that he has conferred a benefit on the other party by way of part performance or reliance.

Comments:

a. Meaning of requirement. A party’s restitution interest is his interest in having restored to him any benefit that he has conferred on the other party…. However, a party’s expenditures in preparation for performance that do not confer a benefit on the other party do not give rise to a restitution interest….If, for example, the performance consists of the manufacture and delivery of goods and the buyer wrongfully prevents its completion, the seller is not entitled to restitution because no benefit has been conferred on the buyer. See Illustration 2.

Illustrations….

2. A contracts to sell B a machine for $100,000. After A has spent $40,000 on the manufacture of the machine but before its completion, B repudiates the contract. A cannot get restitution of the $40,000 because no benefit was conferred on B.

5. A, a social worker, promises B to render personal services to C in return for B’s promise to educate A’s children. B repudiates the contract after A has rendered part of the services. A can get restitution from B for the services, even though they were not rendered to B, because they conferred a benefit on B.

§371. MEASURE OF RESTITUTION INTEREST

If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either

(a) the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position, or

(b) the extent to which the other party’s property has been increased in value or his other interests advanced.

Comments:

a. Measure of benefit….An especially important choice is that between the reasonable value to a party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position and the addition to the wealth of that party as measured by the extent to which his property has been increased in value or his other interests advanced. In practice, the first measure is usually based on the market price of such a substitute. Under the rule stated in this Section, the court has considerable discretion in making the choice between these two measures of benefit….

b. Choice of measure….The reasonable value to the party from whom restitution is sought (Paragraph (a)), is, however, usually greater than the addition to his wealth (Paragraph (b)). If this is so, a party seeking restitution for part performance is commonly allowed the more generous measure of reasonable value, unless that measure is unduly difficult to apply, except when he is in breach (§374)….

Source: http://www.lexinter.net

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