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Decision: Reversed. Giesler’s failure to know what the RFP specifications meant was not
excusable, so there could be no rescission, as would be the case if the government knew of the
seller’s mistake. To bid on such a contract not knowing what specifications mean is gross
Add. Case: Stambovsky v. Ackley & Ellis Realty (App. Div., NY, 1991)--After buying a house,
Stambovsky discovered that it was widely reputed to be “possessed by poltergeists, reportedly
seen by defendant seller and members of her family on numerous occasions over the last nine
years.” He sued seeking rescission of the contract of sale. Trial court dismissed; Stambovsky
appealed.
Decision: “The unusual facts of this case ... clearly warrant a grant of equitable relief to the
buyer....” Being new to the area, the buyer did not know that the house was locally famous and
had been the subject of national attention. While living in the house, the owner exploited the
attention. “While I agree with [the trial court] that the real estate broker, as agent for the seller,
Novation—In a novation the parties agree to discharge one party from the contract and create a
new contract with another party who is to become responsible for the discharged party’s
performance.
Add. Case: Fusco v. Union City (App. Div., NJ, 1993)--Union City sued to enjoin C&C from
building houses on a site. C&C had agreed to construct two parks on land to be dedicated to the
City and to pay the City $75,000. $45,000 was to be paid when building permits were issued.
The other $30,000 was to be paid in two installments of $15,000. C&C sold the property to St.
Michael Development, which assigned C&C’s obligations to construct the parks and to pay the
City $75,000. The City knew nothing of the assignment. The City accepted the $45,000
installment and a deed for one of the parks from St. Michael. When the City failed to receive the
$30,000, the City sued. The court ordered St. Michael to pay $30,000, but it was bankrupt. The
City moved to enforce against C&C. Denying the motion, the court held that the City’s
acknowledgment of the assignment and its acceptance of part performance by St. Michael
created a novation discharging C&C, the original obligor. The City appealed.
Decision: Reversed. C&C was not discharged from performing under the settlement agreement.
A novation may be the substitution of a new contract for an old one that is extinguished. Here, a
novation “is a substituted contract that includes as a party one who was neither the obligor nor
the obligee of the original duty.” A novation “necessarily involves the immediate discharge of an
old debt or duty, or part of it and the creation of a new one. The extinguishment of the original
Issue Spotter: Do You Have to Eat the Loss?
There would be impossibility due to the factory fire. It was beyond the control of the retailer. No
doubt substitutes would be offered, but if the buyer wanted that particular model of television, he
would have to wait or look around for another seller.
Accord and Satisfaction—Another way parties may agree to discharge their duties to one
another under a contract is through accord and satisfaction. An accord is an agreement by the
parties to give and accept some performance different from that originally bargained for.
Satisfaction is the actual performance of substituted obligation. Discharge of the original
obligation occurs when the performance of the substituted obligation takes place.
Discharge by Impossibility—An event that makes performance impossible may end
obligations. Objective impossibility is when a party dies or is incapacitated, a law is makes
performance illegal, the subject matter is destroyed, or the performance contemplated turns out
to be massively more costly than anticipated. Subjective impossibility includes such events as
strikes by workers, shortages in supplies, or anticipated loss of profits in performance of a
contract. Subjective impossibility does not discharge obligations of the parties under the contract.
The business assumes the risk of certain occurrences. The more modern view of impossibility, in
the UCC and in some common law states, is impracticability. It refers to “extreme or
unreasonable difficulty, expense, injury or loss.” A contract will be discharged under the
frustration doctrine if some event makes it impossible to achieve the purpose the parties had in
mind when the contract was made. The difference between impossibility and frustration can be
summarized this way: A company that is obligated by contract to supply goods or services that
finds that it cannot perform will try to use the impossibility defense to avoid liability for breach
of contract. A company that is obligated to buy goods or services but finds that it is unable to do
so will try to use the defense of frustration to avoid liability.
Add. Case: Pocono Springs Civic Assn. v. Rovinsky (Comm. Ct., Pa., 2004)--Rovinsky bought
a lot in Pocono Springs Estates. There was an obligation to pay annual dues to a property
owners’ association. Rovinsky claimed he could not build on the lot, so it was worthless, and he
should not have to pay the dues (it appeared that he could in fact build on it, but in a more
expensive way than he had presumed). The trial court ordered him to pay back dues plus legal
costs. He appealed.
Decision: Affirmed. There is no frustration of the contract that obligated Rovinsky to pay his
Add. Case: F. J. Busse v. Dept. of General Services (Comm. Ct., Pa., 1979)--Busse and the
General State Authority (GSA) contracted for a fountain at a park in Pittsburgh, where the
Allegheny and Monongahela Rivers form the Ohio River; a place where flooding frequently
occurred. When excavation was almost complete, a major storm deposited mud on the site. For
Busse to complete construction, the mud had to be removed. Busse submitted a change order for
over $85,000, the cost of the work to remove the mud. GSA gave Busse more time to perform, but
did not accept the change order, claiming the risk of loss was on him. Busse completed
construction and then filed against GSA with the Board of Arbitration of Claims. He asserted it
was impossible to perform the contract as written because of the unexpected consequences of the
hurricane. The board denied Busse’s claim for contract damages for the cost to remove the mud.
Busse appealed.
Decision: Affirmed. Legal impossibility means not only strict impossibility, but impracticability.
The flood damage did not make performance impracticable. To find for Busse, the results of the
REMEDIES—There is a basic premise in contract law that after a breach, innocent parties
should be placed in the same economic position they would have been had the contract been
fully performed. Under normal business circumstances, a monetary judgment for damages will
place the injured party in such a position. If, however, the circumstances are such that the legal
remedy of monetary damages is inadequate, the court may grant the injured party an appropriate
equitable remedy.
Damages—The remedy usually granted for breach of contract is the legal remedy of monetary
damages. A variety of damage awards are available to the courts, including compensatory,
expectancy, liquidated, nominal, punitive, and special damages. In general, damages should
return the injured party to the same economic position if the contract had been performed. There
is restitution interest–the recovery of value given; reliance interest–costs incurred depending on
the contract to be fulfilled; and expectation interest–lost profits that would have been earned had
the contract been fulfilled.
Add. Case: Hanson v. American West Airlines (C.D. Calif., 2008)--Hanson was flying on
American West. He carried on board, and stored overhead, a robotic head worth about $750,000
that was used in movies. When he left the plane and transferred to another plane for another
flight, he forgot about the head until that plane had departed. He reported it and was told the
airline retrieved it at the next airport and would send it to him in San Francisco, but it never
arrived. He sued for damages. The airline requested summary judgment.
Decision: Summary judgment granted. Airlines may limit their liability for lost or damages
goods if the contract that limits the liability offers the shipper a reasonable notice of the limited
Add. Case: Jue v. Smiser (Ct. App., Cal., 1995)--Smiser offered his home in Oakland,
California for sale. He said it was designed by Julia Morgan, a famous architect who designed
the Hearst Castle. After the contract was formed, but before closing, Jue discovered that Morgan
was not the architect and had reason to believe that Smiser knew that. The closing occurred, Jue
took title, then sued for damages. Defendant was granted summary judgment by the trial court.
Jue appealed.
Decision: Reversed. The buyer has the right to complete the contract and then sue for damages,
if any, due to the fraud of the other party to the contract. That is, they could go ahead and buy
Economic Loss Rule—When there is a breach of contract, the damages are the economic losses
suffered, which includes additional costs incurred and lost profits. These damages are rather
strictly defined and measured. It is common to try to add a tort claim to bolster possible
damages.
Add. Case: Lockheed Martin Corp. v. RFI Supply (1st Cir., 2006)--Rantec built steel shielded rooms padded with
foam material to absorb light and sound for Lockheed. Lockheed uses the rooms to test antenna signals. At a room
in Calif. and then at one in N.H., sprinkler systems malfunctioned and flooded the rooms causing $400,000 damage.
Lockheed sued for the damage, claiming negligence and strict liability in tort. The statute of limitations for a
warranty claim under the UCC had passed. The court held that the economic loss rule prevented Lockheed from
making a tort claim. Lockheed appealed.
Decision: Affirmed. The New Hampshire high court defines economic loss as “the diminution in the value of a
product because it is inferior in quality” and “that loss resulting from the failure of the product to perform to the
level expected by the buyer.” It is “commonly measured by the cost of repairing or replacing the product.” Under
Add. Case: Town of Alma v. AZCO Construction (Sup. Ct., Colo., 2000)--Alma, Colorado,
and various residents sued AZCO Construction for breach of contract and negligence due to
problems associated with water line work by AZCO. The trial court dismissed the negligence
claim and the jury held for AZCO on the breach of contract claim. Plaintiffs appealed.
Decision: Affirmed. The negligence claim was properly dismissed. That is a tort claim. The issue
was breach of contract--whether the contractor followed the terms of the contract, which the
jury found to be the case. When a party suffers an economic loss from the breach of an express
Calculating Damages—Firms may sue to recover actual (or estimated) losses for the various
interests just mentioned. Different states have somewhat different rules and terminology about
damage measurement. At times, it is efficient for a firm to breach a contract because the damages
from breach are less than the cost of fulfilling the contract.
CASE: DeRosier v. Utility Systems of America (Ct. App., Minn., 2010)—DeRosier owned land
that needed fill dirt before it could be used for construction. As USA was doing road construction
nearby, he asked if they wanted to dump fill on his land. They said yes. DeRosier got a permit
from the city for 1,500 yards of fill and gave the permit to USA, which proceeded to dup 6,500
yards on his property—thereby meaning 5,000 yards had to be removed. USA denied
responsibility, but offered to move the dirt for $9,500, which was a bargain price. DeRosier
refused the offer and sued. The trial court awarded him $22,829 to pay another company to
remove the dirt plus $8,000 consequential (delay) damages for lost construction time. USA
appealed, contending DeRosier failed to mitigate damages by refusing its offer of $9,500.
Decision: Affirmed in part; reversed in part. There should be no consequential damages; there
was no evidence of a delay in construction or other related monetary loss. The general damages
Questions: 1. Why could DeRosier’s paying USA to haul the excess dirt away be considered an
accord and satisfaction?
If DeRosier agreed to pay USA to haul the dirt away for $9,500 he would be creating a new
contract for USA to do work for him. Since there was a disagreement, it could be interpreted that
2. Why were there no consequential damages?
DeRosier failed to prove that the time spent hauling away the dirt actually delayed firm
Add. Case: International Paper v. Madison Oslin (Sup. Ct., Ala. 2007)--Madison developed a
patented process for coating corrugated boxes without wax, which made the boxes more
desirable as they were fully recyclable. International Paper (IP) agreed to have Madison provide
coating for boxes. The contract specified a minimum monthly purchase level and a price
dependent on the volume of coating used. After 14 months, IP hardly used any coating and
Madison sued for breach. The trial court found IP to have breached the contract because it
failed to make the monthly minimum level of purchases from Madison. The jury awarded
damages of $8.9 million. That determination was appealed.
Decision: Reversed in part. IP was in breach. The contract was clear as to minimum purchases
to be made. However, the damages awarded were for the revenue Madison would have earned
Add. Case: Logan v. D.W. Sivers (Ct. App., Ore., 2006)—Logan sold a piece of property and,
to avoid paying taxes on the gain, needed another piece of land in what is called a 1031 swap
under the tax code. The deal had to be worked out relatively quickly. Sivers had a piece of land
and a deal for it was made but before it was finalized, Sivers sold to another buyer, forcing
Logan to pay $919,652 in taxes that would have been avoided if Sivers sold to her as discussed.
She sued for breach. The jury held for her and awarded her the tax amount she had to pay. The
judge overturned the verdict. Logan appealed.
Decision: Reversed. When there is a breach, as here, the damages are losses caused by the
breach that are foreseeable and not speculative. Sivers knew this was a 1031 deal, so while the
Add. Case: Peevyhouse v. Garland Coal (S. Ct., Ok., 1962)--Garland leased property on the
Peevyhouses’ farm for five years for strip-mining coal. The contract was followed except, when
operations ended, Garland failed to restore the land as promised. The cost would have been
$29,000. The difference in the value of the Peevyhouse land without the restoration and after
restoration was estimated to be $300. Peevyhouse sued and was awarded $5,000; parties
appealed.
Decision: The Oklahoma high court awarded $300. The measure of damages is the difference in
the market value of the land restored compared to it not being restored. To restore the land
International Perspective: Contracting With the Japanese
The attitude of Japanese businesses toward contracts is often different from that in the U.S. The
typical US view is that a contract defines the rights and responsibilities of the parties and seeks
to cover contingencies. The traditional Japanese view is that a contract is secondary in business
relations. The parties should do business is an ongoing relationship, with both parties committed
to the pursuit of similar objectives. Legal documents are often brief and flexible to accommodate
the evolving relationship. Contracts are viewed as tentative agreements that may be redefined as
circumstances change. Long legal contracts specifying the relationship—particularly if written
by a foreign firm—are viewed with suspicion. Because Japanese managers place a high value on
compromise and accommodation, contracts often contain a “good-faith” clause that the parties
are to negotiate if a dispute arises. Japanese negotiation teams are normally larger than American
teams. During the process, the Japanese work to gain a consensus among themselves. As a
consequence, negotiations go at a slow pace.
Liquidated Damages—Liquidated damages are damages specified in the contract to be paid in
the event of breach by either party. They serve as a deterrent to both parties from taking actions
that will result in a breach of contract. Liquidated damages will not be allowed if the court finds
they are so excessive that in actuality they impose a penalty.
Add. Case: Neff Kemper Family Farm v. Dakota Ind. Dev. (Ct. App., Neb., 1999)--DID
offered to buy land from Family Farm. The parties agreed on 17.59 acres at $35,000 an acre for
$615,650 total. The agreement stated that DID would build a paved road to the property and
that “In the event the road is not completed by December 31, 1993, Buyer agrees to pay Seller
an additional consideration the sum of $10,000.00 an acre.” The road was not built by that time,
so Family Farm sued DID for an additional $175,900. DID defended that the clause was an
unenforceable penalty clause. The trial court held that the clause was not enforceable. Family
Farm appealed.
Decision: Reversed. “A contract written in clear and unambiguous language is not subject to
interpretation or construction; rather, the intent of the parties must be determined from the
contents of the contract, and the contract must be enforced according to its terms.... Certainly,
Nominal Damages—When a plaintiff has suffered a technical injury in contract law but has not
suffered an actual loss, the courts will sometimes award nominal damages. The amount of
recovery to the injured party will often be as little as a dollar plus the court costs. These awards
are important because courts are able to establish a precedent that effectively states that even
technical wrongs will be recognized at law, thereby upholding the importance of contractual
obligations.
Punitive Damages—Punitive or exemplary damages are usually awarded when the wrongdoer’s
conduct has been willful or malicious. They punish the wrongdoer by allowing the plaintiff to
receive relief beyond compensatory or expectancy damages. Punitive damages are not awarded
for breach of contract unless there is a tort involved, such as fraud.
Mitigation of Damages—When a breach of contract does occur, the injured party is required to
undertake reasonable efforts to mitigate or lessen the losses that may be sustained. The injured
party may not recover for losses that could have been avoided without undue risk, burden, or
humiliation. In addition, if a buyer does not receive goods ordered under contract, the buyer is
required to mitigate damages by making a reasonable efforts to secure substitutes.
Equitable Remedies—If money damages are inadequate to redress the injury caused by the
breach of contract, equitable remedies such as specific performance or an injunction are
available. These remedies are not available to injured parties as a matter of right but rather are
available at the discretion of the courts.
Specific Performance—Specific performance is an order by the court requiring the party who
created the wrong to perform the obligations contracted for.
Injunction—An injunction is an order by the court that requires one of the parties to do or to
refrain from doing certain acts.
Restitution—A remedy to prevent unjust enrichment; not much different in practice from the
notion of quasi-contract.
Add. Case: DCB Construction v. Central City Development (Ct. App., Colo., 1997)--Central
City Development (CCD) leased a building for five years and assumed all responsibility for
repairs, maintenance, and alterations. Lessee hired DCB to do alterations to the building that
cost about $300,000. CCD notified DCB that it was not responsible for any of the costs; the
contract was strictly with the lessee. Lessee quit paying rent, was evicted, and failed to pay DCB
for the work done. DCB sued CCD for unjust enrichment for the work DCB had done to the
building. The trial court awarded DCB $280,000 for the work done plus interest and costs. CCD
appealed.
Decision: Reversed. A claim based on contract implied in law or unjust enrichment is not based
on any contract; it is an obligation that arises not from the consent of the parties, but from
equity. Plaintiff must show that: 1) a benefit was conferred upon the defendant; 2) defendant
Quasi-Contracts—A quasi-contract is not contract. This term is used by the courts to impose
obligations on one party to a dispute when to do otherwise would create an injustice to the other
party. The courts created the concept of quasi-contract to give relief to innocent parties even
though no “true” contract exists. The remedy prevents unjust enrichment.
CASE: Scheerer v. Fisher (Ct. App., N.C., 2010)—Scheerer, a real estate agent, helped Fisher
find $20 million worth of property to buy for a commercial development. The seller and Fisher,
the buyer, both promised to pay a 2% commission, but the deal fell through. Fisher formed a new
company and had a third party buy the property and sell it to Fisher’s company, thereby avoiding
paying the commission. Scheerer sued for breach of contract or quantum meruit. The trial court
held for Fisher. Scheerer appealed.
Decision: Reversed. There is a claim of quantum meruit. Scheerer could show that he rendered
services to Fisher, Fisher knew Scheerer worked on his behalf and produced property of interest
Questions: 1. There was no written contract involving Scheerer and the purchase of the property
by Fisher from Antonio, so why should Scheerer receive payment?
Fisher clearly was avoiding paying at least a 2% commission by avoiding Scheerer. The only
plausible reason for his setting up a new company and having his friend Antonio appear to be the
2. Does this rule allow many parties to claim they were cheated out of a deal, thereby generating
a lot of litigation?
In practice this does not happen routinely; many people feel cheated in a deal, but as the court
Discussion Question
By placing fifty cents on the counter and uttering the words “A Coke please,” Jones has created
an offer to buy a Coke from the grocer for fifty cents. If the owner of the grocery store takes the
fifty cents and hands a Coke to Jones, a contract to buy and sell the Coke between the grocer and
Jones exists. Many contracts do not have to be in writing or meet formal guidelines to be held to
exist. The law looks to the intent of the parties as a reasonable person would interpret the intent
as expressed by their actions and words.
Case Questions
1. (answer on Internet for students) There was no contract. The deposit check for $25,000 was
not payment for an option, it was just a check that Polk could keep if he wished to accept the
offer from Avon, but there was no consideration to create an option contract. There was no
2. (answer on Internet for students) Anglin wins. Barry claimed “there was no meeting of the
minds as to the rate of compensation for Anglin’s work because the purchase order only
described Anglin’s rates as ‘mutually agreed upon.’ Anglin counters that there was an oral
agreement with Barry that the rates were the prevailing ‘street rates’ of $45.00 per hour ...
depending on the type of employee performing the service.” In such cases, “the court looks to the
3. (answer on Internet for students) There was no lease contract. The tenant made an offer,
consistent with oral discussions, but the offer was not accepted in writing. Since it was a contract
for real estate over two years, under the statute of frauds, the contract had to be in writing. “The
tenant’s mere offer to relet the premises for a two-year period at the rate of $1,800 per month
4. Yes. The issues were if there was a contract at all and if there was, if it failed because of the
statute of frauds. “A party’s intentional conduct which constitutes a manifestation of assent will
bind a party even though the party’s conduct does not truly express his or her state of
mind....Amdahl was entitled to rely on her signature to the statement that she was binding herself
to sell all 880 acres.” Mary Lowe claimed she only wanted to sell half the farm, not the whole
5. (answer on Internet for students) Minors ordinarily cannot be held to contracts such as this
one for the purchase of a car. A minor does not have the contractual capacity to execute such a
contract, so it can be disaffirmed and the parties returned to their original state. The car dealer
6. The pledge by Burt to the hospital can be enforced whether he is dead or alive. Ordinarily,
gifts (promises without consideration) that are promised can be withdrawn, but Burt made the
promise of a gift knowing that it would be relied upon by the hospital. The courts hold promisors
to their gifts under the doctrine of promissory estoppel where there is detrimental reliance by the
promisee upon the funds. In many such cases, the recipient expends funds (such as renovating
7. The covenant was upheld; it was not too broad. Stanley could use his property for other
business purposes other than retail gas sale in case he refused to sell BP gas; he violated the
8. He is due the costs of moving and the profits lost during the time his equipment was out of
service; that totaled $3,525. He claimed the profit he lost during the rest of the contract would
9. Justice Cardozo held that the owned had to make payment and the pipe was not to be
replaced. Since the pipe was of the same quality, to replace it would be economically wasteful
10. The trial court granted GE the extra payment, holding that they got benefit of the equipment
and so should pay for it. The high court reversed. “How the plaintiff could charge defendant with
Ethics Question
The Met admits the signage is rather unclear since it says $25 adults, $12 students and $17
seniors. It looks like a regular pricing schedule, except it says “recommended” in small print.
The Met is supposed to provide free admission most days in exchange for its valuable property
Essay Questions Based on Cases
The Dows owned 125 acres of land. Teresa, their daughter, claimed the family had always
discussed that she and her brother could each have a home on the property and the Dows
promised to transfer ownership of some land to her. With her parent’s permission, Teresa built a
home on the land. She said the Dows encourage this and said they would transfer the deed to her
later. Relations among the family members began to sour. Teresa asked her parents for a deed to
the property. They refused and she sued for breach of contract, requesting the court to compel
conveyance of property to her. The Dows contended that they had made her no promise, and she
had no right to any land. The trial court held that there was no enforceable promise. Teresa
appealed; on what basis could she claim she had a right to the property? [Harvey v. Dow, 962
A.2d 322, Sup. Ct., Maine, (2008)]
Answer: Vacated and remanded. General promises by the Dows to convey land the Teresa as a
gift or inheritance would not, alone, support a claim of promissory estoppel. It applies to
promises that are otherwise unenforceable, and is invoked to enforce such promises so as to
Smith contracted to build a gymnasium for Limestone College. About the time the building was finished, an
“extraordinarily heavy rainfall” caused the sewer system to back up into the gymnasium, doing damage that cost
Smith $37,000 to repair. Smith billed the city sewer system for the work done. The city refused to pay, claiming
there was no contract. Smith claimed an implied contract existed; was he right? [Stanley Smith & Sons v. Limestone
College, 322 S.E.2d 474, Ct. App., S.C. (1984)]
Answer: There was no proof the Board requested Smith to repair the flood damage to the
gymnasium or agreed to pay “cost-plus” for such repairs. The appeals court stated that a contract
rests on an actual agreement of the parties to be bound to a particular undertaking. The parties
must manifest their mutual assent to all essential terms of the contract in order for an enforceable
obligation to exist. If one of the parties has not agreed, then a prerequisite to formation of the
contract is lacking. Smith must prove the Board’s assent to the terms essential to create a
Internet Assignment
Cornell University Law School, Legal Information Institute, “Wex”:
http://topics.law.cornell.edu/wex
Wex is a legal dictionary and encyclopedia. Using the keyword “contracts” will provide hits for a
wide range of contracts materials.
