Contracts Outline Maggs Fall 2011

Contracts Outline – Maggs – Fall 2011

A Contract is a promise that is enforceable by law.

Courts enforce promises by

1. Specific Performance

E.g. return the item

1. Pay Damages

There must be a basis for enforcement to show that promise was seriously made

Prinicipal Modern Bases

1. Consideration
2. Reliance
3. In a few special cases moral obligations but usually not

Consideration

1. promise or performance (action or forbearance)
2. and bargained for (sought and given) in exchange of the promise

Policy bases

1. Economic Importance. Bargains are essential to any business deal and our economy
2. Minimal Dangers as to proof. It is much harder to lie and claim that Bill Gates gave you a million dollars if one must prove consideration.

Restatement § 71

(1)To constitute consideration, 1. A performance or a return promise must be 2. 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

(b)Or a forbearance

2 non-valid arguments for no consideration

Restatement § 79

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

If forbearance of a legally permissible act is the performance that was bargained for, the court will not determine whether that forbearance was beneficial or detrimental for the promisor or promisee.

1. WE DON’T CARE ABOUT BENEFIT OR DETRIMENT IN CONSIDERATION

E.g. Hamer v. Sidway, The forbearance of smoking and drinking was beneficial to the nephew and brought no benefit to the uncle, yet it was still considered a legally valid contract because the uncle sought a bargain where his nephew forbore from smoking etc. and he performed his part of the bargain, therefor there was consideration.

2. There is no requirement of equal values and there can be consideration even if one side gets something worth much more than the other but it must have been a real bargain. If the bargain was a mere sham e.g. $1,000 for a book worth $1 then it does not meet the requirements of §71(acc. to restatement there is some historical basis for it being binding). This is referred to as the peppercorn example.

The peppercorn example is a valid argument for no consideration

Argument for invalid promise

1. Forbearance of invalid claim

Forbearance to assert an invalid claim may serve as consideration for a return promise if the parties at the time of the settlement 1. reasonably believed 2. in good faith that the claim was valid.

We determine 1. Objectively by determination of the jury

We determine 2. Subjectively by bringing the party to the stand and asking them.

The court ruled in Feige v. Boehm, that her promise not to bring a bastardly suit against Feige was valid consideration because she reasonably believed in good faith that the child was Feige’s, but had she not reasonably believed that in good faith then there would have not been consideration because it was an invalid claim.

Restatement § 74

(1)Forbearance to assert or the surrender of a claim or defense which proves to be valid is not consideration unless

(b)the forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid.

2. (second argument for invalid promise) Illusory promises, will be discussed later

Determining Bargains From non-bargains

Non Bargains

• Past Service is not a basis for consideration. Feinberg, Mills (because it is not bargained for)
• Continued non-bargained for service is not consideration. Consideration must be something that is bargained for; if one just performs for another without bargaining for this performance it is not consideration. I.e. continued service like in the Feinberg case.

The Ohio Supreme Court disagreed with this in the Lakeland case. The court held that continued employment alone satisfies the contractual requirement of consideration when a non-compete is signed by an at-will employee who is already employed by the employer. Their reasoning was that the gain of the employee is to not be fired (he signed non compete, they foreborefrome terminating him). The dissent argues and says that nothing was actually bargained for and the employer just gains non compete and can still fire employee; hence there is no consideration. Another dissenting justice points out that according to this rational the employer would be required to keep the employee for an unspecified period of time.

- A way to argue this case successfully not based on consideration is based on reliance that Lakeland gave their private information relying on the non-compete clause

• Moral Obligation is not enforceable by law. Mills(there are some exceptions)
• Promises to make gifts including conditional promises to make gifts are not consideration.Kirksey

In Kirksey a woman sold her home and left with her children and travelled 70 miles away to her brother in law who promised to make her comfortable. He eventually did not keep his promise. The majority ruled that there is no consideration because it is just a conditional promisealthough she took ceratin actions, they were just prerequisite actions, she did not bargain for her brother in law’s promise. Defendant did not seek these actions in exchange for the defendant’s promise (Today this would probably have been enforced as Reliance by the theory of promissory estoppel).

There is a dissent that holds that the hardships she went through are forbearance and there is consideration.

How can we determine if something is a conditional promise (i.e. come to my office and I will give you a syllabus) or a real bargain? Williston gives a helpful guide. If there is a benefit to the one who made the promise or a detriment to the promisee then it is most probably consideration (i.e. a bargain and not a conditional promise). This is not a contradiction to Hamer where the court said they will not look at benefit and detriment in regards to consideration because there we know that there was a bargain. The court is just telling you a general rule that it doesn’t lose its status as a bargain if there is no gain to promisor etc. Whereas Williston is referring to cases where we are trying to find out if there is a bargain at all and benefit and detriment can aid in that determination.

This is not always true sometimes it is so clear that it is a conditional gift that even with a detriment the promise has been held unenforceable.

• As we mentioned before a sham argument is also not a bargain good enough basis for consideration.

A truly illusory promise cannot be a basis for consideration

Restatement §2

(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.

In Strong v. Sheffield, Strong promised to forebear from collecting the debt until such time that he wanted the money. Since there was no specified time and nothing stopped him from collecting the money the very next day, his keeping of the promise was optional and therefore could not be a basis for consideration.

Implied terms can make a promise non-illusory by either being terms implied in law or fact.

Promise implied in law

Restatement § 205

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

A promise is not considered illusory, if by implication of law one is bound to keep his side of the promise. In Mattei v. Hopper, they made the sale conditional on Mattei finding satisfactory leases for the land. Hopper claims there is no consideration because his promise is not real, he can just claim he didn’t find satisfactory leases and pull out of the agreement. The court rules that there is an implied promise to act in good faith meaning he cannot just arbitrarily pull out. This is a promise implied in law.

Promise implied in fact

Implied in fact means implied in the conversation or the specific terms of your contact. For example, when you sit down in a barbershop or a cab or a restaurant you cannot claim that you never promised to pay, it is a promise implied in fact.

In Wood v. Lucy…., there was a contract that he would distribute her designs and receive half of the profit. She claims there is no consideration because he was not bound to do anything. The court rejected this argument and held that the promise was implied in the facts that he would make reasonable efforts to get endorsements and market her designs, even though there was no express promise.

Reliance(promissory estoppel)

§ 90

(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 forebearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for the breach should be limited as justice requires.

There are 5 elements

1. A promise by defendant
2. That results in action/ forebearnace by plaintiff
3. Induced by (i.e. taken in reliance on) the promise
4. Reasonably expected by promisor
5. Necessary to prevent injustice

In Feinberg the court ended up ruling in her favor because she testified that she retired from her job in reliance on the pension.

Policy Reasons For Reliance

1. The plaintiff was damaged and there is an injustice
2. If plaintiff relied on promise it shows that it was made seriously
3. If there was reliance it shows that it is worth enforcing

In Rickets, she quit her job on reliance of the $2,000 her grandfather promised to give her. In Allegheny, the college relied on her promise to start a scholarship.

(In both of these cases the court ruled that there was a contract by stretch of other theories because there was not yet promissory estoppel, nowadays this would have been enforced through reliance).

In Cohen v. Cowles Media, we saw that the court made sure that there was an injustice before ruling in his favor through reliance.

In Feinberg, the company unsuccessfully argues that there was no injustice because she could now just get another job and there would be no injustice, the reason they were unsuccessful is because she was old and had cancer therefore there was an injustice.

The company also argued that she didn’t retire based on the pension and she would have done it anyways, the court relied on her testimony that she did actually rely on pension.

Restitution as a substitute for enforcement

When the plaintiff cannot prove that the defendant made an enforceable promise, the plaintiff may seek “restitution” from the defendant if the defendant has been unjustly enriched at the plaintiff’s expense. The defendant must pay the reasonable value of any benefit received from the plaintiff.

3 defenses to Restitution

1. The plaintiff was a volunteer. People that benefit others without manifesting that he expects payment in return.

Why no restitution? because it would be unjust to expect something in return for a gift.

There is in an exception if it is a professional service like we saw in Cotnam v. Wisdom.

Another exception is if the services are excessive or burdensome like driving someone 100 miles to a hospital, but if he just drove a few miles or gave basic first aid that is a volunteer.

1. Officious intermeddlers: meaning your services were neither asked for nor needed even if it improves the value of my land.

The reason there is no restitution is because people would just come and start changing other people’s tires etc. and claim restitution.

1. Plaintiffs with other remedies: restitution is a last resort. Callano

Even though there was an unjust enrichment in that case, which would normally allow for recovery based on reliance the court did not allow because Callano had the ability to sue Pendegrast’s estate. (The court also ruled that they could not recover because they had no dealings with Oakwood they were hired by Pentegrast and they didn’t expect anything from Callano)

Moral Obligation as a basis for remedy

generally not enforceable, Mills

1. If there is a gratuitous new promise reaffirming an old debt that is uncollectable because of

1. statute of limitations
2. bankruptcy
3. infancy

1. In some jurisdictions there is a moral obligation to pay if it is necessary to prevent an injustice like we saw in Webb, § 86 where he was crippled for life because he saved the defendant. Most states disagree,Dementas this is a rare example of where we don’t follow the restatement

Assent

A promise is not binding if one of the parties makes clear that he does not assent to be bound by the promise. § 21

An objective, reasonable person standard determines this.

We don’t care if one of the parties thinks in their mind that they don’t want to be bound it must be clear in an objective not subjective manner. Lucy v. Zehmer

The only exception to this rule is if the promisee knows that promisor didn’t mean it.

This could have been good advice to Mr. Zehmer to either make it clear to Lucy or to the objective person that he didn’t assent to be bound by his promise.

Offer

Generally, if one wants to prove a contract is valid there must be proof of an offer and of acceptance.

Defendant will always claim that it was not an offer rather it was preliminary negotiations, which cannot be considered an offer.

Determining if offer or negotiations

1. In Owen v. Tunison the court relies on precedent when it rules that “cannot do it for less than” is not an offer but rather preliminary negotiations.
2. In Harvey v. Facey, the court rules that there was no offer because he didn’t answer both of the questions, he only answered an amount by saying I will not sell it for less than 900 pounds, but he didn’t say how much he would sell it for, this is called comparison drafting and it shows that there was no real offer. (There is another reason it is not an offer and that is because it was a request for lowest price like we will see shortly).
3. Normally if a vendor gives an unsolicited price quote or a response to the lowest price that they would be willing to sell for it is not binding unless they add a language similar to “for immediate delivery” that shows (objectively) that it is a real offer, Fairmount Glass
4. Advertisements are generally not a real offer because everyone knows that they are not really subjecting themselves to unlimited liability (if false advertising laws negate this understanding then it can be considerd a real offer). We saw an exception in the Lefkowitz case because there the ad made it clear that they were serious since they said it would only be for the first person who came.

Acceptance

1. If a promise is being used as acceptance for an offer, there must be notice of this acceptance communicated to offeror, unless the terms of the offer waive the requirement of notice. § 56

In International Filter, the acceptance was good, even if there had been no notice because the offeror waived the notice requirement. (the court says in an alternate holding that the acknowledgement was notice).

In Corlies, there was no acceptance because Corlies changed their mind before Tift gave notice of his acceptance, Tift argues that he gave notice because he had already bought wood and was working on it in his shop the court rules that was not notice to defendants because that could have been for any job. If Tift had gone to the office and actually started working there, or sent defendants a note with his acceptance, that would have been considered notice.

In Green v. Evertite, there was notice before the Green’s changed their mind because they actually showed up at their house.

2. There is no acceptance when the method is performing an act, until completion of the entire performance. When the acceptance is made by complete performance there is no requirement of notice. In Carlill, she completely performed and therefore there was no requirement of notice.

3. The acceptance must be in a manner permitted by the contract. If the offer suggest one method of acceptance, that does not preclude other reasonable methods of acceptance.

In Allied Steel, they argue that their starting to work was not an acceptance because Ford said that the acceptance would be by an acknowledged copy to buyer, but the court ruled that this does not exclude other reasonable methods. (of course if Ford had said that the only way to accept would have been through acknowledged receipt, then nothing else would have worked.

4. Generally silence is not considered acceptance. § 69

Rationale: because then people would just say: if you are silent I’m buying your car for $2 and take advantage of people.

Exceptions:

1. Offeree takes service
2. Oferror tells offeree silence can be acceptance and offeree intends to accept.
3. Previous dealings
4. Offeree uses offered property

In Hobbs, silence was considered an offer based on previous dealings and the fact that the offeree used the goods.

Termination of Offers

1. Lapse of either reasonable amount of time or the time specified in the offer.
2. Revocation of offer by offeror

1. the revocation can come any time before acceptance
2. If there is a binding option contract, then there can be no revocation. E.g. I was paid $5 to leave the contract open for two weeks I cannot revoke before the end of the two weeks. This is only true if it is a real contract, in Dickinson, there was a promise to leave an offer open but it was not binding because there was no consideration.
3. Revocation is only valid if offeree receives communication of revocation even if that communication was indirect like in Dickinson.

3. Death of offeror