Contract Law Is the Enforcement of Promises- Consensually Imposed Duties

Contracts:

Contract law is the enforcement of promises- consensually imposed duties.

Gratuitous promises should not legally enforced.

Public Policy:

1.  to encourage commerce, consumer security – sales are single most important contract.

2.  to right a wrong, promote justice and equity

Apply either the UCC: sale of goods or Restatement: non goods!

i. In mixed goods/services contracts, courts normally apply Art. 2 only if

contract is predominantly for the sale of goods.

ii. Some courts will apply Art. 2 in a mixed goods services contract if the

problem is with the goods part of the K, even if the contract is predominantly

for services.

iii. If contract is not for sale of goods, court might use Art. 2 by analogy if it

prefers the Art. 2 rule for policy reasons.

I. When is a promise enforceable?

A. Consideration:

In order for a promise to be enforceable, it must be supported by consideration.

1. Restatement § 71: Requirement for 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) act other than a promise, or

(b) forbearance, or

(c) 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.

2. Inducement + detriment. Inducement required or reciprocal relation of motive. Both parties

are induced.

i. Hamer v. Sidway: (Uncle & Nephew) “Consideration is not so much as one party is profiting, but rather that one party abandons some legal right in the present or restricts his legal freedom of action in the future, as an inducement for the promisor.”

3. Mutuality: If consideration exists, there is no separate requirement of mutuality of

obligation. R §79

a. Courts will not inquire regarding the value of promises exchanged; the

question is whether or not the promises were bargained for.

à“even a tomtit will do." R.2d 79

b. Mutuality of obligation is really a synonym for consideration, at least in the

Restatement.

c. A contract should not be void for lack of mutuality.

i. Laclede: When one party has the power to cancel by notice for some stated

period the contract should not be invalid for lack of mutuality or

consideration.

ii. Weiner v. McGraw Hill: Weiner could not be fired without reasonable notice but he could leave anytime he wanted. Though this lacked mutuality, he gave McGraw the consideration of his work and services, in exchange for that right. Because there was consideration, mutuality was not necessary.

Employer could not terminate the employment without just cause.

a.  Promissory Estoppel: not a satisfactory theory since the promise

can be limited to the extent justice requires. The court will found

that she did not suffer when taking the job because he was

compensated à But there was in fact sufficient

consideration.

b. CA does not consider job security part of the bargained for

exchanged of work – If an employer/employee relationship is

indefinite in duration, , employment will be considered at will for

any time for any reason and employee may quit at will.

c. By analogy 2-309: can be terminated essentially by will so

long as there is reasonable notification.

Promises That Lack Consideration :

B. Gratuitous Promise: à not enforceable

1. Gratuitous Promises are not enforceable for lack of consideration. (i.e., “If you do this, you’ll get this”), even if the promisee suffers a detriment, there is still no consideration because it was not bargained for.

ii. Kirksey v. Kirksey (brother in law wrote letter to woman so that “they do well.”)

Courts found that her move was not an inducement to the promisor and that she was not giving up a legal right. He could kick her off at his well. However, one could argue promissory estoppel.

iii. Cash v Benward. No inducement for promisor to make promise to process insurance

papers. Detriment suffered, but no bargained for exchange. Promisors were not induced by

detriment- but simply made a gratuitous promise.

2. Gifts do not need to be supported by consideration- but a gift is enforceable. Once a gift has

been made, it is irrevocable.

a. A note promising to pay money, even if delivered is unforceable unless (in some

states) the note is under seal or reliance supports promissory estoppel.

b. Donations are unlikely to be enforced.

C. Illusory Promises

1.  A statement that appears to be promising something, but is promising nothing at all (“I will paint your house if I feel like it”). à you must have an out.

2.  § 77: Words of promise that make the promise entirely optional by the promisor do not constitute a promise. Where the apparent assurance is illusory, there is no consideration for a return promise.

3.  the UCC will allow output & requirement contracts, though illusory, if they are made in good faith.

D. Past Consideration/ Moral obligation:

1. Past consideration will generally not cause a promise to be enforceable; The benefit

was conferred before promise was already made, so therefore there was no consideration- no

bargained for exchange.

2. Moral obligation: the past benefits give rise to a view that a promise to pay for those

benefits ought to be enforced. Justice requires promise to be enforced.

i. Web v. McGowin. Employee sacrificed self in lumber mill accident to save

employer. However, moral obligation is an exception to the rule. A promise is

enforceable by way of a moral obligation where the promisor received a material

benefit.

3. Restatement § 86

(1) Promise

(2)  recognition of benefit received by promisor from promisee

(3)  extent necessary to prevent injustice

(4)  benefit not gift (promisor was unjustly enriched)

(5)  enforced to extent not disproportionate to benefit

4. POLICY: This gives a certain amount of discretion to the courts on a case by case basis.

Maybe this leaves it wide open.

D. Promissory Estoppel

1.  § 90: A guarantee will be binding without consideration if (1) the promisee acts in reliance on the promise, and (2) the promisor should expect it would induce action or forbearance.

a)  Promise

b)  Promisor should reasonably expect action or forbearance

c)  Induces such action or forbearance

i. Hayes v. Plantation Steel Co.: P told D he was going to retire before D said “Co

would take care of him.” No promissory estoppel. Action not taken in

response to promise. No knowledge of promise at time of action. Must structure a deal

to show a forbearance or bargain for exchange.

d)  Injustice avoided only by enforcement

e)  Remedy will be limited to the extent justice requires.

ii. Rickets v. Scothorn: Having intentionally influenced the granddaughter to alter her position for the worse by quitting her job in exchange for the promise of money, the court found the D created an enforceable promise based on promissory estoppel. No consideration.

iii. Hamer v. Sidway: Contrasted to the uncle who promised his nephew money if he’d not drink, etc. until 21, where the promise was made in exchange for action, and so, there was bargaining.

2.  What does justice require?

a)  Reasonable reliance- would a reasonable person rely on promise

Had the grandfather not expresses his reason for making the promise, she would not been able to rely on it, and quit her job. In this case, the promisor did reasonably expect that she would quit her job, so it’s enforceable.

b)  Reliance was definite and substantial character – forbearance

When someone does nothing it is not as clear that there was a reliance.

In Rickets, she quit her job as a result- rather than not sending in an application.

In Cash, it is unclear if he would have ever sent the application in.

c)  Formality of promise- not casual conversation

In Rickets, there is a promissory note and indicates his intent to be bound.

In Cash, it was just casual conversation, not the same clear intent to be bound.

F. Requirement/Output Contract:

a. Output/Requirements/Exclusive Dealings: Courts and statutes will sometimes imply an obligation to act in good faith which will make a promise non-illusory. 2-306

à good faith will be the consideration given in exchange.

1.  A requirement contract exists where one party promises to supply the needs of the

other party during a certain period of time at an agreed price and the other party

expressly or implicitly promises that he will obtain his goods or services

exclusively from the first.

2. Output K: seller agrees to sell as of specified goods that he produces.

3. § 2-306: The requirement is such actual output as may occur in good faith, and no

quantity unreasonably disproportionate to any reasonable amount can be tendered

or demanded.

i. Laclede v. Amoco: Amoco made a promise to keep the offer open,

but Laclede had the power of unrestricted termination. Amoco tried to terminate on the basis that the contract lacked mutuality. The Court held that they could not terminate when they wanted, however, because Laclede had given consideration for the sole right to terminate. There was an implied agreement to buy all the output that Amoco produced, which was consideration. In exchange, they had a right to restricted termination.

ii. Schlang: P was injured in car accident, tried to guarantee insurance co. to

pay for medical equipment. Letter sent was no more than invitation for

orders, indicating estimates were as good as long as co. around. NOT a

requirement contract à not enforced b/c it was illusory.

Mutuality of Obligation?

a)  Consideration and Mutuality are basically one in the same; they require that both parties are bound

b)  Promissory Estoppel isn’t at issue b/c Weiner didn’t suffer in taking the job. Also, consideration issue makes the contract enforceable, while Promissory estoppel only gets him damages → Use Promissory estoppel and moral obligation as a fall back if the consideration argument doesn’t work.

II. CONTRACT FORMATION

A. Contract by Express Terms – Offer and Acceptance

1.  IS THERE AN OFFER:

à Offeror is master of the Offer. Offer dictate terms of acceptance.

à UCC does not define offers, except firm offers (for option contracts).

1.  Offer: R § 24- 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.”

a. R § 17- Contract formation requires a bargain in which there is a manifestation

of mutual assent to the exchange and consideration.

à If someone has made an offer to another, the person is bound to the contract

if the offeree accepts it.

b. Distinguish between offers and invitations to bargain: Terms must be

reasonably definite:

1.  quantity

2.  price

3.  time for acceptance/performance

2. Preliminary Negotiations: R § 26- An invitation to 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 a further manifestation of assent.

a. Objective Test: Whether a person in the offeree’s shoes would reasonably

have understood that the offeror was merely soliciting bids or starting

preliminary negotiations.

3. Advertisements are generally not considered offers unless they are very detailed.

i. Leonard v. Pepsico: Advertisements, order forms, catalogs are not offers, but solicitation for offers which create no power of acceptance in the recipients. An offer is made when the purchaser sends in check. A contract is formed when company cashes check.

a. But, if the advertisement contains words expressing the advertiser’s

commitment or promise to sell a particular number of units or to

sell them in a particular manner there may be an offer.

(1) “First come first serve” à Offer is valid. Where the offer was limited quantity available, then the public knows there is limited amount and the advertiser has limited liability.

b. If the ads offer rewards to induce performance of conditions, there requires

a reciprocal promise from the offeree, the ad is a valid offer.

i. Carbolic Smoke Ball: Ad said that if one gets influenza after taking product for 2 wks a reward will be offered. This ad sought to induce performance, seeking a reciprocal promise. Anyone who performs condition, accepts the offer.

4. Price Quotations are usually understood to be inviting an offer rather than

making one. However, sometimes even when the word quote is used, an

offer will be found.

a. In determining whether it is an offer, relevant factors include

b. the terms of a previous inquiry

c. the completeness of the terms of the suggested bargain

d. the number of persons to whom the communication is addressed.

2. REVOCATION OF OFFER PRIOR TO ACCEPTANCE

à In most circumstances, an offeror can revoke his offer at any time before it is accepted.

A. Revocation can be direct or indirect:

1. An offeree’s power of acceptance is terminated when offeree receives from offeror a

manisfestation of unwillingness to enter into proposed contract. R § 42

2. Indirect communication of Revocation: An offeree’s power of acceptance is terminated

when the offeror takes a definite action to revoke contract and the offeree acquires

reliable information to that effect. R§ 43
a. if the offeree hears about it through the grapevine, revocation is effective, if

the source is reliable.

Mailbox rule

CISG Article 16

1)  Until a contract is concluded an offer may be revoked if the revocation reaches the offerree before he has dispatched an acceptance.

3. Exceptions to when offer cannot be revoked before acceptance:

A) Consideration supports option. Common law required consideration to keep the

contract open. Otherwise option was revocable.

i. Krauss v. Fox: Krauss argued that he had consideration to keep the contract open. Court said this is earnest money – part of purchase price, and was not new consideration for option contract. Had new consideration been given, or purported, Fox could not have revoked the offer.