I. Promises and Contracts

  1. When can someone obtain the power of the state to enforce a promise made by somebody else?
  1. Remedies:

a. Enforcement of contract/Affirm contract

1) Get value of what’s promise: Compensation w/ monetary damages

2) Specific enforcement: Order promisor to keep promise

b. Disaffirm: Get out of contract (no suit may be required)

1) If sued, can raise breach as a defense

2) Rescind: If paid and D refuses to give money back can sue

2. Policy reasons for/for not enforcing contract:

a. Reasons why not to enforce:

1) Administrability

2) Promises made on mistaken premises

3) Extent to which promise is harmed by failure of promisor

4) Everyone makes promises

5) Inequality of bargaining

6) Duress

b. Reasons why we should enforce

1) Encourage economic activity

2) Uphold societal moral beliefs

3) Don’t want people to get something for nothing

4) Don’t want one party to speculate at the expense of the other party

  1. Contracts can be written or oral
  2. Contract Definition: a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty. R.2d 1

a. contract = offer, acceptance, consideration

D. Basic Flow chart

1. Do we have a contract? (Consideration, Estoppel, Quasi-Contract, Offer & Acceptance)

a. Would someone be justified in thinking that if they accept, a contract is formed?

b. How definite is the offer?

c. Definite Factors:

1) quantity

2) # of persons to whom directed

3) other terms (e.g., cash or credit)

4) time of acceptance

5) Seriousness

d. Generally, Advertisements are not offers

2. If so, what are the terms?

3. Is the contract enforceable?

4. Has the contract been properly performed?

5. What remedies are available if not performed?

E. Article 2? Flow chart:

1. Is the contract for a sale of goods? Article 2 applies to goods 2-102

a. Goods: tangible personal property (2-105) (not real estate or service contracts)

1) Licenses: Right to use intangible property, but most courts will say they’re covered by UCC

b. Mixed goods/services

1) Predominantly for goods(purpose)/minority?

a) Goods: UCC

b) Services: Common law

(1) e.g., installing a pool and diving board.

c) In mixed goods/services contracts, courts normally apply Art. 2 only ifcontract is predominantly for the sale of goods.

d) Some courts will apply Art. 2 in a mixed goods services contract if theproblem is with the goods part of the K, even if the contract is predominantly forservices (gravamen test).

e. If contract is not for sale of goods, court might use Art. 2 by analogy if itprefers the Art. 2 rule for policy reasons.

2) Does the problem involve the goods or services?

a) Goods: UCC

b) Services: Common law

2. Once determine apply/ Sale of Good Cases – Covered by the U.C.C.

a. Look to Article 2(look to unamended)

b. Look to Article 1: general provisions to all cases that are covered by UCC

c. General principles of law & equity supplement the Code

1) §1-103: If not covered by article 2 or article 1 where there’s a gap, look to principals of law and equity

2) e.g., estoppel, fraud, misrepresentation

d. Merchant? UCC has different rules for merchants

1) Defined: holds himself to deal in goods of this kind or has special knowledge about the product

3. Non-sale of goods cases

  1. Look for Restatement rule or rule given by a case we studied
  2. UCC rule may be used by analogy (meaning that if court thinks it is a good rule, it may apply it in a non-sales situation

I. Is the contract enforceable? (enforceability of contract)

A. Statute of frauds

B. Parol Evidence Rule*

C. Misunderstanding*

D. Mistake

E. Impracticability **

F. Unconscionability

* could be considered under topic of “terms of the contract”

** could be considered under topic of performance contract

II. Forming a Contract

  1. Consideration: Generally, for a contract to be enforceable, it must supported by consideration
  1. Restatement: Consideration R.2d 71: “Bargained for” exchange – sought by promisor in exchange for the promise and given by the promiseee in exchange for promise. Performance could be:
  2. Act (“benefit”): Requiring promisee to perform something in exchange for promise

1)Illegal acts can’t constitute consideration

2)Not an actif the act is means to take the benefit of gift being promised (e.g., If you come to my house, I will give you my necklace)

a)Kirksey: if you come down here and see me, I will let you have a place to raise your family…” (to sister-in-law)

  1. Forbearance (“detriment”): Withholding from performing a legal right in exchange for the promise

1)Must have evidence that performed act previously and stopped doing it in exchange for promise

a)e.g., Hamer: Nephew had legal right to gamble and drink and previously did so

  1. Promised act or forbearance
  2. Creation, modification or destruction of legal relationship (don’t need to worry about)
  1. Bargained for:Emphasis on “bargained for” aspect
  2. Objective view: Whether a reasonable person would determine there was bargaining going on based on facts and circumstancee
  3. Illusory promises not consideration, because they reserve in a party the complete power to terminate based on performance

1) e.g., I’ll sell you my bike if I feel like it

  1. Factors to determine whether there was bargaining:

1)Relationship

a)Family members: Sometimes there is a presumption that promise is a gratuity. (e.g., Kirksey; Hamer)

2)Nominal: not consideration if it is nominal (e.g., I’ll sell you house for $1)

3)How Promises made:

a) e.g., Cash: promise to help fill out insurance form

b) cf. Hamer: made proclamation in front of everyone

c) Written agreements: there is a rebuttable presumption of consideration

  1. Gratuities/Gifts are not contracts because no consideration

a. irrevocable if: (R2d332)

1) in writing

2) makes present transfer

  1. Policy reasons for requiring consideration:

a. Pros

1)Indicates seriousness of promisor, intent to be bound

2)provides way of measuring value for promise (easier for court to enforce)

3)people shouldn’t get “something for nothing”

4)commercially significant contracts are protected

b. Cons

1)doesn’t protect reliance necessarily

2)some significant bargains can wind up in court (e.g., family matters)

1) May exclude too many or include too many

5. Cases:

  1. Hamer: Consideration: Nephew changed conduct for $. Benefit/detriment irrelevant. Anything promised, done, foreborne or suffered as consideration/inducement for promise.
  2. Kirksey: NO Consideration: Booty call sister-in-law. Indefinite promise to have a place to stay to raise your family.
  3. Cash: NO consideration. Insurance form guy. Casual promise w/ no benefit to promisor, not enforceable

B. Consideration substitutes (some courts call it consideration) moral obligation, promise made in recognition of past benefit.

1. R. 2d 86. Promise for benefit received

  1. Elements:

1)Promise

a) Given after act completed or after benefits received

(1) i.e., if given before, then would be consideration, not bargained for

(2) e.g., Webb: promise to give $ after Webb saved promisor from falling brick

2)Recognition of benefit previously received by promisor from promise

a) Must be tangible:

(1)e.g., adult son v bull hypo: saving bull = enforceable b/c economic gain in bull, cf. saving son ≠ enforceable b/c psychological untangible benefit

3)Enforced to extent necessary to prevent injustice

4) Not a gift (promisor has been unjustly enriched)

a) Unjust enrichment: If promisor gained benefit at cost to promise w/o paying

5) Enforced only to extent proportionate to benefit

a) ask: is it crt’s place to 2nd guess what benefit is worth?

(1) won’t allow frivolous promises (take out trash for $50mil)

(2) but what is human life worth? (crts say priceless/> than any $ amt)

b.Written Contracts: Rebuttable presumption of consideration. (minority view)

c. Policy for rule: Brightline rule

d. Case:

1)Webb v. McGowin: Moral Obligation to enforce. Falling brick guy saves testator who promises to pay Webb until Webb dies, payments stop when testator dies

2)Ca Civil Code: moral or legal obligation from benefit conferred or prejudice suffered

2. Remember gen. rule - past consideration is not consideration (not bargained for).

C. Consideration substitute- promissory estoppel, R. 2d 90

  1. Definition: Court bars someone from doing something they have a legal right to do if that person by deliberate words or conduct, misled other party to justifiably believe that the right does not exist or would not be asserted and the party relies on the representation.
  2. Elements:
  1. Promise
  2. Promisor should reasonably expect action or forbearance

1) Foreseeability that promise would rely on the promise?

a) Formality of promise  More formal the promise the more sense of justice is enforced.

(1) Hayes: informal “we’ll take care of you”

b) Definitenessand substantial character of promise

(1) Rickets: Definite promise: grandfather promised to give $2,000

(2) Hayes:Indefinite: “As long as I was around”

2) Reasonableness: implies objective view

  1. On part of promise or third party
  2. Induces such action or forbearance

1) Doesn’t refer to detriment, just forbearing something that you are legally eligible to do.

2) Look to conduct of parties to determine reliance

a) Rickets: Reliance: Grand-daughter quit job on promise to give her $2,000

b) Hayes: No Reliance: Retiree was going to retire anyway

  1. Injustice avoided only by enforcement (whether should be enforced at all)

1) cf. consideration which doesn’t require that justice require enforcement

2) Worsening of position not necessarily required, but may be evidence of injustice.

3) Injury not required to enforce

4) Factors:

a) ) adequacy of other remedies

b) definite and substantial character of the action

c) extent to which action or forbearance corroborates evidence of making and terms of promise

d) reasonableness of action or forbearance

e) extent to which foreseeable

  1. Limited as justice requires (i.e., not all or nothing)

1)Factors:

a) Formality of promise  More formal the promise the more sense of justice is enforced

2)cf. consideration:Court has a lot of leeway to apply (full enforcement not req)

3)Out-of-pocket expenses, normally, but sometimes damages resulting from lost opportunity may be recoverable

4)Normally, neither bankruptcy nor cessation of business terminates a company’s contractual obligations.

5)UCC cases:per§1-103general principles of law supplement, unless displaced by particular provisions of the act

  1. Cases:
  2. Rickets v. Scothorn: Enforceable Reliance: Grandfather promised granddaughter $2000 or interest on loan because he did not want her to work. No consideration because would give anyway. Would be unjust if didn’t enforce because she quit her job on reliance of getting money.
  3. Hayes v. Steel: No reliance: Hayes works for 25 years at Steel plant. Owner promises to “take care” of him, and gets $5k payments for 4 years. No consideration b/c intention to retire arrived at w/o regard to promise by Plantations - Owner’s promise was vague (no bargain in exchange for). Pl. retirement not induced by reliance on promise (action/forebearance not induced) - announced retirement 7 mos. before promise made + had to continually check on status of promise by returning to plant and inquiring.

D. Not consideration - performance or promise to perform pre-existing duty. R.2d 73

1. Similar performance is consideration if it differs from what was required by the duty.

E. Like other promises, a promise to modify an existing contract normally requires

consideration in order to be enforceable.

  1. Definition: Modification of a contract is the entering into of a contract to amend a prior contract. As in the case of any other contracts it generally requires consideration or a consideration substitute to be enforceable.

a. Pre-existing duty rule: Consideration does not encompass agreeing to do something that the party was already bound to do.

1) e.g., Gilbert Steel: 2nd price increase not enforceable even though agreed to first price increase bc seller already had a duty to provide steel

b.Policy:Protects other party’s rights they already had to receive product

2. A court might be more willing to find consideration in the case of a modification than in the case of an ordinary contract.

  1. Unlike in the case of other contracts there may be good reasons why a modification should not require consideration. Often in business the parties need to be able to change their contracts when they both feel that it is unfair to one party.

1) Policy: This promotes good will.

  1. They have found a peppercorn to be sufficient consideration.
  2. Some courts have found that if truly voluntary, a modification may be enforced if it takes the form of a rescission - new contract.

1)The old contract is rescinded with the consideration being the release by each of the other's obligations thereunder. The new contract is supported by consideration in that each party is making a new promise to each other.

2)Courts will not find a rescission - new contract if it is a sham.

3. Exception - Modification of executory contract, see R.2d 89 permits modification of executory contracts in situations

a. Promise modifying duty under contract not fully performed on either side is binding w/o consideration if modification is:

1) fair and unanticipated

a) If one party runs out of money and needs to charge more money?

2) reliance made on modification

a) e.g., requiring consideration may lead to more litigation

4. Exception - contract for the sale of goods, good faith modification ok w/o consideration, 2-209

a. Good faith defined: honesty in fact in the transaction involved §1-201(1)

1) Merchants: also requires the observance of reasonable commercial standards of fair dealing.§2-103(1)(B)

b. Good faith examples:

1) Good faith requires a legitimate business purpose and the absence of improper threats

2) Modification should be unanticipated

a) If the parties had bargained that one party would assume the risk of a price increase,a subsequent price increase will not justify a modification.

a) e.g., Gilbert Steel: Seller indicated would be future price increases, still needed consideration

c. 2-313 commentindicates that statements made after contract formed could be modifications.

5. Even if consideration present, modifications (and other promises) made under duress (as defined) are voidable. & 176

a. Even if consideration is present, a modification will not be enforced if a result of economic duress. R.2d 175

1) Wrongful threat - bad faith,

a) e.g.,Austin v. Loral: Subcontractor threatened to w/hold prior shipment if MC did not agree to purchase all parts @ higher price and pay retroactively for previous shipment

b)Improper Threats: crimes, criminal prosecution, litigation or is bad faith, breach of duty of good faith and fair dealing, not on fair terms. R.2d 176

2) AND leaves party w/ no reasonable alternative - if the threat is to withhold needed goods, the party must be unable to obtain those goods elsewhere.

a) Policy: Allow individuals to mitigate their own damages.

6. Cases:

  1. Gilbert Steel. Modifications require consideration: Old school CL case. B contracted steel miller to provide steel for 3 housing projects . Seller sent notice that would increase price. Written agreement to buy @ 1st increase, arguably to prevent litigation; Verbal agreement to 2nd price increase not enforceable bc no consideration bc seller only providing what was originally contracted for.
  2. Austin v. Loral: Duress case rescind contract: Main contractor awarded government contract, where subcontractor threatened w/hold shipment of prior contract if MC did not agree to purchase all parts from SC at higher price and retroactively pay for previous shipment. MC contacted approved list of 10 other contractors and still unable to procure parts. UCC case but no UCC rule §1-103

F. Like other promises, a promise to release someone from an existing obligation needs consideration to be enforceable. (When agreement to settle for less than due can be enforced)

  1. A promise to pay an amount undisputably due is not consideration.

a. Pre-existing duty not consideration, something in addition to what was already required is needed to uphold settlement agreements.

b. e.g., Jole v. Bredbenner: T had a already duty to pay back rent, so no consideration in agreement to pay LL retroactive monthly payments.

  1. A promise to forbear pursuit of a legal claim can be sufficient consideration to support a contract when the promisor has a good faith belief in the validity of the claim."Mathis (Agreement not to sue upheld because hospital forbore ability to sue on frivolous claim [consideration])
  1. Note that some jurisdictions require that the claim objectively have validity.
  2. The objective validity of the claim in Mathis is limited to whether the asserted good faith belief would "affront the intelligence of the ordinary and reasonable layman.", (i.e., more like subjective)
  3. Exception–to settle for less than what’s due w/o consideration UCC 1-107, 2-209 and 3-311(as long as acting in good faith)

a. 1-107: Party may waive rights arising out of a breach through written release so long as acting good faith

1) Written release: (to some extent, like consideration)

2) Evidence that peeps agreed

3) Evidence that peeps thought about the settlement

b. 2-209: Oral modification of contract (which could include a reduction of the price) is valid as long as it is in good faith. This rule applies to sale of goods cases

c.3-311:Accord and Satisfaction by Use of Instrument: Payment in fullcheck is effective (with some exceptions described in the section) if person tendering check acted

1)in good faith,

2)the amount of the claim was unliquidated or subject to a bona fide dispute, and

3)the person to whom the check was tendered obtained payment of the check. Thus, both good faith and a bona fide dispute are required.

4)e.g., CountyFire Door: Payment in full check cashed, so creditor cannot expect full performance of debt.

5) Exception: Creditor has 90 days to return if cashed by mistake

d. Policy:

1) If acting in good faith, can work out own deal that is enforceable (if not enforceable, then debtor would not have an incentive to settle)

a) contra traditional view, where settlement wouldn’t be upheld anyway

2) Furthers settlements no longer require consideration  good faith

4. A compromise of good faith dispute, accord and satisfaction, is enforceable.

a. Definition: Settlement of an existing claim which parties agree that the debtor will give, and the creditor will accept a lesser performance than that originally claimed by the creditor

5. Cases:

  1. Jole v. Bredbenner: Traditional ViewConsideration Required: T agreed to pay LL back rent as part of monthly payment for month to month lease. LL had right to require full performance on back rent because there was no consideration to discharge duty to pay full amount.
  2. CountyFire Door: Payment in Full; No real consideration but what was indisputably due. Debtor sent check for less than agreed to amount bc of late shipment. On check wrote “Payment in Full”, but creditor cashed and wrote “cashed under protest” (i.e., not waiving rights). Cashing check constituted acceptance of offer.
  3. Mathis: Forbearance as consideration: Wrongful death case. Agreement that if P did not file case, then hospital would not sue P for frivolous case and sanctionsCt. says that forbearance to sue for frivolous claim constituted consideration so agreement not to sue constituted an enforceable contract.

G. Not consideration - illusory promises. R.2d 77

1.Definition: An apparent promise that is so qualified, or in respect of which such wide discretion is reserved, that the apparent promisor actually made no binding commitment at all.