CONTRACTS II – Spring 2011 – Professor R. Farrell
The Domain of Legally Enforceable Promises (Chapter 2)
I. What’s an Enforceable Promise?
a. Commercial arrangements of straight business nature with consideration are generally considered an enforceable legal arrangement, whereas purely social arrangements aren’t (see chart)—but what happens when you get a situation in the middle?
b. Probabilities of enforcement increase as go from oral to formalized because there is more evidence and the more effort you put into a contract, the more seriously you will take it (cautionary function)
II. Gift Promises
a. Usual rule for conditional gift is the promisor doesn’t get anything—no expectation of return performance because it is driven by “natural love and affection”
b. Gifts are completed only by delivery—completed gift requires outright delivery and intention that the ownership of the thing be transferred over to someone else.
c. Nudum Pactum non obligea-a “bare promise” with no consideration is not enforceable. Bare promises not enforceable until completed, and then can only be set aside for duress, incompetence, etc. Need reliance or consideration to move out of bare promise.
d. Congregation Kadimah Toras-Moshe v. DeLeo-(dead man stiffs synagogue) old guy was ill, made oral promise in presence of witnesses to give Congregation $25,000 after his death, which the Congregation planned to use to convert a storage room in the synagogue into a library. Oral promise never reduced to writing.
i. Promise is unenforceable; No consideration or reliance and would be against public policy to enforce an oral promise against an estate.
ii. A PROMISE TO MAKE A GIFT W/ NOTHING MORE IS NOT ENFORCEABLE
iii. RULE>>A hope or expectation is not equivalent to either legal detriment or reliance
If no legal benefit to promisee or detriment to promisor there is no consideration.
III. Consideration: Something (such as an act, a forbearance, or a return promise) bargained for & received by a promisor from a promisee; that which motivates a person to do something, esp. to engage in a legal act. • Consideration, or a substitute such as promissory estoppel, is necessary for an agreement to be enforceable.
i. Reliance: Dependence or trust by a person, combined w/ action based on that dependence or trust.
ii. Detrimental Reliance: Reliance by one party on the acts or representations of another, causing a worsening of the first party's position. • Detrimental reliance may serve as a substitute for consideration and thus make a promise enforceable as a contract.
iii. Bargain: An agreement between parties for the exchange of promises or performances. • A bargain is not necessarily a contract b/c the consideration may be insufficient or the transaction may be illegal. informal contract
b. Two elements necessary to constitute consideration:
i. A bargained-for exchange
1. Each side hopes for a gain.
ii. That which is bargained for must be considered of legal value, either a benefit to the promisor or detriment to the promisee.
BARGAIN THEORY OF CONSIDERATION: the reason I do something for you is I expect something in return
2 PART TEST, FROM R.71 = (1) Sought & (2) Given
R 71- (1) To constitute consideration, 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 & IS GIVEN BE THE PROMISEE in exchange for that promise.
R.79 Adequacy of Consideration; Mutuality of Obligation – Non-Completed exchanges (throw benefit/detriment out the window all your looking for is the bargain)
a. Doctrine of Mutuality: Consideration must exist on both sides of the contracts (must be mutual obligations) (applies
ONLY to bilateral contracts) Unilateral contracts = one sided consideration (i.e. promise given for performance.)
b. Part performance allows you to keep what was transferred, but doesn’t entitle you to the rest that’s due (Installment/multiple gift rule—Duncan v. Black)
c. Legal Value
iii. Courts will usually not question the adequacy of consideration. Exceptions:
1. Token consideration: if consideration is a token, almost totally devoid of value, it will usually be treated as a gift rather than bargained-for consideration and not be legally sufficient.
iv. Detriment to promisee—detriment includes doing this he is under no legal obligation to do AND also refraining from something that he has a legal right to do.
1. Hamer v. Sidway-(Pays nephew to keep sober) Uncle promises his nephew $5000 if he refrains from drinking, gambling, using tobacco, & swearing until he becomes 21. Uncle gives letter stating promise & money in bank. Nephew does all these things, sues Uncle’s estate for money.
a. Promise is enforceable. Consideration was that he restricted his lawful freedom of action in accordance with the agreement. Doesn’t matter that it may benefit him morally, legally it was to his detriment.
b. DETRIMENT=GIVING UP ANY LEGAL RIGHT TO SOMETHING
d. Fisher v. Union Trust Co-Father gives daughter deed. She gives him $1. He pays the mortgages on the property until his death, at which point no one pays and the mortgage is foreclosed. Daughter doesn’t think should have to pay mortgage b/c deed was a gift. [Under R.1 exchange of deed for $1 would be a bargain] v. There was no consideration—the giving of the dollar was a joke rather than actual consideration.
vi. Property was not given—if you want to make sure it is a gift, must pay off the mortgages so the property is free of encumbrances.
vii. Courts don’t supervise an even exchange or look at adequacy of exchange, but rather if there was a bargained for exchange – parties better off to value the exchange (i.e. $2M McGuire baseball)
e. Duncan v. Black- (illegal cotton allotment suit) D sold man land with 65 acre allotment for cotton planting. Following year, P requested that D make the same arrangement in regards to the allotment, but D refused. P sued for damages
viii. INSTALLMENT/MULTIPLE GIFTS RULE: D doesn’t owe P damages b/c there was no consideration. Each gift is individual—just b/c you pay the first one does not mean you have to pay all the others.
ix. “A claim of purchase of the green cheese monopoly on the moon doesn’t meet dignity of consideration.”
R. 74 Settlement of Claims
(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless
(a) The claim or defense is in fact doubtful b/c of uncertainty as to the facts or the law, [REASONABLE SIDE] or
(b) The forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid. [Good Faith] Illustrations:
1. A, a ship owner, has a legal duty to provide maintenance and cure for B, a seaman. B honestly but unreasonably claims that adequate care is not available in a free public hospital and that he is entitled to treatment by a private physician. B's forbearance to press this claim is consideration for A's promise to be responsible for the consequences of any improper treatment in the public hospital.
f. Promises Grounded in the Past
x. In general, if something has already been given or performed before the promise was made, it will not satisfy the “bargain” requirement since it wasn’t given in exchange for the promise when made. Therefore, no consideration. For consideration, one thing has to be an inducement to the other.
1. Exception: If services were performed by the promisee at the promisor’s request, the new promise to pay will be enforceable.
a. Mills v. Wyman-Prodigal son grows ill after sea voyage and P takes care of him, Dad promises to pay P expenses incurred for the care D gave to his son, but reneges.
i. The promise is unenforceable b/c nothing was paid & no services were rendered directly to the father.
ii. You can’t influence conduct that had already occurred – past performance.
iii. Promise today for performance yesterday isn’t consideration EXCEPT;
2. Promises based on Past performance: Debt Barred by a Technical defense: If a past obligation would be enforceable except for the fact a technical defense to enforcement stands in its way, such as a (1) statute of limitations, (2) Discharge of obligation to pay debt, but if you make a promise after that you’ll pay debt, your liable for that promise & have to pay. (3) Debts incurred.
a. When a promise is subsequent to performance there can be no consideration under the bargain theory of consideration, but;
b. Webb v. McGowin-P is about to drop a block over a loft when he notices D standing below; he falls with block, injuring himself, but preventing harm to D. D promises to pay him $15 every two weeks, which he does until he dies, and then D’s estate refuses to pay, claiming there was no consideration.
i. The promise is enforceable; consideration was material benefit & a moral obligation & made in a necessity situation.
ii. McGowan received a benefit and while he didn’t bargain for it, it’s assumed that he would hav
loss. (Looks like a purely gratuitous promise b/c D’s not getting anything in return)
1. There was consideration for agreement to insure b/c P relied on D’s promise that he’d buy insurance; otherwise, P might have purchased his own insurance.
2. Roman rule on gratuitous bailment : if gratuitous bailee, must bring to goods you accept as bailee the same level of care you would give your own goods.
3. Can give repudiation when it is still possible for other side to do something (ie, obtain insurance on his own)
4. Duties arise from an exchange of promises, but breech isn’t a Tort, but certain duties arise from law (i.e. duty of care) where breech is a Tort. But only negligent is you have a duty of care separate from a contract. (Here, promisor undertook to do something & did not).
iii. First National Bank of Logansport v. Logan Mfg. Co.-Bank promises to loan Ps $100,000 if they will open a business in the town. After a few loans not equal to the $100,000, bank refused further loans. P sued bank for damages as a result of refusal to loan.
1. There was a promise, even though there was not a contract. Participation in the business had been suggested by the bank, which represented to P they would provide the financing. Ps relied on this promise to their detriment, meeting the elements of promissory estoppel under R.90.
2. Bank should have put in clause that getting loan was subject to their best effort
3. R.90 doesn’t mention Promisorry Estoppel (in comments)- but wrong to consider it not a contract. Equitable Estoppel is a reliance on a promise of fact that stops the promisor from denying the facts.
iv. Mahban v. MGM Grand Hotels-Shop in hotel had lease clause permitting either party to terminate if the leased premises are damaged or destroyed to such an extent that they cannot be put into tenantable condition by Lessor within 180 days after such damage or destruction. Fire damaged hotel. About ten weeks later, P received letter from D stating that targeted date for reopening and stating plans for reconstruction must be submitted for approval. P relied on letter by ordering merchandise to restock; P later received letter terminating lease.
1. Promise can be enforced; Letter sounds like a waiver to the release clause (which was proper because fire is a frustrating event), so P was proper to rely on it.
v. Stearns v. Emery-Waterhouse Co.-D gave P an oral contract for five years if he would quit his current job and move to Maine to take a new job. P did, and D fired him after 2 ½ years.
1. The oral contract was covered by the statute of frauds & was not enforceable.
2. There was no reliance by moving b/c every employment offer is going to cause you to quit your old job.
3. R.139 (NOT a R.90 case although language similar) allows enforceability of a contract not in writng, so reliance gets you out of statute of frauds.
4. BUT as Posner suggested in Goldstick, if you applied the statute liberally then almost every employee could prove they acted in reliance of a job offer &state aims to get contracts in writing.
Common Law Doctrine- an offer, until its accepted, isn’t binding & is revocable.
V. Pre-contractual Obligations = reinforcement of offers.
a. Common law doctrine that an offer (proposal of an exchange with no consideration) is ordinarily revocable by its maker until the offer is accepted. Sometimes exceptions to this.
b. Offer is a conditional promise & if your willing to do something I will do something & acceptance (return promise) of those terms is the methodology of a promise.
c. Questions to ask when considering if Pre-contractual obligations should be enforceable
i. Is the stuff definite enough from which a contract could be inferred?
ii. Are there damage norms that can be used to guess on the damages incurred?
d. Options-I promise to hold something available for you, but you don’t have to take it. Gives you an advantage with a particular commodity. One-sided obligation entered into in hopes of gaining something in unstable markets. Generally enforceable.