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Contracts
Rutgers University, Newark School of Law
Tractenberg, Paul

contracts, tractenberg, fall 2012

I. A Roadmap for Contract Law

1. Lucy v. Zehmer, 196 Va. 493 (1954)

a) Facts: Π allegedly enters a contract with Δ for the sale of land. Π says they were serious, but Δ says he was clearly only joking around. Π wants specific performance.

b) Issue: Was there a contract, and is it enforceable?

c) Held: The contract was in good faith and specific performance was awarded. The private intentions of Δ are irrelevant, only the manifested acts.

(1) Ex. Under the objective test it is not enough for P to assert hat he did not actually intend to sell his house. He is accountable for his apparent intent, as reasonably interpreteted by Hume from his words and actions. We do not judge Joe’s manifestation purely on the basis of Hume’s subjective interpretation, not do we look at it from the perspective of reasonableness in the abstract. The proper test is whether a reasonable person in P’s position would have understood Joe as manifesting contractual intent. That is, was Hume, under all circumstances of their relationship, and knowing what he did about P, justified in concluding that the offer was serious? P apparently took great trouble to make his bluff credible, and there seems to be nothing that could have reasonably indicated to Hume that Joe was fooling around.

(2) Ex. 2 A reasonable person would understand that the A’s was not real, but just a bit of hyperbole. This argument is based on sever grounds: FACTS. These rationales are similar to those advanced by the court in Leonard v. PepsiCo to support the conclusion that the TV commercial could not reasonably have been understood as serious.

Prof. T’s joke is certainly more apparent than that of Mr. Zehmer, but not quite as obvious as that in the Pepsi commercial. Nevertheless, a reasonable student could have been alerted to the likelihood that this was not seriously intended to be an offer. There is at least a plausible argument that this was a joke, not a serious offer.

2. Delchi Carrier SpA. v. Rotorex Corp., 71 F.3d 1024 (1995)

a) Facts: Π, an Italian company contracted for goods from Δ w/ a letter of credit. The goods upon arrival were not to spec and Π wasn’t able to use the goods. Π covered with extra expense.

b) Issue: Under the CISG is Π able to recover damages for nonconforming goods?

c) Result: Π was entitled to lost profits, foreseeable consequential damages. Π was not entitled to damages for modifications necessary for cover.

The Bargain Theory of Contract

B. Consideration

1. Definitions

a) A Contract is “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Restatement 2d §1.

b) Consideration is the inducement of a contract, something of value given in return for a performance or a promise of performance by another, for the purpose of forming a contract. This is a required element in the formation of a contract.

c) Illusory Promise is a promise so indefinite that it cannot be enforced or which, by virtue of provisions or conditions contained in the promise itself, is one whose fulfillment is optional on the part of the promisor. Not adequate for consideration.

2. Restatement

a) Restatement 2d §71(1) – to find consideration there must be a performance or return promise which has been bargained for by the parties.

b) Restatement §76 – Any consideration that is not a promise is sufficient to satisfy the requirement of §19 (c), except the following:

(1) (a) An act or forbearance required by a legal duty that is neither doubtful nor the subject of honest and reasonable dispute if the duty is owed either to the promisor or to the public, or, if imposed by the law of torts or crimes, is owed to any person;

(2) (b) The surrender of, or forbearance to assert an invalid claim or defense by one who has not an honest and reasonable belief in its possible validity;

(3) (c) The transfer of money or fungible goods as consideration for a promise to transfer at the same time and place a larger amount of money or goods of the same kind and quality.

c) Restatement §79 – A promise or apparent promise which reserves by its terms to the promisor the privilege of alternative courses of conduct is insufficient consideration if any of these courses of conduct would be insufficient consideration if it alone were bargained for.

(1) See Petroleum Refractionating Corp. v. Kendrick Oil Co., infra.

d) Restatement 2d §77 Comment (a) – Words of promise which by their terms make performance entirely optional with the promisor do not constitute a promise.

e) Restatement 2d §79 – If the requirement of consideration is met, there is no additional requirement of

(1) (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or

(2) (b) equivalence in the values exchanged; or

(3) (c) “mutuality of obligation.”

f) Restatement 2d §175 – a contract is voidable by the victim if that party’s “manifestation of assent is induced by improper threat by the other party that leaves the victim no reasonable alternative.”

g) UCC §2-306 – Output, Requirements, and Exclusive Dealings

(1) A term that measures the quantity by output or requirements means actual output or requirements as may occur in good faith, cannot be disproportionate to a stated or implied estimate.

3. Refraining from a right is adequate consideration.

a) Hamer v. Sidway, 124 N.Y. 538 (1891)

(1) Facts: Uncle tells Nephew that if he refrains from certain vices until he is 21, he will give him $5000. Π is the executor of Uncle’s estate; Δ is the assignee of Nephew.

(2) Held: Nephew’s refraining from certain vices is a forbearance that amounts to consideration necessary for contract enforceability. The court “will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party.”

b) Lake Land Employment Group v. Columber

(1) (AT WILL EMPLOYMENT AS CONSIDERATION)

(2) Facts: D is an employee of P from 1988 to 2001. D signs a non-compete agreement. D forms similar company similar to Lakeland after being fired.

(3) Issue: After employment has already begun, is continued employment of the same nature sufficient consideration to make a non-competition contract enforceable?

(4) Held: Yes, consideration exists where an at-will employer and an at-will employee continue their employment relationship, rather than terminate it, after the employer imposes a new requirement for employment

c) Petroleum Refractionating Corp. v. Kendrick Oil Co., 65 F.2d 997 (1933)

(1) Facts: Δ contracted to buy 1.5M G of oil from Π unless Π should stop making that grade of oil. Δ states that the grade of oil is not correct and will not accept further deliveries. (This is during the depression when the price of oil is falling fast.) Π then sells the remaining contract for much less than originally contracted and is suing for the difference.

(2) Issue: Δ argues there was no consideration.

(3) Held: A benefit to the promisor (Δ) or a detriment to the promisee (Π) is a sufficient consideration for a contract. Under Restatement 79, both need to be sufficient when promisor has alternative courses of conduct. Δ got oil, and Π gave up the right to discontinue producing that grade of oil. Giving up a right is adequate consideration.

4. Options Contracts

a) Firm Offers under UCC §2-205

(1) An offer by a merchant which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the stated time (or reasonable time if not stated, no more than 3 months). Must be signed.

b) Restatement 2d §87(a)

(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute.

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.

c) Board of Control of Eastern Michigan University v. Burgess, (INSTEAD OF HAMILTON BANCSHARES V. LEROY)

(1) Facts: Π entered a contract with Δ for a nominal fee for the option to purchase Δ’s land. Π never actually tendered Δ the money. When Π tried to execute the option, Δ refused.

(2) Issue: Is there consideration for the option?

(3) Held: a dollar is valid consideration for options for the purchase of land. However, no consideration was received, so there was no option, but simply an offer by Δ to sell, which is revocable.

5. Employment at Will

a) Permanent Employment is terminable at the will of either party without liability to the other.

b) Fisher v. Jackson, (Consideration in Employment At-Will)

(1) Facts: Δ told Π to give up his job and work for Δ (for less money) under an oral contract for life or until he was physically unable to work. Π complied and then was discharged. Π act

(1) Promise to make a gift: The P.E. doctrine is most often applied to enforce promises to make gifts, where the promisee relies on the gift to his detriment.

(a) Intra-family promises: The doctrine may be applied where the promise is made by one member of a family to another. (Example: Mother promises to pay for Son’s college education, and Son quits his job. Probably the court will award just the damages Son suffers from losing the job, not the full cost of a college education.)

(2) Charitable subscriptions: A written promise to make a charitable contribution will generally be binding without consideration, under the P.E. doctrine. Here, the doctrine is watered down: usually the charity does not need to show detrimental reliance. (But oral promises to make charitable contributions usually will not be enforceable unless the charity relies on the promise to its detriment.)

(3) Gratuitous bailments and agencies: If a person promises to take care of another’s property (a “gratuitous bailment”) or promises to carry out an act as another person’s agent (gratuitous agency), the promisor may be held liable under P.E. if he does not perform at all. (However, courts are hesitant to apply P.E. to promises to procure insurance for another.)

c) Quasi-contract – One party has something they were not entitled to in the first place, and in good conscience he should either return it or pay its value (doctor charging for reviving a person who passes out on the floor). The law implies a contract where no contract existed previously and dispenses relief according to that implied contract. The contract implied-in-law is a legal fiction imposed by the court to remedy injustice.

d) Ricketts v. Scothorn ($2000 to niece to leave job)

(1) Facts: Δ is the executor. Testator promised to pay Π $2000 on demand so she wouldn’t have to work. P leaves job.

(2) Issue: There was no consideration, but Π relied on the money and quit her job.

(3) Result: Because it would be grossly inequitable to permit Δ to resist payment, Π should receive the payment.

(4) JJ notes that while the court tries to fit this case to Equitable Estoppel, they actually created Promissory Estoppel because Δ had misrepresented no facts.

(5) Restatement §90 was borne in part from this case.

e) Cohen v. Cowles Media Company (Media company does not keep promise to hide identity)

(1) Facts: Π gave facts pertinent to a story to Δ when assured that Δ would not share Π’s identity. Δ then printed Π’s name in the paper, and Π was fired from his office.

(2) Held: Although there was no contract, promissory estoppel barred Δ from using Π’s name, so damages are due.

4. Promissory Estoppel in Franchise Negotiations

a) A party to unsuccessful negotiations may recover for losses reasonably and foreseeably sustained by him as a result of the other party’s negligence or lack of good faith during the bargaining process.

b) Alternate: recovery may be based on the duty to bargain in good faith.

c) Typical context is an unsuccessful contract negotiation involving franchises or government contracts. Both have a great inequality in bargaining power.

d) Midwest Energy, Inc. v. Orion Food Systems, Inc., 14 S.W.3d 154 (2000)

(1) Facts: Π was building a gas station/convenience store with hopes to provide Δ’s product. Δ required that certain mods be done to the design before they could provide their product. Π redesigned and constructed as Δ required. Δ then never agreed to the deal. Trial court granted summary judgment for Δ.

(2) Result: While the contract was not enforceable, there was a promise, foreseeable reliance, reliance in fact, and injustice absent enforcement, so the judgment was overturned.