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Contracts
South Texas College of Law Houston
Carlson, Richard R.

Carlson,  Contracts 1, Fall 2011
 
BASES FOR ENFORCING PROMISES
 
I.                    The Meaning of “Enforce” (Measurements of Damages)
a.       Compensation vs. Punishment:  (1) law concerned w/ relief of promises to redress breach, not punishment of promisors to compel performance; (2) relief granted to aggrieved promisee should protect promisee’s expectation (attempt to put the promisee in position would’ve been had k been performed)
b.      Economics of Remedies:  “Efficient” reallocation of resources makes one economic unit better off w/o making another worse off.  Should economic units break K’s to reallocate resources efficiently? (usu. more to consider than just efficiency)
 
c.       Alternative Measures of Compensation
                                                               i.      Expectation Damages
1.       Expectation Interest:  put the promisee in the position he would have occupied if promisor had kept his promise.  Restatement § 347.
a.       Formula = [value of D’s promised performance] – [whatever benefits P received from not having to complete his performance {generally expenditures}] b.      If expectation interest is too speculative, cts frequently adopt some alternative measure of damages
 
2.       Reliance Interest:  Put promisee in the position he would have occupied if he had not “relied” on the promise (had K not been made). Restat. § 349.
 
3.       Restitution Interest: Require promisor to return the value of any benefit promisee gave to promisor. Restatement § 371.
a.       Primarily used to prevent unjust enrichment
b.      Market value is the standard
 
                                                             ii.      Specific Performance – requires breaching party to perform (usu. for breach in sale of land)
 
                                                            iii.      Punitive Damages for Breach of Contract
1.       Punitive Damages may be granted for tortuous conduct that sufficiently outrageous to justify punishment (i.e. breach w/ “fraudulent” conduct).
 
II.                  Consideration as the Basis for Enforcement
a.       Fundamentals of Consideration
                                                               i.      Two types of contracts:
1.       Bilateral Ks – promise in exchange for a promise (e.g. “I promise to deliver car in exchange for your promise to deliver the money”)
2.       Unilateral Ks – promise in exchange for something other than a promise (usu. affirmative act or forbearance, e.g. “if you bring me the money, I’ll give you the car”)
 
                                                             ii.      “Consideration” is what was given in exchange for a promise
 
                                                            iii.      Restatement §71: Requirement of Exchange: Types of 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.       An act other than a promise, or
b.      a forbearance, or
c.       the 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.
 
                                                           iv.      Conditional gifts:  Where promisee must meet certain conditions in order to receive a gift, but the meeting of those conditions is not really “bargained for”, there is a lack of consideration.  Kirksey v. Kirksey.
 
                                                             v.      Preconditions vs. Bargains:  If the condition for accepting a gift is of benefit to the promisor, it is probably “bargained for.”
1.        Non-economic benefits:  A bargain may be present even though the promisor does not receive any economic benefit from the transaction.  Hamer v. Sidway.
 
                                                           vi.      Restatement §81: Consideration as Motive or Inducing Cause
1.       The fact that what is bargained for does not itself induce the making of a promise does not prevent it from being consideration for the promise.
2.       The fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise.
Basically, as long as there are some aspects of a bargain, courts don’t care that the promisor’s deep and ultimate objective was charitable or otherwise.
 
                                                          vii.      Promisee’s Awareness:  If the promisee is not aware of the promise, an act she performs is obviously not bargained for.  (e.g. where P captured and returned a prisoner w/o being aware of a reward, D’s promise of a reward was not supported by consideration. Broadnax v. Ledbetter.)
 
                                                        viii.      “Executed” Gifts vs. “Executory” Gifts
1.       Executed gifts (gifts already given) cannot be rescinded for lack of consideration (the doctrine doesn’t apply).
2.       Executory gifts (promises to give a gift) are unenforceable for lack of consideration.
 
                                                           ix.      Exchange by coercion or deception is not voluntary
 
                                                             x.      “Peppercorn” Theory – still consideration if you get a peppercorn in exchange for a promise. (exception: unless consideration is pretense for a gift)  If the claim was asserted in bad faith, there’s no consideration.  (compare more lenient Restatement below).
 
                                                           xi.      Surrendering a Claim
1.       Restatement (Second) § 74(1) Settlement of Claims
Forbearance to assert a claim is not consideration unless: (a) claim/defense is doubtful b/c of uncertainty about facts/law; OR (b) forbearing party believes claim/defense may be fairly determined to be valid.
(e.g. the promise not to institute bastardy proceedings was valid consideration b/c the paternity of the baby was uncertain)
2.       Restatement (2d) § 74(2) Standardized Release
Execution of a written release surrendering claim/defense by one who’s under no duty to execute it is consideration if the execution of written instrument is bargained for even though he is not asserting a claim/defense and believes that no valid claim/defense exists.
(i.e. before new mgmt lays off an oblivious ee, ee signs a K agreeing to not to sue for age discrimination)
 
b.      The Requirements of Exchange: Action in the Past
                                                               i.      “Past consideration” is usually not enforced (b/c no bargained for exchange)
                                                             ii.      Exception:  Moral Obligation
Elements (see Webb v. McGowin)
1.       Physical injury to the promisee
2.       Benefit to the promisor
3.       Circumstances precluded negotiation
C.f. Restatement §86
 
                                                            iii.      Restatement §86: Promise for Benefit Received
1.       (1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.
2.       (2) A promise is not binding under Subsection (1)
a.       (a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or
b.      (b) to the extent that its value is disproportionate to the benefit.
 
c.       The Requirement of Bargain
                                                               i.      Enforcement Considerations
1.       Agreement clearly describe alleged performance (formal K)?
2.       Might parties rely on alternative means of enforcement (exit from relationshi

ed to restitution under the rules stated in this Restatement only to the extent that he has conferred a benefit on the other party by way of part performance or reliance. (emphasis added) (other rules in torts, property)
 
b.      Restatement (Second) §371.  Measures of Restitution Interest
If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either:
                                                               i.      (a) The reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position [(“cost-avoided”)]; or
                                                             ii.      (b) The extent to which the other party’s property interest has been increased in value or his other interests advanced [(“unjust enrichment”)].
 
c.       Doctor’s providing emergency medical services without an express contractual authorization to perform the services rendered may recover fees that are reasonable from the patient
 
d.      Caveat: Generally most non-emergency services if provided without the creation of an express contractual relationship through mutual bargaining are considered gratuitous. (not enforceable)
 
THE BARGAINING PROCESS
 
I.                    The Nature of Assent
a.       Alternative Perspectives for Resolving Issues of Intent
                                                               i.      Parties to a contract must manifest an assent to the terms of the contract.
1.       Subjective View: What was each party thinking when he appeared to make a contract? (not enforceable, unless facts are egregious enough [see Unilateral Mistake])
2.       Objective view: How would disinterested observer interpret what he saw (the “fly on the wall”)?
 
                                                             ii.      Restatement §20: Manifestation of Assent in General: Effect of Misunderstanding
1.       (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
a.       neither party knows or has reason to know the meaning attached by the other [equally innocent]; or
b.      each party knows or each party has reason to know the meaning attached by the other [equally at fault].
2.       (2) The manifestation of the parties are operative in accordance with the meaning attached to them by one of the parties if
a.       that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party or
b.      that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
 
                                                            iii.      “Gentleman’s Agreements”: agreements not enforceable by the judicial process (e.g. underwriters refuse to accept legally binding obligations, ER’s promise of a bonus isn’t binding; agreements to do illegal act)
1.       Also applicable in family/social settings (e.g. Carlson asks someone on a date; his date calls at the last minute and cancels b/c “she has to paint her nails”)