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Contracts
South Texas College of Law Houston
Kelso, R. Randall

Contracts 1 – South Texas College of Law Houston – Kelso Fall 2016

Test

Traditional

Modern

Might be Important

Consideration

Bargained for Exchange of legal value

Bargain between parties (promisor and promise)—A does something for B

Bargain can be express or implied
Implied bargain is based on objective evidence as viewed by a reasonable person (can often “create” an implied bargain so long as a reasonable person would interpret this as a bargain)
Implied even if one party remained silent

Ex: injured mechanic: “I’ll take care of you” (please don’t sue me)

Must be a legal bargain
Test of existence of a bargain:

Depends on the objective evidence of what happened, and how would a reasonable person interpret that objective evidence (subjective mental intent is not enough)
Cant bargain for something that has already happened to create consideration for something in the future

Ex: If name baby Eve, and then you say “I promise to name my baby Eve if you will do X”àthis has already happened

Exchange (Promise or Performance)—more than a mere pretense or sham

Does not have to be equivalent in value; just has to be more than a mere pretense or sham. Can’t be nominal or just words

Benefit to promisor

Must be a legal benefit
Benefit can be provided by 3rd party (A pays B, B has C mow A’s lawn)

Ex: A offers to do something for B, and B offers to do something for A

Traditional courts = self esteem/love & affection is NOT a benefit for exchange (MAJORITY)
Modern courts = family promises is a benefit

Will be enough for benefit-not a sham
OR detriment to promisee

Must be a legal detriment (16 year old who gives up right to smoke is not a legal detriment) because it’s already illegal
Legal, good-faith belief that you’re giving up a legal right is a valid detriment, even if that belief is wrong (guy promises to pay child support, learns child isn’t his = valid consideration)
Giving up right to seek employment is valid consideration

Detriment can be placed on a 3rd party. (A pays B for promise to stop P from smoking)
As long as the promisee’s detriment was bargained for by the promisor
Recital of consideration is not proof of consideration. In the absence of actual consideration recital alone is not valid
Modern: if you gave up any right at all, that’s enough
Gift: man died leaving wife, brother offers to help and later after woman moves, man later rejects offer; no k b/c only a gift
Do not have to follow through with gifts unless gift is already made, then cannot take back
Gift w/ conditional requirement – nephew gave up legal rights in order to receive money = k b/c a gift with a meaningful conditional requirement is enough
Give up rights: retiree gave up rights to work at a competitive firm for $100 a month for life = K b/c consideration was formed with the payments and the company benefited
MODERN APPROACH: never ask if the consideration is enough, only ask whether something is given up and something is gotten
**Substantial Performance is usually enough

Sufficiency of Exchange

Nominal Consideration must be more than a mere pretense or sham

Ex: selling a Mercedes ($1 would be nominal and not enforceable; $500 would probably work even though it’s not adequate, could still be enforceable)
Nominal consideration: a “gift” promise even though written, signed, and containing language that the promisor intends to assume a legal obligation is not consideration
No adequacy requirement
Exceptions:

Option Ks for land
Modification of Ks—nominal is okay but here must be SOMETHING
Ex: perform one extra day, pay one day early, etc.

Past acts are never valid consideration (But see moral obligation exception)
No true exchange=no consideration

Man and woman had an affair and she sued that he promised her a lot of things and has breached his K with her. There was no exchange, a lot of bargaining, but nothing being given to the man to complete the exchange (her “services” were not considered)

Consideration must be more than a “mere pretense or sham”

But consideration doesn’t have to be equal, just sufficient
Ideas with value are valid consideration (doesn’t have to be a novel idea)
Consideration is measured at time bargain is made

Subjective = good faith at time of agreement
Objective = must have reasonable basis for support
Traditional courts require subjective AND objective
Modern courts require subjective OR objective (more likely to help the little guy)

If enforceable at time K was made, remains enforceable
If unenforceable at time K was made, remains unenforceable
If something of value was exchanged when K was made=consideration
Ex. I buy you a coat – you go pick it up. No ba

reasonableness.

Alternative Promises – A promise which offers the promisor alternative performance is enforceable only if either of the methods of performance would be valid consideration if bargained for alone
Implied Promises

Output clause = extraordinary measures required to create consideration
Exclusivity contract = best efforts required to create consideration
Satisfaction clause = Objective standards or good faith required to create consideration
Today these standards are implied by law

Satisfaction Clauses – Promisor can refuse to pay if s/he isn’t subjectively satisfied with promisee’s performance (or the item, or land, etc…)

Two-part test to determine if satisfaction clause is valid

Use good faith test for matters of “fancy, taste or judgment”

Ask whether in good faith satisfied, or using as a pretext to get out of the deal. Multiplicity of factors to determine satisfaction (fancy taste of judgment – no clear objective criteria to evaluate

Use objective reasonableness test for commercial value or utility

If there are multiple claims which must be evaluated à there’s no clear objective. In this case use good faith prong of test
Can’t argue that satisfaction clause creates illusory promise because good faith is assumed by law
Traditional: Literally, no expressed consideration b/c person has total discretion to say they don’t want the land. Not enforceable.
Modern: Implied obligation to buy the land – enforceable
Modern/Majority/TX – Satisfaction clause always ENFORCEABLE because consideration limits discretion. P has obligation to use “good faith” reason for determining satisfaction. They’ve limited their legal right to total discretion. Consideration.
TX: In a General K, TX is traditional and will not apply good faith, only for REQUIREMENT and SATISFACTION CLAUSES and any SALE OF GOODS (UCC)
MOD/UCC Will require that K be completed in GOOD FAITH

Moral Obligation