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Contracts
South Texas College of Law Houston
Page, Phillip E.

INTRODUCTION TO CONTRACT LAW

Prof. Page Spring 2011

A. PRELIMINARY SURVEY OF CONTRACTS AND SOURCES

Contract – a promise or set of promises for the breach of which the law gives remedy, or the performance of which the law in some way recognizes as a duty. A bargain btwn two parties to do or not to do something in the future.

– Not all promises are contracts

– All contracts must have a promise, if no promise – not a contract

– Contracts have to have a promise to do or not to do in the future (forward looking).

– Must be a promise that the law will recognize & enforce

– Not necessarily based on consideration, but it is the most important

Why don’t courts provide specific enforcements of the particular contract?

– The court does not make you follow through with the contract, but it makes you pay money as damages. Why? Efficiency – The court does not want to have to monitor whether or not the contract was performed correctly. Money, however, has monetary value and can end to the dispute immediately

Types

– Unilateral – 1 promise: exchanging for performance – other party not bound to

– Bilateral – 2 promises

– Option contract – keeps offer open; limits promise’s rt. to revoke offer

Which Law Will Govern?

– With contracts for services – The Restatement: Not adopted so only Persuasive

– With contracts for goods – U.C.C.: Adopted and Binding

B. AN INTRODUCTION TO CONTRACT REMEDIES

Why are No Punitive Damages Are Awarded In Contract Law?

Because the state does not want to discourage breaching contracts where the breach is efficient. There is no fault in contract law

Sullivan v. O’Connor (nose surgery)

Expectation Interest – Damages are measured in terms of what non-breaching party should have gotten from the contract had it been performed as promised; Moves the P where promised to be

Restitution Interest – Provides damages to non-breaching party by returning to the breaching party whatever benefit the breaching party received from the contract; Moves D back to where he was

Reliance Interest – Damages are measured according to what it would take to return the non-breaching party from where they are as a result of the breach to where they were before there was a contract; Moves P back to where he was

II. BASIS OF CONTRACT LIABILITY

(1)The Requirement of Consideration

A. CONSIDERATION REQUIREMENT (§71).

1. Consideration as a Bargained for Exchange; to constitute consideration, a performance or a return promise must be bargained for.

2. A performance or return promise is bargained for if

a. it is sought by the promisor in exchange for his promise &

b. is given by the promisee in exchange for that promise.

3. Performance may consist of:

a. An act other than a promise

b. A forbearance

c. The creation, modification, or destruction of a legal relation

4. May be given to the promisor or another; may be given by promisee or another

Legal Detriment / Benefit

– There must be a benefit to the promisor or

– Detriment to the Promisee.

Bargained For Exchange:

– For consideration the promise and performance must be bargained for.

– This means that the promise must prompt the performance and the performance must prompt the promise. (Promise is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise)

Bargain Theory

– Provided a natural formality to channel human conduct & insure deliberation

– Protected & structured the important market transaction

– Expanded legal protection by supporting the executory exchange – a promise for a promise

– Permitted a fuller development of remedies that protected the plaintiff expectation interest

B. TYPES OF PROMISES NOT HAVING CONSIDERATION THAT ARE NOT BINDING

1. Gratuitous Promises – Promises made as gifts have no consideration because the promisor receives no benefit, as the promise is not provided in exchange for any return performance or return promise.

· Kirsky v Kirsky – Motive searching to see the desire of the promisor, their benefit – could not prove that brother wanted her there. Should have argued that D wanted to have them – that would have been consideration.

– Altruistic Pleasure (not consideration) but Peace of mind is

· The Case of The Injured Mechanic – There is no consideration, since the promise did not prompt any behavior on the part of P, who was injured. Thus, D was really making his promise to P as a gift.

2. Promises without Bargained for Exchange

· Bogigian v. Bogigian – Divorce settlement. Court said there was no consideration because she was not bargaining to wave her claim. (court uses wrong definition of “bargain”)

– Example of Bad Law – Whether or not someone is fooled into signing a waver has no bearing on whether or not there was consideration – Problem of fraud

– The exchange was bargained for because plaintiff was receiving a benefit from a 3rd party mortgage company, consideration can be from a 3rd party.

3. Past Performance – consideration cannot be given for past performances; b/c promise must be sought in exchange for his promise OR given by promisee in exchange for that promise. Promise must induce the other promise. EXAMPLE: I will do X if you will do Y.

· Jara v. Suprema Meats, Inc. 2004 – Father gave startup $

· The Case of The Proud Grandfather – (baby named after) The grandfather’s promise did not prompt their behavior, since the parents had already named the baby after him a week before the offer was made.

4. Altruistic Pleasure

1. Altruistic Pleasure vs. Peace of Mind – If the plaintiff can prove that in moving she was providing defendant with a peace of mind, this may be sufficient for consideration.

· Kirsky v. Kirsky –

5. Nominal Consideration – The parties to agreements that are essentially promises of gifts frequently recite that the agreement is made “in consideration of $1 paid,” or some other small sum. While it is true that the law does not concern itself with adequacy of consideration, provided that the consideration was truly bargained for, the recital of purely nominal consideration is usually an indication that there was no bargain at all, but rather, a gift.

· In re Green – $1 is not consideration because it is to nominal to allow a reasonable person to conclude that it prompted behavior on the part of the promisee. – was not induced by it, not an incentive

6. Illusory Promises – is based on an illusory promise, which is a statement that appears to be promising something, but which in fact does not commit the promisor to do anything at all.

(a) §77 Illusory & Alternative Promises – A promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless:

i. each of the alternative performances would have been consideration if it alone had been bargained for.

· Omni Group v. Seattle 1st National Bank – Land buyer has way out if engineering report is not satisfactory.

·

more than a pretense of a bargain.”

· The pre-existing legal duty rule does not apply when the promise to do the duty is made to some third person, and not to the person to whom the duty was owed because there is no preexisting contract btwn the 2 parties.

· Pre-existing legal duty rule does not discriminate between people who are abusing a contract and people who are not.

B. MODIFICATION OF CONTRACT (§73) – When modifying a contract, the bargain must only be more than a pretense. Promise to do something that you are already under contract to do is not valid consideration, but a similar agreement that has a modification that is more than a pretence – then it is enforceable.

· Levine v. Blumenthal – (Rented Space then couldn’t pay) – will promise not to go into bankruptcy proceedings, if you will lower the rent. – this would work

C. WAYS AROUND LEGAL DUTY RULE

1. UCC 2-209 – Pre-existing duty rule does not apply if it is the sale of goods. However, the modification must still be made is good faith. The test for good faith is whether or not the modification was obtained by a “legitimate commercial reason.”

2. §89(a) – Unforeseen Circumstances – §89 (a) A promise modifying a duty under a contract not fully performed on either side is binding if modification is fair & equitable in view of circumstances not anticipated by the parties when the contract was made. (this governs services) Angel v. Murray – (garbage collector & more money)

3. Make a new contract – resend first agreement and start over

4. Accord & Satisfaction – If there is a disputed amount, you can’t just pay what you think is appropriate and be done with it. U.C.C 3-311 provides instruments that we must use to bury disputes. For example, if you want to dispute an amount charged on your credit card, you must send that dispute to a specified place (AFC v. Dicello – Bad law).

*Must be a dispute to solve and it must be in good faith first before you can pay off

1. Must have acceptance of instrument (i.e. a check)

2. With “Payment in Full” (or similar words/sentiment)

· Then by cashing, you agree to settle

UNLESS:

· There is conspicuous notice to debtor (i.e. that it must go to special office – this protects the creditor – Ex: AFC Interiors v. DiCello)

(3) MUTUALITY OF CONSIDERATION

UNILATERAL CONTRACT v. BILATERAL CONTRACT

1. Unilateral K –(kind of reward) Results when an offer can only be accepted by the offeree’s performance. Performance equals acceptance. Thus, there is no breach of contract if there is no performance.

2. Bilateral K – Promise is exchange for a promise. Promise = Acceptance. Thus, if you don’t do what you promised to do, you are in breach of K. The bilateral K is more common because it allows companies to rely on future performance.