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

Contracts I – Professor Kelso – Fall 2010
 
Basis of Promisory Liability
 
CONSIDERATION
 
Elements:
1.       Bargain between parties (Promisor and Promisee) – A does something for B
a.       Can be express or implied
                                                               i.      Implied even if one party remained silient
                                                              ii.      Can often ‘create’ an implied bargain so long as a reasonable person would interpret this as a bargain
–          Ex. Injured mechanic: “ill take care of you” {please don’t sue me}
b.       Must be a legal bargain
c.        Test of existence of a bargain:
                                                               i.      Depends on the objective evidence of what happened, and how would a reasonable person interpret that objective evidence (Subjective mental intent is not enough)
                                                              ii.      Can’t 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”. this has already happened.
2.       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.
a.       Legal Benefit to Promisor or 3rd Party OR
                                                               i.      Ex. A offers to do something for B, and B offers to do something for A
b.       Legal Detriment to Promisee or 3rd Party
                                                               i.      As long as the promisee’s detriment was bargained for by the Promisor
                                                              ii.      “bargained for detriment”
                                                            iii.      do something you otherwise wouldn’t have to do
–          A will give B money if B goes to the store and picks up something for A. B does not have a legal obligation to go to the store, but it is a “bargained for” detriment
–          It does not matter if after the fact you suffered a detriment in performance to A if that detriment was not bargained for
c.        Traditional/Majority – merely feeling better or love/affection is not enough for exchange
                                                               i.      Deals with sufficiency rather than adequacy – why love/affection won’t work
d.       Modern: family promises exception – will be enough for legal benefit; not a sham
e.        Hypos:
                                                               i.      Legal Detriment: If uncle had made nephew only give up gambling which was not legal anyway, then no legal detriment, thus no consideration = no k
–          Modern : if you gave up any right at all, that’s enough
                                                              ii.      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
                                                            iii.      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
                                                            iv.      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
                                                             v.      MODERN APPROACH: never ask if the consideration is enough, only ask whether something is given up and something is gotten
                                                            vi.      **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 is not adequate, could 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
o    Option Ks for Land
o    Modification of Ks – nominal is ok, but there must be SOMETHING
§  Ex. Perform one extra day, pay one day early, etc.
–          Past Acts are Never Consideration
–          ex. Grandfather: I’ll give you the painting ($5000) if you name the baby after me. They had already named the baby after him before he made the offer, so not enforceable
 
–          “Idea” does not have to be novel to be valid consideration for K
–          if idea has value, it’s valid consideration
 
–          No True Exchange = No Consideration
–          ex. 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 ‘service’ were not considered)
 
–          Consideration is measured at Time K was entered
–          Subjectively – good faith at the time of the agreement
–          Objectively – reasonable basis of support
–          Traditional: Must have Subjective AND Objective
–          Modern: Must have Subjective OR Objective (more likely to help the little guy)
–          Ex. Paternity suit; P made deal with D not to sue for paternity if D paid her $. After birth blood test showed he was not the father. D stopped payments. P won b/c the bargain was made before the tests were known.
o    Subj: P brought claim in good faith
o    Obj: P was giving something up (paternity suit)
–          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 then = consideration
–          Gifts – One Sided Ks and is not enforceable
–          Can’t promise to make a gift and have it enforced by law
–          Ex. I buy you a coat – you go pick it up. No bargain, no legal benefit or detriment. Gift = not enforceable
–          Ex. Mixed Motives – bargain for exchange as part of the agreement
o    If K has severable bargain – ct will break it out
§  Treat gift as gift, bargain as bargain
o    IF K can’t be severed – all of it will be enforceable
–          Exception:
o    Charity gifts (promissory estoppel)
o    Executed Gifts (always enforceable b/c already given)
–          K modifications must have own consideration (Restatement §86)
–          Section 86: 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
–          Nominal consideration is ok for K modifications
–          Pre Existing Duty Rule – the performance or the promise to perform a pre-existing duty does not constitute consideration. You can’t use something as consideration that was promise to give in the past.
o    Modifications:
§  Traditional: need consideration (any new consideration will do, even if nominal); one way to avoid is to recede old contract and start over (both parties agree to tear up old k and start over)
§  Modern: UCC 2-209; Restatement II Sect 89: fair and equitable circumstances not anticipated by the parties
–          Rule: a promise to pay a man for doing that which he is already under K to do is without consideration
–          Ex. Hard bargaining: Alaska fishermen had k with company. Used their position to take advantage of the situation. Waited until in Al with no alternative.  No other consideration was given – modification of k was not valid.
o    To make valid, could have torn up old k for $60 (both parties must agree to tear up) AND THEN make new K for $100
o    Wanted to renegotiate an employment k, not modify
–          Unforseen Circumstances: Garbage collector – add’l houses – he asked for more money – but offered no other consideration
o    RULE: MODERN Rest II 89 enforces a modification if the parties voluntarily agreed and
§  1. Promise modification was made before the k was fully performed
§  2. Underlying circumstances were unanticipated by the parties
§  3. Modification is fair and equitable
o    Traditional/Texas: would deny him b/c no new consideration for modification
o    Modern: extra homes would have been sufficient for add’l consideration
§  Don’t need consideration for modifications in unforeseen circumstances – good faith
o    UCC: no new consideration needed for modifications but modification must be bargained for in good faith
Mutuality of Obligation – a k that allows one party to act w/ unbridled discretion lacks mutuality of obligation “if I feel like it”
–          Ex. In a k that requires A all it needs from B there is mutuality and the promise is not illusory since if A does order anything, it must be from B
–          Two types of Ks:
o    Output Ks: how much the seller is selling (no seller can possibly sell all buyer needs) – sell all output but doesn’t specify amt
o    Requirement Ks: buyer will buy all requirements of some material/parts, but k does not say what those requirements are (no buyer could possibly buy all seller has)
–          Traditional Approach: Reluctant to Imply
o    Only apply for Expressed K
o    Ve

in writing and signed
o    § 83: Bankruptcy (in writing)
§  can waive protections of bankruptcy if do so in signed writing
o    § 84: Non Concurrence of Non Material Condition
§  condition upon a performance and condition did not occur – can waive the condition if in writing and signed (if state requires, may not have to be done in writing as long as knowingly and voluntarily)
o    § 85: Voidable Defense
§  made agreement but have a defense to it (ex, capacity, mistake)
§  can waive this defense orally or in writing
**** don’t’ want oral waiver b/c want to make sure the person knows what they are doing
–          Ex. D says it could use SOL to not pay debt, but D promises to waive SOL and pay anyway. Enforceable even though no new consideration, there was consideration for initial K
–          Ex. Must be 18 to make a K – D (aged 17) makes a K. Unenforceable b/c impediment created by law. If now 18, can’t waive right to infant defense and K is now enforceable.
–          In these cases when you waive the rule, that doesn’t necessarily reinstate the entire consideration that was created in the bargained for exchange
o    Ex. If you owe from bankrupt 10,000 you can say “wel I will pay you 3000 so you waived the protection only up to the 3000 dollar amount. Not an all or nothing waiver, whatever you waive is the only part you are required to fulfill. 
–          Promises for Benefit Received (No Consideration) §86
o    Promise made in recognition of benefit previously received will be enforced to the extent necessary to prevent injustice BUT is not binding to the extent that it’s value is disproportionate to the benefit
o    Original enforceable contract, but because of some legal rule that K can’t be enforced (§82-§85); all barriers can be waived and doesn’t have to satisfy consideration (can be one sided)
o    These are NOT modifications
o    NO THIRD PARTIES.
o    Traditional – REJECTS §86 – can’t bargain for past consideration
o    Modern – Accepts §86 – if person receives material benefit in the past, then moral obligation is sufficient consideration (enforceable)
o    No clear Majority & No recent Texas Cases
o    EX. Doctor saves car accident victim’s life. V must pay doctor for saving life. Restitution b/c public policy wants doctors to save people in need.
o    EX. Realtor: K lapsed and then realtor found a buyer for house. He had owner sign post-dated k. House was sold after first K lapsed and so this was really past consideration
§  Trad: couldn’t be bargained for in the second signed agreement
§  Mod: Broker made the deal after original agreement expired w/o obligation to do so – justice requires enforcement
–          Life Saving Act
o    Ex. P saved Ds life by diverting log away from D, injuring himself in the process. D agrees to pay P $15 every 2 weeks for the rest of his life. D died and P brings suit for unpaid installments.
o    Can ENFORCE a promise for life saving act b/c it is MATERIAL BENEFIT b/c life preservation is measurable in $. Moral obligation is enforced where the promisor has received a material benefit for which he promised to pay.
o    Material benefit must actually go back to the person who saved, can’t go to third party.
Promissory Estoppel Exception to Consideration (promise + unbargained for Reliance)
–          promisee acts in reliance on promise to her detriment
–          B/c she relied on promise, therefore, promise is enforceable
–          Equitable Estoppel: Promisor misled other person, or fraudulently presented information
–          Promissory Estoppel: just a promise (not necessarily fraud/misrep)
–          §90 (1):
o    Promise (FACT)
o    Reasonably Foreseeable Reliance (FACT)
o    Reliance (Substantial & Definite Character) (FACT)
o    Justice (Law) Requires Enforcement (LAW)
–          §90 (2): some states don’t require reliance