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Contracts
St. Johns University School of Law
Kniffin, Margaret N.

Contracts Outline

Kniffin, Fall 2011

· Sullivan (entertainer with botched nose job) v O’Connor (doctor)

o RULE: Courts can award reliance damages for breach in pt v doc cases, when the doctor affirmatively promised a particular result

o First time that a lawyer argued that a malpractice case should be viewed as a K

§ Court considers the policy arguments for this and decides it is a K

· **arguments are omitted from casebook**

o Usually courts give expectation damages, but declined here

§ Argued it didn’t want to be overly hard to doctors

§ Didn’t want to begin considering the expected value of the nose job

o Three types of damages

§ Restitution – recovery of any expenses paid directly to D

· Typically not part of expectation damages, but may be if there was a partial pre-payment

§ Reliance – damages to make P whole as before the K (back in time)

· Incidentals – recovery of expenses, fees to hospital, etc

· Pain and suffering – suffered for operations

§ Expectation – damages to make P whole as if K was executed (forward in time)

· These are distinct from consequential damages because these consider foreseen value gained in a chain reaction from K, whereas Reliance and Expectation look at units of utility as value to P.

o Example of calculating damages (using note 1, pg 19)

§ Reliance

· Hospital fees: $300 ($100 per operation x 3)

· Pain: $9,000 ($3,000 per operation x 3)

· Nose value: $10,000 decrease in value

· Restitution: $300 in fees directly to doctor

§ Expectation

· Hospital fees: $100 ($100 per operation x 1)

· Pain: $3,000 ($3,000 per operation x 1)

· Nose value: $30,000 delta in expected value

· Restitution: NA, forward looking

o Courts usually give expectation damages, however:

§ May be difficult to calculate

§ May be a partial breach, therefore difficult to calculate

§ Sullivan court – “it would be harsh to give expectation damages”

· But that’s wrong, not the point of K law

§ Sullivan court – “doctor was found innocent of negligence”

· But that’s not the point; only breach of K matters

· Arbitration differs from K law

o Binding; no appeal process

o Not bound by rules of evidence, UCC, etc

o Not required to disclose RD

o More expedient the courts

o Each party has a say in who the arbitrator is

· Hamer (nephew refrained from smoking, drinking etc) v Sidway (uncle promised to pay)

o RULE: the surrender of a right can serve as consideration

o Requirements of a K

§ Mutual accent: both parties agree to be bound (the bargain)

§ Consideration: an exchange of values by EACH party

· A benefit to me (including a promise, which has value)

· A detriment to you

o Why require consideration:

§ Procedural: it prevents courts being flooded with every nonsense promise

§ Cautionary: when parties commit a value, they think twice about a K

§ Evidentiary: helps courts decide on Ks

o Contrast with a gift (or promised gift), where there is no exchange of values

o Contrast with hurricane hypo (two men trade $100 and a $100 briefcase when blow to each other in a storm. Values were exchanged, but there was no bargain

o Did the uncle in Hamer receive a value?

§ Court declined to consider

o Did the nephew in Hamer suffer a detriment?

§ Yes, he gave up his legal right to smoke

· Giving up a non-legal activity (speeding?) is not a detriment

o Since both uncle and nephew received consideration, K is formed

o Consideration does not have to be the only or even chief benefit desired

§ EG. A man sets K to paint a picture for $500, but his real motive is desire for fame. $500 still counts as consideration.

o Psychological happiness generally NOT considered consideration (e.g. Uncle’s desire for nephew to not smoke)

o If uncle had given actual cash at outset, there is no clawback against nephew.

o Offeror has choice to ask for a promise or performance

§ Offeror always makes a promise (e.g. to pay $ in the future)

§ If he requests a promise, it is a bilateral contract (2 promises)

§ If he requests performance (e.g. Hammer) it is a unilateral contract (1 promise)

· K is not formed until performance is complete

· Question of ability to revoke offer once performance has begun?

· Procedure issues regarding the raising of issues / points

o In some states, if one side doesn’t raise an issue, the court cannot

o In other, courts are required to raise issues for both sides

· Contract offeror

o Unusual, but you can have a contract where there is NO offeror

§ For example, corporate negations done by lawyers, set term sheet, and both companies agree to K simultaneously

o Offeror is master of his offer

§ Can set mode of acceptance

§ Cannot request illegal terms

§ Can ask for a promise (bilateral) or a performance (unilateral)

· Under a unilateral K, other party must complete performance before K is formed

· Most K are bilateral because it satisfies each parties desire for a future action.

o EG: you order goods, you want the promise (certainty of arrival) rather than waiting on the uncertain arrival of goods

· Consideration

o Courts generally do not require if consideration is sufficient

§ Exceptions

· If K is unconscionable (EG prices outrageous)

· If consideration is only token

· Token consideration

o Courts are divided on the subject

o EG: parent sells a house to a child for $1

o EG: Father has 2 children; one is retarded. Father sets K with brother to care for sister for life. Sister would pay the brother a “hairpin”

§ Brother grew dissatisfied with burden of care and breached

§ Court rules that the hairpin was only token consideration

· Fiege (promiscuous woman promises not to file paternity suit) vs Boehm (man)

o RULE: Forbearance of bringing suit for a valid claim can be consideration, but an invalid claim cannot be consideration. EXCEPT forbearance of an invalid claim can be consideration if the forbearer has a bona fide subjective believe it is valid, AND this believe is reasonable.

o Rule of law note: if you suffer a MATERIAL breach, you are released from the rest of the K

§ EG in Feige: the man’s stopping of payment released Feige from her promise not to file a paternity suit

o Assuming the parties had mutual consent, was the promise not to file a paternity suit sufficient consideration?

§ This was the first impression of this issue in MD: is forbearance of a claim sufficient consideration.

§ Court looked to Rest 1st :

· Requires that the forbearing party has belief that is

o Honest (person really believes it) AND

o Reasonable (the belief stands to reason)

§ Contrast with Rest 2nd:

o Requires only Honesty (“ one believes a claim may be fairly determined to be valid”)

o Reasonableness is not included in Rest 2nd

· Feiberg (old lad retired when give a pension not previously promised) v Pfeiffer (company wants to stop paying pension)

o RULE: past performanc

EG “I promise to buy your house when I feel like it.” = illusory

· EG: “I promise to buy your house when I win lotto” = a real promise, although unlikely.

· Strong (debt holder desires payback) v Sheffield (Wife [owned her own business] promises to back husbands debt)

o RULE: an illusory promise is not consideration

o P promises not to “bank” (i.e. cash in) the promissory note, “until such a time as I want my money”

o Did the note holder make a real or illusory promise?

§ Illusory because it was so open ended, it really had no value

· If he had said “I want my money” 5 minutes later, the wife would have received effectively no value.

· If he had promised to not bank it for a fixed period of time (e.g. 6 months) there would be value to the wife

o If the offeror asks for a performance (i.e. hold off on banking the note for 6 months) there is a real promise because it is a unilateral K.

· Mattei (Real estate developer; put satisfactory lease clause in K) v Hopper (seller)

o RULE: Satisfaction clauses do NOT automatically make promises illusory, because it requires good faith by promisor.

o Court offers 2 examples of where clauses are not illusory

§ Commercial satisfaction, which can be settled by a reasonable man rule

· EG: I will paint your barn. There it is, it’s red.

§ Artistic items, which require good judgment can be settled by good faith

· EG: I will paint you a picture of a barn to your liking. Subjective

· However, you could have dishonest dissatisfaction – EG you have a fight independent from the painting, and you decide before even seeing the painting you will claim dissatisfaction as revenge.

o Thus, we have a rule of law that a satisfaction clause is not illusory, per se, because they require good faith

o It can be uncertain how a court will view the satisfaction clause (commercial or artistic), therefore ARGUE BOTH.

o Good faith performance is required of all K, or K is breached.

· Eastern Airlines (airline) v Gulf Oil (oil supplier)

o RULE: Requirement and output contracts are not automatically illusory (due to of uncertainly) because it requires promisor act in good faith

o Requirement contract – I will buy a specific amount of my requirements exclusively from you

o Output contract – I will sell a specific amount of my production specifically to you

o P agreed to buy all fuel from D for specific cities

o Issue: are requirement contracts illusory promises

§ Suggests that it is illusory because it allows the buyer / seller so much choice as to be meaningless (i.e. 0% to 100%)

§ No, because you must act in good faith

· Including, according to UCC, no abusive requirements / outputs, to protect parties from unexpected (although honest) flux in demand

· Subsection indicates basis can be:

o Relative to estimates

o Previous deliveries