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Contracts
St. Johns University School of Law
Sharfman, Keith

CONTRACTS I OUTLINE – SHARFMAN FALL 2014

PERSPECTIVE ON CONTRACT LAW

Posner’s Three Functions:

1. Furnishes incentives for value maximizing conduct in the future

2. It reduces the complexity and cost of transactions by supplying a set of normal terms that (absent contracts) would have to be negotiated expressly.

3. Furnishes prospective transacting parties with information about contingencies that my defeat or assist.

CONTRACT TYPES

An express contract may be oral or written and consists of an offer, acceptance, and bargained-for consideration.

An implied-in-fact is inferred as a matter of reason and justice from the acts, conduct, or circumstances surrounding a transaction, rather than one formally or explicitly stated in words. As with express contracts, the source of the obligation in implied-in-fact contracts is the manifested intent of the parties. However, whereas in express contracts, all of the terms and conditions are expressed by the parties, implied-in-fact contracts require one or more of the terms of the contract to be inferred from the conduct of the parties.

Quasi-contract is implied in law: An obligation imposed on a person not because of his intention to contract, but because the circumstances between the parties are such as to justify in one party a right an in the other a duty.

Howard E. Bailey v. Richard E. West: plaintiff seeks recovery for service provided to a horse. Defendant wasn’t liable to pay for the services because the agreement was assumed.

Rule: The essential elements of contracts “implied in fact” are mutual agreement and intent to promise but the agreement and the promise have not been made in words and are only implied. Agreement was not mutual

Elements of a quasi-contract:

1. A benefit conferred (granted) upon D by P

2. The plaintiff rendered such performance with the expectation of being paid.

3. The plaintiff was not acting as a volunteer.

4. Allowing the defendant to retain the benefits without paying the plaintiff would result in the unjust enrichment of the defendant at the plaintiff’s expense.

Private Autonomy: the law views private individuals as possessing a power to effect, within certain limits, which changes their legal relations.

Charles Fried (Individual Autonomy in Contracts/Promise) page 143: he stresses individual autonomy in contract construction, the sharing principle when fault is not shared in the breach or nonperformance of a contract. Says that the courts will fill in the gaps in a way that a reasonable person (with the intent formed in the contract) would.

Richard Craswell (Default Rules and Philosophy of Promising) page 15: Critiques the sociological data research of promises, that too many theories of contract/promises would leave the lay person without the proper knowledge of which promise or contract to enter into. Also critiques the individual autonomy principle that Fried talks about. Says that any remedy for a breach of contract goes against individual autonomy. Individual autonomy is not what governs a contract; it is only a background rule, which the parties can change. Points out the paradox of individual autonomy because a binding contract limits one’s freedom. Two types of rules in contracts, background rules and agreement rules:

– Background rules [default rules] define the exact substance of a parties’ obligation by specifying the conditions under which her nonperformance will be excused, and the sanctions, which will be applied to any unexcused nonperformance.

– Agreement rules specify the conditions and procedures the parties must satisfy to change a background rule. AR include most of the rules governing offer and acceptance, fraud or undue influence, which define conditions necessary for consent to be valid

He provides an alternative to autonomy: economic efficiency.

REMEDIES

Sullivan v. O’Connor: malpractice suit for damages and emotional distress

Rule: Pain, suffering, and mental distresses are compensable damages for breach of contract under either expectancy or reliance damages. Clear proof of promise between doctor and patient require.

Expectation Measure: non-breaching party in the position that they would’ve been had the contract been performed

Formula for calculating:

[1] the amount by which the value of the defendant’s actual performance was less than the value of the promised performance.

-Minus-

[2] whatever benefits, if any, the plaintiff received from not having to complete his own performance.

Reliance Measure: non-breaching party in the position that they were in prior to contract (had there been no contract) (used when expectation measures are difficult to compute and when π recovers on promissory estoppel)

Restitution: compensating the non-breaching party for the benefit conferred of the breaching counter party. Amount by which breaching party would be unjustly enriched. Used when: (1) a non-breaching plaintiff has partly performed, and the restitution measure is greater than the K price; and (2) a breaching plaintiff has not substantially performed, but is allowed to recover the benefit of what he has conferred on the defendant.

Positive Jurisprudence: seeks to explain what they law is and why it is that way and how it affects the world

Normative Jurisprudence: theories that tell us what the law ought to be

EQUITABLE REMEDIES:

I. Specific Performance (Land Sale contracts are the most common)

II. Injunction (Employment K most common [can’t induce specific performance])

III. Limitations on equitable remedies: Three important limits on willingness of court to issue either a decree of specific performance or injunction:

a. Inadequacy of damage:

i. Because the injury cant be estimated with sufficient certainty; or

ii. Because money cant purchase a substitute for the contracted-for performance. (ex: each piece of land is “unique” so an award for damages isn’t adequate.)

iii. Definiteness: Court wont give equitable relief unless the K terms are definite enough to enable the court to frame an adequate order.

iv. Difficulty of enforcement: wont grant equitable relief where there are likely to be significant difficulties in enforcing and supervising the order: such as performance of a personal service K.

CONTRACT ELEMENTS

CONSIDERATION

General rule: a contract is not enforceable unless it is supported by “consideration.” The few exceptions are treated in “promises binding without consideration. A promise is supported by consideration if:

Detriment: the promise gives up something of value, or circumscribes his liberty in some way (i.e.: he suffers a “legal detriment”); and

Exchange: The promise is given as part of a “bargain”; the promisor makes his promise in exchange for the promisee’s giving of value or circumscription of liberty.

o Some right, interest, profit, or benefit accruing to one party

o OR some forbearance detriment, loss, or responsibility taken by the other [legal right (Hamer v. Sidway), right to litigate (Browning v. Johnson) and non-compete (Langer v. Superior Steel Corp) are consideration]

o Performance may be: an act other than a promise, forbearance, creation of modification or destruction of a legal relation

o Bargain concept replaced the benefit/detriment concept

o Novelty is not consideration (Apfel v. Prudential-Bache Securities, Inc)

· Pre-existing duty rule: If a party does or promises to do what he is already legally obligated to do, or if he forbears or promises to forbear from doing something which he is not legally entitled to do, he has not incurred a “detriment” for purposes of consideration. [Alaska Packer’s Association v. Domenico] They were already under a legal duty to perform so the oral agreement doesn’t constitute fresh consideration.

· Modification: if parties to an existing contract agree to modify the K for the sole benefit for one of them, the modification will usually be unenforceable at common law, for lack of consideration. *** be on lookout for this in construction cases*** William Levine v. Anne Blumenthal: Parties are free to modify existing agreements, as long as the modification is supported by new and independent consideration

· Exception for unanticipated circumstances: modern courts and the restatement make an exception to the pre-existing duty rule where the modification is “fair and equitable in view of circumstances not anticipate by the parties when the contract was made.” [Alfred Angel v. John Murray] courts should enforce agreements modifying contracts when unexpected or unanticipated difficulties arise during the course of the performance of a K, even though there is no consideration for the modification, as long as the parties agree voluntarily. [Bolin Farms v. American Cotton Shippers Assoc] Changes in outside conditions that do not affect a party’s performance will not make a contract unenforceable **Libertarian Policy**

Melvin Aron Eisenberg (Principles of Consideration) page 223:

– The Element of Bargain: bargain promises should be enforceable because the injury is great and it promotes bargain and increases exchange. States may have a private interest in this matter to promote exchange and create surplus.

– Illusory Promises: illusory promises should be abandoned because it typically will render normally enforceable

– Firm Offer (Option Contract):

asure. P is placed in the position that he would have been in, had the promise never been made.

Prof Sharman says: Reliance would be the recovery for damages, but it should/must be reasonable. If you overspend, etc., that may not be recoverable.

PROMISSORY ESTOPPEL AND THE CHOICE OF REMEDIES:

a. Under Willistonian view, full range of remedies should always be available, whether the reason for enforcement is consideration or reliance.

b. From another view, recovery under promissory estoppel should be limited to the amount of the plaintiff’s reliance, whether measured “out of pocket” expenditures, forgone opportunities, or both. Historically promissory estoppel was used as a defense whether the representor was simply estopped from denying the accuracy of what had been stated.

c. Another view, Restatement of (Second) §90 eliminated the first restatement’s requirement that the reliance be “definite and substantial” and that the “remedy granted for breach may be limited as justice requires” à The assumption is that one starts from a position of full-scale enforcement but that the “same factors which bear on whether any relief should be granted also bear on the extent and character of the remedy” Thus, recovery might be limited to restitution or damages or specific relief measure by the extent of the promisee’s reliance rather than by the terms of the promise.

Edward Yorio and Steve Thel [The Promissory Basis of § 90] page 238:

· Eliminated the “bargained-for consideration” but requires that reliance be within the reasonable expectation of the promisor

· Under the first restatement, the expected action or forbearance had to be of a definite and substantial character.

· Enforcing promissory estoppel is subtle because it’s not whether to protect the reliance but whether to enforce the promise. What distinguishes enforceable from unenforceable promises is the quality of commitment made by the promisor.

· Pledges or chartable donations are often enforced even without reliance. Other courts reject enforcing them because of the lack of consideration.

Andrew D. Ricketts v. Katie Scothorn: Promissory note promising granddaughter money and verbal promise that she wouldn’t have to work anymore. She quit her job.

Rule: Detrimental reliance- she relied on the promise to her detriment, therefore the promisor is estopped from not enforcing the promise.

Allegheny College v. National Chautaugua County Bank of Jamestown: Charitable donation to a college. There was partial payment and then the estate revoked the promise.

Rule: This was a bi-lateral agreement. Charitable subscription is supported by consideration [money in exchange of commemoration]. Promissory estoppel may result from an assumption of a duty.

Congregation Kadimah Toras-Moshe v. Robert A. DeLeo: Verbal promise to spiritual advisor for donation. Promisor died without the promise in writing.

Rule: There was no benefit or detriment and therefore no consideration. No injustice because there was no reliance.

King v. Riveland: [Prisoners sought injunction from a promise that was divulged and supposed to be confidential] Court concluded that although there was no consideration, it relied on §90 to hold that the promise did induce reliance and it should be enforced.

Abresch v. Northwester Bell Telephone Co.: [Someone called the operator instead of 911 and asked the operator to report the fire and the operator didn’t do so.] Even though there is no consideration and no duty to assume, the company is required to exercise reasonable care in performing the duty so assumed and a failure to do so made them liable in tort action.

Malfeasance: negligent performance of a promised act.

Misfeasance: non-performance of a promised act.