Contracts I Outline
Professor Christopher Borgan
SECTION 1: BASES FOR ENFORCING PROMISES
I. REMEDYING BREACH
Compensatory Damages: Monetary relief for actual losses incurred by the non-breaching party
Punitive damages will not be awarded in contract cases.
Case Example: White v. Benkowski: The jury awarded $2000 punitive damages. On appeal, the court denied punitive damages, finding that punitive damages cannot be awarded for breach of contract.
Nominal Damages: Very small monetary value to set down that there was a breach of contract but no actual damages.
GOAL: Put the promisee in the position they would have occupied, had the contract been performed.
Give the non-breaching party the “benefit of the bargain”
Expectation interest is the “default” remedy
Damages: The economic value of the difference between what you got and what you expected to get.
GOAL: Put the promisee in the position they would have occupied had the promise never been made.
The promisee is in a worse position than they would have been had promise never been made
The promisee relied on the promise
It would be unjust not to
Damages: The loss incurred as a result of relying on promise AND any expenses.
GOAL: Put the promisor in the position they would have occupied had the promise never been made.
NB: The goal is to prevent unjust enrichment; the breaching party should not be able to retain the “benefit of the bargain” by breaking the contract.
Direct economic benefit to the promisor
Benefit was gained at the expense of the promisee
Damages: The economic value of the benefit gained by the promisor.
Doctors fee – $300 (all 3 visits)
Hospital Fees – $100 per operation (3)
Pain & Suffering – $3,000 per operation (3)
Increase in Value of appearance if enhanced nose as promised – $20,000
Loss in value of actual appearance – $10,000
Expectation Interest – 20,000 +10,000+3,000+100 = $33,100
P does not get back Doctor’s fee (part of original bargain). P gets 1 of the 3 hospital fees back (2 part of the bargain). P gets 1 of the 3 pain & suffering (2 part of bargain). PLUS expected gain and compensation for actual loss.
Reliance Interest – 300+300+9,000+10,000 = $19,600
P does not get expected gain. P gets back Doctor’s fee, all 3 hospital fees, all three pain & sufferings, and her actual loss.
Restitution – $300
Only the benefit conferred on the breaching party so JUST the Doctor fee.
A breach is efficient if the cost of breaching and paying damages is less than performing the contract.
Hypo: Tony Stark agrees to sell an arc reactor for 100. The arc reactor is worth 90 to Stark and 110 to Lex Luthor. BUT, then Bruce Wayne comes along and wants to buy the arc reactor from Stark for 150. Stark breaches the contract with Lex Luthor and sells the reactor for 150. Lex Luthor gets compensated 10 because that’s his full expectation interest. Stark has to pay 10 but makes a net profit of 50 from selling the reactor to Wayne. Everyone is in a better position than they would have been and no one is worse off. Pareto superior
Efficient Breach does not take into account externalities.
Consideration Definition: Something of value (such as an act, a forbearance, or a return promise) received by a promisor from a promisee that is needed for a contract to be enforceable. The benefit that each party receives
Restatement § 71 Requirement of Exchange; Types of Exchange
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.
Bargained for exchange: a relationship of reciprocal inducement
Res. § 71 comment b: the consideration induced the making of a promise and the promise induces the furnishing of the consideration
Good Faith: If a promise is made upon a claim of fact to induce a return promise, and that fact turns out to be false, the original promise is still valid consideration as long as the promisor has a reasonable good faith claim:
Believes in good faith that he/she is holding a good claim (subjective requirement)
Dyer v. National By-Products Inc.: P actually thought that he had a real legal claim that he was not pursing as per his promise with his employer. He held that belief in good faith and said belief was reasonable. Therefore, the court held that his forbearance was valid consideration.
Is holding a good claim that would hold up in court (objective requirement)
Sec 1-201 paragraph 20: “Good faith,” except as otherwise provided in Article 5, means honesty in fact and the observance of reasonable commercial standards of fair dealing.
REQUIREMENT OF EXCHANGE
Mutuality of Obligation
Mutuality of Obligation: Both parties must be bound to perform. Unless both parties to a contract are bound to perform, neither party is bound.
Past Acts: Past performance cannot constitute valid consideration because it lacks mutuality of obligation since the past performance was not induced by the promise
Case Example: Feinberg v. Pfeiffer Co.: Feinberg was given a pension of $200/month by the President of the company for her many years of service. After the death of that president, the new leadership stopped paying her pension. The court held that her past years of service to the company could to be consideration for the pension since there is no mutuality of obligation. Feinberg was already compensated for her past employment (salary) and has no obligation under the pension agreement.
Moral Obligation as Consideration
Four Rules (Two of which are important)
Traditional Rule: Moral obligation does not impose a legal obligation
Mills v. Wyman: Wyman’s son is ill and Mills takes care of him, ultimately saving his life. Wyman’s father tells Mills he will pay him back for the treatment but does not. Court rules that while Wyman has a moral obligation to pay Mills, he does not have a legal one since Mills’ actions were not induced by a promise of payment from Wyman.
Judicial Liberalization Rule: An act done without request which provides a material bene
e” because the new handbook said that an employee can be discharged “at the will of the company”.
PROMISES AS CONSIDERATION
A contract in which a promise is offered for a promise in exchange is a bilateral contract
A promise in which one does not promise to actually do something is an illusory promise and cannot be used as valid consideration.
Strong v. Sheffield: Strong promises Mr. & Mrs. Sheffield that he will forbear on collection of promissory note until such time as he wants his money. The court found that this promise was illusory because he did not promise to forbear for any specified period of time. Even though Strong didn’t collect note for 2 years, Mrs. Sheffield was bargaining for a promise to not collect in order to have peace of mind. Strong’s promise of “I’ll collect whenever I want” does not give her that.
Res. § 77: A promise or apparent promise is not consideration if, by its terms, the promisor reserves a choice of alternative performance unless
Each of the alternative performances would have been consideration alone if it had been bargained for; or
One of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.
Satisfaction clauses are not illusory because the assessment is judged by an external standard.
Commercial satisfaction clause: reasonable person standard
this type of satisfaction clause is used for commercial value/quality, operative fitness, mechanical utility
Fancy, taste, or judgement clause: good faith standard
Mattei v. Hopper: D tried to get out of real estate contract by saying that P’s satisfaction clause which made agreement subject to him finding satisfactory leases for the development was illusory because he could unilaterally terminate contract by saying no leases were satisfactory. Court found that the satisfaction clause did not render promise illusory because P was constrained by external standard to act in good faith.
Sale of Goods contracts
Promises in the sale of goods are not illusory because there is a general requirement that the buyer act in “good faith” (UCC 1-201 and 1-203) and the contracts can be reviewed for reasonableness based on standards in the area.
Structural Polymer v. Zoltek: Zoltek argued that SP’s promise to buy all their required carbon fiber from Zoltek was illusory because they did not have a requirement for same at the time of contract. Court found that promise was not illusory since SP had a duty to act in good faith.