Contract II Outline Mensel (Fall 2009)
I. Consideration
A. Introduction
Promise not enforceable unless it is supported by consideration.
B. Bargain Promises
1. General rule is a bargain (an exchange of promises, acts, or both, in which each party views what she gives as the price for what she gets) constitutes consideration. Don’t need to be of equal value but if gross disparity can be used as evidence for defenses.
2. Exceptions
a. Nominal consideration- A K based on nominal consideration will fail as a lack of consideration. May look like a bargain but lacks the substance of one.
b. Promise to surrender from asserting a legal claim- a bargained-for promise to surrender from asserting a legal claim is deemed consideration if the promisor’s belief in the claim’s validity is honest and reasonable.
c. Illusory Promises
1) General rule for bargains- A bilateral contract is a bargain in which the parties exchange a promise for a promise. Bilateral contracts require mutuality of obligation (both parties must be bound or neither is bound).
a) Effect of illusory promise- If one party makes an illusory promise (a statement in form but not in substance) in exchange for the other party’s real promise, the rule of mutuality applies and neither party is bound. Ex. Promise couple with the power to terminate obligation at will and without notice is illusory.
2) Exceptions to the mutuality rule
a) Unilateral contracts- The rule of mutuality is not applicable to a unilateral contract (a contract in which a promise is given in exchange for an act).
b) Limited promises- promises that limit the promisor’s options in some way are real and are consideration. Ex. Promise coupled with power to terminate obligation at will with 10 days notice is not illusory.
c) Voidable Promises- a real promise is not illusory because it is voidable by one party as a matter of law (ex. Promise by a minor).
d) Conditional Promises- a promise that the promisor need only perform if a specified condition occurs is not illusory, because the promisor has limited her future options.
e) Alternative Promise-
1) If the promisor reserves the right to discharge the obligation by choosing between alternatives, there is valid consideration only if each alternative would be sufficient consideration if bargained for alone.
2) If the promisee can choose between alternatives, consideration exists if any of the alternatives would be sufficient and consideration if bargained for alone.
f) Agreements allowing one party to supply a material term- Common law hold that such a promise is illusory. However where one party has the power to alter or modify contract terms, is not illusory because the power is subject to the obligation to perform in good faith. Even the power to supply a material term is not illusory if the term must be fixed in relation to an objective measure.
1) UCC Provisions
a. 1-203 – General obligation of good faith on all parties in a K for the sale of goods.
b. 2-305(1) Right to set a price is enforceable if the parties so intend.
g) Implied Promises- Mutuality is satisfied if a promise can be implied in fact or in law from a party’s words or actions. Ex. Promise to use one’s reasonable or best efforts.
h) Requirements and output contracts- Courts and UCC enforce the Ks since the party who determines quantity has limited his options. If he buys or sells at all, he must buy from or sell to the other party. Under UCC output or requirements must be provided in good faith and must not be unreasonably disproportionate to any stated estimates.
d. Legal duty rule- promise to perform an act promisor already obliged to perform.
The promise to perform an act that the promisor has a preexisting legal duty to perform does not constitute consideration. Legal duty Rule
1) Preexisting public duties- If an official’s promised performance is within the scope of his official duties, neither the promise nor the performance thereof is legally sufficient consideration.
a) Performance of preexisting contractual duty for increase in payment- not consideration unless following exceptions
1) Promise of different performance- Slight difference sufficient for consideration.
2) Preexisting duty owed to third party- If a party owes a preexisting contractual duty to someone other than the party who makes the new promise, valid consideration.
3) Defense under original contract- If party has a valid defense to performance under original contract; new promise to perform is good consideration.
4) Modification- New promise to pay is enforceable if unanticipated circumstances arise that make modification of original K terms fair and equitable.
5) Modification for Sale of Goods- UCC does not require consideration to make modification of K for sale of goods. Must be sought in good faith.
b) Payment of lesser amount as discharge of debtor’s full obligation- not consideration unle
ormed by mutual assent of the parties. Whether the parties have mutually assented to the K one should generally use the objective theory of contracts (What a reasonable person to whom an expression has been addressed would understand the expression to mean). Purpose is to protect the parties’ reasonable expectations.
2. Express and implied contracts
a. Express Contracts- In an express contract, mutual assent is manifested in words of agreement, oral or written.
b. Implied Contracts
1) Implied-in-fact contracts- If promise is inferred by the parties’ acts or conduct, or from words that are not explicit words of agreement, the contract is implied in fact.
2) Implied-in-law contracts- When a court fictionally implies a promise to pay for benefits or services to avoid inequities and unjust enrichment (quasi-contact).
B. Offers
1. Legal significance of an offer- An offer creates a power of acceptance in the offeree (the power to conclude a bargain and bind the offeror by giving assent).
2. What constitutes an offer- a present willingness to enter into a bargain made in such a way that a reasonable person would believe that she could conclude the bargain by giving her assent.
a. Essential Elements
1) Intent to enter into a bargain. Must be distinguished from invitation to begin negotiations. Intent to make offer reflected by language and surrounding circumstances.
2) Definiteness of the terms. Must make clear subject matter of the proposed bargain, the quantity involved, and the price. (Terms)
b. Special Rules
1) Advertisement – invitations to deal not an offer, unless it is definite in its terms.
2) Auctions- If with reserve a bid by a member of audience is an offer accepted only when auctioneer hammers down. Offer can be withdrawn before auctioneer hammers down. If without reserve same rules apply except goods cannot be withdrawn unless no bid is made within a reasonable time.
Termination of Power of Acceptance- results from any of the
