Contracts Outline

Gergen_Contracts_Spring_2018
 
Themes & Policies of Contract Law
 
Core Doctrine
The law of contracts is a voluntary obligation, usually an express/implied commitment
Contracts is concerned with private order
Will either be an expression or intention to act/refrain from acting
Much of contract law is to get a judgment without litigation à court used as an instrument so that people can collect on their debts
Each party in contracts both a promisee and promisor (because both will give up something in return for something else)
 
“Elementary ideas” of justice underpinning contract law/Basis for Obligation [Gardner] Forward Looking
1. Bargain idea
pay seller the price agreed upon à justice known before the event
2. Promise idea (autonomy)
Promises are binding & kept in all cases à justice known before the event
Backward looking//fairness
3. Tort idea (harm or reliance)
remedy after the harm has occurred rather than a means for private ordering
4. Quasi-contractual idea (unjust enrichment)
pay for anything of value except voluntary gifts
 
Sources of Contract Disputes
When people make a bargain, expectation is that exchange will be mutually beneficial à if bargain is not consummated usually because circumstances change and increase the cost of performance or diminish the social value
Another source of contract disputes is misunderstanding
 
Legal Formalities in Contracts
4 Purposes legal formalities serve
Evidentiary
Insufficient proof that is a contract/ “manufactured evidence”
Did the actor really make a choice
Cautionary
Safeguard against own/others rashness
Encourages the actor to think about what they’re doing
Channeling
Legal formalities provide an autonomous individual the means to achieve an outcome that requires the assistance of the state
If you want something to happen, then must do this (ex. Marriage ceremonies)
Enforceability must be made apparent to parties (& that there are legal consequences)
Assumes a legal fiction that everyone knows the law
Deterrent
Suspect marginal value contracts
Legal formalities might make certain undesirable contracts (such as pre-nuptial contracts) hard to do because do not think should undertake this type of obligation (but not impossible to do so)
State could be seen as paternalistic
The seal used to be a legal formality to make a promise legally binding but has since lot its effect
Power of seal is diluted, too burdensome and too hard to make contracts legally binding and once the seal’s significance is diluted à loses its social recognition
Pros
Allows people to receive gifts and rely on the promise à enhances the value of gifts because you can better rely on them and it furthers the promise
Reduces legal fees from certainty
Promotes autonomy
Cons
Protects individuals that cant fulfill
Might incentivize people not to make gifts because want to still be able to change their minds
Not enough value in social gifts to increase burden on courts
Maybe its not an instrument of autonomy because people don't know what they are getting themselves into
Forcing it into a legal transaction could change the nature of the transaction or compliance
Gifts are tacit and implicit à would need more of a legal framework to dealt with this
Legal formalities give people who are able to afford lawyers more power
b/c they can understand the form and understand what it takes to make a promise legally binding
 
CLASSICAL v. MODERN
 
Classical
Modern
Bargain Test of Consideration
Promissory Estoppel
Pre-Existing Duty Rule
R2 § 89(a); UCC 2-209(1)
Old Restrictive from of Duress Rule
Modern Expansive form of Duress Rule
Mirror Image Rule/ Strong presumption an offer is revocable
Exceptions to rule making offer irrevocable (R2 § 45, §87(1), § 87(2), UCC § 2-205); Promissory Estoppel
Strong definiteness requirement
Loosen definiteness requirement/ promissory estoppel claim
Strong presumption preliminary agreement (“agreement to agree”) is not binding
Loosen presumption preliminary agreement is not binding/enforce agreement to negotiate in good faith
Limited claims when SoF defense
Promissory estoppel claim available when SoF defense raised
Strong certainty requirement for damages
Loosen certainty requirement for damages
Classical preferred rules, so people knew where they stood, however, it had unjust results à modern contract tries to work through this
 
Consideration/Bargain
 
Overview
In common law, principal basis of enforcement is consideration, defined as part of bargain (narrow definition)
A promise that is supported by consideration is presumptively enforceable with expectation damages
2 Definitions of Consideration:
Narrow – a bargained exchange in which each party incurs a legal detriment
Broad – what makes a contract enforceable
Bargain – there must be a reciprocal exchange, must have a return performance
Bargain Test came from classical contract theorists, it is “value-neutral” and turns on apparent motive (and not actual motive)
Consideration is an issue when the plaintiff is trying to enforce a promise that hasn't been performed
Intent is not a requirement – do not ask whether the party intended to be bound, but instead look at apparent motive – did it look like you intended to make a promise (reasonably appear)
 
Elements
Contract = promise + consideration (broad definition – legal basis for enforcement)
Consideration (narrow definition) = bargain (to the promisor) + detriment (to the promisee)
Promise = formation of a promise requires a bargain
Bargain = return performance/promise must be bargained for
Bargain test = reciprocal inducement, each for the other
 
Restatement (Second)
§ 1: A contract is a promise . . . for the breach of which the law gives a remedy . . .
§ 17: . . . the formation of a contract requires a bargain . . .
§ 71(1): To constitute consideration, a performance or a return promise must be bargained for.
§ 71(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.
Comment b: In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration
 
Donative/Gratuitous Promises
 
Not All Donative/Gratuitous Promises are Enforced:
1) A promise to make a gift that is not supported by consideration is NOT legally binding
2) A promise to make a gift is not legally binding just by casting it in the form of legally binding promise (i.e. a note, a seal) to make it seem like a bargain
Dougherty v. Salt  (NY Appeals Ct., 1919) is authority for the above proposition – Aunt promised her nephew $3000 and presented it in the printed form of a note to bind herself, didn't put it in her will because she thought it would be binding
Aunt’s gratuitous promise not enforced because no consideration à no legal basis for enforcing her promise
Even though she cast her gratuitous promise in the form of a bargain (wrote “for value considered”), this isn’t enough
Using specified form = using the magical words of “value considered”
Consistent with Restatement Second
Only Gardner’s Elementary idea of promise as a basis for obligation (promises are binding & kept in all cases) would justify an enforcement of a promise as in Dougherty
Because a donative promise cant be made legally binding just by casting it in the form of a bargain (and since the seal doesn’t have this power anymore), it is impossible under US law to make a donative promise legally binding à how to treat donative promises
Classical Contract Theory [Holmes] – as long as the promise is in the form of a bargain, then should enforce the promise (unless have special circumstances such as fraud, duress, mistake, etc.)
This may go too far and give too much effort to a donative promise
Civil Law [France & Germany]  — similar to Classical Contract Theory, but also will not enforce a donative promise if the promisor will suffer financial misfortune or the promisee is ungrateful
This seems to give the individual the most autonomy, but will require courts to inquire into personalities and financial information
Different from US because no legal framework to handle this situation
Modern US Contract Law – only enforce a donative promise in special circumstances à in order to protect reliance or to avoid unjust enrichment
May give too little effect to a donative promise and may also seem paternalistic
 
Bargain vs. Conditional Gift
Bargain is performance or return promise is sought in exchange for another promise à reciprocal relation of motive or inducement [Restatement Second § 71(2) and comment b definitions] Holmes definition: reciprocal conventional inducement for the other, between consideration and promise
Reciprocal inducement = bargain
Conventional = formal expression whose meaning and significance is artificially determined 
Conditional gift (type of gratuitous promise) is when the promisor is not induced or getting anything form the performing the promise, not legally binding à no reciprocal inducement (BOTH SIDES must be induced)
Ex: C promises D “if you pick a car costing no more than $20k, I will buy it for you as a graduation present” à conditional gift because C is not getting anything, C’s motive is not to induce D to buy the car, doesn't care if D buys the car
D is induced to buy the car, but this is one-sided and not enough à C must ALSO be induced
Kirksey v. Kirskey (AL SC, 1845): D’s letter offers to provide P a place to live & raise her family on his land if she sells the land she currently has à she moved, after 2 years he kicked her off, P filed a claim for a breach of contract
Could be bargain if court thinks that D induced P to move ot her land so that he could obtain the labor of her and her children
But court thinks that this is a conditional gift and an act of gratuity à he was not motivated by getting anything in return, so the letter is not binding/enforceable
Sometimes it will depend on interpretation and the motive of the parties (also see bargain test below):
Ex. Williston’s Tramp
B promises A, tramp, that B will pay for a coat for A if A will go around the corner to shop. A goes to the shop à if B promised the coat with the purpose of inducing A to walk around the corner to shop then it's a bargain
But, if B did not promise the coat with the purpose of inducing A, then this will be seen as a conditional gift
This will depend on interpretation for B à if A walking to the shop is a condition of making a gift or “the price” B sought to exact in making the promise
Ex. Grandma promises to pay granddaughter’s tuition if she goes to law school
Bargain – want granddaughter to go to law school (even if granddaughter doesn't want to) à to induce daughter to go to law school, will pay for her tuition and granddaughter will be induced to go to law school because of the promise that tuition will be paid for
Conditional gift – do not care if granddaughter goes to law school but if she wants to go, then grandmother will help her
Individuals (like the Grandma example) should be able to designate her purpose and legally bind herself if she wants to à contracts is a form or private order
Different from Dougherty in that the grandmother is not casting her promise as a bargain but is revealing that her motive is a bargain à then this would be enforceable if its cast in a legal form
**Sometimes it isn’t clear whether a promise subject condition is conditional donative promise or a bargain in which the promise is made with the purpose of inducing the promise to perform the condition
Pennsy Supply Inc v. American Ash Recycling Corp (PA Superior Ct 2006): American Ash supplied AgRite free of charge as paving material. While AgRite was a hazardous waste its use in paving material was an approved form of disposal.
RULE: there may be sufficient consideration to form an enforceable contract even though the parties have not bargained for the specific terms of the agreement
Needs reciprocal inducement to establish consideration. This promise induced Pennsy to assume the detriment of collecting and taking the title material at the benefit of American Ash not having to dispose of the toxic material. It is a bargain through reciprocal inducement rather than a conditional gift, despite aspects of the terms not being laid out.  
 
Justifications for Not Enforcing Gratuitous Promises (Policy)
Rawls: Promises are morally binding – promising a social practice that is essential to facilitating human cooperation and exchange
Promises are something that we do for ourselves, assumes basic case of a promise is a quid pro quo
Scanlon: Case of “guilty secret,” Scanlon eliminates the usual reasons for a moral obligation (benefits to the promisor, detriment to the promise, maintaining social practice), but still finds that there is still moral obligation because of the psychological relationship between two people
Human interaction involved in promising
But there is no legal obligation for donative promises (gifts) because there are evidentiary and cautionary concerns
Evidentiary concern – issues of proof donative promises are usually made orally
Cautionary concerns – signals to both parties that there has been commitment (e.g. marriage ceremonies – will force parties to think twice)
BUT these concerns to not appear present in Dougherty à may have cautionary concerns that may have question as to whether the Aunt would have followed through this it, but this is not persuasive
Little doubt that she meant to bind herself
 
The Bargain Test
There must be a reciprocal inducement, each for the other to satisfy the bargain test
Past considerations and nominal considerations are not adequate legal considerations to pass the bargain test
Past Consideration – benefit that is conferred before the return promise is made
Schnell v. Nell (IN SC, 1861): wife died and left her relatives $200 each but this was worthless because she didn't have any property of her own à Schnell promised to make the bequests good, but the court didn't find consideration for her practice
(2) Schnell had love and affection for his wife & that she helped him amass property w