CONTRACTS LAW
Basics:
The law of Ks is the law of voluntary obligations that arise b/c of a promise.
A promise: An expression of an intention to act (or refrain from acting) in a specified way, so made as to justify the person to whom the expression is addressed in understanding that a commitment has been made to that person.
CONSIDERATION: To be enforceable promise must be supported by Consideration:
Modern broad conception: Consideration is equivalent to a bargain (an exchange of promises/acts, where each party views what she gives as the price of what she gets); or any factor that will make a promise or K enforceable (detrimental reliance, etc.)
Donative Promises, Form and Reliance
Gifts: Common law distinguishes between:
A gift: A completed gift is considered a valid/binding legal transaction (only fraud = reverse).
A promise to make a gift (a donative promise): Unenforceable
Deed of gift or inter vivos document of transfer: Signed doc giving gift w/out delivering possession
Trustee: Holds legal title but beneficial ownership (right to enjoy benefits of property) vests in the beneficiary.
Simple Donative Promises:
Affective reasons; general rule = unenforceable for lack of consideration.
Dougherty v. Salt (NY 1919) Boy receives promissory note from aunt; no consid.
· Nominal Consideration: Transaction has form but not substance of a bargain; promisor dn view what he got as the price of his promise (unless parties really intended to make a bargain and viewed performance as price of other’s performance).
Schnell v. Nell (IN, 1861) Promise in consid of 1cent = nominal consid = not enforceable.
But nominal consid. makes a promise enforceable in two specific areas b/c more commercial than donative:
Options (a promise in writing to hold an offer open for a fixed amount of time)
Guaranties (a promise in writing to answer for another party’s debt/perf. in contractual obligation)
But Modern rule that donative promise that induces foreseeable Reliance will be legally enforceable.
Ricketts(Neb. 1898) Reliance estoppes D from pleading lack of consideration; reliance is treated either as consideration itself or as a substitute for consideration.
Obligations of Promisees: Under morality of aspiration, promisee is obliged to release a repenting promisor.
Conditional Donative Promises:
Promisor intends to confer a gift on promisee, but some condition must be fulfilled first.
Performance of condition is the means to make the gift, not the price (bargain) of the gift.
No more enforceable than any other donative promise, even if condition has been fulfilled, except if fulfillment constitutes foreseeable reliance.
§ 90 Promissory estoppel: If a P/ee has relied on donative promise, P/or is prevented from pleading lack of consideration.
Feinberg v. Pfeiffer (Mo. 1959): Relying on ER’s promise to pay $200/mo for life upon retirement, elderly EE retired (and abandoned opp to continue in gainful employment). Π prevails b/c § 90.
Hayes v. Plantations Steel Co. (RI 1982): ER’s donative promise not enforceable b/c EE already gave notice.
R2 § 90: Promise Reasonably Inducing Action or Forbearance:
A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires…
Main Remedy for Donative Promises: Reliance interest: When a donative promise is enforceable only b/c of reliance by promisee, who is worse off than he would have been if the promise had not been made. (Awarded for promissory estoppel cases; large % of cases)
Reliance damages: Cost-based; restoring victim who relied on a donative promise back to the position she would have been in if the promise had not been made.
Out of pocket costs & Opportunity costs: Victim of breach is equally well off whether there is no promise, or promise + breach + payment of damages.
D&G Stout, Inc. v. Bacardi Imports, Inc. (1991)
Bacardi’s breaks promise and ruins D&G’s negotiations; B liable thru promissory estoppel (no exchange occurred where a bargain would apply); b/c employment was terminable at will, and is difficult to sue under expectation damages b/c don’t know what to expect, B is liable for D&G’s reliance damages (opportunity foregone in reliance of the promise – through its repudiation B destroyed Π’s negotiating leverage).
Grouse v. Group Health Plan: One resigning employment in reliance on a job offer may recover damages if the offer is withdrawn. Doctrine of promissory estoppel entitles EE to recover against D (implies a K in law): Due to the bilateral power of termination, no K actually exists; but D made an implied promise to give him a chance in good faith to show his stuff, and he relies on that promise. Relief may be limited to damages measured by the promisee’s reliance: not what he would have earned from D but what he lost in quitting the job he held and declining the other offer of employment. The promise was that he would have a fair chance.
Walters v. Marathon Oil(1981) Using expectation damages as surrogate for reliance damages (expected profits as opp. costs)
Πs rely on D oil distributor’s promises and purchase and make improvements on service station lot. Sue D under promissory estoppel theory, under which damages should be based on cost of Π’s reliance, measured by the difference between their expenditures on the site and its present value. But under this calculation Πs would receive no recovery b/c present value of site was slightly more than amount Πs had expended (thus a gain). B/c promissory estoppel is an equitable matter, the trial court has a broad power in its choice of remedy, and allowed loss of profits (expectation damages) as measure of damages (b/c in reliance on D’s promise, Πs had foregone the opp. to make the investment elsewhere). Had D performed according to its promise, Πs would have received anticipated net profit of $22K.
The Bargain Principle and Its Limits: Treats consideration as equivalent to bargain.
R2 § 71: Requirement of Exchange; Types of Exchange: (Supp. p. 254)
· (1) To constitute consideration, a promise 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
o an act other than a promise, or
o a forbearance, or
o the creation, modification, or destruction of a legal relation.
· (4) The performance or return promise may be given to the promisor/by the promisee or to/by some other person.
Hammer v. Sidway (NY 1891) Uncle promises to pay $; forbearance of drinking & smoking is valuable consideration.
Batsakis v. Demotsis (TX 1949)Mere inadequacy of consideration will not void a contract.
Loan of $25 (Greek) with express promise to pay back $2000 is valid consideration (loan obviously worth $2000 to her).
Unconscionability
Unconscionability is determined based on when the K is made.
· Substantive: Overtly harsh terms; unjust or 1-sided K; sometimes sufficient in itself to avoid a term in the K; sometimes helps confirm or provide evidence of procedural unconscionability.
o Maxwell.(AZ 1995) Unconscionable disproportion between price and benefit of water heater.
· Procedural: Bargaining ‘naughtiness’; fine-print clauses; bears strong resemblance to fraud and duress.
UCC § 2-302: Unconscionable Contract or Clause (Supp. p. 46)
· If court finds that the K or any clause was unconscionable, may refuse to enforce the whole K or just part of it…
Federal Trade Commission Regulations: Door-to-Door Sales Regulations: (Supp. p. 547)
· Buyer may cancel the transaction at any time prior to midnight of the 3rd business day after the date of the transaction.
· (Must clearly indicate this to seller) . . .
Story re Kirby Vacuum and Door-to-Door Sales:
· No opportunity for consumer to shop around
· High-pressure sales-man; procedural unconscionability (improper manipulation)
· Sales-man is shopping around for ignorant buyers who won’t realize that the actual price in stores is much lower.
Ks for Goods & Services
Hybrid transactions involving both goods and services raise difficult Qs about the applicability of the UCC.
· Predominant factor test (majority): Applies the UCC to the entire K or not at all.
· Second approach: Allows UCC to be applied to goods involved in the K, but not to services.
Novation:
· Substitution by mutual agreement of new debt/obligation for existing one which is thereby extinguished.
· A valid novation requires a previously enforceable debt, the agreement of all parties to the new K, extinguish the old debt, and the validity of the new one.
Mutuality:
If a promise is illusory (statement in form but not substance of a promise), neither party will be bound.
Both parties must be bound or neither is bound (only applies to bilateral Ks).
· Moragues Lumber (AL 1918) The conditional promise to charter vessel to Π if he buys the vessel is a real commitment (even if condition is within promisor’s control) b/c if condition occurs, promisor must perform (has limited his options).
Doctrine of Mutuality is Eroding:
· Laclede v. Amoco (1975) A bilateral K is not rendered invalid and unenforceable merely because one party has the right to cancellation while the other does not (unless said right is unrestricted).
· Plate glass to be shipped w/in 3 months; buyer has option to cancel the order before shipment; constitutes consideration b/c seller had one clear opp to enforce K by shipping as soon as he received the order.
· For those Ks involving fancy, taste, or judgment… promisor’s duty to exercise judgment in good faith is an adequate consideration to support the K. Court said this is an obligation, b/c if satisfied he will be bound.
· Envelope from Time promises free calculator watch just for opening the envelope. Once open, must fill out certificate or purchase magazines. B/c getting a customer to open junk-mail is valuable to Time, the opening of the envelope was valuable consideration and Π can enforce promise.
· Lady Duff-Gordon (NY 1917): Common promise implies party will use reasonable or best efforts to perform.
UCC § 2-306: Output, Requirements and Exclusive Designs (Supp. p. 49)
o …Obligation by seller to use best efforts to supply goods and by buyer to use best efforts to promote their sale…
Requirements/Output Contracts: Valid b/c both parties have made real promises & shrunk their realms of choice
In a requirements K:
· 1) Seller promises to supply all of the buyer’s requirements of a defined commodity at a stated price over a designated period of time, and
· 2) Buyer promises to purchase all of her requirements of the commodity during that time from the seller at the stated price.
In an output K: Vice-versa re seller’s output
Legal Duty Rule:
· A promise to perform an act that the promisor has a preexisting legal duty to perform does not c
nvolved the payment of money.
R2 § 89: Modification of Executory Contract (Supp. p. 262):
· A promise modifying a duty under a K not fully performed on either side is binding
o (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the K was made; or
o (b) to the extent provided by statute; or
o (c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.
Defense of Change in Circumstances:
· Someone otherwise bound by a K is excused. Thus if they agrees to perform their duty for an extra fee, there is no legal duty rule problem b/c they no longer have a duty to perform under old K.
· Angel v. Murray: Fair and equitable modification in light of unanticipated circumstances:Refuse-collection case; legal duty rule does not apply when a party to a K encounters unanticipated difficulties and the other party, not influenced by coercion or duress, voluntarily agrees to a new promise to pay/perform.
Waiver: A waiver occurs when a party to an existing K promises to perform even though some contractual condition to his obligation to perform has not occurred.
· Enforceable if given for separate consideration or if (i) waived condition was not a material part of the agreed upon exchange & (ii) the uncertainty of occurrence of condition was not a risk assumed by the party who gave the waiver.
· An otherwise enforceable waiver can be retracted if (i) the waiver was not given for separate consideration, (ii) no reliance, (iii) dn relate to 3P, and (iv) retraction occurs before waived condition was supposed to occur and reasonable notice was given re retraction.
· R2 § 84: Promise to Perform a Duty in Spite of Non-Occurrence of a Condition (Supp p. 260)
Clark v. West (NY 1908)
A condition in a K may be waived, but no waiver is implied by mere acceptance of the proffered performance.
· Ds position is that the stipulation as to Π’s total abstinence is the consideration for payment of $2 v. $6/page, and could only be waived by new agreement. Π argues that the stipulation for his total abstinence was merely a condition precedent, intended to work a forfeiture of the additional compensation in case of a breach, and that it could be waived w/out any formal agreement to that effect based upon a new consideration. Court decided it was a condition precedent, and since the Ds knew and waived it verbally the condition is no longer part of the K.
Note on Waivers and UCC § 2-209:
· Under UCC § 2-209(5) certain circumstances an otherwise-effective waiver can be retracted, as long as reasonable notification is received by other party and unless retraction would be unjust.
· But under UCC § 2-209(1) an agreement modifying a K needs no consideration to be binding. Since a modification needs no consideration, presumably it is enforceable when made and cannot be retracted.
· So if a modification cannot be retracted, while a waiver can be retracted, it is important to be able to distinguish them.
Cassidy: S claims C was in breach of K by failing to pay for delivered goods w/in 30 days; but course of perf was to pay approx 90 days after shipment; acquiescence to late payment amounted to a waiver of 30-day payment term (but can retract the waiver w/ respect to future shipments).
Moral or Past Consideration: Promisor seeks to discharge a moral obligation owed to the promisee b/c of a past event.
· Traditional rule is that a promise based on moral/past consideration is unenforceable
o Mills v. Wyman (1825) A moral obligation is insufficient as consideration for a promise: D wrote letter to Π promising to pay for expenses after Π cared for sick boy. Promise not enforceable (b/c donative and no bargain).
· Modern rule is that a past/moral promise is enforceable, at least up to value of benefit conferred, if promise is based on material benefit (economic) previously conferred on promisor that gave rise to an obligation (even if only moral) to make compensation. (But not for gifts)
o Webb v. McGowin (AL 1935) Π was badly crippled for life in saving McGowin; in consideration of protecting him McGowin agreed to care for Π w/ $15 every two weeks from the time of the accident to the remainder of Π’s life. K is valid and enforceable b/c the benefit to the promisor (was saved) or injury to the promisee (was badly injured) is sufficient legal consideration for the promisor’s agreement to pay. Is a material benefit.
