Contracts
Professor COGAN
Spring 2009
I OBJECTIVE THEORY OF CONTRACTS
Contract law deals with breaches of private agreements between parties.
Why should the law go to the trouble of enforcing contractual relations?
Most contracts are future oriented, a lapse of time between the agreement and the
performance of the contract.
Unless there is an understanding that promises will be enforced (there must be a
solid mechanism for enforcement) there will be a general reluctance to enter into
a contract.
What are the sources of contract law and when does contract law (as a formal law) matter?
Three main sources: (what type applies to this dispute?)
1.) common law (judge-made law) – by state; R2d restatement of common law
2.) statutory law – UCC (passed by Ohio and all other states)
3.) convention on the international sale of goods (CISG) – treaty entered into by the USA (parties whose places of business are in different states)
R2d 1: contract defined
R2d 2: promise; promisor; promisee; beneficiary defined
R2d 4: how a promise may be made
R2d 201: whose meaning prevails
CISG 1: the application of the CISG
CISG 8: determining and applying the intent of the parties
1. Lucy v. Zehmer (1954) (handout) – Facts: Lucy had made repeated offers to Zehmer to purchase the Ferguson Farm. On 20-Dec-1952 Lucy entered a bar owned by Zehmer and offered him $50K for the purchase of farm. There was a lengthy discussion (approx. 30-40 minutes) on the matter at the end of which Zehmer (at Lucy’s behest) wrote on a paper: “We hereby agree to sell W.O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer.” Both Zehmer and his wife signed this statement. Lucy gave Zehmer $5.00 as a good faith deposit. W.O. Lucy contacted his brother J.C. Lucy and the two agreed to pay half the price for half of the interest. Lucy wrote to Zehmer stating that he was ready to proceed. Zehmer replied that the contract and deal had been made in jest and that he had no intention of selling.
Issue: The defendant (Zehmer) asserts that both he and Lucy were drunk when the deal was made and the contract written and signed. In addition, he states that the deal was made in jest. Lucy (the Plaintiff) states that the contract was not made in jest and that the written, signed statement to sell is binding and requires the sale of the farm at the price of $50K. Is the contract binding?
Conclusion: Find for the plaintiff; the contract stands.
Reason: In contracts the court looks to the “outward expression of a person manifesting his intention rather than his secret and unexpressed intention.” This corresponds to the “reasonable meaning of his words and actions.” The record is convincing that Zehmer was not intoxicated enough to not be able to understand the consequences of his actions. The contract, the discussion of the contract and Zehmer’s inaction and lack of communication subsequent to the signing suggest it was not a jest. Mental assent of the parties is not a requisite for the formation of a contract, provided the actions and basic intent is understood.
II CONTRACT FORMATION
A. CONSIDERATION (OR SUBSTITUTE)
1. CONSIDERATION
R2d 71: requirement of exchange; type of exchange
R2d 73: performance of legal duty
R2d 74: settlement of claims
R2d 77: illusory and alternative promises
R2d 79 (b): adequacy of consideration; mutuality of obligation – if met there is no requirement of
equivalence in the values exchanged
R2d 81: consideration as motive or inducing cause
1.Hamer v. Sidway (1891) pg 25 – Facts: Uncle promises nephew $5000 if he refrains from certain vile behaviors (i.e. drinking, smoking etc) until his 21st birthday. Nephew complies and writes uncle stating that he has done what was asked. Uncle states he will wait until nephew is older to pay but then dies before paying debt.
Issue: Estate will not pay nephew, states that he contract was without consideration.
Conclusion: Costs should be payable by the estate.
Reason: Consideration means that one party is profiting as that he either abandons some legal right in the present or limits his legal freedom of action in the future as an inducement for the promise of the first. It is enough that something is promised, done, forborne or suffered by the party whom the promise is made as consideration for the promise made to him. It is sufficient that the nephew restricted his lawful freedom of action within certain prescribed limits upon the faith of his uncle’s agreement…
2. Baehr v. Penn-O-Tex Oil, Corp. (1960) pg 40 – Facts: Plaintiff leased a gas station to Kemp (dba Webb Oil Comp.); Kemp was purchasing Webb Oil and certain related property from D. Kemp defaulted on the rental payments due to D and assigned rights to D (including accounts due to P). P never received payment for the lease contracts due to him; P was told that the leases had been assigned to D. D denies knowledge or responsibility for payments due to P. P returned to jurisdiction in Feb. but did not file suit until May.
Issue:Plaintiff asserts that the defendant’s agent gave unequivocal assurance that rents would be paid; this is a promise. However, a promise must be coupled with consideration to validate a contract. Plaintiff says that his delay in filing the case was consideration.
Conclusion: Applying these principles to the present case, it appears that although defendant’s agent made a promise to the plaintiff it was not in such circumstances that a contract was created. Nor is there any evidence that the plaintiff’s delay from the middle of February until May in undertaking legal action was related to the defendant’s promise. They believe that in this particular case it was simply inconvenient to the plaintiff. This could be (theoretically) considered consideration, but not in this case.
Reason: Consideration requires that a contractual promise be the product of a bargain. “Bargain” here means a negotiation resulting in the voluntary assumption of an obligation by one party upon condition of an act or forbearance by the other – i.e. if…(consideration is given)… then I promise that…
3. Dougherty v. Salt (1919) pg 54 – Facts: P, Charley (an 8 year old boy) received a promissory note from his aunt, for $3000.00 to be provided for from her will. When handing over the note the aunt said to her nephew: “You have always done for me, and I have signed this note for you…” The jury ruled in favor of the P but the trial judge questioned consideration made for the payment and dismissed the case. The appellate court reversed the ruling and said that the note was evidence enough of consideration.
Issue: P asks for payment of note based on aunt’s intention. D holds that note is not valid because there was no consideration, the aunt simply gave the note to the nephew.
Conclusion: Find for D, no consideration made and so promise made is invalid. The note was not payment for a debt but the conference of a bounty. It was given in kindness; Charley did not perform or promise anything in return to receive the payment.
Reason: The court interprets the note as the “voluntary and unenforceable promise of an executor gift.” (Past consideration you cannot bargain for something that is already completed.)
4. Batasakis v. Demotsis (1949) pg 59 – Facts: P and D were caught in the circumstances of WWII. P loaned D 500,000 drachmas (Greek currency) that was supposedly equal to $2000.00 (USD). At the time the P knew the true value of the drachmas to be $25.00. D was to repay P upon return to the States the sum of $2000.00 (plus interest). Trial court rules in favor P, concluding that there was an enforceable agreement between P and D and was breached by D’s failure to pay.
Issue: The D refuses to pay due to the unfair exchange rate exacted by the P. The P maintains that the D signed an agreement and owes the money regardless of the rate of exchange. Does a contract exist even though there is so much disparity in the values exchanged? Can consideration be inadequate?
Conclusion: Reformed and affirmed – find for the P in the amount of $2000.00.
Reason: The inadequacy of the consideration does not void the contract, as long as the consideration had some value. The D received exactly what she bargained for by her own testimony. Accuracy of consideration is not the area of the court to look into; they will only look for a bargaining act.
5. Plowman v. Indian Refining Co. (1937) pg 64 – Facts: P allege that in D (in the person of a vice-president of the company) asked that they, as elderly employees, stop working and that in return the company would pay them ½ the usual wage and allow for continued coverage of insurance. Most of Ps testified that these payments were to continue for the rest of their lives. The payments stopped and the employees were simply informed that the arrangement was terminated. P claims that past work (done over many years) is consideration. D argues that nothing was said about these payments continuing throughout their lives and that the payments were gratuitous, continuing at the will of the D. D claims that the officer who allegedly made the bargain was not endowed with the corporate authority to do so and there was no consideration given for the promise of the payments.
Issue: The payments have now suddenly stopped and the plaintiffs believed that they would continue throughout their lives. The court must determine if there is sufficient information to constitute a contract for life-long payments between the company and the plaintiffs.
Conclusion: The court sees them coming to get the check as a condition and not as a consideration. If it is a consideration there would be some benefit to one of the parties and a condition is simply a mechanism that facilitates the contract. In the absence of valid agreeme
alior-bailee relationship between Dr. King and BU. A bailment is when you give someone something, asking them to take reasonable care of it and you will return to pick it up at a later date. P argued that the statement that begins “In the event of my death…” could not be viewed as a will because it did not conform general will form and lacked to witnesses signatures. The court rejects this saying that the form of a will does not negate a promise made to be fulfilled after one’s death. Element of PS are fulfilled:
1. Action or forbearance on the part of the promisee (BU) – to take care of the papers (they indexed the papers, made papers available to researchers, provide assistance etc)
2. Clearly induced by the promise
3. Reasonable that this would be the result of the promise
4.Injustice – its up the jury to decide based upon the facts
4. Katz v. Danny Dare, Inc. (1980) pg 101 – Facts: P worked for D for twenty-five years. P was injured on the job, hospitalized briefly and later returned to work. Due to his injuries P’s his work product was lower. P negotiated (for 13 months) with D to secure an acceptable pension plan and was offered two alternatives: accept the pension plan or be fired. P decided to accept the pension plan and later found part-time employment with another employer. (This was not prohibited in the pension). Later D asked if P would work one half day per week; P consented. The next pension check that P received was for half the amount previously agreed upon. D stated that due to P’s half-day of work D had determined that he was able to return to work and was no longer entitled to a pension.
Issue: Is P entitled to the pension payments under the doctrine of promissory estoppel?
Conclusion: The judgment is reversed and the case is remanded with direction to enter judgment in all suits in favor of P for the amount of unpaid pension.
Reason: The court found the pension from D did not require P to do anything and he was in fact free to work for another company. The test to be applied in this case is not whether P gave up something to which he was legally entitled, but rather whether D made a promise to him on which he acted to his detriment. D made a promise to P; P relied upon this money for living expenses etc.; injustice can only be avoided by forcing D to pay P.
Notes: P had filed three cases concerning this matter but they were consolidated into one; this is called “trial de novo” – a form of appeal in which the appeals court holds a trial as if no prior trial had been held. A trial de novo is common on appeals from small claims court judgments.
3. RESTITUTION
(a) The Principle of Restitution
(1) When the American Law Institute reporters wrote the Restatement of Restitution in 1937, they consciously rejected the term “quasi contract” and replaced it with “restitution.”
a. The principle of restitution is based on the idea of unjust enrichment and has no relationship to contracts except that its various forms of development originated from an action for assumpsit, which allowed for the collection of a debt.
b. Restatement of Restitution §1 identifies two elements that are central to restitutionary recovery, but one must look to case law to determine what is “unjust” and what is “enrichment.”
(b) Restitution in the Absence of a Promise
(1) Classical contract law might find no basis for imposing a promissory obligation in the circumstance of one party
a. having received a benefit from another, but
b. NOT having promised to pay for the benefit.
(2) Restitution principles seek to offer a remedy and create a legal obligation.
R2d 82: Promise to Pay Indebtedness; Effect on the Statute of Limitations
R2d 83: Promise to Pay Indebtedness Discharged in Bankruptcy
R2d 86: Promise for Benefit Received (Material Benefit Rule)
1. Credit Bureau Enterprises, Inc. v. Pelo Facts: D had an argument (2000) pg 118 –
