Contracts Outline

CONTRACTS OUTLINE
Prof. Farrell
Fall and Spring of 2012
 
 
 
 
PROMISES
Performance in exchange for a promise is a unilateral contracts. Promise in exchange for promise is a bilateral contracts.
 
ILLUSORY PROMISE
Illusory promise is a promise where one party is free to perform or to withdraw from the agreement at their own pleasure.
·         Under the bargain theory, there can be no consideration based on illusory promises because illusory promises do not have the necessary commitment to do something. With illusory promise, one is free from acting or not acting on the promise.
·         An illusory promise might be: “I’ll sell you my car next if I feel like it.”
 
 
CONSIDERATION / RELIANCE / PAST BENEFIT CONFERRED
RULE: A promise is enforceable if it is supported by consideration, if it is relied upon or if a past benefit has been conferred.
 
CONSIDERATION
Consideration can be in the form of a bargain, or benefit or detriment.
 
BARGAIN THEORY OF CONSIDERATION:
According to Restatement 2nd, consideration must be bargained for. That is, a promise or performance must be sought by the promisor and in exchange, be given by the promisee. 
·         RULE-Promises to make gifts are typically not enforceable under the bargain theory of consideration, because they are not bargained for.
 
IMPLIED PROMISES
A contract may be enforceable if there is an exchange of promises creating mutual duties between the parties. In such a case, each promise is consideration for the other, having been sought after and given in exchange.
·         In Woods v. Lucy Lady Duff-Gordon, Woods was given the exclusive rights to market the products of Duff-Gordon for a one-year period. Duff-Gordon argued that the agreement lacked consideration because Woods had never made an explicit promise to market Duff-Gordon’s designs. Thus, according to Duff-Gordon, since Woods was not bound to do anything, there was no consideration for her promise to give Woods the exclusive rights. Was his promise illusory? On the one hand, he did promise to split profits, but didn’t promise that there would be profits.
Judge Cardozo, who could find consideration anywhere, held the contract was enforceable because there was an implied promise by Woods that he would make reasonable efforts to market and enforce Wood’s products. Without such an implied promise, the agreement would lack business efficacy and Duff-Gordon would be at his mercy. Therefore, the contract was supported by consideration and is enforceable.
·         Look to see if (1) the terms and the benefits were understood by both parties. Did the parties understand the risks involved in making the contract. Even though there was no specific promise by Duff to pay Wood any particular sum of money, it was implied that Duff was going to do his best to deliver on his end of the deal. In addition, (2) the deal had a very specific period attached to it of one year. Whether one is to use an objective “reasonable man” test or the subjective “good faith” test to determine whether Duff’s promise was illusory, it is clear that Duff was going to do his best to uphold his part of the deal and that the relationship was going to be beneficial
·         Article 2 of UCC also includes this provision of “good faith” dealing between the merchants. “I will deal with you in good faith seeking to bring about the commercial objective of our relationship.”
 
BENEFIT/DETRIMENT THOERY OF CONSIDERATION
RULE: For the promise to be enforceable under the benefit/detriment theory of consideration, there must be a benefit to the promisor or a detriment to the promisee.
·                     A forbearance of any legal right at the request of another party is a sufficient consideration for a promise, because there is detriment to the promise.
·         In order to serve as valid consideration, forbearance must be either absolute or for a definite time, or for a reasonable time.
·         In Hammer v. Sidway, the nephew had a legal right to use tobacco and drink alcohol. He gave up this right for a period of a few years to comply with the promise. Thus, the requirement of consideration was met. Therefore the contract was enforceable.
·         Good Faith claim – To be valid consideration, the claimant must subjectively believe in good faith that the claim is valid, and that belief must be reasonable from the standpoint of a reasonable person in the position of the claimant. Forbearance from asserting a legal claim known to be invalid is not valuable consideration. (Fiege v. Boehm).
PAST BENEFIT
RULE: Generally, past benefit received is not enforceable. That is because past performance is not bargained for under the bargain theory which dictates that the performance must be sought by the promisor and in exchange, be given by the promisee. Even if there performance was given by promisee, it could not have been sought for by the promisor. It makes no logical sense to bargain for something that had already happened.
·                     This was demonstrated in Mills v. Wyman, where a man who took it upon himself to care for sick sailor, was promised compensation for his services by the deceased sailor’s grateful father. The court there held that because the services were already given and that the father had not bargained for those particular services, the contract was not enforceable under moral obligation.
·                     RULE: On the other hand, there are circumstances, under Restatement 86, where a promise made in recognition of a past benefit received (such as saved life) is enforceable, to the extent to prevent an injustice.
·         In Webb v. McGowin, a man grateful for having his life saved by one of his employees, promised to compensate the injured employee, who was injured in the process of saving his employer’s life, compensation for the rest of the employee’s life. Here, because a material benefit was conferred, the contract was enforceable. Furthermore, the employer received a benefit in that he was not injured and the employee received a detriment in that he was injured in the process of saving his employer.
·         So, it could be argued that under Restatement 86 and Webb, Mike received a material benefit, for which he should be liable to Ann.
 
RELIANCE OR PROMISSORY ESTOPPEL (Section 90 of Restatement 2nd)
RULE: A promise which the promisor should reasonably expect to induce action or forbearance and which does induce such action or forbearance is enforceable to the extent necessary to prevent injustice. Recovery may be limited as Justice requires.
·         In the case of charitable donations, inducing action or forbearance is not required. For example, courts will typically enforce promises to make a charitable donation, if the charity relies on the promise. Courts have held that taking care of papers for Marin Luther King’s estate was consideration for the donation of the papers. In addition, when a donation was made to a school for setting up a scholarship, the act of setting up the scholarship was reliance. Depends on whether the school did anything already.
·         Reliance or promissory estoppel prevents a promisor from using lack of consideration as a defense to breach of contract. A promise can be enforced even though it was given without consideration if the promisee has reasonably relied on the promise to her detriment.
·         Look for consideration first. Reliance is a last resort argument. Concedes that there is something wrong with the contract.
·         Reliance is not a contract claim, but a claim of “breach of a promise”. The promisee alleges that the promise reasonably induced action or forbearance, which resulted in a detriment to the promisee (he/she is worse off that he/she was before the promise)
·         Elements:       
1.      Must have a promise with foreseeable consequence of inducing reliance
2.      Detrimental reliance by the promisee (actions taken or actions forborne).
3.      Breach of the promise.
4.      Promisee is worse off.
 
AT-WILL RELATIONSHIP
Rule: Under at-will relationship, each party can choose to stop working with the other at any time. To the extent the parties have exchanged promises about future performance, those promise are illusory. In essence, the parties promise to stay in the relationship as long as they feel like it.
·