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Contracts
University of Florida School of Law
Dawson, George L.

Contracts Outline – Dawson Fall 2012

WHICH PROMISES DO WE ENFORCE

Donative Promises – promises made for AFFECTIVE reasons (love/friendship)

· Promises to make gifts are NOT enforceable bc there is NO consideration

o Both parties must be seeking something

o Contract law intended to protect flow of business, gifts not a part of commercial aspect of business

§ 17 – Formation of contracts – (two tracts)

· Require bargain in which there is a manifestation of mutual assent to the exchange and a consideration,

· or if no bargain à contract can be formed under special rules §§ 82-94

· Dougherty v. Salt – Aunt gives boy note “you have always done for me and I sign this note for you for $2,000” She dies. Executor refuses to provide the money.

o Rule: A promise with no consideration is an executory promise and is unenforceable

o important to have bargain so people cannot simply allege a promise has been made

· Schnell v. NelI – Wife made inoperative will giving 200 to each of 3 people, Schnell promised to pay in exchange for a penny, then refused to pay; held one cent not supportive of consideration, only morally needed to fulfill wife’s wishes.

o Rule: Nominal Consideration is consideration in form rather than substance à will not create an enforceable K.

BARGAIN PRINCIPLE

· Bargain theory – Donative promises, conditional donative promises, and nominal considerations à NOT enforceable

· Consideration is not a thing – it is something of value or a promise to provide something of value

o a promise without getting something in return is NOT consideration

o Both parties must be seeking something

· Bargain – substantive transaction, consisting of exchange in which each party views what he gives up as the price of what he gets

o Nominal consideration – has the form of a bargain, but not the substance

§ Promisor did not view what she got as the price of her promise

§ consideration that does not bear any real relationship to the value of the thing contracted for

§ NOT actually a bargain à Insufficient to make a contract enforceable

§ Schnell v. Nell: Husband didn’t really SEEK anything – They do not believe he sought 1 penny for 600$

· Conditional donative promise – Parties view performance as the necessary means to make the gift, NOT as the price of the gift

o LOOKS like a bargain – condition makes it look like a bargain but I am not SEEKING what is embodied in that condition

§ Ex: if you go around the corner to the clothing shop there, you may purchase an overcoat on my credit

· No reasonable person would think the walk is in exchange for the coat (it is not the price for it), it was just a condition of a gratuitous promise

§ 1 – Contract is a promise or set of promises the law will enforce

§ 17 Requirement of a Bargain

v To be a contract à must have a bargain in which there is a manifestation of mutual assent and a consideration

v If no bargain – can only be formed under special circumstances §§ 82-94

v Moral obligation alone does not mean there was a bargain

§ 71 Requirement of Exchange; Types of Exchange

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) 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 be:

· an act other than a promise, or

· a forbearance, or

· the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the

promisee or by some other person.

§ 72 Exchange of Promise for Performance

Except as stated in §§ 73 and 74, any performance which is bargained for is consideration.

§ 79 Adequacy of Consideration; Mutuality of Obligation

If requirement of consideration is met, no additional requirement.

(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or

(b) equivalence in the values exchanged; or

(c) “mutuality of obligation”

§ 175 When Duress by Threat Makes a Contract Voidable

(1) If party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.

(2) If party’s manifestation of assent is induced by one who is not a party to the transaction, K voidable by victim. Unless the other party in good faith & w/o reason to know of the duress either gives value or relies materially on the transaction.

§ 176 – defines improper threat

· Hamer v. Sidway – Uncle promises nephew that if he is a dull boy, Uncle will pay him $5,000 on his 21st birthday

o Rule: A waiver of any legal right at the request of another party is a sufficient consideration for a promise

o consideration b/c regardless of health/personal benefit the nephew suffered a legal detriment through his forbearance.

§ §79(a) does not require benefit to promisor or detriment to promisee to make a bargain.

· Batsakis v. Demotsis: Man loaned 25 to a woman having financial difficulties and made her sign a promissory note to repay him 2,000 plus interest, Plaintiff agreed to pay the equivalent of what she received but did not want to pay what she agreed to pay; Held: Contract was enforceable and Demotsis is responsible to pay full amount

o Rule: Mere inadequacy of consideration will not void a contract

Important Takeaways

1. Promise for Promise (bilateral contract)- once both promise, there is a bargain.

2. Promise for Performance (unilateral contract)- once performance commences, it is a bargain.

3. gray area when using the bargain analysis tool to determine if there is in fact a contract due to issues of form & substance. Restatement requires a bargain in fact rather than form.

RELIANCE

Reliance – reason for enforcing a promise based on fault (secondary to bargain principle)

· Promise does not have to be legally enforceable to be relied upon

· Relied upon donative promise is enforced only b/c it has been relied upon, thus it should be enforced to the extent of the reliance (rather than expectation) measure of damages

Equitable estoppel (estoppel in pais) – relates to facts; If other party relies on the statement then the party is therefore estopped from making another statement.

Promissory estoppel – Common name for §90. alternative means for remedy for a normally unenforceable contract.

· A promisor is estopped from pleading lack of consideration once there is reliance on their promise in the form of action or forbearance

o Promise does not have to be legally enforceable. It just has to reasonably induce action or forbearance.

§ 90. Promise Reasonably Inducing Action or Forbearance

1) A promise

2) which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person

3) and which does induce such action or forbearance

4) is binding if injustice can be avoided only by enforcement of the promise.

· The remedy granted for breach may be limited as justice requires.

· If injustice can be avoided through other means = not sufficient to satisfy requirement

Reliance Interest/Damages:

promisee is worse off than he would have been if promise had NOT been made

restoring the promisee BACK to the position she would have been in had the promise not been made

usually used when the contract was based on RELIANCE

Out of Pocket Costs: Net costs incurred by a promise in reliance on the promise prior to breach (less value produced)

Measured by loss suffered

Opportunity Costs: surplus that the promisee would have enjoyed if he had taken the opportunity that the promise led him to forgo

Difficult if not impossible to calculate

Expectation Interest/Damages:

Promisee is worse off than he would had been if the promise had been performed

Placing a promisee FORWARD to where they would be had the promise been performed (Feinberg)

Amount required to make promisee indifferent between performance and damages

Usually used when the contract is based on CONSIDERATION

Compensatory Damages: money equivalent to the injury

· Kirksey v. Kirksey: Brother In-Law offers Widow a place to live if she’ll move 60 miles to his farm. She does. After a few years, he kicks her out. Court calls this a “gratuity” and doesn’t find a contract (100 years later overruled by §90)

o Rule: Reliance does not impose contractual obligation in the absence of a bargained-for exchange

o Would be Promissory estoppel today – but didn’t exist back then

· Fienberg v. Pfeiffer Co. – Company decides to offer 50% pay for life upon retirement to current employee with no strings attached (i.e. no consideration). They paid for 7 years then discontinue. The court finds that she retired when she did in reliance on that pay and therefore the company is obligated to continue to fulfill its promise.

o Rule: A promise that the maker knows is likely to be relied upon by the promise and is so relied upon is enforceable under a theory of promissory estoppel

o Employment at will doctrine – if you do not have a contract to work for a fixed period of time – employer can fire you or you may quit at any time without cause

Takeaway à Always go through bargain analysis first before determining if the contract is enforceable on other theories such as reliance.

· §90 has two limitations on recovery:

1. Court has freedom to limit remedy

2. Court enforces promise if injustice can be avoided only by enforcement of the promise

UNCONSCIONABILITY (issues with the bargain principle)

· Mostly used in consumer cases b/c consumer-business relationships more unequal than business-business

Unconscionability– (1) an absence of meaningful choice on the part of one party; AND

(2) terms unreasonably favorable to the other party

· Meaningfulness of choice – often negated by gross inequality of bargaining power

o Did each party to the K, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the K?

· reasonableness or fairness à Primary concern must be w/ terms of the K considered in light of the circumstances at the time the contract was made

Procedural unconscionable: unfair surprise

· Focuses on “bargain” process – the mechanics, negotiations, statements

o Fine print clauses

o Age, education, intelligence, business experience, who drafted the K, terms explained to weaker party?, alternative sources of supply for goods

· Strong resemblanc

e is illusory in the context of consideration, it might be something that can be relied on.

o promissory estoppel can imply a contract in law where none exists à Grouse reasonably relied on job offer

§ no promise that obligates Group Health to give Grouse job b/c at-will employment, but illusory promise induced action and good faith opportunity to perform

o Damages limited to promisee’s reliance – what he lost in quitting his job and declining the other job offer

§ expectation damages (what he would have made w/ ∆) impossible to calculate because not guaranteed any duration of employment

LEGAL DUTY & MODIFICATION (issues with the bargain principle)

Example of where bargain exists but don’t enforce because something wrong with bargain

Legal Duty rule: performance of a preexisting legal duty is not consideration

o just means that promise cannot be ENFORCED; does NOT mean that it cant be carried out

§ it is a legal duty case when it is an executory promise (has not been carried out yet)

o Eroded under modern contract law

§73 Performance of a Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense bargain

Lingenfelder v. Wainwright Brewery Co. – P in contract to build building, threatens to stop work when additional contract awarded to third party, D needed job complete so agreed to pay more, court holds no consideration

· Rule: When a party merely does what he has obligated himself to do, he cannot demand an additional compensation after

· §73 through the eyes of Dawson & Lingenfelder- There is a bargain, but we don’t like the kind of bargain they struck (hold-up scenario) so we will make it disqualified as a consideration issue.

o “Consideration is a device you manipulate when you decide this is a contract you don’t want to enforce.”

o §73 exists because we are suspicious of the circumstances.

Foakes v. Beer – Parties entered into an agreement where Foakes would pay Beer all the money owed at once & Beer would forgive interest, Beer decided she wanted interest; Held: Foakes must pay interest

· Rule: Payment of a lesser sum, cannot be considered satisfaction of a greater sum; Under the legal Duty Rule. Performance of a preexisting duty is not consideration.

· Court thinks legal duty rule is wrong but they follow it anyway bc it’s the rule.

Austin Instrument, Inc. v. Loral Corp. – Loral entered contract with Navy, subcontracted Austin to get parts (1st K); parts go up in price, Austin wants more money and withholds shipment; Austin will not produce unless they get 2nd contract; Loral had to agree bc they could not get parts elsewhere so they PAID Austin

· NOT Legal duty case b/c Contract was already carried out so they can no longer use legal duty rule

o If Loral had not paid the increased amt and Austin had sued à Dawson believes the court would say Austin already had a pre-existing duty and the fact that Loral promised to pay more couldn’t be enforced via pre-ex duty.

· Contract is VOIDABLE when it is established that the party making the claim was forced to agree to it by mans of an improper threat precluding the exercise of his free will.

§ 89 Modification of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding

(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made

(b) provided by statute; or

(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise

(promissory estoppel)

Comments: must be voluntary agreement to modification

· Deals with bargains that are without consideration only because of the legal duty rule

· Provides a remedy for the hold up game – if Court doesn’t believe modification is good then they can strike it down.

§ 175 When Duress by Threat Makes a Contract Voidable

(1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.