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Contracts
University of Illinois School of Law
Kar, Robin B.

KAR_CONTRACTS_FALL_2011
 
I)             THE ‘FIRST BEAST’: BREACH OF K/FORMATION
 
-breach of K has “expectation damages” (the monetary value if both parties fully performed); in some very rare cases, damages can be in the form of specific performance
 
1)    MANIFESTATION OF MUTUAL ASSENT/CREATION OF PROMISE
 
i)             Subjective v. Objective Theories
 
-for a contract to be valid, the parties to the contract must agree to what it is they are contracting to. To see if this has happened, we use an objective test, and there are generally three ways in which parties can show mutual assent: 1) signing a final written contract, 2) engaging in conduct sufficient to establish the existence of an agreement (think Princess Cruise,) or 3) engaging in an effective offer and acceptance
 
-formation: 1) mutual assent + 2) consideration (you can have mutual assent w/o consideration -> resort to promissory estoppel; you can also have formation even w/o both mutual assent and consideration -> restitution
 
-Reasons for Objective Test (for mutual assent, O/A):
·         Promises as tools (promissory-oriented): promissor wants to be empowered
·         Reliance interest (promisee-oriented): promisee can rely to their detriment
·         Evidentiary reason (hard to prove subjective intent)
 
ii)            Basic Approach to Offer and Acceptance (objective test)
 
-in Ray v. Williams, mutual assent was executed by a signature, in other cases it is executed through offer and acceptance
 
1)    Identify offer
-an offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it (Restatement, Section 24, p. 181)
-to evaluate an offer, courts look at a) language, b) directedness, c) definiteness, d) history of communication, e) type of K
2)    Check for Acceptance
-acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer (Restatement, Section 50, p. 183)
3)    Check A prior to termination of power to accept:
·         Rejection (by offeree)
·         Revocation (by offeror)
·         Lapse of time
·         Death of offer (by either offeror or offeree)
 
-default ad rule: advertisements in newspapers, magazines, etc. are not offers but merely invitations for offers; because sellers can be bound by over-liability, this rule protects them; the problem with ads as offers -> problem w/ directedness (they’re directed at nobody specifically)
 
-bait and switch (from Izadi v. Machado): an exception to the default ad rule; because the seller isn’t making a good faith effort, his ad is an offer, not a solicitation for an offer; seller is bound because we have a reliance problem with promisee (one of the reasons for the objective test)
 
 
2)    CONSIDERATION: WHEN PROMISES ARE BINDING
 
i)             Definition
-a promise is supported by consideration if and only if there is:
(1)   A performance or return promise that is (2) “bargained for” when : A. it is sought by promisor in exchange for his promise and B. given by the promisee in exchange for that promise
 
-benefit-detriment test (typical test for consideration): there will be a benefit to the promisor and a detriment to the promisee but on the overall, there’s benefit to both parties; benefit/detriment works only in one direction
 
-if we have consideration, we have promises supported by consideration (other types of promises can exist)
 
ii)            Theories for Consideration
 
1)    Formality Rationale: consideration serves a formality function
a.    Evidentiary function (consideration as evidence of K)
b.    Cautionary function (solemnity of K)
c.     Channeling function (bright line rule directing parties and courts that there’s an enforceable document)
2)    Historical contingency: consideration has become central from a historical perspective (historical accident, not a special reason for consideration)
3)    Empowerment theory: promises as tools, moves policy grounds
 
iii)           Hamir v. Sidway: legal obligation as consideration
Pennsy Supply v. American Ash: reciprocal induction/inducement as consideration; perfectly fits the empowerment theory
Dougherty v. Salt: aunt doesn’t seek inducement -> no consideration, just a gift
Batsakis v. Demotsis: false recital of consideration; the fairness argument doesn’t work
Plowman v. Indian Refining: moral consideration doesn’t matter
 
II)            THE ‘SECOND BEAST’: PROMISSORY ESTOPPEL (MORE BENEFIT/DETRIMENT THAN IN ‘FIRST BEAST’)
 
-promissory estoppel starts developing around 1820
 
-when we do cases on promissory estoppel, first look to see if there’s consideration, if there’s not, show that the promise is not supported by consideration but by reliance
 
-distinctive reason why we want to enforce a promise (by consideration): we don’t want damage to ensue from a promise (reliance can be detrimental)
 
-there can be promises w/o consideration but promises ‘supported’ by reliance:
·         Promises to families
·         Promises to charities
·         Employment pensions
 
-all these lead to First Restatement, Section 90 -> commercial cases -> Second Restatement
 
i)              Definition (Section 90, p. 187):
1.    A promise that
2.    Induces an act or forbearance (definite substantial character; not something you’re seeking but what you expect after the promise) that
3.    The promisor should have rea

’s no promise that is relied on, then no reliance damages are possible either
 
-instead we look for the benefit back or the fair market value of the benefit
 
iii)          Policy (gift exchange v. contractual exchange)
 
-gift exchange: 1) confers a material benefit, 2) creates a shared duty to reciprocate, 3) works in small, pre-legal communities (informal sanctions are ok, policed in their own way)
-contractual exchange: 1) promises induce each other, 2) works in large populations (there is bargaining because most people don’t know each other but are strangers and this is the way to mutual welfare, large populations need the legal system)
-gift exchange is not legally enforced but restitution sometimes enforces gift exchange, while contractual exchange is always legally enforced
 
iv)           The Pelo Factors (“against will”)
 
1) attempt to charge
2) service necessary to prevent serious bodily harm
3) no reason to think no consent
4) consent = impossible because there was mental illness
 
-if these 4 are met and there’s conferral of material benefit -> unofficious intermeddling and there’ll be restitution/fair market value of benefit
 
v)            Knowledge + Consent
-Commerce v. Equity
1) conferral of material benefit, 2) circumstances in which retention would be unjust: a. exhaustion of remedies, b. owner doesn’t give consideration for work to anyone but gen. contractor, c) contract context: complicated context of bidding but mutual welfare
 
-Mills v. Wyman
Past consideration is no consideration; moral obligation can be enforceable only when there’s a pre-existing legal obligation, which has become inoperative by positive law to form basis for effective promise, not really a restitution case
 
-distinction b/w knowledge + consent and implied in fact K: request before and after promise
 
vi)           Material Benefit Rule
 
-it has the same elements and remedies of restitution; same standing as knowledge + consent; although there’s a promise here, it is still restitution because the promise isn’t supported by consideration
-the subsequent promise to repay acts like knowledge + consent and obviates the problem of gift exchange and unofficious intermeddling