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Contracts
University of Illinois School of Law
Brubaker, Ralph

Brubaker Contracts Spring 2013

I. ENFORCEMENT OF PROMISES

· Promise is enforceable only if there is consideration

· Over inclusive consideration à Contract defense to avoid the bargain

· Under inclusive consideration à Reliance is typical to look for consideration

A. CONSIDERATION

R§71 – (1) To constitute consideration, a performance 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

(a) an act other than a promise, or

(b) a forbearance, or

(c) 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 è can be given to/by 3rd party

R§79 – If the requirement of consideration is met, there is no additional requirement of (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”

R§81 – (1) The fact that what is bargained for does not of itself induce the making of a promise does not prevent it from being consideration for the promise è Just ONE of the reasons to make promise

§ Conditional promise (could have been an empty promise, but even so, prevention is one of the reasons)

· NOT sham, pre tense, nominal consideration

· NOT past consideration

· NOT conditional gift promise

(2) The fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise è ONE of the reasons to do it

i. Consideration

a. Fundamentals for consideration as a basis for Enforcement

1. Consideration is required for the enforcement of a promise (alternative theories may be used in the absence of consideration: Promissory Estoppel, Restitution, Moral Obligation)

b. R71(3)(a) defines what form of performance consideration may take (act, forbearance, modification of legal relationship)

c. R79 if consideration is met then there is no analysis of benefit/detriment to the promisor/promisee

ii. Consideration through the Bargained For Exchange (BFE)

a. R71(2) Bargained for Exchange – the promise is bargained for if:

1. Sought by the Promisor in exchange for the promise

i. Make a promise to get it (did Story Sr. make the promise to obtain to Story 2nd’s forbearance)

2. Give by the Promisee in exchange for the promise

i. Do it to get what’s promised

b. R81(1) states the reason sought by the promisor does not need to be a significant reason why the promise is made (other reasons why the promise was made may outweigh the promise). As long as the reason had some small part in the creation of the promise.

1. Hammer v. Sidway, Story Sr. created a conditional promise so the forbearance of the activities was evidenced to be part of what was sought.

c. R81(2) the promise does not need to be the primary reason why the act was performed. As long as the act is performed it can be consideration for the promise.

1. R81 further defines consideration in bargained for exchanges. R81 Only applies to BFE’s, does not apply to Promissory Estoppel

d. R79(b) holds that the equivalence of the values exchanged is not required if the requirement of consideration has been met. Essentially, if consideration has been met, the benefit/detriment to either party or values exchanged does not concern the court.

iii. Gratuitous Promises

a. Promise without consideration. This is an unenforceable promise as there is no consideration.

b. But if the good is actually exchanged (actually delivered) then it is a gift. The delivery action of the gift serves 2 functions 1. evidentiary and 2. cautionary.

c. There is no enforcement of Gratuitous promises because:

1. Evidentiary (lack of)

2. Cautionary (lack of)

3. Administrative Costs (incurred if enforced)

4. Non-market Transactions (usually occur outside the commercial realm)

5. Non-legal enforcement mechanisms exist; ex societal pressure etc. (therefore no need for legal enforcement)

6. Only disappointed expectations (no productive effect only redistribution of wealth)

d. Promises in commercial settings may be enforced despite the lack of consideration.

iv. Token Payment (Peppercorns)

a. Consider performance of an act in return for a promise where the act is trivial in comparison to the promise. In these cases were the imbalance between the values is so great, we can only assume that the performance was only created in order to make a gratuitous promise enforceable (ie. the performance was a pretense or only for minimal “consideration”). Only a sham if the promisee recognizes that it is a sham.

b. In context of the reasons why promises are not enforced

1. Evidentiary function is fulfilled by creation of the sham

2. Cautionary function is also fulfilled by creation of the sham

c. Consideration is only induced because the promisor is actually seeking the act or performance.

d. If consideration is not met then R79 is in effect. If there no conceivable ben/det to promisor/promisee or a large imbalance btwn parties. then we can believe that there is no bargain

e. When a contract is in effect btwn persons of close contact then there is greater indication that the bargain made is actually a gratuitous gift.

f. Whether there is actually a bargained exchange is a question of fact.

B. PAST CONSIDERATION

i. Past Performance cannot be the basis for consideration. Promise must be given in exchange of promise. Not because of past promise.

a. Feinburg v. Pfeiffer Co.

1. Facts: At board meeting Pfeiffer board of directors decided to award Feinburg a pension of $200/mo whenever she decided to retire. Later wanted to take away pension

2. Holding: There was no consideration for the pension, There was no bargained for exchange – Feinburg gave no promise or performance in exchange for $200. Cannot use her former employment (action in the past) as consideration for the pension. (§ 71) Needs to be some promise or performance P gives in exchange for the pension after contract made. Pension not given by D in exchange for anything.

C. CONSIDERATION AS BARGAIN – Unilateral Contracts

R§51 – Unless the offeror manifests a contrary intention, an offeree who learns of an offer after he has rendered part of the performance requested by the offer may accept by completing the requested performance

i. Unilateral Contract – the exchange of a promise for a performance. In Unilateral contracts there is only one enforceable promise (only the promisor is bound in this case). In this case the promisee would be an independent variable whereas the promisor would be the dependant variable. Acceptance of the offer can only be signified through performance by the offeree.

a. Unilateral contracts are harder to distinguish from Gratuitous gifts, Bilateral Contracts are easier to distinguish as long as one promise is not a token payment

ii. The Requirement of a Bargain – Was there a bargain?

a. Kirksey v. Kirksey – gift v. bargained for promise

1. Facts: Widow’s(P) brother-in-law wrote her letter advising her to move out of her house and to a residence he would provide on his estate 60 mi away. P and kids packed up and made the move. After some time brother-in-law asked her to leave. P asked to enforce promise

2. Holding: Promise not enforceable, the brother in law made a gift, no contract was made. D was making gift with no contractual duty attached. Need a bargained for exchange for a contract, merely changing position in reliance on a statement is not enough to impose contractual liability in absence of bargain.

b. Implied ConsiderationTropicana Million dollar case: court held that there was consideration for casino’s giving woman $1M for landing on winner in spinning the wheel. In order to spin the wheel the woman had to become a diamond club member which monitored members gambling habits and used by casino marketing. Detriments of standing line to spin wheel, swiping the diamond card when gambling, and allowing casino to gather info on her gambling habits were induced by chance of winning $1M – i.e. faced detriment in exchange for the promise thus consideration.

c. Implied Consideration Jailhouse case: prisoner listened to radio station in return for possibility of winning $25,000. Listening to station was given by P in exchange for the promise of $25,000. – If a prison guard had turned the radio on there probably would not be consideration.

d. Lake Land Employment v. Columber – covenant not to compete

i. Facts: E’ee makes offer of non compete promise to E’or for continued employment for a reasonable period of time.

ii. Holding: There was consideration

iii. Issue: whether this actually was reasonable amount of time

iv. Rule: the ten years that Columber stayed at company after signing is a reasonable amount of time. Substan

king one party’s performance dependent on his good faith satisfaction with a related matter, are neither illusory nor lacking in mutuality of obligation – So long as the decision of being satisfied or not satisfied is made on good faith contract is valid

3. Policy Considerations

i. Enforcement of Contracts to allow for Complex business transactions.

ii. Allow various aspects of endeavor to happen simultaneously

4. Satisfaction Conditions

i. Objective Satisfaction – If there is an objective standard for the measurement of a good then satisfactory will take on the objective commercial standard

ii. Subjective Satisfaction – only used if the subject matter does not lend itself to objective commercial standards (personal taste/judgment). Good faith (honesty) is used to determine whether subjective satisfaction is met

iii. Contracts for the Sale of Goods

UCC§2-306(2) (Output, Requirements and Exclusive Dealings) – (2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale

a. (Exclusive dealing and implied best efforts) Wood v. Lucy, Lady Duff Gordan: D hired P to turn her fashion endorsements into money. P was given exclusive right to endorse products using Lucy’s (D’s) name for split of profits. D endorsed products w/o P and didn’t split profits. P sued, D said contract lacked mutuality b/c P never made any promise to market her goods.

1. Rule: Exclusive dealing arrangements impose an implied obligation by seller to use best efforts to distribute and market goods. i.e. in exclusive dealing arrangements one may read in an agreement to use best efforts.

2. Thus, court found there was mutuality b/c she had obligation to split contracts and let him use her name in exchange he had obligation to use best efforts.

b. UCC Sec 2-306(2) “Best Efforts” has good faith elements

1. Under the UCC good faith for:

i. merchants goes beyond subjective honesty, objectively adhering to reasonable commercial standards.

ii. non merchants uses the regular subjective honesty definition

2. In the hypothetical of real estate financing: Seller promises to sell real estate for the the return promise from the Buyer to buy conditional on financing.

i. Implied promise to use reasonable efforts to obtain financing

ii. To keep the buyer from backing out of the deal using the condition for financing, it is expected that the buyer use reasonable efforts to obtain financing

iii. Implying terms can only occur when there is not explicit language stating otherwise

iv. Termination Clauses

UCC§2-309(3) (Absence of Specific Time Provisions; Notice of Termination) – (3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

a. Clauses that allow either party to terminate the contract.

b. Any restrictions on the ability to terminate the contract will be upheld.

1. Quality/Satisfaction Clauses

2. Notification Clauses

c. UCC2-309(3) – Upholds the contract nonwithstanding termination rights by implying in law restrictions on the parties termination rights

· Courts started to acknowledge when p’ee relied on the promise, but there is no consideration

o 1) Gratuitous promises to convey land

o 2) Gratuitous promises by bailees

o 3) Charitable plees

o 4) Family promise