Contracts Tabb Fall 2017
What is a contract?
A contract most often refers to a promise or set of promises for the breach of which the law gives a remedy
A legally binding obligation arising from a promise
Contract law determined mostly by judicial decisions (common law)
What is a promise?
A promise is an assurance or declaration that one will do/refrain from doing some act
“A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.”
Manifest, intention, promisee, commitment
Are all promises enforceable?
To be enforceable the promise must have freedom of contract, predictability and security, commercial reasonableness and fairness, and consideration
gift promises are usually not enforceable
Components of a Contract? (What is required to form a “contract”?)
“Any benefit accruing to him who makes the promise, or any loss, trouble, or disadvantage undergone by or charge imposed upon him to whom the promise is made, is sufficient consideration in the eye of the law to sustain the promise. Accordingly, in the absence of fraud, mere inadequacy of consideration is no ground for avoiding a contract”
Manifestation of Promise
The parties themselves created obligations to each other.
“whether the parties manifested assent, whether any defenses might by plausibly claimed to exist, whether any writing required for enforcement exists, what terms the parties agreed to, whether and how seriously one or both parties breached, and what remedies might be available and appropriate.”
Sources of Contract Law and Authority
Restatements of the Law
Document created by scholars in the legal community to bring coherence to the law, uniformity, and increase predictability for future cases
Attempts to make the precedents for cases more prescriptive
Written by the ALI
What is the “Restatement of Contracts”? The product produced by ALI (American Law Institute) that seeks to formulate clearly the principles and rules of the common law as reflected in judicial opinions and, sometimes, statutory enactments. It is not binding until it is adopted by a court or legislature.
Primary statutory law for contracts is for the sale of goods
International Commercial Law and the CISG
contract law is primarily state law
Was there something of value exchanged?
“A valuable consideration…may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility give, suffered, or undertaken by the other.”
Benefit or Detriment
Appeal of Clark
Facts: Charles B. Clark sued Sheldon Clark for $700 promissory note. Sheldon Clark provided the Clarks with a promissory note to repay them for assistance outside their agreed boarding contract. Note was to be fulfilled after Sheldon’s death. Clark’s attempt to claim the $700.
Issue: Whether the promissory note was truly intended to provide compensation for the Clark’s assistance? Was there consideration or was the promise solely gratuitous?
Holding: The note was made on sufficient consideration and thus should be honored, the court is not at liberty to set value on services rendered; therefore, the Clarks are to be awarded $700 so promised by Sheldon. Sufficient benefit/detriment notedàsomething of value exchanged, services for extension of life. Services rendered for Sheldon exceeded the stated expectations of the Clarks according to their contract for board; thus, the promissory note was reimbursement for the Clark’s detriment incurred by providing additional care to Sheldon. “if he chose to pay for the services rendered a much larger sum than they were apparently worth, he had the right to do so. The note was not a gratuity or a testamentary gift.” There are clear services provided to and he promised to them.
court’s definition of “consideration: “When a party contracts for the performance of an act which will afford him pleasure, gratify his ambition, please his fancy, or express his appreciation of a service another has done him, his estimate of value should be left undisturbed, unless there is evidence of fraud. There is such a case absolutely no rule by which the courts can be guided, if once they depart from the value fixed by the promisor. If they attempt to fix some standard, it must necessarily be an arbitrary one, and ascertained only by mere conjecture.”
Why do we require consideration to enforce a promise? You could change your mind and the other party is not harmed. It is not out of something. If I break my promise, the other person is not harmed.
What arguments would you make the other way? They didn’t ask for payment for their services, so the note is just a gratuity. you don't have, what is the timing of the service. They have already be rendering the services
Dougherty v. Salt
Facts: Susan M. Teves, guardian ad litem for Charles N. Dougherty, sued Emma L. Salt, executrix of Hellena M. Dougherty for the fulfillment of a promissory note for $3,000. When Charles was a young boy, his aunt, Hellena, promised him $3K to help him financially. After her death, Charles’ guardian tried to receive this promise from the estate of Charles’ aunt.
Issue: Whether or not consideration was present. Was this solely a gift promise?
Court Holding: no sufficient consideration to enforce the promissory note, aunts offer was neither offered nor accepted with any purpose other than to assist Charles financially=gift; this promise was in no way repaying Charles for his loss or trouble; other ways to take care of Charlesàincluding him in her will, etc.
Because aunt Tillie didn’t get anything from making a note so there is no consideration. So the promise is not enforceable.
At the extremes:
a marketplace “deal” where Company A agrees to buy Stuff from Company B for a price à obvious “consideration” – a bargained-for exchange, a “deal,” with benefits and accompanying detriments on both sides
for Co. A: benefit: acquire Stuff; detriment: pay $
for Co. B: benefit: get $; detriment: relinquish Stuff
an unadorned promise to make a gift – “I promise to give you $100” à no consideration
Hamer v. Sidway (I) and (II)
Facts: William E. Story promised his nephew $5,000 if his nephew, William E. Story II refrained from smoking, drinking and gambling until the age of 21. The uncle promised to pay up on his nephew’s 21st birthday. Louisa Hamer, mother of William E. Story II, is suing Franklin Sidway, executor of William E. Story’s will for the fulfillment of his promise to his nephew.
Issue: Was there sufficient consideration? Was this simply a promissory gift or was there bargain for exchange?
Court Ruling: the intermediate appellate court ruled that this was a promissory gift contingent on proper behavior=conditional gift promise, and there was not sufficient consideration for enforcement; on the other hand the court of appeals noted the nephew’s change in his course of action and stated this constituted loss/trouble under the definition of consideration, the nephew abandoned his legal rights to follow the code outlined by his uncle and the uncle should therefore follow through with his end of the deal. “it is sufficient that he restricted his lawful freedom of action within certain prescribed limits upon the faith of his uncle’s agreement, and now, having fully performed the conditions imposed, it is of no moment whether such performance actually proved a benefit to the promisor, and the court will not inquire into it; but, were it a proper subject of inquiry, we see nothing in this record that would permit a determination that the uncle was not benefited in a legal sense.”
What definition(s) of consideration did the Court of Appeals use? How does that definition differ, if at all, from that used by the intermediate court? “a valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other.”“any damage, or suspension, or forbearance of a right will be sufficient to sustain a promise.”“consideration’ means not so much that one party is profiting as that the other 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.”
Under the approach taken by the Court of Appeals, when was a contract formed (if at all)? When he reached the legal age.
Would it be consideration if your mother promised to pay you $20 for every hour you studied for Contracts? How can (such) a good thing be a “detriment” to you, the promisee? Yes
I knew a father who promised his son $100 if the son qualified for state in cross-country. Assume son qualifies for state. Does Dad have to pay? yes
Back to Hamer — does it matter what the Uncle intended when he made the promise at the party? Not?
Does it matter whether the nephew took him seriously? Or whether the Uncle knew what the nephew understood? He has to believe that there is a bargain. No because he can infer that there is no bargain.
What if the nephew took the Uncle seriously but no reasonable person would have done so? Yes. Because there is an offer and he accepted it. If the uncle could have been aware that his nephew took it seriously. subjective
Review early definitions of “consideration”
– focus was on benefit / detriment (e.g., benefit to promisor, or detriment to promisee): see, e.g., p. 26 Hamer: “A valuable consideration … may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other.”
See similar definition p. 74 in Clark.
So, we saw that in Clark the court found consideration in the services rendered by Charles and his wife, and the correlative benefit enjoyed by the promisor, Sheldon;
and in Hamer nephew Willie suffered the detriment of not doing anything fun for a few years;
and by contrast in Dougherty Aunt Tillie got nothing of benefit from her nephew Charley, nor did Charley suffer any detriment.
Restatement (Second) § 71
To constitute consideration, a performance or a return promise must be bargained for.
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 promise in exchange for that promise.
The performance may consist of:
An act other than a promise, or
A forbearance, or
The creation, modification, or destruction of a legal relation.
The performance or return promise may be given to the promisor or to some other person. It may be given by the promise or by some other person.
Restatement (Second) § 81
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.
The fact that ta promise does not of itself induce a performance or return promise from being consideration for the promise.
Baehr v. Penn-O-Tex Oil Corp
Facts: E.J. Baehr is suing Penn-O-Tex Oil Corp. for monetary compensation for gasoline filling stations; Kemp was trying to buy the oil filling stations owned by Baehr over a period of time and ended up in severe financial trouble, Penn-O-Tex Oil company began supporting Kemp in his efforts by taking over the business aspects of the filling stations, then Baehr attempts to reclaim the filling stations for lack of paymentàBrings suit against Penn-O-Tex Oil Comp. in lieu of Kemp b/c they have financial means
Issue: Whether or not the promise made by Penn-O-Tex to Baehr that “his debts would be repaid” was enforceable
Court Ruling: court defines consideration a
t that he would be employed for life There was a compromise between the two parties; bargain for exchange and the benefit to the company was to avoid the headache of the law suit
Summary judgement: there is no genuine issue of material fact. To grant summary judgement in the case, if the outcome is promising to relinguish a claim that has no value, does not and cannot constitute consideration.
Contract Modification and the Pre-Existing Duty Rule
The modification of the contract must have separate consideration in order for the modification to be enforceable. If the modification does not have consideration then the courts revert back to the original contract that was formed with considerationàpre-existing legal duty.
What does consideration have to do with modifying contracts?
You and I agree that I will sell you this cool reproduction Chicago Whales 1915 Federal League baseball cap for $25, delivery next Thursday. Thus, I promise to deliver the hat, you promise to pay me $25, and that is our deal. After we agree to the deal, another student says, “Oh, Tabb, I would have paid you $50 for that hat!” So I go back to the 1st student and say, “well, what do you think, this other student would have paid me $50 for the hat, would you be willing to match that price?” So student # 1, for whatever reason (I mean, we do grade anonymously), says to me, “okay Tabb, I promise to pay you $50 for that hat, if you will promise to deliver the hat to me next Thursday.” I say “deal.” So, come next Thursday, I bring the hat to class, tender delivery to student # 1, and student # 1 says “ok here is your $25.” I say “wait a minute, you promised to pay me $50. Don’t make me sue you for breaching the $50 sale contract.” Student # 1 replies, “bring it on, Tabb, I don’t owe you $50. You better deliver the hat to me for $25, or YOU are the breacher!”
So – how would you analyze this hypo? What role, if any, does consideration play in the analysis?
Performance of legal duty under Rest. § 73. 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 is what was required by the duty in a way which reflects more than a pretense of bargain.
You got nothing because I am already under pre-duty to deliver that for $25.
What if I promised student # 1 that I’d deliver the hat on Wednesday instead of Thursday when # 1 promised to pay me $50 instead of $25?
That’s absolutely consideration. That’s what people criticize. I just need to promise something different new. Because I have a legal right not to do. What’s about come a day later? I think it will be fine. You just need to change it.
A few years ago, I was on the board (“vestry”) of my church. We entered into a contract with a pipe organ company (we’ll call “POC”) for POC to build and install a pipe organ in our church for $330,000, within 4 months. We paid the entire $330K up front (over my strenuous objection, but that’s another story …). POC started having serious financial troubles (just to give you some sense – we found out that they had stopped paying over employee withholding taxes to the IRS – that is a very big no-no), and POC approached us and said, “look, we’re basically insolvent. Heck, some of our people may end up going to jail, but whatever. We’ve already spent all of your money. You have 2 choices: agree to pay us $500,000 (i.e., another $170 grand) and we’ll come out and build your organ, and stiff everybody else, or not pay us the extra $, and we can guarantee you that we’ll never be able to build your organ. You’re just out $330 thousand. By the way, we have contracts with three clients with pending contracts (including you), and we’re making the same pitch to each of you. Whoever agrees to our terms first will get their organ built. The other two are – out of luck. Oh, and we weren’t born yesterday, we want to have the $170 grand in hand before we lift a finger.”
So – what to do? What should our church have done? If we agreed to their terms, then what?
Does the fact that we actually paid the extra $170K matter? Note that instead of us being able to raise a defense of no consideration (or other defenses – such as what?) to POC’s attempt to collect the $170K, we’d have had to sue to recover from POC the already paid $. On this point, consider the view taken by the Angel court regarding the $10K payment already made by the city to the refuse collector for the 1st year (1968), under part II.A. at pp. 117-18. —We could make the argument that the promise is not enforceable because of duress, or pre-existing duty.
Since consideration is only relevant with regard to the enforceability of promises that has been made but has not been carried out.