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Contracts
University of Illinois School of Law
Maggs, Gregory E.

CONTRACTS OUTLINE (MAGGS)         
 
Consideration
 
1.   Definitions
 
a.     Benefit/Detriment Theory (no longer used) – Hamer v. Sidway
b.    “Bargain” Theory (§71R2d) – benefit/detriment is irrelevant so long as the return promise sought by the promisor is bargained for. “bargained for” if:
                                          i.    it is sought by the promisor in exchange for his or her promise
                                         ii.    it is given by the promisee in exchange for that promise
 
2.   Types of Consideration
 
a.     Act, forbearance, or the creation, modification, or destruction of a legal relationship.
                                          i.    §74: a forbearance to assert a claim that proves to be invalid is not consideration unless
1.     the claim was doubtful b/c of uncertainty of fact/law, or
2.     forbearing party believed the claim may be valid
a.     Fiege v. Boehm (Good faith belief that he may be father)
                                         ii.    forbearing to assert claim is consideration if its bargained for even if he wasn’t going to assert a claim and believes no valid claim exists
                                        iii.    §75: a promise is consideration the promised performance is cons.
 
b.    Invalid forms of consideration:
                                          i.    past consideration – Mills v. Wyman, Feinberg v. Pfeiffer. 
1.     Exception: §86R2d – promise for past benefit enforceable as justice requires unless promisee intended benefit to be gift; or value of promisor’s promise is disproportionate to benefit he received. (modern approach)
a.     Webb v. McGowin – saving life not meant as gift, and promise not disproportionate ($30/mo.), so enforced. Difference bet. Booth v. Fitzpatrick is service not asked 4
b.    Mills v. Wyman – still can’t enforce under §86 b/c benefit was not received by promisor (received by son).
                                                                                          i.    Moral obligation can be argued in this case since father/son, in Fienberg company already paid her salary so little moral obligation there, in Webb P had suffered serious injury so high MO.
                                         ii.    gratuitous promises – Kirksey v. Kirksey – acts incidental to a gift promise are insufficient consideration for enforcement. Exceptions:
1.     gift promise to repay uncollectible pre-existing debt (barred by bankruptcy/SOL) are enforceable.
2.     hypo – father says to daughter “if you meet me at X I will buy you a car.” Consideration only if her going to X is bargained for in exchange (i.e. she dislikes father and doesn’t want to see him)
3.     Peppercorn Theory – inadequate consideration might be evidence of fraud, duress, undue infl. OR may be sham (when it is apparent that the transaction is a gift and that consideration is a mere pretense to disguise a gift, resulting k will not be enforceable due to lack of consideration)
 
                                        iii.    Illusory promises – Strong v. Sheffield
1.     modern rule – personal satisfaction clauses are enforceable due to implied duty of good faith and fair dealing. Mattei v. Hopper
2.     Exclusive K’s have Implied duty of good faith rendering the K enforceable. Wood v. Lucy – Wood only promised to split profits, not obligating himself to actually try to sell anything.
3.     output contracts – A contracts to provide all gas needed by B. prices for gas go up so B threatens to stop needing gas (halts manufacturing) if A doesn’t lower price. B then halts and claims no breach b/c didn’t need gas – implied good faith so enf. K.
a.     no implied floor, but implied ceiling – Can’t require disproportionately large amount – Eastern Air v. Gulf
4.     at-will K’s – consideration is “reasonable” time to terminate
a.     CAB v. Ingram (court says non-comp clauses have cons. for at-will employment K’s if they are presented prior to, at the time of, or shortly after hiring. Court also notes all 3 defendants received raises, promotions, etc)
                                                                                          i.    Strong dissent – could not have bargained for those raises/promotions, at-will k was illusory, clause presented after hiring so not arms length
                                        iv.    Pre-existing duty rule – reaffirmation to take same action is not consideration, even if bargained for and in response to a new promise.
1.     Exception – §89 – parties can make enforceable modification to any unperformed portion of a K w/o consideration so long as modification is fair and equitable, and either made b/c of circumstances unanticipated at the time K was made; or has induced reliance by a party to the agreement.
2.     Foakes v. Beer (Foakes was obligated to repay Beer 2k, Beer agreed to waive interest if Foakes would pay 500 on due date, remainder to be paid on agreed upon schedule. After full repayment, Beer sued for interest and won b/c no consideration)
c.     Employee Handbooks
                                          i.    Employees are bound by policies in handbooks b/c they have choice of quitting, and by continuing employment they are accepting the terms of the handbook, thereby creating bargained for consideration.
                                         ii.    Bankey v. Storer (company changed from termination “for cause” to “at will.” Court rules that employers can change policies so long as reasonable notice is given to their employees)
 
3.   Promises enforceable w/o consideration:
a.     Promissory estoppel – §90: a promise is binding if
                                          i.    in making the promise the promisor should reasonably expect to induce action or forbearance on the part of the promisee
                                         ii.    the promise does in fact induce foreseeable action or forbearance by the promisee; and
                                        iii.    injustice can be avoided only by enforcement of the promise
1.     the remedy may be limited as justice requires
                                        iv.    where justice required full enforcement – Rickets v. Scothorn (GF upset that GD is working gives her 2k promissory note, telling her she won’t have to work. GD quits work for 1 yr., GF unable to pay note, but says he would pay if he could sell his farm, then GF dies)
1.     hypo – If Scothorn had continued working but relied on the promise by buying a horse, no reliance bc her change of position was not in accordance with his intention that she stop working.
2.     different from hamer v. sidway b/c there is no condition placed upon the promise so no bargained for exchange (consideration)
                                         v.    Gratuitous bailments – Siegel v. Spear (Siegel relied on the gratuitous bailment offered by McGrath, so can recover after stuff burned in fire)
                                        vi.    Cohen v. Cowles (reliance on confidentiality promise, damages awarded)
                                       vii.    D&G Stout v. Bacardi (DG had 2 suppliers jump ship, but Bacardi said they would remain, DG relied on this promise and turned down an offer to sell out. Bacardi backs out, and 2nd offer is 550k lower. DG wins)
b.    Promise to pay barred legal obligation (Maggs calls this moral obligation) – subsequent promises to perform contractual obligations which became unenforceable b/c bankruptcy or statute of limitations
c.     Promise to perform voidable preexisting duty – subsequent promises to perform contractual obligations which became void b/c lack of capacity, statute of frauds, duress, etc are enforceable w/o consideration, provided the new promise is not also subject to the same privilege or defense.
d.    Promise to pay for benefits previously conferred – where no contractual liability previously existed, a subsequent promise to pay for benefits previously conferred may nonetheless be enforceable. (Webb v. McGowin) – this is the modern view. Trad. View says subsequent promise to pay for benefits previously conferred is not enforceable.
e.     Implied-In-Fact Contracts – Contract inferred as a matter of reason and justice from the acts, conduct or circumstances surrounding a transaction rather than one formally or explicitly stated in word. Source of obligation is the manifested intent of the parties. e.g. one person renders services to another at the other’s request but w/o express agreement as to the compensation paid, a promise to pay reasonable value of the services may be inferred.
f.     Implied-In-Law/Quasi Contracts – obligation imposed upon a person, not b/c of intent to agree, but b/c one party

eonard v. Pepsico. (absence of words “first come first served” renders alleged offer sufficiently indefinite)
Auction Rules
                                          i.    Auctions with reserve –merely an invitation for offers by bids that can be accepted or rejected by the one who has invited them.
                                         ii.    Auctions without reserve – the auctioneer is the offeror and each successive bidder is an offeree, and the offer to sell is irrevocable. Bidders may withdraw offers so long as the sale has not been completed.
                                        iii.    Online auctions (ebay has its own set of rules b/c most items < $200)                                         iv.    Fake Bidding 1.     allowable when the auction is forced by law (bank auctions house for non-payment, repossessed cars, etc) 2.     suppose bidder 1 bids 100, bidder 2 bids 120 in bad faith (fake bid), all subsequent bids can then be retracted since they are predicated on the bad faith bad. 3.     if all bids are bad faith, first bad faith bid can be estopped from saying his bid was in bad faith, he can then take the item for the bid price if he wants, or can walk away.   Mistake   Bilateral Mistake: (§152)                                           i.    where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154.                                          ii.    in determining whether the mistake has a material effect on the agreed exchange of performances, account ist aken of any relief by way of reformation, restitution, or otherwise. Unilateral Mistake: (§153) where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under §154, and                                           i.    enforcement of the contract would be unconsionable; or                                          ii.    the other party had reason to know of the mistake 1.     Elsinore v. Kastorff (city had actual notice of error in bid before it attempted to accept the bid, thus Kastorff can rescind offer) 2.     hypo – airline offers $50 tickets to China, could argue that consumers should have known that the price was unreasonable 3.     hypo – reward for symbol under bottle cap, company prints more than they should. There’s no way for consumer to know there might have been a mistake, thus must be enforced. When a Party Bears the Risk of Mistake: (§154) a party bears the risk when                                           i.    the risk is allocated to him by agreement of the parties, or                                          ii.    he is aware, at the time the contrtact is made, that he has only limited knowledge w/ respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or 1.     Elsinore (mistake not result of neglect of legal duty)                                         iii.    the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so   Restitution Required if Contract Avoided on Basis of Mistake