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University of Iowa School of Law
Smith, Peggie R.

CONTRACT: To be legally enforceable, a K must have consideration and mutual assent
1.      Concern for evidentiary security – protection against manufactured evidence
2.      Individual must be safeguarded against his own rashness
3.      Enforceable obligations need to be marked to ensure each individual’s part has legal significance
4.      Unwillingness to enforce transactions that are suspect/of marginal value
NOMINAL CONSIDERATION: A gift trying to pass itself off as a bargain; something that has the form but not the substance of a bargain and that won’t make a K enforceable
            R.2d §1: Contract Defined
            R.2d §2: Promise; Promisor; Promisee; Beneficiary
            R.2d §17: Requirement of a Bargain
·         Formation of a K requires a bargain in which there is manifestation of mutual assent to the exchange and consideration
            R.2d §71: Requirements of Exchange; Types of Exchange
·         To constitute consideration, a performance/return promise must be “bargained for” (sought by PR in exchange for his promise & given by PE in exchange for that promise)
·         Performance is: a) An act other than the promise; b) A forbearance; or c) Creation, modification or destruction of a legal relation
            R.2d §87(1): Option K
·         An offer is a binding option K if: 1) It is in writing and signed by OR, recites consideration and proposes an exchange on fair terms within a reasonable time, or 2) It is made irrevocable by statute
            R.2d §90: Promise Reasonably Inducing Action/Forbearance
·         Detrimental reliance may be an alternative to bargained-for consideration; elements of proving reliance are: a) Foreseeability, b) Reliance, and c) Injustice
I)        Bargain/Gift Distinction
A)      Consideration can be a bargain for either a performance or a return promise of performance
1)       A legal issue arises when there was a bargain for a return performance and the promise was not upheld
2)       The promise of a gift doesn’t contain any value received and thus lacks consideration(Dougherty v. Salt)
II)     Nominal Consideration
A)      In Schnell v. Nell, court held that wife’s promise to leave money/chattels to devisees wasn’t OK bc husband provided consideration in form only (this is an issue of past consideration)
B)      Nominal consideration works when there are option contracts (promises holding an offer open for a time period to allow PE to decide if she wants to take it) as long as it’s in writing (R.2d §87)
III)   Promissory Estoppel/Theory of Reliance
A)      A promise made without consideration may nevertheless be enforced to prevent injustice if the PR should have reasonable expected the PE to rely on the promise and if the PE actually did rely on it to her detriment
B)      R.2d §90 Elements
1)       Foreseeability: Was there a promise which the PR should have reasonable expected to induce action/forbearance?
2)       Reliance: Did the promise actually induce such action/forbearance?
(a)     In Feinberg v. Pfeiffer, retiree actually relied on the promise and it’s thus enforceable; the opposite result in Hayes v. Plantations Steel where employer’s decision didn’t shape the employee’s decision, and there was never certainty that the promise would continue (so no reliance) – also, just bc payments occurred in the past isn’t enough to create reliance
3)       Injustice: Is it necessary to enforce the promise to prevent injustice?
(a)     In Kirksey v. Kirksey, court held it wasn’t unjust – it was just a conditional donative promise/gratuitous conditional promise (a gift can be conditional if to get it, you have to travel to it, e.g.)
C)      Relationship between detrimental reliance and consideration:
1)       Narrow view: Reliance operates independently of consideration; consideration is a bargain; reliance will be treated as a substitute for consideration
(a)     This is the view taken by the R.2d
2)      Broad view: Reliance is a type of consideration, as is a bargain
ILLUSORY PROMISE: A promise with a loophole
PRE-EXISTING DUTY RULE:A bargain is unenforceable where one party promises to perform an act that he/she is already obligated to perform
            R.2d §79: Adequacy of Consideration
·         If consideration is present, no additional requirement of a benefit to the PR or a loss to the PE, equivalence in values exchanged, or mutuality of obligation
            R.2d §77: Illusory and Alternative Promises
            R.2d §73: Performance of a Legal Duty
·         Performance of a legal duty already owed a promisor isn’t consideration – unless it differs from what the duty required in a way that isn’t just a pretense of a bargain
            R.2d §89: Modification of an Executory K
·         A promise modifying a duty under a K not fully performed on either side is binding if: a) modification is fair & equitable in view of circumstances not anticipated by parties when K was made; or b) to the extent provided by statute; or c) to the extent that justice requires it in view of material change of position in reliance on the promise
            R.2d §82: Promise to Pay Indebtedness; Effect on SOL
            R.2d §83: Promise to Pay Indebtedness Discharged in Bankruptcy
            R.2d §86: Promise for Benefit Received
·         A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice
I)        Adequacy of Consideration
A)      In classic K theory, there had to be a benefit to the PR and detriment to the PE for consideration to exist – this is not the modern theory
B)      Forbearance of legal rights on promises of future benefit made by others can constitute consideration(Hamer v. Sidway – uncle promises nephew $5,000)
C)      Consideration doesn’t always have to be fair to both sides; parties to a transaction are free to fix their own valuations bc they are thought best able to evaluate circumstances of the particular transaction (Batsakis v. Demotsis: Greek wartime loan)
1)       A court won’t protect you from the consequences of making a bad bargain
2)       Another case where consideration was disparate but adequate: Harris v. Time, Inc. (Time received value for π’s opening of the envelope)
D)      Want vs. failure of consideration
1)       Want = complete lack of consideration/invalid consideration
2)       Failure = there was once good consideration but it is not non-existent/defective
II)     Illusory Promises
A)      Promises require mutuality of obligation (each party must be bound to the agreement) to create an effective contract; contract law is about limiting voluntary choices in the future, and a prediction of future willingness is not the same as an expression of present interest and illusory promises do not bind parties to the agreement (promise for a performance)
1)       Generally, if a bargain involves the exchange of a real promise for an illusory one, it is unenforceable
2)       While if there’s an illusory promise there isn’t a bilateral contract, there may still be a bargain
3)       If B only makes an illusory promise to A, and A gives B a bargained-for chance (i.e. the law student with poor grades offering to work at a firm for half-salary), this concludes a bargain. In other words – B got what she bargained for, and since A gave her a chance, we should hold her to the promise, albeit illusory
B)      Examples
1)       A delivering, at a specified price, as many bushels to B as he will choose to order in a specified time period – no promise from B & thus no consideration
2)       Anytime that A & B enter into an agreement but A reserves the power to terminate the agreement at any time – A promises nothing. (Miami Coca-Cola Bottling Co. v. Orange Crush Co.) However, in Lindner v. Mid-Continent Petroleum, the lease agreement gave π 10 days notice when ∆ wanted out of the contract and the court upheld ∆’s right to terminate – begging the question, “How much time is enough to make a restriction such that a court will keep the deal alive?”
C)      You can take an arguably illusory promise and make it enforceable by:
1)       Interpreting even the slightest restriction as something that was bargained for
(a)     Wood v. Lucy – court created an implied promise that π had to use best efforts to avoid getting zero
2)       Find an implied promise and apply general rule that promise can be consideration – if the promise would have been consideration if it were explicit, then it is consideration when implied
(a)     Grouse v. Group Health Plan- court implies that ∆ would give π a good faith opportunity to perform a duty, and tha

s well as words/actions; 2) Objective – court focuses on external signs and expressions as the governing rule
·         Manifestation of the parties – their expressed words & conduct
·         Any conduct by the parties in the course of performing under the agreement
·         Any prior course of dealing between the parties in similar contractual relationships
·         Any trade usage, common usage, or custom that is reasonably applicable to the parties’ dealings
            R.2d §20: Effect of Misunderstanding
·         No mutual assent if parties misunderstand and either 1) neither party knows/has reason to know of the meaning attached by the other, or 2) each party knows/has reason to know of the meaning attached by the other
·         Manifestations are operative according to one party’s meaning if that party doesn’t know/have reason to know of a different meaning attached by the other, and the other knows/has reason to know of the meaning attached by the first party
            R.2d §201: Whose Meaning Prevails
·         Where parties have attached different meanings, it is interpreted according to the meaning attached by one party if, at the time of K formation, that party didn’t know/have reason to know of a different meaning attached by the other, and the other knew/had reason to know the meaning attached by the first party
V)      Contract Interpretation
A)      Classical K law focused more on objective intent (whatever was written down in the K); modern K law is more subjective
1)       Courts sometimes must determine what intent was, essentially, even if parties weren’t sure
(a)     Ex: Engaged couple – woman gives fiancé money for his business; it goes badly and business dissolves; judge must decide whether money was a loan or gift
2)       Court should use objective standard of words/actions used by parties when it tries to determine the intentions in forming a K (Embry v. Hargadine, McKittrick Dry Goods–employee tried to get K renewed and employers’ words were ambiguous, but court holds there was only one possible interpretation, & that it was that a RP would consider it an offer)
3)       Implied meanings of Ks (article by Williams)
(a)     Three types of non-logical implications
i           Terms the parties probably had in mind but didn’t express
ii         Terms the parties would have expressed (whether or not they were in mind) had the question been posed to them – legal fiction
iii        Terms the parties would have expressed (whether or not they were in mind) had they foreseen the difficulties that would result – legal fiction
(b)     Court implies these meanings for fairness, policy, or consequences of rules of law
(c)     A sentence is never not in context (article by Fish)
B)      Innocent party + Innocent party
1)       If neither party can be assigned the blame for the misunderstanding, there’s no basis for deciding which party’s understanding should be enforced (Raffles v. Wichelhaus – the ship Peerless; Oswald v. Allen – π purchasing coin collection but dispute as to which coins were included)
C)      Guilty party + Innocent party
1)       When one party knows/has reason to know that the other takes the K seriously, it will be enforced (Lucy v. Zehmer – ∆ knew that π took it seriously bc he took pains to make sure it seemed real; Frigaliment Importing Co. v. BNS International Sales – what is “chicken” – court based decision on evidence from sources of K interpretation above)