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University of Iowa School of Law
Estin, Ann Laquer

Contracts I


Intention to be Bound: the Objective Theory of Contract

Contract: an agreement between two or more parties creating obligations that are enforceable or otherwise recognized at law.

Was there mutual assent – Offer and Acceptance?
Was there Consideration?
Are there any Defenses to enforcement?

Promise: the manifestation of an intention to act or refrain from acting in a specified manner, conveyed in such a way that another is justified in understanding that a commitment has been made.

Reliance: the breach of a promise may work an injury to one who has changed his position in reliance on the expectation that the promise would be fulfilled.

Unjust Enrichment: the retention of a benefit conferred by another, without offering compensation, in circumstances where compensation is reasonably expected (Restitution).

“Classical contract law” refers to the period of the first Restatement of Contracts circa 1934. Justice Oliver Wendell Holmes (essays in the 1880s) and others were important to the development of this approach.
· Showed a preference for clear rules/legal formalism
· Relative indifference to moral or social issues reflected in contracts

“Modern contract law” was developed in the mid-1900s.
· Characterized less by rules than by standards
· More responsive to issues of social justice and economic power

End of 20th Century: shift back toward legal formalism when dealing with contracts.

R.2d §21: Intention to be Legally Bound: neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract…

Ray – P homeowners brought action against D building contractor to recover damages for complete breach of written contract to build house. D had signed contract without reading it, and failed to notice some very specific requirements demanded by P. A defendant who signs a written contract without reading the entire agreement and all incorporated documents cannot defend against enforcement of the contract on the basis of a mistaken understanding as to the contents of the writings or documents.
Court held that contractor could not avoid performance of contract because of alleged unilateral mistake on part of contractor.

Note: Is promisor serious? If past dealings between parties made it reasonable for buyer to believe seller was serious, seller reasonably should have known that, and contract can be enforced. (Lucy)

Park 100 Investors – P lessor sued D lessees for unpaid rent after D signed a personal guaranty lease. However, P misrepresented the contents of the lease, and a contract is void if a party “employs misrepresentation to induce a party’s obligation under a contract.” A person must use ordinary care and diligence to guard against fraud. However, the requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore intentional fraud practiced on the unwary.
Court held that lessor used fraudulent means to procure signatures of part-owners, and therefore D lessees were not bound by contract.

5 elements of fraud test from this case:

a material misrepresentation of past or existing fact by the party to be charged, which
was false,
was made with knowledge or in reckless ignorance of the falsity,
was reasonably relied upon by the complaining party, and
proximately caused the complaining party injury.

Enforcing Exchange Transactions: The Doctrine of Consideration (Ch. 4 – §71, 79)

Consideration: something (such as an act, a forbearance, or a return promise) bargained for and received by a promisor from a promise; that which motivates a person to do something, especially engage in a legal act.

Hamer – P nephew had agreement with uncle that if he refrained from smoking, drinking, etc. until age 21, that uncle would pay P $5000. After uncle died, D (uncle’s estate) refused to pay P for successful completion of the agreement. A waiver of any legal right at the request of anther party is sufficient consideration. Forbearance from doing what one has a legal right to do constitutes consideration that will render a contract enforceable. The forbearance doesn’t have to benefit any of the parties. Forbearance, detriment, and loss all constitute consideration.
Court found it was “sufficient that he restricted his lawful freedom of action within certain prescribed limits upon the faith of his uncle’s agreement… it is of no moment whether such performance actually proved a benefit to the promisor… we see nothing in this record that would permit a determination that the uncle was not benefited in a legal sense.”

R.2d §71: Requirement of Exchange; Types of exchange:
(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) Performance may consist of: a) an act other than a promise, b) a forebearance…
(4) The performance or return promise may be given to the promisor or to some other person. It may be
given by the promisee to some other person.

Baehr – Landlord’s action for rents brought against corporation to which tenant had made assignment, as security

Courts will not insist on a fair or even exchange. A “gross inadequacy of consideration may be relevant” to some cases. The idea of a bargain in this case closes off the court’s ability to examine the adequacy or fairness of the exchange.
Both the classical and modern approaches outlined in R.2d§ 79 require the same outcome for P.
Contracts serve economic goals – certainty, ability to plan financial decisions, etc.
If you make a bargain: a) you’re stuck with it, b) you get the benefit of your bargain – with very slim circumstances under which you can get out of the contract.

R.2d §79: Adequacy of Consideration; Mutuality of Obligation

Note: Adequacy of Consideration: Courts do not insist on a fair or even exchange; the law will not enter into an inquiry as to the adequacy of the consideration. A consideration of gross inadequacy may be relevant.
Trend today of law moving away from willingness to police the fairness of bargains.

Note: Modern theory: contractual obligation depends upon the convergence of individual desires.

Note: Equitable theory: limited and sometimes denied contractual obligation by reference to the fairness of the underlying exchange.

Note: Illusory Promises: an illusory promise makes performance entirely optional by the promisor. May result in non-enforcement.

Note: Mutuality of Obligation: In some courts, both parties must be bound or neither is bound. Second restatement rejects this in saying a promise is valid if consideration requirement is met.

Plowman – Agreement between P employees and D corporation for D to pay retirees ½ their normal salary for life as a pension in gratitude for their years of service. D later stopped making payments, and Ps sued.
Court held that past consideration (gratitude for faithful service of employees) is insufficient. Under the bargain theory of consideration, the D did not bargain for Ps coming to pick up the checks. Ps picking up the checks was a condition not a consideration. Payments amounted to a gratuitous conditional promise, extinguishable at a time of D’s choosing. There was no legal promise, and mere moral obligations are not legally enforceable.