CONTRACTS OUTLINE DRAHOZAL SPRING 2012
I. Introduction
a. Definition
i. Generally: a legally enforceable promise
ii. RS § 1: a promise or set of promises for the breach of which the law gives a remedy or the performance of which the law in some way recognizes a duty (15)
b. Applicable Law
i. Common Law: applies to transactions NOT dealing with goods
ii. UCC Article 2
1. § 2-102: applies to transactions dealing with goods (243)
2. Article 2 is NOT limited to merchants only
a. ON EXAM DO NOT STATE ARTICLE 2 APPLIES B/C PARTY IS A MERCHANT
3. UCC is supposedly uniform, but in practice it varies by state and a court’s interpretation
4. § 1-103: Supplemental Principals of Law
c. Purpose
i. To facilitate exchange
ii. To facilitate investment (contracts that take place over time)
iii. To provide moral justification (contract enforcement = good thing)
iv. To provide confidence in exchanges and promises
d. Types of Contracts
i. Unilateral: only one party promises (promise for performance)
ii. Bilateral: a promise in exchange for a return promise that binds both parties (promise for promise)
e. Requirements
i. Consideration
ii. Assent
f. Determining a Valid Contract
i. Steps
1. Determine the promise the party is seeking to enforce
2. Determine whether there is consideration
a. Benefit-Detriment Theory
b. Bargain Theory
3. Determine whether the consideration is sufficient
ii. Commercial Element: the more commercial the contract, the more likely it will be enforced b/c courts hesitate to interfere in family matters
g. Remedies (RS § 344)
i. Expectation Interest: being put in as good a position as one would have been had the contract been performed (175)
1. The standard measurement of damages
2. Example: anticipated profit and all out of pocket expenses
ii. Reliance Interest: being reimbursed for any loss or being put in as good as a position had the contract NOT been made (175-176)
1. Example: all out of pocket expenses
iii. Restitution Interest: restoring any benefit that was conferred upon the breaching party (176)
1. Example: a down payment or a deposit
h. Damages
i. Subsequent Remedial Measures: a change to a product later does not necessarily mean that the original product was wrong and the manufacturer can’t be punished for changing the product b/c it would discourage companies from fixing problems
ii. Example: Leonard v. Pepsico, Inc. (1999)
1. Facts: after lawsuit Pepsi added “just kidding” under the jet’s points in the commercial
2. Conclusion: Leonard can’t use the change as evidence that a reasonable person would’ve thought first commercial wasn’t a joke
i. Parts of a Written Contract
i. Example: KCRAR Vacant Land Real Estate Contract (3-14)
1. Entire Agreement Clause: statement that all parties, clauses, and addendums constitute the whole contract (Paragraph 17)
2. Contingencies: conditions that may allow a party to terminate the contract (Paragraphs 3, 5, 6, 7, 21)
3. Expiration Deadline: statement of how long the offer will be available (Paragraph 23)
CONSIDERATION
I. Background Information
a. Definition: A performance or return promise that is bargained for – a performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and given by the promisee in exchange for that promise (RS § 71)
b. Types
i. Benefit-Detriment Theory: the promisor gives up something and the promisee receives something
ii. Bargain Theory: promisor and promisee offer each other an inducement
c. Adequate Consideration (RS § 79)
i. A gain, an advantage, or benefit
ii. An equivalence in values exchanged
iii. A mutuality of obligation
d. No Consideration: a promise for a benefit received (RS § 86)
i. Gifts: a gift lacks the necessary inducement to constitute consideration
ii. Illusory Promises: a pretense, sham, or peppercorn of a bargain is insufficient to meet the requirement of consideration
iii. Past Actions: all actions done in the past can’t be bargained for or induced
II. Bargain Theory
a. Hamer v. Sidway (1891)
i. Promise: Uncle promised to give nephew $5,000 for not drinking, swearing, gambling, and smoking tobacco until he was 21
ii. Claim: breach of contract – seeking expectation interest
iii. Defense: no consideration based on benefit-detriment theory
iv. Conclusion: there was a contract that must be enforced under both theories of consideration
1. Benefit-Detriment Theory
a. Benefit: Uncle was willing to pay for nephew’s improved behavior
b. Detriment: nephew abstained from engaging in activities he had a legal right to do
2. Bargain Theory
a. Uncle sought to improve his nephew’s behavior in exchange for $5,000
b. The nephew sought the $5,000 to be given by his Uncle in exchange for improving his behavior
v. Important Points
1. Hamer v. Sidway illustrates a shift from the benefit-detriment theory to the bargain theory
2. Hamer v. Sidway is not good authority for arguing that a contract is NOT enforceable
III. Implications
a. Moral Obligation
i. Webb v. McGowin
b. Past Action
i. Feinberg v. Pfeiffer Co.
ii. Mills v. Wyman
c. Bargained for Exchange
motions constitute consideration b/c these monetary benefits would not have been received had the employees not signed the provision
3. The continued employment of all 3 past employees constitutes consideration
a. Ingram b/c he was an at-will employee who could either sign the provision or be fired
b. Goostree b/c he signed shortly after being hiring so the provision was part of original hiring agreement
c. Bjorkholm b/c signed 3 weeks after being hired and continued to work for several years
v. Important Point: Hamer v. Sidway is a good example of consideration of a promise for performance b/c CAB forbore from firing Ingram (promise) if he signed the provision (performance)
VII. Illusory Promises
a. Strong v. Sheffield (1895)
i. Promise: Sheffield promised to pay Strong for her husband’s debt
ii. Claim: breach of contract – seeking expectation interest
iii. Defense: no consideration based on bargain theory
iv. Conclusion: there was no consideration
1. The promise to forbear from collecting the debt until Strong wanted to demand the money was illusory b/c there was no substance to the promise (there was no way for Strong to breach the contract)
2. Actual forbearance is not consideration b/c Sheffield sought a return promise from Strong and not a performance (forbearance) – the fact that Strong forbore is irrelevant
v. Important Point: case represents traditional approach to illusory promises in which court take a literal approach to the promises made b/w the parties
b. Mattei v. Hopper (1958)
i. Promise
1. Hopper promises to sell his land to Mattei
2. Mattei promises to buy Hopper’s land and pay a deposit under the condition that he can find satisfactory leases
ii. Claim: breach of contract – seeking expectation interest
iii. Defense: no consideration b/c illusory promise existed in the satisfaction clause which didn’t legally bind Mattei
iv. Conclusion: there was consideration b/c the satisfaction clause must be based on an honest judgment – Mattei can be held liable for not exercising good faith
v. Important Points
1. Case represents the modern approach to illusory promises in which the court analyzes the intent of the parties
2. The court applies a good faith standard to the satisfaction clause to give the illusory promise substance and to reflect the original intent of the parties who believed they were entering into a valid contract
