FA ’07 Lungstrum Contracts Outline
I. INTRODUCTION TO THE STUDY OF CONTRACT LAW
a. PRELIMINARY MATTERS
i. Restatement (2d) of Contracts § 1. Contract Defined. A promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.
ii. Restatement has an authoritative nature – looked at when there are problems. Captures the core theory about contracts – recognized throughout.
b. THE MEANING OF ENFORCEMENT
i. Fundamental Assumptions:
1. Priority is the relief of promisee not punishment to compel performance.
a. Don’t want to punish and scare people into performing contracts, bec. under some circumstances, breach of contracts might be acceptable.
2. Relief to promisee should protect the promisee’s expectation by putting the promisee in the position in which it would have been had the contract been performed.
a. (Expectation interest = position if promise performed)
3. Relief should be substitutional (money damages) rather than specific (court order directing performance)
a. Exception: Sale of interest in land, each land is unique so that damages will not be adequate
ii. Three Interests Protected:
1. Expectation Interest
a. Put promisee back in position as if contract had been performed
b. The promisee is often said to receive the “the benefit of the bargain”.
2. Reliance Interest
a. Put promisee back in position as if the promise had not been made
b. Promisee has changed its position to its detriment in reliance on the promise
c. Promisee’s injury is worse off than if the promise had not been made
3. Restitution Interest
a. Promisee conferred a benefit on the promisor
b. Remedy would be putting the promisor back in the position had the promise not been made
i. Ex.) Promisee might have rendered a performance in return for a broken promise.
c. Promisor would return the benefit incurred
d. It would be unjust for the promisor to retain the benefit
iii. Courts will not award punitive damages for a breach of contract.R(2d) of Contracts § 355.
1. Naval Institute v. Charter Communications
a. Navy sued for all profits from pre-October sales of book
b. Court awarded the difference bt. what they did sell in hardback in September and what they would have sold had not the paperback been sold (profits in August)
c. Court reasoned that not all who bought the paperback would have bought the hardback – would have just waited till came out. Otherwise would have been punitive damages.
d. Exception to punitive rule: If conduct is an independent tort for which punitive damages are awarded.
iv. Clear proof of a doctor’s promise of specific medical results may give rise to an enforceable contract
1. Sullivan v. O’Connor
a. P had entered into contract w/ D to fix her nose – ended up w/3 operations and nose was worse
b. Court says reliance interest is appropriate to use – bec. she was trying to recover the very specific pain she suffered as a result of the 3rd surgery – it is recoverable
c. Under expectation – she would have been theoretically been able to recover for the value of the nose as it should have looked as promised – good example why court decided to go with the reliance method – too speculative.
II. THE BASIS FOR ENFORCING PROMISES
1. R 2nd §17(1) Requirement of a Bargain
1. Formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.
2. Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts or under the rules in §82-94.
ii. Legal Value
1. Hamer v. Sidway – uncle promised $$ to nephew if he didn’t drink/smoke till 21, nephew did forbear – uncle held on to the $$ then died. Executor didn’t think claim was valid.
a. Executor sd no consideration bec. no tangible benefit to the promisor (Uncle).
i. View based on “Quid pro quo” from common law from of action for debt – looked at whether there was a benefit bestowed on someone “that for which” the promisor received a benefit.
b. Executor also sd. no detriment to the promisee – he actually benefited from the promise
i. Relied on concept of “Assumpsit” – where there is a promise made and a detriment suffered by the promisee
c. Court says nephew gave up a legal right for the uncle’s promise – that it was enough for consideration. Uncle bargained for a performance, not a promise.
2. R 2nd §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 the promise.
3. The performance may consist of:
a. An act other than a promise, or
b. A forbearance, or
c. The creation, modification or destruction of a legal relation.
4. The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.
3. R (2d) § 74. Settlement of Claims
(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless:
(a) the claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or
(b) the forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid.
(2) The execution of a written instrument surrendering a claim or defense by one who is under no duty to execute it is consideration if the execution of the written instrument is bargained for even though he is not asserting the claim or defense and believes that no valid claim or defense exists.
4. R (2d) §79 Adequacy of Consideration Mutuality of Obligation.
If the requirement of consideration is met, there is no additional requirement of:
(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or
(b) equivalence in the values exchanged; or
(c) “mutuality of obligation”
a. Says no additional requirement of benefit/detriment as long as consideration is met under §71
5. R (2d) §81 Consideration as Motive or Inducing Cause
(1) 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. Ex.) Nephew abstained anyways – regardless of the uncle’s promise – no matter what the subjective motivation was – can still be consideration
(2) The fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise.
6. Marine Contractors Co. v. Hurley – Employee decides to retire and employer wants promise not to compete with company – w/ just the promise w/o something in return will not be enforceable so company offers to pay him his fully vested amount in trust fund immediately in return for no competition.
a. Unusual: Employer isn’t actually doing something and it is a 3rd party who is doing something.
b. Employee modifies his relationship with the trust fund and subsection (4) of §71 says that the performance or return promise may be given by the promisee or by some other person.
a. Has to be an actual bargain – not just a sham – pg. 33
b. §71 Illustration 5 addresses it
c. Another example – selling T-shirts for the final four for $1,000 and throwing tickets in with it.
8. Fiege v. Boehm – P pregnant, agreed not to pursue bastardy charges if D paid a certain amount in bills/support, tests proved he wasn’t father – tried to get out of agreement.
a. Forbearance to sue for a lawful claim or demand is sufficient consideration for a promise if the party forbearing had an honest intention to prosecute litigation which is not frivolous, vexatious, or unlawful, and which he/she believed to be well-founded and based on a good faith belief or right
b. No consideration if she knew that there was no truthful claim – blackmail.
c. Court said she didn’t know there was no basis – applied a more subjective view of her intentions.
9. Ralston v. Mathew
a. Kansas Stairway to Heaven
b. Ralston was injured on her way up a negligently maintained stairway of a church. The church insurance company agreed to pay her on the promise that she did not sue. The insurance company did not pay her and when she did sue, the insurance company claimed immunity because it is a charitable organization.
c. Court held that the insurance company lacked good faith as illustrated in Fiege v. Boehm above.
d. Also, P won the case bec. at that time there was enough uncertainty about the immunity that by giving up her right to sue was sufficient consideration.
iii. Bargained for Exchange
1. A promise made in consideration of a prior performance is not sufficient to create a binding contract.
a. Feinberg v. Pfeiffer Co
i. P (Feinberg) offered Pension by president of company – she quit year and half later – received $200/mos till new people took over and looked at it as gratuity.
ii. Can’t have consideration due to past acts – can’t be bargained for – because it is already given before the promise is made.
gitive bec. he was a friend – his motivation wouldn’t matter bec. of R§81
v. If he learned of it after capturing him, but before turning him in – would still get reward bec. R§51 – he rendered the performance that was sought by the promisor.
iv. Promise for a Promise
R (2d) § 77. Illusionary and Alternative Promises
A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performance unless:
(a) each of the alternative performances would have been consideration if it alone had been bargained for; or
(b) one of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice, events may eliminate the alternatives which would not have been consideration.
1. UNILATERAL contract vs. BILATERAL contract.
a. Unilateral: Only one party makes a promise.
i. Hamer v. Sidway (where uncle promises to give money for the nephew’s forbearance, nephew never actually promised to forebear, he just did it). If the nephew fails to forebear, the uncle has no right to bring action because nephew never promised.
ii. Duty on one side only, and a right on the other side.
b. Bilateral: both parties make promises – more common and more economically significant.
i. There is a right and a duty on each side.
ii. In Hamer if Uncle promises to pay $ and nephew promises to forbear – if nephew doesn’t forbear – not only loses the $ but also could be sued for damages.
iii. Making a promise puts you at more risk by creating a duty to perform; more significant in commerce bec. provide a vehicle for planning – have security in that you have recourse against the side that breaks the promise and gives incentive to perform.
iv. Once promises are bargained for and exchanged, both parties are bound regardless of reliance, or detriment, or gain. Unless it is for a peppercorn or an illusionary promise.
2. In order to be legally binding, a promise must be supported by consideration and cannot be illusionary.
a. Strong v. Sheffield
i. Strong asked for niece’s endorsement on a note for husband’s debt – relied on uncle’s promise to forbear on collecting the debt till later – but didn’t give a specific amount of time – just “I will keep it until I want it” – no fixed time or a reasonable time.
ii. Court sd there was no consideration for the D’s endorsement – fact that he actually engaged in the act is beside the point, bec. it wasn’t bargained for
iii. Illusory Promise
1. a purported promise that entitles the promisor to perform or not perform, at his own choice and with no binding commitment either way
2. Illusory promise bec. no restriction on his freedom of action.
iv. **On final exam – analyze problems involving illusory promises both under Strong and under §77 – but only if look at in truly applicable sense**