Contracts Outline

Contracts Outline – Frier
Saturday, March 29, 2008
2:07 PM
I – A Roadmap for Contract Law
 
R2K § 2 Promise; Promisor; Promisee; Beneficiary
(1) A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.
(2) The person manifesting the intention is the promisor.
(3) The person to whom the manifestation is addressed is the promisee.
(4) Where performance will benefit a person other than the promisee, that person is a beneficiary.
 
R2K § 16 Intoxicated Persons
A person incurs only voidable contractual duties by entering into a transaction if the other party has reason to know that by reason of intoxication
(a) he is unable to understand in a reasonable manner the nature and consequences of the transaction, or
(b) he is unable to act in a reasonable manner in relation to the transaction.
 
Lucy v. Zehmer (Virginia, 1954) [Objective Manifestations] ·         P asserts that D sold him a farm for $50K, which was written out on a restaurant bill, after both had had a few drinks. Signed by D and wife. D claimed he was not serious, that it was a bluff to get P to admit that he couldn’t pay the $$. No intention to sell. P thought he was serious and made preparations for the sale. P sues for specific performance
·         Issue: Does a valid K for sale exist?
·         Holding: Event constituted a binding K of sale, whether offer was serious or not. Look to the OBJECTIVE manifestations of the parties, not the private intent. P gets specific performance.
·         D said it was a bluff – this is bad, joke would’ve been better. Bluff = intent to deceive. Also, D never made it clear that he was not serious.
·         D argues incapacity – must be unable to comprehend the nature and consequences of the instrument executed (R2K § 16)
§ Capacity goes to the ability to form intent
·         Objective theory: look to outward expression of a person as manifesting intention, not secret and unexpressed intent – as a reasonable person would understand those actions
§ R2K § 2 re: def’n of promise – objective “manifestation of intention”
§ Reasonable person standard, mental assent not important
§ Courts look at actions, only way for others to base decisions
§ Court looked at evidence -> rewriting of K, getting wife to sign, document used legalese
§ Lucy relied on K -> title search, half interest to brother
§ K / No K dichotomy: watershed moment once K created, cannot turn back
·         Note that if P had only offered $10K for it, the offer would be viewed differently – gross inequality of exchange [where to draw the line] ·         They also reduced this to writing, price was reasonable, signatures were there, and they re-wrote it when D misspelled a word! [Statute of frauds – some contracts have to be reduced to writing] ·         Contract/no-contract:
§ Expectation interest – formation of K over (offer/acceptance made, execution). Legally sufficient to prevent Ds to avoid K – no one has given/received anything, expectation of future state of performance only. Exchanging promises (no need for $5)
§ Reliance interest – P invested time/$$ – got an attorney. This is a change in position, investment in K.
§ Restitution interest – transfer in value, the other side has benefited from its promise at your expense
§ $$ value: expectation>reliance>restitution. This is the opposite when considering the moral value
·         Specific performance – equity (common w/ land transfers). Remedy – judicial decree requiring transfer of deed in exchange for purchase price. Cts prefer damages
 
Delchi Carrier Spa v. Rotorex Corp. (US 2nd Cir, 1995)
·         D sold P compressors for ACs, and sent a sample compressor for inspection and written specs. After paying, P realizes that goods do not conform, and informs D, asking for new conforming goods. P tries to cure. D refuses, so P cancels K. P was able to get substitute goods from other suppliers, loss in sales though.
·         Issue: Did D breach and if so, what damages are due?
·         Holding: For P. D breached by delivering non-conforming goods, and this was fundamental breach because D could foresee this result and it was what P was entitled to expect. Damages for lost profits, consequential damages, incidental damages, labor shutdown – all because these were foreseeable
·         Using the CISG here – international sale of goods (not consumer sales, must be between two merchants)
·         D is liable for the lack of conformity because of EXPRESS WARRANTY – assume compressors will conform – not the same quality of goods (as the sample). CISG art. 35
·         This is a fundamental breach because it substantially deprives P of what it expected and it was foreseeable
·         Damages: should be equal to loss, including lost profit. CISG says that they cannot exceed what party in breach could foresee at the time of K’ing. CISG art. 74
§ Give lost profits – revenues minus the costs that would’ve been incurred but were not.
·         Lost Profits = Sales Revenue – Variable Costs or Price – Cost
·         Do not include fixed costs (depreciation, overhead, etc)
·         Variable costs difficult to calculate, very close to consequential damages (unused tools, etc)
§ Incidental damages (direct consequence of breach) – storage of the nonconforming goods, shipping them back – must be reasonable and foreseeable
§ Consequential damages (costs stemming from breach) – unreimbursed tooling costs and unusable stuff obtained for D’s goods
·         Court limits this at damages that are CAUSED by breach, CERTAIN (not projected sales), and FORESEEABLE
·         NOTE: When UCC and/or CISG are applicable, they MUST be used
 
·         Always better to be a debtor (have the money)
·         Unlike Torts, K does not care about fault (strict liability for the most part)
·         Keeps admin costs low
·         UCC is a statute / CISG is a self-executing treaty (use is not optional for either if adopted)
·         Why do we contract?
·         1 – Invoke pwr of the state to get performance or damages – legal deal, threat of suit changes actions.
·         2 – Make sure we agree on terms of deal
·         3 – Allocates and protects against known risks (protects against caveat emptor)
·         Future planning
·         We frown on aggressive self-help
 
II – The Bargain Theory of Contract
 
R2K § 1 Contract Defined
A contract is 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.
 
·         The law recognizes a promise as resulting in legal duties in 2 ways:
·         A moral duty to fulfill it
·         No promise should be enforced unless there is a good reason for enforcing it (the Courts’ view)
·         Two Interpretive devices to see if a promise is enforceable:
·         Form – formal contract, one under seal, written down
·         Consideration
·         Contracts usually promises between two or more parties
·         Contracts are executory at outset
 
A. CONSIDERATION
 
·         What each promisor seeks in return for their making a promise
·         Consideration for each promise is each other’s promise
·         Two elements of contract in CL
o    Oriented toward future performance
o    Law must recognize the promise as resulting in legal duties and remedies
·         Might say all promises ought to be enforced unless there is some good reason for not enforcing them
·         Or, no promise ought to be enforced unless good reason to [CL inclined toward this approach] ·         Determination whether a promise is enforceable
o    Intent (see Lucy) [difficult] o    Form
·         Formal Contract – promisor affixed a seal before delivering to the promisee
§ Enforceable because of the way it was made, not because of content
§ Advantages – ends all doubt on validity of contract
§ Disadvantages – socially obtrusive, burden to express exactly, inflexible
§ No longer effective
·         Form contract – standard form contracts
§ Cannot be bound often unless consumers initial the various provisions
o    Consideration
·         Principle method for determining legal worthiness of promise
 
R2K § 71 Requirement of Exchange; Types of Exchange [“The Bargain Theory of K”] (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) 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.
 
·      The bargaining is the bargain theory of contract, essentially must be an exchange (crucial element) (but it need not be of equal value or look to gains, etc)
·      Courts do not generally police an agreement for fairness
 
R2K § 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.”
 
·         The value of consideration does not usually matter – no need to look at “adequacy of consideration” – just see fair exchange of values.
·         Option contract is valid consideration
 
R2K § 25 Option Contracts
An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.
 
R2K § 87 Option Contract
(1) An offer is binding as an option contract if it
(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or
(b) is made irrevocable by statute.
(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
 
UCC § 2-205. Firm Offers.
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
 
·         Inadequate consideration:
·         Pretense of consideration: mere recital of consideration is not enough usually, unless option K
·         Nominal consideration is increasingly disapproved (page 51), but small sums for consideration of an option K are usually allowed
·         Fear of pseudo-bargains
·         Promise to make a gift is not enforceable because there is no consideration (Aunt Tillie)
·         Daughtery v. Salt – gift of $3,000 from Aunt Tillie to Charley using a promissory note was not a valid contract, no consideration, no bargaining [was merely a donative promise] ·         Past consideration – you can’t bargain for something you’ve already received.; Moral consideration – promisor acts from a strong sense of duty towards promisee. This might be an exception to the rule that w/out a bargain, there is no K. (Webb v. McGowan -> Webb and diverted a 75 pound block to save McGowin, but got crippled in doing so, very narrow exception)
·         R2K § 86: binding to the extent necessary to prevent injustice. Rigid rule, so moral consideration isn’t usually enough to enforce a promise.
 
R2K § 86 Promise for Benefit Received
(1) 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.
(2) A promise is not binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.
 
·         Pre-existing duty rule
·         Illusory promises
·         Forbearance
 
R2K § 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.
 
·         Duress
 
R2K § 175 When Duress by Threat Makes a Contract Voidable
(1) If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.
(2) If a party’s manifestation of assent is induced by one who is not a party to the transaction, the contract is voidable by the victim unless the other party to the transaction in good faith and without reason to know of the duress either gives value or relies materially on the transaction.
 
·         Misrepresentation
 
R2K § 164 When a Misrepresentation Makes a Contract Voidable
(1) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by the other party upon which the recipient is justified in relying, the contract is voidable by the recipient.
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material misrepresentation by one who is not a party to the transaction upon which the recipient is justified in relying, the contract is voidable by the recipient, unless the other party to the transaction in good faith and without reason to know of the misrepresentation either gives value or relies materially on the transaction.
 
·         Unilateral contract: promise is given in exchange for a future act (must fulfill an act, not just promise). Offer of a reward – the offeror wants the act (capture), not the promise. This is the case above.
·          Bilateral contract: exchange of a promise for a promise. The form of most Ks. Each promise is consideration for the other.
·          Donative Promise: as long as this isn’t too blatantly obvious, we don’t care about it for consideration purposes, unless the thing that is bargained for is of no real value or pretense. Look at motive, equivalence, genuine bargain. (This goes along w/ R2K § 79)
·          Illusory Promise
·         A promise that places no limit on the freedom of the alleged promisor but leaves his future action subject only to his own will. Only if you want to. (entirely optional)
·         It is always the person who is not the beneficiary of the condition who claims freedom from a contractual obligation b/c the other party has made the illusory promise
·         Unenforceable due to lack of consideration
·         Mutuality is not needed
·         If A and B arrange that A will work for B for 5 yrs, but B can terminate the agreement whenever she wants, this is not a real promise. It is irrelevant that B hasn’t terminated it yet. She can get out whenever.
·         Exclusive dealing Ks – no duty to sell the goods, so no consideration. However, there is an implied duty to exercise best effort (Wood v. Lucy, Lady Duff-Gordon)
·         UCC § 2-306(2): “A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”
·         R2K § 77 – if the alternatives would each be consideration alone, then illusory promise is consideration.
 
R2K § 77 Illusory 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 performances 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.
 
·         Illustrations of § 77
·         A offers to deliver to B at $ 2 a bushel as many bushels of wheat, not exceeding 5,000, as B may choose to order within the next 30 days, if B will promise to order at least 1,000 bushels within that time. B accepts. B’s promise is consideration since it reserves only a limited option and cannot be performed without doing something which would be consideration if it alone were bargained for.
·         A agrees to sell and B to buy between 400 and 600 tons of fertilizer in installments as ordered by B, A reserving the right to terminate the agreement at any time without notice. B’s promise is without consideration.
·         A promises B to act as B’s agent for three years on certain terms, starting immediately; B agrees that A may so act, but reserves the power to terminate the agreement on 30 days notice. B’s agreement is consideration, since he promises to continue the agency for at least 30 days.
·         A owes B an undisputed debt of $ 5,000 payable in five years. A makes a subsequent promise that he will either pay $ 4,000 at the end of the first year or pay the debt at maturity; in return B promises to accept the $ 4,000, if paid at the end of the first year, in full satisfaction of the debt. A’s subsequent promise is not consideration for B’s return promise, since the alternative of performing his legal duty is not consideration.
 
·         This undermines mutuality of obligation – unless both parties are bound, neither was. Under R2K § 79, this is absorbed into the rest of consideration – not necessary if there is already consideration.
·         Ouput Ks (seller agrees to sell all goods manufactured during a certain time to buyer) and
·         Requirements Ks (buyer will buy everything it requires from seller).
·         These are enforced by courts because the seller or the buyer is constrained in some way. For output Ks, the seller’s detriment is he is limited in who he can sell too even though he could obviously not manufacture any goods
 
 Hamer v. Sidway (Ct of Appeals NY, 1891) [Restriction of lawful freedom is consideration] ·         Uncle (promisor) agreed to give his nephew $5,000 on his 21st bday if the nephew refrained from drinking/smoking until then. He performed this duty.
·         This is different