Contracts Outline

A Roadmap for Contract Law
 
Objective Theory of Contract:
Risk-Allocation Theory of Contract:
 
Restatement §24: Offer Defined. An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
 
 
§154: When a Party Bears the Risk of a Mistake. A party bears the risk of a mistake when
(a)    The risk is allocated to him by agreement of the parties, or
(b)   He is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
(c)    The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
 
·         Lucy v. Zehmer: If one’s words/acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the unexpressed state of his mind.
·         SMS v. Malouf: Evidence of the parties’ intent to be bound can be found in their prior course of dealing. 
NIPSCO: The defenses of frustration, impracticability, force majeure, are unavailable in a K which already explicitly (or implicitly) assigns this particular risk to one party.
 
The Bargain Theory of Contract
 
Consideration:
 
 
Restatement §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)   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.
 
 
 
 
Unilateral Contract (Hamer v. Sidway):
 
 
Restatement §45: Option Contract Created by Part Performance or Tender. Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance an option contract is created when the offeree tenders or begins the invited performance or tenders the beginning of it. The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.
 
Restatement §90: Promise Reasonably Inducing Action or Forbearance. A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. A charitable subscription or marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.
 
 
 
 
Consideration vs. Condition:
 
Fisher v. Jackson:
 
Facts: Magazine advertisement for a “permanent position;” guy left other job to take position.
 
Rule: Although a detriment, quitting a prior job to accept new employment is merely a condition necessary to accept the new job.   It is not consideration because the employer did not bargain for it.
 
 
 
Forbearance vs. Illusory Promises
 
 
Restatement §77: Illusory and Alternative Promises. A promise is not consideration if by its terms the 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.
 
Comment a: “Words of promise, which by their terms make performance entirely optional with the promisor do not constitute a promise.”
 
Petroleum Refractionating v. Kendrick:
 
Facts: The seller is able to cancel shipment of oil if it stops making the grade of oil requested by buyer.
 
Holding: The seller’s promise to provide oil unless it stopped producing it was sufficient consideration. Ceasing to produce the oil would be a sufficient detriment.
 
Rule: A “legal detriment” (giving up a legal right) constitutes valid consideration.
 
Forbearing from sale: Even though the seller may not be obligated to manufacture any goods whatsoever, the seller’s giving up of the right to sell to others such goods as he should manufacture during a specified period is sufficient consideration for the promise of a buyer to purchase such goods.
 
 
At-Will Employment (Lake Land Employment): Forbearance on the part of an employer from discharging an at-will employee constitutes sufficient consideration to support a non-competition agreement.
 
 
 
Moral Consideration:
 
Majority (Harrington v. Taylor):
 
Facts: P stops D’s wife from axing him.
 
Rule: A past act voluntarily performed does not constitute valid consideration.
Minority (Webb v. McGowan): A past act, voluntarily performed can constitute valid consideration if the parties would have bargained for it provided the opportunity (similar to restitution).
 
Restatement §86: Promise for Benefit Recived: Not followed by the courts.
 
Restatement §90(2): “Moral consideration” is sufficient to bind a charitable donation promise.
 
 
 
Consideration and Option Contracts:
 
Option Ks require actual paid consideration (EMU v. Burgess):
Restatement 87(1): Option Contract.
Facts: Recited consideration of $1 to keep option open to buy house.
 
Rule: A written acknowledgment of receipt of consideration merely creates a rebuttable presumption that consideration has passed (Hagan v. Moch). Acknowledged, but unpaid consideration is insufficient to support a valid option contract.
An offer is binding as an option contract if it is in writ