Contracts I Outline
Fall 2000, Professor John Bradley
Prepared by Jeremy P. McNinch
Part I. What Promises Should the Law Enforce? – The Doctrine of Consideration
I. Chapter 1: An Introduction to Consideration – Donative Promises, Form, and Reliance
a. Contract (“K”): 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 as a duty. Formation of a K requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.
b. Bargain: an agreement to exchange
ii. Promise for a performance
c. Promise: the heart of a contract; not all promises are enforceable.
d. Agreement: a mutual understanding between two or more persons about their relative rights and duties regarding past or future performances; a manifestation of mutual assent by two or more persons.
R § 71(2)
e. Consideration: something of value (such as an act, a forbearance, or a return promise) sought by a promisor and received by a promisee in exchange for the promise; consideration, or a substitute, is necessary for an agreement to be enforceable.
R § 71(1)
Consideration may be in the form of a return promise or performance
§ Consideration must either be a detriment to a promisee or benefit conferred upon the promisor. Text pg. 1062.
R § 71(3)
f. Performance: successful completion of contractual duty; may consist of:
§ An act other than a return promise
§ A forbearance
§ Creation, modification, or destruction of a legal relation
1. Simple Donative Promises
v General Rule: Donative promises – promises to make gifts – are not enforceable because there is no exchange of value, i.e., no consideration.
· Doughtery v. Salt: aunt promises to give $ to nephew; nephew makes no promise in exchange; no consideration; not enforceable.
· A completed gift, however, is a valid and binding legal transaction; cannot be reversed by the donor in absence of fraud, etc.
· Summary: promise to give not enforceable; however, a gift made is not reversible
2. The Element of Form
v General Rule: Form alone does not make a contract enforceable.
· Nominal Consideration: “warm glow”; consideration that is so disproportionate with what it is being given for that the court finds that the promisor never intended to be bound by K. A bargain is a substantive transaction in which each party views what he gives up as the price for what he gets. Nominal consideration has the form of a bargain but not the substance of a bargain.
· Courts generally reject nominal consideration. Schnell v. Nell: Schnell did not view one cent as the price of giving up $600.
· Exception: nominal consideration can make a promise enforceable in 2 situations:
o Option contracts
3. The Element of Reliance
R § 90
General Rule: A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
· This doctrine is known as “promissory estoppel”: a promise made without consideration can be enforced to prevent injustice if the promisor should have reasonably expected the promisee to rely on the promise and if the promisee did actually rely on the promise to his or her detriment.
· Feinburg v. Pfeiffer: P retired from work in reliance of her boss’s promise to pay retirement benefits. Boss paid for a while but later quit. Promissory estoppel applies: boss intentionally altered P’s “position” and P relied on the promise. Feinburg distinguished from Plantation Steel: In the latter case, boss specifically promised to pay a certain amount for P’s life. However, in the former case, boss told P that he would be “taken care of.” In Plantation, the promise did not “shape the thinking of the plaintiff”: not enforceable.
· Remedies for promissory estoppel may be limited as justice requires – measure damages as to the extent of the reliance. NOT the terms of the promise. ONLY ENFORCE PROMISE TO THE POINT THAT INJUSTICE IS AVOIDED.
· Note on estoppel in pais: (equitable estoppel). Said to apply only when representations are made. Works like an evidentiary rule. A alleges the existence of facts X, Y, and Z, and those facts, if true, give rise to an action against B. A proves X and Y by direct evidence but seeks to prove Z by showing that B said that Z was true, and that A relied on Z. B is estopped from introducing evidence that Z was not true. Differs from promissory estoppel in two ways:
o Estoppel in pais is based on a statement of fact, whereas Section 90 is based on a promise
o An action can be brought under Section 90, while estoppel in pais requires some independent right.
II. CHAPTER 2: THE BARGAIN PRINCIPLE AND ITS LIMITS
1. The Bargain Principle
R § 71(2)
General Rule: 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.
· Performance may be
R § 71(3)
An act other than a promise, or
o A forbearance, or
o The creation, modification, or destruction of a legal relation
R § 79
· If the requirement of consideration is met, there is no additional requirement of
o A gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or
o Equivalence in the values exchanged; or
o “Mutuality of obligation.”
· Consideration can be in the form of forbearance on the part of the promisee. Hamer v. Sidway. Uncle promises to pay nephew if latter abstains from drinking, etc. The kid’s act is the forbearance of a legal right and constitutes consideration. Promise to pay is enforceable.
· Consideration can be in the form of a detriment to the promisee. Dahl v. Hem Pharmaceuticals. Test subjects were to receive test drug after test was over. Pharm. reneged. Submitting to the test was a detriment that constituted valid consideration.
· Courts won’t relieve K duties simply because a party made a bad deal. If the requirement of consideration is met, there is no additional requirement of equivalence of values exchanged. Hancock Bank v. Shell Oil: Because there was consideration (leased space in exchange for $), the equivalence of the values exchanged was not a factor. Note that this does not usurp the nominal consideration rule, which deals with the exchange of grossly disproportionate values.
· Mere inadequacy of a consideration will not void a contract. Batsakis v. Demotsis. D agreed to pay $2,000 for a loan of $25. Held, D had to pay.
· The use of duress will void a K.
R § 175, 176
If a party’s manifestation of assent to the K is induced by an improper threat by the other party that leaves the victim no other reasonable alternative, the contract is voidable (not void) by the victim. A threat is improper if: see R § 176.
o This does not mean that courts will void a K just because one party takes a hard bargaining position. The “threat” that a party won’t enter into a contract unless his terms are met is not economic duress.
o Alleged economic duress must be attributable to the person against whom duress is alleged. That is, the “bad” economic situation faced by the party claiming duress must have been caused by the party accused of duress.
o Applied: Chouinard v. Chouinard. P’s wouldn’t sign a contract for $ infusion into their business unless their partner, D, settled a long-standing dispute over the three partners’ respective interests in the company. The settlement resulted in D issuing promissory notes to P’s. D alleged economic duress. Held for P’s: alleged duress (the business was going to fail without $ infusion) not attributable to P’s. Record showed failing business was D’s fault. Moreover, the threat was not wrongful – P’s asserted their legal right to their share in the company.
o Exception: Rule does not apply when one party falls on hard times and the other party takes advantage of it. Applied: Post v. Jones. Whaling ship run aground. Rescuing ship talked stranded captain into an auction sale. Stranded captain agreed (had no other choice). This was economic duress.
v General Rule: Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one the parties together with contract terms that are unreasonably favorable to the other party.
· Two elements of unconscionability:
o Procedural unconscionability: “evils in the bargaining process”
§ Oppression: inequality of bargaining power which results in an inequality in bargaining power such that the weaker party has no real choice
§ Surprise: “fine print” – provisions hidden in a wordy document
o Substantive unconscionability: “evils in the resulting contract”
§ Must be “shocking” to court
§ Great disparity in the exchange
· To be held as unconscionable, a K must have both procedural and substantive elements.
· Unconscionability sliding scale test: the greater degree of substantive unconscionability, the less the degree of procedural unconscionability that is required to annul the contract or clause
UCC § 2-302; R § 208
Remedies (UCC): court may strip the unconscionable term from the K; refuse to enforce the K; or the court may limit the application of the unconscionable term so as to avoid any unconscionable result.
· In some cases, the purchase price of goods may alone be found to be unconscionable, therefore bringing the statutory provisions (UCC) into play. However, seller usually entitled to “reasonable profits.” Applied: Toker v. Westerman. D agreed to purchase a freezer under a retail installment K. The price was 2 ½ times what the good sold for in stores. Held, D didn’t have to pay entire contract. CT concluded payments to date “reasonable profit.”
· Note on the application of the UCC to “hybrid contracts” (I’m not sure why this note is in the unconscionability section): Contracts that deal with a combination of goods and services, such as a contract for the purchase and installation of carpet, i.e., Pittsley v. Houser, present difficult questions about the applicability of the UCC. Two constructions of hybrid contracts
o In the noted case, the court used the predominant factor test to determine which holds that if the contract is a transaction of sale, with labor incidentally involved, the UCC applies. Vice versa – UCC doesn’t apply. Bradley noted in class that the Mississippi Supreme Court rejects the predominant factor test in J.O. Hooker and Sons, 683 So.2d 396, 1996. I’m not sure if the Court adopted the construction below.
o The other line of authority allows the contract to be severed into different parts, applying the UCC to the goods involved in the contract but not to the non-goods.
3. Forbearance to Bring Suit
R § 74
General Rule: Forbearance to bring suit is valid consideration if there is any reasonable ground for the claimant’s belief that it is just to try to enforce his claim. He must be asserting his claim in good faith, not threatening suit for purposes of aggravation or nuisance.
4. The Problem of Mutuality (Need to study the book and notes with this; section might need revision)
R § 77
General Rule: An illusory promise is not valid consideration for a return promise. Key theme: restriction of freedom of action.
· Principle of mutuality: asserted as a general rule of contract law; both parties must be bound or neither is bound
· Illusory promise: statement that creates the illusion of a promise but is not actually a promise. [Bradley: if promisor has a free way out, the promise is illusory.] [Corbin: the chief feature of contract law is that by an expression of his will today the promisor limits his freedom of choice in the future. A prediction of future willingness is not an expression of present willingness and is not a promise.]
· A valid contract may be conditioned on the happening of an event, even though the event may depend upon the will of one of the parties. While the promising party is not bound to perform the act, the promise he made is enforceable if he, in fact, does perform the act. Thus, if the promisor performs the act that is dependent on his will, his offer to perform thereafter remains as if the condition had never been stipulated. Applied: Scott v. Moragues Lumber. D promised to ship for P if D bought a vessel. D bought vessel and repudiated. Promise enforceable since D actually bought the vessel.
· A contract to sell personal property is void for want of mutuality if the quantity to be delivered is conditioned entirely on the will, wish, or want of the buyer. That is, a K is void if buyer promises to buy all he wants from seller. (Buyer would not be bound to do anything but seller would be bound to sell Buyer all he wants: § 71 – no return promise means no consideration). Applied in Wickham & Burton Coal Co. v. Farmers’ Lumber Co. Buyer “promised” to buy all the coal that he wanted. Held, K lacked consideration because buyer not bound to do anything. Illusory promise. To be valid, a contract like this must: (Is this an “and” or “or” situation?)
o Obligate the buyer (I’ll buy X amount), or
o Restrict the buyer’s actions (I’ll only buy from you)
· K not mutual when there is:
o An obligation to buy and no obligation to sell
o An obligation to sell and no obligation to buy
· If Buyer agrees to purchase all he needs, there would be sufficient consideration.
· The requirement of mutuality does not mean that the promisor’s obligation must be exactly coextensive with that of the promisee. It is enough that the duty unconditionally undertaken by each party be regarded by the law as a sufficient consideration for the other’s promise. Applied: Linder v. Mid Continent. MT leased a service station from L with the option to cancel. L had no such option but tried to cancel. His defense was that K lacked MUT. Held, L could not cancel. Applied: Gurfein v.Werbelovsky. Purchaser could cancel order. Seller never sent order. Seller argued lack of MUT since he couldn’t cancel. Held, was consideration since seller could ship the order any time before cancellation.
· The general statement of the mutuality principle applies only to bilateral contracts. It does not apply to unilateral contracts. Moreover, the modern tendency is against lending the aid of courts to defeat contracts on technical grounds of want of mutuality. Helle v. Landmark, Inc.
· The mutuality principle, when combined with § 77, leads to the conclusion that a contract involving an illusory promise and a real promise cannot be enforced against the party making the real promise. Moreover, the illusory promise cannot be enforced against the party that made it.
· However, the text argues that the conclusion above rests on a fallacy because it treats transactions involving illusory promises as failed bilateral contracts when, in many situations, the transactions are actually unilateral contracts.
o Example: Because she is so confident in her skills, a law student offers to work for a firm for a year at half the firm’s normal salary. According to her offer, the firm can discharge her at any time. She quits after three months. Firm brings suit. Is the promise enforceable? Under the illusory promise doctrine, A would not be bound by her offer. However, A has received exactly what she bargained for – a chance – and should be bound by her promise…
· Wood v. Lucy, Lady Duff-Gordon: Wood agreed to use “reasonable efforts” to market Lucy’s designs. Court concluded that even though there was no express obligation of Wood, there was an implied obligation and, therefore, both parties were bound to the K. (He paid Lucy royalties, accounted for all transactions, etc.) UCC § 2-306(2) is a virtual codification of this rule. Consideration would have been ensured if the K required that Wood:
§ Sell only for Lucy, or
§ Pay Lucy for exclusive right, or
§ Pay $ for advertising, or
§ Guarantee Lucy at least $X/yr
· UCC § 2-306 refers to requirements and output contracts. Neither K type presents mutuality problems because both Buyer and Seller put restrictions on their freedom of choice. Both have consideration.
o Requirements K: Buyer will buy from Seller all of buyers requirements of a given commodity during a designated period at a designated price.
§ Note that a requirements K can be implied from the situation. Laclede v. Amoco. Amoco contends no mutuality. However, L’s pipes were hooked up to Amoco’s. Expensive for L to get another supplier. Thus, implied RK. Consideration!
o Output K: Seller will sell to Buyer all of Seller’s output of a given commodity during a designated period at a designated price.
as consideration for the later promise. That is, when the debtor recognizes this moral obligation by making a promise to pay he becomes liable.
· In all of these situations the creditor has, prior to the new promise, not merely a moral claim but a legal claim. The new promise does not create a legal right in the creditor where none existed before (for this would require consideration), but rather the promise operates to remove from the hands of the debtor a defense against the assertion of a legal right already existing.
5. Mills v. Wyman: moral obligation is a sufficient consideration for an express promise only in cases where at some time or other a good or valuable consideration has existed. (P cared for D’s twenty-five year old son until the son died. D promised to pay P’s expenses – promise not binding; no past consideration between father and P.)
6. Webb v. McGowin: “Where the promise cares for, improves, and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisor’s subsequent agreement to pay for the service because of the material benefit received.” Examples:
R § 86
D’s bull gets loose and P takes care of it; D promises to pay; enforceable promise
· P saves D’s life and injures himself in the process; D promises to pay; P conferred a material benefit to D. Enforceable.
· EXAM: So, in general there are 8 exceptions to the PDR:
Dispensed with – that is, needs no consideration – if duty is owing to a third person (comment to Restatement § 73)
Dispensed with if all elements of Restatement § 89 are met (Angel v. Murray)
Dispensed with by UCC § 2-209: modifications need no consideration, but must not be unfair
UCC § 1-107: promise to give up a claim
Restatement § 73 says if the performance of the second K differs from the first K (paying early; horse or hawk; compromise)
Courts have rejected Foakes v. Beer
Restatement § 84: waiver (Clark v. West); dispenses w/ PDR
Restatement §§ 82-, 83, 86: past consideration
IV. THE LIMITS OF CONTRACT
1. In general, courts will not enforce contracts that are:
· Against public policy (Miller – husband and wife; court enforcing K would be against public policy; Matter of Baby M – about twenty reasons)
· In violation of a statute: Matter of Baby M – agreement clearly in violation of state adoption laws
PART II: REMEDIES FOR BREACH OF CONTRACT
V. AN INTRODUCTION TO CONTRACT DAMAGES
R § 344
1. Judicial remedies under the Restatement serve to protect one or more of the following interests of a promisee: (a) his expectation interest, (b) his reliance interest, or (c) his restitution interest.
· Expectation: promisee’s interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed.
· Reliance: promisee’s interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made
· Restitution: promisee’s interest in having restored to him any benefit that he has conferred on the other party.
2. Hawkins v. McGee
· D Dr. promised P a “100% perfect hand”
· SCT of New Hampshire said that the measure of damages was “the difference between the…value of a perfect hand…and the value of his hand in its present condition, including any incidental consequences fairly within the contemplation of the parties when they made their contract.”
3. The goal of remedies in contract law: try to put non-breaching party in as good a condition as he would have been without the breach.
R § 356 comm. a
4. The central objective behind the system of contract remedies is compensatory, not punitive. United States Naval Institute v. Charter Communications
R § 355
5. Punitive damages are not recoverable for breach of contract unless conduct constituting the breach is also a tort for which such damages are recoverable. United States Naval Institute v. Charter Communications
VI. THE EXPECTATION MEASURE
A. Damages for Breach of a Contract to Perform Services
1. Breach by Person Who has Contracted to Perform Services
· General Rule: In general, where K’ors performance is incomplete or defective, the usual measure of damage is the reasonable cost of replacement or completion, where “reasonable cost” refers to reclamation costs not disproportionate to the value of the benefit received, e.g., the value of the land in question. However, if the K’or acts in good faith but defects nevertheless exist that render the contract incomplete, and remedying the defects could lead to economic waste, the proper measure of damage is the diminution of value rule.
· Louise Caroline Nursing Home v. Dix Construction:
o P cannot recover damages that would put P in a better position than if D had carried out the K.
o Fundamental rule of damages based on compensation; compensation is the value of the performance of the K – that is, what P would have made had the K been performed.
o Construction K: the measure of a plaintiff’s damages = cost to complete K – such part of K that has not been paid.
§ K price = $500K
Paid = -100K
Price not paid = $400K
If cost to complete = $500K, => Damages = $100K
· Peevyhouse v. Garland Coal & Mining Co.:
o P argues for damages based on Cost of performance:
Damages = Cost to complete remediation = $29K
o D argues for damages based on diminution of value
Damages = Market value of land after remediation – Market value before remediation = $300.
o P cannot recover a greater amount in damages for the breach of obligation than he would have gained by full performance thereof; and where the cost of performance of a breached contract is grossly disproportionate to the results to be obtained (in this case, reclamation), the appropriate measure of damages is the diminution rule, not the cost of performance rule. Thus, damages are limited to the diminution in value resulting to the premises because of the non-performance.
· Where there is a good faith effort to perform the contract but there are defects that render the contract incomplete, the owner is entitled to recover the cost to make the contract complete unless the cost of repairing the defects is grossly disproportionate to the benefits derived therefrom, in which case the owner is entitled to recover only the difference between the value as constructed and as it would have been if the contract had been performed.
2. Breach by a Person Who Has Contracted to Have Services Performed
· Aiello Construction: Two formulas
o Aiello for