CONTRACT LAW
Master Outline
McGowan, Spring 2013
A. General Underlying Theory of all Contracting Behavior
“Bilaterally voluntary and informed transactions are presumptively welfare enhancing.”
B. Models and Statutory Bases of Contract Law
Restatements. The Restatements (both First and Second) are not binding law, but they are persuasive in many jurisdictions. Their purpose is basically to state the essence of contract law.
Uniform Commercial Code. The U.C.C., like the M.P.C., is a model code. Unlike the M.P.C., however, the U.C.C. has been adopted by almost every jurisdiction in the United States in some form or another. In those jurisdictions, it is the governing law in all cases involving the sale of goods.
C. Promises Enforceable at Law
A promise is an assurance that something will or won’t be done in the future. A promisor is the person who makes a promise. A promisee is the person to whom the promise is addressed. Promises enforceable at law are contracts.
Hawkins v. McGee. The court in this case found that D’s representations that he could make P’s hand “100% perfect” induced P to consent to the operation, and therefore constituted a promise enforceable at law (or a contract).
Bayliner Marine Corp. v. Crow. In this case, D made all sorts of representations in an attempt to get P to buy a boat. P sued when the boat didn’t perform according to D’s representations. Pursuant to Virginia contract law, the court found that those representations were not promises enforceable at law because they did not apply to P’s specific boat, but rather to D’s inventory generally.
There are two basic issues at play in these cases. First, was D’s assurance what induced P to enter into the agreement? (Was it the basis of the bargain?) Second, did D’s promises apply to the specific good for which the parties were contracting?
D. Remedying Breach of Contract
Remedial Interests and Principles of Enforcement. The purpose of contract law is to provide relief for a party “injured” by the failure of a contract. Courts award substitutional, not punitive, damages. That is, damages are intended to make the P whole, not to punish D.
U.S. Naval Institute v. Charter Communications. In this case, a literature publication licensing and timing issue gave way to a breach of contract. The lower court granted P damages in the amount of his injury plus D’s profit as a result of the breach. The appellate court ruled that this was improper – P was entitled only to his injury, not to D’s profit. To award P D’s profits would be to award punitive damages. This case stands for the general proposition that the focus of contract law damages is on P’s injury, not D’s benefit. To this end, contract law damages encourage efficient contracting behavior by allowing for efficient breach.
In terms of compensating for injury alone, there are three measurements of substitutional remedy.
Expectation damages (“benefit of the bargain”) can be awarded in the amount that puts P in the position he or she would have been in had the agreement been performed. There are many situations in which this is not an appropriate remedy, so the court may elect to award the next two types of damages instead.
Restitution damages can be awarded to compensate P for the benefits he or she conferred upon D.
Reliance damages can be awarded to put P in place he or she would have been in had the contract never been performed.
Sullivan v. O’Connor. This case examines the different damage measurements. The details are negligible – it’s essentially a botched plastic surgery with a subsequent suit brought by patient. D was clearly liable, the question for the court was how much he should be liable for. At one end of the spectrum, this was clearly not a case for expectation damages because these people are not exactly rational actors, and plastic surgery is a highly variable endeavor, so there was no way for the court to determine expectations ex ante. At the other end of the spectrum, restitution damages (i.e. the amount P paid D for the surgery) would have been too minimal to properly compensate P. The court awarded reliance damages as a happy medium between the two.
White v. Benkowski. The details of the case aren’t important. The only two important factors here are that courts do not award punitive damages for breach of contract, and that if P wants to recover amplified damages on a contract claim, in some cases, he or she can allege a tort claim for a breach of contractual duty. (The court also draws a distinction between compensatory damages, which are awarded in recognition of actual injury, and nominal damages, which are awarded in recognition of a technical breach of contract.
E. Consideration
Consideration is either the benefit received by the promisor or the detriment incurred by the promisee in exchange – in short, it’s what the promisor gets for promising. Consideration (or some substitute for it) must be given for a contract to be enforceable.
Hamer v. Sidway. In this case, P agreed to abstain from smoking, drinking, and gambling in exchange for $5,000 on his 21st birthday. P never received the payment and sued for breach of contract. D tries to defend on grounds that no consideration was given because P benefited from abstinence and gave nothing for the promise. The court doesn’t buy this argument – P’s waiver of his right to engage in legal activity was a sufficient detriment to constitute consideration (they don’t want to get into the question of whether he was benefited because benefit is often too subjective for courts to have to deal with). Also, we can’t be so sure that the promisor wasn’t benefited from P’s abstinence from vice.
When looking at issues of consideration, we always have to ask whether a stipulation is actually consideration or whether it’s just a condition (i.e. “I’ll give you X if you come live here…”).
Fiege v. Boehm. D promised to pay P’s childcare costs if P forbore from suing D for bastardy. After D found out the child wasn’t his, D didn’t pay childcare. P filed a suit for bastardy and lost it, then filed a suit for the unpaid childcare. D defended his failure to make those payments by saying that P’s forbearance was not adequate consideration. The court says that P’s forbearance was adequate consideration so long as she acted in good faith and with a reasonable belief (i.e. whether her forbearance was actually a detriment to her or a benefit to D).
Feinberg v. Pfeiffer. Here, D’s predecessors elected to give P, in recognition of her 37 years of hard work, a gratuitous pension plan and retirement income upon her decision to retire. P decided to retire, relying on those benefits. D takes over and decides not to pay benefits any longer. P sued to enforce the pension plan. The court found there was no consideration because P had not conferred any benefit to D’s predecessors and did not forebear from doing anything. Her past performance did not count as consideration. The question of consideration is arguable here, though. You could find ways that D’s predecessors benefited (i.e. encouragement of current employees, pay off to get her to stop working). The court did enforce the contract on an estoppel theory, however.
Promissory estoppel can be used to enforce a contract lacking consideration.
Moral Obligations as Consideration. In some cases, a moral obligation to compensate another for some past action can serve as consideration. Whether a moral obligation counts as consideration depends on timing.
Mills v. Wyman. D’s son gets sick. P takes him in and cares for him. After the son dies, D promises to pay P for his expenses, but never does. The court finds no consideration because D agreed to pay after care had been administered (nothing was actually bargained for – at the time of D’s promise, P did not confer a benefit, and P did not suffer detriment). This case represents the black letter rule that promising based on moral obligation alone is not sufficient consideration. This is the traditional stance.
Webb v. McGowin. Contrary to black letter law, the court accepts the idea of moral obligation as consideration in this case. Essentially, P injured himself saving D’s life. Afterward, D promised to pay P until the day P died. D dies and his executor stops payment. Despite the fact that there was no bargain between the parties (a la Mills), the court finds that consideration should exist because of transactional failures – the parties would have bargained if time had allowed. What happened is plausible as a transaction in retrospect because the promisor received a material benefit and the promisee a detriment. This is the more modern stance.
Vagueness as to Existence of Bargain. The language of offers can be vague as to whether the promisor is giving a gift or bargaining for an exchange.
Kirksey v. Kirksey. D’s offer says, “If you come live down here, you can have the land.” On one hand, this could mean that she can have the land simply because its there, in which case it would be a gift, not an enforceable contract. On the other, it could mean that her moving there was consideration for the land. The court finds that it’s a gift. There are no real guiding factors other degree of benefit/detriment.
Lakeland Employment Group v. Columber. D worked for P for a long time. P forced D to sign a non-compete. Ten years later, D violates the non-compete. D tries to say that there was no enforceable contract because he received nothing for signing the non-compete. The court says there was consideration because D received continued employment (they look at this from both an ex ante and ex post perspective). For obvious reasons, this is a very problematic ruling – even after getting his signature, they could have fired him then and there. Basically, P gave P not
a benefit that would be conferred to him by the promisor (reliance can be used in absence of consideration). Section 90 of the Second Restatement of Contracts governs promissory estoppel.
Rule. A (1) promise, (2) which should reasonably induce action or forbearance (3) on the promisee or a third person (4) and which does induce such action or forbearance, (5) is binding if (6) injustice can be avoided by enforcement of the promise. (7) The remedy granted for breach may be limited as justice requires. Rest. 2d Contracts § 90.
Ricketts v. Scothorn. This is a case of old school, illustrative case of promissory estoppel. The only item of note is that P was permitted to recover a promised amount of money because D made the promise with the intention of getting P to change her situation, and P, relying on the promise, did change her position to her detriment. Basically, this met all the Section 90 requirements.
Feinberg v. Pfeiffer. In the first part of this decision, the court ruled that the plaintiff had been given a gift because there was no consideration given. In the second part, the court enforces the promise to pay her benefits on a reliance argument, the significance being that reliance can be used as consideration.
Cohen v. Cowles Media. This case has to do with the injustice aspect of Section 90. From my notes, it doesn’t seem like he talked about it in class. Basically, the court just upholds damages against a newspaper, saying that it would be unjust to allow newspapers to break promises with confidential informants.
Stout v. Bacardi. P is going under, has to choose whether to sell or operate on a smaller scale. P solicits offers for the business, gets a decent offer. D, P’s main source of income, promises to stay in business with P. P turns down the good offer, then D rescinds its promise. P sells at a lower price, then sues D on promissory estoppel for difference in first and second price. P could not recover lost profits (because those have to do with expectation, not reliance), but could recover the difference in the prices because that was the detriment they suffered by relying on D’s promise. And reliance was reasonable here.
H. Restitution as a Basis for Recovery
When one party conveys benefits to another absent any sort of reciprocal promise to compensate for the benefits, the law will sometimes imply such a promise to make compensation, or that there was a quasi-contract between the parties. The purpose of this is to avoid unjust enrichment of a single party.
Rule. Recovery on restitution requires 1) that A confers a benefit to B 2) with the expectation of being paid; 3) that A was not a volunteer; 4) failing to provide remedy would result in unjust enrichment. Courts are split as to whether they should remedy by providing P with the reasonable value of the benefit conferred or the value of the detriment to P.
Cotnam v. Wisdom. Here, the court provides for a quasi-contract between P and D where P rendered life-saving medical services to D while D was unconscious. Although there’s no actual contract, the rational actor assumption tells us that if the parties had been in a position to bargain for the medical services, they would have (someone in risk of physical harm would want to be saved). But damages should not depend on whether the defendant is wealthy or poor – it is not socially optimal to incentivize saving only wealthy people.
Callano v. Oakwood Park. Quasi-contract is not the proper theory for remedy where a possible remedy from a contract already exists. P plants shrubbery for Pendergast, who has a pending motor home sale contract with D. Pendergast dies without paying P and his estate cancels the sale. P sues D on a theory of restitution, but he should have sued Pendergast’s estate to compel payment. P is just trying to use restitution to substitute promisors. (Basically, all the quasi-contract elements are missing between P and D.)
