CONTRACTS OUTLINE
HOWARD ABRAMS
SPRING 2017
STEP 1: WAS A CONTRACT FORMED?
Contract = a legally enforceable promise.
Some contracts are legally binding and others are not.
WAS THERE A LEGALLY ENFORCEABLE CONTRACT?
Courts use three principle doctrines to distinguish between enforceable and nonenforceable promises:
(1) Consideration Doctrine (R.2D § 71)
(2) Promissory Estoppel (R.2D § 90)
(3) Material Benefit Rule (R.2D § 86)
THE CONSIDERATION DOCTRINE
A promise made in connection with a contract will not be enforceable unless it is supported by “consideration.”
R.2D § 71. REQUIREMENT OF EXCHANGE; TYPES OF EXCHANGE
To constitute consideration, a performance or a return promise must be bargained for.
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.
The performance may consist of
an act other than a promise, OR
a forbearance, OR
the creation, modification, or destruction of a legal relation.
The performance or return performance may be given to the promisor or to some other person. It may be given by the promisee or by some other person.
Bargain Versus Gift
R.2D § 71 emphasizes the “bargain” theory of contract, providing that there is consideration if the promisee gives up a legal right and that relinquishment is bargained for (i.e. desired) by the promisor.
Replaced “benefit detriment” theory of consideration applied in Hamer v. Sidway.
THE BARGAIN ELEMENT
“Bargained for” promises are supported by consideration (bargained for” = the promisor wants it done).
PROMISES TO MAKE GIFTS (“gift promises”) are not supported by consideration (lacks the “bargain” element) and therefore are generally unenforceable.
Existence of condition: No consideration. Even if the person promising to make a gift requires the promisee to meet certain conditions in order to receive the gift, there will still be no consideration if the meeting of the conditions is not really “bargained for” by the promisor. [Kirksey v. Kirksey]
Occurrence of condition is of benefit to promisor: Consideration. If the promisor imposes a condition, and the occurrence of this condition is of benefit to him, then the bargain element probably will be present. [Hamer v. Sidway]
Mixture of bargain and gift: Consideration (e.g. friend agrees to sell something of value at a great discount to another friend).
Executed gifts: It is only the promise to make a gift, not the actual making of a gift, that is unenforceable for lack of consideration. Once the promisor makes the gift, he cannot rescind it for lack of consideration.
NOMINAL CONSIDERATION: Even though a deal looks on its face as if it is supported by consideration, the court may conclude that the purported consideration is nominal, and is thus not consideration at all.
Nominal amount: Where the “consideration” that has been paid is so small as to be nominal, the court may conclude as a factual matter that there is no real “bargain” present at all. If so, the promise will not be enforced due to lack of consideration (e.g. Dad says he will buy car for son in four years if son pays him $1 = no bargain, no consideration, unenforceable).
Payment not in fact made: If a non-trivial payment is recited, but the payment was not in fact made, most courts will take this as evidence that no bargain was present.
PROMISEE UNAWARE: Generally, the promisee must be aware of the promise for the act performed by him to be consideration for the promise (e.g. rewards).
PAST CONSIDERATION: If the promise is made in return for detriment previously suffered by the promisee, there is no consideration (e.g. promise to pay existing debt; promise to pay for services already received).
THEORIES OF CONTRACT LAW
The distributive effect of a court's decision is its effect on the relative wealth of the parties to the current lawsuit. In addition, there can be a distributive effect on nonparties to the extent that new rules are inconsistent with settled expectations.
The instrumental effect of a court's decision is its impact on the behavior of people who modify their future behavior to exploit (or avoid) the court's ruling.
For example, consider someone who is injured by the negligence of a church bus, arguing that the traditional immunity for charitable organizations should be abolished. Note that a legislature can minimize the distributive effect of its decisions by making them prospective only—normally, a court cannot do this.
R.2D § 73. PERFORMANCE OF LEGAL DUTY: A promise to perform an act that the promisor has a preexisting legal duty to perform (i.e., a legal duty that existed before the new promise) does not constitute consideration, even if bargained for.
OFFICIAL DUTIES: Under the legal duty rule, the promise of an official to perform an act that falls within the scope of the official’s duties is not consideration, and neither is the actual performance of such an act (e.g. police officer promises store owner to keep watch on store within patrol area in exchange for $ = unenforceable b/c within scope of officer’s official duties).
ACTION NOT WITHIN SCOPE OF OFFICIAL DUTIES: The legal duty rule is not applicable if the act performed by the official is not within the scope of her official duties, even though it is similar to those duties (e.g. officer is on vacation = enforceable b/c not within scope of officer’s official duties since off-duty).
PRETENSE OF BARGAIN IS NOT SUFFICIENT: The legal duty rule cannot be avoided by a bargain that merely pretends to call for a performance outside the scope of an official’s duties. The difference between the official duty and the promised performance must be real and material, not a slight difference contrived to make the contract enforceable (e.g. officer also offers to check windows each night = unenforceable b/c slight deviation is not enough to make contract enforceable).
Hamer v. Sidway
FACTS: Uncle promises nephew that uncle will pay $5,000 when nephew turns 21 if nephew refrains from drinking, smoking, swearing, and playing cards and pool for money. Nephew agrees and fully performs. When nephew turns 21, uncle reaffirms the promise but says he will hold the money on account. Uncle dies without making payment, and nephew sues uncle's executor.
HELD: In favor of nephew. Consideration exists because nephew restricted his lawful freedom of action upon faith of his uncle's agreement and performed the conditions imposed. While the uncle may have derived no actual economic benefit from his nephew’s abstinence, he was clearly attempting to obtain something he regarded as desirable (his nephew’s health, morality, etc.), and was therefore bargaining.
Analyzed pre-R.2D § 71 under the “benefit detriment” theory of consideration.
BENEFIT DETRIMENT RULE: ‘Consideration’ means not so much that one party is profiting as that the other abandons some legal right in the present, or limits his legal freedom of action in the future, as an inducement for the promise of the first.
NON-ECONOMIC BENEFITS: A bargain may be present even though the promisor does not receive any economic benefit from the transaction.
Kirksey v. Kirksey
FACTS: Brother promises sister-in-law that if she will move to his land, he will give her a place to live with her family. She moves, but eventually he makes her leave. She sues to enforce the promise.
HELD: In favor of brother because there was no consideration for brother's promise.
ANALYSIS: Sister-in-law suffered a “detriment” (the expenses) sufficient to meet the “detriment” requirement of consideration. However, the brother did not promise her a place to live because he wanted to see her—that is, he was not bargaining for a visit from his sister-in-law by promising her a place to live. Rather, her coming to see him was simply a necessary pre-condition of her accepting the gift.
The promisee must meet certain conditions in order to receive the gift, but the meeting of these conditions is not really bargained for by the promisor—the meeting of the conditions is not the promisor’s motive for making the promise—thus, the promise is not enforceable.
In re Greene
FACTS: A married man agreed to pay $1,000 per month, rent for four years on an apartment, and transfer an insurance policy to a woman with whom he had had an adulterous relationship. In exchange, she agreed to release him from any claims she might have against him. Ultimately he defaulted on the promise, and she sues to enforce.
HELD: No consideration for the promise because she had no rights against him (sex is not a legal consideration).
There cannot be a contract where consideration is illegal (sex cannot be consideration).
Note: The court observed that if the promise had been in exchange for future illegal cohabitation, there would be consideration BUT the contract would be unenforceable as immoral.
R.2D § 74. SETTLEMENT OF CLAIMS
VALID CLAIM SURRENDERED: If a promisee promises to waive a valid claim, all courts agree that this promise is “detriment” to the promisor, and constitutes consideration for the promisor’s promise to pay a settlement amount.
SURRENDER OF AN INVALID CLAIM [§ 74(1)(a) & (b)]: If the claim that the promisee promises to forbear from suing on is invalid, the forbearing promisee gives consideration if either: (a) the promisee’s forborne claim is one whose validity is uncertain, or (b) the promisee subjectively believes that the forborne claim has possible merit (even if it doesn’t in fact have any possible merit).
Validity of forbearance of a claim depends upon if parties thought that the claim was a good one. This is a change from the norm where we look into mind of other party and how they viewed the deal—
When the promisor thinks it would be a good claim and promisee knows that it wouldn’t be à no consideration; promisee is abusing and trying to profit from court system (i.e. BLACKMAIL). The court will not be a party to a “shakedown.”
When promisor thinks it is bad but promisee thinks it is good and promisor settled à counts as consideration; promisor has made a promise when they basically shouldn’t have.
In defining fairness of consideration, fairness is based on how the parties view it.
If the underlying claim is invalid, the release of liability from that underlying
claim is invalid as well. It does not matter if the claimant believes the underlying claim is valid, it’s about whether the claim was in fact invalid.
EXECUTION OF RELEASE [§ 74(2)]: Even if the promisee who is forbearing from asserting her claim does not subjectively believe that the claim is valid, if the promisee executes a written instrument settling the claim, and the promisor bargained for that instrument, the instrument itself will be sufficient consideration for the promisor’s counter-promise.
Assume that state law provides that one can bring a civil suit against anyone without violating the law. I tell you that I am about to file a suit against you for $100,000, alleging that you injured me in a car accident. We both know there was no car accident. I offer to save you the cost of a lawyer by settling the suit for $500, and you agree to pay me in one
at her material and intended reliance on the promise makes the promise enforceable.
Foreseeable = money was given so that she wouldn’t have to work.
Reasonable = this is what he intended.
Detrimental = she suffered because she relied on the promise.
Remedy could be no more than $2000 because that’s what she was promised.
Note: We could not enforce the theory using traditional consideration doctrine because the grandfather did not condition his promise on her agreeing to quit her job or on anything else, so NO BARGAIN.
A Reconsideration of the Intrafamilial Cases:
Hamer v. Sidway
Kirksey v. Kirksey
In re Greene
Wolford v.
Haase v. Cardoza
Ricketts v. Scothorn
Promisor is ∆?
Promise Enforced?
Note that the only exceptional case is In re Greene, and in that case the defendant was the promisor's estate because the promisor was in bankruptcy.
Note further that Kirksey might well come out differently today under the doctrine of promissory estoppel.
Promises Made in Employment Contexts
Feinberg v. Pfeiffer Co.
FACTS: Mrs. Feinberg worked for the defendant from 1910 until 1947 at which time she was granted by the Board of Directors a pension of $200 per month upon retirement. This pension was not conditioned upon future services by Mrs. Feinberg although she continued to work for the company until 1949. Payments were made until 1953 and then were discontinued, and Mrs. Feinberg sued for continued payments.
HELD: The court found as a fact that the board did not condition the promise of the pension upon any future work of Mrs. Feinberg. Despite an absence of consideration, the court held the promise enforceable on the grounds of promissory estoppel.
Note that Mrs. Feinberg stated that she would have continued to work for the company even absent the promise of the pension.
Hayes v. Plantations Steel Co.
FACTS: The employee worked for the employer for 25 years. Starting one year after he retired and continuing for three years, the employee received an annual sum from the employer. The employee testified that approximately one week before his actual retirement he spoke with an officer of the employer who stated that the employee would be “taken care of.” There was no mention of a sum of money and no formal authorization for payments by the shareholders. The lower court held that the employer owed the employee an annual sum for four years because the employee had a right to expect the continued payments.
HELD: For the defendant, that no consideration supported the promise and no detrimental reliance occurred. The Court held that the plaintiff’s retirement one week after receiving the promise of a pension was not detrimental reliance because plaintiff had already announced his intention to retire.
The court held that the employee did not supply the required consideration to make the employer's promise binding.
The court held that the employee announced his intent to retire well in advance of any promise by the employer to pay him, and therefore the intention to retire was arrived at without regard to any promise by the employer.
The court held that the employee's long years of dedicated service was legally insufficient consideration because his service was rendered without being induced by the employer's promise.
WERE THERE MUTUAL MANIFESTATIONS OF ASSENT?
OFFER AND ACCEPTANCE
R.2D § 17. REQUIREMENT OF A BARGAIN
The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.
R.2D § 18. MANIFESTATION OF MUTUAL ASSENT
Manifestation of mutual assent to an exchange requires that each party either make a promise or begin or render a performance.
Subjective and Objective Tests of Mutual Assent
SUBJECTIVE TEST: What the person making the expression subjectively meant the expression to convey or what the person to whom the expression was addressed subjectively understood the expression to mean.
OBJECTIVE TEST: What a reasonable person would believe if in the situation. Look to what the parties show, not what they think. An act will be an offer only if a reasonable person in the position of the offeree would conclude that she has the power to bind the parties (the offeree would also have to have a subjective belief that the offeror was making an offer).
Contract law follows the objective theory of contracts.
