Contracts Outline – Oren Bracha – Fall 2012
Bases for Enforcing Promises
Enforceable Promises: An Introduction (E&E Ch. 1, pg. 1)
a. Contract (Restatement 1) – 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
i. Bilateral contract – where both of the contracting parties are required to fulfill obligations reciprocally toward each other – Two promises
1. Ex. A contract of sale where the seller promises to deliver goods to the buyer and the buyer promises to pay the price for them
2. Ex. A says to B, “I’ll buy that kayak from you provided that it is watertight. I will give you a check for $400 immediately.” B says, “It is watertight. I accept. Give me the check and take the kayak.”
a. A has given B a promise to pay $400 (in the future with the check)
b. B made a promise to A concerning the kayak’s condition
ii. Unilateral contract – where one party becomes bound to fulfill obligations toward the other without receiving any return promise of performance
1. Ex. A promises to pay $100 for return of her dog
2. Ex. A offers to buy a kayak from B with a check for $400. B agrees to sell it “as is.”
a. A makes a promise to pay with a check
b. B delivers the kayak without making a promise
b. RULE: Whether or not there is a contract depends on the context of the situation
i. Hawkins v. McGee (1929) – Court holds that doctor entered into a contract because he repeatedly solicited business from the boy’s father to perform skin graft surgery and he said “I guarantee to make the hand 100% perfect.”
ii. Hypo: A buys B’s car, but before they make the exchange A gets cold feet and worries that car will drop in value. B says, “Are you kidding? The value will only go up in the future, I guarantee it, you can take that to the bank.” Value ends up dropping and A wants to sue. Did B make a promise?
1. Maybe, it depends on the context of what B said and did
c. U.C.C. – Uniform Commercial Code
i. Express Warranty – any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of bargain
ii. Implied Warranty – warranty that is implied by the promisor that the promisee relies upon when making their purchase
iii. Bayliner Marine Corp. v. Crow (1999) – Court held that Bayliner Marine Corp. did not breach express warranty because the boat purchased had a different propeller size and more cargo weight than the advertised boat. Also, sales brochure said “the kind of performance you need to get to prime offshore fishing grounds,” which the court held as the seller’s opinion. Seller’s opinion does not create a warranty
Consideration as a Basis of Enforcement (E&E Ch. 7, pg. 145)
Fundamentals of Consideration
1. Consideration (Restatement 71)
a. To constitute consideration, a performance or a return promise must be bargained for.
b. 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
c. The performance must consist of:
i. An act other than a promise, or
ii. A forbearance, or
iii. The creation, modification, or destruction of a legal relation
d. 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
a. A gives B a promise, and B gives A a performance
i. Hypo – A offers to pay B $100 if B walks across Lamar bridge in bikini
ii. A is promisor and B is promisee
iii. Only one side has undertaken a promise, this is called a Unilateral contract
iv. Only B can sue A if they fail to pay
b. A gives B a promise, and B gives A a promise
i. Hypo – A offers to pay B $100 if B promises to walk across Lamar Bridge in bikini
ii. A is promisor, B is promisee
iii. This is called a bilateral contract because there are two promises
iv. In this example both can sue each other because they both have given valid promises and consideration
3. Detriment/Benefit – for there to be consideration, there must be a benefit to the promisor OR a detriment to the promisee (E&E Ch. 7, pg. 148)
a. Ex. Hamer v. Sidway (1891) – Uncle promises nephew he’ll pay him $5,000 if he abstains from drinking, using tobacco, swearing, and playing cards until he is 21. Nephew abstains, but uncle dies before he can pay him. He sues his uncle’s executor for the money.
i. Issue: Was there consideration given by the nephew?
ii. Holding: Yes. Court rules that even though the nephew probably benefited from abstaining from those vices, he still gave up his legal right to engage in those behaviors, which is considered a detriment and, therefore, consideration.
iii. Detriment/benefit is a broad concept
4. Bargains v. Gifts (E&E Ch. 7, pg. 148)
a. Bargains are the kind of stuff we want to enforce in contract law, not gifts. Why?
i. Argument 1: Bargains are economically valuable
1. Mutually beneficial exchanges enhance both parties’ welfare
ii. Argument 2: Preserving the value of gifts
1. Much of what is valuable about gifts is the fact that they are not legally enforceable
b. Hypo 1: B will give A $5,000 and A promises to give B $1
i. No authority says there is consideration here
ii. This is because of the mathematical certainty
iii. If it was a special $1 than it would make a difference
c. Hypo 2: Bracha promises to give Eric his house, Eric promises to give him one peppercorn
i. Some authorities say this is enforceable, Restatement says it’s not
5. Continuum between form and substance
<- Substance (Bargains) Bargains v. Gifts Formality ->
a. If you are on the right side (Formality) of the continuum, you are more likely to say peppercorn scenario is enforceable consideration
b. If you are more near Substance on the continuum, you’re likely to say the peppercorn does not suffice as consideration because it’s only a pretense, a form of the empty shell
i. The point: it matters where you fall on the continuum
6. RULE (common law) – Forbearance to sue is only consideration if both the elements of good faith and reasonableness are met.
a. Good Faith (subjective)
i. Person submitting the claim has to believe there is some sort of validity to the claim
b. Reasonableness (objective)
i. Given what the parties knew at the time of the contract being formed, what would a reasonable person think
c. Ex. Fiege v. Boehm (1956) – P sues D when he quits paying child support after he finds out he isn’t the father of her child. Under their agreement, she promised not to sue D for bastardy if he paid her child support.
i. Issue: Was P’s forbearance to sue valid consideration even though D ended up not being the father?
ii. Holding: Yes. Even though her claim was false and D wasn’t the father, she believed at the time that she was and both parties could reasonably have thought to think D was the father, so both elements of good faith and reasonableness were met.
7. Settlement of Claims (Restatement 74)
a. Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless:
i. The claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or – objective requirement
ii. The forbearing or surrendering party believes that the claim or defense may be fairly determined to be valid. – subjective requirement
b. 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
i. Note the difference between AND and OR in common law and restatement
The Requirement of Exchange (E&E Ch. 7, pg. 151)
i. Bargain Theory – MODERN EXTENSION OF BENEFIT/DETRIMENT
1. In order for something to be considerat
hange the rich person mentioned that in 5 minutes potential buyers for his house are going to drop by and that the usual spot of the tramp is right next to the entrance of the house and that the trip to the store usually takes 15 minutes.
1. We changed something about the context of the story that might change the meaning of whether we can interpret it as a factual condition or consideration in which the promisor is seeking consideration from promisee (see picture on notes)
c. Objective Test: It’s not the subjective understandings of each of the parties, but the objectives meanings of the exchange by a reasonable person, how both parties would interpret the situation
d. Kirskey v. Kirksey (1845): P’s dead husband’s brother D invited P to bring the children to his land and he promised that he would provide a home for them on the farm until they had grown up. P moved the 60 miles to the farm; after two years, D required them to leave.
i. Issue: Was D’s promise to provide P a home if she moved to his land valid consideration?
ii. Holding: No, a reasonable person would not understand D’s promise as seeking consideration, but simply as a factual promise. What D essentially said was “if state of affairs A occurs in the world, then I’ll give you the promise,” which is a factual condition and not seeking consideration. There’s no bargain going on.
Promises as Consideration (E&E Ch. 7, pg. 164)
1. RULE: An illusory promise is not sufficient consideration
a. Illusory promise (def) – makes performance optional for the promisor
i. Ex. Joe: “I’ll pay your debt tomorrow, if I want to.”
ii. E&E Ch. 7, pg. 164
b. Strong v. Sheffield (1895) – D promised not to collect on demand note from P for two years. He didn’t collect for two years, even though there was nothing on the note that would’ve prevented him from collecting immediately.
i. Issue: Was D’s not collecting for two years valid consideration?
ii. Holding: No. There was nothing on the face of the note that would prevent him from doing so. Even though he did wait two years to collect, nothing would’ve stopped him from collecting immediately. Because this was an illusory promise, no consideration was given
iii. TEST for Bilateral Contracts: Look to what was the agreement, not what was actually done
iv. Even though D actually didn’t collect for two years, the note (agreement) said he could’ve collected immediately
v. Note: If this had been a Unilateral Contract and P said “I’ll endorse the note, if you do not collect for two years,” this would’ve been a valid contract
c. Note: Some concepts, such as illusory promise, still hinge on benefit/detriment.
i. D didn’t give anything up (no detriment) and P didn’t gain anything (no benefit)
d. Note: An agreement not to collect debt is seen as consideration now by the U.C.C.
2. Bilateral Contract example: A promises to pay B $500 if B promises to paint A’s house
a. For a bilateral contract to be legally enforceable, each party’s bargained-for promise must be legally sufficient consideration for its counter-promise.
b. TEST: Whether the performance promised would be sufficient consideration.
i. In other words, a bargain must have mutuality of obligation; both parties must be bound or neither will be.