Contracts Outline

Contracts

Saiman

Spring 2014

*Contract = Offer/Acceptance + Consideration

I. Introduction

1. Sources of Law

a. 2nd Restatement (RS)

i. Common law persuasive authority

b. Uniform Commercial Code (UCC) Article 2

i. Statutory authority that applies to the sale of goods

c. Common Law

i. Judicial opinions/case law

2. Restatement Terms

a. §1. Contract Defined

i. A contract is 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

b. §2. Promise; Promisor; Promisee; Beneficiary

i. 1) A promise is a manifestation of intent to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made

ii. 2) The person manifesting the intention is the promisor

iii. 3) The person to whom the manifestation is addressed is the promisee

iv. 4) Where the performance will benefit a person other than the promisee, that person is a beneficiary

c. §3. Agreement Defined, Bargain Defined.

i. How a Promise May be Made

1. A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct.

d. Unilateral Contract

i. Agreements in which only one party makes a promise (binds only one side to an agreement)

e. Bilateral Contract

i. Agreements in which each party makes a promise to the other (binds both sides to an agreement)

3. Categories of Agreements

a. Contracts for the sale of goods (UCC Article 2)

b. Real estate transactions

c. Construction contracts

d. Employment agreements

e. Family contracts

4. Questions Posed

a. Although not all promises are legally enforceable, a contract is nothing more than a promise the law will enforce

i. Formation: which promises should the law enforce

ii. Performance: how do we know whether the promises were kept?

iii. Remedies: what happens when one side does not fulfill its promises

iv. Defenses: are there any policy reason not to enforce this contract

*Formation: What promises do we enforce?

-Offer & Acceptance + Consideration

II. Consideration

1. Definition

a. Consideration is the “the glue that binds parties of a contract together”

i. Makes an agreement legally enforceable

ii. Provides a test as to whether there is a contract or not

1. Calling something a contract is a conclusion, not a starting point for enforceability

b. Consideration = a bargain

2. Requirement of Bargain

a. Bargain: giving up or exchanging a legal right; forbearing on a legal right

b. §17. Requirement of a Bargain.

i. 1) Except as stated in subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange a consideration

ii. 2) Whether or not there is a bargain, a contract may be formed under special rules applicable to formal contracts or under the rules stated in §§82-94

c. §71. Requirement of Exchanges; Types of Exchanges.

i. 1) To constitute consideration, a performance or a return promise must be bargained for

ii. 2) A performance or a 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

iii. 3) The performance may consist of

1. a) An act other than a promise, or

2. b) A forbearance, or

3. c) The creation, modification, or destruction of a legal relation

iv. 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

d. Holmes’ Bargain Theory

i. “Reciprocal Conventional Inducement” à the promise must be made and accepted as the conventional motive or inducement for furnishing the consideration

1. The promise and consideration must purport to be the motive for each other (in whole or at least in part).

2. It is not enough that the promise induces the detriment or that the detriment induces the promise if the other half is wanting.

e. “Giving Up a Legal Right”

i. Bargained for Exchange: Hamer v. Sidway

1. Facts: Uncle promised to give nephew $5K if nephew stopped drinking, smoking, gambling, wearing until his 21st; Uncle died without paying after nephew’s 21st

2. Rule: Forbearance of legal rights (voluntarily abstaining from one’s legal rights) on promises of future benefit made by other parties can constitute valid consideration (in general, a wavier of any legal right at the request of another party is sufficient consideration).

a. Consideration exists when one party abandons some legal right in the present, or limits his legal freedom of action in the future, as an inducement of the promise of the first party

3. In general, a waiver of any legal right at the request of another party will be sufficient to sustain a promise

ii. Forbearance: Dyer v. National By-Products (settlement claims)

1. Facts: D injured at work; although D believed he had a valid cause of action against his employer, D refrained from litigating in exchange for a promise from his employer that he would have lifetime employment; D later laid off; D’s only remedy was through worker’s comp

2. Rule: Forbearance from asserting an unfounded legal claim may act as valuable consideration to create an enforceable contract if that claim is asserted in good faith.

a. Consideration was lacking as a matter of law because the claim wasn’t a valid cause of action.

b. P asserts the claim in good faith; reasonability of the claim is relevant to whether it was asserted in good faith.

3. §74. Settlement of Claims.

a. 1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless

i. a) the claim or defense is in fact doubtful because of uncertainty as to the facts or the law, or

ii. b) the forbearing or surrendering party believes that the claim or defense may be fairly determined as valid

b. Comment: a requirement of good faith to support consideration

4. *Benefits of settling: risk aversion, trial costs, privacy

f. Adequacy of Consideration

i. General Rule: courts will not inquire into the adequacy or sufficiency consideration

1. Courts do not look at whether a bargain is on-sided or was entered into for a fair price

2. Courts care about whether there is a bargain, not whether it makes economic sense

3. Exception 1: Extreme cases of nominal consideration/insufficient consideration

4. Exception 2: Like-kind exchanges (unless promise takes on risk of nonpayment)

5. 1st restatement embodied a concept of sufficiency of consideration; 2nd restatement abandoned concept of sufficiency

6. §79. Adequacy of Consideration; Mutuality of Obligation.

a. If the requirement of consideration is met, there is no additional requirement of

i. a) a gain, advantage, or benefit to the