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Contracts
Wayne State University Law School
Findlater, Janet

Contracts A Outline-Findlater Fall 2012—Farnsworth, 7th Edition

QUESTIONS TO ASK WHEN STARTING AN EXAM QUESTION
·         Does the Code/UCC apply? (CODE ALWAYS TRUMPS COMMON LAW)
o    Just answer it and briefly say why it does or does not apply (sale of goods, etc)
·         Does the Statute of Frauds apply?
·         Is there an offer? Or was it a gratuitous promise? Consideration or reliance?
·         What is the offer looking for—promise or performance?
·         Is there an acceptance?
·         Is this offer revocable? If it is revocable, was it revoked?
·         Is there any other reason in why the contract will not be enforced?
What makes a promise binding?
·         Consideration—bargained for
·         Past act promises–§86 of restatement
·         Reliance—gratuitous promise §90
What promises are not enforceable?
·         Gratuitous promise [unless it is] ·         Illusory promise is not a promise
·         Past act if state doesn’t recognize statute
·         Moral obligation
·         Promises of a reward where the actor doesn’t know a promise has been made

UCC §1-103: The Code applies to transactions of movable goods (all things that are movable)

Two Types of remedies
·         Specific performance: Court will order the breaching party to do what he promised to do
·         Money damages (preferred); three categories
1)      Expectation (preferred): Put party in the same position had the contract been performed
2)      Reliance: The number of dollars the agreed party is out of pocket due to the K
3)      Restitution: Make the breaching party give back what the other party has paid

Contract-a promise that is enforceable by law—it requires consideration or a substitute for consideration
·         §1-Contract Defined: A contract is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which in some way recognizes as a duty
·         §2-Promise: A promise is a manifestation to act or refrain from acting in a specified way, so made as to justify a promise in understanding that a commitment has been made
·         Unilateral contract: a promise seeking performance in return
o    Why enter into a unilateral K? When you have a promise who is willing to try but not sure if eh can deliver (creating next generation technology).
·         Bilateral contract: a promise seeking a return promise
o    Most commercial contracts are bilateral because they want immediate contractual obligation/liability. If they seek a return performance, there is no K until that performance is completed whereas with a return promise, they are contractually obligated as soon as they accept that promise.
·         The promisor’s promise is not binding until performance he is seeking is completed or until the return promise is sought

Fundamentals of Consideration/Consideration as a basis for Enforcement

ü  Consideration: An element of exchange that is sufficient to satisfy a legal requirement; promise or performance of legal value that has been bargained for.  Does not have to be of economic value. 
o    Two Elements: (1) bargained for exchange, (2) that which is bargained for is of a legal value. 
ü  A promise is supported by consideration if something is bargained for in exchange
ü  Mutuality of Consideration (bilateral): Each party is required to furnish consideration to other
ü  Evidentiary function: Objective evidence that parties intended to make a binding agreement
ü  Cautionary functions: parties will be more careful knowing that the other’s promise may be enforceable
ü  A mere pretense of consideration does not suffice (Peppercorn; illustration 5: $1000 for a book)
ü  Must be present, not past consideration.
ü  Promise + consideration=contract
o    Bargain theory: The performance is induced by a promise seeking a promise; promise does it in exchange for the promisor’s promise
§  A bargain occurs when a promise or performance is sought by the promisor in exchange for that promise
o    Benefit-Detriment Theory: A contract must be to either the benefit of the promisor or to the detriment of the promisee to constitute consideration. 
§  Mostly, we are dealing with bargain theory. 
Þ      Hamer v. Sidway (1891)—Benefit/detriment not necessary for consideration
·         FACTS: Uncle offers nephew 5K to forbear legal rights (drinking, gambling, etc) until his 21st b-day.  Nephew performs and is seeking legal payment from estate.  D argues no consideration b/c no detriment.  Traditional View: Consideration requires benefit/detriment but the court rejects this and moves towards the bargain theory. The court will not look into the sufficiency of the consideration; it is enough that something is done/foreborne. 
·         RULE: Forbearance of legal rights constitutes valid consideration.  The uncle bargained for something and he got what he wanted.

R2d §71-Requirments of Exchange
1.       To constitute consideration, a performance or return promise MUST BE bargained for
2.       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 promise in exchange for that promise
3.       The performance may consist of
a.        An actor other than a promise, or
b.       A forbearance, or
c.        The creation, modification, or destruction of a legal relation
4.       The performance of a return promise may given to the promisor or to some other person.  It may be given by the promise or by some other person.
Definiteness [§33 or §2-204(3)] ·         We cannot know if a person breaches a K unless we know the definite terms of the K
o    What was promised to be done or what the damages should be
·         Arises when term of indefiniteness are used to describe a term in the K
·         Trade usage or gap fillers from the UCC might give us the term
·         If you cannot make a K definite, there may be relief in the form of restitution or reliance damages.  Just because K is not effective does not mean there is no remedy.
R2d §33 Certainty
1.       Even thought a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a K unless the terms of the K are reasonably certain.
2.       The terms of the K are reasonable certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy
3.       The fact that one or more terms of a propose bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance.

Þ      Fiege v. Boehm (1956)—Gratuitous promises—Forbearance is sufficient consideration when it is a good faith belief
·         FACTS: Appellant, believing he was the father of the appellee’s child, promised to pay child support to the appellee, who also believing appellant was the father, promised not bring bastardy proceedings against him.
·         Rule/Held: Forbearance to sue, although based on an invalid claim, is sufficient consideration to make a promise to pay binding.  All that is required is that P acted in good faith, under a reasonable belief.  Cannot threaten legal proceedings in bad faith because you cannot give up a legal right you don’t believe you have.

The Requirement of Exchange: Action in the Past

ü  A promise is said to be given for moral or past consideration when the promisor is motivate by some past event which inspires the promisor to make his promise [to prevent an injustice] §86, pg 96.
ü  Usually, the past event is a transaction between the promisor and the promisee which benefited the promisor and placed him under a moral obligation to the promisee.
ü  Past acts are not consideration because past acts cannot be bargained for at the time they were performed.

Þ      Feinberg v. Pfeiffer Co.—Past consideration is no consideration [Gratuitous promise] ·         FACTS: The president agreed to pay P $200/month/life upon her retirement.  D claims it was intended to be a gift and that no K resulted because there was no consideration given or paid for paid for by the P [could retire at any time].  P then claims that continuing to work after the promise to pay benefits=consideration.
·         RULE/HOLDING: Court says no, continuing to work for D after the promise to pay benefits was not consideration since to promise was given.  Past performance is not valid consideration to support a promise.  Past acts can never constitute consideration, not bargained for at time of promise. 
o    §86 would not work in this case b/c there is no “injustice to prevent”; benefits are just a “plus”.  [§86 did not exist here anyways.

Moral Obligation/Past Acts
ü  A moral obligation is not consideration to make a promise enforceable (Mills v. Wyman)
ü  A moral obligation can create an enforceable promise if the promisor received a material benefit construing valid consideration or his promise (Webb v. McGowin; §86)

Þ      Mills v. Wyman (1825)—Traditional approach denying enforcement—past acts not consideration
·         FACTS: P gave D’s son shelter and comfort until he died after dangerous sea voyage.  After son’s death, D’s father wrote to P and told him he’d pay for all expenses incurred for the care of his son and then never paid.
·         RULE: Past act’s act not consideration.  Court won’t extend enforceability to include a moral obligation of past acts.  A moral obligation is not consideration to make a promise enforceable.  The services provided to D’s son were not bestowed

ok as the employer’s response to the practical problem of transactional costs.  Given these costs, an employer may not prefer to write out a separate K for each employee.  Metille’s continued performance of his duties despite his freedom to quite constitutes an acceptance of the bank’s offer and afford the necessary consideration for that offer with the bank gaining the advg of a more stable and productive work force.

ü  To the extent that the terms of an employee handbook become part of an employment K, can an employer unilaterally change or modify its terms so as to reduce the employee’s rights?
o    Several courts have said, no.  if the disclaimer modifies an existing employment K requiring termination for cause, the employer must provide consideration to make the disclaimer effective. 
ü  Handbooks are statements of policy [not individually bargained for] and not promises—unilaterally promises
ü  Employer with written policy requiring discharge “for cause” may unilaterally change its policy to termination “at will” as long as changes made in good faith w/ equal administration and notice. 
ü  Handbooks make it hard to find consideration for a binding promise b/c there is no consideration for a promise you don’t know has been made
ü  Handbook: “job security” and “disciplinary procedures”
ü  What is consideration? Receive handbook…then work
ü  Discipline procedures (policy) are binding b/c there is consideration (work) and therefore there is K
ü  Job security are NOT BINDING b/c “no more than general statements about policy” in contrast to “definite language” used to set out disciplinary policy
ü  Can employer unilaterally change what is in a handbook?
o    Some courts say no b/c if handbook is part of K, basis for K, it cannot be unilaterally changed
o    Some courts say yes b/c they are not Ks therefore, the employer can unilaterally change it
ü  As long as employer gives notice of a change in policy and it is fair, employer can change policy because it is not a K
ü  If a contract is at will, handbook can be changed unilaterally

Þ      Toussaint (Michigan Supreme Court, 1980)
·         Boss: “Do a good job and I promise you will have a job”.  Only fire for good cause.
·         Toussaint started working, received handbook that included procedures for discipline and list of what constitutes good cause.
·         Fires Toussaint.  He sues saying you fired w/o good cause.  D said you’re an at will employee because you have indefinite term employment. 
·         Court: Employee wins.  Must have good cause for firing. 
·         Grounds for ruling the employee:
o    Express Promise
o    Employee handbook

Þ      Bankey v. Storer Broadcasting—Employee handbooks; unilaterally changing policy w/o notification
·         An employer may alter the terms of the employment for existing employees by unilaterally changing its written policy statements even without prior notifications to employees

Rewards
ü  If a promisor promises a reward, it may only be accepted by the promisee who
o    Performs the requested service
o    Knew of the reward offer, and
o    Performed the service in order to receive the award
ü  If one had a mixed motive but knew about the reward/promiseàthere is consideration.  The act does not have to be purely motivated by promise [can’t tell what people are thinking. 
ü  Objective theory—we enforce Ks by what appears to be motive
o    As long as one finds out about reward before completionàcan collect
ü  Broadnax v. Ledbetter
o    P captured wanted criminal and sued for the promised award
o    A reward of may be accepted by anyone who performs the service called for when the acceptor knows that is has been made and acts in performance of it
o    Not enforceable: Must know that the promise was made before you perform on the promise