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Contracts
Wayne State University Law School
Findlater, Janet

Findlater for Contracts A Fall 2013

I. Chapter 1: Bases for Enforcing Promises

A. Section 1: Enforceable Promises p.1-2

1. Restatement 2nd SEC 1 defines contract as a “promise or set of promises for the breach of which the law fives a remedy, or the performance of which the law in some way recognizes as a duty”

2. Yet not all promises are binding, not every promise broken can have a remedy

3. How does the law determine which promises to enforce?

B. Section 3: Consideration as a Basis for Enforcement

1. Fundamentals of Consideration 31-48

a. Benefit and Determent – There must be a benefit to the promisor, and to the extent that assumpsit (undertaking) inspired it, a determent to the promise…This concept has receded and led to: Bargained for Exchange

b. Restatement § 17: Requirement of a Bargain p. 33 states that (1) Except as state in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

c. Restatement § 71 : Requirement of Exchange p. 85 (1) To constitute consideration, a performance or a 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 promisee in exchange for that promise. (3) The performance may consist of a) an act other than a promise, or b) a forbearance, or c) the creation, modification, or destruction of a legal relation (4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promise or by some other person.

i. Restatement § 71/ comments: “Bargained for.”. . . a mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal. [bargain can’t be fake or really trivial]

d. Restatement § 79 : Adequacy of Consideration “If the requirement of consideration is met, there is no additional requirement of (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or (b) equivalence in the values exchanged

i. Restatement § 79/comments states that Pretended exchange. Disparity in value, with or without other circumstances, sometimes indicates that the purported consideration was not in fact bargained for but was a mere formality or pretense. Such a sham or “nominal” consideration does not satisfy the requirement of § 71.

e. Typical Categories of Agreements: (there are Five) Family Contracts: Often times family agreements can be informal and oral, lacking in detail and may not proceeded by significant bargaining. Traditionally such family contracts have not been enforceable, but through time they have become ore detailed contracts.

i. Example: Hammer v. Sidway: Was there an enforceable contract where uncle promised pay his nephew $5,000 in exchange for giving up smoking, drinking, etc.? Is mere abstention from legal conduct sufficient consideration? Facts: At family celebration, uncle promises nephew “if you refrain from drinking, using tobacco, swearing, and playing cards or billiards for money until you reach the age of 21, then I will pay you $5,000.” Nephew agrees, and refrains from these activities until reaching the age of 21. Uncle dies without paying; nephew sues his estate. The D argued that there was no contract because there was no consideration because Promisee (nephew) benefited, not harmed, by his performance (giving up smoking, drinking, etc. = good for him) and there was no benefit to promisor from this performance. Decision: Court decides there was consideration because there was a forbearance of a legal right (drinking, gambling etc) in exchange for money. Also this case was a step away from the Traditional view: Consideration requires benefit/detriment. Judge Hamer rejects the requirement of benefit/detriment – exemplifies shift toward bargain theory of consideration. (How can a judge determine what is a benefit or detriment? This is too subjective for the courts to decide.) à Also, Forbearance or giving up a legal right in the present or for the future can be consideration for a promise

f. Gratuitous Promises: Gratuitous Promises are not recognized–

i. Example – What if uncle gives 5,000 out of the love of his nephew and nephew subsequently promises to stop drinking in return for the money. This is not consideration because it wasn’t sought and the money was a gift.

g. Example: Dyer v. National By Products: Is forbearance from litigating an unfounded and invalid claim asserted in good faith consideration for a promise of settlement? Facts: Dyer (P), an employee of the D, loses right foot in a job-related accident. P is given paid leave; is reinstated in his job as foreman; and is then laid off. P alleges that he had a good faith belief that he had a valid claim against his employer for personal injury. P alleges that he forbore from litigating this claim in exchange for his employer’s promise of lifetime employment. P would not have had a valid tort claim against employer, because his only recourse was to file for workmen’s compensation. The D argued: The employer specifically denied that it had offered a lifetime job to dyer after his injury. The district court sustained the employer’s motion that there was no cause of action (they filed a summary judgment) because 1) no reciprocal promise to work for the employer for life was present and 2) there was no forbearance of any viable cause action, because workers’ compensation provided P’s sole remedy (he couldn’t file a tort legally because of his worker’s comp). P appeals. holding: Forbearance for asserting an unfounded legal claim may still act as a consideration for an enforceable contract if the claim was acted on in good faith. As long as the agreement was based on the fact that there was good faith that the plaintiff can forgo his tort claims (which he could not in reality) in exchange for continued employment, then the contract remains. The promise is enforceable.

2. The Requirement of Exchange: Action in the Past 48-58

a. Consideration: An action in the past. Past acts are not consideration (unless there is reliance

–see below)

i. Example: Feinberg v. Pfeiffer Co. p. 48 – Does Pfeiffer have a contractual obligation to pay Feinberg $200/month for life? Was there consideration for Pfeiffer’s promise to pay? Facts: 1910: Anna Feinberg (P) begins working for Pfeiffer Co(D).1947: Board of Directors resolution: Feinberg “has given the corporation many years of long and faithful service.” Feinberg was working for the company for almost 40 years and the board of directors of the company raised her salary from 350 to 400 dollars a month plus 200 dollars after her retirement for her commitment to the company. Officers and directors hope that P would continue in her present position as long as she is able. But, in view of her long service, resolve to provide her retirement benefits “whenever she should see fit to retire.” ($200/month). P testifies that she would have continued to work regardless of resolution. 1949: P retires; Pfeiffer pays benefits from 1949 till 56. Several years later after her retirement, the late president of the company’s son in law decided to reduce her retirement pay to 100 dollars a month. Then Fienberg refused the amount so then Pfeiffer decided to stop the payments all together. Holding: Promise based on past services is without consideration. The Plaintiff’s argument was that because she continued to work after promise to pay benefits there was consideration. Court stated No to the plaintiff’s argument because there was no bargained-for exchange. Continuing to work was not sought by promisor (the employer) or given by promise (Fienberg) in exchange for the promise to pay the retirement benefits. She could quit at any time and so there was no exchange here. Essentially they were just trying to be nice and past actions is NOT consideration (past action cannot be a bargain for exchange for money). Black Letter Law : A action is the past cannot be held as Consideration but there is a reliance issue here

b. Consideration- Moral Obligation

i. Example: Mills v. Wyman p. 52- Is there consideration for Wyman’s promise to pay? Levi Wyman, age 25, falls ill; Daniel Mills cares for him and pays his expenses until he dies. Seth Wyman, Levi’s father, learns that Mills has paid his son’s expenses, and writes promising to pay Mills back. Seth Wyman changes his mind, decides not to pay. Mills sues and loses and then appeals. Holding: There is no consideration for his promise to pay because there was no bargain for exchange (Wyman never sought nor request Mills to care for his son.) Also, it was after the fact that Mills cared for him (past action) and Wyman had no obligation to his son since he was already 25 years old. Black Letter Law: A promise to pay for past consideration is not supported by consideration [especially when there was no material benefit to Wyman] Traditional common-law rule: A promise made in recognition of a moral obligation arising out of a benefit previously received (past action) is not enforceable. He might have a moral obligation to pay but moral obligation here does not create sufficient consideration to render his promise enforceable because Wyman is not promising anything to Mills, he is simply paying her back for her past actions and his gratefulness [he gets nothing in return].

c. Exceptions to Traditional Rule: Past Benefit/Moral Obligation See note 3 on page 54.

i. Examples: Promise to pay debt no longer enforceable b/c statute of limitations. This was adopted by Restatement § 82 and Promise can be inferred (see R2d § 82 (2)(a) and (b)).

ii. Examples: Promise to pay debt discharged in bankruptcy. Adopted by Restatement § 83. Promise needs to be express (R2d § 83) Example: Promise to keep promise made as a minor.

iii. Example material benefit: Webb v. McGowin p. 54 – Is there consideration for McGowin’s promise to pay for Webb’s care? Webb diverts falling block to save McGowin from death/serious harm. Sustains disabling injuries as a result. McGowin promises to care for Webb for remainder of Webb’s life (at $15/2 weeks). McGowin makes payments until he dies (8 years). Shortly thereafter, payments discontinued and Webb sues McGowin’s estate. Holding: A moral obligation is sufficient consideration to support a subsequent promise to pay where promisor received a material benefit. Not only was there a moral obligation, but McGowin obtained a substantial material benefit in that he continued to live and make money and so the promise was enforceable.

a. There are differences between why Court ruled for Webb and not for Wyman. First, Wyman did not receive a material benefit while McGowin did, second, both had intent but Wyman backed out while McGowin continued to pay for 8 years before being sued

d. Example Harrington v. Taylor p. 57 – If a promisee cares for, improves, or preserves the property of the promisor, though done without his request, is it sufficient consideration for the promisor’s subsequent agreement to pay for the service? The defendant had assaulted his wife and so his wife took refugee at Harrington’s house. The defendant came to Harington’s house to assault the wife and the wife took an ax to decapitate her husband. In the process, Harrington attempted to stop the act and her hand was badly mutilated while attempting to save the defendant. In return for her act, the defendant promised orally to pay the plaintiff for the damages. But the defendant paid a small sum and refused to pay the rest. Holding: no, the demurrer was sustained. This was a case that was considered to be a voluntary humanitarian act (also the dad did not get a material benefit for himself that was

duty on one side only and a right (to sue) on the one side only. Bilateral contracts are when both parties make a promise and that is a promise in exchange for a promise. In a bilateral contract, there is promise on each side in where there is a right (to sue) and a duty on each side.

Note: Restatement 72: Except as stated in 73 and 74, any performance which is bargained for is consideration

b. Conditional promise: A promise is conditional if its performance will become due only if a particular event, known as a condition, occurs. This does not mean that the promise is not binding until the event offers, but only that the event must occur before the promisor must perform. When a party makes a promise in exchange for a return promise, it can be protected by making its promise conditional on performance by the other party.

c. What constitutes as a promise? Consideration for a promise can also be a return promise R2d §75 Exchange of Promise for Promise. Except as stated in §§ 76 and 77, a promise which is bargained for is consideration if, but only if, the promised performance would be consideration.. Restatement 75 says that “a promise that is bargained for is consideration if the promise performance would be consideration”

i. What counts as a promise? Language and context can indicate this, but also it can indicate whether there is an illusion of performance.

d. Strong v. Sheffied: Sheffield’s Husband owes money to Benjamin Strong (her uncle). Strong says to Louisa: If you endorse H’s promissory note (a promise to pay H’s debt if H does not), then I will refrain from collecting the debt “until such time as I want my money”. Louisa endorses the note and Strong forbears from collecting the debt for 2 years. Strong brings an action to collect the debt from Louisa Holding: Strong’s forbearance of the loan until he wants his money back was not consideration because his promise was illusory. While there was the bargain of Louisa: promise to pay H’s debt in exchange Strong: promise not to collect the debt “until I want my money”, the “until I want my money” is not binding and it is illusory Black Letter Law: Illusory promises cannot be consideration for a promise. To be legally binding, a promise must be supported by consideration and cannot be illusory.

e. Restatement 77: A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless

i. each of the alternative performances would have been consideration if it alone had been bargained for; or one of the alternative performances would have been consideration and there is or appears to the parties to be substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.

a. Comment a: Illusory promises: “Words of promise which by their terms make performance entirely optional with the “promisor” (Strong in this case) do not constitute a promise.” The performance is only bargained for and when the apparent assurance [pledge] of performance is illusory it is not consideration for a return promise.

ii. Mattei v. Hopper: Does the inclusion of the clause making plaintiff’s duty to buy the property conditional on his obtaining satisfactory leases render the plaintiff’s promise to buy illusory, such that the defendant’s promise to sell is unsupported by consideration? Plaintiff was a real estate developer who wanted to construct a shopping center on a tract adjacent to Defendant’s land. After lengthy negotiations, Plaintiff agrees to buy D’s property in 120 days for agreed-on price subject to the plaintiff “obtaining leases satisfactory to” Plaintiff. Thus, The agreement also contained a personal satisfaction clause where Mattei was excused from performing the contract if he was unable to arrange satisfactory leases of space in the shopping center. D agrees to sell the property for that price and signs the deposit receipt. After performing the contract, D changes mind, decides not to sell; P seeks to enforce promise to sell. D’s argument was that there was no consideration for her promise to sell because P’s promise to buy was illusory since it was “subject to” his securing “satisfactory leases” with tenants. Holdings: Held for P. “Satisfaction clauses” don’t necessarily render a promise illusory because in this contract promisor can’t be arbitrary in his dissatisfaction (if he is able to get good leases he has to commit) and court reads this requirement as either reasonableness or good faith.

Thus, Note that Illusory Promises Have No Consideration and Satisfaction Clauses (such as getting more tenants in a contract) Are Not Illusory Promises.