#11436 - The Basics - Contracts

The basics

Theory of Contract, Consideration, Reliance, Unilateral Ks, Modifications

BASIC

1. Contract is:

   1. Promise in that the obligation is forward-looking

2. General requirements

   1. Promise or expression of assent to obligation (most important)

   2. Legal basis for enforcing the promise

      1. In US: an expressed intent to undertake a legal obligation is neither necessary or sufficient for there to be a contract. Bargain does this work.

   3. (sometimes) written evidence of the promise (usually only under Statute of Frauds)

3. Classical Theories

   1. Contract as “private legislation” – someone voluntarily puts themselves under an obligation that a court/state will enforce

   2. Forward-looking (promise)

   3. Formal

   4. Axiomatic

   5. Deductive

   6. Rigid: relied on objective, standardized, static, and binary rules

      1. Predictability and certainty were valued over results of particular case (aspiration was that a man who had the money to hire a good lawyer could know with certainty the legal consequences of making a contract)

      2. Explains all as a series of legal propositions that follow from the general proposition that equates contract with a promise given to reduce another to relinquish a legal right

   7. Kirksey and Batsakis (bargain rules)

CONSIDERATION is a legal basis for enforcing promises. (the principal legal basis at common law) Is a proxy for intent to undertake a legal obligation.

1. Reasons for enforcing promises

   1. (Gardner pg 4)

      1. The injury (harm or reliance) idea (backward looking)

      2. The bargain idea (forward looking)

         1. Empowers promissor in voluntary obligation

      3. The promise idea (forward looking)

         1. Justifies enforcement in Dougherty and Schnell

         2. Empowers promissor in voluntary obligation

      4. Quasi-Contract (unjust enrichment) idea (backward looking)

   2. Rawls: why are promises morally binding?

      1. The value of the institution = enables cooperation.

      2. emphasizes the bargain, harm/reliance, and unjust enrichment ideas.

   3. Legal formality: requires that the choice of legal status be made using a specified form. Purposes:

      1. Evidentiary – did the actor make this choice?

      2. Cautionary – encouraging the actor to consider the choice

      3. Channeling – telling the actor what to do to make the choice

      4. Deterrent – preventing bad people from turning the actor’s choice to an undesirable end

2. No consideration in gratuitous promise

   1. Dougherty v. Salt (pg 6): promise by Aunt Tillie to Charlie. Intent clear. Drafted on form.

      1. A promise to make a gift, unsupported by consideration, is not legally binding.

      2. Casting a promise to make a gift in the form of a legally binding promise, citing consideration, does not change this.

      3. Tillie should have made a will, or put the money in a trust for Charley, or simply given Charley the money (he could give the money back to her to hold for him).

   2. Schnell v. Nell (pg 14):

      1. (Like Salt): generally not possible in US to bind oneself to a promise to make a gift by making the promise under seal or declaring the promise was given for consideration.

3. Reliance as an alternative to consideration

   1. Equitable Estoppel (Estoppel in pais)

      1. Definition: if A represents x to B, and B predictably relies upon x, then A may be estopped from denying x.

         1. The misrepresentation…

            1. May be innocent

            2. Is usually of fact

            3. Is usually explicit

      2. Kirksey v. Kirksey (pg 24) – sell land your homesteading, move to my land. Not enforceable – mere gratuity. Consistent with bargain theory if we look at it as a conditional gift.

         1. Like Hayes: no clear time/amount, no clear promise, unlikely d intended to undertake legal obligation

         2. Like Feinberg: reliance based on poverty & having children

   2. Promissory Estoppel

      1. Feinberg v. Pfeifer Co. (pg 29) - accepted pension, which boss told her would apply whenever she quit (so the 2 years she worked after the offer were not consideration)

         1. The doctrine of promissory estoppel: Restatement 2nd, Section 90: A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

            1. equates consideration with bargain; reliance as an alternative basis = narrow concept of consideration

            2. (rather than treating reliance as a form of consideration, as Missouri law does) = broad concept of consideration

            3. DOES NOT REQUIRE DETRIMENTAL/HARMFUL RELIANCE

               1. P only has to show the promise of a pension predictably induced her to change her position

               2. Harm may bear on the discretionary factors of S90.

                  1. Note: question for the judge, not jury

            4. Concerned with protecting autonomy: an actor has some responsibility to keep a promise that predictably induces another to alter his actions.

            1. Although her disability occurred after payment stopped, she was too old to get another job. She also gave up salary of $400/month in return for pension of $200/month. Promise of pension for life induced P to give up add’l income that could have contributed to her retirement savings.

         2. Hayes v. Plantations Steel (pg 34) – P announced retirement before pension arrangement. No clear promise of pension; P asked each year. If there was a promise, time and amount was never established.

      2. Representation (retain the right to change plans) vs promise

4. Bargain Theory of Consideration

   1. Advanced by Williston, adopted by Restatement

   2. R2 § 71 equates consideration with bargain:

      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 promisee in exchange for that promise.

   3. Holmes’ “pithy” definition of a bargain: The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise.

      1. § 71, comment b echoes Holmes:

         1. “In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration . . . the law is concerned with the external manifestation rather than the undisclosed mental state.”

   4. Hamer v. Sidway (pg 47): $5000 promise in exchange for abstinence. There is reciprocal inducement.

      1. Consideration does not require determint to promisee or benefit to promisor. Subjective preferences.

         1. Such a rule would make bargains less secure and undermine autonomy.

   5. Davies v. Martel Laboratory (pg 49): despite benefit of going to business school, this did not mean that P’s attendance was not consideration for D’s promise

   6. Schnell v. Nell (pg 14): things specified as consideration:

      1. One cent for $200 (this would never induce the promise)

         1. R2 § 71, comment b states “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 . . .”

         2. Court’s reasoning: unconscionable contract, void at first blush, upon its face

            1. This reason goes to the fairness of the exchange

            2. Bargain theory goes to parties’ motives

      2. Z. Schnell’s love and affection for his wife/fact that she helped him amass property (wife was not induced to provide these benefits by the promise – always true of a promise made based on benefits already received)

      3. Wife attempted to leave each promise $200 in an inoperative will (same as b)

5. Bargain principle: bargains are enforced according to their terms

   1. Batsakis v. Demotsis (pg 51) note for $2k plus interest in exchange for drachmae with exchange rate of $25. Inadequacy of consideration is not a defense.

      1. Want of consideration = Batsakis gave nothing the law treats as consideration

         1. Not gratuitous

         2. No pre-existing duty

      2. Inadequacy of Consideration

         1. Not misled

         2. Restatement § 79(b): “If the requirement of consideration is met, there is no additional requirement of . . .equivalence in the values exchanged.”

      3. Failure of Consideration = while there was consideration, Batsakis failed to fulfill his part of the bargain

         1. He paid the drachmae

      4. Policy: courts do not use the doctrine of consideration to police hard or bad bargains

         1. Note how much harsher than is the doctrine of promissory estoppel in a gratuitous promise

6. Unilateral Obligation

   1. Problem for classical theory

   2. Hamer v. Sidway: consideration means that one party abandons some legal right in the present, or limits his legal freedom of action in the future.

      1. Creates problem of circularity. It is odd to describe either promise as consideration for the other for a promise….the promise will limit its maker’s “legal freedom of action” only once the promise received in exchange is deemed to limit its maker’s “legal freedom of action.”

      2. Classical theory solved this problem by assuming it away

      3. Uncle never extracts promise from Nephew to abstain. So there is no consideration until Nephew fulfills his promise. But this is crazy because Uncle must commit himself in order to induce Nephew to try.

      4. Illustration: A promises to deliver to B $2 a bushel, however many bushels of wheat B may choose to order in the next 30 days, but not exceeding 5,000. B has not abandoned legal right/restricted legal freedom. So there is no consideration and no mutuality. But this is crazy.

      5. Note in the illustration above…B could…

         1. Have A spell out that any orders made by B will be consideration to bind A to the promise to keep the offer open

         2. Pay A something for an option (nominal consideration would probably work)

         3. UCC § 2-205...