What is a Contract?




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What is a Contract?

  • A promise or set of promises, for breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.

  • Three types of contracts:

    • Express Contracts: formed by language (oral or written)

    • Implied Contracts: formed by manifestations of assent other than oral or written language (i.e. by conduct)

      • Contracts implied in fact

      • D requested P to perform work

        • Will assume the request in some instances, such as emergency medical care

      • P expected D to compensate him for those services

      • D knew/should have known that P expected compensation

      • Remedy: reasonable market value or the price intended by the parties, if ascertainable.

    • Quasi-Contracts: not really contracts at all. Constructed by the Courts to avoid unjust enrichment by permitting Ps to bring actions in restitution to recover the amount of benefit conferred on D. Only relationship to actual contracts is historical.

      • Benefit conferred with the expectation that there would be compensation.

        • D knew or should have known that P expected to be paid

      • Benefit is useful and appreciated by the benefited party

      • Benefit is accepted such that it would be inequitable not to require them to pay (D would be unjustly enriched)

      • Remedy: value of the benefit conferred on D (not detriment to P)

    • Bailey v. West: no contract existed between P and D for P to care for D’s horse. Not implied because P did not know D owned the horse, could not assume the request to care for it. Not Quasi-Contract because D did not accept/appreciate the benefit conferred by P; he returned the bills and denied ownership

  • Variations as to acceptance

    • Bilateral Contracts: the traditional contract, exchange of mutual promises.

      • Promise for a promise

      • Each party is both promisor and promisee

    • Unilateral Contracts: acceptance by performance

      • The offer requests performance, not a promise

        • Offeror-promisor promises to pay on completion of the requested act by the promisee

        • Once the act is completed, the contract is formed

        • Revocable by offeror at any time prior to completion. Starting performance does not create the contract!

      • One promisor and one promisee

    • Modern view is that most contracts are Bilateral

      • All offers are “doubtful”, which may be accepted by promising or performing, unless otherwise indicated by language or circumstances. Therefore, acceptance of a bilateral contract may be made by performance or start of performance

      • Unilateral Contracts are limited to 2 circumstances

        • Where the offeror clearly indicates that completion of performance is the only manner of acceptance

          • Offeror is master of the offer and can create the offer in this fashion

        • Where there is an offer to the public (e.g. reward), which so clearly contemplates acceptance by performance rather than a promise, only the performance requested in the offer will manifest acceptance.

      • Test for Determining Between Unilateral/Bilateral Contracts Considers whether, at the time the contract was formed

        • Each party as a right and a duty (Bilateral) or

        • One party only has a right and the other party only has a duty (Unilateral)

    • Option Contracts:

      • Confers on the offeree a right to complete the performance that has been commenced if he chooses to do so.

      • Means by which to convert many unilateral contracts to bilateral contracts BUT

        • Only ends up binding the offeror once performance is commenced

        • Offeree can stop performance at any time and will not be in breach

  • The four major questions we ask in relation to Contract Law

    • Have the parties behaved in such a way as to create legally recognizable expectations in one another?

    • If they have, how should those expectations be characterized and understood?

    • Was that understanding faithfully carried out by the parties or somehow thwarted?

    • If the understanding was thwarted, what should the law do about it?


What are the different theories of Contractual Obligation?

  • Party-Based Theories

    • Will Theories protect the promisor

      • Promisor has to have chosen to be bound by the commitment; look at state of mind at formation

      • Exercise of promisor’s will justifies enforcement against him

    • Reliance theories protect the promisee

      • Makes promisors liable when their assertive behavior creates justified reliance in others

      • Protects people when they rely on commitments that will be legally enforced

  • Standards-Based Theories

    • Efficiency theories focus on economic efficiency

      • Consider whether the “size of the pie” is increased or decreased by a contract to determine enforceability

      • Assumes that all contracts are enforceable, the focuses on remedies and enforcement

      • Only looks at the consequences

      • Is efficiency really the only goal of the law?

    • Substantive Fairness Theories

      • No predictable standard of enforceable vs. unenforceable contracts

      • Requires constant interference with personal preferences

  • Process-Based theories look at how the agreement was reached between the parties

    • Bargain Theory of Consideration

      • Consideration provides the distinction between enforceable/unenforceable contracts

      • Focus on voluntary assumption of obligation

      • Provides neutral formality, legal protection for the exchange, structure and protection for market transactions, and fuller development of remedies to protect expectations.

      • Problem is that it fails to enforce certain important, but unbargained-for commitments


THE BASES OF PROMISSORY LIABILITY
Consideration: The Bargain Requirement

  • A bargained-for change in legal position between the parties; required for enforceability of bilateral contracts (with exceptions)

  • Elements of Consideration

    • Bargained-for exchange

      • Reciprocal and Mutual; must be connected!

      • The promise induces the detriment

      • The detriment induces the promise

      • Each party views what she gives as the price for what she gets

    • Whatever is bargained for must constitute a benefit to the promisor or a detriment to the promisee

    • Performance can be in the form of:

    • The performance or the return promise can be given to the promisor or to a third party; may be given by the promisee or a third party

  • Gifts (i.e. donative promises)

    • Act or forbearance by promisee must be of benefit to the promisor

      • Promisor’s motive must have been to induce the detriment

      • If the detriment was merely a condition, then there is no consideration; there has to be benefit and detriment in gift contracts

      • The act or forbearance must be something that the promisee was already legally obligated to do/not do.

    • Economic Benefit is not required

      • Peace of mind

      • Posthumous Remembrance: Allegheny College v. National Chautauqua County Bank of Jamestown: Seeking to enforce donation; not just a gift because college had an implied obligation to set up a scholarship in donor’s memory. Enforceable; estate has to pay.

      • Gratification of influencing the mind of another person is enough as long as the promisee was not already obligated to perform the requested act.

    • Promissory Estoppel: The promise may be enforceable if it was relied on (or under seal)

      • If a donative promise induces reliance in a manner that the promisor should reasonably have expected, then the promise will be legally enforceable, at least to the extent of the reliance.

      • Reliance is viewed either as consideration or as a substitute for consideration.

    • Conditional donative promises are also not enforceable even if the condition has been fulfilled

      • Unless the fulfillment of the condition constitutes reliance.

    • Hamer v. Sidway: uncle to pay nephew not to smoke, drink, or gamble. Consideration is satisfied because uncle got what he bargained for. Performance = forebearance.

    • Ricketts v. Scothorn: Grandfather pays granddaughter in hopes that she will no longer have to work. Since she quit her job in reliance on that gift, estoppel prevents grandfather from not paying b/c he intentionally influenced her to quit her job; he got what he wanted.

    • Rickets and Hamer are exceptions to the rule! Usually donative promises within families are not enforceable!!!

    • Langer v. Superior Steel: promise to pay former EE to not work for a competitor. Benefit/consideration is that EE won’t hurt the ER. Detriment is not working for certain ER. Enforceable Contract.

  • Kirksey v. Kirksey: man invites dead brother’s widow and kids to come live with him and will give them a place to live. Court decides it was a mere gratutity, not enforceable b/c he got nothing out of the exchange; she would not have been in breach if she had not gone there in the first place.

  • Consideration Substitutes:

    • Reliance

    • Past or moral consideration

    • Waiver of nonmaterial conditions of the bargain

    • Promises made in special legally recognized forms


Sufficiency of Consideration

  • Adequacy of Consideration is normally not examined (but courts of equity might look at the relative values of the promises/performances and deny an equitable remedy where they find a contract to be unconscionable)

    • Thomas v. Thomas: promise to pay 1#/year and maintain residence as consideration for living on land. Good enough…don’t ask how sufficient consideration is.

    • Token Consideration (has no value)

      • Usually not legally sufficient (i.e. under Restatement)

        • If there is a mixture of bargain and gift, it is only enforceable to the extent of the bargain

      • Indicates a gift rather than bargained-for consideration

      • In Re Greene: contract says there is consideration, but nothing ever paid.

    • Sham Consideration

      • Recital of a sum paid in consideration, which often is not paid at all and was never intended to be paid

        • Will not make donative promises enforceable

        • Will make options and guaranties enforceable

          • UCC Firm Offers: don’t even need a recital of consideration to be enforceable.

          • Guaranties are promises to answer for someone else’s debt

      • Courts may look to evidence to see whether it was paid, or if there was some other consideration

      • In Re Greene: Contract for man to pay his ex-mistress money to release him from his promises to pay her taxes and stuff, but now he won’t pay and she wants the money. No contract b/c no consideration: he owes her nothing, and the consideration (the services he got from her while they were together, presumably) is something in the past, and you can’t make a contract for something you’ve already done. Once the contract was made, she did nothing.

    • Possibility of Value

      • If there is a possibility of value in the bargained for act, even if the value never comes into existence, consideration will be found to be adequate

      • Apfel v. Prudential-Bache Securities, Inc.: contract to pay P for use of ideas. Enforceable even though D claims the ideas had no value. However, actions indicate that it was valuable, was new to D; doesn’t matter that ideas are intangible. P kept quiet for 2 years while D did research, etc. Benefit: more information, options, future earnings. Detriment: confidentiality.

      • Fiege v. Boehm: man promises to pay woman child support; he promises not to do paternity tests. When he quits paying, he claims there was no consideration b/c he knew he wasn’t the father. Contract is enforceable…why would he have paid if he knew he wasn’t the father? As long as her claim was in GF, then it’s enforceable.

  • Legal Benefit and Legal Detriment Theories

    • Legal Detriment to the Promisee:

      • Does something he is not under legal obligation to do

      • Refrains from doing something he has a legal right to do (surrender or forbear from asserting a legal claim) and:

        • The promisor’s belief in the validity of the claim is either reasonable or held in good faith

      • Need not involve any actual loss to promisee or benefit to promisor

    • Legal Benefit to Promisor is whatever the detriment to the promisee was

    • Majority Rule

    • Minority and First restatement

      • Detriment or benefit to the other party is sufficient consideration

    • Second Restatement

      • Doesn’t consider benefit/detriment at all

      • Only asks whether something was bargained for and given in exchange


Pre-Existing Duty Rule

  • The performance or promise to perform a pre-existing duty does not constitute consideration

    • The promise of an official to perform an act that falls within the scope of his official duties is not consideration, and neither is the actual performance of the act.

    • Performance of a public duty required by law, other than an official duty, is treated the same was as performance of an official duty (e.g. promise to tell the truth on the stand as a witness)

    • Alaska Packers’ Association v. Domenico: contract price modification not enforceable. EE’s were already under obligation to do their jobs; demanding a higher price was in bad faith, new contract formed under duress. No consideration for ER to pay more.

    • Levine v. Blumenthal: contract to lower rent not enforceable because T didn’t do anything in exchange.

    • Payment of a lesser amount as discharge of a debtor’s full obligation is not consideration

      • Creditor’s promise to accept the lesser amount as full payment is not enforceable

      • Exceptions:

        • If the debtor did something different than required (e.g. pay the lesser sum before the payment was due; render a service in lieu of paying money)

        • If there is an honest dispute as to the debt, payment of a lesser amount than claimed by the creditor is consideration for a promise to discharge in full

        • If the amount of the obligation is unliquidated, then payment of an amount that is less than the creditor claims is consideration for full discharge.

  • Exceptions to the general rule:

    • New or different Consideration is Promised

      • Promisee gives something in addition to what is already owed in return for the promise

      • Promisee has in some way agreed to vary the pre-existing duty, such as accelerating performance

      • It is usually not important how small the change is as long as there is a change!

    • Modification has to have new consideration

      • Parties must voluntarily agree to the modification

      • Modification must be fair and equitable

      • The modification must be made before the original contract was fully performed on either side

      • The circumstances which prompted the change must have been unanticipated by both parties

      • The obligations of both parties have to be varied (modification for the benefit of one party is unenforceable unless it falls under the good faith exception)

      • Angel v. Murray: garbage collection services for 10 years; city grows beyond what parties expected, and D asks city council to pay him more. City council agrees. P sues saying the modification is not enforceable b/c there was no new consideration. Held: enforceable b/c unforeseen circumstances justified the request; D is doing something beyond what was expected when the contract was formed. (not fully performed yet, fair and equitable, circumstances were unforeseen).

    • Voidable Obligation

      • A promise to perform a voidable obligation (ratification) is enforceable without new consideration

      • E.g. infant ratifies contract upon reaching majority; no need for new consideration; promise to perform a contract made under mutual mistake

    • Preexisting Duty Owed to Third Party

      • Did not used to be able to enforce a promise when you already owed the same duty to another party

      • The majority view now, though, is that you can still enforce the second promise because you did not owe a duty to the second party under the original contract; now you owe the same duty to both parties

    • UCC 2-209: an agreement modifying a contract for the sale of goods is binding without consideration. (No legal duty rule)

      • Fairness is not explicitly required, but the modification is subject to the duty of good faith.

      • Note: a waiver of a right has to have consideration

    • Once the contract has been fully performed, the legal duty rule has no application and the promisor can’t recover the extra money paid unless she paid under duress.

      • A threat to breach is not economic duress unless it leaves the promisor with no reasonable alternative.


Mutuality of Obligation

  • Both parties must be bound for a contract to be enforceable

  • If one party can terminate the contract without breach, then there is no contract

    • Examples of “illusory” contracts:

      • Promise to do something “If I want”

      • Right to terminate at will and without notice

        • UCC 2-309: requires reasonable notification;

          • an agreement dispensing with notification is invalid if its operation would be unconscionable.

          • Might not be illusory, then, because the provision is invalid.

    • Rehm-Zeiher Co. v. F.G. Walker Co.: D provides whiskey to P. D gets out if the whiskey or the bottling room is destroyed. P gets out if it can’t use the whiskey “for any unforeseen reason.” No contract because P has unfettered discretion, not really bound. Only D is bound.

  • Courts are interested in making contracts enforceable, though…

    • Exclusive Distributor Contracts have an implied obligation to us reasonable efforts

      • Common Law -- Wood v. Lucy, Lady Duff-Gordon: P is exclusive distributor of D’s goods and endorsements; D can only go through P. D starts doing stuff not through P, claims P not bound. Held: P has an implied GF obligation to use his best efforts to sell her designs and endorsements; he is bound by the contract. She must have thought that when she entered the contract b/c if he didn’t make money off her stuff, she wouldn’t get any money either.

      • UCC 2-306(2): unless the parties agree otherwise, there is an obligation to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

    • Requirements and Outputs Contracts include an assumption of good faith in how much you will require/produce:

      • UCC 2-306(1) assumes that requirements/output contracts are enforceable:

        • Quantities may not be unreasonably disproportionate to any stated estimates or normal or prior output or requirements

        • Promisee is protected if Promisor changes the quantity in an unforeseeable fashion, even if it was changed in GF

        • Not illusory just because one party might go out of business, because there is an implied promise to remain in business.

          • No breach if one party goes out of business for reasons other than the profitability of the contract

          • Breach if the shutdown was motivated by the unprofitability of the contract in question

      • Modern rule enforces requirements/output contracts even if one party does not have an established business because the parties have limited their options

        • At common law, if one of the parties does not have an established business, the promise was illusory because there is no basis for estimating the quantity that will be produced/required.

      • McMichael v. Price: Good faith in requirements and outputs contracts. Are mutually binding

    • Contracts conditioned on one party’s satisfaction have an implied good faith basis for satisfaction/dissatisfaction

      • OMNI: Implied good faith in satisfaction with property that they don’t have to buy if they aren’t satisfied. Mutual obligation exists.

    • Voidable promises (i.e. made by a minor) are not void for lack of mutuality.

    • Conditional promises are not void for lack of mutuality even if the condition is within the promisor’s control.

    • Alternative promises:

      • If the promisor can choose between means of discharging his obligation, then each of the performances available must be consideration

      • If the promisee can choose, then there is consideration if any one of the alternatives would be consideration alone.

    • When the agreement allows one party to supply or determine a missing term:

      • Common Law: if the term is material, the promise is illusory

      • UCC:

        • The discretion is not unlimited because of the implied duty of GF, therefore it is not illusory (1-203)

        • The contract will be enforceable if the parties intended it to be so. (2-305)

  • Mutuality is not required for unilateral contracts (the promisor is only bound if the promisee, but the promisee is under no obligation to perform)


Moral Obligation

  • See also Quasi-Contracts, Implied Contracts

  • Past Benefit is not sufficient to meet the bargain requirement because performance was not made in exchange for the promise when it was made

    • Exceptions to the general rule

      • Debt barred by a technical defense, e.g. statute of limitations, bankruptcy

        • New promise will be enforced

        • New promise has to be in writing or has been partially performed

      • Promise to pay for Past Requested Act

        • If an act has been previously performed by the promisee at the promisor’s request, a new promise will be enforceable

        • Extended to unrequested acts, such as emergency medical treatment

        • Terms of the new promise are binding, not the prior understood terms

        • Only binding to the extent needed to prevent injustice

    • Past material (i.e. economic) benefit plus moral obligation will qualify as consideration for a promise to compensate someone who suffered detriment to confer a benefit on the promisor

      • Only binding to the extent necessary to prevent injustice

      • Webb v. McGowin: Man who hurt himself falling to save the other guy’s life and the guy whose life was saved promises to pay him a weekly sum: contract is enforceable (benefit conferred upon saved man). Past consideration counts if it was a benefit (preservation of life, health).

      • Not binding if promisee conferred the benefit as a gift or if, for other reasons, there has not been unjust enrichment (P mowed D’s lawn while D was out of town, knowing D did not want his lawn mowed. P cannot recover b/c it was done in bad faith)

      • Mills v. Wyman: Father promises to pay for care of his dead son after his son has died. Doesn’t pay, caretaker sues. No contract b/c no consideration; father didn’t benefit (son was adult). Care was not given as a response to the promise to pay.

      • Doesn’t matter if the promisee incurred expenses; if there was no material benefit to the promisor, it’s not enforceable.


Promissory Estoppel

  • An alternative for Consideration (makes a promise binding without conventional, bargained-for consideration)

    • Consideration is not required when the facts indicate that the promisor should be estopped from not performing

  • Elements are:

    • Clear and unambiguous promise

    • Reliance on the promise must:

      • Be foreseeable by the promisor

      • Be reasonable by and detrimental to the promisee

      • Actually happen and be substantial

    • The injury resulting from not enforcing the promise is “unconscionable”

    • The only way to prevent injustice is enforcement of the promise

  • Feinberg v. Pfeiffer: In appreciation of past services, ER tells EE it’s going to pay her a generous pension, but hopes she’ll keep working as long as she can anyway. When she quits, she becomes unemployable, they quit paying her and she sued. No consideration b/c the pension was paid for past services, the parties did not bargain for it. Enforceable anyway b/c she relied to her detriment by quitting.

  • Cohen v. Cowles Media Co.: P relied on tradition of confidentiality and promises of reporters not to reveal his name. They revealed it, P lost his job. Can’t be a normal contract b/c reporters, as agents, could not bind newspapers not to reveal name. Have to use PE. Reliance: gave info. based on fact that name wouldn’t be used. D breached that promise, detriment to P: loss of job. Public policy: protection of news sources. BUT it was unreasonable for P to rely on that promise; reporters are there to tell the news. No recovery allowed.???

  • Remedy is limited as justice required

    • May be the compensate for reliance

    • May only compensate for part of the reliance if it wasn’t entirely reasonable

    • Grouse v. Group Health Plan, Inc.: D told P they would hire him, so he quit his current job and turned down another. Then it turned out he didn’t meet their hiring requirements, so they didn’t hire him. Employment was to be “at will” so he only recovers damages for lost wages and OC for turning down the job b/c he could not reasonably have relied on the new job for more than one day.


CONTRACT FORMATION
Ascertaining Assent

  • An offer creates a reasonable expectation in the offeree that the offeror is willing to be bound to the offered terms

    • Was there an expression of a promise, undertaking, or commitment to enter into a contract? Judged by RP standard, or if the one party knew or had reason to know that the other would interpret it in a certain way, then that is good enough.

      • Language can show that an offer was or was not intended

        • Certain language is construed as invitation to deal, preliminary negotiations, etc.

      • Surrounding circumstances (the context in which the statement was made)

        • What would a reasonable person have understood?

      • Prior practice and relationship of the parties

      • Method of communication

        • Broad communications Media

          • Usually just the solicitation of an offer, with exceptions

        • Advertisements

      • Industry Customs

      • Certainty and Definiteness of Terms

    • Were there certainty and definiteness in the essential terms?

      • Enough of essential terms must be provided so that a contract including them would be capable of being enforced

        • Identity of offeree

          • Lefkowitz, “first come, first served” works

          • Reward offers: performance provides the ID

        • Subject matter of the offer

          • Have to be able to define it in court

          • Okay if there is an objective standard by which court can determine the missing terms

          • Requirements and Output Contracts

            • Assumption of good faith

            • Quantity tendered/demanded must be reasonably proportionate to a stated estimate or prior output or requirements

            • Requirements of new businesses are unenforceable b/c they are uncertain

        • Price

        • Time of payment, delivery, or performance,

        • Quantity

        • Nature of the work to be performed

      • Employment contracts must specify the duration of the employment, or else it’s terminable at will

      • Court will infer reasonable terms where there are none

      • If the terms provided are vague, then you can’t assume that the parties intended a reasonable term, then how do you fix it?

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