Contracts Outline - Summer 2008, Professor Weistart

Contracts Outline - Summer 2008, Professor Weistart

Freedom of Contract
No party can be forced into a contract. They must enter into the contract willingly.
Hurley v. Eddingfield
Quick Facts: Doctor refuses to treat a sickly patient who later dies. Family sues, but court holds that the Doctor was not obligated to treat the patient due to Freedom of Contract. Also offer and acceptance. There was an offer for him to enter into a contract, but doctor never accepted.
The Aristotelian View of Contract Damages
Restitution Interest: Unjust enrichment; Two units of injustice: The plaintiff loses something of value, and the defendant acquires it unjustly.
Reliance Interest: Relying on the promise of the defendant, the plaintiff incurs a loss. One unit of injustice as plaintiff loses, but defendant does not collect. Court may award these “reliance damages”.
Expectation Interests: Promise is broken, but there is no restitution or reliance interests. Zero units of injustice. Simply, plaintiff incurs damages based upon failed expectations.
Consideration
Three essential requirements of enforceable contracts: Bargain, Manifestation of Mutual Assent, Consideration
Bargaining is an essential piece of the contract. If there is no bargain (consideration), can be interpreted as gratuitous.
Consideration is a bargained-for benefit or detriment. Benefit/Detriment does not have to be in monetary forms.
A Promise is supported by consideration if there is:
Detriment to the promisee: autonomy of the promisee is constrained.
Detriment is bargained for: Promisor wants the detriment bad enough to exchange the promise for it, and vice versa. The detriment induces the promise.
The Promise is bargained for: The promise induces the detriment. Promisee wants the promise bad enough to incur a detriment.
Note: Overtime, the strict of interpretation has waned. There is the peppercorn theory that has emerged. Courts are now accepting implied consideration (usually meaning good-faith requirements) or even the recital of false consideration (such as in Option Contracts).
Salt v. Doherty:
Quick Facts: Aunt promises to provide for her nephew. She writes a note to demonstrate the seriousness of her promise. Court holds that this is not enforceable, because it is a gift.
This promise is extremely formal, however, it is still missing the elements of bargain, mutual assent and consideration.
You cannot waive the need for consideration with seriousness or formality.
Hammer v. Sidway
Quick Facts: Uncle promises to give nephew 5000 if he will cease his problematic behaviors. Nephew ceases, and seeks 5000. Courts hold that there was consideration present in this agreement, and therefore the contract was enforceable.
If the promisee incurs any detriment (restricting autonomy), even if it is for the benefit of the promisee, that constitutes consideration.
The peace of mind of the include may be enough for consideration. There does not have to be a tangible benefit (peppercorn theory).
Even if a promise appears as a gift, if the finder of fact finds that an actual agreement took place and there was an exchange, it is enforceable.
Langer v. Superior Steele Corp
Quick Facts: Company notifies retiring employee that he would be paid 100 every month for the rest of his life granted he did not go work for a competitor. Was this an unenforceable gift, or an enforceable promise supported by consideration?
Court rules this promise to be an enforceable contract as it is supported by consideration due to the detriment that the promisee incurred by giving up the right to work for a competitor.
Not doing something is a positive action. Forbearance is a detriment.
Feige (Bastardy Proceedings)
Quick Facts: Women agrees not to sue man for bastardy if he pays child support. He quits paying child support and he sues. He argues this contract is not supported by consideration because he is actually not the father of the child.
Court holds that there is consideration; she entered into the contract under the good faith impression that he was the father. Therefore there was consideration on her part.
Additionally, there was consideration on his part. The prospect of being the father was enough consideration for him to enter into the agreement.
The Professor’s Vignette
Quick Facts: Professor will give students 1000 dollars if they promise to give him rights to any software they develop in the future. Was this supported by consideration if a student had absolutely no intention of ever creating sotware?
Yes, this promise is supported by consideration. Similar to Fiege, it is the prospect of return. The contract is not necessarily between the professor and the one student, but rather between the professor and a pool of individuals, one of which may design software.
United States v. Meadors
Quick Facts: Agreement had been forged between a loan company and 4 individuals; Meadors did not enter into this agreement until it had already been made. Decided to sign the agreement without loan’s knowledge. Loan was defaulted, tried to collect on Meadors.
Court decided that the contract between Meadors and the loan company was not enforceable. There was no bargained-for-exchange or mutual assent or mutual inducement. There was no consideration because there was no mutual bargain between Meadors and the bank. She assented but the business did not.
Important distinction between consideration and a condition on a gift.
Sometimes there can be conditions placed on a gift; easily confused with consideration
Ex. Man offers to give tramp a fur coat if she walks around the corner to get it. Is walking sufficient consideration? No. Detriment is only one aspect of consideration, the Man must have benefited, which he did not in this transaction.
Tent hypothetical: Women promises to give man the tent if he would walk to the store to get it. This is a gift, not a contract supported by consideration.
Adequacy of Consideration
“The peppercorn view”: The court does not inquire into the adequacy of consideration. The fact that the promisee did something he or she was not required to do and the promisor incurred a benefit he or he was not entitled to receive is sufficient.
The adequacy in most cases needs to be real, not just merely a pretense.
Courts also consider equity. If the consideration is grossly disproportionate the promise, this could be a sign of fraud. Judicial decisions should not “shock the conscience”.
Often times a gross disproportion of consideration is a red-flag to fraudulency. Therefore, we must examine consideration at times to prevent fraud.
Jackson v. Seymore
Even though the widow assented to the terms of the contract, the gross disproportion of the consideration and the promise led the courts to void the contract. Gross inadequacy of consideration.
Vignette where woman pays 2000 for a magazine
Court’s would need to inquire here because the consideration is so off.
Were there lies about the value of the magazine? Was there duress? Was she mentally handicapped? Was there mutual mistake?
If none of these conditions are present, then the contract may be enforceable.
Batsakis v. Demotsis
Mere inadequacy of consideration will not void a contract.

Mutuality
In Bilateral Contracts, one party cannot be bound if the other party isn’t.
If there is an illusory promise there is no mutuality.
Illusory promise: Imposes no constraint on the promisor. He has complete discretion on whether or not to perform.
Ex. Seller says he will ship as many pounds of coal as the buyer might want. This contract is unenforceable because all of the autonomy is with the buyer. Not supported by consideration- no detriment to the buyer if he decides not to perform.
If there is consideration, then there is mutuality.
McMichael v. Price
McMichael agrees to sell Price all the sand he may want, and will not sell sand to anyone else. McMichael pulls out of the agreement, claiming there was no mutuality.
Court holds that there was mutuality, because there was consideration. McMichael limited his autonomy to sale sand to anyone else.

Wood v. Lucy, Lady Duff Gordon
Lady gives Wood exclusive rights to sell her name. She then begins selling without a split of profits. He sues for breach, she claims there was no mutuality or consideration on his part.
Court holds that there was an implication of a promise, that Wood would try to sell the Lady’s name. Even though the contract did not demand him to, he did intend to act on his duties and generate profits.
Represents the waning of consideration. Actual consideration was not necessary, only the implication of it.
The Good Faith Requirement as Sufficient Consideration
Ex. Above in Wood v. Lucy; Wood being bound by the good faith requirement to try and sell Lucy’s name.
UCC 2-306: Parties are bound to act in good faith in Exclusive Dealings contracts: Must use reasonable diligence to perform the contract.
Athlete Hypothetical
Quick Facts: Sports Agent does not charge Athletes a price, telling them to pay for his services what they think he deserves. If he secured a 10million dollar contract, could the athlete pay him nothing?
Can no longer argue that there was no consideration. Athlete is bound by good faith to pay him money.

Exclusive Dealings Contracts
Ex. Wood v. Lucy, Lady Duff. McMichael v. Price.
UCC 2-306: Outputs, Requirements, Exclusive Dealings
Requirements and Outputs Contracts.
Definition of a Requirements Contract: Quantity term is no specific amount, but is dictated by how much the buyer will need at a given time or in a given scenario.
Output Contract: The quantity is all the goods the seller will supply in a given amount of time.
Both of these types of contracts are inherently exclusive, and governed by good faith, which precludes activities such as market speculation.
Personal Satisfaction and Termination Clauses
The performance of some types of contracts depends on one party’s satisfaction
Courts usually constrain the discretion of this party which prevents their promise from becoming illusory.
Courts can chose to use a subjective or an objective standard of satisfaction:
Subjective: Based on personal preferences of the buyer (More appropriate in highly idiosyncratic transactions such as the purchase of art for one’s home.)
Objective: Based on a reasonable person standard or an industry standard. Would this be acceptable to a reasonable person? Would this be generally excepted in the industry?
Both the Subjective and Objective Tests are governed by good faith.
Ex. Omni v. Seattle First National Bank
Quick Facts: Omni agrees to buy land from Clarks if land is suitable for construction. Omni decides to forgo inspection and Clarks pull out of the deal, citing promise was illusory.
Court holds that promise was not illusory. Omni’s obligation to act in good faith constitutes consideration. Feasibility contracts are a standard in the industry.
Modifying a Contract:
Modifying the terms to which only one party suffers additional detriment can cause problems of consideration. Court’s have held however, that additional consideration is not always necessary if the modification of the contract was made voluntarily and in good faith.
Modifications should be supported by a commercial reason
Good faith requirement protects against possibilities of extortion.
When only one party is obligated to perform, the other party is vulnerable. Ex. I’ve paid you to dig a hole, I’ve relied on your promise to do it, now you try and change the terms of the contract to favor you.
This is why these agreements must be supported by a commercial reason, must be in good faith, must be voluntary, must be because of unforeseen circumstances.
The UCC-2-209 governs this, stating that as long as bad faith is not used to escape the terms of the contract, modifications are binding.
Also governed by Restatement (2d) 89 which states that when modifying a contract, there should be circumstances which were generally unforeseen by the parties.
Also states that if the modification may not be binding, if it induces reasonably foreseeable reliance, it may be enforced.
Ex. Levine v. Blumenthol
Quick Facts: Tenants cannot pay the rent due to economic hardships. Landlord agrees to reduce their rent. At the end of the lease, he sues for the amt he would have been paid under the original agreement. Was this modification enforceable?
There was a lack of consideration on the part of the landlord. Had the tenants agreed to pay the rent even a day early, there would have been consideration.
Because there was no consideration, the court ruled that this promise was unilateral and not enforceable.
Restitution
Restitution governs claims for legal or equitable recoveries which are designed to prevent unjust enrichment.
Restitution can be recovered both within and outside of the context of a contract.
Restatement of Restitution: Essence for a cause of action
Person unjustly enriched at the expense of another is required to make restitution
A person who officiously confers benefit upon another is not entitled to restitution
A person cannot profit from his own wrong at the expense of another.
Restitution as a contract remedy:
Problems in the performance of contract can arise because of factors such as: mutual assent, mutual mistake, fraud, impossibility, etc. In these Defective contract cases, restitution is not controversial.
In these scenarios, it is possible that one party has already conferred benefits upon the other party without receiving anything in return.
In these cases, the courts will often award restitution. When measuring restitution:
A party is entitled to restitution to the extent that they benefited the other party or incurred reliance upon the other party’s promise.
Sum to be awarded is usually: value of what other party received.
There can be restitution for both the breaching and non-breaching party:
Non-Breaching party: Injured party is entitled to restitution by way of performance or reliance.
Breaching Party: The party who breached may be entitled to restitution for any benefit that the injured party incurred that was in excess of actual losses.
If one party’s breach permits the other party to be able to rescind the contract, both parties have to make restitution for the benefits incurred unjustly.
Ex. Buyer bails out on the purchase of a 300,000 dollar home; buyer has already put down a payment of 20,000. Is seller entitled to 20,000 if they can sell home for 300,000? No they are only entitled to damages and may be required to make 20,000 in restitution to buyer. Is seller entitled to 20,000 if they can only sell home for 200,000? Yes, In fact they are entitled to 100,000.
Components of Restitution: Enrichment and Injustice
Enrichment:
Do you measure the enrichment based upon what was gained or what was lost? These could be two different values.
Ex. Painter accidently paints your house, assume you benefit. Is painter entitled to cost of supplies, or the value of your benefit (what if you didn’t like the color).
Injustice: The enrichment must be unjust in nature
Benefit cannot be conferred officiously
Restitution: Unrequested Benefits:
The law does provide restitution in cases even where there was an unrequested benefit. Restitution in these cases are controversial.
The benefit must be under such a circumstance that the action was necessary for the protection of the other party’s interest.
There are cases where it would be impractical to request the benefit, but the benefit was conveyed.
Section 116 of the restatement: Restitution is entitled for efforts to save a life or property.
Section 117 of the restatement: Restitution is entitled for efforts to save property.
However, the Salvor must have intended to charge for the efforts from the start. The efforts must not have been a gift.
Glenn v. Savage
Quick Facts: Defendant’s property fell into the river while the defendant was absent, and the plaintiff recovered the property. The service had the reasonable value of $20. The plaintiff refused to pay the defendant. Plaintiff is suing for the amount.
Court ruled that this could have been an act of courtesy, and therefore the defendant is not obligated to pay for the service.
Court states that a verdict in favor of the plaintiff would have been contrary to public policy.
Cotnam v. Wisdom
Quick Facts: Surgeons performed emergency surgery when defendant had been injured in a car accident. Defendant was unconscious and later died. Surgeons suing for cost of their services.
Court ruled that even though there was no real contract between the defendant and the plaintiff, there was a fictitious and implied one, therefore a remedy is in order.
The court also ruled that only reasonable compensation was in order- the doctors knew nothing of defendant’s financial standing when they rendered the services, therefore they cannot seek restitution on the basis of his financial standing.

Restitution: Past Consideration/ Moral Obligation
In some cases, the benefit has occurred before the consideration.
In these cases, the beneficiary made no promise to pay before the benefit was incurred, but after.
Governed by Restatement (2d) 86
A promise made in recognition of a benefit previously received is binding: “It is well settled that a moral obligation is a sufficient consideration to support a subsequent promise to pay…” Material Benefit Rule
Exceptions:
Promisor has not been unjustly enriched (Mills v. Wyman)
Promisee conferred the promise as a gift (Mills v. Wyman)
Value of the promise is disproportionate to the value
Mills v. Wyman
Plaintiff cared for defendant’s son for 15 days prior to his death. In gratitude, father promised to compensate plaintiff. Was this promise enforceable?
Court determines that this promise was not enforceable. Moral obligations are not to be equated with legal ones. There was no consideration on the part of the father, and the care of the son was likely offered gratuitously. The case for no consideration was strengthened by the fact that the defendant’s son was not a minor.
Webb v. McGowin
Quick Facts: To prevent injury to the defendant, plaintiff fell with a block and suffered a debilitating injury.