Contracts I, Mike Selmi, Fall 2003

Contracts I, Mike Selmi, Fall 2003 — Outline

The Perspective of Contract Theory

Formalism (Langdell, Williston) — objective
Set of universal rules distilled from decided cases; no need to explain/justify.
Mechanical application of rules; no moral/political values.

Legal Realism (Pound, Llewellyn, Corbin) — subjective
Rules of law evaluated on the basis of social interests they served.
Decisionmaking includes personalities, points of view, interest, and goals of decisionmakers.
All lawmaking is policymaking; should consider all relevant knowledge of human affairs, including that furnished by other disciplines.
Critical of black-letter law approach of Restatements. (Llewellyn later became principal drafter of UCC, the purpose of which was to reflect actual transactions.)
Law & Economics (Chicago school, Posner) — efficiency (subjective)
Legal rules should tend toward efficient results.
Lower transaction costs.
Resources allocated to most valued uses.
Unfairness does not make an agreement unenforceable; only fraud and duress.
Critical Legal Studies (CLS) — postmodern legal realism (deconstruction) (subjective)
Inspired by Legal Realism, view justifications of existing legal rules as political ideology aimed at preserving power and wealth distributions in society; goal is utopian society based on altruistic and communitarian values.

Tool-kit

Things to look for: Consideration, Reliance, Restitution, Fraud/Duress, Parol Evidence, Ambiguous Terms, Offer/Acceptance, Boilerplate, Signature, Merchants/Goods.
Line-drawing / Slippery-slope
Once the door is open, it opens wide.
We can distinguish facts1 from facts2 in that . . . -OR- We can draw the line with X because . . .
It’s the Legislature’s job
Judges should not legislate from the bench.
Judges should rule as they think is most just, and if legislature doesn’t agree they can change law. Most contract law is common law. Legislature moves slowly.
Flood of Litigation
Courts do not want to open the door to more litigation in an already overburdened system.
Courts should not deny a party relief/justice because they are too busy; we can appoint more judges.
Individual Autonomy vs. Government Protection
Court protectionism is paternalistic, individuals have a right to enter into any agreement they want.
Individuals need to be protected from being duped by corporations with unequal bargaining power.
Policy / Future Effects of Decision
Broad or narrow holding.
Social Norms vs. Rules of Contract Law
Most people think writing (or oral promise, etc.) is binding, even if not signed.
The rules are the rules, it does not matter what most people think.
Market vs. Adhesion
You get a cheaper price because of the arbitration clause (or limitation of damages, etc.).
This is an adhesion K, there is no room to negotiate these terms.

Enforcing Promises: Bases of Legal Obligation

Intention to Be Bound: The Objective Theory of Contract

Social Policy Advantages of Objective Theory of Contract
Administrative ease: intent is difficult to prove; easier/quicker to rule.
Certainty/predictability of rule-based approach (certainty is worth $$ to businesses).
Rules can constrain courts and remove bias.
Disadvantages: inflexible, rules more important than justice.
Ray v. William G. Eurice & Bros., Inc.
Facts: K to build a house, Ray made changes to K, Eurice pretended to have never seen the changes, Ray had to pay more for another builder and sued for the difference, court found for Ray. — Unilateral mistake. — Importance of credibility of parties and telling a story.
Absent fraud, duress, mutual mistake, or lack of capacity to understand agreement, a party who signs a written K with or without reading it, is bound by his signature in law.
“The test of a true interpretation of an offer or acceptance is not what the party thought it meant or intended to mean, but what a reasonable person in the position of the parties would have thought it meant.” (Williston)
“If it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake.” (Learned Hand)
Park 100 Investors, Inc. v. Kartes
Facts: company VP took care of office space lease, then sneaky office park representative had owners/Kartes’ sign a personal guarantee disguised as lease K, owners moved out and office park sued for unpaid rent of sublessee, court found for Kartes. — Unilateral mistake. — Fraud & duress. — Importance of credibility of parties and telling a story.
Elements of fraud: “(1) A material misrepresentation of past or existing fact by the party to be charged, which (2) was false, (3) was made with knowledge or in reckless ignorance of the falsity, (4) was relied upon by the complaining party, and (5) proximately caused the complaining party injury.”
“While a person relying on another’s representations must use ordinary care and diligence to guard against fraud, the requirement of reasonable prudence in business transactions is not carried to the extent that the law will ignore an intentional fraudpracticed on the unwary.”

Enforcing Exchange Transactions: The Doctrine of Consideration

Restatement 2d § 71. Requirement of Exchange; Types of Exchange

(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

(4) The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.

Restatement 2d § 73. Performance of Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain.

Restatement 2d § 77. Illusory and Alternative Promises

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

(a) each of the alternative performances would have been consideration if it alone had been bargained for; or

(b) one of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.

Restatement 2d § 79. Adequacy of Consideration; Mutuality of Obligation

If the requirement of consideration is met, there is no additionally 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; or

Peppercorn Theory of Consideration: even a single peppercorn can be valid consideration provided the parties both view it as consideration. — Court does not consider the value of consideration.
“Nothing is consideration that is not regarded as such by both parties.”
Hamer v. Sidway
Facts: Decedent uncle promised to pay nephew $5K for refraining from bad (but legal) conduct until 21, at 21 decedent wrote letter promising money later, then died, estate doesn’t want to pay, court found for nephew.
Consideration as “Bargained for Exchange” (nephew’s waiver in exchange for uncle’s benefit in the preservation of the good family name).
“In general a waiver of any legal right at the request of another party is a sufficient consideration for a promise.”
“Consideration in the sense of the law may consist in wither some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”
“Courts will not ask whether the thing which forms the consideration does in fact benefit the promise or a third party, or is of any substantial value to anyone.”
Dougherty v. Salt
Facts: Aunt had given nephew a note for $3K payable on her death for “value received” because he was a good boy, estate didn’t want to pay, court held that it was unenforceable for lack of consideration.
Court held that the note was just a donative promise (or executory gift); no bargained for exchange or forbearance. “Value received” language was not sufficient consideration. — Joy in conferring gift is not consideration. — “Nothing is consideration that is not regarded as such by both parties.”
Policy: Court does not want to inhibit gift giving through fear of litigation. (Until the time the gift changes hands, the promise can be revoked.)
Baehr v. Penn-O-Tex Oil Corp.
Facts: Pl leased gas stations to Kemp who was broke and assigned profits to D, when Kemp didn’t pay rent, Pl went after D who had been running the gas stations, court held that D’s promises to pay rent were without consideration.
Pl asserted that his refraining from suing was forbearance which amounts to consideration, but court found that it was not forbearance but just his own convenience. (Forbearance can be consideration under Restatement §71.)
Consideration, as bargained for exchange, requires that promise be the product of a bargain. It doesn’t matter if the things are of value but there must be assumption of an obligation by one party on the condition of an act or forbearance of the other. This insured that the K is not accidental, casual, or gratuitous, but intentional and the result of deliberation.

Plowman v. Indian Refining Co.
Facts: When Pls were laid off they were told they would continue to receive checks for life if they came and picked them up, this happened for a while then stopped, court found for D due to lack of consideration.
Past consideration is not valid (they were already paid for work done in the past). Moral consideration (employer should keep its promise) is not valid. The requirement that they pick up checks is not consideration, merely a condition of the gift (like Williston’s tramp who has to walk around the corner to get a free coat). Also, D’s VP was not authorized to enter into such a K (agency).
The Power of Agents to Bind Their Principals
Agency if: express authority, implied authority (one is authorized to carry out a project and agency is required to do so), principal does something to lead agent to believe he is authorized, if agent acts without authority then principal learns of action and approves.

Protection of Promisee Reliance: The Doctrine of Promissory Estoppel

Restatement 2d § 90. Promise Reasonably Inducing Action or Forbearance

(1) A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee 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.

Promises Within the Family

Greiner [f] v. Greiner [m]
Facts: Pl/mom promised to give son land because he was disinherited, he moved a long distance and did repairs on the place, then mom changed her mind and tried to evict him, court found for son.
Promissory estoppel: (1) promise, (2) reasonable reliance, (3) detrimental reliance, (4) injustice.
Wright [D] v. Newman [Pl]
Facts: Boyfriend (not biological father) assumed parental role and promised to take care of Pl’s son, did so for ten years (facts are disputed here), then he tried to split. Court found for Pl.
Promissory estoppel: Pl’s reliance was that she didn’t seek out biological father. This case shows how much telling a convincing story can go to injustice element of promissory estoppel (dissent tells the facts very differently).

Charitable Subscriptions

Allegheny College v. National Chautauqua County Bank
Facts: Donor promised a donation to college upon her death to set up a memorial scholarship in her name, paid part, then changed her mind, after death college brought suit, court found for college.
Court talks about promissory estoppel in dicta (college began setting up & advertising scholarship fund), but Cardozo says that this is a straight consideration case (donation for memorial in her name).

Promises in a Commercial Context

Katz v. Danny Dare, Inc.
Facts: Pl had been employed for 25 years, became injured and work suffered, boss didn’t want to fire him but instead persuaded him to retire in exchange for pension, paid pension for a while then cut it in half, court found for Pl based on promissory estoppel (detrimental reliance in that he quit job in reliance on pension). — This would be a better case for consideration (quitting job in exchange for pension) but judge tried it as reliance.
Contrast with Plowman: Here Pl had choice to retire and did so in exchange for pension, in Plowman there was no choice, they had to retire.

Shoemaker v. Commonwealth Bank
Facts: Pl’s mortgage required that they have insurance, D provided it for a time then stopped, house burned down, court overturns summary judgment for D saying that jury needs to look at facts to see if Pl’s reliance was reasonable & thus if there was injustice.
Reasonableness of Pl’s reliance: letter did not specify duration but Pl was promise as conditional (D will get insurance if Pl does not). — More info needed: why didn’t Pl get insurance; didn’t qualify?

Liability for Benefits Received: The Principle of Restitution

Restatement 2d § 86. Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.

(2) A promise is not binding under Subsection (1).

(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or

(b) to the extent that its value is disproportionate to the benefit.

Restatement of Restitution § 116

A person who has supplied things or services to another, although acting without the other’s knowledge or consent, is entitled to restitution therefore from the other if

(a) he acted unofficiously* and with intent to charge therefore, and

(b) the things or services were necessary to prevent the other from suffering serious bodily harm or pain, and

(c) the person supplying them had no reason to know that the other would not consent to receiving them, if mentally competent; and

(d) it was impossible for the other to give consent, because if extreme youth or mental impairment, the other’s consent would have been immaterial.

* Officiousness means interference in the affairs of others not justified by the circumstances under which the interference takes place. (Restatement of Restitution § 2 comment a)

Definitions
Contract Implied in Fact: K can be implied based on the facts (request for services/benefit).
Contract Implied in Law: court implies K based on restitution.

Implied in Fact Contract / Implied in Law Contract (Quasi-Contract)
No Written or oral contract / No written or oral contract
Based on the conduct of the parties / No conduct – imposed by court to prevent injustice
Generally are acknowledged by the parties / NOT acknowledged by the parties
Usually is an agreement / No Agreement
Is Consideration / No Consideration
Expectation Damages are imposed / Restitution Damages for Unjust Enrichment

Restitution in the Absence of a Promise

Credit Bureau Enterprises, Inc. v. Pelo
Facts: Bipolar guy committed, didn’t want to pay hospital bill, court said he needs to pay under restitution.
Restitution cannot be applied where one does not request or knowingly accept benefit or where one refuses benefit, except in cases of mental impairment.
Posner on Restitution
Reasonable Person Standard: Would a reasonable person have assented if capable of doing so?
Transaction Costs: How difficult would it have been to get actual assent?

Commerce Partnership 8098 Limited Partnership [D] v. Equity Contracting Co., Inc. [Pl]
Subcontractor was never paid by contractor for work done, is suing owner of building where services were performed, D claims to have paid full contracted price, court reversed judgment for Pl and remanded for new trial to find additional facts about D’s payments to determine if they had indeed already fulfilled their K.
A subcontractor can maintain a restitution action against an owner by proving two elements of unjust enrichment, (1) subcontractor had exhausted all remedies against contractor and was still unpaid, and (2) owner had not already paid someone else for the subcontractor’s work.
Watts [f] v. Watts [m]
Facts: Unmarried partners living together as married, wife gave up career to support husband & raise kids, she also worked long hours at his business, now splitsville and hubby wants to keep everything, court held that there was sufficient evidence to go to trial on three claims, breach of implied in fact K to share assets, D’s holding all assets amounts to unjust enrichment, Pl is entitled to partition of goods under partition statutes (for disputes of commonly held property).
On breach of implied in fact K, court saw possible consideration in wife dropping career and helping with business. Court noted that sexual relations alone are not valid consideration (illicit).
On unjust enrichment claim, there is sufficient evidence to satisfy 3 elements of unjust enrichment under Wisconsin statute: (1) benefit conferred, (2) D knew of or appreciated the benefit, and (3) D accepted the benefit under circumstances that make it inequitable for D to retain benefit.

Promissory Restitution

Mills v. Wyman
Facts: Pl takes care of D’s dying adult son, D promises in writing to reimburse for expenses, then changes mind, court dismissed for failure to state a claim.
Moral obligation not valid consideration. Past consideration not valid consideration. Unjust enrichment does not apply to 3rd parties (benefit must be directly conferred).
Webb v. McGowan
Facts: Pl saved D from death or serious harm crippling himself in the process, D agreed to pay Pl $15 every two weeks for the rest of Pl’s life, D died first and estate doesn’t want to pay, court reversed dismissal and remanded for trial because there is sufficient evidence for a restitution claim.
Past/moral consideration & restitution: “A moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit, although there was no original duty or liability resting on the promisor.”
Restatement 2d § 82. Promise to Pay Indebtedness; Effect on Statute of Limitations

(1) A promise to pay all or part of an antecedent contractual or quasi-contractual indebtedness owed by the promisor is binding if the indebtedness is still enforceable or would be except for the statute of limitations.