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Introduction to Contracts

In general, a contract is a promissory agreement that is legally enforceable.


Kinds of contracts
o An express contract is formed by written or oral language
o An implied-in-fact contract is manifested by the actions of the parties but is not
explicitly stated.
o An implied-in-law contract is an obligation created by the law for reasons of
justice.
Sources of contract law
o Common law has traditionally been governed by common law, although many
important areas have been superseded by statute
o All states except Louisiana have adopted provisions of the Uniform Commercial
Code, which governs many aspects of commercial transactions.

Consideration
Elements of Consideration
Bargained for exchange
A performance or return promise is bargained-for if it is sought by the promisor in exchange
for his promise, and it is given by the promisee in exchange for that promise. (Rest 2d. 71(2))
The bargain requirement serves the purpose of distinguish between enforceable promises and
ordinary gifts.
1. Gifts A promise to make a gift is unenforceable, not only because it is not bargainedfor but also because the offeree suffers no legal detriment.
2. Bargain v. precondition Performance of a bargain benefits the promisor and
therefore is valid consideration. Performance of a precondition does not benefit the
promisor and is not consideration.
3. Benefit The benefit a promisor receives as part of a bargain does not have to be
economic in nature. However, the benefit must be more than just altruistic pleasure;
moral obligations do not constitute valid consideration
4. Adequacy of Consideration
a. Nominal Consideration Although courts will not ordinarily examine the
adequacy of consideration, courts will do so in cases involves purely token
consideration, in order to thwart attempts to make gratuitous promises appear
legal enforceable. Nominal consideration is usually evidence that a gift is
masquerading as a bargained-for exchange.
b. Recited Consideration A majority of courts allow a promisor who is
opposing enforcement of a contract to prove that the consideration recited in the
agreement was not actually given.
c. Past consideration As a general rule, past consideration is not consideration.

i. Pre-existing debt A promise to repay a debt that was excused


because of a technical defense is enforceable without consideration.
(Rest. 2d. 82, 83).
ii. New promise for benefits received A new promise to pay for
benefits will sometimes be enforceable without consideration on grounds
of moral obligation to prevent injustice. (Rest 2d. 86).
Legal Detriment
The second requirement for valid consideration is that it must constitute a legal detriment to the
promisee. Legal detriment is liberally construed to mean either a promise to do something that
one is not legally obligation to do or to refrain from doing something that one has a right to
do There is no requirement that the promisee suffer any actual hardship. Likewise, the
promisor does something that he does not have to do.
1. Minority view Some courts broaden the test such that valid consideration exists if the
promisor receives a benefit, even if the promisee does not suffer a detriment.
2. Unilateral and Bilateral contracts In a bilateral contract, the detriment is in the form
of a promise. In a unilateral contract, the detriment is in the form of an action.
3. Pre-existing duty rule Generally, there is no legal detriment if a party promises to do
something that he is already obligated to do. (Rest. 2d 73).
a. Dispute if there is an honest dispute as to whether the promisor is already
legally obligated to do the promised act, the promise or act may be consideration.
b. Unforeseen Circumstances Unforeseen circumstances make it fair and
equitable to allow a promisor to modify a contract without giving new
consideration. (Rest. 2d. 89).
c. New or different consideration Even a slight change in the terms of a preexisting duty will satisfy the requirement of consideration.
4. Partial Payment as Satisfaction of a Debt A promise to pay part of a debt, instead
of the whole, is not consideration for a return promise by the creditor to relinquish the
debt, because the debtor is obligated to pay anyway. Courts will consider a promise of
partial payment to be valid consideration if:
a. The payment terms are slightly changed.
b. The debtor refrains from declaring bankruptcy.
c. There is an honest dispute as to the debt.
d. A check marked payment in full is cashed.
5. Forbearance to Bring Suit A promise not to sue, made in exchange for some return
benefit, is valid consideration if either;
a. The claim is valid
b. The claim is invalid, and
i. The parties reasonably believed the claim was valid (majority rule).
ii. The validity was uncertain or the promisor subjectively believed that it
was valid (Rest. 2d. 74).
Mutuality
1. An illusory promise is not sufficient consideration, because it only appears to bind the
promisor when, in fact, it commits him to nothing at all. (Rest. 2d. 77).

2. An alternative promise allows the promisor to choose among several alternative


performances will satisfy mutuality only if each alternative has valid consideration. (Rest.
2d 77.)
3. A promise that gives the promisor the right to withdrawal from the agreement can
still be valid consideration for a return promise if:
a. Termination is allowed after performance is rendered.
b. Termination is dependent on ability to perform.
c. Termination occurs with notice
4. A voidable promise at a partys election is valid consideration and satisfies the
requirement of mutuality. (Rest. 2d. 78).
5. A conditional promise that makes performance dependent on the occurrence of a
future event is valid consideration
a. Condition is Outside the Promisors Control There is valid consideration,
even if a promisor eventually does not have to perform, unless the promisor
knows that the condition cannot occur.
b. Condition is Partially Within the Promisors Control A court will imply
such a promise to mean that the promisor will use reasonable efforts to satisfy
the condition.
6. A promisee who receives an irrevocable offer (an option contract or a firm offer) is not
always required to give consideration in exchange for that offer. (Rest. 2d. 87). Even
in cases where consideration is recited, courts do not require that it be paid.
7. Requirements and Output Contracts
a. Traditional Rule A promise to buy goods from a specific seller over a period
of time is insufficient consideration for the return promise to supply those goods,
if the quantity term was to be determined by what the buyer required over that
period. Mutuality was lacking because, although the seller has to provide the
goods, the buyer does not have to buy if he required nothing.
b. Modern Rule Requirements and Output contracts are valid consideration and
do not lack mutuality of obligation. UCC 2-306 implies that the buyer has a
good faith duty to:
i. Maintain reasonable requirement levels
ii. Buy exclusively from that seller, and
iii. Not take advantage of the seller by increasing demand to benefit from
fluctuating market prices.
c. Output Contact Seller promises all of his output to one buyer. A mutuality
problem exists because the seller never promised to have any output let alone a
certain amount. Such contracts are valid, UCC 2-306 implies that sellers have a
good faith duty to maintain a certain level of output.
d. Unilateral Contract Part performance of a unilateral contract is sufficient
consideration to keep a promise open, even though the promisee is not obligated
to complete performance. Once part performance is render, however, the
promisor cannot withdraw the promise unless the promisee revokes.

Promissory Estoppel
Promissory estoppel is an equitable doctrine that is used to avoid injustice by enforcing
otherwise unenforceable promises. It estops the promisor from claiming that no consideration
was given (Rest. 2d. 90)
Requirements for Promissory Estoppel
1. That there was actual reliance on the contract or promise
2. That the reliance was foreseeable to the breaching party.
3. That it was clearly detrimental.
4. That injustice can only be avoided by enforcement.
Case overviews
1. Hamer v. Sidway (1891).
a. Facts: A young mans uncle promised to pay him $5,000 if he abstained from
drinking, smoking, swearing and gambling until the age of 21. The uncles
executor refused to honor the promise, claiming no consideration.
b. Issue: Does voluntary forbearance of a legal right constitute consideration?
c. Rule: Forbearance of a right is sufficient legal detriment to constitute
consideration.
2. Batsakis v. Demotsis (1949).
a. Facts: During World War II, Batsakis loaned Demotsis 500,000 drachmas to get
back to America. Demotsis promises to pay $2,000. Demotsis refused to repay
the debt, claiming that inadequate consideration was given for her promise.
b. Issue: Is a contract void if the consideration furnished by one party is
substantially disproportionate to that given by the other?
c. Rule: Inadequacy in a contract does not void a contract, as long as the
consideration has some value. A party that receives the benefit it seeks will not be
relieved from a bad bargain.

3. Dougherty v. Salt (1919)


a. Facts: Dougherty, at eight years old received a promissory note from his aunt for
$3,000 payable at her death. Note marked value received.
b. Issue: Is the note enforceable?
c. Rule: Although a note states that value has been received, if value has not in fact
been received, the note is unenforceable as a contract for lack of consideration.

4. Schnell v. Nell (1861)


a. Facts: Nell was granted $200 in a will made by Schnells wife. The will was
invalid but Schnell promised to make the payment in exchange for one cent
consideration. Schnell revoked his promise.
b. Issue: Is nominal consideration acceptable?
c. Rule: Nominal consideration is not acceptable?

5. Kirksey v. Kirksey (1845)


a. Facts: The defendant wrote to his sister-in-law, If you will come down and see
me, I will let you have a place to raise your family. Two years after her
relocation, he changed his mind and made her leave. The plaintiff claims that the
expenses she incurred in moving were valid consideration.

b. Issue: Is an act necessary to accept a promise simply a precondition to a


gratuitous act or consideration given in exchange for the promise?
c. Rule: Acts that are required before fulfillment of a promise are preconditions to
accepting the promise, not valid consideration.

6. Mills v. Wyman (1825)


a. Facts: Mills provided board, nursing, and care to Wymans adult son. After the
services had been rendered, Wyman wrote to Mills, promising to pay for them.
Wyman later refused to pay.
b. Issue: Is moral obligation sufficient consideration to support a promise?
c. Rule: Moral obligation is not sufficient consideration to enforce a promise to pay
for services already rendered. Past consideration is no consideration.

7. Webb v. McGowin (1935)


a. Facts: Webb was crippled in the course of a heroic act to prevent harm to
McGowin. Consequently, McGowin promised Webb $15 every two weeks for
the rest of Webbs life. McGowin made payments until his death, whereupon his
estate refused to honor the promise.
b. Issue: Is moral obligation sufficient consideration to enforce a promise?
c. Rule: Minority Rule moral obligation is sufficient consideration to support a
subsequent promise when the promisor received a material benefit.

8. Wood v. Lucy, Lady Duff-Gordon (1917)


a. Facts: Lady Duff-Gordon agreed with Wood that he would have exclusive
agency to place her endorsements on clothing designs, to place her designs on
sale and to license others to market them, hi exchange, Wood promised to keep
the books and to split the profits evenly with Duff-Gordon. Duff-Gordon
breached by endorsing designs herself and keeping the profits
b. Issue: Is a contract void for lack of mutuality because one party did not promise
to use reasonable efforts to perform his duties?
c. Rule: A promise to use reasonable efforts can be implied from a contract and,
therefore, a contract does not fail for lack of mutuality because it does not
contain explicit clauses requiring good faith efforts (UCC Section: 2-306(2))

9. Scott v. Moragues Lumber Co. (1918)


a. Facts: Scott agreed to charter a vessel to Moragues on the condition that Scott
was able to buy it. Scott purchased the vessel but rented it to a third party.
b. Issue: Is a contract void for lack of mutuality when it is conditioned upon an
event whose occurrence is at the will of one of the parties?
c. Rule: A contract that is conditioned upon the occurrence of an event at the will
of one of the parties is not void for lack of consideration. Once the condition is
met, an obligation exists.

10. Grouse v. Group Health Plan, Inc. (1981)


a. Facts: Grouse resigned from his job because Group offered employment. The
offer was revoked.
b. Issue: Does the Plaintiff have a promissory estoppel cause of action?
c. Rule: An illusory promise can still be enforceable where the promisor should
reasonably expect to induce action on the part of the promisee and which does

induce such condition action if injustice can be avoided only be enforcement of


the promise.

11. Clark v. West (1908)


a. Facts: West promised Clark $6 per page if he did not drink while drafting a
manuscript and $2 if he did drink. West later told Clark not to worry about
drinking. West later refused to pay more than $2 per page. West claimed
abstinence was a consideration for the contract.
b. Issue: May a condition of a contract be waived?
c. Rule: A condition to a contract can be expressly waived. Waiver must be explicit.

12. D & G Stout, Inc. v. Bacardi Imports, Inc. (1991)


a. Facts: Defendant promised Plaintiff would continue to be Defendants
distributor for Northern Indiana. Based on that representation, Plaintiff turned
down an offer to purchase the company. Defendant subsequently withdrew its
account and General was forced to accept a substantially lower offer.
b. Issue: Can promissory estoppel be used to enforce a promise made between two
parties in an at-will relationship?
c. Rule: If a promise induces reliance, then the promise can be enforced through
estoppel. Damages would be for reliance not expectation.

Policing the Bargain


Capacity to Contract
1. Minors can disaffirm any contract, except for necessities, during minority and within a
reasonable time after reaching majority (Rest. 2d. 15).
a. Exceptions are statutory or involve contracts that deal with duties imposed by
law.
b. Upon a minors disaffirmance, the non-infant party is limited to restitution, and
only if the minor still possesses the goods.
c. A minor can ratify after a contract coming of age, expressly or by conduct that
causes reliance by another party.
2. Mentally incompetent parties can disaffirm a contract if, by reason of mental illness
or defect:
a. They are unable to understand in a reasonable manner the nature and
consequences of the transaction, or
b. They are unable to act in a reasonable manner in relation to the transaction, and
c. The other party has reason to know of the condition. (Rest. 2d. 15).
3. An intoxicated party can also avoid contractual duties if he does not understand the
transaction. (Majority rule).
Revisions of Contractual Duty
Pre-existing duty rule
If one party promises another that he will do what he is already legally obligated to do, the
promise is not a detriment sufficient to satisfy the requirement of consideration (Rest. 2d.
73).

1. Courts have held that modifications of rents and wages are invalid because of the preexisting duty rule.
2. An agreement to accept payment of a lesser sum on or after the due date is not binding
for lack of consideration
a. This rule is severely criticized because it discourages settlements. It has been
overruled in some jurisdictions.
b. Most jurisdictions follow it, but hold that sufficed detriment exists if payment of
a lesser sum is accompanied by some additional act of the debtor.
3. The pre-existing duty rule is not applicable if:
a. The original contract is rescinded and a new contract is executed.
b. Contraction modification is a partial rescission and therefore supported by
consideration.
c. Some new detriment can be found for consideration.
d. Rest. 2d. 89(a) allows a modification to be binding if compelled by unforeseen
circumstances.
e. Under promissory estoppel, a modification is binding to the extent that justice
requires enforcement because of reliance on the modification.
f. Some state statutes allow modifications without consideration as long as written
and signed.
g. Dropping an invalid claim serves in most courts as consideration for
modification if the party has a genuine and reasonable subjective belief that the
surrendered claim in valid.
Economic Duress
1. Rule: A contract is voidable if a party was forced to agree to it by use of a wrongful
threat precluding his exercise of free will.
2. Proof: A party must show that immediate possession of needful goods is threatened and
that the goods could not be obtained from another source
3. The remedy is usually restitution
4. Exercise of a legal right is not duress
Check Tendered as Payment in Full
1. Common law Rule If there is a good faith dispute over the amount of a debt and the
debtor tenders a check for a lesser amount than the creditors claim, cashing the check,
even under protest, discharges the debt.
a. A debtors intention that the check be full satisfaction of the debt must be
cleared indicated to the creditor.
b. Partial payment by a fiduciary will not result in an accord and satisfaction.
2. UCC 1-207 - A creditor can cash a check tendered as payment in full and still reserve
the right to sue for the balance of the debt by righting words of protest on the check.
Unconscionability and Adhesion Contracts
1. Judges decide the issue of unconscionability as a matter of law.
2. Unconscionability is determines by circumstances at the time the contract was made.
3. Parties are entitled to a reasonable opportunity to present evidence of the circumstances
to aid the court in making its decision

4. The doctrine is used mostly in consumer cases.


5. Rest 2d. 208, using similar language as UCC 2-302, allows a court to refuse to enforce
all or part of an unconscionable agreement.
Types of Unconscionability
1. Procedural unconscionability in the bargaining process is required before courts refuse
to enforce a contract.
2. Once procedural unconscionability is found, courts look for substantial
unconscionability in the bargaining outcome.
a. Unconscionability has been recognized to include an absence of meaningful
choice on the part of one of the parties, together with contract terms that are
unreasonably favorable to the other party.
b. Courts have used price unconscionability to invalidate agreements.
3. Waivers of defenses and cross-collateral clauses have been found unconscionable.
Case Overviews
1. Austin Instruments v. Loral Corp. (1971)
a. Facts: Loral had a contract to produce radar for the Navy. Austin was a
subcontractor. When Loral received a second contract, Austin threatened to stop
delivery on the first contract if it did not receive a price increase on the second
contract. Loral forced to accept.
b. Issue: Is a contract modification enforceable if it was agreed to under economic
duress?
c. Rule: A contract is voidable if the party claiming duress was forced to agree by
means of wrongful threat. The existence of duress is demonstrated by proof that
immediate possession of the goods is threatened and the goods could not be
received from elsewhere.

2. Williams v. Walker-Thomas Furniture Co. (1965)


a. Facts: Appellants purchased household items from Defendant Walker-Thomas
furniture, alleged that the installment contracts that were entered into with
Defendant were unconscionable and should therefore, be unenforceable.
b. Issue: Whether the contracts were unconscionable, and thus unenforceable, due
to the boiler plate language on back of the installment contract.
c. Rule: Where the element of unconscionability is present at the time a contract is
made, the contract should not be enforced.

3. Ligenfelder v. Wainwright Brewery Co. (1891)


a. Facts: Wainwright hired architect to build new brewery. Architect walked off
after different job awarded to his competitor. Wainwright promised additional
compensation for resumed work. Wainwright reneged.
b. Issue: Does the resumption of work contractually obligated constitute
consideration.
c. Rule: A new contract that was signed to prevent breach of earlier contract lacks
consideration.

4. Foakes v. Beer (1884)

a. Facts: Beer agreed to forgive interest on Foakes debt if he entered installment


plan. Beer later sued for interest.
b. Issue: Will an agreement to forgo interest in exchange for payment of the
principle fail for lack of consideration.
c. Rule: An agreement to forgo interest in exchange for repayment of a principal
fails for lack of consideration due to previous obligation.

5. Gray v. Martino (1918)


a. Facts: Defendant offered plaintiff, a police officer, reward if given help solving
crime.
b. Issue: Can a public servant enforce a private offer of reward for performing duty
encompassed by employment?
c. Rule: Public policy forbids outside remuneration for official duties.

6. Angel v. Murray (1974)


a. Facts: After signing a five-year collection contract, Maher requested increased in
pay due to extra houses. Increase granted but sue brought later.
b. Issue: Can a contract be modified because of unanticipated difficulties?
c. Rule: If a party to a contract encounters unanticipated difficulties and the other
party voluntarily agrees to pay, the contract is enforceable.
Remedies
If an agreement, or part of it, is unconscionable, the court may:
1.
2.
3.
4.

Refuse to enforce the whole contract


Refuse to enforce the unconscionable part of the contract
Limit the application of an unconscionable clause to avoid an unconscionable result.
When remedies are limited:
a. UCC 2-719(2) When a limited remedy fails of its essential purpose because of
the circumstances, remedy may be had as provided by this Act.
b. UCC 2-719(3) Consequential damages may be limited or excluded, unless the
limitation or exclusion is unconscionable.

Remedies
Equitable Remedies
Although the standard relief for breach of contract is monetary damages, they may be
inappropriate in certain situations, such as where the amount of damages is too speculative, or
the contract was for unique goods. In such cases, courts will grant primarily two forms of
equitable relief: injunctions and specific performance. A primary consideration in granting
equitable relief is the issue of justice and fairness.
Specific Performance (Rest. 2d. 359; UCC 2-716)
Instead of giving monetary damages, a court can force the breaching party to perform as
promised in the contract. Specific performance is usually granted where a contract involves a
unique good, such as land. Before granting this remedy a court will consider several issues:

1. Indefiniteness (Rest. 2d. 362). The agreement between the parties must be
sufficiently definite and certain to be specifically performed, all material terms included.
2. Extensive Supervision (Rest. 2d. 366). If specific performance of the agreement
requires extensive supervision by the court to ensure that each party is fulfilling its duties
property, the court will avoid awarding this measure of damages.
3. Adequacy of Alternative Remedies (Rest. 2d. 360). Specific performance is an
attractive remedy if other remedies do not appear adequate. Relevant considerations
include:
a. The difficulty of proving monetary damages,
b. The availability of satisfactory substitute goods, and
c. The likelihood the plaintiff will be able to collect a monetary judgment from the
defendant.
4. Do equity to get equity (Rest. 2d. 364). A court may refuse to grant equitable relief
if the party requesting such relief did not act fairly in forming the contract or if denial
would cause great hardship to the breaching party.
5. Personal Service (Rest. 2d. 367). Contracts made for the personal services of a party
are rarely specifically enforced because courts dislike the idea of forcing people to work
in places not of their choosing. However, injunctions are used to prohibit the breaching
employee from working for his employers competitors for the duration of the contract.
Injunctions (Rest. 2d. 361)
As another alternative to monetary damages (and to specific performance), a court may prohibit
the breaching party from rendering the contracted-for performance to anyone but the
nonbreaching party. Courts will grant an injunction if:
1. A noncompetition clause is in the contract.
2. The contract is for unique services. The employer must prove that the employees
services or abilities are special or unique.
3. The employees livelihood is not threatened. A court will not gran an injunction if doing
so would leave the employee with no other reasonable means of making a living.
Case Overviews

1. Hawkins v. McGee (1929)


a. Facts: A surgeon guaranteed the plaintiffs operation would be 100% successful.
b. Issue: How are damages calculated in a case of breach of contract?
c. Rule: The measure of damages in a breach is the difference between the
plaintiffs actual position and the position had the contract been fulfilled.

2. Louise Caroline Nursing Home, Inc. v. Dix Construction Co. (1972)


a. Facts: Dix failed to complete construction of a nursing home.
b. Issue: What is the measure of damages against builder who fails to complete
construction?

c. Rule: Damages are based on the reasonable cost to complete the contract and
repair any defective performance less the unpaid portion of the contract price.

3. Rockingham County v. Luten Bridge Co. (1929)


a. Facts: Luten was told to cease construction of a bridge but did not.
b. Issue: Once notified of repudiation, is other party obligated to cease?

c. Rule: Once notified of repudiation, other party may not continue and has
obligation not to increase damages.

4. Parker v. Twentieth Century Fox Film Corp (1970)


a. Facts: Parker contracted to star in musical. Fox cancelled movie and offered
different role for same amount of money. Parker refused.

b. Issue: Must a party mitigate damages by accepting alternative employment?


c. Rule: Party is entitled to recover compensation less the amount employer can
prove would be earned from other employment. Employer must show that other
employment was comparable.

5. Hadley v. Baxendale (1854)


a. Facts: Mill shut down after shaft broke. Baxendale contracted to bring shaft for
repairs. Carrier negligently delayed, keeping mill closed. Hadley sued for lost
profits.
b. Issue: Is a party liable for all consequences resulting from breach of contract?
c. Rule: The amount of damages awarded is limited to those that were fairly and
reasonable contemplated by the parties at the time of contracting. Special
circumstances must be communicated beforehand.

6. Neri v. Retail Marine Corp.


a. Facts: Neri wrongfully repudiated a contract to buy a boat. Retail sold boat to
third party but refused to refund deposit to Neri.
b. Issue: Can a seller recover lost profits from a breaching buyer if he sells the item
at the same price?
c. Rule: A seller can recover lost profits from a breach even if item was sold for the
same price because the seller could have sold two of the same item but for the
breach (UCC 2-708(2)).