Transcript Contracts – Unit 1 Nature, Classification, Offer/Acceptance and Consideration Promises Why are promises important to society? How do markets depend on promises? What would the.

Contracts – Unit 1
Nature, Classification,
Offer/Acceptance and Consideration
Promises
Why are promises important to society?
How do markets depend on promises?
What would the economy be like without
enforceable promises?
Promise vs. Contract
Promise: an assertion that something will or will
not happen in the future
Contract: an agreement that can be enforced in
court
Law Governing
• Common Law
• Restatement
• Statutes
Uniform Commercial Code (UCC)
Other statutory provisions
Promise v. Contract
• I promise that tomorrow, there will be $10,000 in cash on that
table.
• I promise Francis that tomorrow I’ll pay her $10,000 in cash.
• I promise Francis that tomorrow I’ll pay her $10,000 in cash if
she’ll give me her champion dachshund.
• Francis gave me the dog today, when I told her that I’d pay her
$10,000 in cash tomorrow.
• Francis said she’d give me the dog tomorrow, and I said I’d pay
her $10,000 in cash tomorrow.
Enforcement
If the promise is not fulfilled,
what can happen?
- Party breaching may be required to pay
money
- In certain circumstances, the breaching party
may be required to perform
Elements of a Contract
• Offer and Acceptance (agreement; at least
two parties required)
• Consideration (something of value given in
exchange for the other party’s promise or
performance)
• Contractual Capacity (all parties must be
legally competent to contract)
• Legal Object (cannot be for an illegal end)
Elements, cont’d
If any of those four elements is missing, then there is
no contract. In addition, there will be no contract if:
- There is not genuine assent (absence of certain
mistaken beliefs; a meeting of the minds), or
- The contract is in the required form, if there is a
required form (in writing, if required to be in writing,
for instance)
Classification based on Contract
Formation
Contract Formation
Bilateral
Formal
Express
Promise for promise
Special form required
By words (oral or written)
Unilateral
Informal
Implied in Fact
Promise for conduct
No special form needed
By conduct (in whole or in part)
Bilateral and Unilateral
Bilateral
Offeree must make a return promise
in order to accept the offer
Unilateral
Offeree must perform in order
to accept the offer
Ardito v. City of Providence
Facts:
During process of hiring police officers, City of Providence sent letters to
best candidates stating that if the recipients successfully completed
medical and psychological exams, then they would be allowed to attend
the Police Academy. Academy training was the last step to being hired by
the city. The letters stated that they were “conditional offers of
employment.”
New police chief had come in during the middle of the selection process
and determined that certain people sent the letter would not be offered a
job, even though they had completed the exams. Ardito was one of those.
He was one of 14 applicants who got the letter and then were rejected.
They sued to have the City stop holding the academy unless they were
admitted.
Ardito Case, cont’d
Question:
Was the letter valid contract that was accepted by Ardito and the others
when they completed the medical and psych exams?
Answer:
YES – CLASSIC UNILATERAL CONTRACT. CITY PROMISED THAT IF THEY
SUBMITTED TO THE EXAMINATIONS, THEY’D HAVE A SPOT IN THE
ACADEMY TRAINING, AND THUS A SHOT AT THE JOB. THEY DID THEIR
PART, THE CITY MUST DO ITS PART.
Special Problems:
Revocation of Offer in
Unilateral Contract
• Roberta offers to buy Ed’s sailboat if he’ll sail it down to
Newport Beach from its regular mooring at San Francisco. He
leaves; the trip takes three days.
• While he’s in route, Roberta decides to revoke her offer and
notifies him by radio.
What result?
Revocation of Offer in
Unilateral Contract, cont’d
• Traditional View. No acceptance until the offeree
completes performance, so Roberta prevails – she
can revoke or withdraw the offer anytime before it is
accepted.
• Modern View. Once performance has been
substantially undertaken, then the offer becomes
irrevocable. Up to a judge or jury to determine what
that means.
Formal Contracts
Certain contracts require
particular forms. Examples:
-- Contracts under seal
-- Recognizances
-- Negotiable instruments
-- Letters of Credit
(Probably others as well)
Contracts not requiring a particular form are – you guessed it – informal
contracts. Most contracts are informal under this definition
Express and Implied Contracts
• Basic difference is that an express contract is
one whose terms are stated in words,
whether written or oral.
• In a contract implied-in-fact some of the terms
are established by one or more of the parties’
conduct or actions instead of their words.
Requirements for Implied-in-Fact Contract
• Plaintiff furnished some goods or services
• Plaintiff expected to be paid, and Defendant
knew or should reasonably have expected to
pay
• Defendant had a chance to reject the goods or
services, but didn’t
Performance
• Executed Contract – one that has been fully
performed by all its parties
• Executory Contract – one for which
performance by some or all of its parties still
remains to be completed
Contract Enforceability
Contract may be:
•
•
•
•
Enforceable
Voidable
Unenforceable
Void
Voidable
A valid contract that one or more of the
parties can – at its option – either avoid or
enforce.
An example is a contract made with a minor;
the minor has the option to either perform it
or not.
Unenforceable
Also a valid contract, but one that a party has a defense to.
The parties may perform it, but a court will not enforce it.
Important thing to remember is that this kind of contract is
not unenforceable because one of the four basic elements is
missing – that wouldn’t be a contract, would it? It’s not
enforceable for some other reason.
Example would be an oral lease of real property for more than
a year. The statute of frauds requires that such a lease be in
writing or it’s not enforceable.
Void
A void contract has all the elements but is still
regarded as being no contract at all. No party
has any legal obligation at all.
Example – a contract to have a romantic rival
“eliminated” a la the Sopranos would be a
void contract, because it did not have a lawful
object.
Quasi-Contract
• Quasi-contract = contract implied –in-law
• Distinguish from a contract implied-in-fact
“Quasi” means “as-if.” Quasi-contract is an equitable
device. It’s not a real contract; there is no agreement
between the parties. It is a fictional contract
imposed by the law in order to remedy unjust
enrichment.
DCB Construction v. Central City Development Co.
FACTS
o Central City Development (“Landlord”) leased building to
Tenant for 5 years.
o Tenant (who was responsible for all repairs, maintenance and
alterations under the lease) hired DCB Construction to
remodel the premises at a cost of about $300M. Landlord
told DCB that it would not be responsible for any of those
costs.
o Tenant stopped paying rent and stopped paying DCB.
Landlord evicted Tenant.
DCB Construction v. Central City Development Co.
Tenant went into bankruptcy, so DCB sued the
Landlord for the remaining $280,000 that
Tenant owed it, saying that the work DCB had
done had increased the value Landlord’s
property. Unless the Landlord paid DCB for
that work, the Landlord would be unjustly
enriched.
Would Landlord be unjustly enriched?
DCB Construction v. Central City Development Co.
Court said no, the Landlord was not unjustly
enriched. Why not?
• No fraud or mistake here;
• DCB did the work for Tenant specifically, and not for
the Landlord; and
• Landlord advised DCB that it would not be
responsible for payment.
DCB could have protected itself by not doing the
work if it didn’t have another responsible party to
look to for payment.
Offer and Acceptance
(Agreement)
The agreement of the parties essential to
the formation of a contract is composed of:
1.
OFFER; and
2.
ACCEPTANCE
Before we talk about offers – consider:
Objective Theory of Contracts
Objective v. Subjective
When interpreting a contract, court’s will look at a
party’s words and conduct from the perspective of a
reasonable person in the circumstances of the
parties, not the subjective intention of one of the
parties.
Objective Theory
Consider this from Judge Learned Hand in Hotchkiss v. National City Bank
of New York, 200 F. 287 (2d Cir. 1911):
“A contract has, strictly speaking, nothing to do with the personal, or
individual, intent of the parties. A contract is an obligation attached by
the mere force of law to certain acts of the parties, usually words, which
ordinarily accompany and represent a known intent. If, however, 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, or something else of the sort. Of course, if it appear by other
words, or acts, of the parties, that they attribute a peculiar meaning to
such words as they use in the contract, that meaning will prevail, but only
by virtue of the other words, and not because of their unexpressed
intent.”
BOTTOM LINE: "The manifestation of a party's intention, rather than the
actual or real intention, is controlling."
Three Requirements of a valid Offer
• Serious objective intention of the offeror – it must be clear
(objectively, or to a reasonable person – not subjectively, to
him alone) that offeror intends to form a binding contract
• Terms of the offer must be reasonably definite and certain –
It must be clear to the offeree what the contract is going to be
if he or she were to accept it.
• The offer has to be communicated to the offeree.
Once a valid offer is accepted, a contract is formed.
Elements of an Offer – Objective Intention
to Contract
Lindsey Lohan drives a $750,000 Ferrari. While it’s indeed awesome
when it runs, it is persistently hard to start. After class, in the parking lot
it, sure enough, won’t.
Out of frustration, Lindsey yells out “Whoever’ll give me $10 can
have this son-of-a-Testarossa.”
Hilary Clinton, who happened to have a little cash burning a hole in
her pocket, immediately says “I accept! Here’s the ten bucks, now hand
me the keys and your mechanic’s phone number.”
Do we have a contract? What would a reasonable observer think?
Elements of an Offer – Objective Intention
to Contract
Expressions of Opinion
Justin Timberlake, whose mechanical abilities are
legendary, takes a look at Lindsey Lohan’s
temperamental Ferrari, and makes a few
adjustments to the ravioliator for her. He says that it
will probably make it start better for her in the
future.
However, it doesn’t work. Contract?
Elements of an Offer – Objective Intention
to Contract
Statements of Future Intent
Justin Timberlake, seeking to capitalize on his mechanical
abilities, announces that he’s thinking about opening his own
garage (which will only work on Ferraris) and he tells
Madonna that he will need some first class talent to
schmooze his uppity clientele. Madonna quits her lucrative
position as Lindsey Lohan’s bail bondsperson and tells Justin
that he’s ready to start work for him in the new job.
Has Justin Timberlake made an offer to Madonna that she can
accept, resulting in a binding contract?
Elements of an Offer – Objective Intention
to Contract
Preliminary Negotiations
If Prince Albert asks Lindsey Lohan if she’d consider
selling her Ferrari to him for $700,000 and she says
“yes,” is there a contract formed?
No, an invitation to negotiate is not an offer.
Elements of an Offer – Objective Intention
to Contract
Advertisements, Catalogs and Circulars
The general rule is that an advertisement does not constitute an offer. The
Restatement (Second) of Contracts explains that:
Advertisements of goods by display, sign, handbill, newspaper, radio or television
are not ordinarily intended or understood as offers to sell. The same is true of
catalogues, price lists and circulars, even though the terms of suggested bargains
may be stated in some detail. It is of course possible to make an offer by an
advertisement directed to the general public, but there must ordinarily be some
language of commitment or some invitation to take action without further
communication.
The exception to the rule that advertisements do not create any power of
acceptance in potential offerees is where the advertisement is “clear, definite, and
explicit, and leaves nothing open for negotiation,” in that circumstance, “it
constitutes an offer, acceptance of which will complete the contract.”
Click here!
Leonard v. Pepsico – The Commercial
The commercial opens upon an idyllic, suburban morning, where the
chirping of birds in sun-dappled trees welcomes a paperboy on his
morning route. As the newspaper hits the stoop of a conventional twostory house, the tattoo of a military drum introduces the subtitle,
“MONDAY 7:58 AM.” The stirring strains of a martial air mark the
appearance of a well-coiffed teenager preparing to leave for school,
dressed in a shirt emblazoned with the Pepsi logo, a red-white-and-blue
ball. While the teenager confidently preens, the military drumroll again
sounds as the subtitle “T-SHIRT 75 PEPSI POINTS” scrolls across the
screen. Bursting from his room, the teenager strides down the hallway
wearing a leather jacket. The drumroll sounds again, as the subtitle
“LEATHER JACKET 1450 PEPSI POINTS” appears. The teenager opens the
door of his house and, unfazed by the glare of the early morning sunshine,
puts on a pair of sunglasses. The drumroll then accompanies the subtitle
“SHADES 175 PEPSI POINTS.” A voiceover then intones, “Introducing the
new Pepsi Stuff catalog,” as the camera focuses on the cover of the
catalog.
The scene then shifts to three young boys sitting in front of a high school
building. The boy in the middle is intent on his Pepsi Stuff Catalog, while
the boys on either side are each drinking Pepsi. The three boys gaze in
awe at an object rushing overhead, as the military march builds to a
crescendo. The Harrier Jet is not yet visible, but the observer senses the
presence of a mighty plane as the extreme winds generated by its flight
create a paper maelstrom in a classroom devoted to an otherwise dull
physics lesson. Finally, the Harrier Jet swings into view and lands by the
side of the school building, next to a bicycle rack. Several students run for
cover, and the velocity of the wind strips one hapless faculty member
down to his underwear. While the faculty member is being deprived of his
dignity, the voiceover announces: “Now the more Pepsi you drink, the
more great stuff you're gonna get.”
The teenager opens the cockpit of the fighter and can
be seen, helmetless, holding a Pepsi. “[L]ooking very
pleased with himself,” the teenager exclaims, “Sure
beats the bus,” and chortles. The military drumroll
sounds a final time, as the following words appear:
“HARRIER FIGHTER 7,000,000 PEPSI POINTS.” A few
seconds later, the following appears in more stylized
script: “Drink Pepsi-Get Stuff.” With that message, the
music and the commercial end with a triumphant
flourish.
Elements of an Offer – Objective Intention
to Contract
Auctions
In an auction, a seller “offers” items for sale via an auctioneer. However, this is
not an “offer” for purposes of contract formation.
For contract formation purposes, an auction is considered an invitation to submit
offers to buy. The bidder is the offeror; the offer is accepted only when the bid is
struck off. At any time before that, the bid can be revoked or the auctioneer can
reject any bid received.
Lindsey Lohan puts up her Ferrari for sale at auction. Garth
Brooks is the auctioneer. The price has quickly risen from an
initial bid of $500 up to well over $500,000. Expecting that her
bid will easily be surpassed, but wanting to give Lindsey a hand,
Lady Gaga bids $600,000. Shortly after, Madonna bids $625,000,
which Garth Brooks takes. The momentum quickly subsides,
however, and while Garth Brooks is looking around the now
silent room for other bids, Madonna realizes that she doesn’t
want this thing, and she withdraws her bid. Garth Brooks looks
at Lady Gaga and says “SOLD, for $600,000. Does Lady Gaga
have a new car?
Elements of an Offer – Objective Intention
to Contract
Agreements to Agree
Because the auction was such a disaster, Lindsey Lohan and Justin
Timberlake enter into a valid written agreement for Mr. Timberlake to
lease the car for one year. The lease provides that Mr. Timberlake has the
option to renew the lease at the end of it’s term, for a lease payment to
be mutually agreed to by he and Lindsey at that time.
Is Mr. Timberlake’s option to renew worth the paper it’s written on?
NOPE – an agreement to agree won’t be enforced as a contract. The
lease may be valid, but the option to renew is not enforceable.
Elements of an Offer – Definiteness
An offer must have reasonably definite terms; if not, a court
cannot determine if a breach has occurred nor can it give an
appropriate remedy.
The UCC relaxes the requirements for definiteness in some
areas, calling for the court to supply certain missing or
indefinite terms with “reasonable” terms. The UCC is
intended to govern commercial relationships involving the
sale of goods, often among merchants, and has as a primary
purpose the facilitation of commerce
Elements of an Offer –Communication of
Offer
If we don’t tell the offeree how are we going to have a contract?
One type of advertisement that is often held to be an offer is one offering
a reward for, say the return of a lost pet. Suppose Mr. Black places an ad
offering a $100 reward for his lost cat. Mr. White, not seeing the ad, but
recognizing the cat as Mr. Black’s, finds it wandering around and returns it
to Mr. Black.
The offer has not been communicated to Mr. White. Is there a valid
unilateral contract? Does he get the reward?
No, there’s no contract…but Mr. White may still get the reward in some
jurisdictions based on equity, but not on contract theory.
Termination of Offers
A valid offer is made but not yet accepted; what can happen to the offer
before acceptance, and prevent a contract from coming into existence?
Termination by Act of the Parties
Revoked by Offeror (unless irrevocable)
Rejected by Offeree
Counteroffer by Offeree
Terminated by operation of law
Lapse of time
Destruction of subject matter
Death or incompetence of a party
Supervening illegality of the object of the contract
Termination of Offers
Revocation by Offeror
• Generally, offers are revocable as long as the revocation is
communicated to the offeree before he or she accepts.
• If before accepting, offeree learns from another source
information indicating the offer has been revoked, what
happens?
• Generally revocation can be communicated in the same way
the offer was communicated. Now that Mr. White had
reunited Mr. Black with his cat, how might he communicate
that the reward is no longer being offered?
Termination of Offers
Irrevocable Offers – some offers can be made irrevocable
• If offeree has substantially changed position in
reliance on an offer (for example, the guy who began
sailing his boat from San Francisco) it may be held to
be irrevocable.
• Option Contracts are irrevocable; offeror has
received payment or consideration in exchange for
giving up his right to revoke for a specified time.
Termination of Offers
Rejection by Offeree
• If an offeree rejects an offer, it is terminated; the offeree
cannot thereafter change his mind.
• Rejection is effective when received by the offeror.
• Merely inquiring about an offer doesn’t constitute a rejection
Now that the lease on Lindsey Lohan’s Ferrari is up, Kobe
Bryant makes an offer of $600,000. Lindsey asks, “is that the
best you can do?” Is the offer rejected?
What if he says “I was really looking for $650,000”?
How about “I’ll take $650,000”?
Termination of Offers
Counteroffer
Now, Lindsey Lohan has made a counteroffer. A counteroffer
is a rejection of the first offer and a new offer by the former
offerree. If Kobe Bryant says no, Lindsey Lohan cannot then
take him up on his first offer…that offer was terminated by
the counteroffer.
Common law employs “mirror image” rule: if the acceptance
doesn’t match the offer exactly, it’s a counteroffer, and the
original offer is terminated.
Termination by Operation of Law
Termination by Lapse of Time
• An offer may specify that it expires after a given
period of time.
• If a number of days is specified, but the specific
starting date is not, it will normally be held to start
on the day the offer is received, and terminate at
midnight on the expiration date.
• If not specified, then an offer will expire after a
“reasonable” time.
Termination by Operation of Law
Other ways offers can be terminated:
• Destruction of Subject Matter – A offers to sell B a
cow; before B accepts, cow struck by lightning
• Death or Incompetence of Party. Unless irrevocable,
an offer terminates if the offeror or offeree dies or
becomes incompetent.
• Supervening Illegality. A bank offers to loan A money
at 17% interest. Before A accepts, the legislature
passes a law limiting interest rates to 10%. The law
terminates the offer.
Acceptance
A voluntary act by the offeree that shows
assent to the terms of the offer.
Must be unequivocal
Must be communicated to the Offeror
Acceptance
Lindsey Lohan offers to sell her Ferrari to
Kobe Bryant for $600,000. If Kobe Bryant
doesn’t respond right away, can Justin
Timberlake accept the offer?
No…Only an offeree – the person or one of
the persons to whom the offer was intended
to be made – may accept (their agents may
also accept)
Acceptance
Kobe Bryant is considering Lindsey Lohan’s offer to sell the
Ferrari. He decides to accept, but wants Lindsey to put a
trailer hitch on it so he can pull his cutting horse trailer
behind it. Has he accepted?
No…this is the other half of the “mirror-image” rule we
talked about earlier. By adding terms, Kobe Bryant has
made a counteroffer. If Lindsey refuses to add the trailer
hitch, can Kobe Bryant back-up and say, “well, OK I’ll take it
without the trailer hitch”?
Acceptance
 Let’s say that Lindsey Lohan transmits her offer to sell the
Ferrari to Kobe Bryant and the offer says “unless I hear from
you within 10 days, I’ll assume that you have accepted my
offer.” Kobe Bryant remains silent. We got a deal?
 No – generally, silence cannot be an acceptance. However,
in what circumstances might silence operate as an
acceptance?
 (1) where the parties have an established course of dealing
between them, there can be a duty to speak, and (2) where
the circumstances are such that silence can create an
implied-in-fact contract
Acceptance
Communication of Acceptance
In a unilateral contract, acceptance is
communicated by performance
In a bilateral contract, it has to be communicated
separately from performance (unless the offer itself
dispenses with the requirement of communication
of the acceptance).
If the offer specifies how acceptance is to be made,
then that’s how it has to be accepted
Acceptance
Communication of Acceptance
George Bush sends a letter to Lindsey Lohan offering
$700,000 for her Ferrari, but stating that his offer expires on
October 15. Lindsey writes a letter back, saying “I accept
your offer.” She puts it in the mail on October 12 (properly
addressed and with proper postage). It doesn’t arrive until
the 17th. Meanwhile, George Bush has heard about the
starting problem, and has found a nice cherry Yugo that he’d
rather spend his money on. Has George Bush bought the
Ferrari?
Yup…’fraid so. This is the “mailbox rule.” What if Lindsey
used the wrong address or didn’t use enough postage on his
letter? Different result?
Acceptance
Communication of Acceptance
• Mailbox Rule: Revocation of an Offer is effective when
actually received; but acceptance of an offer is effective
when placed in the mail (assuming it’s properly addressed
and posted). WHY?
• It’s to prevent confusion that can occur when revocations
and acceptances cross each other in the mail – If the
revocation were effective when mailed, then the offeree
could accept it without knowing it had been revoked. It’s a
rule that is designed to facilitate the formation of contracts.
Acceptance
Communication of Acceptance
 Authorized means of communication of acceptance – Can be
expressly stated or implied by the facts or implied by law
 If the offeror chooses one means (say mail) to transmit the
offer, then the offeree may accept in the same way or by a
faster means.
 When the parties are at a distance, mailing is impliedly
authorized.
 Exceptions: (1) If not properly addressed or posted or (2) if
the offer explicitly says it won’t be effective until received.
Acceptance
Communication of Acceptance
• So what happens if an offeree screws up the
mailbox rule – for instance, he sends a rejection
first, but then transmits an acceptance?
• Here, the law cancels the rule that says the
acceptance is valid on deposit in the mail, and
whichever is first received by the offeror is
effective.
Consideration
Definition: “the value given
in return for a promise”
Two Elements:
۩ Legal Value.
۩ Bargained-for Exchange.
Consideration
Hamer v. Sidway
Mr. Story told his nephew that, if he would not smoke, drink
or play cards or pool until he was 21, that he’d give him
$5,000.
Nephew did not smoke, drink or play cards or pool for six
years, when he became 21. Nephew reported to Uncle that
he had fulfilled his end of the deal, and Uncle responded,
saying that Nephew would have his reward, and could
consider the money to be invested with interest.
Nephew left the money with Uncle for 12 years. At some
point, he assigned the money to another person. After Uncle
died, Nephew’s assignee asked the Uncle’s executor to pay.
The executor refused, saying there was no consideration for
Uncle’s promise.
What result?
Consideration
Court held that the executor had to pay the nephew’s assignee
because the promise was an enforceable promise. The court
said:
“The promisee used tobacco, occasionally drank liquor, and
he had a legal right to do so…that right he abandoned for a
period of years upon the strength of the testator that for
such forbearance, he would give him $5,000.”
The court said the issue was not how difficult this was for the
nephew, the issue was that he had a legal right to indulge,
which he gave up because of the Uncle’s promise. The
consideration was legally sufficient.
Consideration
Legal Value
Must be something of “legally sufficient”
value
A promise to do something that one is not
otherwise legally bound to do
Performance of an action one is not otherwise
legally required to perform
Refraining from action one is otherwise legally
authorized to take
Consideration
Key Concept:
☺To give “legally sufficient” value, the party has
to do something he or she is not otherwise
legally required to do
☺This assures that the consideration is indeed
intended to support or be exchanged for the
promise by the other party
Consideration
“Legally sufficient” is not a mathematical
concept. The inquiry as to “sufficiency” is not
into how much consideration is offered. The
court’s don’t evaluate what the consideration
is worth. Why is this?
If it were, then people wouldn’t have the
freedom to contract as they wish.
Consideration
Bargained-for Exchange
Mr. Johnston has become fabulously wealthy, and
now he has ungrateful children that won’t come see
him. In a conversation with his son, he says, “My
boy, Lattimore, in consideration of the fact that you
don’t have enough money to come see me very
often, I am going to give you $500 a month for the
next year.”
Has Mr. Johnston made an enforceable contract
with little Lattimore?
Consideration
No…Despite the fact that Lattimore really doesn’t come see
his dad very often, he’s not been asked to do anything,
forbear from doing something, or to incur any “legal
detriment.”
What if Mr. Johnston had instead said, “Little Lattimore, my
son, if you will come see me three times a year, I’ll give you
$500 a month.” Contract here?
Yes. Why?
Because now, Lattimore has been asked to do something for
the promised money…he has to come and see his dad
Consideration
Change it up: Little Lattimore is a minor; he’s 16,
and a royal pain. Some of Lattimore’s wealthy
friends parents are afraid that because of Lattimore’s
bad attitude that Mr. Johnston is about to boot him
out of the house; if that happens, they’re afraid that
he’ll want to live with them.
They offer to pay Mr. Johnston $500 per month if
he’ll agree to continue to support Little Lattimore.
Can Mr. Johnston enforce the promise?
No…why not?
Consideration
Since Little Lattimore is a minor, Mr. Johnston has a
legal duty to support him, whether he gets the
money from the neighbors or not. There’s no
legally sufficient consideration. He has a “preexisting duty.” This matters why?
If you pay someone to do something they are
obliged to do anyway, then there’s no
consideration.
Consideration
Mr. White contracts with Ms. Green to build a
building for him. The contract requires her to build
the building for a fixed sum of $1 million. In the
middle of doing the work, she encounters problems
that double her cost of doing the work. She tells Mr.
White that she needs more money or she’ll stop
work. Mr. White, needing to have the building ready
because his lease is expiring, agrees. Can Ms. Green
enforce the amendment to the contract?
Consideration
Generally No. Why?
Because Ms. Green had a preexisting duty to build
the building for the agreed price. If this weren’t the
rule, what injustice would result?
This would facilitate extortion, wouldn’t it? That
being said, are there still a kind of unforeseen
difficulties that may justify an amendment like Ms.
Green made with Mr. White? What might those be?
Extraordinary and completely unforeseen; also NOT
the kind of risks ordinarily assumed by builders.
Consideration
Mr. Allen is a real estate agent. He sells Mr. Price’s
house for him, but because they are friends, does
not charge a commission. Mr. Price later on tells Mr.
Allen that, because he did such a good job selling the
house, that he will give him $3,000 out of his next
paycheck. If Mr. Price doesn’t in fact pay, can Mr.
Allen sue him for breach of contract?
No. Why not?
Past consideration is no consideration. Mr. Price’s
offer is merely a statement that he intends to make
a gift.
Consideration
Lindsey Lohan is president of Floormart. She tells
her employees that if they gain an additional 10% in
market share against their close competitor,
Wallmart, she’ll give them all a 10% bonus, if
management approves it.
Can the employees hold her to this?
No, there’s really no promise here, is there? This is
called an “illusory promise.”
Consideration
Lindsey Lohan offers to hire Justin Timberlake as Vice
President of Floormart for one year. She offers him
$10,000 a month, but reserves the right to terminate
him at will (at any time and for any reason or no
reason – employment at will).
What’s the effect?
Again, it’s an illusory promise. Does this mean
there’s no contract? What is the contract that
results?
Consideration
Same situation, except that this time, Lindsey Lohan
offers to hire Justin for a year, but she provides that
the company can terminate the employment on 30
days notice.
Any difference in your answer?
Yes – this is not illusory; Floormart is giving up the
right to hire somebody else as VP for at least the 30
day period during which Justin is entitled to notice.
Consideration
Can you think of a class of contracts where it makes a
difference whether an employment contract is
illusory or not?
Non-competition agreements are often entered into
in connection with employment. Normally, a
simple at will employment agreement won’t
provide adequate consideration for a Non-Compete.
Consideration
Settlement of Claims – All require consideration
 Accord & Satisfaction: Literally a settlement and payment.
Used to settle “unliquidated” claims or debts.
What is the difference between a liquidated claim and an unliquidated claim?
Why may a liquidated claim not be settled via the use of an accord & satisfaction?
 Release: An agreed forfeiture of a right, such as the right to
pursue a claim against another.
Can a Release be used to resolve a liquidated claim? Why?
 Covenant not to Sue: An agreement not to enforce a claim by
suit. If the consideration given for the covenant fails, then a
suit may still ensue.
How about this? Liquidated or Unliquidated?
Consideration
Mr. Gray’s aging uncle, Mr. Blue, is very wealthy and
enjoys spending time with his nephew. Mr. Gray
likewise enjoys spending time with Mr. Blue.
One day, Mr. Blue promises to pay Mr. Gray $35,000
a year so that Mr. Gray won’t have to work anymore.
In reliance on the promise, Mr. Gray quits his job
(which paid him $30,000/yr).
Mr. Blue doesn’t pay. Is there a Contract?
No, no consideration. Is there anything that Mr.
Gray can do?
Consideration
Promissory Estoppel
Sometimes when there has been justifiable and
reasonable reliance by a person upon a promise
made without consideration, courts will hold that the
promisor should be prevented, or estopped, from
failing to make good on the promise. This is the
doctrine of Promissory Estoppel.
In our example with Mr. Gray, Uncle Blue may be
estopped to deny his promise of payment.
What does it take for the doctrine of promissory
estoppel to apply?
Consideration
Elements of Promissory Estoppel
Clear and definite promise
Promisee must justifiably rely on the promise
The reliance must be of a substantial and
definite character
Justice will be served by enforcing the
promise