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CONTRACTS MIDTERM - JOFFE FALL 10

I. Elements of a Contract

A. Offer
B. Acceptance
C. Consideration
D. Future action (or future forbearance)

Key cases

o Bailey v. West
 [horse farm; boarding a horse]
 Even implied-in-fact contracts must have mutual understanding
as the basis
 Mere voluntary service does not create an obligation or a
contract

Key terms

o Promisor / Promisee
o Offeror / Offeree

II. The Consideration Requirement

A. Must be bargained for (R§71)


B. Must be given in exchange (quid pro quo; something for something)
C. Something of value
a. Money; [or]
b. Services or goods; [or]
c. Act or forbearance (from an act legally or rightfully entitled to
perform)
D. Performance or return promise may be given to some other party (instead of
promisor)

Key Cases

o Kirksey v. Kirksey
 [offer for widowed sister-in-law to come live]
 Gratuitous promises (gifts) are not consideration
 Conditions needed to accept gifts, if not bargained for, are not
consideration
o Hamer v. Sidway
 [grandson promises not to drink or smoke]
 Forbearance from future acts or from exercising a legal right
can be consideration if that forbearance is in the interest of the
promisor

o Langer v. Superior Steel Corp


 Langer retired and was told he would be given retirement pay
as long as he did not seek employment elsewhere
 Forbearance from a legal right, finding employment elsewhere,
is sufficient consideration
o Jara v. Suprema Meats, Inc.
 Son and friend create a company ask father for advice, father
suggests they do not give raises unless everyone on board
agrees
 Father did not condition his joining the board, there was not a
bargain for exchange, the advice was not bargained for
therefore it was not consideration
 Basically it was just advice and you do not have to follow advice

o Thomas v. Thomas
o Nominal consideration/Mixed Motives
o Brothers own property, one brother dies says his wife can stay
in house for $1/yr, as long as she remains unmarried, and
maintains the house
o While the considerations seems nominal it is sufficient because
fore bearing from legal right (remarrying) and maintaining the
house is sufficient consideration
o Also ruled this way b/c it is what the husband wanted

Relevant Restatement or UCC

o R§71 - the consideration induces the making of the promise and the
promise induces the furnishing of the consideration

III. Consideration Limits and Special Cases

A. Nominal consideration
a. Consideration in name only merely to cover the pretense of a gift
b. Value is so low as to actually be a sham (R§79)
c. Cases:
o In re Greene
 Performing illegal acts are not consideration
 Forbearing from filing frivolous lawsuits is not
consideration
B. Mixed motives
a. If promisor gets what is bargained for, the motive is irrelevant (R§81)
b. Consideration pertaining to one motive of a contract makes the whole
contract valid
c. Cases:
o Thomas v. Thomas
 Nominal consideration/Mixed Motives
 Brothers own property, one brother dies says his wife
can stay in house for $1/yr, as long as she remains
unmarried, and maintains the house
 While the considerations seems nominal it is sufficient
because fore bearing from legal right (remarrying) and
maintaining the house is sufficient consideration
 Also ruled this way b/c it is what the husband wanted
C. Adequacy of values exchanged
a. The relative values of promise and consideration do not affect
sufficiency (R§79)
b. Sufficient consideration need not have actual value, only that it was
bargained for
c. Sufficiency only requires parties to value the consideration at time of
the contract
i. Fiege v. Boehm
 Fiege agrees to pay child expenses if Boehm agrees not
to sue for bastardity
 When court looks at the validity of a claim it looks at the
circumstances at the time the agreement was made and
if contract was in good faith at the time the contract was
made, then it is a valid contract
d. Adequacy speaks to the actual value of the consideration
e. Courts rarely review adequacy, but if they do, there are limited
circumstances
i. Promisor was not aware of value disparity so did not actually
bargain for it
ii. The bargain process itself was flawed (unequal sophistication of
the parties)
iii. The outcome of the contract, if enforced, would shock the
conscience
iv. Jones v. Starr Credit
o Freezer case
o ∆ sold P freezer at grossly overpriced price
o Court looked at unconcionability of the price Jones paid for
the freezer and said that salesman took advantage of
Jones’ circumstances and lack of knowledge
o Court trying to protect the buyer
Cases:
o Browning v. Johnson:
 When second contract was made, the plaintiff was giving up his
legal right to sue, this is consideration
o Apfel v. Prudential-Bache Securities, Inc.
 Computer system was novel at the time contract was entered
into, after a few years system no longer value and P no longer
wants to pay
 Court looks at the value when the contract was made
D. Pre-existing Duty
a. Under common law, performance of a pre-existing duty is not
consideration (R§73)
b. Therefore, changes to existing contracts (duties) require new
consideration
i. Levine v. Blumenthal (also under b)
o Leasee’s had a pre-existing duty to pay their lease
o When landlord agreed to not increase the rent for the
second year of the lease, it was not a new contract b/c
there was no new consideration on the part of the leasees
c. Primary purpose of the preexisting duty rule is to prevent the "hold-up
game"
i. Alaska Packers’ Association v. Domenico
o Refusing to fulfill a pre-existing duty unless receive a
pay increase is considered duress and therefore
invalidates a new contract
d. Allows modification of a contract only if the following are true (R§89)
i. Parties voluntarily agree; [and]
ii. Contract not fully performed on either side; [and]
iii. Circumstances were unanticipated by the parties; [and]
iv. Modification is fair and equitable to both parties
1. Angel v. Murray
o ∆ provided garbage services at a set rate, then
asked for more money b/c of major increase in #
of houses, council agreed to give him more
money
o City council then sues and claims preexisting
duty so want their money back
o Court rules in favor of ∆ b/c of reasons listed
above
e. Contracts under the UCC can be modified without additional
consideration (U§2-209)
E. Mutuality of obligation
a. If one party can withdraw at its own discretion then the promise is
illusory (R§77)
i. Wood v. Lucy, Lady Duff Gordon
o Not an illusory contract
o Wood had exclusive rights to Duff’s endorsements and
fashion designs. Duff changes mind and decides to go
w/Sears instead
o Duff claims contract was illusory b/c Wood did not have
to actually do anything
o Court says there was an implied promise to do work (it
was his livelihood) making the contract valid
o Wood could also have claimed promissory estoppel if
breach did not work
ii. Omni Realty v. Seattle First National
o Omni put in contract that they would buy the land
subject to a satisfactory feasibility study
o Sellers decided not to sell after all claiming the contract
was illusory
o Court said it was not illusory b/c had to have a specific
reason to change mind
o Contract was made in good faith and wanting an
inspection of the property prior to completing purchase
is not uncommon
iii. Rehm-Zeiher Co. V. F.G. Walker Co.
o Illusory contract is a one-sided contract where
one party is allowed to not perform for any
reason they see fit
o Lack of mutuality renders agreements
nonenforceable

b. Output and Requirement contracts are mutual if reasonable and


proportionate to "norms" (U§2-306)
i. Agreed upon price between supplier and buyer, and agreement
for buyer to buy all items from supplier
ii. Safe guards: good faith, mutuality, unjust enrichment, UCC §
2-306
iii. Bolin Farms v. American Cotton Shippers Association
o At time contract was formed it was a fair price and made
in good faith, regardless of future price increase
iv. McMichael v. Price
o Price agreed to buy all sand from McMichael at a
specific price thus creating mutuality
o This was therefore a valid Output and Requirement
contract

Relevant Restatement or UCC

o R§81 - disparity in value ... sometimes indicates purported


consideration ... was a mere formality or pretense ... nominal
consideration does not satisfy the requirement
o R§79 - parties to a transaction are free to fix their own valuations ...
valuation is left to private action ... they are not ordinarily bound to
follow the valuations of others
o R§81 - the promisor may have more than one motive ... it is
immaterial that the promisor's desire for the consideration is incidental
to other objectives
o R§73 - performance of a legal duty is not consideration for a promise
in any such case if the duty is owed to the promisor
o R§89 - modification of contract ... not fully performed on either side is
binding if modification is fair and equitable in view of circumstances
not anticipated
o U§2-209 - agreement modifying a contract ... needs no consideration
to be binding
o U§2-306 - agreement ... for exclusive dealing ... imposes ... obligation
by the seller to use best efforts to supply ... and by the buyer to use
best efforts to promote

IV. Moral Obligation / Quasi-Contract

A. A moral obligation arising from past action can be, in limited circumstances,
consideration
a. Promisee acted to prevent imminent death or other such extreme
emergency
b. Promisee suffered grave or severe detriment
c. Presumed consent by the promisor
d. Conduct of the promisor confirms the promise
o Case: Webb v. McGowin
 [worker injured preventing death of McGowin; McGowin
promises care]
 Only extreme detriment creates moral obligation
 Circumstances and continuous conduct prove intended contract
 Future act is the injuries
B. Moral obligation is not created by simple gratitude or sentiment
o Mills v. Wyman
 [father of sick sailor offers payment]
 A promise out of gratitude is not consideration
 Benefit received by another does not create a moral obligation
[father/son]
o Harrington v. Taylor
 Similar to Mills
 Neighbor saves husband as wife is about to hack him w/an axe
and ends up hurting her hand
 Husband says he would pay her then changes mind, neighbor
sues
 Unfortunately offering to pay a good Samaritan is not
consideration b/c for past act
C. If found, moral obligation creates a contract
D. Courts now focus on prevention of unjust enrichment rather than "moral
obligation" (R§86)
E. Quasi-contract is not actually a contract, rather it is implied-in-law
a. Benefit is conferred from A to B
b. B knows of and appreciates the benefit
c. B had opportunity to decline benefit before it was conferred
d. It would be unjust for B to retain benefit without paying or
compensating A
Bailey v. West (revisited)
 [horse farm; boarding a horse]
 Quasi-contract requires benefit be recognized and appreciated

Relevant Restatement or UCC

o R§86 - promise for benefit received is enforced only if (a) necessary to


prevent injustice; (b) not intended as a gift; and (c) not
disproportionate to the benefit

V. Promissory Estoppel

A. Promissory estoppel is an alternative when no actual contract exists


o All-Tech Telecom v. Amway
 If there is a valid contract, then promissory estoppel is not a
option
o Allegheny College v. National Chautauqua County Bank
 In this case court found there was actually bargained for
consideration
 Charitable subscriptions are special case of reliance as
consideration (R§90)
B. Based on concept of reliance rather than consideration
C. Elements that support claim for promissory estoppel:
a. Promise from A to B
b. A intends or can foresee that B will rely on promise [reasonable
inducement]
c. B acts and shows reasonable reliance on the promise
d. It would be unjust not to enforce the promise
o Congregation Kadimah Toras-Moshe v. DeLeo
• Reliance not intended and not reasonably foreseen does
not allow granting PE
o Blinn v. Beatrice Community Hospital
• It is unreasonable to rely on statements contrary to an
existing contract
• Unreasonable reliance by the promissee does not allow
granting PE

e. B sustains detriment as a result of reliance [substantially changed


condition]
f. It would be an injustice for A not to fulfill promise or not to
compensate B

Note

o Equitable estoppel is different from promissory estoppel in that it is


based upon a representation of existing or past facts and does not
require a promise

Key Cases

o Ricketts v. Scothorn
 [grandfather promises money; granddaughter quits job]
 Promises that reasonably induce reliance allow granting PE
Relevant Restatement or UCC
o R§90 - the principle of this section is flexible; the promisor is affected
only by the reliance which he does or should foresee, and enforcement
must be necessary to avoid injustice
o R§90 - the force of particular factors varies in different types of cases:
thus reliance need not be of substantial character in charitable
subscription cases, but must in cases of firm offers and guaranties
o R§90 - relief may sometimes be limited to restitution or to damages or
specific relief measured by the extent of the promisee's reliance rather
than by the terms of the promise

VI. Damages

A. Expectation
a. The reliance takes the place of consideration
b. The value of contract is calculated and ordered paid as if there was no
breach
B. Specific Performance
a. Contract terms must be performed as agreed
b. Usually ordered for real property or for unique goods and services
C. Reliance only
a. Recovery only of expenditures or foregone opportunities (or both)
b. Under this theory losses of expected profits are not considered
D. Restitution
a. Order to return or disgorge benefit that was unjustly received
b. Limited by the extent of the reliance rather than the terms of the
promise

Key Cases

o Ricketts v. Scothorn (revisited)


 [grandfather promises money; granddaughter quits job]
 Reliance substitutes for consideration; full expectation value
was ordered

VII. Object Manifestation / Implied-in-Fact

A. Old common law subjective theory (meeting of the minds) no longer


controlling
B. Objective, outward manifestations of offer and assent are essential
[formalism]
a. Embry v. Hargadine, McKittrick Dry Goods Co.
o Reasonable person (objective view) would have taken the
president’s response as a definite promise
o Outward manifestations of the president made it reasonable to
infer that there was an offer-objective view
C. Courts may consider subject matter, relationship of parties, and
circumstances [realism]
a. Lucy v. Zehmer
o Outward expressions are manifestations, not the unexpressed
intentions
o Looked at relationship of parties (knew Lucy wanted to buy
property based previous offers), and circumstances (40 minute
negotiation)
D. Manifestation can be implicit rather than explicit, forming an implied-in-
fact (IIF)contract
a. Deduced from conduct, language, acts, and pertinent circumstances
b. Still requires (implied) mutual assent and consideration
o Wrench v. Taco Bell
 [ongoing negotiations for use of “Psycho Chihuahua” in
marketing]
 Accepting an idea knowing that compensation is expected
creates IIF contract
E. IIF contracts frequently found in two scenarios:
a. Transaction of a type wherein compensation is customary
b. As a consequence of protracted, ongoing bargaining

IX. Offer

A. An offer is complete and leaves nothing open for negotiation


a. Confers upon the offeree the power to assent
b. Directed to specific person (or specific group)
c. Contains clear, definite, and explicit terms
d. Provides means for offeree to accept offer
B. Requests for offers are not sufficient to create a contract
a. Advertisements are (generally) requests for offers
b. Words like "receptive to" and "asking" imply requests rather than offer
Case: Lefkowitz v. Great Minneapolis Surplus Store
o Because ad was very specific, gave quantity, addressed to
specific person, and left nothing open to negotiation
o Ads with explicit terms and defined potential offerees
constitute an offer
C. Offers viewed by objective manifestation and reasonable understanding of
circumstances
o Leonard v. Pepsico
 [ad offers Harrier fighter jet]
 Indefinitely targeted ads without defined means for acceptance
are not offers
D. Offerer is master of the offer and can withdraw before any assent
a. Lonergan v. Scolnick (Also falls under B)
o At what poing is it a binding offer and at what point is it still
negotiations?
o The original ad is an invitation for an offer not a contract
o The second letter made it clear that there were other offers so he
needed to act fast, this made it clear that it was not a defined offer
E. Auctions are particular type of offer
a. Bids are offers, and bidders can withdraw before fall of the hammer
b. With reserve: sellers reserve the right to withdraw before fall of the
hammer
Without reserve: seller forgoes right to withdraw and soon as first bid is made

Key Cases

o Bretz v. Portland General Electric Co.


 [during negotiations for coal mine buyer believes accepts offer]
 Offers with specific means for acceptance must be accepted as
stated
 Offeree can only rely on the expressed manifestation in the
offer

Relevant Restatement or UCC

o R§26 - negotiations are when actor intends to make a bargain in the


future, but only if he makes some further manifestation of assent; if
the addressee ... has reason to know that no offer is intended, there is
no offer

**Joffe study tips/suggestions from 10/12:**

-Read the question thoroughly-what is the exam asking for? Answer in


a way that shows a thorough understanding of facts and legal issues.
-You can refer to Restatement, UCC, or cases-but put more weight on
analyzing issues and less on regurgitating rules.
-Get to as many issues as possible. But don't dwell too long on the
ones that are obvious.
-Separate paragraphs.
-Pre-existing duty rule exists to prevent coercion under duress.
Certain elements allow a way around pre-existing duty-study these
(IV, D-4 of this outline!)
-Illusory-(colloquially)free way out for only one party.
-Adequate (about amount; nominal consideration-it's a sham-
pretense, a fraud, unconscionable---Traditional common law doesn't
judge adequacy of consideration) v. Sufficient (if it's what is
bargained for-Hamer v. Sidway).
-Promissory estoppel-damages, Expectation (Ricketts granddaughter),
Reliance (Allegheny College)
-Start with preliminary framework-Are we dealing with UCC
(commerce of goods) or common law?
-If referring to Restatement or UCC-cover what is said, you don't need
to specify the section number.
-Go through all K possibilities, then look to alternatives.
-Label any assumptions you make: "The facts do not tell us…"
-Try to cover yourself (eg. Explain possible damages even if you say
that P can't win.)