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.
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
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 inUnilateral 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 inUnilateral 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 Central City Development (“Landlord”) leased building to Tenant for 5 years. 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. 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 areasonable personin 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 two-story 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
AcceptanceCommunication 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
AcceptanceCommunication 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?
AcceptanceCommunication 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.
AcceptanceCommunication 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.
AcceptanceCommunication 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 “pre-existing 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 Lohanis 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 Lohanoffers 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