Even More About Bargains . . . Contracts – 1.24.2011 Prof. Merges
Bargain vs. Performance • The bargain or exchange • May be “promise for promise”, or • Promise for an action, i.e., performance
Promise for promise • X promises to work for Y for one year • Y promises to pay X monthly
Promise for performance • X says, “if you carry this package to the UPS office I will give you $10.00 • The promisor bargains for an action, seeks an action to “close the bargain” or exchange • Unilateral K
Performance • Often separate in time from the promise • Bilateral K: The return promise may be for a performance far in the future • In a bilateral K, a return promise binds the parties.
When is performance required? • X promises to work for Y for a year, conditioned on Y’s payment to X at the end of each month • Y misses two months’ payments • X is not required to work the next month
Rights and duties • Under the K, X has the right to receive payment for his work • And Y has a duty to pay • After Y’s non-payment, X’s duty is suspended, perhaps at an end
Wesley Newcomb Hohfeld. Fundamental Legal Conceptions, As Applied in Judicial Reasoning and Other Legal Essays . Yale University Press, New Haven, 1923.
Strong v. Sheffield • Procedural History
Strong v. Sheffield • Procedural History • Trial court: judgment for P; General term reversed
Strong v. Sheffield • Promissory Note? • General Term?
Strong v. Sheffield • Promissory Note? • General Term? • Maker or endorser • Payee
Facts • P, Benjamin Strong, sold a business to Rard Sheffield, his niece’s husband • “Later,” Rard’s debt was embodied in a promissory note, or a “demand note” • This converted the contractual debt from Rard to B. Strong into a negotiable instrument -- due on demand to the note’s holder
What is “the general rule” Andrews recites at p. 69? “. . . The general rule that a promise, not supported by consideration, is nudum pactum . . . “
What exception does he mention? • “The contract between the maker or endorser of a promissory note forms no exception” to this general rule
Why is there a “no inquiry into consideration” rule for promissory notes?
Negotiable Instruments – Quick Summary • Before the UCC, “negotiable instrument” was generally viewed as synonymous with negotiable paper or bills and notes. • “Simple forms of contract long recognized in the world's commerce and governed by the law merchant." 1 Joseph F. Randolph, A Treatise on the Law of Commercial Paper § 1, at 1 (2d ed. 1899).
"Defined most broadly, commercial paper refers to any writing embodying rights that are customarily conveyed by transferring the writing. . . .” Richard E. Speidel, Negotiable Instruments and Check Collection in a Nutshell 1 (4th ed. 1993).
Consideration and commercial paper • “The law governing commercial paper precludes an inquiry into the consideration as against bona fide holders for value before maturity . . . .”
Why? “A large subset of commercial paper consists of such writings that are negotiable, which means that the law enables a transferee to acquire the embodied rights free of claims and defenses against the transferor."Richard E. Speidel, Negotiable Instruments and Check Collection in a Nutshell 1 (4th ed. 1993).
commercial paper. 1. An instrument, other than cash, for the payment of money. • Commercial paper -- typically existing in the form of a draft (such as a check) or a note (such as a certificate of deposit) -- is governed by Article 3 of the UCC.
Credit and economic activity, growth • Negotiability allows merchants to get their cash faster, buy new inventory faster, sell more goods – all of which increases the velocity of economic activity
Why not relevant here? • “Has no application where the suit is between the original parties to the agreement” • No bona fide purchaser (BFP) issue • Policies favoring negotiability, flow of credit, are not implicated here
What was “the original deal”? Promise to repay Mr. Sheffield Mr. Strong $$
What was “the second deal”? Promise to repay Mr. Sheffield Mr. Strong Business Promissory Note Endorsed: Mrs. Strong
Promissory Note Mrs. Sheffield Mr. Strong
Promissory Note Mrs. Sheffield Mr. Strong ????
What is the consideration issue? • What did Mr. Strong promise Mr. and/or Mrs. Sheffield?
What did Mr. Strong say? “[I]f you will give me a note, with your wife’s endorsement I will not pay that note away; I will not put it in any bank for collection, but will hold it until such time as I want my money.”
Why wasn’t this consideration? “There was nothing on the face of the note to prevent an immediate suit on it to recover the debt” – p. 70
Wife’s endorsement • Essentially a guarantee of payment • Says in effect, “I will back this debt with my assets”
“Illusory Promises” – Rest. 2d § 77 A promise or apparent promise is not consideration if by its terms the promisor or purported promisor reserves a choice of alternative performances unless (a) each of the alternative performances would have been consideration if it alone had been bargained for; or (b) one of the alternative performances would have been consideration and there is or appears to the parties to be a substantial possibility that before the promisor exercises his choice events may eliminate the alternatives which would not have been consideration.
Fee Schedule – Contra Costa County 1959 Office work or consultation:$20.00 per hour (down from $25.00 in the 1957 Schedule) Drafting Real Property Purchase Agreement:$50.00Drafting miscellaneous contract:$25.00Drafting a General Partnership Agreement:$100.00Ordinary Will:$15.00Trust Will:$50.00Trial Per Diem:$175.00Depositions in defense cases:$50.00Adoption:$150.00Default Divorce:$250.00 (Property Settlement Agreement $50.00 extra)Handling Quiet Title action:$200.00Drafting Lease:$50.00 or 5% of the first-year's rent Handling a civil or a criminal appeal,from filing through oral argument:$250.00
Terms of the deal • Deposit on full payment amount • Closing w/in 120 days • “Subject to Coldwell Banker & Co. obtaining leases satisfactory to the [plaintiff].”
Who wants to negate (renege on) the deal? • Why? • One theory: “economic holdout” or “holdup”
Assembling parcels for development Separately owned parcels
Economic Advantages to Being the “last holdout” • Entire value of project is “at risk” for the party assembling the parcels • Can lead to “extortionate pricing”