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Contracts: The Legal Duty Rule

There’s an important rule in contract law and that’s the legal duty rule. The legal duty rule says that a promise to perform what is already a legal duty isn’t consideration. For example, in Slattery v. Wells Fargo Armored Service Corp. an armored car was robbed. The plaintiff was a polygraph operator and discovered that a man he was testing for a matter unrelated to the robbery was the guilty party. He tried to recover the reward, but the court said that since he was working for the Sheriff’s Department at the time, he had a duty to report his findings.

An important case that illustrates the legal duty rule with contracts is Lingenfelder v. Wainwright Brewery. Here, an architect (the plaintiff was the plaintiff’s executor) was supposed to design a brewery for the defendant, but stopped work when another company was awarded a freezer contract that he wanted for his own company. The defendant offered to pay him commission in exchange for his continued work and the architect agreed. Wainwright, however, didn’t pay and the plaintiff sued. The court held that the architect was already under contract to design and build the brewery so Wainwright’s promise to pay for what he was already supposed to do was not consideration.  

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January 30, 2007 Posted by | Contracts | Leave a comment

Contracts: Mutuality

An important part of a contract is mutuality, that is, both parties must be bound or neither is. This principle doesn’t apply to unilateral contracts where only one party is bound or to cases where both parties make promises but one party isn’t bound (such as fraud). It does, however, apply to bilateral contracts. An example of mutuality is seen in Scott v. Moragues Lumber Co. Here, Scott told the lumber company that if he bought a ship, he’d ship their lumber. This created an express condition. Neither party was bound until the condition was fulfilled. Indeed, Scott did buy a ship, but he chartered it to someone else. The lumber company was understandably upset. The court held that Scott was bound to the contract as soon as he bought the ship.

This is pretty straight-forward, but what about illusory promises? An illusory promise has the form of a promise, but not the substance of one. We have an example of such a promise in Wickham & Burton Coal. v. Farmers Lumber. The coal company agreed to fill any orders from the lumber company at a certain price. The lumber company, however, didn’t actually promise to buy any coal. The court held that the contract wasn’t mutual because the quantity to be delivered (even if it’s none) is conditioned entirely on the buyer. Because Farmers Lumber could have decided not to purchase coal, they weren’t bound. So if both aren’t bound, neither are. For more on illusory promises, check out section 77 of the Restatement Second on Contracts.

January 30, 2007 Posted by | Contracts | 2 Comments

Contracts: Unconscionability

Unconscionability is one of those limits to the bargain principle. In Schnell v. Nell we can see parts of it when the court says that 1¢ for $600 is too uneven. In Williams v. Walker-Thomas Furniture Co. the plaintiff had purchased several items from the defendant’s store, the most recent being a stereo for over $500. The plaintiff had a limited income and really couldn’t afford the stereo. The financing agreement the plaintiff signed had a cross-collateral clause that said the defendant retained title in the property until it was paid off, and it combined all the debt into one. At the time of the suit, there were several items that had less than $10 left to pay, but because of the structure, payment on those items was minimal because most went to the stereo.

The court held that where the element of unconscionability is present at the time a contract is made, the contract shouldn’t be enforced. Unconscionability includes an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.

The remedies for an unconscionable contract are put forth in section 208 of the Restatement Second which says that if a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

 

Maxwell v. Fidelity Financial Services, Inc. says that there are two kinds of unconscionability: procedural and substantive. Procedural unconscionability is concerned with things that mean the bargaining didn’t proceed as it should. Factors to look at are age, education, intelligence, business acumen, relative bargaining power, who drafted the contract, whether the terms were explained to the weaker party, whether alterations were possible, and whether there were alternative sources. Substantive unconscionability is an unjust or “one-sided” contract where the contract terms are so one-sided as to oppress or unfairly surprise an innocent party, and an overall imbalance in the obligations and rights imposed by the bargain. A claim of unconscionability can be established by showing substantive unconscionability alone; both types aren’t needed, though some courts do require both types.

Unfortunately, there aren’t a lot of guidelines on how to define “unconscionability,” but the contracts that are clearly unconscionable should be easy to spot.

January 16, 2007 Posted by | Contracts | Leave a comment

Contracts: The Bargain Principle

Consideration is one of the necessary elements of the contract, and for a long time, the only form of consideration was the bargain. Restatement Second of Contracts § 71 says that a performance or a return promise must be bargained for, and a performance or a return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise. A case that illustrates this is Hamer v. Sidway in which an uncle told his nephew that he’d give him $5,000 if the nephew didn’t smoke, drink, or gamble until he was 21. The nephew did this and requested the money. The uncle said that he’d give it to the nephew, but that he thought it would be better if he kept it until his nephew could use it responsibly. The nephew thought this was a good idea. When the uncle died, he sued to collect his money. The court said that consideration means not so much that one party is profiting as that the other abandons some legal right in the present, or limits his legal freedom of action in the future, as an inducement for the promise of the first. Here the uncle bargained for his nephew’s abstinence from cigarettes, alcohol, and gambling. The nephew, as promisor, received something of value, the $5,000, for his promise to his uncle, the promisee. This fulfilled the consideration requirement. It may seem as if the consideration involved here was a bit unbalanced. Hancock Bank v. Shell Oil Co. talks about this.

In Hancock Bank, a lessor lease property to Shell Oil for 15 years with an option to extend for another 15 years, and a clause that Shell could terminate the lease with 90 days notice. The bank bought the property at auction after the property was foreclosed. It sued Shell, claiming that Shell had such a good lease that the consideration paid for the lease was uneven. Courts have traditionally declined to relieve a party from the terms of a contract merely because he made what he regards as a bad or uneven bargain.

Thus, Shell kept the lease as it was. You can compare this to Schnell v. Nell when the court said 1¢ didn’t constitute consideration for $600 because the two cases both deal with uneven consideration. The difference is that in Schnell, there wasn’t really an exchange, only the form of one, whereas in Hancock Bank there was an exchange because both parties got something of value. Further, according to Restatement Second of Contract § 79, if the requirement of consideration is met, there is no additional requirement of a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee.

 The bargain principle does have limits, however. Sections 175 and 176 of the Restatement talk about using duress and threats to get the bargain. If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.

January 11, 2007 Posted by | Contracts | Leave a comment

Contracts: Reliance

The next topic is reliance. The first case is Kirksey v. Kirksey. Here, a man invited his widowed sister-in-law and her family to his property and said he’d provide a home and land for them. Initially he did this, but he moved them twice; they eventually ended up in a place slightly better than a shack that was located in the woods. The court said that there wasn’t consideration, but one judge, in his dissent, said that the sister-in-law’s reliance on the brother-in-law’s promise should be sufficient consideration. Because courts started thinking this way, they found ways to get around the question of reliance as consideration.

The first way is estoppel in pais or equitable estoppel. Here, if A makes a statement of fact to B and B has foreseeably relied on the statement, A is prevented from denying the truth of the statement. So, using Kirksey as an example, the brother-in-law said he’d take care of his sister-in-law, and since the sister relied on that statement, the brother couldn’t deny he’d made the statement.

The second way is promissory estoppel, also known as detrimental reliance. Promissory estoppel occurs when a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. (Res. 2d. § 90). Basically, if someone makes you a promise and you act on that promise, then the promise is binding. Thus, reliance is a form of consideration.

January 9, 2007 Posted by | Contracts | 1 Comment

Contracts: Form and Nominal Consideration

Let’s talk a bit about the form of consideration. In Schnell v. Nell, a man may or may not have received consideration of 1¢ in exchange for a promise to pay a total of $600 to three people to whom his wife wanted to leave some money. She didn’t have any property in her name, so any money would have to come from her husband. The court said that a contract to pay $600 for 1¢ is unconscionable. The consideration of one cent was nominal consideration. Nominal consideration has the form of a bargain, but not the substance of one. Nominal consideration isn’t enough to meet the consideration requirement for an enforceable contract except in two cases: options and guaranties.

January 9, 2007 Posted by | Contracts | 3 Comments

Contracts: Consideration and Simple Donative Promises

We’re starting out with consideration. To constitute consideration, a performance or a return promise must be bargained for. Essentially, consideration is something of value that’s bargained for. In the early years of contract law, consideration was the reasons the contract is entered into by the parties. Over time, courts recognize really one type of consideration which is the bargain. There is a broader conception, however, that also includes concepts like reliance.

 

We’ve started our discussion on consideration by discussing simple donative promises. A simple donative promise is a promise made for affective reasons (love, friendship, and the like). In Dougherty v. Salt, an eight-year-old boy received a promissory note for $3,000 from his aunt that was payable at her death. When the testatrix of the aunt’s estate refused to honor the note, the boy sued. The New York Court of Appeals held that the note was the voluntary and unenforceable promise of an executory gift. The court said that there wasn’t consideration, which meant that the boy did nothing to get the note—he didn’t bargain for it. The note, therefore, wasn’t enforceable. Most gifts like this are a promise to make a gift. Actual gifts, those delivered to the recipient, are a legally valid and complete transaction so courts won’t allow the giver to take it back. A promise to make a gift, however, is usually unenforceable unless the promisee can show something like reliance, which we’ll talk about later.

January 8, 2007 Posted by | Contracts | Leave a comment