11/15/11 6:06 PM CONSIDERATION – when is there a promise Bargain Theory of Consideration (two way commercial exchange) I. When Is a Promise Legally Enforceable? A. Consideration doctrine provides the law’s basic answer to this question. Exceptions aside, a promise is legally enforceable only when there is consideration for it (See Restatement S.17(1) - (2)). Consideration is necessary, but not sufficient for a contract. No consideration = No contract II. Consideration Requires A Two-Way Exchange A. There is consideration for a promise only when the promisee (= the one to whom the promise is made) gives something back to the promisor in return for the promise. 1. There are two ways to “give something back,” (i.e. two kinds of consideration) a. Give a promise b. Do something (give a performance) B. Party’s intent for a legally enforceable K does not matter. C. A gift is not consideration – no exchange. Ex: Dougherty v. Salt – gift to nephew is a one-way exchange D. Adequacy of K is typically not considered b/c of freedom to contract III. RULE A “Bargained For” Promise Or Performance A. A promise or performance is consideration when it is "bargained for" (Restatement §71(1)). B. A promise or performance is “bargained for” if: (a) the promisor gives his or her promise in order to get that promise or performance in return, and (b) the promisee gives the promise or performance in exchange for the promisor’s promise (§71(2)). 1. When is the “In order to” requirement fulfilled? a. Must be reliably verified. (or readily verifiable)
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11/15/11 6:06 PM
CONSIDERATION – when is there a promise
Bargain Theory of Consideration (two way commercial exchange)
I. When Is a Promise Legally Enforceable?
A. Consideration doctrine provides the law’s basic answer to this question.
Exceptions aside, a promise is legally enforceable only when there is consideration
for it (See Restatement S.17(1) - (2)). Consideration is necessary, but not sufficient
for a contract. No consideration = No contract
II. Consideration Requires A Two-Way Exchange
A. There is consideration for a promise only when the promisee (= the one to whom the promise is
made) gives something back to the promisor in return for the promise.
1. There are two ways to “give something back,” (i.e. two kinds of consideration)
a. Give a promise
b. Do something (give a performance)
B. Party’s intent for a legally enforceable K does not matter.
C. A gift is not consideration – no exchange.
Ex: Dougherty v. Salt – gift to nephew is a one-way exchange
D. Adequacy of K is typically not considered b/c of freedom to contract
III. RULE A “Bargained For” Promise Or Performance
A. A promise or performance is consideration when it is "bargained for" (Restatement §71(1)).
B. A promise or performance is “bargained for” if: (a) the promisor gives his or her promise in order to
get that promise or performance in return, and (b) the promisee gives the promise or performance in
exchange for the promisor’s promise (§71(2)).
1. When is the “In order to” requirement fulfilled?
a. Must be reliably verified. (or readily verifiable)
Ex: Schnell’s exchange to show gratefulness? Love not reliably verified.
b. Nominal Consideration is not consideration
1. Exchange is a sham – does not count. Pretending to do an exchange to fulfill
requirement.
2. Ex: Schnell v. Nell: $600 for a penny? No reasonable person would.
3. Note: cancellation clauses may appear to be nominal, but when there is advance
notice typically courts hold that there is consideration. Ex: Linder
a. It is an escape clause; parties still commit to coordinate but allow for escape for
unforeseen/unlikely events.
2. Illusory Promises
a. A promise which does not really obligate the promisor to do anything. NOT consideration
b. Ex: “I’ll marry you if I want to”
c. Note: Option contracts are not considered illusory
IV. Personal and Private Versus Commercial Exchange
A. Courts may not enforce a promise even if it meets the conditions above for being “bargained for.”
1. The paradigm case of an enforceable “bargained for” promise is a
commercial transaction.
2. If a “bargained for” promise occurs in a context that is personal and
private (a domestic context, for example) courts may not enforce it.
a. Promises to family members can sometimes be enforceable. Ex: $ to pay for kid to
come to funeral. She gets assurance in exchange for $.
B. Policy Rationale
1. Zone of Privacy
V. Implied Promises
A. Where a party’s explicit promises are illusory, the court may imply a promise to serve as
consideration.
1. Example: Lucy, Lady Duff Gordon v. Wood.
a. Lucy promises Wood that Wood will be the exclusive marketer of her designer
clothes. Wood promises to be the marketer. But: he does not promise to make
any effort to do so. Wood could satisfy his promise without doing anything.
Wood’s explicit promise is illusory.
b. Lucy did not give her promise in order to get from Wood a promise he could
fulfill by doing nothing; therefore, Wood’s explicit promise cannot be
consideration for Lucy’s promise.
c. The court implies a promise that Wood will make a reasonable effort to
market the goods.
i. The court implies the promise because it thinks both parties
understood that Wood would make a reasonable effort to maker the
goods; they just did not make this understanding explicit.
B. Implied Promises and UCC §2-306.
1. §2-306 implies a promise to serve as consideration in three situations: outputs
contracts, requirements contracts, and exclusive dealing contracts.
a. Outputs Contract
An outputs contract is a contract in which the buyer agrees to purchase
all that a seller produces. §2-306 implies a promise by the seller to
conduct business in good faith and in accord with commercial standards
of fair dealing so that the output will be reasonably foreseeable. The
implied promise serves as consideration for the buyer’s promise to buy
all that the seller produces.
b. Requirement Contract
A requirements contract is a contract in which the seller agrees to sell to
the buyer all that the buyer requires of a given product. §2-306 implies
a promise by the buyer to conduct business in good faith and in accord
with to commercial standards of fair dealing so that his requirements
will be reasonably foreseeable. Implied promise serves as consideration.
c. Exclusive Dealing Contract
1. A seller promises a buyer that the buyer will be the exclusive dealer
for the seller’s goods. The seller will not contract with anyone else to
deal in the seller’s goods.
2. A buyer promises a seller that the buyer will be the exclusive dealer
for the seller’s goods. The buyer will not contract with any other seller
to deal in that seller’s goods.
3. In (1), §2-306 implies a promise by the buyer to use best efforts to
promote the sale of the goods. In (2), §2-306 implies a promise by the
seller to use best efforts to supply the goods. The implied promise
serves as consideration for the seller’s promise in (1) and for the buyer’s
promise in (2).
2. By implying these promises, §2-306 eliminates any illusory promise problems about
consideration.
VI. The Pre-Existing Duty Rule
A. The rule: A promise or a performance provided by a promisee in exchange for a promise is not
consideration for that latter promise if: (a) the promisee is already legally obligated to do what the
promisee promised; or, (b) the promisee is already legally obligated to provide the performance.
1. Ex: Grey V. Martino paying police officer to find the thief. Good to have the
rule to prevent bribery.
2. Impt: WHO is the pre-existing duty TO?
B. Judicial Hostility Toward The Rule
1. Courts and legislatures have created exceptions to the rule. But the rule has not been
completely eliminated.
a. Contract Modification is one of the main exception when parties sometimes want to alter their
contractual agreements. However, The pre-existing duty rule rendered some modifications
unenforceable.
1. Where in the modification, party X’s promised something new, but party Y did not. Party Y’s
unchanged promise could not be consideration for X’s new promise b/c of rule
2. The historical solution: rescission.
a. The parties would mutually rescind the old contract (thereby eliminating its obligations) and execute a
new contract. Problematic: sometimes voluntary and for good reasons; other times extorted. Ct would
only enforce the voluntary rescission and when it was modified in a reasonable way.
1. Ex: DeCiccio V. Schewizer where father pays $ to daughter when she gets married. Ct. upheld because
she could still call off the wedding.
b. UCC §2-209 eliminates the pre-existing duty rule in the modification of contracts for the sale of goods.
1. A modification is enforceable if it is voluntary (not extorted) and sought in good faith for a legitimate
commercial reason.
c. The Common Law parallels UCC §2-209.
1. The modification is enforceable if it is fair and equitable and made in light of circumstances the
parties did not anticipate at the time of contracting. In addition, according the Restatement §89, the
contract must not have been fully performed by either side.
2. Ex: Expansion City and the garbage. Modification is unenforceable because they already took into
account the risk of expanding and are trying to prevent their losses from their own poor estimates. It is
not fair and equitable to enforce.
3. Modification and Debt Forgiveness
a. Under common law, typically the creditor has fully performed and the modification provision would
not apply. Under the UCC, as long as it is in good faith and legitimate commercial reason it can apply,
but some courts to not do so. States adopt their own approaches
b. When the two parties disagree on the amount in good faith (ea. Have honest believe he is
right) and come to a compromise, the promises are consideration for ea. Other because neither will
pursue a valid legal claim against the other.
c. If one is wrong, typically giving up a invalid claim is not consideration unless giving up a valid claim can
be consideration when the party giving up the claim has an honest, good-faith belief that the claim is
valid.
VII. Giving Up a Legal Claim as Consideration
A. Can be consideration when ea. Party believes in good-faith he has an honest claim and gives
that up.
1. Even if the party is wrong on his claim, can be consideration if it is in good-faith.
2. Courts want parties to compromise and solve their own disputes
VIII. Exceptions to the Bargain Theory
A. Quit Claim Deeds
1. A quitclaim deed is a release of any legal claim one may have to a piece of property.
2. Will be enforce even if the person releasing the legal claim knows its invalid
a. Why? Policy reason to know who has clear title to the property
B. Modification of a K
1. Pre-existing duty rule does not apply.
C. Options Contracts
1. Yes, consideration. Different from illusory promise.
Benefit/Detriment Theory – no longer the law!
I. The theory: there consideration for a promise if the promisee incurred a legal detriment, or the
promisor received a legal benefit in exchange for the promise.
A. A promisee incurs a legal detriment whenever the promisee agrees not to do something he or she has
a legal right to do. The promisor receives a legal benefit that the promisor receive, in exchange for his or
her promise, a promise or performance which the promisee is not legally bound to provide
B. Ex: Hammer V. Sidway where uncle pays nephew not to do drink, smoke, etc till 21 even though he
could legally do so.
C. Using this theory, there would be consideration when we would say no on policy grounds.
1. Too easy to make something a legal detriment – Doughterty – Charlie could exercise his legal right to
accept Aunt Tillie’s money and would have a legal detriment and thus consideration.
Moral Obligation
I. Courts sometimes hold that there is consideration for a promise made in the acknowledgement of a
moral obligation arising from an act prior to the promise.
A. There is no clear pattern, or general rule, as to when a court will find consideration in this way.
B. Webb V. McGowan where employee Webb was injured saving employer’s life from the falling block.
1. Court held that Webb’s past act of saving his life was consideration
2. Also enforced through promissory estoppel
Promissory Estoppel
I. RULE: A promise is enforceable to the extent necessary if: (1) the promisor expected, or should have
reasonably expected, his or her promise to induce action or forbearance on the part of the promisee or
third person; and (2). the promise did induce such action or forbearance; and (3) enforceable to the
extent necessary to avoid injustice
A. How do you determine what is necessary to avoid Injustice?
1. Consider: the reasonableness of the promisee’s reliance on the promise and the burden on the
promisee for not enforcing the promise.
II. Why? A promise may be enforceable even if there is no consideration b/c there was nothing
“bargained for”
III. Ex: Scrooge’s promise to help Sally recover after Sally saved Scrooge’s daughter’s life. Sally relied on
the promise.
INTERPRETATION
Objective Intent Test
RULE: If a reasonable person in the circumstances would interpret the words as a promise, they count as
a promise (to do or not to do that thing).
Disregard’s party’s intent.
Policy matters
Don’t want to condone deceit.
Avoid careless/negligent language
Ex: Embry V. Hargardine-McKittirck
How a reasonable person would have interpreted the manager’s word on employment.
Hypothetical Intent Test
RULE: How a reasonable person would interpret these words taking into account the main goal of the
promise and the unforeseen events that have arisen since the promise was made.
Used when the objective intent test and mutual understanding do not suffice. Typically, there are
unforeseen events that the parties did not consider
Ex: Spaulding V. Morse.
Reasonable person taking into account main goal of supporting their son while at school and home and
paying for him when he was drafted.
Mutual Understanding/ Party Intent Matters/Trade Usage ( Sec 201)
Meaning
Where the parties have attached the same meaning to a promise or agreement or a term thereof, it is
interpreted in accordance with that meaning.
Many courts use this vs. objective intent test if there is a mutual understanding.
?Where the parties have attached different meanings to a promise or agreement or a term thereof, it is
interpreted in accordance with the meaning attached by one of them if at the time of the agreement
was made
Interpret against the party who knows of the misunderstanding between the two different terms.
Except in two points above, neither party is bound by the meaning attached by the other, even though
the result may be a failure of mutual assent.
Trade Usage
When two merchants are in the same industry, they should know the trade usage term (mutual
understanding in the trade)
Ex: Berwick V. Salem Press
Burden of Drafting - Used when the term is not w/ a special trade meaning and when it is not clear to a
reasonable person
Where a document is ambiguous, construe the ambiguity against the person who drafted the document
Interpret the ambiguity against the party best informed about the subject matter of the contract
Ex: Chicken ?
REMEDIES
On the Contract Remedies:
Expectation Measure
I. The Fundamental Goal in Awarding Damages
A. An award of damages is an award of money.
B. The fundamental goal is to award enough money to put the promisee in as good a position as he or
she would have been in had the promissor kept the promise.
II. The Basic Expectation Measure
A. There are three steps in applying the expectation measure:
1. Determine the position the promisee would have been in if the promise had been kept.
2. Determine the position of the promisee as a result of the breach.
3. Award the difference in value (measured in money) between the promise-kept position and the-
result-of-the-breach position.
III. Proper Mitigation under the Expectation Measure
A. The duty to mitigate: in calculating expectation damages, a court always treats the non-breaching
promisee as a proper mitigator--whether or not the promisee really did properly mitigate damages.
Damages awarded = Losses minus mitigation expenses
(1) When we calculate damages this way, we divide them between the breaching promisor and the non-
breaching promisee:
(a) The breaching promisor bears those damages not avoidable by proper mitigation.
(b) The non-breaching promisee bears any damages that it fails to avoid and that it would have been
proper mitigation to avoid.
(2) This why courts talk about the duty to mitigate damages. There is no duty to mitigate in the sense
that a non-breaching promisee commits a legal wrong if he or she does not do so. The point is simply
that the promisee bears the avoidable damages.
B. Proper mitigation consists in taking all reasonable steps after a breach by the other party to minimize
the losses caused by the breach.
C. Luten Bridge. Should have stopped building after the city said “no.” Do not get expenses after city
gave them notice – did not mitigate.
D. Proper Mitigation: Reasonableness
1. To properly mitigate damages is to take all reasonable steps to curtail the losses caused by the
breach.
2. There is no definition of what counts as reasonable.
a. To assess reasonableness, courts compare how much a mitigation step would cost to how much the
step would save.
E. Uncertainty
1. After a breach, it may not be clear how the non-breacher may best cut losses.
2. In making judgments about what will likely cut losses, the courts give the benefit of the doubt to the
non-breaching mitigator.
a. Want to encourage mitigation and have the non-breaching party “gamble”
F. Successful Mitigation And Unsuccessful Mitigation
1. If the non-breaching party takes a mitigation step that succeeds in cutting the losses, the court takes
that reduction into account in calculating expectation damages—even if the step was not reasonable,
and hence even if a proper mitigator would not have been required to take the step.
a. The step could be unreasonable but still succeed in saving money.
1. For example, the non-breacher spends $100 trying to resell some leftover supplies. It was
unreasonable to spend the money because it was very likely no one would buy the supplies and the
expense would be wasted. But the non-breacher was very lucky, and someone bought them.
2. If the non-breaching party takes a reasonable mitigation step, but that step does not succeed in
reducing losses, the non-breaching party nonetheless recovers the mitigation expenses in the
expectation damage award.
G. Mitigation In The Employment Context
1. The rule: in an employment contract, it is proper mitigation for the wrongfully terminated employee
to take another job only if the other job is “comparable or substantially similar”; the wrongfully
terminated employee is not obliged – for mitigation purposes - to take a job that is “different or
inferior.”
Ex: Parker V. 20th Century fox
2. Courts will be deferential to employee’s decision
IV. The Foreseeability Limitation
A. RULE: You can only recover damages that were reasonably foreseeable at the time of contracting as
the probable result of a breach.
1. Sometimes referred to as the Hadley rule, or the rule of Hadley v. Baxendale.
B. Damages may be reasonably foreseeable in two ways:
1. Because damages of the sort in question typically follow from the breach in the ordinary course of
things
a. Damages foreseeable in this way are sometimes called general damages.
2. Because they result from special circumstances (which would not obtain in the ordinary course of
things), and the breaching party had reason to know of the special circumstances
a. Damages foreseeable in this way are sometimes called special damages.
C. . Applying The Forseeability Limitation
1. Calculate the result-of-the-breach / proper mitigation position, and
2. Ask, with regard to each element of damage listed there, whether it was reasonably foreseeable at
the time of contracting as a probable result of the breach.
D. . Determining Reasonable Foreseeability
1. Damages arising in the ordinary course of things (general damages)
a. The determination is based not just on empirical assumptions but also on normative and/or economic
principles and assumptions.
2. Damages resulting from special circumstances, about which the breaching party had reason to know.
a. The determination is based not just on empirical assumptions but also on normative and/or economic
principles and assumptions.
E. Informing About Special Circumstances
1. Most jurisdictions: informing a contracting party of the possibility of special damages is sufficient to
make them reasonably foreseeable at the time of contracting as a probable result of a breach.
a. There are exceptions.
1. The Restatement recognizes policy driven denials of reasonable foreseeability in §351(3).
i. Courts may hold that losses are not reasonably foreseeable if “justice so requires to avoid
disproportionate compensation.”
2. A minority of jurisdictions: the contracting party be informed of the possible damages and also the
party expressly or impliedly agreed to bear the risk of those damages.
a. This is called the tacit agreement test.
V. Proof requirement
A. RULE A plaintiff must prove the amount of damages with reasonable certainty.
1. A plaintiff can only recover those damages that he or she can prove occurred.
2. A reliable basis for estimating losses is required.
a. 100% certainty is not required.
3. The trier of fact determines whether damages have been proven with reasonable certainty in light of
the relevant evidence.
B. Track Record
Provide a history of performance to provide a reliable basis for predicting benefits that would have
occurred but for the breach.
C. New businesses
1. The “old” new business rule
a. As a matter of law, you could not prove lost profits from a new business with reasonable certainty.
b. The rationale was that the lack of a history of business success made proving lost profits too
uncertain.
c. This is no longer the law.
2. The “new” new business rule
a. A plaintiff may produce evidence of the performance of other similarly situated businesses to prove
losses from a breach.
b. The rationale is that the performance of other businesses can provide a reliable basis for estimating
losses.
D. Loss of goodwill
1. A breach may cause a business to lose the goodwill of its customers.
2. Some jurisdictions allow a plaintiff to offer the trier of fact evidence of losses resulting from loss of
good will.
3. Other jurisdictions hold, as a matter of law, that such damages cannot proven with reasonably
certainty.
E. Emotional distress damages
1. A plaintiff may in the appropriate case to present evidence of emotional distress to the trier of fact.
2. Ex: Failure to deliver a casket
- In Sum, if the contract is enforceable, then one gets full expectation damages except for:
Unforeseeable Damages (Hadley Rule)
Unprovable Damages (Reasonable Certainty Rule)
Unmitigate (Duty to Mitigate Rule)
Unrequested (Procedural Requirement)
Reliance
I. The Reliance Measure of Damages
A. The reliance measure of damages awards expenses incurred in reliance on the contract.
1. The reliance measure of damages is a useful alternative to the expectation measures--when the
plaintiff cannot prove his or her expectations damages with reasonable certainty.
B. To recover the reliance expenses, the plaintiff has to prove them with reasonable certainty.
C. A court will limit the award of reliance expenses to those expenses that were reasonably foreseeable
by the party in breach at the time of contracting.
1. Lost profits are not an expense that can be recovered under reliance damages.
2. Cannot recover under Reliance and Expectation damages. Avoid overcompensation.
II. Pre-Contractual Expenses
Some jurisdictions will count pre-contractual expenses as reliance expenses.
1. Expenses that are incurred in pursuit of a project of which they would have been in.
III. Losing Contracts
A. To avoid overcompensation, the court allows the defendant to deduct from the reliance measure
award any net loss the defendant can show the plaintiff would have sustained if the contract had been
performed.
1. L. Albert & Son v. Armstrong Rubber
Cost of Completion
I. Cost Of Completion
A. Definitions
1. Cost of completion: the cost of properly completing the work.
2. Diminution in value: the difference in value between the work as completed and the work as
promised.
3. Wilful breach: a breach that significantly violates standards of fair dealing and good faith.
B. The rule (may be thought of as one rule or three).
1. Cost of completion: the injured party is entitled to the cost of completion unless that amount is
grossly disproportionate to the value produced by completing the work.
a. Most likely successful when: Value when completed > cost of completion
2. Diminution in value: When the cost of completion is grossly disproportionate to the value
produced by completing the work, the injured party is entitled to the diminution in value, unless
(some jurisdictions only) the breach was willful, in which case:
a. Diminution in value = difference in the value of the work had it been done as promised and the value
of the work as it was done.
3. Wilful breach: If the breach was willful, the injured party is entitled to the cost of completion.
II. Market value versus non-market value
Market value is (very roughly) what people in general are willing to pay for something.
B. Non-market value has many sources—a non-exhaustive list (cost of completion still must not be
grossly disproportionate):
1. Aesthetic value
2. Cultural value
3. Historical value
4. Personal (sentimental) value
III. Measuring the value produced
A. It may be measured by market or non-market value.
IV. Wilful breach
A. Wilful breach significantly violates standards of fair dealing and good faith.
1. In general, the breaching party attempts to gain the benefits of the bargain while avoiding costs the
party voluntarily undertook in entering the bargain.
V. Recovery For Willful Breach
A. In some jurisdictions, if the breach was willful, the injured party is entitled to the cost of completion.
(Even if it is grossly disproportionate)
B. Why? Deserving “punishment”; breaching party deliberately tries to get the benefits without the
agrred-upon costs and risks.
Liquidated Damages
I. What Is A Liquidated Damage Clause?
A. A liquidated damage clause is a provision in a contract that specifies what the damages shall be in
the event of a breach.
1. Such a provision is said to “liquidate” damages.