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Cornell Law - Contracts Outline (Summers, Fall 2003)

Cornell Law - Contracts Outline (Summers, Fall 2003) -...

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Unformatted text preview: Contracts Outline - 2003 Fall Term, Professor Summers CHAPTER 1. INTRODUCTION I. White v. Benkowski (WI 1967), p.22 (Punitive damages are not available in actions for breach of K, if no tort was pleaded or proved. White should recover for loss of water and inconvenience.) II. In letter (pp. 41-42) from Lon Fuller to Karl Llewellyn, Fuller argues that contract-no contract Llewellyn, dichotomy is a fallacy. Llewellyn is preoccupied with business agreements, esp. sales. However, fallacy. there exists a hierarchy of contract interest and thus there is an ascending scale of enforceability from restitution to reliance to expectancy. E.g. Sullivan, since there was a contract, expectancy Sullivan, would have been awarded. However, in this doctor-patient case, expectancy is too harsh. Expectation Interest: In most breach of contract cases, P will seek and receive expectation interest. Interest: Courts attempt to put P in the position he would have been in had contract been performed. P performed. is given benefit of bargain, including any profits he would have made from contract. bargain, Grainseller and Grainbuyer, prob. 1-1, p. 35: K that grainseller would sell 1000 bushels for $3.55 35: per bushel on Sept. 1 and Grainbuyer is to send his delivery trucks. Grainbuyer sent his trucks ($500) but Grainseller sold out. On Sept. 2, Grainbuyer sent his trucks to another seller and purchased for $5.55 per bushel. Theory of oblig: Agreement w/consideration oblig: U.C.C. Article 2 entitled "Sales," and applies to "transactions in goods." U.C.C. sec. 2-102: 2-102: "Goods" includes "all things which are movable at the time of i.d. to K for sale ." U.C.C. sec. 1-106 Remedies to be Liberally Administered: "aggrieved party may be put in as Administered: good a position as if other party had fully performed . . . ." U.C.C. sec 2-712 "Cover"; Buyer's Procurement of Substitute Goods: " damages the difference Goods: between the cost of cover and the contract price together w/ any incidental or consequential damages " Expectation interest = $2 per bushel for 1000 bushels + $500 + other costs to obtain other seller (time, phone calls, research). III. A. B. C. D. E. IV. Reliance Interest: It may be impossible to measure expectation interest of P accurately. Thus, P Interest: may recover his reliance interest. Courts attempt to put P in as good a position as he was in before the K was made. P is given out-of-pocket costs incurred in perf he has already rendered, made. but no profits. profits. Sullivan v. O'Connor (MA 1973), pp. 35-41: 35-41: A. Facts: P, entertainer, paid $622.65 for one nose operation to enhance her appearance, but D, : Facts surgeon, made nose even worse in 3 operations and no further operations could help nose. B. Holding: P wanted expectation interest: Holding: (1) promised better nose - present worse nose; (2) pain and suffering from op. 3; (3) lost profits. However judge awarded partial reliance: (1) out-of-pocket expenses; (2) old nose - present worse nose; (3) pain and suffering from op. 3; (4) should have also awarded for ops. 1 and 2; (5) no proof of lost profits. C. Reasons for awarding Reliance and not Expectancy damages 1. U.C.C. doesn't apply b/c not transaction of goods. 2. The promise was unreasonable because the results were uncertain. 3. Promote health care, not defensive medicine. 4. Fee paid disproportionate to value of promised result. 5. 6. Difficult to value promised result. Expectancy of promised result in a medical or noncommercial context is weaker, than in a typical business context where goods are being allocated. CHAPTER 2. GENERAL THEORIES OF OBLIGATION I. A. SECTION TWO: OBLIGATION ARISING FROM AN AGREEMENT W/CONSIDERATION -- LEADING THEORY, pp. 46-78. Buyer cannot recover for objectively worthless rights if buyer "bargained" for it. Hardesty v. Smith (Ind. 1851), p.47 (D refused to pay promissory notes b/c invention re: improving a lamp had no utility. "Where one person examines an invention, and upon his own judgment, uninfluenced by fraud, or warranty or mistake of facts, agrees to give a certain sum for conveyance of that rt to him, conveyance forms valid consid for such agreement." Can have valid, enforceable K even if something you get is objectively a nothing b/c only the subjective value is needed for consid. 1. Private autonomy - People can make their own bargains. 2. Person is in best position to determine. 3. Ct. does not want to determine value. Once the "bargain" element is shown, cts will not inquire into "adequacy" of detriment. There are some situations in which the parties exchange things that do not have roughly equivalent value. This may be due to donative intent of parties, to the fact that one party is more ignorant than the other, to the fact that the parties are mistaken, etc. In such situations, as long as the promisee suffers some detriment, no matter how small, ct will not find consid lacking merely b/c what promisee gave up was of much less value than what he received. Haigh v. Brooks (Eng 1839), p.77 -- Like Hardesty v. Smith (A promises B that if B will return document to A, A will pay $10,000 to B. Neither realize that document is actually worthless. Return of doc was consid for A's promise to pay $10,000, even though doc was worthless). 1. Corbin (1963), p.77. "Parting w/doc, contents of which can in fact render no service, has been held to be a sufficient consideration for a promise to pay a lg sum of money. 2. Restatement (Second) of K, 79: Adequacy of Consid. p.78 "If the req of consid is met, Consid. there is no addtl req of equivalence in the values exchanged." 3. Restatement (Second) of K, 208: Unconscionable K or Term. p.78 "If K or term is unconscionable at time K is made, ct may refuse to enforce K, or may enforce remainder of K w/o unconscionable term, or may so limit applic of any unconscionable terms as to avoid any unconscionable result." A contract or term is unconscionable if for example, the bargain is so grossly unfair due to: the stronger bargaining powers of other party; procedural abuses relating to terms of contract. Or if no man in his senses would make. If it involves gross disparities in price. Absence of meaningful choice by one party. Unreasonably favorable to one party. 4. Hypo. Suppose owner of car worth $10,000 offers to trade it for a worthless wrist watch, . Hypo will law uphold deal? NO. 5. Fuller does not believe that only function of consid doctrine is to identify gift promises and isolate them for nonenforcement. See Fuller's functions. C. Where promisor promised money to promisee in return for nothing, she was conferring a bounty (gratuity) w/o conditions, which does not constitute an enforceable agreement w/consideration. Dougherty v. Salt (NY 1919), p.48 (Nephew can't recover $3,000 from aunt who conferred a bounty). "When one receives a naked promise and such promise is not kept, he is no worse off than he was before the promise was made. He gave nothing for it, loses nothing by it, and upon its breach he suffers no recoverable damage." Stonestreet v. Southern Oil (N.C. 1946), p.49. Lacks cautionary function b/c informal. B. 1. 2. 3. 4. Hypo: If you go to school and work hard, I'll sign this note. Hammer v. Sidway. Sidway. Hypo: If you go to store, my employee will give you a coat. Maughes v. Porter. Porter. (1) (2) E. D. Restatement (First) of K, sec. 75 (1932), p.50 (1932), Consid for a promise is (a) an act other than a promise, or (b) a forbearance, or (c) creation, modif or destruction of a legal relation, or (d) a return promise, bargained for and given in exchange for the promise. Consid may be given to promisor or to some other person. It may be given by the promisee or by some other person. Fuller, Consideration and Form (1941), p.51 1. Functions performed by legal formalities a. Evidentiary - provide "evidence of existence and purport of K, in case of controversy." Eg, writing, notary. b. Cautionary - act as a check against inconsiderate action. Eg, wax seal. c. Channeling - force parties to communicate and define goals and objectives. 2. Substantive Bases of K Liab a. Private Autonomy - Individs have power to effect change in his legal realtions w/others, like a legislature. b. Reliance - Breach may injure person who relied on expectation that promise would be fulfilled. c. Unjust Enrichment - One party is unjustly enriched if he breaches K and still gains benefit from other party. More urgent case for judicial intervention than reliance. d. Relation of Form to Substantive Bases of K Liab - Form is related to private autonomy. 3. Policies, "Formal" and "Subst," Underlying Common-Law Req of Consideration a. Reasons for Refusing to Enforce Gratuitous and Unrelied-on Promise 1. Lack of consid = promise => weak channeling. 2. Neither reliance, unjust enrichment nor autonomy. 3. Lack of evidentiary and cautionary safeguards. b. Contractual Archetype - Half Completed Exchange 1. Reliance and unjust enrichment. 2. No other provision for circ of goods and div of labor. 3. Delivery and acceptance of goods = natural formality. Williston Test: Whether the condition will be a benefit to the promisor (price of promise) or whether it is merely for purpose of enabling promisee to receive gift (condition of gift promise). Maughs v. Porter (VA 1931), p.55 (Promisee can recover for car b/c promisor lured promisee to auction to stir lively bidding = sufficient consid for chance to win car). 1. Tramp hypo: "If a benevolent man says to a tramp: `If you go around the corner to the hypo: clothing shop there, you may purchase an overcoat on my credit.'" It is a legal detriment to the tramp to make the walk, and the only reason why the walk is not consid is b/c on a reasonable construction, the walk was not requrested as the price of the promise, but merely a condition of a gratuitous promise. F. 1. 2. 3. G. Consid means not so much that one party is profiting as that the other abandons some legal right in present, or limits his legal freedom of action in future (even if he benefits from it). This is sufficient consid for a promise. Hamer v. Sidway (NY 1891), p.57 (Uncle promises nephew $5,000 if nephew will refrain from smoking, drinking and gambling until he reaches 21. Nephew so abstains). A bargain may be present even though promisor does not receive any economic benefit from the transaction. Uncle's promise was "bargained for" and thus supported by consideration. Uncle derived no economic benefit, but obtained something he regarded as desirable (nephew's health, morality). Look at language of offer to determine if mode of acceptance invites promise or performance. Circ and lang of offer indicate that uncle was not interested in having nephew's promise to refrain, but in having nephew actually refrain. See refrain, refrain. Unilateral K. Promise and consideration must purport to be the motive each for the other, in whole or at least in part. Allegheny College v. National Chautauqua (NY Cardozo 1927), p.59 (D promises to give $5,000 to P, a charitable org. Parties agree that $5,000 is for scholarship fund to be named after D. D gives $1,000, and then D repudiates her promise. She dies, and P sues her estate for remaining $4,000. P wins b/c consid for D's promise was P's promise to name fund after her). a. Restatement (Second) of K, 81: Consid as Motive or Inducing Cause. Cause. i. "Bargained for" means that promisor must "manifest an intention to induce the performance or return promise and to be induced by it, and that the promise must manifest an intention to induce the making of the promise and to be induced by it." ii. "Immateriality of motive or cause" means that "unless both parties know that the purported consid is mere pretense, it is immaterial that promisor's desire for consid is incidental to other objectives and even that the other party knows this to be so." b. Gilmore, Death of K (1974): Hamer illustrates that NY Ct of Appeals unlike most American cts rejected so-called bargain theory of consid. c. Hypo: Suppose nephew was planning to refrain from smoking anyway b/c Dr ordered him to refrain. Nephew is motivated by Dr's orders and $5,000. H. If promisee's forbearance to sue is unrelated to promisor's promise and vice versa, then there was insufficient bargaining => no a/c. Baehr v. Penn-O-Tex Corp (MN 1960), p.60 (Promisee can't recover b/c did not forbear rt to sue in consideration for D to pay rent. Ct ruled that promisee's statement, "or will I have have to give it to an attorney to sue" is nothing in the evid that P forbore rt to sue). If the promisee forbears legal rt, but promisee does not have colorable claim to legal rt, no consideration. Springstead v. Nees (NY 1908), p.63 (Promisor bargained for promise by the other children not to bother about Atlantic property, then promisor would give up share of Sackett property. Promisee agrees to forbear legal rt, but promisee does not have valid claim to legal rt, thus there is no consideration) consideration) 1. Corbin on K (1963), p.65: Forbearance to bring a suit not sufficient consideration if forbearance is w/knowledge that claim is ill founded & void. Exception: Good faith belief 2. Note: Promise for Promise as Consid, p.65: B/c a bargained-for promise may constitute Consid, consid, a party may become obligated to perform even though the other has not relied on the agreement. Eg. If Arnold promises to sell his car to Kate for $400, delivery Eg. next Sat, and Kate promises to pay $400, Arnold is legally bound to perform even if he attempts to recant five minutes after deal is made and bf any change of position by I. Kate. Compare to following rule: A party is always free, upon giving appropriate rule: advanced notice, to back out of wholly executory exchange except when other party has reasonably relied in some way. 5. 3. Fuller, Consideration and Form, pp. 66-67, Wholly Executory Form, Exchange. It is now generally assumed that so far as consideration is concerned, the Exchange. executory bilateral contract (where A and B enter into contract and B defaults on promise; even though A hasn't paid for anything, A sues B for damages) is on a complete parity with the half-completed exchange --situation where P has already paid the price of D's promised performance. However, Fuller argues that executory bilateral contract is weaker than half-completed exchange re: judicial intervention b/c: a. No unjust enrichment. b. Reliance may or may not exist; however at least reliance is weaker than P already paying the price of D's promised performance. c. No natural formality because no actual exchange of money, goods, property, etc. d. Can only rely on the fact that the transaction is an exchange and not a gift. i. Some cautionary and channeling functions ii. No evidentiary functions (statute of frauds) Thus, in the half-completed exchange, parties can rely on many factors for enforcement -- (1) exchange, (2) reliance, (3) unjust enrichment, and (4) natural formality in accepting and surrendering articles. In the executory bilateral contract, the element of exchange is the only basis for liability and definition of exchange becomes crucial. Possible definitions of exchange = transaction where: a. Each participant derives a benefit. b. Motives of parties are economic rather than sentimental. c. Conduces division of labor. d. Interests of parties are opposed. 4. Von Mehren -- If contracts are not enforceable, in nonsimultaneous exchanges one party runs the risk that the other will not render performance in due course. Fuller & Perdue, the Reliance Interest -- To encourage reliance, we must dispense with its proof because it is difficult to prove and measure reliance monetarily. Conflict w/ former Consideration and Form? 6. Note: Preexisting Duty Doctrine (Corbin (1973)), pp.76-77. Neither performance (1973)), of duty nor promise to render a performance already req by duty (pre-existing legal duty) is sufficient consideration for a return promise. i. Eg. Suppose Ajax agrees to clear site and provide fill for $60,000 for Brown. During performance, Ajax discovers that amt of fill needed will be greater than it contemplated and Brown promises to pay addtl $5,000. Under preexisting duty rule, Ajax gave no consid for Brown's promise to pay addtl $5,000 b/c Ajax had a preexisting duty to provide all fill necessary for $60,000. However, if Brown had believed it received too good of a deal and refuses to pay => cts decline to apply rule. If Brown could not find another rule. contractor and Ajax refuses to do w/o price increase but wouldn't suffer higher costs providing fill, cts apply rule. rule. J. Mutuality of obligation is an essential element in every enforceable agreement. Mutuality is absent when only one of the contracting parties is bound to perform, and the rights of the parties exist at the option of one only. De Los Santos v. Great Western Sugar Co. (Neb. 1984), p.68 (Trucker can't recover b/c no mutuality of obligation since Co. can dictate how many beets to transport. Co. employed other truckers, did not specify truckers, quantity of beets, and made no promise except to pay for transp of beets that trucker loaded.). Absence of mutuality is troubling b/c one party can leave agreement at any time. 1. 2. L. K. Even though promise to perform duties is not actually expressed, K is valid if whole writing is "instinct w/obligation"/ "implied promise" to perform duties. Wood v. Lucy, Lady Duff-Gordon: 1 of most famous cases in book (NY Cardozo 1917), p.70 (P Duff-Gordon: can recover b/c there was an implied promise to give "reasonable efforts" to gain profits for both of them, esp since P had exclusive privilege to market her designs. This implied promise is sufficient detriment to P to constitute consideration for Lucy's counterpromise not to place her endorsemenet upon anyone else's designs.). One of the terms most frequently supplied by cts is "duty of good faith." Ct supplied req that P make good faith, reasonable efforts to promote D's fashion creations. i. UCC sec. 1-203: Oblig of Good Faith -- "Every K or duty w/in this Act imposes an obligation of good faith in its performance or enforcement." ii. UCC sec. 2-306(2) -- "A lawful agreement by either seller or buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an oblig by seller to use best efforts to supply goods and by buyer to use best efforts to promote their sale." iii. Summers discussion of "good faith" pp. 728-729. In case law, "good faith" does not have a single general meaning. Rather, when the judge uses the term "good faith," ask yourself: "What in the actual or hypothetical situation, does the judge intend to rule out by his use of this phrase?" Determine what is the specific "bad faith" and formulate the opposite situation. In contract law, "good faith" is an "excluder." It lacks general meaning of its own, but takes on meaning in a particular context only by way of contrast to bad faith. faith. Distinguish De Los Santos: Trucker cannot imply a promise b/c he did not have exclusive Santos: rt. Mutuality is not always essential to a binding K, but presence of "What in the actual or hypothetical situation, does the judge consid is a fundamental requisite. Mutuality is not necessary when intend to rule out by his use of this phrase?" Determine what is promisor receives other valid consid. Weiner v. McGraw-Hill (NY 1982), p.72 (Employee can recover for wrongful discharge even though employee could leave at will, b/c (1) employer promised him employment except dismissal for just cause and (2)...
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