The Bargain Theory of Contract : Consideration

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  1. The Bargain Theory of Contract
    1. Consideration
      1. Definitions
        1. A Contract is “a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Restatement 2d §1.
        2. Consideration is the inducement of a contract, something of value given in return for a performance or a promise of performance by another, for the purpose of forming a contract. This is a required element in the formation of a contract.
        3. Illusory Promise is a promise so indefinite that it cannot be enforced or which, by virtue of provisions or conditions contained in the promise itself, is one whose fulfillment is optional on the part of the promisor. Not adequate for consideration.
      2. Restatement
        1. Restatement 2d §71(1)– to find consideration there must be a performance or return promise which has been bargained for by the parties. This is the “bargain theory of consideration:” premised on the idea that a promise is presumptively serious, and so worthy of legal enforcement, if and only if it is consciously given in return for something that is sought: in short, an exchange.
          1. Generally, reciprocal, bargained promises.
        2. Restatement §76- Any consideration that is not a promise is sufficient to satisfy the requirement of §19 (c), except the following:
          1. (a) An act or forbearance required by a legal duty that is neither doubtful nor the subject of honest and reasonable dispute if the duty is owed either to the promisor or to the public, or, if imposed by the law of torts or crimes, is owed to any person;
          2. (b) The surrender of, or forbearance to assert an invalid claim or defense by one who has not an honest and reasonable belief in its possible validity;
          3. (c) The transfer of money or fungible goods as consideration for a promise to transfer at the same time and place a larger amount of money or goods of the same kind and quality.
        3. Restatement §79– A promise or apparent promise which reserves by its terms to the promisor the privilege of alternative courses of conduct is insufficient consideration if any of these courses of conduct would be insufficient consideration if it alone were bargained for.
          1. See Petroleum Refractionating Corp. v. Kendrick Oil Co., infra.
        4. Restatement 2d §77 Comment (a) – Words of promise which by their terms make performance entirely optional with the promisor do not constitute a promise.
        5. Restatement 2d §79- If the requirement of consideration is met, there is no additional requirement of
          1. (a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or
          2. (b) equivalence in the values exchanged; or
          3. (c) “mutuality of obligation.”
        6. Restatement 2d §175– a contract is voidable by the victim if that party’s “manifestation of assent is induced by improper threat by the other party that leaves the victim no reasonable alternative.”
        7. UCC §2-306– Output, Requirements, and Exclusive Dealings
          1. A term that measures the quantity by output or requirements means actual output or requirements as may occur in good faith, cannot be disproportionate to a stated or implied estimate.
      3. Dougherty v. Salt
        1. Facts: The Aunt Tillie gift case. Aunt Tillie gave her 8-year old nephew a monetary gift. Not enforceable by law, she can decide not to follow through on gift. There is no bargain.
      4. Hamer v. Sidway
        1. Facts: Uncle tells Nephew that if he refrains from certain vices until he is 21, he will give him $5000. Π is the executor of Uncle’s estate; Δ is the assignee of Nephew.
        2. Held: Nephew’s refraining from certain vices is a forbearance that amounts to consideration necessary for contract enforceability. The court “will not ask whether the thing which forms the consideration does in fact benefit the promisee or a third party.”
        3. Equivalence of exchange (p. 38): Generally, there is no requirement that there is equivalence in exchange: the Peppercorn doctrine.
          1. It is immaterial whether what is given in consideration “is of any substantial value to any one. It is enough that something is promised, done, forborne or suffered by the party to whom the promise is made as consideration for the promise made to him.”
        4. In a unilateral contract, the promisor has the duty; the promisee has the right. The promisee is the one that can sue; the promisee can bring action in court to enforce the duty.
        5. In a bilateral contract, both parties have a duty, and both parties have a right. Both sides can sue to enforce the other to fulfill its duty.
      5. Lake Land Employment Group of Akron, LLC v. Columber
        1. Facts: At-will employee signs noncompetition agreement. Employee says there was no consideration, so agreement shouldn’t be binding. Employee didn’t get anything for signing agreement. Employer said the consideration was allowing employee to keep job.
        2. Held: Majority says allowing someone to keep a job is adequate consideration. Employer has a legal right to fire and employer forebears (declines to exercise) legal right to fire.
        3. Dissent: No change was made to the employee’s at-will relationship with the company, and so no real consideration was given. Employee retained the same employment status he had before the noncompete contract was signed.
      6. Petroleum Refractionating Corp. v. Kendrick Oil Co.
        1. Facts: Δ contracted to buy 1.5M G of oil from Π unless Π should stop making that grade of oil. Δ states that the grade of oil is not correct and will not accept further deliveries. (This is during the depression when the price of oil is falling fast.) Π then sells the remaining contract for much less than originally contracted and is suing for the difference.
        2. Issue: Δ argues there was no consideration.
        3. Held: A benefit to the promisor (Δ) or a detriment to the promisee (Π) is a sufficient consideration for a contract. Under Restatement 79, both need to be sufficient when promisor has alternative courses of conduct. Δ got oil, and Π gave up the right to discontinue producing that grade of oil. Giving up a right is adequate consideration.
        4. Notes: If Pet discontinued manufacturing the grade of oil specified in the contract, it would refrain from doing what it had the right to do, and thereby it would give up a legal right–the right to continue making the grade of oil specified.
          1. Giving up what one has the legal right to do, the refraining of doing what one has the legal right to do, is a legal detriment to the promisee and sufficient consideration.
          2. Rst. 2d, 77: Illusory & Alternative Promises: Comment A: “Words of promise which by their terms make performance entirely optional with the ‘promisor’ do not constitute a promise.”
            1. Prof. notes this hypo: So, if A and B arrange for A to work for B for five years, but B reserves the right to terminate their agreement whenever she wishes, B’s promise is not a real one and so it cannot serve as consideration for A’s promise (to work).
              1. B can employ A or terminate A. Because terminating A would not individually constitute consideration, the whole thing doesn’t suffice as consideration. No enforceable contract.
          3. Output and Requirements Contracts
            1. Output: where a seller agrees to sell all “such goods as he should manufacture during a specified period” to a specific buyer.
            2. Requirements: where a buyer agrees to buy all its requirements from a seller.
            3. Do these types of contracts have sufficient consideration?
              1. Consider UCC, Sec. 2-306. UCC reads a good faith requirement into these kinds of contracts, and “best efforts” as well.
                1. Subsection (1): “such actual output or requirement as may occur in good faith.”
      7. Harrington v. Taylor & Webb v. McGowen
        1. Taylor was attacked by wife with axe. Harrington saved Taylor from Axe. Taylor offered to pay for her medical expenses. That offer was not enforceable. Harrington is the general rule. Moral or past consideration is not considered consideration to satisfy a contract.
        2. Although not bargained for, there are two circumstances where a promise might seem worthy of enforcement
          1. Promisor acts from a strong sense of duty (moral consideration)
          2. Promisor is seeking to recompense the promisee for a previously conferred benefit (past consideration)
        3. 2nd Rst., Sec. 86: VERY LIMITED EXCEPTION to the general rule that moral consideration is not enough: the material benefit enjoyed by the promisor must have been “received by the promisor from the promisee;” the promise is “binding to the extent necessary to prevent injustice” and may be limited if “its value is disproportionate to the benefit;” and the promise is NOT binding if the promisor “conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched.”
          1. This is very rigid, so few courts seem to follow this; carve out other exceptions.
      8. Options Contracts
        1. Options for the purchase of land, whereby the seller makes the offer to sell land irrevocable for a specified period of time, IF BASED ON VALID CONSIDERATION, are contracts which may be specifically enforced. If the option is NOT based on valid consideration, it is not a contract and will not be enforced.
          1. HOWEVER, an option is a collateral contract to an offer to sell land, and a failure to give consideration affects only the collateral contract to keep the offer open for a specified period of time, but NOT the underlying offer to sell the land.
            1. An option is an offer that becomes contractually binding b/c of the existence of consideration.
        2. Firm Offers under UCC §2-205
          1. An offer by a merchant which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the stated time (or reasonable time if not stated, no more than 3 months). Must be signed.
          2. UCC says an option for goods is binding if it’s signed in writing. If we’re not dealing w/ consideration here, what’s the basis for finding this promise legally enforceable?
            1. Remember, there were two ways for courts to determine a promise legally enforceable: consideration and form. So, this is a type of “form.”
        3. Restatement 2d §87(a)
          1. The rule requiring consideration for option contracts has been criticized:
          2. An offer is binding as an option contract if it
            1. is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or
            2. is made irrevocable by statute.
          3. An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
      9. Board of Control of Eastern Michigan University v. Burgess
        1. Facts: Π entered a contract with Δ for a nominal fee for the option to purchase Δ’s land. Π never actually tendered Δ the money. When Π tried to execute the option, Δ refused.
        2. Issue: Is there consideration for the option?
        3. Held: a dollar is valid consideration for options for the purchase of land. However, no consideration was received, so there was no option, but simply an offer by Δ to sell, which is revocable.
      10. Fisher v. Jackson
        1. Permanent Employment is terminable at the will of either party without liability to the other.
        2. Facts: Δ told Π to give up his job and work for Δ (for less money) under an oral contract for life or until he was physically unable to work. Π complied and then was discharged. Π acts to recover damages. Δ says the employment was not “for life”, but a permanent position as was advertised.
        3. Result: giving up a job is not adequate consideration, but an incident necessary to accept the offer.
        4. JJ suggests that the plaintiff’s lawyer could have made more of the fact that he was giving up some salary. That could be consideration.