(2) Consideration and Promissory Estoppel Flashcards
Consideration:
• Old analysis: Did the promisee suffer a detriment, or give a benefit to the promisor?
• Modern analysis: whether there is a bargained-for exchange?
o Are the promisor and the promisee reciprocally induced by what the other party is giving?
• R2K §§ 71, 79
Consideration tests:
• Benefit/Detriment test (not the main test anymore):
o Did the promisee suffer a detriment, or give a benefit to the promisor?
• Bargained-for Exchange test:
o R2K §§ 71, 79
o Are the promisor and the promisee reciprocally induced by what the other party is giving?
No consideration? Common issues:
- Conditional gifts
- Illusory promises
- Past consideration
- Settlement agreements for worthless claims
- Contract modifications
- Discharge of duties from an existing contract
Conditional gifts:
• Sometimes a promisor makes a promise and asks the promisee to do something, but not because he is induced by the promisee’s performance.
• Rather, the promisor promises to make a gift and stipulates to a condition that the promisee must
fulfill before he can receive the gift.
• Consider the “tramp” hypo
o “If you go around the corner to the clothing shop, you may purchase an overcoat on my credit.” The walk to the shop did not induce the promisor to make his promise, but was instead a gift, conditioned on the promisee’s walking to the shop.
• Helpful tip:
o Ask if there is a benefit to the promisor if the condition is met.
o If so, it is a fair inference that the promisee’s action or inaction was requested as consideration.
Illusory promises:
• Commonly an issue with promises that call for one party’s total discretion
• Examples:
o “I will let you borrow my car this week unless I want to use it, in which case I can keep it.”
• Courts prefer a construction of a so-called illusory promise which will make it enforceable, so they often find that there is a duty to act in good faith.
• Satisfaction clauses:
o Courts will likely impose a subjective standard for personal taste, and objective for a commercial standard
• Note:
o Alternative promises are valid consideration, so long as each separately would constitute consideration.
Settlements based on worthless claims:
- R2K § 74(1)
- Some jurisdictions say this cannot constitute consideration, while others would say it is sufficient.
- Restatement says that forbearance to assert a claim, or the surrender of a claim, which is invalid is not consideration, unless the claim or defense is doubtful because of an uncertainty of fact or law, or that party believes it may be fairly determined to be valid.
Contract modification and the pre-existing duty rule:
• Primary concern is the “hold-up” scenario (“I may walk out unless you give me X”—may be duress!)
• The general rule is that, under the common law, consideration is required to modify a contract (to avoid an existing duty issue). BUT, there are exceptions - § 89
• R2K § 89
o A promise modifying a duty under a contract not fully performed on either side is binding
(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made; OR
(b) to the extent provided by statute; OR
(c) to the extent that justice requires enforcement in view of material change of position in reliance on the promise.
o Note: R2K § 73 (Watch out for this - Legal duty already owed)
• Note alsoa - Jockey illustration (exception to general pre existing duty rule)
o UCC § 2-209(1)
• No consideration needed for modifications to be binding
• However, the UCC imposes a duty to act in good faith; UCC § 1-201 (definition for “good faith”)
Discharging of duties:
• Mechanisms
o Agreement of mutual rescission
• The parties can rescind an agreement by making a subsequent promise-for-promise agreement to discharge the parties’ remaining duties, but ONLY IF the contract is at least partly “executory” (unperformed) on both sides.
o Substituted contract
• If an obligor as to some duty (contractual or not) offers the obligee a promise of a different performance in satisfaction of the original duty, the obligee is free to refuse or accept that promise. If the obligee accepts→ obligor’s original duty is discharged if the discharge is supported by consideration.
o Novation (need third party)
• A and B have a contract
• C takes B’s place
• A can now sue C for breach of contract and B is discharged
Discharging of duties continued:
• Accord and satisfaction
o A party promises to undertake a different obligation, but is not relieved until that obligation is completed! If the executory accord is not performed, the obligee may sue under the OG contract or on the accord agreement.
• Substituted performance
o If an obligor (or a 3rd party) offers the obligee a different performance (not a promise) for the one promised in the OG contract, the obligee is free to refuse or accept that performance in substitution for the original duty under the contract. If the obligee accepts, it immediately discharges the obligor’s original duty IF the discharge is supported by consideration.
• See p.254 in the textbook for a helpful chart
• Note that consideration is required for each of these scenarios.
Promissory estoppel:
• R2K § 90 (Promise made BEFORE the act/benefit):
- An alternative theory of recovery when there is no consideration to support a claim for breach of contract. Always start by looking to consideration!!
• Foundational elements checklist:
o Has there been a promise??
o Promisor:
• (2) Did promisor have a reasonable expectation that the promise would induce the promisee to act/forbear from acting?
o Promisee:
• (3) Did the promise induce ACTUAL reliance?
• (4) Was the detrimental reliance by the promisee justified?
o Enforcement:
• (5) Is enforcement of the promise necessary to avoid injustice?
o Damages:
• Limited as justice requires
• Generally, reliance damages
Notes on construction contracts and promissory estoppel:
• Drennan v. Star Paving on p.301 is an example; R2K § 87(2)
• When a subcontractor makes a bid, it presumably knows that the general contractor is going to rely on that bid to make its own bid to the developer/owner.
• The court in Drennan held that the subcontractor’s bid could not be revoked because of the general contractor’s reliance on that bid:
o Even though there is no consideration for the subcontractor’s bid, the subcontractor is estopped from claiming lack of consideration as a defense when the general contractor sues for breach of contract.
o The subcontractor made an implied subsidiary promise not to revoke the bid.
• Note: from casebook, p. 303, “few courts have adopted § 87(2), even in construction bid settings.”
Promissory restitution:
• Promise made AFTER the act/benefit:
- R2K § 86(1)a - This is a stretch. Most states will not follow this (b/c it’s past consideration)
o A promise,
o Made in response to a material benefit already received,
o By the promisor,
o From the promisee, and
o Enforcement of the promise is necessary to prevent injustice.
• Not enforceable if the benefit is conferred as a gift, the promisor is not unjustly enriched, or the value of the promise is disproportionate to the benefit received. R2K § 86(2).
• Look for an act by the promisee that confers a benefit on the promisor, then a promise by the promisor to the promisee. (The benefit must precede the promise!) See, e.g., Webb v. McGowin (p. 322).
Unjust enrichment:
- Restatement (Third) of Restitution and Unjust Enrichment (Not contract law)
- There is NO PROMISE HERE.
- § 1: A person who is unjustly enriched at the expense of another is subject to liability in restitution.
- Here, there is no promise. However, there must be (1) enrichment/benefit that is (2) unjust to retain without compensation.
