Bargain Theory of Contract/Consideration Flashcards
Nudum Pactum
“Naked or bare promise.” An agreement or promise that is made without consideration and is hence unenforceable.
What is consideration?
A threshold requirement to distinguish which promises are enforceable by contract and which are not. It’s a way to make contracts about the enforcement of promises that arise out of exchange transactions.
A Tautology: Both the thing that is required for a contract and the process by which consideration is created.
What are examples of mutually reciprocal inducement?
I want to pay you $10,000 to paint my house: You are painting my house for $10,000, I am paying you so my house gets painted.
What is an example of not mutually reciprocal inducement?
Promisor offers promisee a dry erase marker if promisee picks it up at my house.
Promise induces the detriment: promisee would not be spending the gas and time to pick up the dry erase marker if the promisor was not promising the promisee the dry erase marker.
BUT detriment does NOT induce the promise. The promisor doesn’t care about the gas and time spent, that’s not what’s inducing the promisor to give the promisee the marker. (If the promisee lived right next door and just had to walk for 5 seconds to get the marker it wouldn’t make a difference to the promisor).
What is the legal detriment test?
- Is either party doing something they are not legally obligated to do either statutorily or contractually?
- Is either party refraining from doing something that they have a legal right to do?
What is an example of where there is no legal detriment?
- Dad promising son to pay him if he doesn’t speed. No detriment on the son’s part because he already had a legal duty to not speed (pre-existing).
- Neighborhood promising cop to pay her extra for making extra rounds. No detriment on the cop’s part because she already had a contractual obligation to patrol the neighborhood.
What is an example of an appropriate bargained for exchange that incurs a legal detriment?
Promisor offers promisee $100 in exchange for promisee (who is over 21) to not smoke for 1 year.
Detriment: Satisfied because promisee is performing an act they are not required to perform (quitting smoking), and refraining from doing something they have a right to do (smoke)
Bargained for exchange: Satisfied because promisee is incurring a detriment induced by the promisor’s $100, and promisor was induced to pay $100 by promisee’s incurring of a detriment (quitting smoking)
How do the courts actualize the bargain theory?
By looking at the benefits and detriments, not at the comparative value of what is being exchanged.
How do court’s determine seller’s intent?
Objective standard rather than subjective: viewpoint of the reasonable buyer. In order to obtain the most efficient transaction costs, the courts decide to require the jokers (unreasonable people) to adjust.
How does the restatement handle contracts entered into by intoxicated persons?
§ 16: No contract can be enforced against a party induced to do so under the influence of alcohol if the inducing party is attempting to enforce the agreement.
A contract made by a person who is so drunk he does not know what he is doing is voidable if the other party has reason to know of the intoxication. If there is some understanding of the transaction, avoidance depends on a showing that the other party induced the drunkenness.
What are the theories of consideration
FERM
F: Functional theory of consideration: There is a purpose served, ceremonial aspect. (Slapping the Scottish boy on the head: imprints the event on his memory, ritualistic, both parties understand the significance, protects both parties because they understand what they are getting into).
E: Economic (Law & Econ/Efficient) theory of consideration: Whether the parties would have wanted and expected the promise to be enforced at the time they made it. If they did, the court will use its resources to enforce the agreement. Tries to remedy the easily manipulated consideration elements by ignoring trivial consideration, or when clear intent is present allows the promise to be enforced.
R: Realistic Theory of Consideration: Courts use consideration as a lever to determine which contracts to enforce.
M: Moral Theory of Consideration: We want as a society people to keep contracts. Concerns over fairness, it’s not fair for someone to sign, do the work, and then try and have a party back out.
Where is consideration in the Restatement?
§ 71
What is the test for consideration?
- Was there a benefit or detriment?
- Was there inducement?
How does the UCC handle consideration?
– The UCC barely mentions consideration.
– Deals with goods and merchants, so assumes people know how to make a contract with proper consideration.
– When it mentions consideration it’s usually in the context of modification of an existing long-term contract.
– UCC 2-306: Allows for requirements contract to not have consideration
What are case illustrations of consideration?
- Hamer vs. Sidway: Uncle says he’ll give his nephew 5k if his nephew doesn’t drink, smoke, or gamble until he’s 21. At the time he could have legally done all these things. Court found for nephew, saying that he incurred the detriment of forbearance refrained from exercising his legal right to do these things induced by his Uncle’s promise of money. Johnson says this is a failed gift transaction, not a contract.
- Lakeland v. Columber: Court held that in at-will employment, an employer’s forbearance from firing an employee constitutes consideration. D breached noncompete after being terminated by P. At the time he agreed to the noncompete clause, D was an at-will employee of P, (no term K) for three years. He signed the noncompete, which required nothing in exchange for his signature. D argues that there was no consideration D promised to forbear from competition, but P made no return promise (no exchange). Employer’s detriment = not exercising a legal right to fire an employee. Employee’s benefit = continuing employment. Majority signals that they wouldn’t have enforced this noncompete if he had been fired a week later instead of ten years later.
- Fortune Magazine: If an advertisement is specific enough, it falls outside of an advertisement and into an offer. Magazine says open this letter to get a free calculator, but when you opened the letter it said you have to subscribe to get a free calculator. Court held that this was a unilateral offer which became a unilateral contract once opened. Fortune magazine’s “benefit” was the letter being opened.
- Employee injured on the job forebears a workers comp claim due to the promise of “lifetime employment.” He is fired a year later, and the company says the claim is invalid due to lack of consideration because workers comp was the only allowable remedy. The employee would win. If you think you have a valid legal claim and forebear it that is consideration.
- Eastern Airlines: Requirements contracts do not lack mutuality and are valid even though the amounts required by the buyer may vary. Requirements contracts are policed in the UCC by the doctrine of good faith (2-306). Good faith is measured in large part by commercial standards of fair dealing. Fuel Freighting isn’t a breach because of the parties’ prior actions (course of dealing).
Eastern has a requirements contract with Gulf Oil for jet fuel. Price of the fuel is based on an oil index, but the index only listed the old govt. price which was lower than the new price. Gulf argued that the requirements contract was vague & indefinite and lacked consideration because there was no mutuality (no mutuality because Eastern is under no contractual duty to purchase fuel from Gulf). Gulf also argued that Fuel Freighting was a breach of contract (fuel freighting: order more fuel at locations with lower prices and less fuel at locations with higher prices). - Professor with tenure is recruited by another school with offer of tenure and salary increases. Professor gets fired from new job, employer says there was no consideration for promise of tenure. Professor wins because he incurred a detriment by giving up another tenured position.
