Contracts: Mutuality of Obligation Flashcards
What is an illusory promise?
An illusory promise is usually one in which the promisor has unfettered discretion whether to perform. Each party to a contract must assume some obligation. Sometimes, a promise is merely illusory.
Are output or requirement contracts illusory since the other party can simply choose not to perform?
No, these contracts are now usually enforceable because there is a good faith duty to give best efforts. Courts will impute terms sufficient to cure excess discretion that would otherwise render promise illusory.
McMichael v. Price
Facts: Defendant refused to pay the plaintiff in a requirement contract claiming it was illusory and therefore no mutuality because the plaintiff could have not sold anything
Rule: Requirement and Output contracts are not illusory as there is a good faith duty to give best efforts.
Wood v. Lucy, Lady Duff-Gordon
Facts: Plaintiff contracted to sell products under the defendants brand in exchange for a percentage of the profit. Defendant breached claiming it was an illusory promise as the defendant could have made no effort to sell.
If you condition your acceptance on passing inspection will that be an illusory promise since it is under your control to accept the results of the inspection?
Omni Group, Inc v. Seattle-First National Bank (pg. 157)
Facts: Defendant contracted to sell land to the plaintiff if he found the inspection “satisfactory.” Defendant breached claiming illusory promise so no contract.
Rule (1): A contract based on whether one party finds something satisfactory contains mutuality as there is a duty to make the judgment in good faith.
Rule (2): Seemingly illusory terms such as “satisfactory” can be enforced by the courts by looking at objective, reasonable market standards.
What is a requirements contract?
In a requirements contract, one party agrees to sell all that the other party requires.
Seller may sell to other buyers, but buyer may not buy from other sellers.
The seller gets the benefit of all the buyer’s business.
The buyer gets the benefit of a steady supply, usually at a preferred or stable price.
What is an output contract?
In an output contract, one party agrees to buy all that the other party can produce.
The buyer can buy from other sellers, but the seller must sell all its output to the buyer.
Seller is assured that it can sell whatever it makes.
Buyer is assured of some supply, usually at preferred or stable price.
