The Three Great Theoretical Oddities of Common Law Contracts
Having essentially completed our main focus, namely, the practical aspects of contracts
such as negotiation, interpretation, drafting, and trouble-shooting contract problems, the
last lecture will take a look at the three great “Common Law Oddities” of contract theory.
To those who did not take my introduction class (or do not read about contract law for
pleasure) this will be new, and hopefully interesting. For those of you who were in the
introduction K class, it will go into these theoretical areas in more depth, and thus should
also prove enlightening!
I. Common Law Requirement of Consideration:
A. In the Common Law system, three initial steps must be made in order for a
contact to be formed: offer, acceptance, and consideration.
B. CONSIDERATION: This third element is unique to the Common Law.
Consideration is a legal concept which requires something of ‘value’ to be
exchanged between the parties before a valid contract is formed. Therefore, a
contract cannot exist without “consideration” being given by both sides.
1. Consideration can be money, goods, a promise to do something, or
anything else that changes the legal position (‘burdens’) the promisor.
2. It is often referred to by the Latin phrase quid pro quo (something for
something)
i.
Restatement §71: Requirement of Exchange; Types of
Exchange
(a)
To constitute consideration, a performance or a
return promise must be bargained for.
(b)
A performance or return promise is bargained
for if it is sought by the promisor in
exchange for his promise and is given by the
promisee in exchange for that promise.
(c)
The performance may consist of
(1)
an act other than a promise
(2)
a forbearance
(3)
the creation, modification, or destruction
of a legal relation.
1
(d)
The performance or return promise may be
given to the promisor or to some other
person. It may be given by the promisee or
by some other person.
ii.
Restatement §79: Adequacy of Consideration;
Mutuality of Obligation
(a)
If the requirement of consideration is met, there
is no additional requirement of
(1)
a gain, advantage, or benefit to the
promisor or a loss, disadvantage, or
detriment to the promisee
(2)
equivalence in the values exchanged;
(3)
"mutuality of obligation."
3. The following are NOT CONSIDERED ‘consideration’:
a. An illusory promise – one which the promisor actually has no
obligation to keep, does not count as consideration.
b. Past consideration is not valid – something that is already
done is done, and does not change the legal positions of the
promisor. Any goods or services to be exchange must be
exchanged at or after the time of the contract formation.
c. Pre-existing duty - A pre-existing duty does not count as
consideration.
4. Situations when consideration does not apply or is modified:
1. Donative Promises = Illusionary Promise:
a. In general, a promise to give a gift in the future
is unenforceable.
b. Pure gift:
i. Dougherty v. Salt (1919): Aunt writes
note promising nephew $3000 at her
death. Court held that there was no
2
contract as there was no consideration. P
gave up nothing - there was no
condition. Intent of grantor is not
enforceable.
c. Demand of specific conduct:
i. Hamer v. Sidway (1891): promise of
$5,000 to quit drinking and smoking.
ii. Court held that forbearing from
exercising a legal right constitutes a
consider action and thus creates a
binding contract.
d. Reliance on a Promised Gift:
i. Ricketts v. Scothorn (1898): promise by
grandfather to give granddaughter a
demand note for $2000 to allow her to
quit her miserable job if she chose.
Daughter quit job.
ii. Court held that if donee, in reasonable
reliance on the gift, incurs debt, expense
or significant change in condition, donor
may be estopped from revoking the
promise on grounds of lack of
consideration.
2. Promissory estoppel:
a. Restatement §90: a promise expected by
promisor to cause promisee to take or forbear
some action, and induces such action, is
3
enforceable if necessary to avoid injustice.
Remedy may be limited as justice requires.
3. Pure promise without consideration:
a. Baehr v. Penn-O-Tex Oil Corp. (1960): P was
owed money by a third party. Third party
claimed that D had all of its assets tied up. P
contacted D, seeking its money. D said they
would see to it that P got money. Court held that
this was not enough to constitute consideration,
despite P’s assertion that he delaying legal
action in exchange for the promise.
4. Illusory Promise:
a. Definition: a promise that does not bind
promisor to any affirmative action or
forbearance and thus is not a consideration.
b. Promise must be made and executed in “good
faith.”
i. Mattei v. Hopper (1958):
1. Developer agreed to buy land
w/in 120 days subject to
obtaining satisfactory leases for
projected shopping center.
2. Court held that a “good faith”
effort to obtain satisfactory leases
was a promise (non-illusory) and
thus was sufficient to create a
contract.
5. Moral obligations and Past Consideration:
4
a. Webb v. McGowin (1935): promisor saved by
employee who was hurt in process of saving
him, promised $15 per two weeks for life. Court
held that past consideration sufficed.
b. Standard: a promise maybe upheld based on
past consideration if the promisor himself
received a personal benefit for which promisee
could justly demand compensation.
c. Restatement §86: a promise made in
recognition of a benefit previously received is
binding to the extent necessary to avoid
injustice, unless the benefit was a gift or for
other reasons the promisor was not unjustly
enriched.
6. Pre-existing Duty – If a party does or promises to do what she is
already legally obligated to do, or forbears or promises to forbear from
doing something which she is not legally entitled to do, she has not
incurred the kind of “detriment” necessary for consideration.
a. Construction Contracts – demands for more money in the
face of threatened walk-out not consideration.
b. Rewards or Bonuses – police cannot collect rewards
c. Liquidated debt – a payment which is fixed and undisputed,
cannot be negotiated for consideration.
- agreement to take partial payment for outstanding debt not
consideration.
5
II. The Statute of Frauds and Contract Law
A. What Is the Statute of Frauds?
1. The "statute of frauds" - also commonly abbreviated as "SOF" was passed in
1677 in order to prevent wrongful K claims. While contracts normally do
not have to be in writing to be legally binding, the SOF requires that
certain types of contracts must be in writing and signed by both parties
in order to be valid.
B. The Purpose of the Statute of Frauds
As suggested by its name, a statute was created to assist society in preventing injury from
fraudulent conduct. Written agreements with signatures provide greater assurances of the
terms of the deal between parties including providing evidence that both parties agreed
that a deal was made. This requirement is intended to reduce the chances of litigation,
create clarity of the agreement, and also provides people with the opportunity to look the
terms and conditions over one last time before making the contract final.
C. What Types of contracts are Governed by a Statute of Frauds
Over time, certain types of contracts were identified as being the most susceptible to
fraud and frequently being of greater importance and dollar value. While the exact
requirements vary between jurisdictions, the following represents the most common areas
where a Statute of Frauds typically applies.
D. You can remember these areas with the pneumonic "MY LEGS" –
- Marriage – A promise for which the consideration is marriage or a promise of marriage
is within the statute of frauds. While unusual, we've all heard claims that "he promised
that if I married him he would buy me a house on the beach." Unless that agreement was
in writing, it's not enforceable.
Example: A offers to marry B. To induce B to accept the offer, A orally promises to
transfer certain stocks to B. B accepts the offer, but changes her mind prior to the actual
ceremony. Both promises to marry, and A’s promise to transfer the stocks, are all within
the Statute of frauds and therefore unenforceable because oral.
Exception:
1. If the oral K solely of mutual promise to marry (with no other “side agreement” to
transfer property).
6
- Year - An agreement that, according to its terms, cannot be performed and completed
within one year, it must be in writing.
Example: Boss and Employee agree that Employee will work for Boss for a 2-year
period beginning that day, the K terminable by either side only for cause. Violates SOF.
Scope:
1. Time runs from the making of the K date, not the time it will take the party to
perform
2. Performance must be impossible within the 1 year period
a. Lifetime Employment ? – OK
b. Employment for a fixed term ? – violates – can die, but K requires a
specific time of performance (K primary purpose not fulfilled. Death =
discharge, not performance)
c. Covenant not to compete – OK, death seen as “full performance” (no more
competition!)
d. Support to child (beyond legal duty) - example: pay for child until 21 –
OK – child could die within a year.
- Land – A promise to transfer an interest in land must be in writing.
Example: Mike, the owner of Blackacre, says to Tony, “I’ll sell Blackacre to you for
$100,000 to be paid in cash within 30 days from today. Tony says, “Great, we have a
deal!” and they both “shake on it” = both not bound by the agreement and neither can sue
for it to be enforced.
Scope:
1. Applies to all property interests (leases [more than one year by statute],
mortgages, easements)
Exceptions:
1. full performance by vendor
2. by virtue of significant reliance by the vendee
- Executors - Any promise to pay an estate's debts from the executor's private funds must
be in writing. A promise to pay the estate's debts out of the estate funds can be oral.
- Goods = Sales of goods of $500 or more, now included in the UCC.
Exceptions:
1. One sale verses several? – depends on whether the court determines the parties
meant a single K, or several individual Ks.
7
2. Contracts combining service and goods? – Where the K is primarily for the
provision of services, but also includes provisions for goods, the K is not covered
by the UCC, and standard SOF rules apply.
3. What about modifications?
A $700 contract that has been modified down to $400 can be oral. A $400
contract modified to $700 is governed by the Statute of Frauds and must be in
writing.
- Suretyship: A promise or contract to pay the debt of another is governed by the Statute
of Frauds and must be in writing. Both evidentiary and preventing/guarding people
against hasty oral promises they might later regret!
E. Requirements of the Statute of Frauds
Typically the statute requires several elements in order to be considered a valid and
binding agreement. The writing must:
(1) identify the contracting parties
(2) recite the subject matter of the contract so it can be reasonably understood
(3)provide the essential terms and conditions of the agreement.(4) signatures of both
parties.
The Uniform Commercial Code states for a sale of good, only the "party to be charged"
(the party against whom the contract is sought to be enforced) is required to sign. The
party seeking enforcement is conceding the validity of the written contract. In addition,
the quantity of goods must also be specified, e.g. 500 bottles of beer and not just "$500
for beer".
F. The Application and Effect of the Statute of Frauds
The Statute of Frauds makes an agreement that does not comply cancelable or "voidable"
by one of the parties pleading the Statute of Frauds. It does not make the contract "void"
contract or unable to be enforced, e.g. an illegal contract for the sale of drugs. In addition,
both parties can agree that a valid contract exists in court and that it can be enforced.
G. Exceptions to the Statue of Frauds.
There are times when a party to a contract that would otherwise be invalid under the
Statute of Frauds will be able to enforce it.
To remember these circumstances, use the "SWAP" pneumonic.
8
- Specially manufactured goods - Goods that have been manufactured per order and can
be identifiable to the order.
Example: Don orally orders the 50 motorcycles that Ted has on his lot and wants them
modified and custom detailed to say "Don's Delivery Service." Ted finishes 10 of them
and then Don tries to cancel the deal. In this instance, since the contract calls for
specifically manufactured goods, it falls within the exceptions to the Statute of Frauds.
- Written Merchants Confirmation - A confirmation of an agreement between two
merchants (not consumers) is sufficient to satisfy the Statute of Frauds. Merchants will
frequently invoice each other pursuant to oral agreements and the law recognizes this.
Example: An invoice identifying the goods, quantity and price pursuant to an oral order
and stating that the agreement is firm unless canceled within 5 days.
- Admissions in Court - A party to be charged can admit that there was an oral agreement
and thus making an oral contract enforceable.
-
Performance or Promissory Estoppel –
1. To the extent that one party has performed, it can remove an agreement from the
Statute of Frauds.
Example, Don orally agrees to deliver Ted 200 iPods in exchange for $3,000. Don
delivers 100 of them after which Ted challenges the agreement. There is an
enforceable agreement for 100 iPodsalthough not for the full 200.
2. The doctrine of "promissory estoppel" – as we know by know, PE is sometimes
used when there is a significant inequity that exists that would result in a
conclusion that society would deem unacceptable.
Example, Don promises Ted $600 to paint his house. Ted told Don that he was going
out to buy the paint later that day and Don gives Ted a ride to the store. A week later
Don claims there was no agreement since it was oral and thus unenforceable under
the Statute of Frauds. In this instance, Don cannot claim ignorance of the agreement
and he induced Ted to spend $200 worth of paint. He could have easily avoided Ted's
significant expense in time and buying paint. The concept of "fundamental fairness"
or promissory estoppel kicks in and will otherwise allow Ted to recover the cost of
his efforts.
To qualify as promissory estoppel, typically all of the following elements are
required:
1. A clear and definite offer was made (offer $600 to paint the house)
2. There was a reasonable expectation of reliance on the offer (Don reasonably
expected Ted to rely upon the offer, it wasn't said in jest)
9
3. There existed reasonable reliance on the offer by the party receiving the offer
(in our example, Don's promise to pay$600 to paint the house)
4. There was detrimental reliance on the offer (Ted's spending $200 on paint)
III: Common Law Oddity, the “Parole Evidence Rule”:
1. Definition: makes unenforceable any oral agreements
entered into prior to adoption of the written contract.
2. Restatement §213: a written agreement that is in itself
“completely integrated” effectively discharges any prior
agreement in its scope.
3. The varying case law:
a. Mitchill v. Lath (1928): oral agreement to
remove ice house as part of sale of land was
barred under parole evidence as the contract was
held to be completely integrated. To be
enforced:
i. Must be collateral in form (capable of
being a separate agreement) and does not
contradict terms of written, and
ii. Written contract fails to fully integrate.
iii. Rule: prior oral agreements only
enforceable if it has separate
consideration.
b. Thompson v. Libby (1885): Classical approach
to Parol Evidence Rule. P and D contract for
logs. P sues to get payment. D claims there was
a verbal warranty for the quality of the logs.
Court says that if contract is complete as written
court will assume that was all parties intended.
10
Collateral exception will not help here because a
warranty is a material, not collateral, term of
sale.
c. Masterson v. Sine (1968): Court allowed parole
evidence that contract included a “non-assign
ability” clause with regards to right to
repurchase property w/in 10 years.
i. If evidence of prior agreement was
credible, then written contract could not
be considered fully integrated.
d. Taylor v. State Farm Insurance (1993): P sues D
for bad faith in their defense of him after a three
vehicle accident. D settled case on behalf of P
for $2 million in excess of his insurance policy.
P wants to introduce parole evidence to clarify
something his attorney did. Court takes the
Corbin view--the judge should look at a contract
and the parole evidence rule to determine if text
is clear. If the text alone is clear, fact-finder
does not get parole evidence.
4. Current trend:
a. Masterson is the majority approach.
b. Explicit merger clauses have become more
common.
c. “True intent” is touchstone for court.
d. UCC and Restatements state that parole rule
will not bar evidence of trade usage or prior
course of dealings. Both may be used to explain
or supplement written contract, but may not
contradict express written conditions. See
Columbia Nitrogen (1971): Court upheld
11
admissibility of trade usage to establish right to
renegotiate contract where precipitous change in
price of phosphate occurred.
5. No application to oral agreements made after contract.
Some Problems, What do you think ?
1. George Washington’s friend Benny Arnold, tells him, “If you walk across the street
with me now and go into the hardware store, I’ll buy you an axe.” Washington crosses
the street and enters the store. Arnold reneges. Has Arnold breached the K?
2. ABC Bakery has a contract with Marie Antoinette to deliver 1,000 cakes for a Bastille
Day Party Antoinette is hosting. ABC Bakery fails to deliver, and Antoinette threatens to
sue. ABC says, “If you agree not to sue, I’ll give you a strand of black pearls.”
Antoinette agrees, and accepts the pearls. Is the agreement enforceable?
3. The New World Cruise Company hires Christopher Columbus to perform a publicity
stunt for them – Columbus promises to sail due West to discover new lands, in return for
which NWCC promises to pay 500 barrels of wine on completion.
Just before Columbus sets sail, he decided that the payment isn’t big enough, and refuses
to go unless NWCC “ups the ante”. NWCC says, “OK, we’ll also name a town after you
if you are successful.” Columbus agrees sails, discovers America, and collects 500
barrels of wine; however, NWCC refuses to name a city after him. Under the Common
Law principles, can Columbus enforce the capital-naming promise?
4. Lear agrees to lease his castle to Richard for nine months, with the lease to begin in six
months from the signing of the K.
a. Must the lease be in writing under the Statute of Frauds?
b. Say instead that the lease is to begin immediately, and to last for nine months.
Must the lease be in writing?
5. Charlie Tuna orally agrees to supply Chicken of the Sea with all the fish bait she
requires over the next 18 months. Charley fully performs his side of the agreement, but
Chicken of the Sea fails to pay up. Charlie sues. Chicken of the Sea defends by arguing
that the K is unenforceable because it falls within the one-year provision of the Statute of
Frauds. Who wins?
12
6. Washington and Adams agree for Adams to sell Washington 1000 Declaration of
Independence Commemorative Placemats, which Washington intends to re-sell. They
sign a written K, which both parties intend to represent all aspects of their agreement, and
which both parties intend to be final. One day after the writing is signed; the parties
orally agree that the price to Washington will be adjusted from $.40 to $.30 apiece.
Adam then ships the mats, with an invoice showing $.40 apiece. If Washington refuses,
and Adam sues, may Washington prove in court that the oral modification occurred?
13