Even More About Bargains .
..
Contracts – 1.24.2011
Prof. Merges
Bargain vs. Performance
• The bargain or exchange
–May be “promise for promise”, or
–Promise for an action, i.e.,
performance
Promise for promise
• X promises to work for Y for one year
• Y promises to pay X monthly
Promise for performance
• X says, “if you carry this package to the
UPS office I will give you $10.00
• The promisor bargains for an action,
seeks an action to “close the bargain”
or exchange
• Unilateral K
Performance
• Often separate in time from the promise
• Bilateral K: The return promise may be
for a performance far in the future
• In a bilateral K, a return promise binds
the parties.
When is performance
required?
• X promises to work for Y for a year,
conditioned on Y’s payment to X at the
end of each month
• Y misses two months’ payments
• X is not required to work the next
month
Rights and duties
• Under the K, X has the right to receive
payment for his work
• And Y has a duty to pay
• After Y’s non-payment, X’s duty is
suspended, perhaps at an end
Wesley Newcomb
Hohfeld.
Fundamental Legal
Conceptions, As
Applied in Judicial
Reasoning and Other
Legal Essays . Yale
University Press,
New Haven, 1923.
Strong v. Sheffield
Strong v. Sheffield
• Procedural History
Strong v. Sheffield
• Procedural History
• Trial court: judgment for P; General
term reversed
Strong v. Sheffield
• Promissory Note?
• General Term?
Strong v. Sheffield
• Promissory Note?
• General Term?
– Maker or endorser
– Payee
Facts
• P, Benjamin Strong, sold a business to
Rard Sheffield, his niece’s husband
• “Later,” Rard’s debt was embodied in a
promissory note, or a “demand note”
• This converted the contractual debt
from Rard to B. Strong into a
negotiable instrument -- due on
demand to the note’s holder
Charles Andrews
1827-1918
What is “the general rule”
Andrews recites at p. 69?
What is “the general rule”
Andrews recites at p. 69?
“. . . The general rule that a
promise, not supported by
consideration, is nudum
pactum . . . “
What exception does he
mention?
What exception does he
mention?
• “The contract between the
maker or endorser of a
promissory note forms no
exception” to this general rule
Why is there a “no inquiry
into consideration” rule for
promissory notes?
Negotiable Instruments – Quick
Summary
• Before the UCC, “negotiable instrument”
was generally viewed as synonymous
with negotiable paper or bills and notes.
• “Simple forms of contract long
recognized in the world's commerce and
governed by the law merchant." 1
Joseph F. Randolph, A Treatise on the
Law of Commercial Paper § 1, at 1 (2d
ed. 1899).
"Defined most broadly,
commercial paper refers to any
writing embodying rights that
are customarily conveyed by
transferring the writing. . . .”
Richard E. Speidel, Negotiable
Instruments and Check
Collection in a Nutshell 1 (4th
ed. 1993).
Consideration and commercial
paper
• “The law governing commercial
paper precludes an inquiry into
the consideration as against
bona fide holders for value
before maturity . . . .”
Why?
“A large subset of commercial paper
consists of such writings that are
negotiable, which means that the law
enables a transferee to acquire the
embodied rights free of claims and
defenses against the transferor."
Richard E. Speidel, Negotiable
Instruments and Check Collection in a
Nutshell 1 (4th ed. 1993).
commercial paper. 1. An instrument, other
than cash, for the payment of money. •
Commercial paper -- typically existing in
the form of a draft (such as a check) or a
note (such as a certificate of deposit) -- is
governed by Article 3 of the UCC.
Credit and economic activity,
growth
• Negotiability allows merchants
to get their cash faster, buy
new inventory faster, sell more
goods – all of which increases
the velocity of economic
activity
Why not relevant here?
• “Has no application where the suit is
between the original parties to the
agreement”
• No bona fide purchaser (BFP) issue
• Policies favoring negotiability, flow of
credit, are not implicated here
What was “the original deal”?
What was “the original deal”?
Mr.
Sheffield
Promise to
repay
$$
Mr.
Strong
What was “the second deal”?
Mr.
Sheffield
Promise to
repay
Business
Endorsed:
Mrs.
Strong
Mr.
Strong
Promissory
Note
Mrs.
Sheffield
Promissory
Note
Mr.
Strong
Promissory
Note
Mrs.
Sheffield
Mr.
Strong
????
What is the consideration issue?
What is the consideration issue?
• What did Mr. Strong promise
Mr. and/or Mrs. Sheffield?
What did Mr. Strong say?
“[I]f you will give me a note, with
your wife’s endorsement I will
not pay that note away; I will
not put it in any bank for
collection, but will hold it until
such time as I want my
money.”
Why wasn’t this
consideration?
Why wasn’t this
consideration?
“There was nothing on the face of the
note to prevent an immediate suit on it
to recover the debt” – p. 70
Wife’s endorsement
• Essentially a guarantee of payment
• Says in effect, “I will back this debt with
my assets”
“Illusory Promises” – Rest. 2d §
77
A promise or apparent promise is not consideration if
by
its terms the promisor or purported
promisor reserves a choice of alternative
performances unless
(a) each of the alternative performances would have been
consideration if it alone had been bargained for; or
(b) one of the alternative performances would have been
consideration and there is or appears to the parties to be
a substantial possibility that before the promisor
exercises his choice events may eliminate the alternatives
which would not have been consideration.
Mattei v. Hopper
Fee Schedule – Contra Costa
County 1959
Office work or consultation:$20.00 per hour (down from
$25.00 in the 1957 Schedule) Drafting Real Property
Purchase Agreement:$50.00Drafting miscellaneous
contract:$25.00Drafting a General Partnership
Agreement:$100.00Ordinary Will:$15.00Trust
Will:$50.00Trial Per Diem:$175.00Depositions in
defense cases:$50.00Adoption:$150.00Default
Divorce:$250.00 (Property Settlement Agreement $50.00
extra)Handling Quiet Title action:$200.00Drafting
Lease:$50.00 or 5% of the first-year's rent Handling a
civil or a criminal appeal,from filing through oral
argument:$250.00
• Procedural history
Terms of the deal
Terms of the deal
• Deposit on full payment amount
• Closing w/in 120 days
• “Subject to Coldwell Banker & Co.
obtaining leases satisfactory to the
[plaintiff].”
Who wants to negate (renege on)
the deal?
Who wants to negate (renege on)
the deal?
• Why?
• One theory: “economic holdout” or
“holdup”
Assembling parcels for
development
Separately
owned parcels
Economic Advantages to Being
the “last holdout”
• Entire value of project is “at risk” for
the party assembling the parcels
• Can lead to “extortionate pricing”
Defendant’s 1st Argument
Defendant’s 1st Argument
• Deposit receipt was merely an offer
• Obtaining high-quality lessees and
informing defendant of that would
constitute acceptance of the offer
Offer-Acceptance
• Without proper acceptance of a binding
offer, there is no contract
• Differs from consideration, in which
there is at least the appearance of a
completed deal – the only question is
whether the completed deal is a “true
bargain”
What is defendant’s
consideration argument?
What is defendant’s
consideration argument?
• The clause making the lessees
“satisfactory to the purchaser” gave
the plaintiff an “out”; no real obligation
at all – thus no consideration for
buyer’s promise to convey title
What is the first argument
that “satisfation clauses” can
be binding?
What is the first argument
that “satisfaction clauses”
can be binding?
• Satisfactory to a “reasonable
person” – applies with respect
to operative fitness,
mechanical utility, etc.
Rest. 2d sec. 228
A contracts with B to install a
heating system in B's factory,
for a price of $20,000 to be paid
"on condition of satisfactory
completion." A installs the
heating system, but B states
that he is not satisfied with it
and refuses to pay the $20,000.
B gives no reason except that he
does not approve of the heating
system, and according to
experts in the field the system
as installed is entirely
satisfactory. A has a claim
against B for $20,000 since it is
practicable to apply an
objective test to the installation
of the heating system.
Fancy, taste or judgment
• Different standard applies –
difficult to apply objective
test in these areas
A contracts with B to paint a portrait of
B's daughter, for which B promises to
pay $5,000 "if entirely satisfied." A
paints the portrait, but B honestly
states that he is not satisfied with it and
refuses to pay the $5,000. B gives no
reason except that the portrait does not
please him, and according to experts in
the field the portrait is an admirable
work of art. A has no claim
against B since it is not
practicable to apply an
objective test to the painting.
A contracts with B to paint a
portrait of B's daughter, for
which B promises to pay
$5,000 "if entirely satisfied."
A paints the portrait, but B
refuses to even look at the
portrait or to pay the $5,000.
What result?
What result?
“[T]he promisor’s determination
that he is not satisified, when
made in good faith, has been
held to be a defense to an
action . . .”
-- P. 74, par. 2
Where is the ¢ ??
Where is the ¢ ??
“[T]he promisor’s duty to
exercise his judgment in
good faith is an adequate
consideration to support
the K.”
The law of “satisfaction” clauses
• California cases
• How does this court handle them?