Contracts Class Notes 10/16/03


Fischer v. Union Trust Co.


Did the father in this case make an effective gift to his daughter?


The father himself described what he did as a “nice Christmas present”. 


Was there an effective gift here?  The father gave the daughter a deed to the property.  The court says that “the delivery was complete”.  The thing is, there was a contract “inside” the deed that said the grantor (the father) would pay the mortgages on the property.


This lawsuit was the daughter against the father’s estate, not against her father’s creditors.


Once a gift is done, it’s done.  There was a gift, and the daughter owns the land.


But there was both a gift and a promise.  The promise was written on the deed.  The promise was to pay off the two mortgages outstanding on the land.  The problem is that you can’t give away something that isn’t yours.  The father gave away his ownership in the land and made a promise to his daughter to give her $8,000.  He died without performing the promise.  The daughter sued to enforce the promise.


Is this an enforceable promise?  The court rejects the idea that the daughter’s act of giving the father a dollar constituted real consideration.  The court says this was more a joke than anything.  That’s not to say that a dollar cannot be consideration ever, but on these facts it isn’t.


The court is looking for a bargain to enforce.  It doesn’t care whether the consideration is adequate.


Consideration is bargained for.


There are actually several reasons to reject the dollar in this case as consideration.


·        It’s not believable that $1 was traded for an $8,000 promise.  It just ain’t so.

·        When you have only a pretense of consideration, that’s not really consideration.  99% of the time, the court won’t pay attention.  We are looking for a real exchange.[1]

·        It’s a joke!  It’s not an exchange, it’s a pleasantry.

·        The dollar is given after the present is all set up.  The dollar looks like a small conditional gift.


Why is love and affection not consideration?  That’s certainly the father’s motivation in making his promise.  But that has nothing to do with consideration.  Consideration doesn’t mean motivation.  Consideration might be equal to motivation or it might be entirely different from it.[2]  “Love and affection” as consideration is…er, um…illegal.


When a father provides for a child, love and affection is a motivating factor in a gift, but it’s not consideration.


Gift transactions


In Hamer, there was a gift but also an element of exchange.  In Fischer, there is no element of exchange.  Note, however, in ordinary commercial transactions there is no problem finding consideration.


Simmons v. United States


Mr. Simmons caught Diamond Jim in Chesapeake Bay and tried to pass off his prize as a gift from the beer company.


Batsakis v. Demotsis


Things are bad in Greece.  Mrs. Demotsis promises to pay Mr. Batsakis $2,000 plus 8% interest.  After the war, Mr. Batsakis sues to collect on the promise.  At trial, he prevailed, but only got $750 plus interest.  On the plaintiff’s appeal, he got the whole $2,000 plus interest.


The writing was a lie!  But the court ignored the lie.  Lies are bad; however, the court treated this one as irrelevant.  Why was it in there?   Batsakis supposed that it would make the debt easier to collect at a later date.


The court figures out what the deal was: it was 500,000 drachmae now against $2,000 plus interest if and when they are able to get back to the United States.  The trial court seemed to find that the 500,000 drachmae were actually worth $750.


This was an illegal transaction under the law of the Nazi occupying power.  If the lender or borrower had been caught, they would have been dealt with harshly and maybe even killed.  The lender was really sticking his neck out to lend this money, and so the very high interest rate may well have been justified.


Mere inadequacy of consideration will not void a contract.


We want to promote trade between individuals.  The parties make the bargain, and the court enforces whatever bargain the parties make.  We aren’t going to scrutinize the fairness of the deal that closely.


There are some reasons for which we will not enforce certain promises.  We won’t enforce promises made under duress, by children, or by people who are not mentally competent.


Planks to board up windows cost more when a hurricane’s coming because they’re worth more.  You aren’t being coerced; you’re not under duress from the seller.


One basis for non-enforcement of promises is unconscionability.  This is relatively new and is tied to the adoption of the UCC.


The unconscionability of a contract is a question of law (for the judge) rather than a question of fact (for the jury).  If the contract shocks the conscience of a law-abiding person, the court may choose not to enforce the entire contract or just strike down the bad bits.


Was the contract in Batsakis unconscionable?  Was there a high degree of risk involved?  Did Batsakis have unreasonable power over the money-lending market?  Did Batsakis have a lot of money to spare, or was he down to his last several hundred thousand drachmae?


Why wasn’t the issue of unconscionability raised in Batsakis?  The whole issue was new back then.  Also, we only strike down promises that are really bad.


Once you can find a bargain, you enforce it.


Two hypotheticals on claim settlements


Here’s more on consideration in a different context.


Suppose the plaintiff and defendant are involved in an automobile accident in which the plaintiff is seriously injured.  The plaintiff claims that the defendant’s negligence caused the plaintiff’s injuries and the plaintiff sues for $1 million.  Both the plaintiff and defendant are vigorously represented, and the defendant argues that he is completely without fault.  The case is vigorously tried before a jury.  Before the jury comes back with a verdict, the plaintiff and his lawyers get nervous about walking away with nothing.  The defendant’s lawyers are also nervous about losing the whole $1 million.


The two sides come together and reach a compromise.  It is agreed that the plaintiff will surrender his claim in exchange for $400,000 paid by the defendant.  That’s done at 11 AM and then they go off to lunch.  The problem is that they forget to tell the judge and jury that they’ve settled the case.


The jury comes back with the defendant’s verdict and says there’s no liability at all, at which point the defendant says: “I don’t think I want to pay the $400,000 at all.”


Does the defendant have to pay?  The defendant would argue that the defendant gained no benefit and the plaintiff suffered no detriment.


Why do we make the defendant pay?  We want to allow the plaintiff and defendant to make settlements like this as a matter of public policy.


So, we will allow dropping valid lawsuits to be consideration.  But the problem is: what about invalid claims?


Suppose that we have Arnold running for Governor.  Ms. Itch[3] sues Arnold for emotional distress.  It’s a totally bogus claim, and that’s what Arnold says.  Itch says, “I don’t care, I’m suing anyway.”  She’s suing for $400,000 and Arnold promises to pay $200,000 for her to drop her claim.  This promise is not enforceable.  How come?  This is extortion.


The plaintiff knows that this is a bogus claim.  There is no “good faith” belief in this claim.  Itch knows that Arnold is at risk, and so she makes a credible threat to attempt to get money from Arnold.


So here are our policies: we want to encourage settlements out of court, but we want to discourage extortion.


Duncan v. Black


“The claim upon which settlement is based must be made in good faith [honestly].”


The Restatement Second says something quite similar.


There is a difference between the Duncan test and the Restatement test.


Duncan says that (1) the claim must be made in good faith and (2) the claim must have some substance.


On the other hand, the Restatement Second § 74 says you’ll have an enforceable settlement promise if either (1) the claim is in doubt due to uncertainty of law or fact, or (2) the plaintiff isn’t an extortionist, that is, the plaintiff believed the claim might be valid.  So with this test, you only need one or the other as opposed to both.


This is a very big, abstract doctrine of consideration.  It protects two policy interests: (1) the interest of enforcing socially useful settlement agreements and (2) the interest of preventing extortion.


Back to Class Notes

[1] If you want to fake an exchange to make a promise enforceable, don’t use a dollar or a penny.  Instead, trade something without a precise value or with sentimental value.  That probably won’t work either, but it has a better chance of working than the dollar.

[2] See Restatement (Second) of Contracts § 81.

[3] First name: Beatrice