Contracts Class Notes 10/23/03


Exam review times: Friday October 24 at 9 AM, Wednesday October 24 at 4 PM, Thursday October 30 at 2:30 PM, and Friday October 31 at noon.  All of these will be in Rm. 348.


Allegheny College v. National Chautauqua County Bank


Mary Johnston made a promise to the college in writing to give them $5,000.  The promise is to be performed upon her death by her estate.  While still alive, she does two things: she gives $1,000, and then repudiates the promise for the other $4,000.  Then she dies and the college sues her estate.  The college is successful and recovers the $4,000 from her estate with the help of the Court of Appeals of New York and Cardozo, who wrote this opinion.


The question is: why does Cardozo enforce this promise?[1]  Is there consideration?  In order for there to be consideration, there must be something that Johnston was seeking and that the college gave her.


When did this promise become enforceable?  It became enforceable when the college received the $1,000.  There is nothing that makes the promise enforceable before then.  There is nothing in this opinion that would result in enforcement if the $1,000 hadn’t been given and accepted.


But just what is it that Johnston is seeking in return for the promise of the rest of the $4,000?  She got a promise in exchange for a promise.  The college promised to memorize her in a small way.  That’s an exchange, and that is going to make the $4,000 promise enforceable.


Where and how did the college promise to memorialize Johnston?  There is no express promise, but Cardozo suggests that there is an implicit promise.  If Johnston wrote a check, gave it to the college, and they took it, it is suggested that this action implies an intent to memorialize Johnston as soon as the rest of the money comes in.


This is really reaching for consideration.  This is working awfully hard to find an exchange.  Sometimes the facts are so strong that it is easy to imply a promise.  Here, the facts were not strong at all.


When the promisee is some charitable organization, the court will work hard to find consideration or, as an alternative, reliance on the promise, and therefore come up with a reason to enforce the promise.  That’s what you find in this case.


Cardozo is working hard to get future courts to enforce charitable subscriptions.  There’s no doubt that he could have had stronger facts to work with.


Restatement § 90


In Restatement Second § 90(2), charitable subscriptions and marriage settlements are given special status.  Unlike other promises, there is no need to show that such promises induced action or forbearance.


Under § 90(1), you need a promise that it is reasonable to think that the promisee would rely upon.  There’s also this bit about justice…that’s pretty vague.  § 90(2) suggest that charitable subscriptions are automatically enforceable.


Lessons of Allegheny College


What do we learn from Allegheny College?  You can bargain for a charitable promise, and you can have consideration.  Some charitable promises are enforceable on these grounds.  Other charitable promises may be enforced on the basis of foreseeable detrimental justifiable reliance.


The other thing to learn is that courts try to be helpful to charities just like Cardozo was helpful to Allegheny College.  They will find consideration and exchange in a way that they wouldn’t normally find consideration and exchange with regular old people or businesses.  Also, courts will find reliance and make promises fully enforceable in favor of a charity in cases where they normally wouldn’t.  Charities will get a lot of breaks in the courthouse.


That gets us to § 90(2), which says that basically charitable subscriptions are automagically enforceable.


Notice that in the note cases that some states “swallow” § 90(2) in full, such as in Salsbury v. Northwestern Bell Tel. Co.


The few courts that address Salsbury directly have rejected it.  However, the common belief is that charitable subscriptions are enforced.


If you’re thinking about repudiating a promise to a charity, you better check the law of the jurisdiction you’re in.  In most jurisdictions, you can bet that the promise will be enforced.  On the other hand, if the promise was “ill-considered” or extravagant in light of the promisor’s resources—factors that have nothing to do with consideration or detrimental reliance but have a lot to do with the question of whether or not to enforce promises—the promise may not be enforced.


Cardozo at work


Cardozo works real hard to find consideration in Allegheny College, and one justice dissents.  This dissent would be generally regarded as right if the plaintiff were not a charity.  Also, there are a lot of dicta in the opinion about promissory estoppel, but the case is not decided on that basis.  Why did Cardozo include all that stuff?  Or on the other hand, why didn’t he apply promissory estoppel to this case?


Cardozo says there are basically two possible grounds for enforcement.  First, you could use bargained-for consideration.  Alternatively, you could use detrimental reliance (AKA promissory estoppel).  If you find valid consideration, it would be a mistake to mess around with promissory estoppel.


It doesn’t please a reader of exams when you have a business contract with clear consideration and you decide to write a bunch of stuff about promissory estoppel and § 90.


Why does Cardozo hang his hat on consideration and not § 90?  What’s wrong with this case from a § 90 perspective?  Was there any reliance here at all?  Did the College do anything in reliance of Johnston’s contribution?  No, not at all.


When there is no reliance, § 90 and promissory estoppel do not apply.


That’s why Cardozo goes for consideration.  Also, when we don’t have a charity in the picture, we’ll look for serious, substantial reliance.  If that’s lacking, we won’t enforce the promise.


Furthermore, in this particular case, it is far from unconscionable to enforce this promise because the promisor got something.  This was a donative promise, primarily made out of “affection” for the College.


A “smidgen” of reliance will not cause justice to demand enforcement unless you are dealing with a charity as the promisee.


Overall, this case leads us further down the road to enforcement based on unbargained-for detrimental reliance.


When the established law gives you an answer that you don’t like, courts may look around for ways to get around enforcing a promise that they don’t like.


We’ve looked at family cases and charitable cases, but now we will look at business cases.


East Providence Credit Union v. Geremia


The Geremias secure a loan by giving the lender an interest in their car.  How valuable is a car?  It might have zero value if it gets stolen or damaged.  If you’re a lender and you take a security interest in a car, you require the debtor to take out insurance on the car.


Part of the agreement is that the insurance company will notify both the creditor and debtor if the insurance is about to lapse due to late payment of premiums.  The Geremias fall on hard times and fail to make payments.  The creditor sends them a letter that if the Geremias fail to pay, the credit union will pay the premiums and will add the cost to the principal of the loan.


Was there a promise here?  Did the credit union promise to pay the insurance premiums?  They did not do so in the telephone conversation.  All that was discussed was whether the debtors should get in touch with the treasurer.


The letter is at least a threat.  It says if they don’t shape up, the payments will be made for them.  But is there really a promise here?  We will come back to this question when we discuss agreement formation.  It is surprising that this issue was not discussed in the opinion; it’s a more difficult matter than it seems.


For our purposes, we assume that there was indeed a promise.  The question at hand is whether the promise should be enforced.  The court considers two alternative bases for enforcement:


1.     Was there consideration for the promise?  The lender promised to pay the premium in exchange for the debtors paying back the premiums with interest.  This is a typical lender/borrower situation.  A creditor lends you money today in exchange for the promise to repay with interest.  Was that the situation here?  The amount of the interest on the premium would have been tiny.  Also, the creditor is not motivated by wanting to make a profit on loaning the premium payments.  The creditor is making a threat to try to keep the car insured.  Consideration is relatively thin here.

2.     Did the Geremias rely on the promise to their detriment?  They didn’t pay the premiums.  Was that reliance?  Maybe, maybe not.  One reason to be suspicious is that they are doing the same thing (inaction) as before the promise was made.  Another reason to be suspicious is that they had no money and couldn’t pay the premium.  They would have done the same thing whether or not the promise had been made.  Also, the Geremias continue to drive the car.  If they thought the car was uninsured, they might have chosen not to drive it around.  Was their driving relying on the promise to pay the premium?  Maybe, maybe not.  Maybe they were just so dependant on driving the car that they decided to take their chances.  Is there any real reliance here?


The reality of this situation is that the Geremias are the little guys and the credit union is the Big Guys.  That’s part of the reason that it comes out the way it does.


Back to Class Notes

[1] Now he calls on someone.