Contracts Class Notes 10/29/03

There’s a two-year lease from April 1931 to May 1933 to rent space for a women’s clothing store. Blumenthal promises to pay $175 per month for the first year and $200 a month for the second year. At the end of the first year, the defendant tenant talks to the plaintiff landlord and says the economy’s bad and the defendant is going to have to quit unless the plaintiff will take $175 per month for the second year, too. There was some factual controversy. The trial court held that the landlord promised to take the $175 in full satisfaction of the promise. Later, the plaintiff sued for the $25 per month plus the last month’s rest, and he got what he asked for. The trial court refused to enforce the landlord’s promise to take $175 instead of $200. If the landlord’s promise had been enforced, he would have only gotten $175 for the last month.

The court takes the amended agreement to be a good faith modification of the contract. Why does the court refuse to enforce this modification? There is no consideration for the landlord’s promise. Paying the rent that the tenants were already bound to pay isn’t consideration.

The legal duty rule

This is also known as the “preexisting legal duty rule” or “preexisting duty rule”. What was the tenant’s duty? It was to pay the $175, in fact, the duty was to pay more: $200 a month. It follows that the tenant suffered no detriment as a result of his promise to pay $175. The tenant was already bound to perform under the preexisting contract. When you think about it in those terms, the landlord got nothing in exchange for his promise. We will not inquire into the adequacy of consideration, but you have to get something for your promise, or on consideration grounds it will be unenforceable.

“A promise to do what the promisor is already legally bound to do is an unreal consideration.”

One of the things this case is about is debtor pressure on creditors. Creditors are frequently in need of the money that is owed them. It’s expensive and it’s a hassle to have to sue and work hard to collect on your debts. Shall we allow debtors to haggle creditors down by threatening them with the possibility of having to go to court? No way!

The doctrine of Levine is useful for preventing debtors from sort of blackmailing creditors. This doctrine has been modified and sort of watered-down since.

How could the agreement be made enforceable here? You just need to have some consideration, no matter how small. For example, Blumenthal might have given Levine some clothing as additional consideration, or he could have made his payments earlier than the parties had previously agreed. If you throw something into the deal that you weren’t under a preexisting legal duty to deliver, you can make your amended agreement enforceable.

This is kind of tricky because this is the sort of think that a lawyer would think of but ordinary folks would never think of. It’s sneaky.

How do we distinguish this case from Fried v. Fisher? Fisher relied on the promise. He went out of the flower business and got into the restaurant business. That’s huge reliance.

On the other hand, Blumenthal didn’t do anything different after the promise than he did before the promise. There was no palpable change in position. Blumenthal will argue that the reliance was not going out of business, but we would be forced to take his word for it. A bigger reason is that to enforce on the basis of reliance we need detrimental reliance; a situation where justice requires enforcement. There is nothing detrimental about Blumenthal’s reliance because he was under a preexisting legal duty to pay the rent. Justice doesn’t require any enforcement for this guy.

The Restatement on the preexisting legal duty rule

The commentary to Restatement § 73 (which states the preexisting duty rule) says even when there is no consideration on account of the preexisting legal duty rule, promissory estoppel can form a basis for enforcement in appropriate situations.

What’s the connection between this and Duncan v. Black? In Restatement terms, when does § 73 apply as opposed to § 74 (1)?

§ 74(1) deals with creditor pressure as opposed to debtor pressure. Someone asserts a claim against you (“pay me or I’ll sue”), and in response to that threat you promise to pay them to settle the claim. If the claim was made in good faith, we will uphold the settlement agreement.

§ 73 deals with debtor pressure (“I’m going to pay you less than I owe”). I threaten to default in order to get you to take only part of the debt to satisfy that debt.

The preexisting legal duty rule operates with respect to liquidated debts, but not in respect to non-liquated debts. What’s liquidated debt? It means a debt that is undisputed as to both liability and amount. When there is a good faith dispute as to either liability or amount, the preexisting legal duty rule doesn’t operate.

That is to say, when we disagree about whether I really owe you anything, or we disagree about how much I owe you, the matter is ripe for compromise or settlement and we’ll enforce agreements to that effect.

However, your promise to take less than 100% in satisfaction of my debt (that we both agree upon), without more, will be assumed unenforceable.

How does the court get around this? They will not judge the adequacy of consideration.

Statutory modification of the preexisting legal duty rule

Also, the preexisting legal duty rule may be changed by statute. In Ohio, we haven’t done this, and that’s the case in a majority of jurisdictions. One thing that all fifty states have done is to eliminate the preexisting legal duty rule for the sale of goods under UCC § 2-209.

When you make the contract for the sale of goods, you need consideration. Once the contract is made, however, it can be changed without any further consideration. For example, the buyer can agree to pay more than the agreed price or the seller can agree to sell for less than the agreed price. This can be done without any consideration under the UCC.

In the comments, the text is construed to mean that modifications must be made in good faith: UCC § 1-203 says that all contracts impose the obligation of good faith. Therefore, you can’t modify a contract in bad faith (with extortion or coercion or duress).

You can abolish the preexisting legal duty rule, but as soon as you do, you must substitute something else in its stead. What you substitute it with might do a much better job of protecting the interests we’re trying to protect.

There is more to read about this on pages 561-573.

In the commentary of Restatement § 73, it is suggested that when the only consideration for a promise is something you already owed, you probably have a situation of bad faith anyway. If you use the preexisting legal duty rule, you don’t have to inquire into whether the promise was made under duress. This rule is a cheaper, faster solution than the more contemporary UCC § 2-209 approach.

Notice the differences in the statutory approaches to the preexisting legal duty rule: Virginia appears to be more liberal than California in that they don’t require a writing in order to modify an agreement.

Unilateral versus bilateral contracts

A unilateral contract is one where only one party has made a promise. That is, a promise has been exchanged for performance. This is the older kind of contract that was common in the olden days. For example, when you promise a reward for finding a lost dog, you won’t take a promise to find the dog in exchange for the money. You’ll only take the dog itself in exchange for the promise of money (and then the money).

A bilateral contract is one where a promise is exchanged for a promise. This is now the most common type of contract. The parties will bargain not only for a promise, but also for performance.

Betsey wants to buy Sam’s sailboat. They sign a written agreement in which Betsey promises to pay $5,000 for the boat and Sam promises to “sell the boat or not”.

Say Sam repudiates. Can Betsey recover damages? No, because Sam didn’t make a promise. He made an “illusory promise”. Another way to say it is that Sam is not in breach because he didn’t make a promise that it is possible to breach. Sam said, “Either I’ll sell you the boat for $5,000, or I won’t. My choice.” Sam has not chosen to restrict his freedom of action at all.

A useful definition of an illusory promise is that it is a promise that is impossible to break.

In Davis v. General Foods Corp., there’s a non-promise. There’s no breach, and thus no remedy. In Nat Nal Service Stations v. Wolf, both parties make illusory promises to each other. One side says “we’ll sell as long as we want” and the other side says “we’ll buy as long as we want”. It may be good information and could inform real contracts made in the course of business between the parties, just like price lists or catalogs. But the illusory promises don’t make an enforceable contract.

To the extent that a promise is illusory, you can’t hold someone to it.

Go back to the hypothetical and say Betsey backs out. Will Sam have a cause of action for breach of contract against Betsey if he can prove that the market price of the boat is lower than the contract price? Does an illusory promise constitute consideration for Betsey’s promise? No. Betsey’s promise is unenforceable because it’s not supported by consideration. Betsey got nothing in exchange for her promise. All she got was a non-promise.

Another name for all this is “mutuality of obligation”.

Back to Class Notes