Contracts Class Notes 10/30/03

More on the handout problems

If someone makes the illusion of a promise, but no promise, you can’t enforce that promise against the promisor.

If only one side makes a promise, that promise may be enforced if it is accompanied by consideration. If you make a promise for nothing, you won’t be bound to it.

Say you have two unqualified promises: one oral, and one in writing. Sam promises to sell orally, while Betsey promises to pay by a signed writing.

If Sam repudiates, can Betsey get damages? No, because Sam has a statute of frauds defense. The oral promise is within the statute of frauds and the statute of frauds is not satisfied. How can the statute of frauds be satisfied? Betsey could sue him, depose him, and somehow force him to admit in court that he made a contract. That provision has been difficult for courts to work with. Most courts will allow a suit on an oral promise and the taking of a deposition on the alleged promisor. However, if Sam is willing to perjure himself, or Betsey doesn’t depose him, he can get off the hook and he won’t have to pay.

If Betsey repudiates, can Sam get damages? Can Sam enforce her promise? Betsey made promise in writing, and thus she has no statute of frauds defense. Does Betsey have a consideration defense? If Sam’s promise was unenforceable under the statute of frauds, is Betsey’s promise thus unenforceable on consideration grounds? Was Sam’s promise illusory? Yes, and thus it cannot be consideration. In turn, Betsey’s promise is unenforceable.

Restatement § 78

Just because a promise is voidable or unenforceable by law doesn’t mean it’s not consideration.

§ 78. Voidable And Unenforceable Promises

The fact that a rule of law renders a promise voidable or unenforceable does not prevent it from being consideration.

Policy can make one-sided enforcement appropriate in cases involving, for example, minors or incompetent persons (a promise by a kid is not enforceable; a promise to a kid may be enforceable). The policy behind the statute of frauds is to prevent people from making up contracts that didn’t really exist. We think that is a considerable risk when there’s no writing. We say that unwritten agreements that fall within the statute of frauds are unenforceable. We thus deny the ability of Betsey to enforce against Sam.

However, we have every reason to believe that Betsey really did make a promise. Therefore, we let Sam recover from Betsey, enforcing her promise.

Let’s say, for the sake of problem 4, there’s no statute of frauds or other legal rules that make promises unenforceable. Let’s say both Betsey’s and Sam’s promises are in writing. Betsey has made an unqualified promise to buy Sam’s boat for $5,000. Betsey repudiates. Can Sam recover?

The difference between this and problem 1 is that Sam conditions his performance upon changing his mind and keeping his boat. Sam has made a promise that it is possible to breach by selling the boat to somebody else. He promises that he will do one of two things: he’ll either sell Betsey the boat for $5,000 or keep the boat for a reasonable amount of time. During the time he’s promised to keep it, it would be a breach to sell or give the boat to anyone else. Sam doesn’t have a “non-onerous” alternative. Sam has made a promise of substance; it’s a promise that forms consideration and makes Betsey’s promise enforceable.

Restatement § 77(a)

§ 77. Illusory And Alternative Promises

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.

§ 77(a) is the law of the land in most places; § 77(b) is far more doubtful.

In the last problem, Sam commits himself of one of two possible actions, each of which could constitute consideration for Betsey’s promise. Thus, Sam has made a promise that it is possible to breach.

Obering v. Swain-Roach Lumber Co.

Swain is in the lumber biz in southern Indiana. Swain wants some timber on a farm. The farm is going to be sold at public auction. Swain wants the timber but not the buildings and other stuff on the land. The Oberings are relatives of the decedent and want the land and the house and the barn, but not the timber; they’re farmers.

Before the auction, Swain and the Oberings sign an agreement that says “if Swain buys the land at the auction sale, Swain and the Oberings agree that Swain will sell to the Oberings for $8,000, and the Oberings will give Swain four years to remove the timber.” Is that a contract? The court says no in dicta. However, in its holding the court says that it became a contract upon the Swain’s performance, that is, when they bought the land at auction.

The court views the writing from before the auction as an offer by the Oberings to buy the property for $8,000. This offer was accepted when Swain became the high bidder at the auction. Until the auction, the Oberings were free to withdraw the offer.

Clovis says that’s a perfectly good way to do justice in this case.

The Oberings have two defenses: (1) they say the description of the land was inadequate. This is silly! Both parties knew exactly what land they were talking about. There was a perfect meeting of the minds as to what land they were talking about. (2) The Oberings argue that Swain wasn’t bound to do anything, however, Swain did perform, at which point a contract was created.

Swain made a promise that it is possible to breach. They could decide (1) not to buy the land at auction, or they could (2) go ahead and buy it and then turn around and sell it to the Oberings under the agreed conditions. This suggests that the court was wrong in its dicta: there was a contract from the signing of the writing. It is argued that foregoing buying the tract of land is a forbearance of enough significance to independently constitute consideration for the Oberings’ promise.

Compare the promise made by Swain to the promise of Sam in Problem 4.

Problems on p. 293

Why might the contract not be enforceable? The seller has maintained certain controls over his promise.

In the first situation, the seller has the right to cancel upon the buyer’s default. Thus, the seller’s opportunity to get out of the contract is not within the seller’s control, and the contract is enforceable.

In the second situation, the seller is not bound to do anything until there is less than 10 days to go before performance. This is a comment clause in employment contracts. The exchange here is unbalanced. Consider an employment contract constructed this way: the employer might promise three years employment, while the employee only really promises two weeks’ employment. Usually, we’ll uphold this contract, especially if we’re within two weeks of the employee’s start date.

Cancellation requires giving notice. What is the promise? “Either I’ll do it, or I’ll give you notice that I won’t.” Giving notice isn’t much, but it could be bargained for; it could be consideration.

In the third situation, the seller agrees to give notice, but there is no specified time period. The contract can’t be enforced until at least some performance has occurred. Before performance occurs, it is uncertain as to enforceability.

In the second problem, the seller reserved the right to cancel at any time without notice. Now, the seller’s promise is clearly illusory. The buyer will have both a statute of frauds and a consideration defense.

Suppose that the seller shipped 100 sweaters and the buyer received and accepted the 100 sweaters. What will the situation be? Can the seller collect damages for the buyer’s refusal to accept the other 400 sweaters? No, because for those 400 sweaters, the buyer has both a statute of frauds defense and a consideration defense. Can the seller recover the agreed price of the 100 sweaters delivered to the buyer? Yes, under § 2-201(3)(c), the statute of frauds is satisfied by goods received and accepted. Is there any consideration problem with respect to the 100 sweaters? No! The consideration for the buyer’s promise to pay is the performance: he got the sweaters!

Paul v. Rosen

Here’s a promise to sell a retail liquor store business for $25,000 plus what the booze in the inventory is worth. The contract is conditioned upon the buyer obtaining a new lease from the owner, however the buyer is not bound to try to get such a lease. The court holds that this makes the buyer’s promise illusory. Thus, there is no consideration to support the seller’s promise and the seller can walk away from the deal. This would not likely be the case now. If there had been an express promise on the part of the buyer to use reasonable efforts to obtain a lease, then the seller’s promise would have been unenforceable. A majority of courts today would find an implied promise on the part of the buyer to make such reasonable efforts.

Wood v. Lucy, Lady Duff-Gordon

This is a Cardozo™ opinion! We have a big agreement between Wood and Lucy. Lucy promised Wood in writing the exclusive right to market her endorsements and designs for a year. Lucy broke the promise by marketing her stuff through Sears.

Lucy’s defense is that her promise was unenforceable because she didn’t get anything from Wood. She says Wood didn’t promise her anything. That’s arguably a good defense unless we find an implied promise within this agreement. Wood has not expressly promised to do anything. He hasn’t promised to market Lucy’s stuff. Thus, Lucy argues, I didn’t make an enforceable promise, and I can do what I want, so there.

Cardozo makes an argument that there is an implied promise on the part of Wood to market Lucy’s stuff.

Why does Cardozo imply a promise to use reasonable efforts? What facts does he use? Lucy has given Wood an exclusive right. If Wood doesn’t do anything, Lucy gets nothing. It would seem that Lucy wouldn’t have made this promise if she didn’t express Wood to do his thing. Wood promised to account for the profits so that Lucy could get her 50%. It doesn’t mean anything if Wood doesn’t do anything, but it goes towards proving an implied promise to use reasonable efforts to market Lucy’s stuff. Cardozo also sort of says “it looks like a contract, it quacks like a contract, and so it must be a contract”. Cardozo also argues that Lucy is to be paid a percentage of the revenue Wood receives. This helps to imply a promise the Wood will go and make those revenues.

What would happen if Wood had promised a flat $50,000 instead? We wouldn’t construe an implied promise; we wouldn’t have to. There would also be no question of consideration for Lucy’s promise.

Implying a promise is distinctly to Wood’s benefit because it makes Lucy’s promise enforceable and gives Wood a remedy.

Consequently, if Wood failed to make a reasonable effort to sell Lucy’s stuff, Lucy would also have a remedy against him.

“This is a marvelous brief for implying a promise.”

However, there are some facts that cut in the other direction. There was a wealth of recitals and tons of lawyers working for both sides, yet there was no express promise included in the agreement. Why might this be? Perhaps the lawyers intentionally made the contract non-binding. Perhaps they couldn’t figure out what kind of obligation they might impose on Wood in order to protect Lucy. It would be hard to define “reasonable efforts”, and thus hard for Lucy to prove that Wood isn’t doing enough to market her designs.

So it’s open to debate whether or not an implied promise can be construed from this case. This is a hard case.

Dawson said, “The court performed judicial surgery on this agreement”, making it into a contract. Perhaps, he ventures, the parties didn’t want to make a contract and wanted some flexibility.

Wood might have spent money in reliance on exclusively marketing Lucy’s designs. On the other hand, if Wood hasn’t relied upon Lucy’s promise, it might be better not to make it a binding contract and let the parties just walk away.

A hypothetical for tomorrow

Suppose we have a deal between Ursula Ugly and Rick Rembrandt. Rick Rembrandt promises to paint Ursula Ugly’s portrait (with sympathy) and Ursula promises to pay Rick $10,000 if she is satisfied with the portrait. Say Rick paints, and Ursula is dissatisfied. Or, suppose Rick paints, and Ursula is too upset to even look at the painting and won’t pay him. Or, suppose that before Rick has begun to paint, Ursula finds that she can have Dave paint for $5,000. Rick sues. Can he recover? Or, what if Rick repudiates? If Dave would do the portrait for $15,000, can Ursula sue for the $5,000 difference?

Back to Class Notes