Contracts Class Notes 2/11/04

The Alaska Packers hire some dudes in San Francisco. They hire them to go to Alaska to do some fishing stuff in Pyramid Harbor. Once they get there, they decide that they’d rather get paid twice as much. So they sit down and stop working and tell Alaska Packers that they won’t do anything unless Alaska Packers agrees to double their wages. Alaska Packers agrees, and then the workers work. When they get back to San Francisco, Alaska Packers doesn’t pay them. This is brought as an admiralty suit. That’s why we have the words “libel” and “libellant”. But the workers fail. How come?

Here’s our old friend, the preexisting legal duty rule from Levine v. Blumenthal. The Alaska Packers got nothing in exchange for the promise to pay the workers $50 more. The promise to pay more was not supported by consideration. It was based on having the workers perform just those services that they were already contractually bound to do. Alaska Packers’s promise is unenforceable, and so the workers don’t get their extra $50.

Do we agree with this result? Is there anything troublesome that the court says? Was there consideration? Is there an argument that there was consideration? Did the fishermen give up something in exchange for the $50 bonus? The fishermen contend that the nets were full of holes. Part of their pay was on a piecework basis: two cents per catch. If they can’t catch any fish, they’re getting less money. They would argue that they were implicitly promised decent nets, but they got crappy nets. They argue that they’re not going to get as many two centses as they expected. Are they dropping this claim in return for $50?

It doesn’t make commercial sense for the Alaska Packers to go up to Alaska with bad nets.

The appellate court says that they won’t review the trial court’s finding about the nets because the witnesses aren’t before the appellate court. That’s fine, but what about consideration? If the evidence was sharply conflicting, it would appear that the fishermen had a good faith claim that there was something wrong with the nets. Also, the claim was probably plausible (colorable). Otherwise, where could the sharply conflicting evidence have come from? Then you could argue that they have surrendered a claim that ended up being invalid for the $50 extra. By modern lights, the court might have been wrong about the existence of consideration.

The editors say that we ought to uphold modifications in many situations. However, the doctrine of consideration and the preexisting legal duty rule can cause a lot of problems. The doctrine is highly technical and often gets in the way of good results. However, that’s not to say that there’s nothing to it. When someone promises a benefit and gets nothing in exchange for it, that ought to make you sensitive to whether something rotten is going on. Sometimes you’ll conclude that there isn’t and the modification ought to be upheld as a matter of policy. But the consideration doctrine, while it has its technicalities and shortcomings and won’t do justice in every case, it is powerful in suggesting that this is a situation that calls for close scrutiny.

How should the fishermen have been advised? If the fishermen had done anything that was bargained for that they didn’t have a preexisting legal duty to do, they would have made out okay. The preexisting legal duty rule is an academic doctrine, and if you think like a lawyer it’s easy to avoid it.

Recall Restatement § 74 which deals with the surrender of an invalid claim as consideration. This ties in with Duncan v. Black. While the preexisting legal duty rule and consideration is still law and could help to decide a number of cases, it also has lots of limitations.

What is a better way to do justice in this case? The court should have thought about it as a duress case. This wouldn’t have gotten the court into all these technicalities. Was there an improper threat here? Yes! The workers threatened to break their promise to work. Would the threat have caused actual harm? Sure! They wouldn’t have been able to get replacement workers. They would have lost out and they wouldn’t have had a very good remedy against the workers since there’s so many of them and they may not have much money.

Duress, whether there is consideration or not, makes a better way to get at what’s going on in this case. So the packers can argue that they were coerced into making this “bonus” promise.

When you have contract formation in San Francisco when the people are hired, Alaska Packers have strong bargaining power and they won’t have to pay more than the market rate for fishermen. The bargaining power situation is changed enormously by the time they get to Pyramid Harbor. The fishermen are the only ones available there to do work during that season.

Compare this to Austin Instrument. While Loral is looking for subcontractors, they have bargaining power. If Austin doesn’t offer a market price, they can go to someone else. Once the deal has started, Austin has Loral “over a barrel” and they have the chance to exercise some duress.

Alaska Packers has the chance to argue either no consideration or duress. Loral, on the other hand, had to make it a duress case. There are two factual differences that explain why that’s so:

1. This is a contract for the sale of goods. Under § 2-209 (1), you don’t need consideration to change a contract under the auspices of the UCC. Does that do Loral in? Not necessarily. Modifications must be in good faith. You can’t use extortion to get a contract modification without a legitimate commercial reason.

2. Loral had already performed the promise for the bonus. Once performance has been completed, there is no longer any consideration argument.

So if Alaska Packers had already paid the extra $50 to the fishermen, they would have no consideration argument, because consideration is a doctrine that only applies to promises that haven’t yet been performed.

These doctrines police modifications of existing contracts. Some of the modifications make sense and ought to be upheld. Other don’t make sense and shouldn’t be upheld.

Schwartzreich v. Bauman-Bauch, Inc.

Schwartzreich has promised to work for a particular period of time for $90 a week. Then he gets an offer to work for someone else for either $110 or $115 a week. The original employer says: “I want you to stay here. We’ll up your salary to $100 per week.” Is that an enforceable promise? There are two arguments that it is not:

1. The employer didn’t get anything in exchange for the bonus.

2. The bonus was coerced because the employer would have been left in the lurch without Schwartzreich.

What does the court do? The court thinks about the case in consideration terms and finds a way to say that there was consideration. How?

First, when you have two parties to an agreement that is at least in part executory (not fully performed) on both sides then they can both choose to back out and consideration won’t cause any problem. The two sides can mutually agree to rescind, then make a whole new deal. Both sides might say: “The deal looked good to both of us when we made it, but now it looks crappy for both of us. Let’s both walk away from it.” That is allowed, and there is no problem of consideration for the rescission agreement: each side gives up rights they had under the contract. Once that’s happened, there’s no preexisting legal duty problem and they can make a new problem.

The result may be okay, but Clovis says that the rationale is a fraud. He says there was no moment in this case when the deal was actually rescinded. Clovis says this is a legal fiction, though such fictions can sometimes produce sound results. See Restatement § 89. When there isn’t some actual time between the mutual assent rescission and the new deal, that is a fictional way around the consideration doctrine and not a very sensible basis for upholding the modification. The modification should rise and fall depending on whether it’s fair under the circumstances and makes commercial sense. In the restaters’ view, the decision could be upheld under § 89 (a).

Accord and satisfaction

In general, we’re talking about bargaining pressure exerted by a debtor on a creditor. Debtors can cause their creditors a lot of misery, and sometimes they do! They can do this by using checks.

Let’s look at some hypotheticals. Say D borrowed $40,000 from C and now owes $45,000 including interest. D sent a check for $30,000 to C. At the top of the back of the check, D wrote “by indorsing and cashing this check, C agrees that D has paid him in full and hereby releases D from all liability.” C reads the inscription and cashes the check. Then C sues D for $15,000. What’s the result? Does D’s thing work?

Debtors do this all the time. This is kind of a “torture” of the creditor. You put money in the creditor’s hands and tempt them with it. “Here it is! Just take it! But of course, if you take it, you’ll never see the rest of your claim.”

So has C lost the rest of his claim? No! The debt is not disputed. It’s a liquidated debt. There is no argument about the debt as to how much it is and the fact that it exists. You can’t enforce a promise to accept less than full payment in satisfaction of a liquidated debt. D owed $45,000 with no ifs, ands, or buts. We won’t let D pay less than that to satisfy his debts. The creditor can take the money, apply it on account, and then turn around and successfully sue for the remaining $15,000.

If there’s no question that D is trying to get out of his debt on the cheap, we won’t let him!

“Full payment checks! It’s one of the greatest things since canned beer!” By the overwhelming weight of authority, they won’t work when you have a liquidated debt, undisputed as to amount and liability. The law will tell the creditor that “you can have your cake and eat it too”.

UCC § 3-311 (a) gives some conditions under which accord and satisfaction can kick in.

Say D owed C $45,000 and it’s undisputed as to amount and liability. Say D tenders his used bulldozer in full satisfaction of that $45,000 claim. C takes the bulldozer. Then C sues D for $15,000, proving by reliable evidence that the bulldozer was worth $30,000. Can C recover? No, because D was under no obligation to pay C a bulldozer. This is a whole new deal! A bulldozer is offered in exchange for the forgiveness of a $45,000 debt. The deal was accepted! So that’s it. There was no preexisting legal duty in regard to the bulldozer. The creditor is hooked! The debt has been paid! C would only be able to argue that somehow he had been defrauded. But that would be tough to argue, and so this debt has probably been discharged.

The preexisting legal duty rule and the doctrine of consideration have their good points, but they also have their technicalities and may not do justice in all situations.

Say we have a loan of $45,000. D says that the interest was calculated wrong and only owes $42,000. D tenders a check for $42,000 with a “full payment” legend on it. C reads the legend, indorses the check, and gets the money, then sues D for $3,000. Say C’s calculation of the interest was right and D was wrong. Does C win? Let’s say the interest about dispute is in good faith. If there is an unliquidated debt, the debtor can make it go away with this kind of full-payment check. That’s a very valuable opportunity available to debtors. You can make the debt go away if you pay what you admit you owe and honestly dispute the rest.

Notice that one of the big policies at work here is the fact that we favor settlement. But what’s troublesome? The debtor is torturing the creditor, putting pressure on the creditor to take the money now, or else maybe never get any money ever. This is debtor pressure on the creditor. Be aware of it because you’re probably going to use it in practice. Notice that it is considerable pressure, and in appropriate circumstances, we’ll allow it to work.

But, when the claim is unliquidated or the dispute is alleged in bad faith, we won’t let this kind of pressure work.

Let’s say D writes the $42,000 full payment check. What if C scratches out the “full payment” legend and then writes “payment on account” on the back of the check. What’s the effect on C’s suit against D for $3,000?

On Monday, we’ll talk about executory accords.

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