Contracts - Consideration and Promissory Estoppel

  1. Consideration and Its Equivalents
    • Generally, a promise must be supported by consideration (or one of its equivalents) to be enforceable. This precludes gratuitous promises from being enforceable unless they are covered by PE or moral obligation.
    1. Consideration
      • As defined in §71 of the Second Restatement….
        • To constitute consideration, a performance or a return promise must be bargained for.
        • A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
        • The performance may consist of
          • an act other than a promise, or
          • a forbearance, or
          • the creation, modification, or destruction of a legal relation.
        • The performance or return promise may be given to the promisor or to some other person. It may be given by the promisee or by some other person.
      1. Three elements that must all exist in order for consideration to be valid.
        1. Detriment to the promisee; — This can be either a legal detriment to the promisee or legal benefit to the promisor.
        2. The detriment is bargained-for; — The detriment is bargained-for if the detriment is the thing that induces the promise.
        3. And the promise is bargained-for. — The promise is bargained-for if the promise is the thing that induces the detriment. The promisee must know of the promise and is induced to act because of the promise.
          • FORK - Be careful about confusing promises that are bargained for with conditions on a gift.
            • Ex. Kirksey - Sister-in-law widowed, moved in with brother. Her moving was considered a condition on a gift, not consideration.
              • From Kirksey, a gratuitous promise is not enforceable even if the promisee reasonably relies on the promise and incurs a detriment to do so.
              • Modern day courts could decide cases like Kirksey under promissory estoppel and find that the promise induced reliance and should be enforceable.
      1. Motive and Past Consideration
        • Past consideration and motive do not constitute valid consideration.
        1. Past consideration - parties cannot make an exchange based on something that has already occurred.
          • Ex. Since you named your child after me, I'll pay you $5k. (past, unenforceable)
          • FORK - Past consideration is viewed differently by the Second Restatement and the courts.
            • Past consideration enforceable points…
              • §86 of the Second Restatement says, "A promise made in recognition of a benefit received by the promisor from the promisee is binding to the extent necessary to prevent injustice."
              • Webb v. McGowin - falling block case (would not be decided this way today!)
            • Past consideration unenforceable points…
              • Courts today do not enforce past consideration currently.
              • Mills v. Wyman - father offered to pay for doctor's services rendered in the past for his dead son. Found to be unenforceable since a promise based on events that happened in the past is not enforceable.
        1. Motive - The promisor's motive in entering into the exchange is irrelevant. Detriment must still occur.
          • Ex. Since you aren't as wealthy as your brothers, I'll pay you $5k (motive but no detriment by promisee, unenforceable)


    1. Adequacy of consideration
      1. As a general rule, any detriment, no matter how economically inadequate, will support a promise provided that the detriment is actually bargained for. Courts say that they will not inquire into the (in)adequacy of consideration; however, there are several ways that courts can get around this.
      2. Exceptions when inadequacy can be examined…
        1. Unconscionability - when the disparity in the values received by both parties "shocks the conscience"
          1. UCC 2-302 - "If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result."
          2. Ex. Jones v. Star Credit Corp - consumer agreed to pay $1400 for a $300 freezer. Court found contract was invalid under UCC 2-302.
        1. Fraud, mutual mistake, nominal consideration, etc.
          1. Inadequacy of consideration can be an indication that the detriment was not truly bargained for.
          2. Ex. Beachcomber Coins, Inc. v. Boskett - parties were coin dealers. Both thought the coin was valuable, worth $500. Later found out it was a fake, worth only 10¢. Court rescinded contract because of mutual mistake.
    1. Nominal consideration
      • A mere pretense of bargain is not sufficient consideration.
        • A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is not binding, A writes out and signs a false recital that B has sold him a car for $1000 and a promise to pay that amount. (invalid, sham)
        • A desires to make a binding promise to give $1000 to his son B. Being advised that a gratuitous promise is not binding, A offers to buy from B for $1000 a book worth less than $1. B accepts the offer knowing that the purchase of the book is a mere pretense. (invalid, nominal)
      • Mixed motive consideration - a transaction that is in part bargain and in part gift (consideration sometimes valid)
        • A offers to buy a book owned by B and to pay B $10 in exchange. B's transfer and delivery of the book are consideration for A's promise even though both parties know that such books regularly sell for $5 and that part of A's motive in making the offer is to make a gift to B.  (valid)
          • Valid possibly because of the shared knowledge that the motives are mixed and not mere pretense.
          • Court can also see from the disparity of value in the exchange if the bargain was merely the pretense for a gift.
    1. The Pre-Existing Duty Rule (Contract Modification)
      • In contract modification, consideration problems arise from the pre-existing duty rule.
        • In the initial contract, both parties are placed under some constraint or detriment necessary to constitute consideration.
        • If the modified contract does not require one of the parties to incur any additional detriment, the modified contract may not be supported by consideration.
          • Want to protect the parties' abilities to change and adjust.
          •  The opportunities for overreaching and extortion are abundant.
          • Ex. Buyer and seller agree to exchange widgets for a set price. Because of an increase in cost of raw materials, seller tells buyer it can't supply at that price anymore and asks buyer to agree to a price increase. If the buyer agrees, the new contract will lack mutuality because the promisee will not have suffered any additional detriment.
      • FORK - Three directly competing rules can be applied in the area of contract modification.
        • Common law
          • Modification of contracts will be enforceable only if there is additional consideration present in the modification.
          • Levine v. Blumenthal - Lease of building, promisee asked for decrease in rent, court found the modified contract was not enforceable because there was not an additional detriment for promisor and no consideration for the new contract.
          • In cases where creditor agrees to accept partial payment to satisfy the debt of a debtor, there must be additional consideration for the promise to be valid (i.e. if the payment was made earlier than it would be otherwise, if the debtor agrees not to file for bankruptcy, etc.)
        • Second Restatement S89
          • The contract cannot be fully performed by either party.
          • The modification must be made in light of circumstances that were unanticipated at the time the contract was made.
          • The terms of the modification have to be fair and equitable (good faith).
        • UCC S2-209 (only applies to sale of goods)
          • No consideration is required to have a modification of a contract.
          • Will be enforced only if the modifications are made in good faith by the parties.
          • Directly addresses question of overreaching and extortion.
          • UCC: “An agreement modifying a contract within this Article needs no consideration to be binding. However, modifications made hereunder must meet the test of good faith imposed by this Act. The effective use of bad faith to escape performance on the original contract terms is barred, and the extortion of a ‘modification’ without legitimate commercial reason is ineffective as a violation of the duty of good faith."
    1. Mutuality of Obligation
      1. One party to a bilateral contract cannot be legally bound to perform unless the other party is also bound. Mutuality problems can be present if one of the component promises of the contract is illusory, a promise that imposes no real constraint on the and leaves the promisor with complete discretion about whether to perform. These issues occur in…
        1. Exclusive dealing contracts
          1. Wood v. Lucy, Lady Duff-Gordon
          2.  A contract is still valid if one party's detriment is implied even if it is not an explicit element of the contract. (Good faith)
            •  The promise that the D market the designs of the P was implied through the business relationship.
              • Neither the P nor the D would make any profits unless the D marketed the products of the P.
              • Without the implied promise, the transaction would not have made sense.
        1. Wickham  case shows how mutuality was seen by traditional courts.
          • Seller agreed to ship by rail to the buyer as many carloads of coal as the buyer "would want to purchase" from the seller. The contract specified the grade of coal that the seller agreed to ship, and the price per ton that the buyer agreed to pay.
          • After the seller had shipped three carloads of coal to the buyer, the seller refused to make any additional shipments. As a result, the buyer was forced to buy the additional coal that it desired in the open market for $3,090 above the contract price.
          • The buyer then sued the seller to recover this amount, asserting that the seller had committed a breach of contract. The seller defended on the grounds that the contract was unenforceable because it lacked mutuality of obligation.
          • The court ruled for the seller and refused to enforce the contract.
            • Reasoning: The buyer had never bound itself to do anything under the contract because the buyer was free to order as much or as little coal as it wanted.  (illusory promise)
        1. McMichael case dealt with mutuality by finding consideration through forbearance.
      1. The Second Restatement does not talk about mutuality because it is redundant (coincides with consideration)
      2. Courts that strictly enforce the doctrine of consideration will probably not enforce a contract that lacks mutuality of obligation
        • However, courts do sometimes find ways of detecting consideration even when promises seem to be illusory (thereby, avoiding mutuality issues, i.e. McMichael)
    1. Requirements and Output Contracts
    • Contracts where the quantity term is measured by the buyer's requirements of seller's output were not enforced in the past. This is because they were deemed illusory because the buyer could refrain from having requirements. Later, they were upheld upon the theory that consideration could be found in the surrender of the buyer's privilege to buy elsewhere. Under modern law and UCC S2-306, requirements and output contracts are clearly valid.
      • UCC S2-306 - "A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith except that no quantity unreasonably disproportionate to any stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded."
        • Buyer is entitled to good faith requirements.  Exceptions…
          • If there is an estimate, the buyer is not entitled to a quantity that is excessively more than the estimate
          • If there is no estimate, the buyer may demand only any normal or otherwise comparable prior requirements.
      • McMichael v. Price (dealt with mutuality by finding consideration through forbearance)
        • Buyer agreed to buy as much sand from the seller as the buyer could sell to his customers for 10 years. Seller at times did not provide sand, so buyer sued for breach of contract.
        • Court found for buyer since the buyer was legally forborne from entering into contracts with other sand providers. So, although there was no mutuality, the court found a different way to enforce the contract
    • Requirements buyers have a duty to promote the goods
      • UCC S2-306(2) says that in an exclusive dealing contract, the buyer has the obligation to "use the best efforts to promote" the sale of the goods.
  2. Promissory Estoppel/Reliance
    1. Definition
      1. A promise that foreseeably induces substantial and definite acts of injurious reliance by the promisee or a third party is enforceable.
        • A promise is required. An estimate or statement of intention is not sufficient.
        • The reliance must be of a kind that the promisor could definitely have expected (foreseeable and reasonable). The promise must be one that the promisor should reasonably expect will lead the promisee to act or forbear.
        • The reliance must be of a substantial character and must be injurious rather than detrimental (in the consideration sense).
        • The promise will not be enforced unless injustice can be avoided only by the promise's enforcement. Enforcement may be limited to reliance losses if justice so indicates.
      1. Restatement (1) 90:  If a promise induces action or forbearance of a definite and substantial character on the promisee is binding if injustice can be avoided only by the enforcement of the promise.
      2. Restatement (2d) 90: The promisor’s promise should REASONABLY EXPECT to induce action or forbearance on the part of the promisee OR A THIRD PERSON, and which does, is binding if injustice can be avoided only by enforcement of the promise. Remedy may be limited as justice requires.
    1. Damages under promissory estoppel
      1. Damages may sometimes depend on the extent of the promisee’s reliance rather than on the promise itself.
      2. Damages should not put the promisee in a better position than the promise would have put him/her in.
    1. Historical Examples of Promissory Estoppel- although promissory estoppel is only a recent doctrine, courts used other methods to enforce reliance cases that now fall under promissory estoppel.
      1. Ricketts v. Scothorn
        • Grandfather gave granddaughter (P) promissory note for 2k, telling her that she wouldn't have to work anymore.  She quit her job as a result of his promise, but he died before paying her. Estate (D) refused to pay, she sued.
        • Court ruled for granddaughter, because the promise induced her reliance on the money. Promise was enforceable, even though it lacked consideration.
      1. Devecmon v. Shaw
        •  MD Ct of Appeals enforced uncle's promise to reimburse nephew's expenses if nephew went on a European vacation, even though uncle's motivation was that of a gift, since it required nephew to incur an expense.


    1. Commercial Reliance Cases
      1. Forrer v. Sears
        • D promised P a contract for permanent employment if P sold his farm and came to work full time. P sold farm at a loss, D fired him a few months later. Promissory estoppel case?
        • Court ruled that there was no promissory estoppel because D held up his end of the bargain when they hired P. If D had not hired P at all, then there would have been PE, but promise for "permanent employment" was met. Justice does not require enforcement of the contract.
          • Permanent employment is still employment-at-will.
      1. Grouse v. Group Health Plan
        • D promised P employment, P quit his job and turned down another offer, D reneged on offer. P sues for reliance damages.
        • Court ruled that this is a promissory estoppel case. Even though offers of employment are terminable at will, employee must be given a good faith chance to perform. D knew that P had relied/would rely on promise.
      1. Hoffman v. Red Owl
        • D promised P a business franchise for a certain amt of money. D made P sell his own store and relocate, but amount kept increasing. D went back on the promise, negotiations fell apart. P sued for reliance damages.
        • Court ruled that case fit under PE even though reliance occurred in the negotiation stage.
        • However, court remanded for damages based on selling store and relocating, because some commercial risk is beyond the scope of reliance.
    1. Issues Surrounding Promissory Estoppel
      1. Promissory estoppel is a way to enforce claims of reliance. However,  it is unclear whether the theory of promissory estoppel is an
        1. On-contract theory- fits within the overall regime of contract law.
          1. Serves merely as a substitute for consideration.
          2. All other doctrinal rules of contract law (offer and acceptance, statute of frauds, parol evidence, etc.) continue to apply. OR
        2. Off-contract theory- a theory of liability that exists independent of the rules of contract law.
          1. Like a tort- recognizes frustration of reliance as a wrongful act for which a legal remedy should exist.
          2. Rules of contract law do not apply.