Formation of Contracts Flashcards
(116 cards)
What is a contract? (Q)
A contract is a mutual exchange between two parties that is a legally enforceable agreement.
When does a bilateral contract occur? (Q)
A bilateral contract results when the parties mutually exchange promises. Acceptance by promise.
When does a unilateral contract occur? (Q)
There is no return promise. Acceptance of the initial promise is done by performance.
What is consideration? (Q)
Consideration is something of value given (e.g., money, a return promise, or forbearance) by a promisee to a promisor. Consideration can constitute either a benefit to the promisor or a detriment to the promisee. To have sufficient consideration to form a contract, the parties must both (1) bargain for and (2) exchange something.
Can the parties to a contract determine for themselves whether consideration is adequate? (Q)
Yes. The parties to a contract normally decide for themselves whether consideration is adequate. Any exchange of value is generally sufficient for adequate consideration. The values that are exchanged do not have to be equivalent. Courts do not usually second-guess the parties’ determination of the relative value of the detriments exchanged, but they may do so if the purported consideration is so trivial in value that it could not possibly have induced the promisor’s promise. (Hardesty)
What is the bargain definition of consideration? (Q)
A performance or return promise is bargained for if it is sought by the promisor in exchange for the promise and is given by the promisee in exchange for that promise.
What is the benefit/detriment approach to consideration? (Q)
The return promise or performance must be bargained for, but it must also result in a benefit to the promisor and/or a detriment to the promisee.
What is a gratuitous (gift) promise? (Q)
A gratuitous promise is a promise to do or refrain from doing something, made without the expectation of or actual compensation. A gratuitous promise is not enforceable as a contract because it is not supported by consideration. A contract requires an exchange of value between the parties. If a party receives nothing of value, there is no consideration and thus no contract. The exchange of values can be very unequal and even nominal, but each party must receive something.
What is an illusory promise? (Q)
An illusory promise looks like or sounds like a promise but in fact promises nothing. If a promise depends on the happening of a future event, or if the promisor reserves a choice for alternative performance, the promise is illusory. Unlike true promises, illusory promises do not bind the promisor.
This means an illusory promise cannot provide the consideration necessary to create a binding agreement.
Can a party give valid consideration by promising the other party to render performance to a third person who is not a party to the contract? (Q)
Yes. As long as the performance would constitute valid consideration if rendered to the other contracting party, a promise to render that performance to a third person who is a non-party is also valid consideration.
A promisee furnishes consideration by incurring a legal detriment (here, the promise to render performance to the third party) in exchange for the consideration to be received from the promisor. Therefore, if the promise to render performance to a third party is bargained for in the contract, it is valid consideration.
Can an existing duty serve as consideration for a new agreement between the same parties?
No. An existing duty cannot serve as consideration for a new agreement between the same parties. Under the preexisting duty rule, a promisee cannot form a contract by promising or performing a legal duty already owed to the promisor, because the promisee does not suffer a legal detriment.
Can past consideration support a contract?
No. Past consideration cannot support a contract if the offeror’s promise is made in recognition of a benefit already conferred by the offeree. Any asserted moral obligation to fulfill a promise made in response to the past consideration is not legally enforceable.
Is an exclusive agreement to sell goods on behalf of another, in which a seller is not bound to actually sell any goods, supported by sufficient consideration?
Yes. If one party to a contract grants the second party the exclusive right to sell the first party’s goods, common law and the UCC imply a promise by the second party to use best efforts to sell the goods. This implied obligation to use best efforts constitutes sufficient consideration to create a valid and enforceable contract, even if the contract does not obligate the seller to sell a certain quantity of goods. (Wood, Judge Cardozo)
Under common law, is new consideration required for a modification of a contract?
Yes. Under common law, the parties must both give new consideration to validate the modification of a contract.
Parties can circumvent the new consideration requirement by first terminating the original contract and then entering into a new contract on exactly the same terms as the old one, except for the modifying amendment. When the parties first agree to terminate the existing contract, they both give consideration by surrendering their rights under the existing contract. The parties’ preexisting duties are extinguished, and the parties can then enter into the replacement contract, in which they both give consideration by exchanging detriments that are the same as those in the earlier contract, with the addition of the modification.
What is the rationale for the common-law rule requiring new consideration to validate the modification of an existing contract?
The rationale for the common-law rule that the modification of an existing contract requires new consideration is the preexisting duty rule—i.e., that a party does not incur a legal detriment by promising or performing a legal duty that is already owed to the other party. An existing contract already obliges the parties to perform what they promised. If the contract is modified to add to the obligations of one of the parties, the other party’s preexisting obligation under the contract will not support the modification. Rather, consideration doctrine requires that the other party must also undertake a new obligation to provide consideration to support the modification.
Is a modification to an existing contract supported by sufficient consideration if both parties alter their duties?
Yes. A modification to an existing contract is enforceable and supported by sufficient consideration if both parties alter their duties, such as by agreeing to accelerate performance. Each party’s alteration of duties provides sufficient consideration for the other’s.
Under the unanticipated difficulties rule, what must a party prove to validate a contract modification without consideration?
Under the unanticipated difficulties rule, a party seeking to validate a contract modification without consideration must prove that (1) a change in circumstances that was not anticipated by the parties at the time of contracting and that made the performance of the party seeking the modification more difficult (2) renders the modification fair and equitable.
The unanticipated difficulties rule is an exception to the usual rule that a modification to a contract must be supported by new consideration. The rationale for this exception is that the modification is motivated by the unanticipated difficulties rather than by unfair pressure or coercion. (Angel)
Does a modification of a contract for the sale of goods require consideration in order to be valid?
No. A modification of a contract for the sale of goods does not require consideration in order to be valid. In a sale of goods, the UCC expressly abolishes the common law rule that requires consideration to make a contract modification binding. Under the UCC, the consideration requirement is replaced by a test of good faith, which would not be satisfied if a party extorted the modification without a legitimate commercial reason. The UCC defines good faith to require both subjective honesty and the observance of reasonable commercial standards of fair dealing.
What remedy will a court provide for a promissory estoppel claim?
The remedy for promissory estoppel will be limited to the promisee’s actual loss based on the extent of the promisee’s extent of reliance. The remedy for promissory estoppel is not based on the terms of any promise.
A member of a church promised the pastor that she would donate $10,000 to the church the following January. The pastor recorded the promised amount as prospective income in its budget. The church member failed to donate the money.
Can the church invoke promissory estoppel to enforce the promise?
No. The church cannot invoke promissory estoppel to enforce the promise. Promissory estoppel may permit enforcement of a promise that is not otherwise enforceable under contract law if:
the promisor expects or should reasonably expect the promise to induce performance,
the promisee justifiably relies on the promise, and
the promisee suffers a substantial detriment.
Promissory estoppel relief is premised on detrimental reliance—i.e., justifiable reliance by the promisee that causes it economic cost or loss.
To enforce a promise under the doctrine of promissory estoppel, must a promisee prove that the promisor made the promise with the intent of inducing the promisee to act in reliance on the promise?
No. To enforce a promise under the doctrine of promissory estoppel, a promisee does not need to prove that the promisor made the promise with the actual, subjective intent to induce the promisee to act on the promise. Courts instead use an objective standard, i.e., whether the promisor reasonably should have expected to induce the specific action or forbearance.
The promisor’s objective expectation is closely linked to the promisee’s justifiable reliance. Both tests evaluate the link between the promise and reliance, seen from the different perspectives of the reasonable promisor and the reasonable promisee.
Is promissory estoppel relief available to a promisee who would have taken the same action allegedly induced by reliance on a promise even if the promise had not been made?
No. Promissory estoppel relief is not available to a promisee who would have taken the same action allegedly induced by reliance on a promise even if the promise had not been made.
To succeed in a promissory estoppel claim, a promisee must show that the promise induced the action. If the promisee would have taken the same action even if the promisor had not made the promise (e.g., because the promisee had made the decision to take the action before the promise was made, or because the promisee would have had no choice but to take the action), then the promisee cannot claim that he or she acted in reliance on the promise.
What are the elements of S 90 Promise Reasonably Including Action or Forbearance for Promissory Estoppel?
Promise
Reasonably expected to induce reliance
Reliance
Injustice can be avoided only by enforcement
Remedy can be limited as justice requires.
A man told his sister that he would give her a gift certificate for a certain hotel as a birthday present. On the strength of this promise, the sister booked a non-refundable two-night stay at the hotel for the weekend after her birthday. The cost of the two nights’ accommodation was $450. The man never gave his sister the promised gift certificate, and the sister had to pay the $450 for the hotel herself. The man’s promise was clearly gratuitous.
Does the doctrine of promissory estoppel provide a basis to enforce the man’s promise?
Yes. Promissory estoppel provides a basis to enforce the promise. The doctrine of promissory estoppel may permit enforcement of a promise that is not otherwise enforceable under contract law if:
the promisor expects or should reasonably expect the promise to induce performance,
the promisee justifiably relies on the promise, and
the promisee suffers a substantial detriment.
Promissory estoppel relief is premised on detrimental reliance—i.e., justifiable reliance by the promisee that causes it economic cost or loss.