Courts in the United States do not recognize a natural right to contract. However, legislators will likely not infringe on freedoms to contract because citizens (voters) value them so much.
Contract Law Theories
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- Consensual Contract
- A consensual contract has six elements:
- 1. Competent parties-
- Contracts made by minors are voidable. However, the minor is liable for the fair value of the necessaries. All other elements of the contract are voidable at the election of the infant.
- A contract is enforceable when an infant re-promises upon reaching the age of majority to pay an avoidable contract debt incurred while an infant.
- Legal Subject-matter
Consideration exists only if there is a bargained for exchange-the promise and the consideration must be motive for each other; the promise induces the consideration, and the consideration induces the promise.
Other ways to say this are: fresh cause arising on each side, or mutual inducement, or recompense.
- If one is legally required to do something, that something can not be consideration for a contract. – Foakes v. Beere, Borrelli v. Brasseau
- Moral Obligation is not valid consideration for a contract.
- when an infant re-promises upon reaching the age of majority to pay an avoidable contract debt incurred while an infant.
- when a bankrupt re-promises to pay a contract debt that otherwise would have been discharged in bankruptcy
- when a breaching party re-promises to pay a contract debt notwithstanding that a statute of limitations bars collection of the debt.
- an act which was done at another’s prior request and which induced a promise from the other after the act was done is given for consideration. Hunt v. Bate (II)
- Some courts also see moral obligation arising from the promisor’s receipt of certain benefits and the promisee’s concurrent incurring of certain detriments as consideration. This rule is of limited scope; see Webb v. McGowin. Many courts do not follow Webb v. McGowin.
- Proper Form: Consideration is required to be in certain form- benefit, detriment, or mutual promise.
- There must be a benefit to the promisor, or a detriment to the promise.
- forbearance of a right (detriment) cannot constitute the consideration for making of a contract unless the forbearing party has a reasonable belief that he or she has, at least, a questionable right to act rather than forbear.
- Mutual promises can be consideration. Think of these as mutual extensions of credit.
- The promise is binding before anyone actually does anything.
- An illusory promise does not constitute consideration for the other promise, and thus the contract is unenforceable against either party. These are promises merely in form, but in reality do not impose any obligation on the promisor.
- A chance of a benefit is not a benefit for purposes of consideration. Coca-Cola Bottling v. Orange Crush
- Even a slight restriction on the exercise of the right of termination, such as the requirement that advance notice be given, is sufficient to prevent a unilateral right of termination from being regarded as illusory in nature. (The promise is not illusory when A has to give 6 months notice before canceling a contract he has with B)
- A valid contract may be conditioned upon the happening of an event, even though the event may depend upon the will of the party who afterwards seeks to avoid its obligation. Scott v. Moragues Lumber Co. Once the conditional event happens, the contract becomes binding.
- Courts will sometimes even imply a promise rather than hold a contract void for lack of mutuality.
Promise to do something, even simply give notice, is not illusory
- Mutual Assent
Assent-Based Niches of Promise Enforcement: Modification & Waiver
- Alaska Packers Ass’n v. Domenico– Pre-existing duty rule. Public Policy against coercion. These modifications are not binding.
- Changes to meet changes in circumstances and conditions should be valid if the law is to carry out its function and service by rules conformable with reasonable practices and understandings in matters of business and commerce.
- Public Policy- people should be able to mutually agree to a new deal in the furtherance of business and commerce. Fair and Equitable changes are ok
- In Foakes v. Beer, one party had nothing to perform so there was no new consideration, and since both didn’t give something up, there was no new consideration.
- Schwartzreich v. Bauman-Basch, Inc. Rescission of an old contract by consent of the parties, and forming a new one is OK. The timing of rescission/new contract formation is unimportant. All that matters is the rescission is mutual and without coercion.
- Public Policy- people should be free to mutually agree to changes/new deals; especially for employment.
- In Angel v. Murray, we get a four part test that we can use to see if we should enforce a modification to a contract:
- Modification only enforceable if the parties voluntarily agree.
- the promise modifying the original contract was made before the contract was fully performed on either side.
- the underlying circumstances which prompted the modification were unanticipated by the parties, and
- the modification is fair and equitable.
- For business transaction contracts, modifications by the merchant must be made in “good faith.” Palmer v. Safe Auto Sales (the frugal optometrist)
- “Good faith” means “honest in fact” AND “the observance of reasonable commercial standards of fair dealing in the trade.” Revised UCC sec. 1-201
- If both parties are merchants, the rules are different, because it is assumed that merchants have access to more options in terms of information and alternatives.
- Modifications made under circumstances of economic duress are voidable by the victim.
- Waiver- the intentional relinquishment of a known right.
- Clark v. West Expressed versus Implied waiver. A waiver of consideration needs new consideration. Here, defendant waived his right to withhold the extra payment due the plaintiff. The plaintiff drank while writing the books, but the defendant expressly waived his right to withhold the extra money by accepting the book, and not mentioning the drinking. The condition of the contract (not drinking while writing) was not the consideration, so the waiver was ok. A waiver of a material part of the agreed exchange is ineffective, because it needs new consideration.
The Push toward Assent
- A Seal or Writing
- Over time, a seal became less important, and the meaning of it diminished.
- A seal imports consideration
- Nominal and Recited Consideration
- Schnell v. Nell This case tries to make consideration into a formality, like a seal. The consideration of 1 cent in exchange for the $200 is nominal. It can not be said that the one induced the other. The plaintiffs had promised to abstain from collecting the money from the estate, but they had no legal right to do so. That forbearance can not be consideration.
- Lewis v. Fletcher The option contract in this case contained words that indicated that the price for the option had been paid. However, it had never been paid. An option contract unsupported by consideration is an offer to sell, and not a binding contract.
- Real Estate Co. of Pittsburgh v. Rudolph This is also a case that has recited consideration, but the court rules differently. In this case, the option seller acknowledged the receipt of the consideration, and the court rules that he is estopped from denying it. Thus, this court holds that recited consideration, whether actually paid or not, is consideration for the option contract. Only a few jurisdictions follow it, but it is the Restatement position.