Consideration in Anglo American Contract

8/13/2019 Consideration in Anglo American Contract

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Consideration in Anglo American Contract

11/12/11- lesson 1

In medieval times, before the term assumpsit was used (a term from the 16th

century),only three types of transactions were enforceable:

Plaintiff could sue defendant only if defendant had an obliation to:

1. Repay money (debt)

!" Deliver goods he borrowed or sold# detinue

$" o per!orm a promise made in writing "nder seal( ) %covenant"

In the first case, all contracts were property based institutions %you promised to ive it

bac& to me% this was a promise I could enforce aainst you"

In the second case% the defendant promised to deliver oods that he borrowed or sold"

'he third case is a little closer to todays contracts% there is a written instr"ment with

a !ormal seal, bindin in the stron sense of the term"

'oday%we are e#changing promises that create obligations" 'his form of contract

was larely missin at this point"

'he first two instances remind us of property and tort suits" 'he third instance, theformal seal, is almost a formal act but still not a promise for promise, uid pro uo act"

*s of the 16thcentury we have a new term called assumpsit, the legal term that was

"sed to describe e#changes o! promises to be legally en!orceable" 'his was the

bi chane in *nlo%*merican law and allowed us to move to contract law as we &now

it"

'his allowed suin over breached promises" 'hat would ive rise to a lawsuit, an

enforceable claim under the law" $e move !rom a very narrow slice o! promises% in

writing "nder seal% to the en!orceability o! m"ch wider types o! contracts" If wedecide that some, but not all promises are enforceable% how do we di!!erentiate

between en!orceable and non-en!orceable contracts+

hy is consideration + hat does it mean% it means that consideration &serio"sness" hy do we care about consideration+ hy do we care that the promisor

considered the promise+ -eriousness is where we draw the line" $e don't want to

en!orce promises witho"t the re"isite serio"sness " hat test should we use+


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romise ind"ces detriment: promise ave up somethin in order to et the

promise% which in practice"

*s a promisor I made a promise to et somethin and thats why I made the

promise" 'he promisee areed to do that thin in order to et my promise"

0t is important to disting"ish between bargained !or promises and gi!ts" 9ifts

are not necessarily welfare%enhancin" 4oncernin barained%for promises, theres a

ood chance to believe that both parties are better off"

/or a ift there has to be:

1" 0ntent to mae a gi!t"

!" Delivery% manual, symbolic, constructive"

$" Acceptance"

argained !or promises v. conditional gi!ts

* 4onditional ift is any ift to which strins are attached" 3rom a legal standpoint

these gi!ts are not en!orceable beca"se there is no consideration" *lso%

promises to mae a gi!t are not en!orceable "nder nglish and American law"

In Israel it these promises can be enforceable"

4ohnson v. 5tterbein 6niversity (1778)

3acts:

In /ebruary 16;,


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$hat sho"ld the college have done to mae it e!!ective+ 'hey could have told

him to ive them the money now% thats delivery of a ift" "t to en!orce a promise

to give something in the !"t"re consideration is needed" ets e7amine a number of e7amples with this analysis"

#ample: I see a homeless person on the street and tell him, If you come with me

to my house I will ive you a coat"

Promise% I will ive you a coat if you come home with me"

/rom the vantae point of the promisee there is detriment - he has to go to the

promisor. 9e changed his !reedom" as it induced by promise+ 'he answer is

yes" -o we have:

a detriment to the promisee

'he detriment was induced by promisors promise"

owever% we need to show that the promisor wanted to ind"ce the res"lt" he

promisor didn't intend !or his promise to ind"ce detriment, and there was no

benefit barained for" e have a conditional ift" 'he coat is at home" 0 don't want

him to come home with me% b"t in order to give him the coat we need to wal


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/or somethin to constitute consideration it has to be barained for:

1" Performance

!" Beturn promise

argained !or:

a" -ouht by promisor in e7chane for promise"

b" 9iven by promisee in e7chane for same promise"

#ample:I promised my teacher 1=== dollars to induce him to write a

recommendation letter and the teacher promised to write a recommendation letter

for 1=== dollars" 0s this an en!orceable contract+ he answer is yes- 0 o!!ered

the money to sec"re per!ormance% and the teacher o!!ered per!ormance !or the

promise(the money)"

#ample:>ets assume that the uncle is havin a reat day" e sees illy and says

if he comes over hell ive him 1=== dollars" In this case its not a barain for

promise" 0t's tr"e that there is a detriment occ"rred by the nephew% b"t !rom

the "ncle's point o! view it's not a bargain !or detriment% it's a conditional gi!t"

#ample


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riid structure of the consideration reuirement the barain fell throuh in the end"

'his is not an easy outcome to accept" 0ne party relied on the other party% its a little

unfair (for e7ample in the case of oore v. lmer (1:@1)

3acts

* person oes to a clairvoyant and she reads him his future"

*fter the readin, after the service rendered, the person promises to pay her if

her prediction comes true"

e doesnt pay" e reneed on the promise"

;egal "estion: is the promise enforceable in the case of past consideration+

It was not a standard transaction% there was no e#-ante bargaining"

R"ling: he promise is not en!orceable-past consideration is not consideration"

$hat's done is done% thins * did for in the past cannot form valid consideration and

constitute a basis for enforcin a future promise"


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Di!!erences between Webb and Mills

>aterial bene!it% in the case of Webb 'here is direct material benefit to the

promisee, whereas in Mills'he

+ame person% promisor is direct recipient of benefit, unli&e in Mills ('he fatherwas the promisor and the son received the benefit)"

artial per!ormance% in Webbpart of the money had been paid already and in

Millsnone had yet been paid at time of suit"

>agnit"de o! detriment% the manitude of the detriment in Webbis sinificantly

reater than in Mills"

ere tryin to find a barain in a case where it is not possible" Its not a calculated act%

It .ust happens and you react"

ased on section 7?% this promise is probably en!orceable"

hy+

1" n!orcement is necessary to prevent in*"stice"

!" A list o! e#ceptions to the e#ception (that do not apply):

romisee meant to con!er bene!it as a gi!t" @o, ebb didnt intend a ift"

romisor was "n*"stly enriched% he was

romise val"e is not disproportionate to bene!it received% no

'heoretically there could be a suit to enforcer the contract on restitution based rounds"

mergency services:

'he absence of a promise severely limits recovery for necessary services furnished to a

person under disability and for emerency purposes" Assentially there is no duty to pay,

even under restitution law"

owever, a subseuent promise may remove doubt as to the reality of the benefit and

its value and may neate daner of an imposition of a full claim"


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hy is it that in reular cases of emerency we dont impose restitution+ 'he promise is

an indication that the recipient of the service actually .uded that there was value in the

sacrifice"

'he teacher thin&s that it doesnt add very much and is redundant"

>odi!ication

+til v. >yric (ngland 17@:)

3acts:

ritish sailors contracted to wor& on a ship for C pounds a month" 'he whole

crew was supposed to be 11 sailors and two of them deserted the ship durin the

.ourney"

'he captain approached the sailors and told them that he cant find substitutes

and offered to divide their waes amonst the remainin sailors"

'he sailors aree" 'hey perform their duties and et the ship bac& to the 2E"

*t this point the captain says he doesnt intend to pay the money" e says he

will pay the C pounds a month"

;egal "estion0s there considerationB

R"ling- here was no consideration as there was already a pre-e#isting d"ty"

'his seems very wron" hy not enforce the contract+

'here is somethin called the hold "p problem-the court is wary of opportunistic

behavior" >ets e7amine the story aain"

In the beinnin, there was freedom of choice on both sides, meanin the captain could

choose to wor& with these particular sailors and vice versa" If they werent free then we

would have a case of duress or unconscionability"

'he circumstances chane% a contract"al party% in reliance on the contract%

materially changed its position" Assentially the captain is sayin that when he areed

to the modification they were away at sea, he couldnt find other crew members, and

therefore the court should not enforce the modification, because it will promote

opportunistic behavior amon soldiers in similar cases"

'he crew claims% we werent in the middle of sea" Fou could have found two alternative

crew members" 'he captain will say that it is hard to find such replacements, however


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in this story he was the one who approached the soldiers" 9ow can he claim that

there was opport"nistic behavior+

0t seems lie the sailors were treated "n!airly" 9ow do we get to the !act that they

had a pree#isting d"ty+ 'he duty was to do a certain amount a wor&%a total amount of

wor& divided by 11 people, which is less than total wor& divided by ;G

he co"rt interprets the promise o! the sailors as s"ch that they wo"ld do

anything in their power to !inish the voyage" 5eath and desertions were not so rare

at this time" very sailor in agreeing to the contract too this possibility into

acco"nt" eca"se they were already "nder contract it is irrelevant that they had to

wor more- they already promised they wo"ld- the captain's promise is witho"t

consideration" 'he court is construin the contract" ow does the court &now how to

do this+

Is it reasonable+ *t first siht it seems really farfetched" 0ne e7ample was whether ornot there was a pree7istin duty to attend class" /or e7ample, Im bein ta&en to

medical treatment for a car accident" I tell the doctor that if he saves my left le I will pay

him C= thousand dollars" e saves the le" 'hen I renee on the promise" I will say that

she is under the ippocratic oath and therefore already has a pre%e7istin duty" 'he

courts will probably say that it is not a leal obliation and therefore does not constitute

a pre%e7istin duty"

-uppose I am in the army" hat are my obliations as a soldier+ 'his promise may be

unenforceable% if the soldier has a pree7istin duty to ma&e the mission successful then

the promise was without consideration"

$hat is the bene!it o! this r"le+ 'he opportunistic behavior can be on both sides" he


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rite it into the contract% but it is very hard" Its difficult to foresee every

continency" 'o price it you need to &now the probability"

Dultiple counterparties% multiple suppliers"

>on term relationship% tit for tat"

5pport"nistic behavior is a ris on both sides. $hat abo"t the captain+

'he captain is in a very different place now" e can substitute ood euipment with

cheap labor" e can ta&e advantae of the sailors"

Alasa acers (1:@2)

3acts:

* fishin voyae to *las&a and bac&, where the defendant had a factory"

'he areement was to pay the fishermen C= dollars for the season and ! cents

per each salmon cauht"

'he fishermen were reuired to do ship duty alone"

* few days later they stopped the wor& and demanded 1== dollars for the

season"

'he captain had no choice and areed, otherwise the whole fishin seasonwould have been lost"

'he captain sins the document but on return refuses to pay"

'he fishermen claimed that the nets were rotten and that made it harder for them" 'his

hurt their premium" In their minds, there was asymmetric information (this could be a

case of misrepresentation in Israel)"

Interestinly the trial co"rt re*ected the arg"ment and decided that the nets were

o b"t that the sailors were in the right"

R"ling -here is no consideration"

his is a


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'he court decided to adopt the trial court rulin about the nets% that they were o&" Also

it doesn't mae sense that the captain wanted them to have bad nets- the

incentives were per!ectly aligned- why wor with s"bstandard nets+

Di!!erences between Stilk andAlaska Packers

'here are several distinctions:

1" Stilkwasn't strictly an emergency case% they were at the port, they could do

thins" Its not li&e bein in the middle of the Pacific 0cean" In the case ofAlaska

Packers% there were no other options"

!" Alaska Packers% plaintiffs seem to have been as&in for morewitho"t their

being any real change in the circ"mstances" In Stilktwo sailors deserted the

ship"

$" Alaska packers- the fishermen initiated the modification whereas in Stilkthecaptain initiated modification"

'here are differences that could have led the court to decide differently, however both

cases are essentially similar" hat have we fiured out in this case+ $hat role does

consideration play here+ $hat are the co"rts trying to do here+

he two cases establish a lin between o"r desire to c"rb opport"nistic behavior

and consideration" e use the pree7istin duty rule to diminish the incentive of both

parties to enae in opportunistic behavior"

owever, it is a very imprecise mechanism:

1" he r"le wors on the sailors' side b"t not on the captain's side"

!" +ometimes modi!ications are wanted by both parties% the rule of

consideration doesnt do anythin on this side of the euation"

$" 0t's very easy to get aro"nd" ow+ 'he sailors will as& for payment up front%

they will barain e7%ante"

0t doesn't seem to mae sense to mae s"ch a rigid r"le in this area o! law" If we

want to reulate opportunistic behavior this seems li&e a very crude measure" 0t's bothover and "nder incl"sive" It seems li&e the courts should .ust deal with opportunistic

behavior when they locate it in the circumstances"

rian constr"ction (1:,7)

R"ling he contract is en!orceable% there is valid consideration.


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hy was this modification considered enforceable, while the others were not+ hy do

we see the court reach such a rulin+

'he court says that in this case there was additional "ne#pected wor that co"ld

not have been !oreseen by the original parties" hat is the implication+ 0ne

possibility is that the court misread the lanuae% not li&ely"

'he other theory is that even tho"gh the d"ties o! the s"bcontractor were written

broadly% there are still some developments that lie o"tside the broadest lang"age

"sed" >anuae, broad thouh it is, may not cover everythin" 'he court does not read

this clause to include everythin" 'hat is why this case is different"

'he main concern was opportunistic behavior" e showed how it controls opportunism

on one side" Is this a typical sit"ation where coercion might arise+ 'his isnt a ship

in the middle of the ocean" 'his is a more mundane situation and a new contractor

co"ld have been bro"ght in" 'he subcontractor seems to be more opportunistic" 'hecontractor is not raisin the consideration arument, but rather the subcontractor"

e said there could be opportunistic behavior on the captains side as well" Co"ld it be

that the contractor was taing advantage o! the s"bcontractor+ 'he type of clause

in the contract neates asymmetric information"

'he subcontractor tried to rely on the pree7istin duty rule to say that the second

contract is null and void" 'his is an absurd arument because he was essentially

admittin that he breached the first contractG 'he court upheld the modification" Fet the

court determined that there was no breach by the subcontractor because in order to et

rid of the debris the subcontractor had to et permission either from plaintiff, the owner

of the site" 'he necessary permission was not ranted so he was not in breach of

contract"

Restatement section 7::

* promise modifyin a duty under a contract not fully performed on either side is

bindin:

0! the modi!ication is !air and e"itable in view o! circ"mstances notanticipated by the parties when the contract was made

or to the e7tent provided by statute


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0r to the e7tent that .ustice reuires enforcement in view of material chane of

position in reliance on the promise"

hy do we have the reuirement that the duties were performed on both sides% if

neither of us performed there is less incentive for opportunistic behavior"

18/12/11- lesson =

Ade"acy o! consideration

4ourts will not review the adeuacy of consideration" 'he courts seeminly dont care

for the followin reasons:

'he autonomy of the parties

-ub.ective value attributed by the parties"

0nce certain parties reali8ed this, they started to outsmart the law"

ewman E +nell's (1:27)

3acts

usband borrows $3== dollars with C= shares of stoc& as collateral"

usband oes ban&rupt"

usband dies"

ife arees to ive ban& new I02 (assumes husband debt) and $3== dollars for

return of old one"

an& attempts to collect, Drs" " says no consideration for new I02"

R"ling- the 056 is "nen!orceable contract !or lac o! valid consideration.

'his court reverses the trial courts rulin and holds for defendant" $as the note o! a

banr"pt given in e#change !or a new note !rom decedent's wi!e% consideration

!or the new note+


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9olding: o- the old note was worthless% and hence the plainti!! neither gave

anything o! val"e% nor did the de!endant receive anything o! val"e"

hy is there no consideration in this case+

%he plainti!! s"rrendered


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+entimental val"e% not because she cared about the note"

0r we could construe it as a ratuitous promise to ma&e a ift to the ban&% if so it is not

enforceable" -he made the promise first, while the ban&, bein savvy tried to ma&e it

loo& li&e a uid pro uo to ma&e it enforceable"

'here was consideration for this promise only if either:

+"ch sentimental reasons are considered to be good consideration(but

then all ifts would be bindin)"

6se !ormalities(seal etc")"

'here is @0 review of adeuacy unless:

he val"e is ero

here is no val"e at all

here is sham consideration

here is nominal consideration

Restatement section ,: comment d:

ot reviewing the ade"acy allows deceiving the co"rts by a !ae contract"

retend e#change: 5isparity in value with or without other circumstances

sometimes indicates that the p"rported consideration was not in !act bargained

!or b"t was a mere !ormality or pretense" +"ch a sham or nominal

consideration does not satis!y the re"irement o! ,1" Promises are enforced if at

all either as promises bindin without consideration under !%;H or as promises

bindin by virtue of their formal characteristics under 6

+hnell v. ell (17?1)

3acts:

-hnells wife made a will leavin !== dollars"

-he dies"

-he had no property in her own name to leave"

er husband drafted a document recitin all of this and because


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1" -he has been a dutiful and lovin wife to Jach -hnell and has materially

aided him in the acuisition of all property now possessed by him

!" In consideration of the love and respect he bears by his wife

$" In consideration of one cent he arees to pay 66 dollars per year for $ yearsuntil each has received !== dollars

H" 'he heirs refrain from ma&in a claim on the estate in consideration of the

money to be received"

F possible considerations:

1" A promise by each o! the plainti!!s to pay the de!endant one cent% as if the

one cent induced the promise% they ave him $ cents for 6== dollars and vice

versa% does not mae m"ch sense"

!" he love and a!!ecting he bore !or his wi!eG sentimental only"

$" +he had done her part in the ac"isition o! theproperty% this is past

consideration% it cant support the promise"

H" 3orbearance !rom s"ing% this is an empty threat% there is no claim aainst the

husband" 9e didn't get anything !rom her"

hat reasons does the court ive as to why the promise to pay 1 cent is not

consideration for his promise to pay 6== dollars:

0nade"acy% the sub.ective value arument does not apply because it is money

on both sides" 'he courts will deviate from the rule"

#change is "nconscionable% 'he court believes that Dr" -hnell is bein ta&en

advantae of"

ominal consideration% there was nothin of value e7chaned here" In some

cases it is riht to intervene such as this case"

@ consideration- no consideration.

1 cent- nominal consideration.

0t's abo"t o"tsmarting the system% to et within the rule of no review of adeuacy"

e will try to et as close as possible to the =" 0t creates negative e#-ante incentives.

Restatement section ,1% comment b


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A mere pretense o! bargain does not s"!!ice as where there is a !alse recital o!

consideration or where the p"rported consideration is merely nominal"

'here is a problem however and that is the fact that the parties drafted the contract to

be real consideration" 'hey understood what they were doin% why not enforce it+

+mith v. $heeler

3acts

-mith ranted heeler an option to buy real estate"

'he contract recited consideration of the sum of one dollar to me in hand paid,

receipt thereof is hereby ac&nowleded"

R"ling Contract is en!orceable% there is valid consideration

+mith'sarg"ment: 'he one dollar is not consideration because it is nominal

consideration, and because in actuality it was never paid" @evertheless the court re.ects

this arument and rulin that the promise to pay one dollar is valid consideration"

9eoria follows the minority view which maintains that if the contract specifies that

consideration was paid for an option, as it did in this case? !ail"re to pay does not

render the contract void !or lac o! consideration. Co"rts m"st in"ire into the

!acts in order to proceed"

Restatement section 7,(1)(a):

'his allows non%barained for options to be enforced when there is either nominal

consideration or a recital of purported consideration"

" 0ffers made in consideration of one dollar paid or promised are often irrevocable"

'he irrevocability of an offer may be worth much or little to the offeree" 'he courts do

not ordinarily inuire into the adeuacy if the consideration barained for" 9ence a

comparatively small payment may !"rnish consideration !or the irrevocability o!

an o!!er proposing a transaction involving m"ch larger s"ms. "t gross

disproportion between the payment and the val"e o! the option commonlyindicates that the payment was not in !act bargained !or b"t was a mere !ormality

or pretense" In such a case there is no consideration as that term is defined in 31"

-uch a nominal consideration is reularly held sufficient to support a short term option

proposin an e7chane on fair terms"

3ormalities


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+eal

In the past, whether or not a promise was made under seal was always bindin" 0t was

an absol"te r"le" Compliance with !ormalities can be a strong indication o!

serio"sness" hat would we want from a formal rule indicatin seriousness+

In contracts we want somethin that is not ordinary, that we dont do every day" $e

want something that stands o"t" Its:

Ca"tionary

videntiary

Channeling

$hat maes !ormality special is precisely that !act that it is special% o"t o! the

ordinary" Promises made under seal were always bindin"

Aller v. Aller (17,7)

3acts

Peter borrowed 1===K from wife Dary and ives her an I02"

e repaid $3HK to Dary, leavin 6!6 still owed"

Dary dies" er estate oes to peter" If he dies it oes to all his &ids"

Peter ma&es out I02s to his ! dauhters from Dary

;egal "estion 0s an e#ec"tory promise "nder seal to give da"ghters money

valid despite the lac o! consideration+

hat was peters motive for writin the ! new notes to his dauhters+ e can assume

that he wanted Darys dauhters to have that part of her estate"

'he main uestion was whether the intention of the promisor was leally and

conclusively manifested so that it could be enforced"

ow did the court interpret the statue of *pril 13C+ +eal is a reb"ttable pres"mption%

it will not be enforced if the counter%promise was not respected% this represents a

wea&enin of the status of the seal" 3ail"re o! consideration de!eats the seal in this

case"

hat functions does the court thin& that the seal performs+


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outcome of the case since the areement bein under seal would not thereby have

been rendered unenforceable"

ere the court invo&es it to address a different arument% the seal imm"nies it !rom

n"ll and void% b"t not !rom challenging the ade"acy o! the contract" 'he court

refuses to et involved in the case"

Consideration in Anglo American Contract

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