Contracts Outline 2 - Legal Duty, Past Considerations, Good Faith, Intro to Interpretation | Study notes Law

Fall 2003 Contracts – Professor Dawson

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Legal Duty, “Past” Consideration, Modification

(pp. 109-163)

Look for: (1) Is there a bargain?

(2) What is basis for deciding if contract is enforceable?

R § 73: Performance of Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject

of honest dispute is not consideration; but a similar performance is consideration if it differs

from what was required by the duty in a way which reflects more than a pretense of bargain.

Lingenfelder v. Wainwright Brewery Co (1891, Missouri) [legal duty]

Π hired as architect, when doesn’t get additional contract for supplying refrigeration, gets

pissed, walks out of performance, then asks for more money and then his heirs sue to collect on

the additional money.

- Π not entitled to the extra money b/c he had a legal duty to fulfill the original contract.

“Modified contract” is not binding b/c not consideration. Can’t offer what you have already

given.

- Performance of a legal duty is not consideration

R § 205: Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in its

performance and its enforcement.

- applies to contracts already made, not negotiations; difficult to prove

- If first nullify original agreement, ok to make new agreement with different terms

Austin v Loral (1970, New York) [Duress]

[Intermediate Appellate Court and higher Court of Appeals have totally different versions of

facts and thus, outcomes]

Similar to Ligenfelder:

- There was a contract for performance; Supplier gets pissed and asks for more,

threatens to stop performance; Buyer gives into demands and complies with new

asking price

Difference? Buyer never paid the additional money in Lingenfelder, and L is the one who

brought suit. In this case, Loral (contractor) did pay the additional $ so that their work would not

be held up, and they are the one who sues in this case to get their money back (recover damages).

- If you’ve paid the extra $, have to use a different theory (apart from Legal Duty) to

get the money back.

- So, they used theory of Duress. Duress makes contract voidable, so can get out of it

even if already performed (paid the money). Theory of duty makes contract void – no

contract to begin with so don’t have to pay – released from performance.

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Legal Duty, “Past” Consideration, Modification (pp. 109-163) Look for: (1) Is there a bargain? (2) What is basis for deciding if contract is enforceable? R § 73: Performance of Legal Duty Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of honest dispute is not consideration ; but a similar performance is consideration if it differs from what was required by the duty in a way which reflects more than a pretense of bargain. Lingenfelder v. Wainwright Brewery Co (1891, Missouri) [legal duty] Π hired as architect, when doesn’t get additional contract for supplying refrigeration, gets pissed, walks out of performance, then asks for more money and then his heirs sue to collect on the additional money.

Π not entitled to the extra money b/c he had a legal duty to fulfill the original contract. “Modified contract” is not binding b/c not consideration. Can’t offer what you have already given.
Performance of a legal duty is not consideration R § 205: Duty of Good Faith and Fair Dealing Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.
applies to contracts already made, not negotiations; difficult to prove
If first nullify original agreement, ok to make new agreement with different terms Austin v Loral (1970, New York) [Duress] [Intermediate Appellate Court and higher Court of Appeals have totally different versions of facts and thus, outcomes] Similar to Ligenfelder:
There was a contract for performance; Supplier gets pissed and asks for more, threatens to stop performance; Buyer gives into demands and complies with new asking price Difference? Buyer never paid the additional money in Lingenfelder, and L is the one who brought suit. In this case, Loral (contractor) did pay the additional $ so that their work would not be held up, and they are the one who sues in this case to get their money back (recover damages).
If you’ve paid the extra $, have to use a different theory (apart from Legal Duty) to get the money back.
So, they used theory of Duress. Duress makes contract voidable, so can get out of it even if already performed (paid the money). Theory of duty makes contract void – no contract to begin with so don’t have to pay – released from performance.

R § 176: When a Threat is Improper (1) A threat is improper if (a) threaten a crime or a tort (b) threaten criminal prosecution (c) threaten to sue in bad faith (d) “the threat is a breach of the duty of good faith and fair dealing under a contract with the recipient” [very subjective – any threat made in bad faith?] (2) A threat is improper if the resulting exchange is not on fair terms, and (a) threatened act would harm recipient and not sig benefit party making the threat (b) the effectiveness of threat is increased by prior unfair dealing by party (c) threatens to use power for illegitimate ends

Threats to NOT enter into the contract are okay and common – duress must be an abuse of normal negotiating process
Threats make the contract voidable. Not automatically invalid, but could be if victim wants out.
Loral v Austin has nothing to do with pre-existing duty b/c contract is already performed Standard of Duress: (1) wrongful threat (2) threat deprives victim of free will (leaves no real alternative) R § 175: When Duress by Threat Makes a Contract Voidable (1) If manifestation of assent is induced by an improper threat... that leaves no reasonable alternative, the contract is voidable by the victim. … Angel v. Murray (1974, Rhode Island) [Duress] Garbage collector asks city counsel for more $ b/c of increase of 400 new units. Modification is enforceable. Difference from Loral and Lingenfelder?
no threats to withhold legal duty
no “hold up game”
both parties mutually agree, it was “fair and equitable”
circumstances of many new units was unanticipated at time contract was made
this promise is enforceable even w/o consideration b/c of R § 89
Courts will not enforce agreement made under coercion or duress, but
Courts will uphold agreements when a party encounters unanticipated difficulties and the other party voluntarily agrees to pay additional compensation even if work is already part of the legal duty under original contract

(a) the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; OR (b) to the extent that its value is disproportionate to the benefit. Introduction to Interpretation (pp. 362-402)

So far, have focused on 2nd^ requirement of bargain, consideration
Now, turning to 1st^ part, mutual assent
We are only legal system that puts importance on mutual assent, and it has important role for us Manifestation of Mutual Assent:
part of mechanics of entering into a bargain
have to determine if parties are talking about the same thing
2 problems: o Interpretation: how determine meaning of language used? o Acceptance: usually an offer by one party and acceptance of the other party
Mutual assent is necessary for consideration, but not sufficient Lucy v Zehmer (1954, Virginia) Lucy (farmer) offers $50K for land, Zehmer writes out contract and signs it, but later says he is “only joking.” Promise IS enforced.
Issue is whether there is a contract at all. Mutual assent?
Courts can only judge the actual conduct, not the unexpressed feelings
They can see only the external manifestation of the intent, not the internal, undisclosed intention
Zehmer should have known Lucy was serious, Lucy did not have reason to know Zehmer was only joking Raffles v Wichelhaus (1864, England) “Peerless” Agreement to buy cotton off of ship named “Peerless,” but 2 different ships, one departing 2 months after the first. Agreement is NOT binding.
no “meeting of the minds”, no mutual assent
ambiguity as to the product (whereas in Lucy had ambiguity about intent)
neither party knew what they other meant so no mutual assent
Identity of Peerless is “fundamental information” to agreement R § 20: Effect of Misunderstanding (1) No manifestation of mutual assent if the parties attach materially different meaning to their manifestations AND (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or should know the meaning attached by the other.

(2) The manifestations of the parties are operative in accordance with the meanings attached to them by one of the parties if (a)(b)* that party does not know (or has no reason to know)* of any different meaning attached by the other, and the other knows (or has reason to know)* the meaning attached by the first party [Lucy v Zehmer] Frigalimment Importing Co v B.N.S. Intern. Sales Corp. (1960, NY) “The issue is, what is chicken?” Contract is NOT binding b/c:

no mutual assent re meaning of chicken.
again, ambiguity as to product
meaning of chicken is “fundamental” to agreement
Judge decided issue as matter of law. He did not say exactly WHAT chicken was, but said Π had burden of showing that “chicken” was used in the narrower rather than the broader sense, and they did not prove so. à complaint dismissed with costs D: There is a continuum b/w Formation and Interpretation Formation – question if there is a contract at all b/c of lack of mutual assent Interpretation – assume there is a contract, parties have already behaved as if there is a contract, but a question re the meaning of a term of the contract is disputed
19 th Century judges were very reluctant to say they were “interpreting” a contract. Thought they “knew” what contract meant based on the literal language. Did not consider context.
Modern approach is to look at the context
Impossible to cover all potential contingencies in a contract, have to figure out how to handle problems when they arise, how predict what court will do? (essence of being a lawyer) Objective and Subjective Elements of Interpretation: (text)
Classical contract law tended to be objective and standardized – “making of a contract does not depend upon the state of the parties’ minds; it depends upon their overt acts” o Williston: demonstrates objectivism of classical contract law: “meaning and effect of contract depends on the construction given the written language by the court , and the court will give that language its natural and appropriate meaning; and, if it is unambiguous, will not even admit evidence of what the parties may have thought the meaning to be” (text p. 384) o Learned Hand: “a contract has, strictly speaking, nothing to do with the personal, or individual intent of the parties”
Modern contract law tends to be subjective and individualized: principles of interpretation should be responsive not only to objective elements but to the parties’ subjective intentions.
Four central modern principles of interpretation:

o Principle IV: If the parties, A and B, attach different meanings, MM and YY, to an expression, and A knows that B attaches meaning YY, while B does not know that A attaches meaning MM, meaning YY prevails even if it is reasonable than meaning MM. § Largely subjective, supported by a fault analysis § B may be at fault for thinking the wrong thing, but A is more at fault in allowing B to proceed knowing they were thinking something different § EX (??): Lucy v Zehmer – only joking. Zehmer was more at fault for knowing that Lucy was serious and proceeding anyway without clarifying his own intentions R § 201 (2) Where the parties have attached different meanings to a promise or agreement or a term thereof, it is interpreted in accordance with the meaning attached by one of them if at the time the agreement was made (a) that party did not know of any different meaning attached by the other, and the other knew the meaning attached by the first party... Haines v New York (1977, NY) [duration of contract] Agreement first entered into in 1924 b/w City and intervenors (Town of Hunter & Village of Tannersville). City assumed obligation of constructing a sewage system... and subsequent operation, maintenance, and repair... also to extend sewage lines when necessitated by future growth. New developer wants NYC to extend lines, and since system is way over capacity, wants NYC to build a new sewage system to accommodate the new development

Trial and Appellate courts both found for Π, said NYC was obligated to build new plant
“Where the parties have not clearly expressed the duration of a contract, the courts will imply that they intended to continue for a reasonable time” (R § 204)
this rule is not applied to contracts of employment, exclusive agency, distributorship, or requirements
NYC is obligated to maintain existing facility, but is not obligated to build a new since extending the lines to the present facility would overextend it
Court applied a reasonableness standard in their response to Π – the contracts looks as though NYC should do what Π wants, but it is not reasonable to expect them to do this 50+ years after agreement was entered into. Court had to find legitimate reasons to apply the reasonableness standard (has to be based on law, thus limiting the duration) R § 204 Supplying an Omitted Essential Term When the parties to a bargain (1) sufficiently defined to be a contract (2) have not agreed with respect to a term which is essential to a determination of their rights and duties, (3) a term which is reasonable in the circumstances is supplied by the court. Spaulding v Morse (1947, Mass.) [Supplying a reasonable term]

Divorce case, F will pay $1200 per year for son until his entrance into college then F will pay $2200 per year for no more than 4 years. Son gets drafted right out of high school into army for WWI, F stops paying. Trustee sues to get F to make back payments and to pay until son enters college b/c he’s a minor.

This is NOT a misunderstanding case, not like Raffles where both parties attached different meanings. The parents never anticipated these circumstances, have to interpret the language to figure out how to handle the situation.
Court handles it by looking at intention of the parties, has 3 options: o F does have to pay [interpretation] o F does not have to pay, OR [interpretation] o Say there is no contract at all, b/c no meeting of the minds (a theoretical option, but not a practically viable option [formation issue]
R § 204 – court can supply a term that is reasonable under the circumstances; a narrow and limiting doctrine, cannot use it arbitrarily
Parties enter into contracts on their own free will, but courts will supply terms to “write the contract” when necessary Berwick & Smith Co v Salem Press Inc. (1954, Mass) Printer (Π) sues author (Δ) for non-payment of publishing 5,000 volumes of a 2-vol set. Dispute has to the “unit” of sale – either 5,000 sets or 10,000 total books. Δ wants to pay for 5,000 sets at .561 each, and Π wants them to pay for 10,000 total books at .538.
language is not super clear, if not in trade probably don’t know what it means
Π knew what the language meant; arguable that Δ knew as well
Court could have said as a matter of law that Π didn’t prove case (like Frigaliment), but didn’t. This court looked at the context of agreement to make sense of the language.
“expression was not unambiguous” à it was ambiguous, so the court can interpret the contract and settle it as a matter-of-law – for the judge to determine (very complex) as question-of-law
when issue goes beyond interpreting the language of an agreement, when there is evidence disputing the meaning, it becomes an issue for a jury to determine as a question-of-fact (for jury to decide on evidence of “usage of trade”)
This case comes down to a usage of trade issue
Can turn to other sources of information to determine meaning of a term: R § 203: Standards of Preference in Interpretation Express terms à Course of performance à Course of dealing (R § 223) à Usage of trade (R §

all sources of info provide info that parties’ didn’t expressly state in contracts, but we must assume they had it in mind
EX: parties implicitly believe “blue = purple” and act as if this is so; thus, when see agreement that says “blue” we assume it really means “purple” R § 202: Rules in Aid of Interpretation

Contracts Outline 2 - Legal Duty, Past Considerations, Good Faith, Intro to Interpretation, Study notes of Law

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