Contract Law Essay Series

CONTRACT LAW ESSAY SERIES

ESSAY QUESTION #5

Ted is the President of ChipCo, a small company that makes computer chips for the secondary personal computer market. In the regular course of ChipCo’s business Ted did the following:

Ted sent an e-mail to his daughter Pam, a Vice President of ChipCo, which stated: “This is to confirm our conversation of the other day wherein you agreed to make your home garage available next week to ChipCo for storage of ChipCo items. You will be paid $5.00 per year.” Pam e-mailed back, stating, “That’s right, Dad; the garage is clean and ready for storage.”

Ted also sent an e-mail to Dave, a customer of ChipCo, which stated, “We agree to replace our defective chip in your computer, but only if you agree not to bring any legal action against Chip Co.” Dave sent a return e-mail stating that he agreed to these terms.

Ted telephoned Bob, another customer of ChipCo, to confirm that ChipCo will send 100 computer chip units to Bob, who had already fully paid for the units, but only if Bob agreed to pay an additional 10% due to an increase in ChipCo’s operating costs. Bob reluctantly agreed, as he needed the chips immediately.

Ted wrote a letter to Silicon Inc., in which ChipCo offered to buy 10 tons of processed silicon during the coming year, at market price, should ChipCo need any silicon. Silicon Inc. responded, agreeing to sell all the silicon to ChipCo that it might want.

Is there adequate consideration for ChipCo’s agreements above-described with Pam, Dave, Bob and Silicon, Inc.? Discuss.

CONTRACT DEFINITION. A contract is a set of promises between two or more people, the performance of which the law recognizes a viable duty, and for the breach of which the law provides a remedy. A valid contract contains offer, acceptance and consideration, with no applicable defenses to contract formation.

I. CONSIDERATION FOR PAM

APPLICABLE LAW. The Uniform Commercial Code governs the sale of moveable goods which are properly identified at contract formation. The Common Law of contracts consists of all other contracts, generally contracts for services. Here, we have Pam who is giving up space in her garage, for Chipco storage. In other words, she is providing a service to Chipco, and this situation is properly discussed under the Common Law of contracts.

CONTRACT FORMATION. A valid contract must have appropriate offer, acceptance and consideration, with no viable defenses to contract formation. This question relates to consideration, and therefore, the other components of valid contract formation, offer, acceptance and defenses, will not be discussed.

CONSIDERATION. Consideration is a bargained for exchange of acts or promises, with either detriment to the promisee or benefit to the promisor, or both.

BARGAINED FOR EXCHANGE. A sham / nominal amount of money, will indicate that no bargaining process actually took place, and the contract will be void for a lack of consideration. However, where someone simply agrees to pay an inadequate amount, but which is higher than a sham / nominal amount, a bargaining process will be said to have taken place.

Here, Pam is the vice-president of Chipco, and the daughter of the president of Chipco, Ted. Pam agreed to make her home garage available for storage of Chipco items, at $5 / year. It looks as though Pam is giving a gift to her father, because $5 / year for storage of valuable computer chips, is of almost no value at all. Therefore, there is no consideration here, for lack of a bargained for exchange.

LEGAL DETRIMENT. Legal detriment is asked for by promisor in exchange for promises. The different types of consideration are performance / doing something you do not need to do, or forbearance / not doing something you are legally bound to do, or a promise to perform or a promise to forbear. Here, Further, Pam and Ted have a close familial relationship, and the question arises as to whether Pam is fulfilling a pre-existing duty to her father, in which case there would be no legal detriment. However, absent a pre-existing duty, Pam is giving up the right to use all of her garage, and Ted is giving up $5 / year, therefore, there is legal detriment.

PROMISSORY ESTOPPEL. Where promisor makes promises which promisor reasonably believes will induce action, forbearance or detrimental reliance by promisee, and which actually do induce such action, forbearance or detrimental reliance, the original promise will be binding

The e.mail from Ted indicates that Ted and Pam talked earlier. If Pam had fixed up the garage to the extent that it was a proper repository for computer chips, she may have a consideration substitute in promissory estoppel.

STATUTE OF FRAUDS / WRITING. Some contracts are unenforceable unless they are accompanied by a written agreement. These contracts include land contracts, marriage contracts, goods for the sale of $500 or more, suretyship contracts, executor or administrator, and contracts lasting a year or more. The writing must be signed by the party to be charged, which is the defendant or their authorized agent, and must contain all material terms including quantity.

Here, it is unclear as to whether there was a sufficient writing here, however, the e.mail correspondence would have indicated the nature of the agreement, and the person who sent it.

II. CONSIDERATION FOR DAVE

APPLICABLE LAW. Supra. UCC. There apparently was a sale of a computer chip from Chipco to Dave, thus, this situation is property discussed under the UCC.

MERCHANTS. Under the UCC, a merchant is someone who trades or deals regularly with the goods involved in the contract, or who otherwise holds themselves out as an expert knowledgeable about the goods in the contract. Here, Dave is characterized as a customer of Chipco, who only apparently purchased one computer chip. Therefore, he is a purchaser, but he could not be considered a merchant. On the other hand, Chipco is characterized as a small company that makes computer chips, and therefore it is a merchant.

CONSIDERATION. Supra.

BARGAINED FOR EXCHANGE. Supra. Apparently, an item had already been purchased, indicating a Bargained For Exchange, in the original transaction.

LEGAL DETRIMENT. Supra. FOREBEARANCE TO SUE. Surrender of a Legal Claim. Where a party promises not to pursue a legal claim that they believe with good faith to be a valid claim, in return for the other party’s promise to pay money, then legal detriment will exist as related to the promisee who gives up the claim, and to the promisor who receives the benefit of not having to defend a lawsuit. Surrender of an invalid claim will still constitute consideration if a reasonable person surrendering the claim could have believed that the claim was well-founded, and that it could have been pursued in good faith. It does not matter if the claim is later revealed to be invalid, or that the disputed claim is not a person’s own claim, or a claim against them.

COPYRIGHT 2010 PROFESSOR GOULD, J.D., M.A. Dave has a breach of warranty claim against Chipco, and it is normally fine for him to give up the claim, even if the claim may have been valid, in order to provide legal detriment. In other words, Dave can exercise his right to forbear from bringing a legal claim, and this will serve as his legal detriment.

MODIFICATION. Pre-Existing Duty Rule. Any agreement to change an existing contract is a potential modification of the contract. However, under the pre-existing duty rule, if parties to a current contract modify the contract for the benefit of only one party, this will violate the pre-existing duty rule, and the contract will be void for a lack of consideration, unless the modification is fair and equitable given the current circumstances not anticipated at the time of contract formation.

Here, the right to have the computer chip fixed had already been established via an implied warranty that the computer chip was fit for its general purpose. Dave could not give up his right to sue, unless we look at this situation as a modification of the original contract. Under the UCC, a modification to an existing contract needs no new consideration, as long as both parties operate with good faith and fair dealing. Here, Ted was endeavoring to trick Dave into giving up a valuable legal right, which Dave had every legal right to exercise. Ted was bound to fix Dave’s computer chip, whether or not Dave consented to forbear from a legal claim. Therefore, bad faith exists on Ted’s part, and no modification will be found. There is no consideration in this instance.

III. CONSIDERATION FOR BOB

APPLICABLE LAW. Supra. UCC. MERCHANTS. Supra. Chipco is a merchant. Bob is also a merchant, inasmuch as he purchased a substantial supply of computer chips.

CONSIDERATION. Supra. There was already a transaction, which apparently had consideration, so the emphasis here is on the consideration necessary for a modification.

MODIFICATION. UCC. NO NEW CONSIDERATION NEEDED. Under the UCC, no new consideration is need for a viable modification, however, both parties must exercise good faith and fair dealing. Bob was waiting for his 100 computer chips, which he had already paid fully for. He had no other obligations under the contract, he was merely waiting for the chips, which he needed immediately. Chipco / Ted should have merely sent the chips, in order to complete their contractual duties. However, instead of sending the chips to Bob, Ted pressured Bob by withholding Bob’s rightful shipment of goods, until such time as Bob agreed to pay another ten percent. The only thing Bob received in paying an additional ten percent, is the right to have Ted follow through on Ted’s pre-existing duty to ship the goods. This would not be a good faith modification, and this there is no consideration, here.

COPYRIGHT 2010 PROFESSOR GOULD, J.D., M.A. STATUTE OF FRAUDS / WRITING. However, were there to be good faith and fair dealing, any such modifications must meet the goods of $500 or more, writing requirement. Here, we have a telephone conversation, and no other indication of a writing, as regards the possible modification. Therefore, the modification is unenforceable under the statute of frauds.

IV. CONSIDERATION FOR SILICON, INC

APPLICABLE LAW. Supra. UCC. MERCHANTS. Supra. Silicon is a merchant because it is listed as a corporation, and because it is dealing in tons of silicon.

CONSIDERATION. Supra.

BARGAINED FOR EXCHANGE. Supra. A market price exchange of goods indicates a bargained for exchange between the parties.

LEGAL DETRIMENT. Supra. ILLUSORY PROMISE. An illusory promise is not supported by consideration, because it seems to promise something, but it does not actually commit the promisor to do anything. Here, it appears as though there is an illusory promise, because Chipco has not promised to buy a particular amount of silicon.

Requirements and Output Contracts. However, where outputs and requirements contracts sometimes appear to have illusory promises, the duty of good faith and fair dealing imputed in UCC contracts will cure any otherwise illusory promises. Therefore, consideration will not be illusory here, as long as both parties proceed with good faith and fair dealing, in effectuating their performance of this contract.

PROMISSORY ESTOPPEL. Supra. Silicon may have already taken actions to make sure that they had a significant amount of silicon in stock, so that when Chipco narrows down when they want silicon and orders it, Silicon will have enough silicon in stock to fill the order. Therefore, if Chipco does not exercise good faith and fair dealing in the future, Silicon will assert promissory estoppel as a consideration substitute.