This Document Contains Chapters 11 to 12 Chapter 11 CONDUCT INVALIDATING ASSENT Duress [11-1] Knowledge of Falsity and Intention to Deceive Physical Compulsion [11-1a] Justifiable Reliance Improper Threats [11-1b] Nonfraudulent Misrepresentation [11-4] Undue Influence [11-2] Mistake [11-5] Fraud [11-3] Mutual Mistake [11-5a] Fraud in the Execution [11-3a] Unilateral Mistake [11-5b] Fraud in the Inducement [11-3b] Assumption of Risk of Mistake [11-5c] False Representation Effect of Fault upon Mistake [11-5d] Fact Mistake in Meaning of Terms [11-5e] Materiality Cases in This Chapter Chapter Outcomes After reading and studying this chapter, the student should be able to: •Identify the types of duress and describe the legal effect of each. •Define undue influence and identify some of the situations giving rise to a confidential relationship. •Identify the types of fraud and the elements that must be shown to establish the existence of each. •Define the two types of nonfraudulent misrepresentation. •Identify and explain the situations involving voidable mistakes. TEACHING NOTES The law demands that agreements be voluntary, knowing, legal and entered into by parties with legal capacity. Otherwise the agreement is either voidable, void, or unenforceable. Defenses to contracts include situations in which the manifested consent was not given knowingly and voluntarily, such as duress, undue influence, fraud, nonfraudulent misrepresentation, and mistake. *** Chapter Outcome *** Identify the types of duress and describe the legal effect of each. 11-1 Duress Wrongful act or threat that overcomes the free will of a party. There are two basic types: 11-1a Physical Compulsion When one party compels another to agree to a contract through actual physical force; renders the agreement void and the party exerting the duress is liable in restitution as necessary to avoid unjust enrichment. 11-1b Improper Threats Using economic and social coercion, leaving the victim with no reasonable alternative to agreeing with the more powerful party; threat may be explicit or inferred from words or conduct. A subjective test is used to determine whether the threat actually induced assent on the part of the person claiming to be the victim of duress; makes the contract voidable at the option of the coerced party. This type of duress makes the contract voidable at the option of the coerced party, and the party exerting the duress is liable in restitution as necessary to avoid unjust enrichment. CASE 11-1 BERARDI v. MEADOWBROOK MALL COMPANY Supreme Court of Appeals of West Virginia, 2002 212 W.Va. 377, 572 S.E.2d 900 http://scholar.google.com/scholar_case?case=1600684206457698039&q=572+S.E.2d+900+&hl=en&as_sdt=2,34 Per Curiam: Jerry A. Berardi (hereinafter referred to as “Mr. Berardi”), Betty J. Berardi, and Bentley Corporation, plaintiffs below/appellants (hereinafter collectively referred to as “the Berardis”), seek reversal of a summary judgment granted to Meadowbrook Mall Company, an Ohio Limited Partnership, and the Cafaro Company (hereinafter referred to as “Cafaro Company”), an Ohio Corporation, defendants below/appellees (hereinafter collectively referred to as “Meadowbrook” or * * * “Cafaro Company”). * * * Facts and Procedural History Between 1985 and 1987, the Berardis leased space for three restaurants from Meadowbrook. In 1990, the Berardis were delinquent in their rent. Cafaro Company, an affiliate of Meadowbrook, sent a letter dated October 1, 1990, to Mr. Berardi citing the arrearages. The letter informed him that a lawsuit would be filed in Ohio requesting judgment for the total amount of the arrearages. The letter proposed that after filing the suits, a consent judgment would be forwarded to Mr. Berardi granting judgment for the full amount of arrearages. Once the consent judgment was signed by both parties and filed with the court, the letter pledged, no steps to enforce the judgment would be undertaken providing the Berardis continued to operate their three restaurants consistent with the then present payment arrangement. Mr. Berardi signed the letter on October 5, 1990. In April 1996, Meadowbrook caused to be filed in the Circuit Court of Harrison County, West Virginia, [the] * * * judgment of the Ohio lawsuits. * * * [Meadowbrook received a] lien on the Goff Building [which was owned by the Berardis, and which] impeded the refinancing [of the building by the Berardis]. Correspondence was exchanged between counsel for the parties. * * * The correspondence ultimately led, in June 1997, to the Berardis and Anthony Cafaro (an authorized agent for Meadowbrook) signing a “Settlement Agreement and Release” settling the 1990 Ohio judgments. In this document, the Berardis acknowledged the validity of the 1990 Ohio judgments and that the aggregate due under them, plus interest and leasehold charges, was $814,375.97. The Berardis agreed to pay Meadowbrook $150,000 on the date the Goff Building refinancing occurred, and also to pay Meadowbrook $100,000 plus 8.5% interest per year on the third anniversary of the initial $150,000 payment. These payments would discharge the Berardis from all other amounts due and owing. The payment of the initial $150,000 would also result in Meadowbrook releasing the lien against the Goff Building. The agreement additionally recited: Berardis hereby release and forever discharge Meadowbrook, its employees, agents, successors, and assigns from any and all claims, demands, damages, actions, and causes of action of any kind or nature that have arisen or may arise as a result of the leases, or Guaranties whether said claims are known or unknown, contingent, or liquidated, from the beginning of time to the effective date of the agreement. Berardis acknowledge there was no unethical behavior on behalf of Meadowbrook Mall Company, its employees, agents. Nevertheless, on October 2, 2000, the Berardis filed a complaint against Meadowbrook alleging that Meadowbrook breached the October 1990 agreement by attempting to enforce the 1990 Ohio judgments, that Meadowbrook extorted by duress and coercion the 1997 agreement, and that Meadowbrook and other business entities had conspired to enter into extortionate agreements with their tenants. Meadowbrook filed a motion to dismiss under the 1997 settlement. * * * Meadowbrook sought summary judgment, which the circuit court granted. From this summary judgment, Berardi now appeals. * * * Discussion “We begin our discussion of this issue by reiterating, at the outset, that settlements are highly regarded and scrupulously enforced, so long as they are legally sound.” [Citation.] “The law favors and encourages the resolution of controversies by contracts of compromise and settlement rather than by litigation; and it is the policy of the law to uphold and enforce such contracts if they are fairly made and are not in contravention of some law or public policy.” [Citations.] Those who seek to avoid a settlement “face a heavy burden” [citation] and “since * * * settlement agreements, when properly executed, are legal and binding, this Court will not set aside such agreements on allegations of duress * * * absent clear and convincing proof of such claims.” [Citation.] The Berardis contend the 1997 settlement is invalid as it was procured by “economic duress:” The concept of “economic or business duress” may be generally stated as follows: Where the plaintiff is forced into a transaction as a result of unlawful threats or wrongful, oppressive, or unconscionable conduct on the part of the defendant which leaves the plaintiff no reasonable alternative but to acquiesce, the plaintiff may void the transaction and recover any economic loss. [Citation.] In [citation], we emphasized that [t]here appears to be general acknowledgment that duress is not shown because one party to the contract has driven a hard bargain or that market or other conditions now make the contract more difficult to perform by one of the parties or that financial circumstances may have caused one party to make concessions. “Duress is not readily accepted as an excuse” to avoid a contract. [Citation.] Thus, to establish economic duress, “in addition to their own * * * statements, the plaintiffs must produce objective evidence of their duress. The defense of economic duress does not turn only upon the subjective state of mind of the plaintiffs, but it must be reasonable in light of the objective facts presented.” [Citation.] Mr. Berardi is a sophisticated businessman who has operated a number of commercial enterprises. As of 1997, the Berardis had substantial assets and a considerable net worth. While economic duress may reach large business entities as well as the “proverbial little old lady in tennis shoes,” [citation], when the parties are sophisticated business entities, releases should be voided only in “‘extreme and extraordinary cases.’” [Citation.] Indeed, “where an experienced businessman takes sufficient time, seeks the advice of counsel and understands the content of what he is signing he cannot claim the execution of the release was a product of duress.” [Citation.] While the presence of counsel will not per se defeat a claim of economic duress, “a court must determine if the attorneys had an opportunity for meaningful input under the circumstances.” [Citation.] * * * No case can be found, we apprehend, where a party who, without force or intimidation and with full knowledge of all the facts of the case, accepts on account of an unlitigated and controverted demand a sum less than what he claims and believes to be due him, and agrees to accept that sum in full satisfaction, has been permitted to avoid his act on the ground that this is duress. [Citations.] Moreover, the Berardis did not file their complaint until October 2, 2000. A party seeking to repudiate a release must act promptly in disavowing it once the putative duress ends or else the party will be deemed to have ratified the agreement. [Citations.] * * * Finally, we do not believe that any relative economic inequality between the Berardis and Meadowbrook sufficiently factor into the summary judgment calculation. We have recognized that, “in most commercial transactions it may be assumed that there is some inequality of bargaining power. * * *” [Citation.] Indeed, even when one sophisticated business entity enjoys “a decided economic advantage” over another such entity, economic duress is extremely circumscribed: Because an element of economic duress is * * * present when many contracts are formed or releases given, the ability of a party to disown his obligations under a contract or release on that basis is reserved for extreme and extraordinary cases. Otherwise, the stronger party to a contract or release would routinely be at risk of having its rights under the contract or release challenged long after the instrument became effective. [Citation.] Given the facts, the law’s disfavor of economic duress, its approbation of settlements, the sophisticated nature of the parties, and the extremely high evidentiary burden the Berardis must overcome, we harbor no substantial doubt nor do we believe the circuit court abused its discretion. * * * Conclusion The judgment of the Circuit Court of Harrison County is affirmed. *** Chapter Outcome *** Define undue influence and identify some of the situations giving rise to a confidential relationship. 11-2 Undue Influence Taking unfair advantage of a person, by reason of a dominant position based on a confidential relationship, renders a contract voidable and the dominant party is liable in restitution as necessary to avoid unjust enrichment. Examples of situations giving rise to a confidential relationship are those of guardian and ward, trustee and beneficiary, spouses to each other, principal and agent, parent and child, attorney and client, physician and patient, and clergy and parishioner. CASE 11-2 NEUGEBAUER v. NEUGEBAUER Supreme Court of South Dakota, 2011 804 N.W.2D 450, 2011 S.D. 64 http://scholar.google.com/scholar_case?case=1062309080412566845&q=804+N.W.2d+450+&hl=en&num=100&as_sdt=ffffffffffffe04&as_ylo=2010 Zinter, J. Harold and Pearl Neugebauer owned a 159-acre farm the parties called the "Home Place." The Hutchinson County farm included a house, garage, granary, machine sheds, barns, silos, and a dairy barn. During their marriage, Harold handled all of the legal and financial affairs of the farm and family. In 1980, Harold died, leaving Pearl as the sole owner of the Home Place and another farm property. Following Harold's death, Lincoln, the youngest of Harold and Pearl's seven children, began farming both properties. Lincoln also resided with his mother on the Home Place. In 1984, Lincoln and Dennis, one of Pearl's other sons, formed L & D Farms partnership for the purpose of managing the farming operation on Pearl's land. L & D Farms entered into a ten-year lease with Pearl that included an option to purchase the Home Place for $117,000, the appraised value in 1984. In 1985, Pearl moved from the farm to a home in Parkston. In 1989, Lincoln and Dennis dissolved L & D Farms without exercising the option to purchase. After dissolution of the partnership, Lincoln farmed Pearl's land by himself. He paid annual rent, but Lincoln and Pearl never reduced their oral farm lease to writing. Pearl trusted Lincoln and left it to him to determine how much rent to pay. Pearl did, however, expect that Lincoln would be "fair." Pearl never took any steps to determine if the $6,320 annual rent Lincoln was paying was fair. On several occasions from 2004 to 2008, Lincoln privately consulted with attorney Keith Goehring about purchasing the Home Place. On December 3, 2008, Lincoln took Pearl to Goehring's office to discuss the purchase. Pearl, who only had an eighth-grade education, was almost eighty-four years old and was hard of hearing. Although Lincoln and Goehring discussed details of Lincoln's proposed purchase, Pearl said virtually nothing. She later testified that she could not keep up with the conversation and did not understand the terms discussed. On December 17, 2008, *** Pearl and Lincoln executed a contract for deed that had been drafted by Goehring. Goehring had been retained and his fees were paid by Lincoln. Neither Lincoln nor Goehring advised Pearl that Goehring represented only Lincoln, and neither suggested that Pearl could or should retain her own legal counsel. There is no dispute that the fair market value of the Home Place was $697,000 in 2008 when the contract for deed was executed. Under the terms of the contract, Lincoln was to pay Pearl $117,000, the farm's 1984 appraised value. The contract price was to be paid over thirty years by making annual payments of $6,902.98. After executing the contract, Lincoln told Pearl not to tell the rest of her children about the agreement. Pearl later became suspicious that something may have been wrong with the contract. In January 2009, Pearl's children returned to Parkston for a funeral. For the first time, Pearl revealed the contract to the rest of her children, and they explained the contract to her. She began to cry and wanted the contract torn up. Pearl personally and through her children asked Lincoln to tear up the contract. Lincoln refused. [Pearl then brought an action for rescission of the contract on the ground of undue influence. The trial court found that Lincoln had exerted undue influence and rescinded the contract. Lincoln appealed, claiming that the trial court erred in finding that the contract for deed was a product of undue influence.] The elements [of undue influence] are: (1) a person susceptible to undue influence; (2) another's opportunity to exert undue influence on that person to effect a wrongful purpose; (3) another's disposition to do so for an improper purpose; and (4) a result clearly showing the effects of undue influence. [Citation.] The party alleging undue influence must prove these elements by a preponderance of the evidence. [Citation.] Susceptibility to Undue Influence Lincoln argues that no evidence supported the court's finding that Pearl was susceptible to undue influence. * * * Lincoln contends that in the absence of medical evidence of mental deficits, the court erred in finding that Pearl was susceptible to undue influence. Concededly, “‘physical and mental weakness is always material upon the question of undue influence.’ Obviously, an aged and infirm person with impaired mental faculties would be more susceptible to influence than a mentally alert younger person in good health.” [Citations.] But this Court has not required medical evidence to prove susceptibility to undue influence. * * * In this case, there was substantial non-medical evidence demonstrating Pearl's susceptibility to undue influence. Pearl had an eighth-grade education, and she lacked experience in business and legal transactions. When she signed the contract for deed, Pearl was almost eighty-four and hard of hearing. Pearl and Dennis testified that she had relied on her deceased husband to take care of all their business and legal matters during their marriage. This dependency continued after Harold's death. Pearl testified that, with the exception of her checking account and monthly expenses, she often asked her children for help with business and financial affairs, which she did not understand. * * * We also note that Lincoln admitted Pearl had some mental impairment. He told [Pearl’s daughter] Cheryl that Pearl was “slipping,” meaning that Pearl would say something and a few minutes later repeat herself because she had forgotten what she had said. * * * Opportunity to Exert Undue Influence Lincoln contends that the court's finding of opportunity to exert undue influence was erroneous because Lincoln and Pearl had no confidential relationship and Pearl had the ability to seek independent advice between the two meetings with Goehring, but chose not to do so. * * * In this case, Pearl testified that Lincoln was her son and someone with whom she had previously lived for many years: someone she trusted to “do right.” Lincoln conceded that on the date Pearl signed the contract, he knew Pearl trusted him and had confidence that he would treat her fairly in his business dealings with her. This type of trust and confidence by a mother in her son was sufficient to prove opportunity. * * * Disposition to Exert Undue Influence The court's finding that Lincoln had a disposition to exert undue influence for an improper purpose was also supported. Lincoln had substantial experience in farmland transactions and real estate appreciation. He collaborated with an attorney a number of times over four years to purchase the farm and draft the necessary documents. Yet Lincoln did not have the farm appraised as he had previously done when farming the property with his brother. Instead, Lincoln set the price at a value for which it had appraised twenty-four years earlier, a price that was one-sixth of its then current value. He also took no steps to ensure that his elderly mother understood the contract terms, including the fact that considering her age and the thirty-year amortization, she would likely never receive a substantial portion of the payments. Finally, neither Lincoln nor his attorney advised Pearl to seek legal representation. * * * Lincoln's conduct after execution of the contract was also relevant to show disposition to exercise undue influence at the time the contract was executed. [Citation.] After this contract for deed was executed, Lincoln instructed Pearl not to tell her other children about the contract. * * * The court finally observed that Lincoln historically took advantage of Pearl by paying her less than fair market rent under the oral lease. * * * * * * Result Showing Effects of Undue Influence Finally, we see no clear error in the court finding a result clearly showing the effects of undue influence. By executing the contract for deed, Pearl sold her property for $580,000 less than its value. Not only was the contract price of $117,000 substantially below the market value of $697,000, the thirty-year payment term would have required Pearl to live to 114 years-of-age to receive the payments. *** We find no clear error in the circuit court's findings of fact. We affirm its conclusion that rescission was warranted. * * * The judgment of the circuit court is affirmed. *** Chapter Outcome *** Identify the types of fraud and the elements that must be shown to establish the existence of each. 11-3 Fraud Fraud prevents agreement from being knowingly given. There are two distinct types: fraud in the execution and fraud in the inducement. 11-3a Fraud in the Execution A misrepresentation that deceives the other party as to the nature of a document evidencing the contract (such as when secretly switching documents before signing); renders the agreement void (extremely rare). 11-3b Fraud in the Inducement An intentional misrepresentation of material fact by one party to the other, who then consents to a contract in justifiable reliance on the misrepresentation; renders the contract voidable by the defrauded party and makes the fraudulent party liable in restitution as necessary to avoid unjust enrichment. The requisite elements of fraud in the inducement are: 1. A false representation Includes assertion of something not true, concealment of a fact, expressly denying knowledge of a known fact, and statement of a misleading half-fact. Silence alone does not automatically amount to false representation. 2. of a fact (not just an opinion) An event that actually took place or something that actually exists, not just a belief or a prediction of a future event. May or may not include a statement of law. NOTE: See Vokes v. Arthur Murray, Inc., below. 3. that is material (relating to something of importance to the contract) Must be likely to induce a reasonable person to manifest assent (or the maker must know that the recipient is likely to do so). NOTE: See Reed v. King, below. 4. made with knowledge of its falsity and the intention to deceive, and Known as scienter; can consist of actual knowledge, lack of belief in the statement or reckless indifference to truthfulness. 5. which representation is justifiably relied on. If the misrepresentation did not influence the complainer's decision, he has no right to relief. The Third Restatement of Torts: Liability for Economic Harm, Section 9, follows the same requirements. (This new Restatement will update coverage on torts that involve economic loss or pecuniary harm not resulting from physical harm or physical contact to a person or property. Tentative Draft No. 2, Chapter 2, Liability in Tort for Fraud, Sections 9-15, was approved in 2014.) The remedies that may be available for fraud in the inducement include rescission, restitution, and damages. CASE 11-3 MAROUN v. WYRELESS SYSTEMS, INC. Supreme Court of Idaho, 2005 141 Idaho 604, 114 P.3d 974 http://scholar.google.com/scholar_case?case=18286843461461582750&hl=en&as_sdt=2&as_vis=1&oi=scholarr Trout, J. Tony Y. Maroun (Maroun) was employed by Amkor when he accepted an offer to work for Wyreless, a startup company. On November 20, 2000, a letter was sent from Bradley C. Robinson, president of Wyreless, to Maroun setting forth the terms of their employment agreement. The pertinent portions of the letter were as follows: * * * • Annual salary of $300,000. • $300,000 bonus for successful organization of Wyreless Systems, Inc. • 15% of the issued equity in Wyreless Systems, Inc. • The equity and “organization bonus” will need to be tied to agreeable milestones (e.g., acquisition of Matricus, organization of management team, etc). • Full medical benefits. • Position of Chief Executive Officer, President and a position on the Board. • Bonuses and incentives will need to be determined by the Board and you after the business plan has been agreed by all parties. * * * I would like you to have an understanding of the fund raising status. I was able to get a commitment from two investors today for a minimum of $250,000 for arrival into the WSI bank account early next week. I believe we will be able to raise an additional $350,000 during the following week. * * * If we are not successful in raising the required capital for the business the funds remaining in the account on May 1, 2001 will be release[d] to you and Jen Gadelman (sic) as compensation beyond salaries and expenses for your efforts in developing the business. I anticipate a starting date of employment of December 1, 2000 or as soon you (sic) can reasonably and professional (sic) resolve your responsibilities with Amkor. Thereafter, Maroun started working for Wyreless but his employment was terminated in February 2001. Maroun then filed suit (the Wyreless suit), alleging he had not received two salary payments totaling $23,077, had not received 15% of issued equity and had not received the remainder of the $600,000 in bank account funds, alleged to be a balance of $429,145. * * * Maroun also claimed Wyreless’ corporate shell should be set aside and the shareholders of Wyreless should be jointly and severally liable for any damages Wyreless caused to him. * * * After Maroun filed a motion for partial summary judgment against Wyreless on the basis that there was no dispute Maroun was owed $23,077 in unpaid wages, the parties stipulated to entry of a judgment in favor of Maroun in the amount of $23,077. In the fall of 2002, * * * Wyreless filed a motion for summary judgment on the remaining portions of Maroun’s wage claim, which included the claim for 15% of Wyreless shares and the alleged $429,145 balance of the Wyreless fund account. The district court granted the motion. * * * Maroun appealed. * * * Maroun argues the district court erred in granting summary judgment in favor of Robinson on the fraud claim. Fraud requires: (1) a statement or a representation of fact; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity; (5) the speaker’s intent that there be reliance; the hearer’s ignorance of the falsity of the statement; reliance by the hearer; (8) justifiable reliance; and (9) resultant injury. [Citation.] In opposition to the defendants’ motion for summary judgment, Maroun filed an affidavit that stated Robinson made the following representations to Maroun: (1) That Wyreless was to be a corporation of considerable size, with initial net revenues in excess of several hundred million dollars. (2) That Robinson would soon acquire one and one-half million dollars in personal assets, which Robinson would make available to personally guaranty payment of my compensation from Wyreless. (3) That he would have no difficulty in obtaining the initial investments required to capitalize Wyreless as a large, world leading corporation with initial net revenues in excess of several hundred million dollars. (4) That he had obtained firm commitments from several investors and that investment funds would be received in Wyreless’ bank account in the near future. “An action for fraud or misrepresentation will not lie for statements of future events.” [Citation.] “[T]here is a general rule in [the] law of deceit that a representation consisting of [a] promise or a statement as to a future event will not serve as [a] basis for fraud “[Citation.] Statements numbered one and two both address future events. Robinson allegedly stated Wyreless “was to be” and that he “would soon acquire.” “[T]he representation forming the basis of a claim for fraud must concern past or existing material facts.” [Citation.] Neither of these statements constitutes a statement or a representation of past or existing fact. A “promise or statement that an act will be undertaken, however, is actionable, if it is proven that the speaker made the promise without intending to keep it.” [Citation.] There is no indication in the record that Robinson did not intend to fulfill those representations to Maroun at the time he made the statements. “Opinions or predictions about the anticipated profitability of a business are usually not actionable as fraud.” [Citation.] Statement number three appears to be merely Robinson’s opinion. As to statement number four, no evidence was submitted that Robinson had not received commitments at the time he made the statement to Maroun. Accordingly, the district court’s grant of summary judgment against Maroun on the fraud claim is affirmed. * * * [The district court’s ruling on this issue is affirmed.] CASE 11-4 REED v. KING California Court of Appeals, 1983 145 Cal.App.3d 261, 193 Cal.Rptr. 130 http://scholar.google.com/scholar_case?case=575864357603110085&q=193+Cal.Rptr.+130&hl=en&as_sdt=2,34 Blease, J. In the sale of a house, must the seller disclose it was the site of a multiple murder? Dorris Reed purchased a house from Robert King. Neither King nor his real estate agents (the other named defendants) told Reed that a woman and her four children were murdered there 10 years earlier. However, it seems “truth will come to light; murder cannot be hid long.” (Shakespeare, Merchant of Venice, act II, scene II.) Reed learned of the gruesome episode from a neighbor after the sale. She sues seeking rescission and damages. King and the real estate agent defendants successfully demurred to her first amended complaint for failure to state a cause of action. Reed appeals the ensuing judgment of dismissal. We will reverse the judgment. * * * King and his real estate agent knew about the murders and knew the event materially affected the market value of the house when they listed it for sale. They represented to Reed the premises were in good condition and fit for an “elderly lady” living alone. They did not disclose the fact of the murders. At some point King asked a neighbor not to inform Reed of that event. Nonetheless, after Reed moved in neighbors informed her no one was interested in purchasing the house because of the stigma. Reed paid $76,000, but the house is only worth $65,000 because of its past. * * * Does Reed’s pleading state a cause of action? Concealed within this question is the nettlesome problem of the duty of disclosure of blemishes on real property which are not physical defects or legal impairments to use. Reed seeks to state a cause of action sounding in contract, i.e., rescission, or in tort, i.e., deceit. In either event her allegations must reveal a fraud. [Citation.] “The elements of actual fraud, whether as the basis of the remedy in contract or tort, may be stated as follows: There must be (1) a false representation or concealment of a material fact (or, in some cases, an opinion) susceptible of knowledge, (2) made with knowledge of its falsity or without sufficient knowledge on the subject to warrant a representation, (3) with the intent to induce the person to whom it is made to act upon it, and such person must (4) act in reliance upon the representation (5) to his damage.” (Original italics.) [Citation.] The trial court perceived the defect in Reed’s complaint to be a failure to allege concealment of a material fact. * * * Concealment is a term of art which includes mere nondisclosure when a party has a duty to disclose. [Citation.] Rest.2d Contracts, § 161; Rest.2d Torts, § 551; Reed’s complaint reveals only nondisclosure despite the allegation King asked a neighbor to hold his peace. There is no allegation the attempt at suppression was a cause in fact of Reed’s ignorance. [Citations.] Accordingly, the critical question is: does the seller have a duty to disclose here? Resolution of this question depends on the materiality of the fact of the murders. In general, a seller of real property has a duty to disclose: “where the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer. [Citation.] This broad statement of duty has led one commentator to conclude: “The ancient maxim caveat emptor (‘let the buyer beware’) has little or no application to California real estate transactions.” [Citation.] Whether information “is of sufficient materiality to affect the value or desirability of the property * * * depends on the facts of the particular case.” [Citation.] Materiality “is a question of law, and is part of the concept of right to rely or justifiable reliance.” [Citation.] * * * Three considerations bear on this legal conclusion; the gravity of the harm inflicted by nondisclosure; the fairness of imposing a duty of discovery on the buyer as an alternative to compelling disclosure, and the impact on the stability of contracts if rescission is permitted. Numerous cases have found nondisclosure of physical defects and legal impediments to use of real property are material. [Citation.] However, to our knowledge, no prior real estate sale case has faced an issue of nondisclosure of the kind presented here. * * * The murder of innocents is highly unusual in its potential for so disturbing buyers they may be unable to reside in a home where it has occurred. This fact may foreseeably deprive a buyer of the intended use of the purchase. Murder is not such a common occurrence that buyers should be charged with anticipating and discovering this disquieting possibility. Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly be imposed upon the buyer. Reed alleges the fact of the murders has a quantifiable effect on the market value of the premises. We cannot say this allegation is inherently wrong and, in the pleading posture of the case, we assume it to be true. If information known or accessible only to the seller has a significant and measurable effect on market value and, as is alleged here, the seller is aware of this effect, we see no principled basis for making the duty to disclose turn upon the character of the information. Physical usefulness is not and never has been the sole criterion of valuation. * * * Reputation and history can have a significant effect on the value of realty. “George Washington slept here” is worth something, however physically inconsequential that consideration may be. Ill repute or “bad will” conversely may depress the value of property. * * * Whether Reed will be able to prove her allegation the decade-old multiple murder has a significant effect on market value we cannot determine. If she is able to do so by competent evidence she is entitled to a favorable ruling on the issues of materiality and duty to disclose. Her demonstration of objective tangible harm would still the concern that permitting her to go forward will open the floodgates to rescission on subjective and idiosyncratic grounds. * * * The judgment is reversed. *** Chapter Outcome *** Define the two types of nonfraudulent misrepresentation. 11-4 Nonfraudulent Misrepresentation Negligent Misrepresentation — made without knowledge of its falsity and without due care in ascertaining its truthfulness; renders agreement voidable. Innocent Misrepresentation — made without knowledge of its falsity but with due care; renders contract voidable. The remedies that may be available for nonfraudulent misrepresentation are rescission, restitution, and damages *** Chapter Outcome *** Identify and discuss the situations involving voidable mistakes. 11-5 Mistake A mistake is an understanding that does not match existing fact. 11-5a Mutual Mistake Both parties have a common but erroneous belief forming the basis of the contract; renders the contract voidable by either party. . In addition, the adversely affected party is entitled to restitution as necessary to avoid unjust enrichment. 11-5b Unilateral Mistake When only one of the parties is mistaken; usually no relief for unilateral mistake unless the error is known or should be known by the nonmistaken party. Nevertheless, relief will be granted in cases in which (1) the nonmistaken party knows, or reasonably should know, that such a mistake has been made (palpable unilateral mistake) or (2) the mistake was caused by the fault of the nonmistaken party. 11-5c Assumption of Risk of Mistake Either party may assume the risk of a mistake, and therefore will not be able to avoid the contract. 11-5d Effect of Fault upon Mistake The mistaken party cannot avoid the contract obligation if she simply did not read what she was signing. 11-5e Mistake in Meaning of Terms In some cases, a term of the contract can have different meanings for the seller and the buyer, without either party knowing that the other party has a different understanding. This renders the contract void. If, however, one party knows that the other party has a different understanding, the contract stands with the second party's interpretation of the terms. CASE 11-5 BURNINGHAM v. WESTGATE RESORTS, LTD. Court of Appeals of Utah, 2013 317 P.3d 445, 2013 UT.App. 244; rehearing denied February 6, 2014 Bench, Senior Judge [In 2006, Jeff Burningham and Westgate Resorts, Ltd. (Westgate) entered into a real estate purchase contract (the REPC) in which Burningham agreed to purchase a Park City, Utah condominium unit from Westgate for $899,000. Pursuant to the REPC, Burningham made a 10 percent deposit of $89,900, which was to be retained by Westgate as liquidated damages if Burningham defaulted. As the 2007 closing date approached, real estate market conditions worsened, and Burningham refused to close. A dispute arose between the parties as to whether Burningham was entitled to a refund of the deposit, with Burningham alleging that Westgate had made misrepresentations to fraudulently induce him to enter into the REPC. In September 2010, the parties settled their dispute by executing a second contract (the Agreement) for the sale of the condominium unit, this time for the reduced purchase price of $462,500. The only deposit contemplated by the Agreement was the $89,900 that Burningham had previously paid. The Agreement purported to resolve all outstanding issues between the parties arising under the REPC and stated that it was “wholly integrated and shall supersede any and all previous and current understandings and agreements between the Buyer and Seller.” Unlike the REPC, the Agreement contained a provision (Paragraph 38.1) granting Burningham the right to terminate the Agreement in his sole discretion by giving written notice to Westgate within seven days of the Agreement’s effective date upon which timely notice Burningham would be entitled to repayment of his deposit. Burningham exercised this termination option by giving timely written notice to Westgate. However, Westgate refused to return Burningham’s deposit, contending that neither party had intended to provide Burningham the unilateral right to cancel the Agreement and recover the full $89,900 originally deposited under the REPC. Burningham sued Westgate for the return of the deposit, and Westgate brought counterclaims arguing mutual mistake. The district court granted summary judgment in favor of Burningham for $89,900. Westgate appealed.] *** The district court concluded that, pursuant to paragraph 38.1 of the Agreement, Burningham timely terminated the Agreement and was entitled to a refund of his $89,900 deposit as a matter of law. Notwithstanding the language of paragraph 38.1, Westgate argues that extrinsic evidence—primarily the declaration of its sales agent [that the parties did not intend to include the provision of a full return of the deposit]—creates material questions of fact on its arguments of mutual mistake * * * *** A mutual mistake of fact can provide the basis for equitable rescission or reformation of a contract even when the contract appears on its face to be a “complete and binding integrated agreement.” [Citation.] “A mutual mistake occurs when both parties, at the time of contracting, share a misconception about a basic assumption or vital fact upon which they based their bargain.” [Citation.] Westgate argues that its sales agent’s declaration, viewed in light of the parties’ course of conduct leading up to the Agreement, raises a fact question as to whether the inclusion of paragraph 38.1’s refund language in the Agreement was a mutual mistake. The sales agent’s declaration summarizes, from Westgate’s perspective, the events leading up to the execution of the Agreement. The declaration clearly provides evidence that Westgate did not intend for the $89,900 to be refundable, stating that “at no time did Westgate intend for the [$89,900] to be considered a refundable deposit under the [Agreement].” It also provides evidence of Westgate’s subjective understanding that Burningham shared its intent, stating that the sales agent “understood these to be Burningham’s intentions based on [the agent’s] discussions and interactions with [Burningham] leading up to the [Agreement].” What the sales agent’s declaration does not do is provide evidence of Burningham’s intent, as opposed to Westgate’s understanding of that intent. The declaration does not provide the substance of any of the sales agent’s “discussions and interactions” with Burningham that would provide evidence of Burningham’s intent. Instead, the declaration relies on Burningham’s silence, stating that “[a]t no time did Burningham indicate ... that he intended the [$89,900] to be a refundable deposit under the [Agreement] or that he interpreted it to be the ‘deposit’ referenced in Paragraph 38.1 of the [Agreement].” We agree with the district court that the sales agent’s declaration “does not show that Mr. Burningham was also mistaken on [the deposit] issue.” The declara¬tion provides evidence only of unilateral mistake by Westgate, not the mutual mistake required to establish grounds for equitable rescission of the Agreement. We therefore conclude that the declaration did not raise a material question of fact on mutual mistake so as to preclude summary judgment. *** The district court correctly concluded that Westgate's evidence demonstrated only a unilateral mistake by Westgate as to whether the $89,900 was refundable and did not raise a material fact question on mutual mistake as argued by Westgate. *** For these reasons, we affirm the district court's entry of summary judgment in favor of Burningham, and we remand this matter to the district court for a determination of Burningham's reasonable attorney fees incurred on appeal. Chapter 12 Consideration Cases in This Chapter Vanegas v. American Energy Services Denney v. Reppert New England Rock Services, Inc. v. Empire Paving, Inc. DiLorenzo v. Valve and Primer Corporation Chapter Outcomes After reading and studying this chapter, the student should be able to: •Define consideration and explain what is meant by legal sufficiency. •Describe illusory promises, output contracts, requirements contracts, exclusive dealing contracts, and conditional contracts. •Explain whether preexisting public and contractual obligations satisfy the legal requirement of consideration. •Explain the concept of bargained-for exchange and whether this element is present with past consideration and third-party beneficiaries. •Identify and discuss those contracts that are enforceable even though they are not supported by consideration. TEACHING NOTES Consideration is the primary basis for the enforcement of promises in our legal system. Promises are enforceable only when the parties have exchanged something of value -- consideration. *** Chapter Outcome *** Define consideration and explain what is meant by legal sufficiency. 12-1 LEGAL SUFFICIENCY Consideration is the legal value which supports a promise in a contract; it is the inducement to make a contract enforceable. To be legally sufficient, the consideration for the promise must be either a legal detriment to the promisee or a legal benefit to the promisor. In other words, the promisor must receive something of legal value or the promisee must give up something of legal value in return for the promise. Legal detriment does not mean harm, but rather something which the promisee was previously under no legal obligation to do or refrain from doing. Legal benefit means the obtaining by the promisor of that which he had no prior legal right to obtain. 12-1a Adequacy Legal sufficiency has nothing to do with adequacy of consideration. The requirement of legally sufficient consideration is not at all concerned with whether the bargain was “fair” or either good or bad for either party. The requirement is simply: (1) that the parties have freely agreed to an exchange and (2) that the subject matter exchanged, or promised in exchange, either imposed a legal detriment on the promisee or conferred a legal benefit on the promisor. 12-1b Unilateral Contracts In a unilateral contract, one party (the promisor) exchanges a promise for an action (or restraint from acting) from another party (the promisee). The promisee does not make a promise in return, but simply fulfills the action or the restraint to complete the contract. 12-1c Bilateral Contracts In a bilateral contract there is an exchange of promises, so each party is both a promisor and a promisee. NOTE: See Case 12-1. *** Chapter Outcome *** Describe illusory promises, output contracts, requirements contracts, exclusive dealing contracts, and conditional contracts. 12-1d Illusory Promises A statement that appears to be a promise but that, upon close examination of the words, promises nothing real or legally binding; it may contain words such as “desire” or “want” or “wish to buy,” making performance entirely optional. The following types of contracts are NOT illusory because the promisor has actually become obligated to do something. Output and Requirements Contracts — The agreement of a seller to sell her entire production to a particular purchaser is called an output contract. An agreement to purchase all the materials of a particular kind that the purchaser needs from a seller is called a requirements contract. These are not illusory contracts because they are for a provable quantity, not for a desired amount. Exclusive Dealing Contracts — an exclusive arrangement made by one party to sell the goods of another in a designated market. A “best efforts” rule is used to evaluate the obligation of the manufacturer to supply goods and of the distributor to promote their sale. Conditional Promises — The obligation to perform depends upon the happening or nonhappening of a stated event. If the promisor knows that the conditional event cannot occur, the conditional promise will not be sufficient. CASE 12-1 VANEGAS v. AMERICAN ENERGY SERVICES Supreme Court of Texas, 2009 302 S.W.3D 299 http://scholar.google.com/scholar_case?case=3293885797327227839&q=302+S.W.3d+299+&hl=en&as_sdt=2,34 Green, J. In this case, we are asked to decide the enforceability of an employer's alleged promise to pay five percent of the proceeds of a sale or merger of the company to employees who are still employed at the time of the sale or merger. The employer, American Energy Services (AES), *** was formed in the summer of 1996. AES hired the petitioners in this case (collectively, the employees) that same year. The employees allege that in an operational meeting in June 1997, they voiced concerns to John Carnett, a vice president of AES, about the continued viability of the company. The employees complained that the company required them to work long hours with antiquated equipment. The employees allege that, in an effort to provide an incentive for them to stay with the company, Carnett promised the employees, who were at-will and therefore free to leave the company at any time, that "in the event of sale or merger of AES, the original [eight] employees remaining with AES at that time would get 5% of the value of any sale or merger of AES." AES Acquisition, Inc. acquired AES in 2001. Seven of the eight original employees were still with AES at the time of the acquisition. Those remaining employees demanded their proceeds, and when the company refused to pay, the employees sued, claiming AES breached the oral agreement. AES moved for summary judgment on [the ground] that the agreement was illusory and therefore not enforceable * * *. The employees responded that the promise represented a unilateral contract, and by remaining employed for the stated period, the employees performed, thereby making the promise enforceable. The trial court granted AES's motion for summary judgment, and the employees appealed. The court of appeals affirmed, holding that the alleged unilateral contract failed because it was not supported by at least one non-illusory promise, citing this Court's decision in Light v. Centel Cellular Co. of Texas, [citation]. The employees petitioned this Court for review, which we granted. AES argues, and the court of appeals held, that our holdings in Light dictate the result in this case. [Citation.] In Light, we stated: Consideration for a promise, by either the employee or the employer in an at-will employment, cannot be dependent on a period of continued employment. Such a promise would be illusory because it fails to bind the promisor who always retains the option of discontinuing employment in lieu of performance. When illusory promises are all that support a purported bilateral contract, there is no contract. * * * Light involved an employee's challenge to a covenant not to compete. [Citation.] * * * We revisited the issue of illusory promises in covenants not to compete in Sheshunoff. * * * We reaffirmed our previous holding in Light that covenants not to compete in bilateral contracts must be supported by “mutual non-illusory promises.” [Citation.] Citing our holdings in Light and Sheshunoff, the court of appeals [in this case] stated that “[a] unilateral contract may be formed when one of the parties makes only an illusory promise but the other party makes a non-illusory promise. The non-illusory promise can serve as the offer for a unilateral contract, which the promisor who made the illusory promise can accept by performance.” [Citation.] We agree with that statement, but the court of appeals erroneously applied those holdings to the current case. The issue turns on the distinction between bilateral and unilateral contracts. “A bilateral contract is one in which there are mutual promises between two parties to the contract, each party being both a promisor and a promisee.” [Citations.] A unilateral contract, on the other hand, is “created by the promisor promising a benefit if the promisee performs. The contract becomes enforceable when the promisee performs.” [Citation.] Both Sheshunoff and Light concerned bilateral contracts in which employers made promises in exchange for employees’ promises not to compete with their companies after termination. [Citations.] The court of appeals’ explanation of these cases—describing an exchange of promises where one party makes an illusory promise and the other a non-illusory promise—describes the attempted formation of a bilateral contract, not a unilateral contract. [Citation.] * * * The court of appeals held that even if AES promised to pay the employees the five percent, that promise was illusory at the time it was made because the employees were at-will, and AES could have fired all of them prior to the acquisition. [Citation.] But whether the promise was illusory at the time it was made is irrelevant; what matters is whether the promise became enforceable by the time of the breach. [Citations.] Almost all unilateral contracts begin as illusory promises. Take, for instance, the classic textbook example of a unilateral contract: “I will pay you $50 if you paint my house.” The offer to pay the individual to paint the house can be withdrawn at any point prior to performance. But once the individual accepts the offer by performing, the promise to pay the $50 becomes binding. The employees allege that AES made an offer to split five percent of the proceeds of the sale or merger of the company among any remaining original employees. Assuming that allegation is true, the seven remaining employees accepted this offer by remaining employed for the requested period of time. [Citation.] At that point, AES’s promise became binding. AES then breached its agreement with the employees when it refused to pay the employees their five percent share. Furthermore, the court of appeals’ holding would potentially jeopardize all pension plans, vacation leave, and other forms of compensation made to at-will employees that are based on a particular term of service. * * * The fact that the employees were at-will and were already being compensated in the form of their salaries in exchange for remaining employed also does not make the promise to pay the bonus any less enforceable. * * * AES allegedly promised to pay any remaining original employees five percent of the proceeds when AES was sold. Assuming AES did make such an offer, the seven remaining employees accepted the offer by staying with AES until the sale. Regardless of whether the promise was illusory at the time it was made, the promise became enforceable upon the employees’ performance. The court of appeals erred in holding otherwise. Accordingly, we reverse the court of appeals' judgment and remand the case to the trial court for further proceedings consistent with this opinion. *** Chapter Outcome *** Explain whether preexisting public and contractual obligations satisfy the legal requirement of consideration. 12-1e Pre-Existing Public Obligations The law does not regard the performance of (or the promise to perform) a preexisting obligation, whether public or private, as either a legal detriment or a legal benefit. CASE 12-2 DENNEY v. REPPERT Court of Appeals of Kentucky, 1968 432 S. W.2d 647 http://scholar.google.com/scholar_case?case=14895092933351248292&q=432+S.W.2d+647&hl=en&as_sclt=2,34 Myre, Special Commissioner On June 12th or 13th, 1963, three armed men entered the First State Bank, Eubank, Kentucky, and with a display of arms and threats robbed the bank of over $30,000. Later in the day they were apprehended by State Policemen Garret Godby, Johnny Simms, and Tilford Reppert, placed under arrest, and the entire loot was recovered. Later all of the prisoners were convicted and Garret Godby, Johnny Simms, and Tilford Reppert appeared as witnesses at the trial. The First State Bank of Eubank was a member of the Kentucky Bankers Association which provided and advertised a reward of $500.00 for the arrest and conviction of each bank robber. Hence the outstanding reward for the three bank robbers was $1,500.00. Many became claimants for the reward and the Kentucky State Bankers Association, being unable to determine the merits of the claims for the reward, asked the circuit court to determine the merits of the various claims and to adjudge who was entitled to receive the reward or share in it. All of the claimants were made defendants in the action. At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum, and Jewell Snyder were employees of the First State Bank of Eubank and came out of the grueling situation with great credit and glory. Each one of them deserves approbation and an accolade. They were vigilant in disclosing to the public and the peace officers the details of the crime, and in describing the culprits, and giving all the information that they possessed that would be useful in capturing the robbers. Undoubtedly, they performed a great service. It is in the evidence that the claimant Murrell Denney was conspicuous and energetic in his efforts to make known the robbery, to acquaint the officers as to the personal appearance of the criminals, and to give other pertinent facts. The first question for determination is whether the employees of the robbed bank are eligible to receive or share in the reward. The great weight of authority answers in the negative. * * * To the general rule that, when a reward is offered to the general public for the performance of some specified act, such reward may be claimed by any person who performs such act, is the exception of agents, employees, and public officials who are acting within the scope of their employment or official duties. * * * * * * At the time of the robbery the claimants Murrell Denney, Joyce Buis, Rebecca McCollum, and Jewell Snyder were employees of the First State Bank of Eubank. They were under duty to protect and conserve the resources and moneys of the bank, and safeguard every interest of the institution furnishing them employment. Each of these employees exhibited great courage and cool bravery, in a time of stress and danger. The community and the county have recompensed them in commendation, admiration, and high praise, and the world looks on them as heroes. But in making known the robbery and assisting in acquainting the public and the officers with details of the crime and with identification of the robbers, they performed a duty to the bank and the public, for which they cannot claim a reward. The claims of Corbin Reynolds, Julia Reynolds, Alvie Reynolds, and Gene Reynolds also must fail. According to their statements they gave valuable information to the arresting officers. However, they did not follow the procedure as set forth in the offer of reward in that they never filed a claim with the Kentucky Bankers Association. It is well established that a claimant of a reward must comply with the terms and conditions of the offer of reward. [Citation.] State Policemen Garret Godby, Johnny Simms, and Tilford Reppert made the arrest of the bank robbers and captured the stolen money. All participated in the prosecution. At the time of the arrest, it was the duty of the state policemen to apprehend the criminals. Under the law they cannot claim or share in the reward and they are interposing no claim to it. This leaves the defendant, Tilford Reppert the sole eligible claimant. The record shows that at the time of the arrest he was a deputy sheriff in Rockcastle County, but the arrest and recovery of the stolen money took place in Pulaski County. He was out of his jurisdiction, and was thus under no legal duty to make the arrest, and is thus eligible to claim and receive the reward. In Kentucky Bankers Ass’n et al. v. Cassady [citation], it was said: It is * * * well established that a public officer with the authority of the law to make an arrest may accept an offer of reward or compensation for acts or services performed outside of his bailiwick or not within the scope of his official duties. * * * * * * It is manifest from the record that Tilford Reppert is the only claimant qualified and eligible to receive the reward. Therefore, it is the judgment of the circuit court that he is entitled to receive payment of the $1,500.00 reward now deposited with the clerk of this court. The judgment is affirmed. 12-1f Pre-Existing Contractual Obligations Modification of a Pre-Existing Contract — The Pre-Existing Duty rule under common law requires that a contract modification or amendment be supported by additional and new consideration. This rule is different from the UCC, which provides that contract modifications are binding despite no new consideration provided they intend to do so and act in good faith. Also, if a valid controversy develops regarding a party’s obligations, a subsequent modification that clarifies the dispute and that is unsupported by consideration, will be valid. Substituted Contracts — A substituted contract results when the parties to a contract mutually agree to rescind their original contract and enter into a new one. This situation actually involves three separate contracts: the original contract, the agreement of rescission, and the substituted contract. Settlement of a Liquidated Debt — An undisputed (liquidated) debt is an obligation whose existence and amount are not contested. Under the common law, the payment of a lesser sum in return for the discharge of a fully matured, undisputed debt is not sufficient to support the promise of discharge. Settlement of an Unliquidated Debt — A disputed (unliquidated) debt is an obligation whose existence or amount is contested. The giving up or compromise of a disputed claim constitutes legally sufficient consideration if the dispute is honest and not frivolous. CASE 12-3 NEW ENGLAND ROCK SERVICES, INC. v. EMPIRE PAVING, INC. Appellate Court of Connecticut, 1999 53 Conn App. 771, 731 A.2d 784 cert. denied, 250 Conn. 921, 738 A.2d 658 http://scholar.google.com/scholar_case?case=2815205762460431873&q=731+A.2d+784&hl=en&as_sdt=2,34 Schaller, J. The defendants, Empire Paving, Inc. (Empire), and its bonding company, American Insurance Company, doing business as Fireman’s Fund Insurance Company (Fireman’s Fund), appeal from the judgment of the trial court awarding damages to the named plaintiff, New England Rock Services, Inc. (Rock Services), under a contract between the parties. The principal issue on appeal is whether the trial court improperly concluded that an agreement made by the parties on December 9, 1995, modified an earlier contract executed by them on October 26, 1995. We affirm the judgment of the trial court. The following facts are relevant to the disposition of this appeal. On October 26, 1995, Empire entered into a contract with Rock Services under which Rock Services would provide drilling and blasting services as a subcontractor on the Niles Hill Road sewer project on which Empire was the general contractor and the city of New London was the owner. Pursuant to the contract, Rock Services agreed to drill and blast a certain amount of rock encountered on the sewer project. In return, Rock Services was to be paid an agreed upon price of $29 per cubic yard with an estimated amount of 5000 cubic yards, or on a time and materials basis, whichever was less. On October 31, 1995, Rock Services commenced work on the project. From the beginning, Rock Services experienced a number of problems with the project. The primary obstacle was the presence of a heavy concentration of water on the site. The water problem hindered Rock Services’ ability to complete its work as anticipated. The trial court found that it was the custom and practice in the industry for the general contractor to control the water on the site and that, on this particular job, Empire failed to control the water on the site properly. In an effort to mitigate the water problem, Rock Services attempted to “load behind the drill,” a process that allows a blaster to load the drilled hole with a charge immediately after the hole is drilled, before water has the opportunity to seep into the hole. The city fire marshall, however, refused to allow Rock Services to employ this method of drilling. Thereafter, in order to complete its work, Rock Services was compelled to use the more costly and time consuming method of casing the blasting hole, a process that requires the blaster to drive a plastic casing down into the drilled hole to prevent seepage. In late November, 1995, Rock Services advised Empire that it would be unable to complete the work as anticipated because of the conditions at the site and requested that Empire agree to amend the contract to allow Rock Services to complete the project on a time and materials basis. On December 8, 1995, Empire signed a purchase order that modified the original agreement. The modification required Empire to pay for the blasting work on a time and materials basis for the remainder of the project. Rock Services, thereafter, completed its work on the project. Upon completion of the work, Empire refused to pay Rock Services for the remaining balance due on the time and materials agreement in the amount of $58,686.63, and Rock Services instituted this action. The trial court concluded that the later purchase order was a valid and enforceable modification of the earlier contract. The trial court found that the parties intended the purchase order to modify the earlier agreement and that Empire’s assent to the modification was not made under duress but, rather, was a calculated business decision. After finding Empire’s withholding of the amount due to Rock Services wrongful, the trial court awarded Rock Services damages in the amount of $58,686.63, plus interest and costs. This appeal followed. On appeal, Empire claims that the trial court improperly found that the later purchase order was a valid and enforceable modification of the earlier contract. Specifically, Empire claims that the later agreement lacked the requisite consideration to be a valid and enforceable modification of the earlier contract. We disagree. * * * In concluding that the modification was valid and enforceable, the trial court determined that the later agreement was supported by sufficient consideration. * * * “The doctrine of consideration is fundamental in the law of contracts, the general rule being that in the absence of consideration an executory promise is unenforceable.” [Citation.] While mutual promises may be sufficient consideration to bind parties to a modification; [citations] a promise to do that which one is already bound by his contract to do is not sufficient consideration to support an additional promise by the other party to the contract. [Citations.]” “A modification of an agreement must be supported by valid consideration and requires a party to do, or promise to do, something further than, or different from, that which he is already bound to do. [Citations.] It is an accepted principle of law in this state that when a party agrees to perform an obligation for another to whom that obligation is already owed, although for lesser remuneration, the second agreement does not constitute a valid, binding contract. [Citations.] The basis of the rule is generally made to rest upon the proposition that in such a situation he who promises the additional [work] receives nothing more than that to which he is already entitled and he to whom the promise is made gives nothing that he was not already under legal obligation to give. [Citations.]” Our Supreme Court in [citation], however, articulated an exception to the preexisting duty rule: “‘[W]here a contract must be performed under burdensome conditions not anticipated, and not within the contemplation of the parties at the time when the contract was made, and the promisee measures up to the right standard of honesty and fair dealing, and agrees, in view of the changed conditions, to pay what is then reasonable, just, and fair, such new contract is not without consideration within the meaning of that term, either in law or in equity.’” * * * “‘What unforeseen difficulties and burdens will make a party’s refusal to go forward with his contract equitable, so as to take the case out of the general rule and bring it within the exception, must depend upon the facts of each particular case. They must be substantial, unforeseen, and not within the contemplation of the parties when the contract was made. They need not be such as would legally justify the party in his refusal to perform his contract, unless promised extra pay, or to justify a court of equity in relieving him from the contract; for they are sufficient if they are of such a character as to render the party’s demand for extra pay manifestly fair, so as to rebut all inference that he is seeking to be relieved from an unsatisfactory contract, or to take advantage of the necessities of the opposite party to coerce from him a promise for further compensation. Inadequacy of the contract price which is the result of an error of judgment, and not of some excusable mistake of fact, is not sufficient.”’ [Citation.] * * * Empire argues strenuously that the water conditions on the site cannot qualify as a new circumstance that was not anticipated at the time the original contract was signed. * * * Empire’s argument, however, is misplaced. Rock Services does not argue that it was unaware of the water conditions on the site but, rather, that Empire’s failure to control or remove the water on the site constituted the new or changed circumstance. Rock Services argues that Empire’s duty to control or remove the water on the job site arose in accordance with the custom and practice in the industry and, therefore, Empire’s failure to control or remove the water on the site constituted a new circumstance that Rock Services did not anticipate at the time the original contract was signed. * * * The judgment is affirmed. *** Chapter Outcome *** Explain the concept of bargained-for exchange and whether this element is present with past consideration or third-party beneficiaries. B. BARGAINED-FOR EXCHANGE A bargained-for exchange requires a mutually agreed upon exchange of consideration. 12-2a Past Consideration Past consideration is an act done before the contract is made. The element of exchange is missing where a promise is given for an act already done. Past consideration is no consideration. 12-2b Third Parties Consideration to support a promise may be given to a person other than the promisor if the promisor bargains for that exchange. Conversely, consideration may be given by some person other than the promisee. *** Chapter Outcome *** Identify and discuss those contracts that are enforceable even though they are not supported by consideration. 12-3 Contracts Without Consideration Certain promises are enforceable even though they are not supported by consideration. 12-3a Promises to Perform Prior Unenforceable Obligations The courts will sometimes enforce a new promise that originally was not enforceable or has become unenforceable. Promise To Pay Debts Barred By The Statute Of Limitations — The statute of limitations provides a time limit on bringing a legal action, but the debtor can become liable again for an expired debt by freely admitting that the debt is owed, by making partial payment, or by making a new promise to pay without pleading the statute. Promise To Pay Debts Discharged In Bankruptcy — The Bankruptcy Act limits the enforceability of such promises, but in some cases, they may be enforceable. NOTE: See Chapter 39: Bankruptcy. Voidable Promises — A new promise to fulfill a previous voidable (but not avoided) promise may be enforced, as long as the new promise is not voidable. Moral Obligations — Under common law, promises to pay these are not enforceable. The Restatement imposes an obligation on promisors "to the extent necessary to prevent injustice" and provides for enforcement of a promise to pay for a benefit already received by mistake. 12-3b Promissory Estoppel Sometimes noncontractual promises are enforced under the doctrine of promissory estoppel where one party has relied, to her detriment, on the promise made by another party. CASE 12-4 DILORENZO v. VALVE AND PRIMER CORPORATION Appellate Court of Illinois, First District, Fifth Division, 2004 807 N.E.2d 673, 283 Ill.Dec. 68 http://scholar.google.com/scholar_case?case=258399757685586555&q=807+N.E.2d+673&hl=en&as_sdt=2,34 Reid, J. [DiLorenzo, a forty-year employee of Valve & Primer, was also an officer, director, and shareholder of one hundred shares of stock. DiLorenzo claims that in 1987 Valve & Primer offered him a ten-year stock option that would allow DiLorenzo to purchase an additional three hundred shares at the fixed price of $250 per share. DiLorenzo claims that in reliance on that employment agreement, he stayed in his job for over nine additional years and did not follow up on any of several recruitment offers from other companies. Valve & Primer claims the 1987 employment agreement between it and DiLorenzo did not contain a stock purchase agreement. The only purported proof of the agreement is an unsigned copy of board meeting minutes of which DiLorenzo had the only copy. In January 1996, DiLorenzo entered into a semiretirement agreement with Valve & Primer, and he attempted to tender his remaining one hundred shares pursuant to a stock redemption agreement. Shortly thereafter, Valve & Primer fired DiLorenzo. DiLorenzo argued before the trial court that, even if the purported agreement was not found to be valid, it should be enforced on promissory estoppel grounds. Valve & Primer’s moved for summary judgment, which the trial court granted for lack of consideration. The trial court denied the promissory estoppel claim because of insufficient reliance. DiLorenzo appealed.] We begin by addressing whether there was consideration for the stock options. “A stock option is the right to buy a share or shares of stock at a specified price or within a specified period.” [Citation.] In order to evaluate the nature and scope of the stock options issued to DiLorenzo, we must assume, for purposes of this portion of our discussion, that DiLorenzo’s corporate minutes are valid. “A contract, to be valid, must contain offer, acceptance, and consideration; to be enforceable, the agreement must also be sufficiently definite so that its terms are reasonably certain and able to be determined.” [Citation.] “A contract is sufficiently definite and certain to be enforceable if the court is able from its terms and provisions to ascertain what the parties intended, under proper rules of construction and applicable principles of equity.” [Citation.] “A contract may be enforced even though some contract terms may be missing or left to be agreed upon, but if essential terms are so uncertain that there is no basis for deciding whether the agreement has been kept or broken, there is no contract.” [Citation.] A bonus promised to induce an employee to continue his employment is supported by adequate consideration if the employee is not already bound by contract to continue. [Citation.] Because we are assuming the validity of the document issuing the stock options, we now turn to whether the underlying option is supported by valid consideration so as to make it a proper contract. “Consideration is defined as the bargained-for exchange of promises or performances and may consist of a promise, an act or a forbearance.” [Citation.] “The general principles applicable to option contracts have been long established. An option contract has two elements, an offer to do something, or to forbear, which does not become a contract until accepted; and an agreement to leave the offer open for a specified time [citation], or for a reasonable time [citation]. An option contract must be supported by sufficient consideration; and if not, it is merely an offer which may be withdrawn at any time prior to a tender of compliance. [Citation.] If a consideration of ‘one dollar’ or some other consideration is stated but which has, in fact, not been paid, the document is merely an offer which may be withdrawn at any time prior to a tender of compliance. The document will amount only to a continuing offer which may be withdrawn by the offer or at any time before acceptance. [Citation.] The consideration to support an option consists of ‘some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other’ [citation]; or otherwise stated, ‘Any act or promise which is of benefit to one party or disadvantage to the other * * *.’" [Citation.] “The preexisting duty rule provides that where a party does what it is already legally obligated to do, there is no consideration because there has been no detriment.” [Citation.] Focusing on the lack of a detriment to the employee, the trial court found no valid consideration. Based upon our view of the discussion in [citation], the trial court was correct in concluding that the option contract is merely an offer which may be withdrawn at any time prior to a tender of compliance. DiLorenzo could have exercised the option the moment it was purportedly made, then immediately quit, thereby giving nothing to the employer. Though the exercise of the option would require the transfer of money for the stock, the option itself carries with it no detriment to DiLorenzo. Therefore, there was no consideration for the option. * * * We next address DiLorenzo’s claim that he is entitled to the value of the shares of stock based upon the theory of promissory estoppel. DiLorenzo argues that the trial court misapplied the law in finding that there was insufficient reliance to support a claim for promissory estoppel. He claims that, once the trial court decided there was insufficient consideration to support the option contract, promissory estoppel should have been applied by the court to enforce the agreement as a matter of equity. DiLorenzo argues that he detrimentally relied upon Valve & Primer’s promise in that he worked at Valve & Primer for an additional period in excess of nine years in reliance on the stock option agreement. * * * Valve & Primer responds that the trial court was correct in finding insufficient reliance to support the promissory estoppel claim. Valve & Primer argues that the DiLorenzo could not satisfy the detrimental reliance prong of the promissory estoppel elements. Though DiLorenzo claimed he did not act upon offers of employment he claims were made by other companies during the course of his employment with Valve & Primer, he presented to the trial court nothing but his own testimony in support of his claim. Valve & Primer argues that, since DiLorenzo essentially is claiming his stock option vested immediately, he cannot contend that he detrimentally relied upon the purported agreement in the corporate minutes by turning down those other opportunities. * * * For purposes of promissory estoppel, if DiLorenzo’s allegations are taken as true, and the purported option vested immediately, it required nothing of him in order to be exercised other than the payment of $250 per share. “Promissory estoppel arises when (1) an unambiguous promise was made, (2) the defendant relied on the promise, (3) the defendant’s reliance on the promise was reasonable, and (4) the defendant suffered a detriment.” [Citation.] Whether detrimental reliance has occurred is determined according to the specific facts of each case. [Citation.] While we would accept that, under certain circumstances, it may be possible for a relinquishment of a job offer to constitute consideration sufficient to support a contract, this is not such a case. There is nothing in the language of the corporate minutes or any other source to be found in this record to suggest that Valve & Primer conditioned the alleged stock option on DiLorenzo’s promise to remain in his employment. While the corporate minutes say the alleged grant of the stock option was intended to “retain and reward,” it contains no mechanism making the retention mandatory. Since the corporate minutes lack a mandatory obligation on which DiLorenzo could have reasonably detrimentally relied, and he could have elected to buy the shares of stock immediately, DiLorenzo’s decision to remain on the job for the additional period of over nine years must be viewed as a voluntary act. Under those circumstances, promissory estoppel would not apply. It was, therefore, not an abuse of discretion to grant Valve & Primer’s motion for summary judgment on that issue. * * * Affirmed. 12-3c Promises Made Under Seal Under the common law, a promise under seal was binding without consideration. In some states a promise under seal is still binding. Most states, however, have created laws which remove the distinction between contracts under seal and written, unsealed contracts. 12-3d Promises Made Enforceable by Statute Some gratuitous promises that otherwise would be unenforceable have been made binding by statute. Most significant among these are certain promises that are made enforceable by the Uniform Commercial Code, including: Contract Modifications — contract for sale of goods can be modified in good faith. Renunciation — any claim or right arising from a breach can be discharged with a written, signed renunciation. Irrevocable Offers — is not revocable for lack of consideration during the stated time of the offer, or for a reasonable time. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637
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