Legal Meaning Is Not Everyday Meaning
Unconscionability
Unconscionability is a term used in contract law to describe a defense against the enforcement of a contract based on the presence of terms unfair to one party. Typically, such a contract is held to be unenforceable because the consideration offered is lacking or is so obviously inadequate that to enforce the contract would be unfair to the party seeking to escape the contract.
There are two tests to consider when deciding on conscionability:
Substantive: you need to look at content of the contract.
(1) Lack of meaningful choice
(2) Gross inequality of bargaining power – are the parties equal?
(3) Commercially unreasonable contract
Procedural: you need to look at the unfair negotiation process, how the contract was formed.
(1) Was there an unfair surprise?
(2) The contract procedures indicate that there was no chance to be informed of unconscionable clause.
Guarantee
The one who receives a guaranty. Also used, as in “guaranty”, to mean a promise to answer for the debt, default or miscarriage of another. A warranty is a promise to undertake an original obligation or something given as security for the performance of an act or the continued quality of a thing.
Surety
The one who undertakes to pay money or perform other acts in the event that his principal fails to do so.
Everyday “Legal” Jargon
A contract is a promise, enforceable by law, to perform or to refrain from performing some specified act.
In a general sense, all civil obligations fall under tort or contract law. Torts are usually characterized as violations of duties that are imposed on all persons and that have been established entirely by law. In contracts, on the other hand, the parties determine, at least in part, what their obligations to one another will be. Special types of contracts are given separate articles, e.g., negotiable instrument, insurance, and deed.
In Grammatigalhas, we have oftentimes discussed the elements of a valid contract:
1. Offer: For a contract to be valid, both parties must indicate that they agree to its terms. This is accomplished when one party submits an offer that the other accepts within a reasonable time or a stipulated period.
A valid offer creates the opportunity for an offeree (one to whom an offer is made) to accept, thus creating a valid contract (assuming what is offered and accepted is legal consideration). Few rules dictate what is required for a valid offer. Generally, the offeror controls the process.
2. Acceptance: To accept, an offeree must abide by the stipulations dictated in the offer. (E.g., accept in person; accept by such date or time). Any deviation in the acceptance from the terms of the offer renders the “acceptance” a rejection. If the terms of the acceptance vary from those of the offer, that “acceptance” legally constitutes a counteroffer; the original offering party may then accept it or reject it.
At any time prior to acceptance, the offer may be rescinded on notice unless the offering party is bound by a separate option contract not to withdraw. Only those terms expressed in the contract can be enforced; secret intentions are not recognized.
Unless the offer says otherwise, an acceptance is valid (thus creating a contract) when the acceptance is dispatched (Mail box rule). Under the common law, the offeree must accept each and every term of the offer (mirror image rule).
3. Legality: For a contract to be binding, it must not have an immoral or a criminal purpose or be against public policy.
4. Consideration: Generally, the law of contracts only enforces promises that are given in exchange for something of value, given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances. The exchange of something of value (usually mutual promises) is consideration. Contract Consideration must be: mutual (quid pro quo), bargained-for, for a legal detriment and/or benefit. Without these the “contract” is void for lack of consideration. If a contract contains promises that are unsupported by consideration, then the contract is void ab initio.
Consideration is an essential element for the formation of a contract. It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. In a bilateral contract-an agreement by which both parties exchange mutual promises-each promise is regarded as sufficient consideration for the other. In a unilateral contract, an agreement by which one party makes a promise in exchange for the other’s performance, the performance is consideration for the promise, while the promise is consideration for the performance.
Consideration for a particular promise exists where some right, interest, profit or benefit accrues (or will accrue) to the promisor as a direct result of some forbearance, detriment, loss or responsibility that has been given, suffered or undertaken by the promisee. The key to understanding the doctrine of consideration is reciprocity. That is, a promisee should not be able to enforce a promise unless he or she has given (or promised to give) something in exchange for the promise which will benefit the promisor.
The consideration must be executary or executed, but not passed. A consideration is executary when a promise to do something in the future is given in exchange for another promise to be done in the future. A consideration is executed when a promise is actually executed, in exchange for another promise to be executed in the future. A consideration is passed when a promise has been given or executed before and independently to the other promise
The importance of promises in commercial and industrial society produced a new criterion, and generally a promise is now enforceable only if it is made in exchange for consideration, i.e., a payment, for some action, or for another promise. In some jurisdictions, statutes have made certain promises enforceable without consideration, e.g., promises to pay debts barred by the statute of limitations.
Promises enforceable without consideration
All promises are not enforced as valid and binding contracts. Today, we discuss the exceptions to the rule requiring consideration and the situations in which the doctrine of promissory estoppel can serve as a substitute for consideration.
The vast majority of all contracts are supported by bargained-for consideration. However, on rare occasions, an agreement will lack consideration and yet be enforceable on the basis of promissory estoppel, quasi-contract, or public policy, or as a contract under seal.
Here are the key exceptions, situations in which a promise can be enforceable even though there is no consideration for it:
Promises to pay past debts
Most states enforce a promise to pay a past debt, even though no consideration for the promise is given.
Promise to pay for benefits received
A promise made in recognition of a benefit previously received by the promisor from a promisee is enforceable without consideration to the extent necessary to prevent injustice. The key is restitution. A promise is not binding if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly enriched; or to the extent that its values is disproportionate to the benefit.
A promise to pay for benefits or services one has previously received will generally be enforceable even without consideration. This is especially likely where the services were requested, or where the services were furnished without request in an emergency.
Modification of sales contracts
The rule was: the performance of or the promise to perform a pre-existing duty is not consideration (for a new contract). The parties have already bound themselves to certain things; the consideration for this agreement already made cannot support a new agreement – it must stand on its own.
Under the UCC, a modification of a contract for the sale of goods is binding without consideration. The UCC explicitly removes the consideration requirement for modification of existing contracts. For example: A contracts to supply 100 widgets to B at $4 a piece. Before shipment, A says, “My costs have gone up; I’ll have to charge you $5.” B agrees. Under UCC, this modification is enforceable, even though B received no consideration for promising to pay the higher price.
But a “no oral modifications” clause in a sales contract will normally be enforced, if separately signed. For example: On the facts of the above example, if the original contract between A and B said that any modification must be in writing, B’s promise to pay the higher price would be enforceable only if in writing.
The UCC guards against extorting concessions from the other party by threatening to breach through two provisions: every contract or duty imposes an obligation of good faith in its performance or enforcement; the court has the right to refuse to enforce any contract which it finds to be “unconscionable”.
Option contract
An option contract is a binding promise in which the owner of property agrees that another shall have the privilege of buying the property at a fixed price within a stated period of time. It is the offeror’s acceptance of consideration in exchange for his promise to keep the offer open for a designated period of time, thus rendering the offer irrevocable.
An option must be supported by consideration, often payment of a small sum of money, which may be, though need not be, applied as down payment if the option is exercised. It exists only when the option holder himself has the right to determine whether he shall require the performance called for by the option. If the agreement states that the option may be exercised only with the consent of the other party, it is not an option even though so-called by the agreement.
Some types of option contracts are formed without consideration: an offer is binding as an option contract if it is in writing and signed by the offeror , recites a purported consideration for the making of the offer and proposes an exchange on fair terms within a reasonable time. An offer, which the offeror should reasonably expect to induce action or forbearance, is binding as an option contract to the extent necessary to avoid injustice.
Under UCC a seller can offer a buyer an option contract without consideration by making an irrevocable offer and complying with other statutory requirements. For example, a stock option granting to an individual of the right to purchase a corporate stock at some future date at a price specified at the time the option is given rather than at the time the stock is obtained (the option is exercised). The option may be purchased or sold, as in call option, or maybe granted to an individual by the company as in an employee stock option.
Thus, option contracts are sometimes enforceable without consideration. An offer that purports to be enforceable, and that falsely recites that consideration was paid for the irrevocability, will be enforced in most courts. As long as the terms of the proposed agreement are fair, it does not matter that the consideration recited in the document was never in fact paid, or that it was not bargained for.
Also, remember that UCC renders enforceable “firm offers” under certain circumstances.
Guaranty contract
A guaranty is an agreement or a promise by one person (the guarantor) to pay the debt, default or miscarriage incurred by another person (the debtor) owed to a third person (the creditor). Where the guaranty is not given until after the underlying debt has been created, however, consideration will not necessarily be present for the promise of guaranty.
Guaranty without consideration is invalid in some jurisdictions; however, in most states, a guaranty will be enforced without consideration. Generally, the guarantee must be in writing, and must state that consideration (even a nominal one) has been paid though the consideration does not in fact have to have been paid.
Promissory Estoppel
Promissory estoppel is an equitable doctrine declaring that a promise, which the promissor should reasonably expect will induce an action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The promisor having induced reliance on his promise by the other party is said to be estopped from denying the existence of a contract, though in fact one has not been made. Thus, promissory estoppel departs from traditional contract law in that no bargain is involved. For instance, the doctrine of promissory estoppel is invoked when a pension is promised to an employee and at the fruition period the promise is not honored. The non-contractual promise may be made enforceable to avoid an injustice.
Promissory estoppel is a recognized alternative to the requirement of consideration in appropriate cases. However, some jurisdictions do not accept it and demand that the traditional requirement of consideration be met.
Promissory estoppel always involves a gratuitous promise (i.e. promise to make gifts). The promisor does not expect the promisee to accept an offer by performing an act or making a return promise. The bargain element is lacking because no bargain is intended.
For example: Mary pledges to donate $10 million to the University of Florida. The University begins construction of a new building. Mary retracts her pledge. The pledge may be enforceable under the doctrine of promissory estoppel. Mary’s promise was gratuitous. The doctrine would be invoked as an alternative to bargained-for consideration.
There are three requirements sets forth for the doctrine of promissory estoppel:
- A promise that the promisor should reasonably expect to induce action or forbearance by the promisee.
- Action or forbearance by the promisee that is induced by the promise: Charitable subscriptions and marriage settlements may be enforced under the doctrine of promissary estoppel without proof that the promise induced action or forbearance. Enforcement of the promise as the only means of avoiding injustice. The promise induces the promisee to justifiably rely on the promise to his detriment (unbargained-for reliance).
A prerequisite for applying promissory estoppel is the lack of bargained-for consideration.
Quasi-Contract (contract implied in law)
A quasi-contract, unlike true contract, is not based on the apparent intention of the parties to undertake the performances in question, nor are they promises. They are obligations created by law for reasons of justice. Quasi contracts have the same judical effect of trying to avoid an unfair result but they differ from promissory estoppel because in quasi contracts, there was NO promise made at all.
The doctrine of quasi-contract is based upon the principle that a party who has received a benefit, which was desired, under circumstances rendering it inequitable for the party to retain the benefit without making compensation, must do so. A quasi-contract imposes an obligation to prevent unjust enrichment.
The parties to a quasi-contract make no promises and reach no agreement. However, one of the parties is substantially benefited at the expense of the other party. The benefit may be a quasi-contract if the recipient appreciates (understands) the benefit given and accepts and retains the benefit. If so, then the recipient should pay for the benefit to avoid an inequity.
For example: Alan contracts to paint Craig’s house. Alan mistakenly paints the house next door, which belongs to Sharon. Sharon observes Alan painting her house but voices no objection. To prevent unjust enrichment of Sharon, equity will require her to pay Alan the reasonable value of his services.
Promises to pay past debts
Most states enforce a promise to pay a past debt, even though no consideration for the promise is given. Sometimes, courts cite public policy to support enforcement of a promise despite lack of bargained-for consideration, promissory estoppel, or a quasi-contract.
- Debts barred by the statute of limitations.
When a debtor promises to pay a debt, even when collection is barred by the statute of limitations, courts hold the promise to pay enforceable without consideration. The rationale is that, when the debtor acknowledges the debt and promises to pay it, public policy favors upholding the promise notwithstanding the lack of bargained-for consideration. An enforceable promise to pay an entire debt is inferred from any partial payment accompanied by an acknowledgment of the larger debt. If the debtor does not make a partial payment, the mere promise to pay must generally be in writing and signed by the debtor to be enforceable.
- Debts barred by a bankruptcy proceeding.
The Federal Bankruptcy Act of 1978 as amended governs the rights of debtors and creditors. Promises made by a debtor to a creditor during bankruptcy proceedings but prior to discharge may be enforceable without consideration. However, the bankruptcy court must hold a hearing and explain that the debtor need not promise to repay the debt.
Contracts under seal
At common law, a seal is a substitute for consideration. A sealed promise (contract) is enforceable merely because it is sealed. For a promise to be sealed, the parties to the agreement, by all appearances, must have intended it to be a sealed instrument. The purpose of a seal is to attest in a formal manner to the execution of an instrument. The other requirements of a sealed promise are: a writing; the seal; the delivery.
The first seals were made by a signet ring in hot wax. Eventually, any impression on the paper was considered a seal, including gummed wafer. Modern trends permit the word “seal” or the letters “L.S.” (locus sigilli) to constitute a valid seal. Many attorneys incorporate a recital of a common phrase to substitute for a seal; e.g., “In witness whereof I have hereunto set my hand and seal.” A seal of a corporation is sometimes called a common seal.
Statutes of many states have abolished any distinction between sealed and unsealed contracts. The UCC has explicitly abrogated the effects of a seal. A seal imports only a rebuttable presumption of consideration.
Statutes
A statute may provide that certain gratuitous promises may be unenforceable. Examples under the UCC include modification of a control for the sale of goods, a written waiver of renunciation of rights arising from a breach of contract, and an irrevocable offer to buy or sell goods.
