Contracts Hypo- (Unilateral, Illusory, Option, ???) Forum

[wsw15]

Below is the basic overview of part of a contracts hypo... (This was just a part of a series of events that happen, but my question is: What type of contract do Mr. A and Mr B. have?)

Mr A. has a successful land development business, he does something illegal, loses all of the land he owns and goes to jail for a few years. He gets out and wants to rebuild his business. He is confident that if he can purchase a certain piece of land for $10,000, he can then split up the large parcel and sell the individual pieces for a total profit of $120,000. He tells 5 friends if they give him $2,000 each, he will give them each $20,000, when/ if the subsequent deal materializes. They each give him the $2,000. He writes a note to Mr. B (one of the 5 friends) “thank you for the $2,000. This will help me get reestablished. I will pay you $20,000 if my deal goes through successfully. etc” Two months later the deal goes through.

At this point, What type of contract does Mr A have with Mr B.

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I sort of thought it seems to be a unilateral contract , verging on illusory. But it seems it could have an option aspect as well. I understood a unilateral contract to be a promise for and action, but this almost seems to be an action for a promise? Overall I am a bit lost with the exact classification. Any thoughts?

[nucky thompson]

In exchange for A's promise to pay back 20k IF the deal goes through, B gives A 2,000
In exchange for B's giving 2,000 A promises that he will give B 20,000 if the deal goes through successfully

This is a unilateral contract. A is bargaining for B's act - giving of the loan money. B is making a risky bet - he is willing to give A 2,000, in hopes that A will pull the deal off - B exchanges the loan for A's promise to repay. If A pulls the deal off, A's duty to perform his promise to B (and the others) will become due. A's duty to perform will ONLY become due upon the deal going through successfully.

A's promise to B (and the others) is not illusory. An illusory promise gives the promisor freedom to act anyway they choose - Here, A cannot do whatever he wants - if the deal goes through, he has to repay, if the deal does not go through, he will not have to pay, but he will not have the property dealings that he wants. Courts would likely find an implied promise on the part of A to actually try and make the deal go through - meaning, he cant just take the 2K and tell his homies that the deal did not go through thereby alleviating him of his debts to the friends. Therefore, A is not free to act as he chooses. This promise is more of a conditional promise - his performance to the friends will only become due if a certain event occurs - that event being the deal going through successfully.

The facts say the deal went through. That means that A is now bound to perform his duty because the condition upon which his promise was predicated (ie: will pay back if the deal is successful) has occurred.

[wsw15]

Thanks for the response- which is on target with cases we read that seem to relate to this hypo (ie Lucy Lady Duff & implied duty to perform, etc).

One follow up question...
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Hypo continues:
Now, suppose Mr A dies the same day he recieves the $120,000 proceeds from the real estate deal, but before he actually gives the $20,000 to Mr B (and the others).

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Is Mr A actually giving the $20,000 to Mr B.... The act (of a unilateral K) Mr. A is responsible for, in which case the contract dies with Mr A, short of having an option. And is there any way to squeeze an argument for an option created in the hypo (in which case the executor would require writing), or would Mr B rely on substantial performance.

[musicfor18]

I don't see why this is a unilateral contract. Isn't a unilateral contract one that can be accepted only by performing? Isn't this a bilateral contract with a conditional promise on one end? In other words "if you give me $2k, I'll give you $20K on the condition that the deal goes through." It was an exchange of promises on both ends. Then, one party performed his promise and the other's performance is outstanding.

This is almost certainly an illusory promise, but is cured by the implied promise to use best efforts to make the deal go through. Without the implied promise, it would be too discretionary.

Please correct if I'm wrong on any of this.

[manofjustice]

This probably WAS NOT a contract, because there was no mutual assent, because the offeror's promise was illusory.

Before the business materialized, the exchange of money and the return illusory promise probably constituted no binding obligation on either party.

However, the court would likely consider it a unilateral contract NOW, because the business did materialize.

Consider Marshall Durbin Food Corp: an illusory promise may form the basis of a unilateral contract.

[minnbills]

No contract, unless it falls under investments or something, which obviously isn't a 1L subject.

You could argue that the "offeror's" performance was conditional and it was an implied assumption if the deal didn't go through, he had to return the money or something, were a dispute to arise. But yeah, I think based on the typical 1L subject matter, there's no contract here.

I think the real issue here is what a court would do to sort it out were a dispute to arise.

[manofjustice]

I'd disagree. Take it from a legal realist perspective. (And Marshal Durbin is a 2005 case.) The deal went through. The guy said: if the deal goes through, I'll give you a cut. In exchange for that promise, the guy took 2 grand. How does a court tell the P he's out his 2 grand?

The only difference between this and a typical unilateral contact is that there are two conditions, one within the P's control (i.e. handing over the 2 grand) and another outside the P's control (i.e. the deal going through.) Both conditions are now met. It's hard to see why it should matter if both conditions were under the D's control.

In Marshal Durbin, the P had to be employed AND a triggering event, outside of his control, had to occur. The P in that case had his promise enforced.

[shumpshump]

He tells 5 friends if they give him $2,000 each, he will give them each $20,000, when/ if the subsequent deal materializes

How is this not a bilateral contract that comes up all the time in PE and other financial investment areas?

A promises to give B $20,000 later if his deal goes through in exchange for B promising to give A $2,000 now. B could have a claim against A if there were not good faith efforts put in to get the deal to go through but the risk of the deal not going through is something B is accepting in exchange for giving the $2,000 right now.

[manofjustice]

He tells 5 friends if they give him $2,000 each, he will give them each $20,000, when/ if the subsequent deal materializes

How is this not a bilateral contract that comes up all the time in PE and other financial investment areas?

A promises to give B $20,000 later if his deal goes through in exchange for B promising to give A $2,000 now. B could have a claim against A if there were not good faith efforts put in to get the deal to go through but the risk of the deal not going through is something B is accepting in exchange for giving the $2,000 right now.

I can see that argument to, but I wonder if, within the confines of "1L subject matter," you can't go bilateral contract.

I am just trying to figure out how you structurally make that argument. Parol evidence to imply the meaning of "when/if," i.e. not to make an illusory promise, but to establish "limited liability," i.e. "this is an investment, you could loose money"? That could work.

[shumpshump]

He tells 5 friends if they give him $2,000 each, he will give them each $20,000, when/ if the subsequent deal materializes

How is this not a bilateral contract that comes up all the time in PE and other financial investment areas?

A promises to give B $20,000 later if his deal goes through in exchange for B promising to give A $2,000 now. B could have a claim against A if there were not good faith efforts put in to get the deal to go through but the risk of the deal not going through is something B is accepting in exchange for giving the $2,000 right now.

I can see that argument to, but I wonder if, within the confines of "1L subject matter," you can't go bilateral contract.

I am just trying to figure out how you structurally make that argument. Parol evidence to imply the meaning of "when/if," i.e. not to make an illusory promise, but to establish "limited liability," i.e. "this is an investment, you could loose money"? That could work.

I'm not sure what you mean by 1L subject matter. In my class, my professor said that almost anything is regarded as consideration by the courts. Betting $2,000 to get $20,000 would definitely be a promise with consideration.

It's B giving a promise for A giving a promise based on a condition occurring. If that condition was something that was solely under A's control (ie: I will buy as many trinkets from you as I want at $5/trinket), then there can be an argument that there is no contract. Where the condition is something that A has to put good faith efforts towards and is in the control of external factors that B is accepting the risk of, I just don't see how this isn't a bilateral contract with promises exchanged.

[manofjustice]

He tells 5 friends if they give him $2,000 each, he will give them each $20,000, when/ if the subsequent deal materializes

How is this not a bilateral contract that comes up all the time in PE and other financial investment areas?

A promises to give B $20,000 later if his deal goes through in exchange for B promising to give A $2,000 now. B could have a claim against A if there were not good faith efforts put in to get the deal to go through but the risk of the deal not going through is something B is accepting in exchange for giving the $2,000 right now.

I can see that argument to, but I wonder if, within the confines of "1L subject matter," you can't go bilateral contract.

I am just trying to figure out how you structurally make that argument. Parol evidence to imply the meaning of "when/if," i.e. not to make an illusory promise, but to establish "limited liability," i.e. "this is an investment, you could loose money"? That could work.

I'm not sure what you mean by 1L subject matter. In my class, my professor said that almost anything is regarded as consideration by the courts. Betting $2,000 to get $20,000 would definitely be a promise with consideration.

It's B giving a promise for A giving a promise based on a condition occurring. If that condition was something that was solely under A's control (ie: I will buy as many trinkets from you as I want at $5/trinket), then there can be an argument that there is no contract. Where the condition is something that A has to put good faith efforts towards and is in the control of external factors that B is accepting the risk of, I just don't see how this isn't a bilateral contract with promises exchanged.

I don't think the issue is in the consideration, but the mutual assent. Even if there is consideration, but no mutual assent --> no contract.

[shumpshump]

I don't think the issue is in the consideration, but the mutual assent. Even if there is consideration, but no mutual assent --> no contract.

Oh, ok. There's still nothing in the fact pattern that shows that there's a misunderstanding, especially if the deal goes through. Why do you think there is?

[wsw15]

After I posted the question, I did a bit of reading & looking over my notes... And I think it is most likely a unilateral contract. A promise for an action- I promise to give you the opportunity to make $20k, if you give me $2,000. The reason it would not me bilateral, is because a promise to give the $2,000 would be of no use to the offeror, because he needed the money immediately. I can't remember where, but I read something to this effect. The cases we read that seem most related were Batsakis v Demotis (where essentially a loan was made in wartime ww2 Greece for $25 USD and the repayment was equivalent to $2,000k, with repayment to come after the war, when the person was able to get back to the states to access an account) & Lucy Lady Duff Gordon (which essentially overturned a lower court that considered a contract illusory, on the basis that there was an implied best efforts to perform & inadequacy of consideration= consideration).

So in the present case, once the act of giving $2,000k to Mr A- Mr A was then bound to his promise to perform his best efforts in obtaining and flipping the land, etc. Then when he dies after the sale, on the way to fulfill the promise of paying Mr B, I think, the contract dies (because the illusory nature of the promise indicates a lack to reliance due to all of the inherent risk Mr B accepted- the deal not going through, Mr B dying, etc). Additionally, for similar reasons & because it is a unilateral contract, Mr B would not be able to get any sort of expectation damages from the executor.

All of the above could be wrong, and it not explained very precisely, But I am pretty sure that there was a Contract and that is was unilateral. Does the 2nd paragraph make any sense?

[shumpshump]

After I posted the question, I did a bit of reading & looking over my notes... And I think it is most likely a unilateral contract. A promise for an action- I promise to give you the opportunity to make $20k, if you give me $2,000. The reason it would not me bilateral, is because a promise to give the $2,000 would be of no use to the offeror, because he needed the money immediately. I can't remember where, but I read something to this effect. The cases we read that seem most related were Batsakis v Demotis (where essentially a loan was made in wartime ww2 Greece for $25 USD and the repayment was equivalent to $2,000k, with repayment to come after the war, when the person was able to get back to the states to access an account) & Lucy Lady Duff Gordon (which essentially overturned a lower court that considered a contract illusory, on the basis that there was an implied best efforts to perform & inadequacy of consideration= consideration).

So in the present case, once the act of giving $2,000k to Mr A- Mr A was then bound to his promise to perform his best efforts in obtaining and flipping the land, etc. Then when he dies after the sale, on the way to fulfill the promise of paying Mr B, I think, the contract dies (because the illusory nature of the promise indicates a lack to reliance due to all of the inherent risk Mr B accepted- the deal not going through, Mr B dying, etc). Additionally, for similar reasons & because it is a unilateral contract, Mr B would not be able to get any sort of expectation damages from the executor.

All of the above could be wrong, and it not explained very precisely, But I am pretty sure that there was a Contract and that is was unilateral. Does the 2nd paragraph make any sense?

What do you mean by promise for an action? That's still a bilateral agreement. Just because both promises aren't in the future doesn't mean that it isn't a bilateral contract. Batsakis was money for in exchange for money later, a promise for an action now (I'm using your terms), and was held as a bilateral agreement. Lucy Lady Duff just means that there is an implied promise of good faith efforts, the standard to what the main actor would be held here.

[viking138]

I'm a Contracts TA. A unilateral contract is one promise: a contract is made when the requested act/forbearance is complete. A bilateral contract is a promise exchanged for a promise, which you have here ("I promise to do X if Y happens") and both promises are enforceable from the moment they are made.

In a unilateral contract, only the promisee can make plans because only she knows whether or not she will perform as requested. An advertisement is the perfect example ("I'll pay $50 to the person who returns my dog"). In a bilateral contract, both parties can make plans from the moment of contract. Here, the promisee will have to pay $20,000 if something happens, so they can plan around that.

[manofjustice]

I don't think the issue is in the consideration, but the mutual assent. Even if there is consideration, but no mutual assent --> no contract.

Oh, ok. There's still nothing in the fact pattern that shows that there's a misunderstanding, especially if the deal goes through. Why do you think there is?

I actually don't think there is a misunderstanding. But the heavy lift is in arguing that the promise is not illusory so as to negative mutual assent. I think we can take consideration pretty much for granted.

[Blessedassurance]

It's a contract.

In your analysis you should say something about "condition precedent"...v...promise etc

ETA: There's also something about interpreting against the drafter/to avoid forfeiture when it's unclear...

[shumpshump]

I don't think the issue is in the consideration, but the mutual assent. Even if there is consideration, but no mutual assent --> no contract.

Oh, ok. There's still nothing in the fact pattern that shows that there's a misunderstanding, especially if the deal goes through. Why do you think there is?

I actually don't think there is a misunderstanding. But the heavy lift is in arguing that the promise is not illusory so as to negative mutual assent. I think we can take consideration pretty much for granted.

You're saying two different things. If it's an illusory promise issue, it's a consideration issue. If it's a mutual assent issue, it's a misunderstanding issue. Which one are you arguing?

[manofjustice]

To my mind, the key is to see that this isn't black or white. It's actually pretty weird.

Before the deal went through, there was a contingent contract, pretty close to no contract at all, and no obligation, and arguably (arguably, that is), the promisor could have taken the 2 grand and went to Maui, deal-be-dammed. He could then have argued there was no obligation, his promise was illusory, and the P is a poor sap who gave away $2,000 in exchange for no firm assurance.

But once the deal went through, it seems to be the contract converted into an obligation. All the conditions are met. Consideration is in. It's hard for the guy to say "we made no agreement which would indicate I am obligated to give the P anything."

You could say it was a "contingent contract" from the beginning or you could say there was no contract, but once the deal went through, it "became" a contract. The former seems to make more sense, because contracts don't usually "invent" themselves. But it's not really that important how you structure the argument. There is a reasonably strong basis of contractual obligation here.

[manofjustice]

I don't think the issue is in the consideration, but the mutual assent. Even if there is consideration, but no mutual assent --> no contract.

Oh, ok. There's still nothing in the fact pattern that shows that there's a misunderstanding, especially if the deal goes through. Why do you think there is?

I actually don't think there is a misunderstanding. But the heavy lift is in arguing that the promise is not illusory so as to negative mutual assent. I think we can take consideration pretty much for granted.

You're saying two different things. If it's an illusory promise issue, it's a consideration issue. If it's a mutual assent issue, it's a misunderstanding issue. Which one are you arguing?

The issues overlap, when the consideration is the intention to be bound to a specific course. You can call it consideration or mutual assent, but either way, the promise has to be cast as non-illusory, and that happens when the conditions to the promise are fulfilled.

[shumpshump]

To my mind, the key is to see that this isn't black or white. It's actually pretty weird.

Before the deal went through, there was a contingent contract, pretty close to no contract at all, and no obligation, and arguably (arguably, that is), the promisor could have taken the 2 grand and went to Maui, deal-be-dammed. He could then have argued there was no obligation, his promise was illusory, and the P is a poor sap who gave away $2,000 in exchange for no firm assurance.

But once the deal went through, it seems to be the contract converted into an obligation. All the conditions are met. Consideration is in. It's hard for the guy to say "we made no agreement which would indicate I am obligated to give the P anything."

You could say it was a "contingent contract" from the beginning or you could say there was no contract, but once the deal went through, it "became" a contract. The former seems to make more sense, because contracts don't usually "invent" themselves. But it's not really that important how you structure the argument. There is a reasonably strong basis of contractual obligation here.

Agree with the post-deal analysis. Completely disagree with the pre-deal analysis. Pre-deal is Lady Duff. Dude has to put good faith efforts as there is an implied promise that he will work to get that $20k. If he doesn't put in good faith efforts, B has a suit against him for that $2k back.

[manofjustice]

To my mind, the key is to see that this isn't black or white. It's actually pretty weird.

Before the deal went through, there was a contingent contract, pretty close to no contract at all, and no obligation, and arguably (arguably, that is), the promisor could have taken the 2 grand and went to Maui, deal-be-dammed. He could then have argued there was no obligation, his promise was illusory, and the P is a poor sap who gave away $2,000 in exchange for no firm assurance.

But once the deal went through, it seems to be the contract converted into an obligation. All the conditions are met. Consideration is in. It's hard for the guy to say "we made no agreement which would indicate I am obligated to give the P anything."

You could say it was a "contingent contract" from the beginning or you could say there was no contract, but once the deal went through, it "became" a contract. The former seems to make more sense, because contracts don't usually "invent" themselves. But it's not really that important how you structure the argument. There is a reasonably strong basis of contractual obligation here.

Agree with the post-deal analysis. Completely disagree with the pre-deal analysis. Pre-deal is Lady Duff. Dude has to put good faith efforts as there is an implied promise that he will work to get that $20k. If he doesn't put in good faith efforts, B has a suit against him for that $2k back.

I wouldn't disagree with the Lady Duff analysis. The main difference between Lady Duff and the hypo is that the contract in Lady Duff was objectively evident. It was signed, sealed and delivered. In the hypo, the D can still come back with a plausible case that considering he repeated twice "if the deal 'materializes'," there wasn't a contract to begin with. Of course, when he said "thank you, this should get me started," I think you can use that as parol to suggest the Lady Duff implied good faith was part of the agreement, thus rendering the promise non-illusory.

[swtlilsoni]

To my mind, the key is to see that this isn't black or white. It's actually pretty weird.

Before the deal went through, there was a contingent contract, pretty close to no contract at all, and no obligation, and arguably (arguably, that is), the promisor could have taken the 2 grand and went to Maui, deal-be-dammed. He could then have argued there was no obligation, his promise was illusory, and the P is a poor sap who gave away $2,000 in exchange for no firm assurance.

But once the deal went through, it seems to be the contract converted into an obligation. All the conditions are met. Consideration is in. It's hard for the guy to say "we made no agreement which would indicate I am obligated to give the P anything."

You could say it was a "contingent contract" from the beginning or you could say there was no contract, but once the deal went through, it "became" a contract. The former seems to make more sense, because contracts don't usually "invent" themselves. But it's not really that important how you structure the argument. There is a reasonably strong basis of contractual obligation here.

I now see your pre deal analysis. Actually pretty smart. The way I thought of it was that it IS a unilateral contract because offeree was not obliged to give the 2k, he could choose whether or not he wants to give the 2k. If he gives the 2k he accepts by performance. However I thought the "if the deal goes through" is just a condition on offeror's promise. HOWEVER, I realized that your point is that "if the deal goes through" is UP TO the offeror. He can stop the deal from going through if he wants. He is in no obligation to put his best efforts into making the deal go through. Thus it can be construed as illusory.

The argument against being illusory is that with an illusory promise it is ENTIRELY up to the promisor whether or not it happens. (I'll give you 10k if I feel like it), it is ENTIRELY up to you whether you "feel like it" or not. However whether or not the 10k goes through is not 100% up to the offeror. He can certainly stop it from going through by goin to Hawaii like you said, but at the same time even if he tries to make the deal go through there is no guarantee that it will go through (because the other person in on the deal could back out) so it isn't completely in the offeror's control.

However that all depends on if an illusory promise needs to 100% be in promisor's control, or if it is sufficient for it to partially be in the promisor's control.

[shumpshump]

I wouldn't disagree with the Lady Duff analysis. The main difference between Lady Duff and the hypo is that the contract in Lady Duff was objectively evident. It was signed, sealed and delivered. In the hypo, the D can still come back with a plausible case that considering he repeated twice "if the deal 'materializes'," there wasn't a contract to begin with. Of course, when he said "thank you, this should get me started," I think you can use that as parol to suggest the Lady Duff implied good faith was part of the agreement, thus rendering the promise non-illusory.

I get what you're saying now. That's definitely an argument that should be made on the test but I still think the principle in Lady Duff will win out, even considering the differences in the current fact pattern.

[manofjustice]

To my mind, the key is to see that this isn't black or white. It's actually pretty weird.

Before the deal went through, there was a contingent contract, pretty close to no contract at all, and no obligation, and arguably (arguably, that is), the promisor could have taken the 2 grand and went to Maui, deal-be-dammed. He could then have argued there was no obligation, his promise was illusory, and the P is a poor sap who gave away $2,000 in exchange for no firm assurance.

But once the deal went through, it seems to be the contract converted into an obligation. All the conditions are met. Consideration is in. It's hard for the guy to say "we made no agreement which would indicate I am obligated to give the P anything."

You could say it was a "contingent contract" from the beginning or you could say there was no contract, but once the deal went through, it "became" a contract. The former seems to make more sense, because contracts don't usually "invent" themselves. But it's not really that important how you structure the argument. There is a reasonably strong basis of contractual obligation here.

I now see your pre deal analysis. Actually pretty smart. The way I thought of it was that it IS a unilateral contract because offeree was not obliged to give the 2k, he could choose whether or not he wants to give the 2k. If he gives the 2k he accepts by performance. However I thought the "if the deal goes through" is just a condition on offeror's promise. HOWEVER, I realized that your point is that "if the deal goes through" is UP TO the offeror. He can stop the deal from going through if he wants. He is in no obligation to put his best efforts into making the deal go through. Thus it can be construed as illusory.

The argument against being illusory is that with an illusory promise it is ENTIRELY up to the promisor whether or not it happens. (I'll give you 10k if I feel like it), it is ENTIRELY up to you whether you "feel like it" or not. However whether or not the 10k goes through is not 100% up to the offeror. He can certainly stop it from going through by goin to Hawaii like you said, but at the same time even if he tries to make the deal go through there is no guarantee that it will go through (because the other person in on the deal could back out) so it isn't completely in the offeror's control.

However that all depends on if an illusory promise needs to 100% be in promisor's control, or if it is sufficient for it to partially be in the promisor's control.

Thanks swtlilsoni.

I think you're onto something with the "100% in the promisor's control" analysis. That's where I think the parol --> clarify meaning comes in. The P could say "come on! when he said 'if the deal goes through' he was just trivially saying that the investment might fail, due to powers outside of his control--not that he might blow up the deal himself and go to Maui!" Poster above talked about how "if the deal goes through" seems pretty boilerplate for a lot of PE deals.

The Lady Duff analysis is a stronger way to get the implied good faith. Could work too!