APU Legal Studies Original

Promissory Estoppel Can Save Unenforceable Legal Contracts

The world of entertainment is replete with legal contracts. There have been multiple cases where contracts were disputed, such as De Havilland v. Warner Bros., ABC v. Wolf and Batfilm Productions v. Warner Bros.

Clearly, legal contracts that are not carefully drafted can cause issues. But what happens when a contract is actually silent or unclear as to the basic terms of consideration?

Consideration is one of the fundamental required components of every valid contract. Consideration in contracts refers to “a promise, performance, or forbearance bargained by a promisor in exchange for their promise,” according to the Legal Information Institute. In other words, consideration is the exchange of value between the parties agreeing to be bound.

Consideration can take a lot of forms. It can be a promise to do something now, such as to mow your neighbor’s lawn today in exchange for $5. It can be a promise to do something in the future, such as to mow your neighbor’s lawn in a week’s time in exchange for $5 today.

Similarly, consideration can be a conditional promise, such as to mow your neighbor’s lawn whenever it rains in exchange for $5. Also, it can be a promise to refrain from doing something, such as to never mow anyone else’s lawn besides your neighbor’s in exchange for $5 – this type of promise would be a kind of exclusivity agreement.

The only general requirement for exchanged consideration is that the promises must not be illusory. Illusory promises, as defined by the Legal Information Institute, are those which are “unenforceable due to indefiniteness or lack of mutuality, where only one side is bound to perform.” So promises must be definite in the sense that they are not conditional on the discretion of the promisors making them.

For example, if your neighbor agreed to pay you $5 in exchange for your commitment to mow his lawn whenever you feel like it, this type of promise would probably not be legally enforceable. Why? Because by leaving your commitment up to your discretion, you effectively have not promised to actually do anything. Instead, your promised consideration must be firm, and if there are conditions, they cannot be strictly within your control.

Also, note that the exchange of consideration does not have to be equal or fair. Courts are generally not in the business of adjudicating what kinds of bargains are good or bad. People are generally free to make unwise commitments if they choose.

So if your neighbor wants to pay you $5,000 to mow his lawn one time, such a contract might be enforceable. The only time courts will generally step in and void a contract is if it is determined to be unconscionable, as defined by Upcounsel.

In order for a contract to be unconscionable, it must “shock the conscience” with respect to how unfair or one-sided its terms are. In a previous article, I discussed unconscionable contracts in the context of the Batfilm Productions v. Warner Bros. case.

But be warned – the bar for unconscionability is a high one. Unless there is evidence of coercion, fraud or deceit, it may be a difficult argument to prevail with in court.

So what happens when legal contracts are silent or ambiguous on the subject of consideration? In the case of Bonner v. Westbound Records, an unclear contract created serious problems.

The Background of Bonner v. Westbound Records

Leroy Bonner was a band member of a musical group called the Ohio Players in the 1970s. The band was relatively unsuccessful with achieving fame and notoriety until it was signed in 1972 by Westbound Records and its sister company, Bridgeport Publishing, for musical recording and publishing services respectively.

The written contracts between the band and their recording/publishing partners required the band to make musical recordings exclusively for Westbound and Bridgeport over a five-year period. However, the agreement did not explicitly require any action from Westbound or Bridgeport. Instead, it was merely implied that the recording studio and publisher would use their best efforts to promote and sell the records produced by the Ohio Players.

In 1974, just under two years into the five-year agreement, the band wanted to jump ship and sign with a different label. So they repudiated the agreements with Westbound and Bridgeport, and they asked the courts in Illinois to declare them void for lack of mutual consideration.

The trial court agreed with the plaintiffs and granted summary judgment. However, Westbound and Bridgeport appealed, and at the appellate level, the court reversed the decision of the lower court.

But why? After all, the contracts were silent as to Westbound’s and Bridgeport’s commitments. So it would have seemed to have been an open-and-shut case of a unilateral (i.e. one-sided) – and therefore unenforceable – contract.

This way of thinking would be true, except for the doctrine of promissory estoppel. Promissory estoppel is a legal concept, which holds that a contract that is deficient in its material terms may still be upheld and enforced by a court of law. However, it must be shown that the parties mutually acted in good faith and relied on their reciprocal commitments in carrying out their duties commensurate with the business relationship.

Let’s return to our lawn mowing example. Suppose you sign an exclusive agreement to mow your neighbor’s lawn every Friday for a year. Your neighbor verbally agrees to buy – and give to you at no charge – the lawnmower that you will use to mow his lawn. Also, you will be permitted to keep the lawn mower after the end of the year-long agreement has ended.

In addition, he agrees to pay you $5 every Friday for the completed work. But these verbal statements, for whatever reason, never make it into the written contract.

Following execution, your neighbor buys the new lawnmower for you as promised, and you set off mowing his lawn every Friday. Three weeks pass by, you mow the lawn and your neighbor makes timely payment of the $5 just as promised.

But after your third lawn mowing visit, you decide you don’t want to mow your neighbor’s lawn anymore. Instead, you want to take the new lawnmower and start a lawn mowing business mowing other people’s lawns for more money. Consequently, you take the contract with your neighbor to court and ask for it to be invalidated on the grounds that the written agreement contained no explicit consideration from your neighbor.

On one hand, the lack of mutual consideration would normally render such an agreement unenforceable. However, it would be unfair to allow you to breach your commitment with your neighbor and walk away with the new lawnmower and the profits from the first three weeks without fulfilling the rest of your obligations.

Why? It’s because the neighbor relied on your promise to fulfill your end of the bargain, which is why he made the investment that he did. For you to be able to back out now would amount to unjust enrichment for you and detrimental reliance for your neighbor. This behavior is what the courts recognize in the doctrine of promissory estoppel.

Parol Evidence Made a Difference in the Bonner v. Westbound Records Case

Applying this line of thinking to the Bonner v. Westbound Records case, parol evidence (evidence of contractual commitments not included in the actual contract document) was allowed in court to show that Westbound had made a number of substantial commitments to the Ohio Players in reliance on their agreement.

Westbound and Bridgeport acted in good faith, commensurate with their implied duties to make best efforts at recording, publishing, and selling the music of the Ohio Players.

First, Westbound had paid a $4,000 advance to the band on royalties owed for record sales. Next, Westbound paid nearly $60,000 on recording studio equipment and fees to support the band’s music production efforts. This collaborative work ultimately resulted in several hit singles from the band and a “gold record” album that earned more than $1 million in sales. Finally, Westbound paid more than $20,000 in taxes and legal fees to help the band settle a lawsuit that was pending against them.

Clearly, Westbound and Bridgeport made substantial investments in the band. While it’s true that they were not obligated to do so by the exact terms of the contracts, they still ultimately did.

Westbound and Bridgeport acted in good faith, commensurate with their implied duties to make best efforts at recording, publishing, and selling the band’s music. The evidence is in the success of the singles and the albums.

Therefore, despite the contracts’ language, the appellate court ruled that it would be unfair to allow the Ohio Players to simply duck out of their agreement early just because their legal contracts didn’t reflect an obligation to do what the appellants had in fact already done through their course of performance. And so again, the appellate court reversed the decision of the trial court and awarded summary judgment to Westbound and Bridgeport.

The Bonner Case Shows That Legal Contracts Must Be Explicitly Worded

The lesson to be learned here from the Bonner case is that legal contracts usually require mutual consideration between the parties that is definite and explicit in its terms. If Westbound and Bridgeport had simply stipulated their own consideration commitments in the legal contracts with the Ohio Players, this litigation likely could have been avoided altogether.

However, if the parties in legal contracts can show that they acted in good faith and relied in good faith on the commitments of their counterpart(s), then promissory estoppel might preclude an argument that they should be released from their contractual commitments simply because a contract’s language was deficient.

Gary Deel

Dr. Gary Deel is a faculty member with the Dr. Wallace E. Boston School of Business. He holds an M.S. in Space Studies, an M.A. in Psychology, an M.Ed. in Higher Education Leadership, an M.A. in Criminal Justice, a J.D. in Law, and a Ph.D. in Hospitality/Business Management. Gary teaches classes in various subjects for the University, the University of Central Florida, the University of Florida, Colorado State University, and others.

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