· Facts: Corthell is a salesman for Summit. He invents contraption that is bought by his company. Resulting contract promised a salary, money for inventions and portion of profits from invention in exchange for all future inventions. Contract also said “reasonable recognition will be made to him by the Company, the basis and amount of recognition to rest entirely with the Company at all times.” Company pays him nothing and fires him after end of contract period. Maintains that the authority to determine the amount (stated in contract) meant that they were free to choose $0 as compensation. Also contended that vagueness makes contract unenforceable.
· Court finds that “reasonable recognition” language can be enforced to mean reasonable compensation. Must be interpreted in good faith on basis of what is reasonable and intended. Company’s promise was not illusory, it was bound to determine and pay the reasonable value of what was accepted from him.
· Good faith is a duty in all contracts. Can’t be eliminated from the contract in any way- even if Summit says they have complete discretion.
· Terminology: options
· A stock option, ex: if IBM is $100 today, someone can sell you an option to buy IBM at $100 one week from now. It has value b/c there is 50% chance it will be at $110 and a 50% chance it will be at $90. Turns out it is worth $90. Would you choose to exercise it? No. If you wanted it, you would buy it at $90. Took option (bought it) but did not exercise it. Suppose it is $110 a week from now. You decide to buy it at $100 (exercise your option). If the option costs $10, no one would buy it, b/c you only have a 50% chance of breaking even (and 50% chance of losing). But it’s worth paying $1. What is fair price of option? $5, b/c 50% chance at 0 and 50% chance at $10. So options have value.