CONTRACTS PROF. KETTLE FALL 2012 / RUTGERS NEWARK
I. Introduction to Contract Law
(A) Contract as Legally Binding Agreement
What is a Contract? A contract is formed in any transaction in which one or both parties make a legally enforceable promise. A promise is a commitment or undertaking that a given event will or will not occur in the future and may be express or implied from conduct or language and conduct. A promise is legally enforceable where it:
␣was made as part of a bargain for valid consideration;
␣reasonably induced the promisee to rely on the promise to his detriment; or
␣is deemed enforceable by a statute despite the lack of consideration.
R2 §1. Contract Defined ; R2 §2. Promise; Promisor; Promisee; Beneficiary
R2 §3. Agreement Defined; Bargain Defined ; R2 §4. How a Promise May be Made
Promisor—the party under the duty
Promisee—the party to whom the duty is owed.
Types of Contracts
1) Express–an agreement manifested by words
2) Implied-in-fact–an agreement manifested by conduct
3) Implied-in-law(“quasi-contract”)–not a true contract but an obligation imposed by a court despite the absence of a promise in order to avoid an injustice. Usually between parties who don’t know each other.
(B) Sources of Contract Law
1) Common Law–in most jurisdictions, contract law is not codified.
2) Restatement– written by the American Law Institute to provide guidance, has persuasive authority, but no legal force.
3) Uniform Commercial Code (UCC)–created under the auspices of the American Law Institute and the National Conference of Commissioners on Uniform State Laws. Article 2 of the UCC covers all transactions for the sale of goods other than securities (Article 9) and leases (Article 2A) & adopted by every state except Louisiana.
Sale of Goods— Under the UCC, a “good” is any tangible thing that is moveable. (UCC §2-105)
What to watch out re: UCC
a) See if the case is in Louisiana
b) Make sure the case predominantly deals with sale of goods
c) See if the provision differentiates between merchants & non-merchants
d) Check past judicial decisions even if the case is governed by a UCC provision
Enforcement of Money Judgments & Secured Transactions— UCC Article 9 – security interest (right to receive payment only). Future interest/assets can be assigned.
4) United Nations Convention on Contracts for the International Sale of Goods (CISG)– ratified by many of the leading trading nations including the US and China (but not the UK and Japan), it governs many int’l transactions for the sale of goods.
2. Introducing Some Basic Issues
Bailey v. West (pg. 11) – Lame horse, Bailey cared for W. No implied contract because no mutual agreement or intent to promise for W to pay B. Source of obligation in implied contract is intention to be bound by conduct, not words. No quasi-contract because Bailey volunteered at own risk.
Contract Law & Morality—Contract law focuses on parties’ O.M. rather than their actual intent.
Bolin Farmers v. American Cotton Shippers (pg. 18) – BF sell/deliver all cotton to ACS at fixed price range. Cotton market big rise. Forward sales contract valid, enforceable. ACS bears own risk in entering. BF does not guarantee quality nor quantity, should have included condition tying price to market rates. UCC Article 2 isn’t enacted in Louisiana.
Ora Lee Williams v. Walker Thomas Furniture (pg. 21) – Williams bought a bunch of furniture on layaway type plan, where she did not own it until all things were paid off (cross-collateralization clause). She ended up defaulting on this; they repossessed everything (even though she had paid off some of them if taken individually). The court said the contract could be found unconscionable and therefore unenforceable and sent it back to trial.
Two types of Unconscionability
1) Substantive Unconscionability – the terms themselves are grossly unfair
2) Procedural Unconscionability – based on unequal bargaining power arising from the fact the store
is sophisticated and the customer gets swept along in this transaction because she’s not able to
effectively bargain. This is the most controversial point.
The Ex Ante & Ex Post Perspectives— Ex Post (after the event); Ex Ante (before the event)
Sullivan v. O’Connor (pg. 28) – O’Connor botched two nose jobs for Sullivan, who then had to get a third, which still left her nose worse off than before the first surgery. Pain, suffering, and mental distresses are compensable damages for breach of contract under either expectancy or reliance damages.
REMEDIES FOR BREACH OF CONTRACT
**EXPECTATION= out of pocket at time of breach plus total profits, puts the P in the position where he/she would be if the contract had been performed. Benefit of the bargain/BOB. Usually capped @ K price.
**RELIANCE = out of pocket only, puts the P back to the point before entering K
**RESTITUTION = to prevent unjust enrichment, P gets benefit received by D. Not disgorgement.
Hadley v. Baxendale (pg. 39) – Hadley sent broken crankshaft via Bax, did not tell Bax mill stopped, delivery delayed. Cannot recover lost profits since not reasonably contemplated by parties at time of contract. Special circumstances wholly unknown to Bax; indirect and consequential damages only
recoverable if reasonably foreseeable by both at time of contract & arising naturally from breach. Hadley Rule (R2 §351)
Default Rules, Altering Rules and Mandatory Rules—
1) Default Rules-rules parties can contract around; govern when the parties rem
merican Ash (pg. 72) – Pennsy, a pavement subcontractor, picked up free AggRite from AA, in which AA conditioned giveaway on Pennsy disposing hazardous material. Aggrite was defective and had to be removed before disposal. In turn, Pennsy brought “breach of contract & warranty” causes of action. Court held consideration was present in bargaining process, reversing dismal of lower court and remanding. No actual bargaining over the terms of the agreement necessary.
Why Consideration?— 1) Value creating exchange—Lawmakers want to make sure that contracts are welfare enhancing. 2) Cost of enforcing gratuitous promises—It would be a complicated, costly and not so worthwhile process for courts to try to enforce such promises. Also, bringing gratuitous promises into the world of contracts would diminish their moral value and beat the purpose. 3) Exchange and intent to contract—Consideration provides legal enforceability.
(C) Intent to Contract & Seal
In re Greene (pg. 79) – Debtor promised to marry Mistress. Relations ended, agreement for Debtor to pay $1,000 per month, $100,000 life policy, rent for 4Y. $1 consideration. Debtor paid for 2Y. Invalid, past consideration, not current consideration for contract. $1 payment nominal, could not be proven as paid nor support executory promise. Intent to contract (evidenced by document, seal) does not make enforceable.
The seal—The promise in a notarial deed, executed before a notary, is binding precisely because of the method employed in making it. R2 §95 Requirements for Sealed Contract clarifies this issue. However, it is crucial to know the exact requirements of the jurisdiction you are in.
UCC provides two examples in which a signed agreement can serve as a substitute for consideration. §1-306 (Waiver or Renunciation of Claim or Right After Breach) & §2-205 (Firm Offers). §2-201 (Statute of Frauds) is also relevant.
Cohen v. Cowles Media (pg. 86) – Cohen gave info to reporters who promised confidentiality. Editors overruled promises, published story, identified Cohen as source. Cohen lost job. Promise for act, supported by exchange of consideration. No intent to contract, so unenforceable. No authority to bind publisher to contract. Court decided contract law isn’t the milieu for journalistic confidentiality.