BASIS FOR ENFORCING PROMISES
I. Contract.
A contract is a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. Restatement (Second) of Contracts, sec. 1.
Thus, “contract” means an enforceable promise.
Example: Mary says to Charles, “If you attend the State University Law School, I will reimburse the first year’s tuition.” If the courts would enforce Mary’s promise, it is a contract. Otherwise, it is not.
Some commentators struggle to come up with examples of exchanges which do not involve promises. The effort is unsuccessful and misguided. Here is what one commentator writes:
Suppose A transfers title to her car to B, and in return simultaneously receives $1000 from B; this whole transaction is done on the spur of the moment. No contract has been created. Since the transaction contains no promise by either party of a future performance, it is completely executed, rather than executory.
To test the accuracy of this example, ask what would happen if the buyer returned home and found that the car had no reverse gear. The transaction included an implied term that, at the least, the car would move both forward and backward. This implied term is an implied promise. The exchange is clearly a contract.
Another commentator uses this example:
Eddy M. Mersion was sitting on the shore next to his kayak. Rocky Rapids approached him, took $400 in cash out of his pocket and offered to buy the kayak from Eddy “as is” (that is, without any warranty from Eddy as to its condition or quality). Eddy accepted the cash, and Rocky climbed into the kayak and paddled off. At this point, there is a simple, instantaneous exchange. Rocky has paid cash and Eddy delivered the kayak to him without any promise as to its quality or any other future commitment. Each party has fully performed and no promise has been made. The transaction is not a contract.
To test the accuracy of this example, ask what would happen if when Rocky pulled the kayak into the dock, a woman appeared who said that she was Eddy’s former wife and that the kayak was hers under a divorce settlement agreement. She explained that Eddy did not agree with this but that he was wrong. She threatened to sue Rocky for the kayak. Rocky has a cause of action against Eddy. There is an implied promise in the exchange that the seller has title to the item sold. This is called a warranty of title. The exchange is clearly a contract.
But in any event, the inquiry is irrelevant. Lawyers worry about whether a statement is a promise, rather than, say, a prediction or a statement of opinion. They worry about whether a promise has the qualities necessary to make it enforceable. They do not worry about whether an exchange should be called a contract.
A promise does not have to be in writing in order to be a contract unless it falls under the “Statute of Frauds,” discussed below.
II. Applicable Law.
State common law applies to contracts. “Common law” means judge-made law. It relies on precedent and a court’s notions of sound policy. The decisions of one state’s courts are not binding on the courts of another state, although they may be found to be persuasive. So, the rules may differ from state to state. Some decisions are thoughtful articulations of doctrinal analysis, while others are seemingly instances of mindless obedience to old cases and “majority rules”. Not too many of the later make their way into Contracts case books, understandably.
A special case of applicable law is transactions in goods. These contracts are controlled by Article 2 of the Uniform Commercial Code (“UCC”). The UCC is a statute that has been enacted in every state except Louisiana. The rules are thus uniform–this is one of the main reason for the statute’s development and enactment–but may be interpreted differently from state to state. Where Article 2 does not have a rule to cover an issue, the common law applies. UCC § 1-103. Most Contracts courses devote about 20% of the semester to UCC cases, often contrasting a UCC approach to a doctrinal issue to a common law approach. The “comments” to each section of the Code are quite important. They are often more clearly written than the sections themselves. However, they are not part of the enacted UCC, serving as legislative history.
Finally, the United Nations Convention on Contracts for the International Sale of Goods (CISG) is a multilateral treaty. It applies to sales of goods between parties whose places of business are in different countries, both of which have ratified the treaty.
III. Types of Contracts.
Contracts are frequently described as express, implied, or quasi. Only the first two are actually contracts, and they only differ in the manner in which they are formed.
A. Express Contract.
Express contracts are formed by language, oral or written.
B. Implied Contract.
Implied contracts are formed by manners of assent other than oral or written language, i.e., by conduct.
Example. I go on the Internet and order a copy of Dunction Wood from your bookstore. You do not reply but you charge my credit card and send the book. We clearly have a contract and you could call it implied. Alternatively, you could call it an express contract where the acceptance was implied from conduct. It is just terminology, nothing turns on it.
C. Quasi-Contract.
Quasi-contracts are not contracts at all.
The doctrine is used by courts to avoid unjust enrichment in a variety of contexts. One such context is where the contract is for some reason unenforceable, but where something of value has changed hands.
Example. I agree to paint your house for $4,000 but we have no written agreement. I paint the house but your lawyer says the deal is unenforceable because it is not in writing. If you have to pay me for the reasonable value of the painting, the doctrinal category would be quasi-contract. Alternative terms are quantum meruit and restitution.
In the middle of the 1900s there were entire (required) law school courses devoted to this area of the law, and multi-volume treatises written. Oddly, they have completely died out.
IV. Bilateral and Unilateral Contracts.
A. A bilateral contract is a promise for a promise.
Example: “If you will promise to pay me $500, I will promise to deliver the llama to you on Thursday.” “I accept.”
B. A unilateral contract is a promise for a performance.
Example: “If you gain 100 yards or more tomorrow, I will buy you a Porsche.”
V. Executory Contract or Promise.
An executory contract is one in which neither party has yet performed. Sometimes this is called “wholly executory.”
An executory promise is a promise that has not yet been performed.
VI. Promisors and Promisees.
The party making a promise is the promisor, and the party receiving a promise is the promisee. In a bilateral contract, each party is both a promisor and a promisee.
ECONOMIC ANALYSIS OF CONTRACT LAW
I. Remedies: Efficient Breach.
A. The principle of efficient breach holds that contract damag
point in her favor on college applications. This loss cannot be recovered. She fears the court may be fooled into thinking that production problems excused Bob’s nonperformance. She cannot afford a lawyer to recover the $250. As a result, Sarah accepts the $50. Bob cannot do this often, however, because his reputation will suffer.
II. Contract Default Rules.
A. Majoritarian preferences.
A default rule is a rule that a court will apply to a contract if the contracting parties have not specified their own rule.
Example: Jack contracts to sell his color printer to Jill for $500. On Tuesday, the day of delivery, Jack delivers the printer to Jill, and Jill responds by offering Jack a check for $500. Jack says that he can only accept cash. Since the parties did not specify in their contract whether the purchaser could pay by check, the law must supply a rule to govern the situation. This is a default rule.
B. An efficient default rule is one that most parties would negotiate if they addressed it at the time of contracting. Otherwise, parties will have to spend time and energy negotiating around a “bad” legal rule.
Example: Jack contracts to sell his color printer to Jill for $500. On Tuesday, the day of delivery, Jack delivers the printer to Jill, and Jill responds by offering Jack a check for $500. Jack says that he can only accept cash. Suppose the legal rule is that Jack would be in breach if he did not accept the check. However, this has the effect of forcing Jack to extend credit to Jill without security. Most people might prefer that this risk not be present: the seller would like to avoid this risk because the check may bounce, and the buyer would not like because she will have to pay seller to take the risk. If the parties anticipate the problem, we can predict they will negotiate a “cash-only” clause. A “cash-only” default rule will eliminate the costs of these negotiations.
Parties who do not share the preferences of the majority of people can tailor their own rule.
C. Criticism: Judges do not investigate empirically what the majoritarian preferences are; instead, judges guess. The guess depends on how the buyer, for example, is characterized: as a common buyer, a sophisticated buyer, as risk-averse or risk-neutral, and so on.
Typically, this approach to default rules places the benefit of the rule so as to favor the party who values the outcome the more highly.
III. Information-forcing default rules.
A court could construct a rule that overly-favors a set of parties with the purpose of forcing a set of disfavored parties to bring the matter to the negotiating table. This is normatively attractive where those disfavored by the rule have less information than those favored by it.
Criticism. One is hard-pressed to find actual instances of information-forcing rules.
