Chris Borgen
Contracts
Fall 2012
I. Contracts
A. Contractual Language
1. General rule is that a description of the goods that forms a basis or induces the sale constitutes a warranty – Language inducing the contract is contractual language
a) Hawkins v McGee – “I promise to make your hand 100% a good hand”
– Considered Contractual language because it induced the patient to agree to the operation
2. Puffery – Mere sales talk that is not part of the K
b) Bayliner v. Crow – The information in the brochure of the Yacht was considered Puffery, merely the seller’s opinion of the goods that did not create a warranty
c) Some statements will be enforced by courts and some will not – depends on circumstances and what REASONABLE PERSONS (Objective 3rd person) would understand
II. Remedy & Breach
1. In calculating and determining who and how much damages should be awarded in breach of K case, it’s important to know the π’s loss, not the Δ’s gain.
2. The primary objective behind the system of contract remedies is to COMPENSATE, NOT PUNISH
– United States Naval Institute v. Charter Communications Inc. – The goal of damages for breach of K is to compensate the injured party for the loss cause by the breach, not to punish the breacher. It is important to know the π’s loss when calculating damages, not Δ’s gain
a) U.C.C. §1-106 – Remedies should be liberally administered to the end that the damaged party may be put in as good a position as if the other party had fully performed.
b) Restatement §352 – Damages are not recoverable for loss beyond the amount that the evidence permits to be established with reasonable certainty.
i. Err on the side of the nonbreaching party – doubts resolved against party in breach
c) Restatement § 355 – Punitive Damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable
A. 3 Damage Interests
1. Expectation Interest – Puts the promisee in as good of a position as he would have been had the contract been performed
a) The promisee has the right to expect the benefit of the bargain
b) Courts will look at the question of whether the promisee is worse off because the promise has not been performed and will seek to compensate him (Liquidate him – money)
c) Will only take account worsening that wasn’t part of the bargain, ex; pain and suffering from agreed upon surgery would not count
d) Default Interest used by the Courts – Compensated by cash to get you up to the point of where you would have been if completed
Ø Law & Economics – Jurisprudential school – a way of organizing your thoughts about the law (Judge Posner)
Ø Two main ideas
1. Pareto Superiority – Allocate the goods in a certain way that somebody is better off, and nobody is worse off
2. Pareto Optimality – Where it is not possible to make anybody in the transaction better off, without making somebody worse off
EFFICIENT BREACH THEORY – Contract Doctrine
– Idea is to increase efficiency within the system
a) A agrees to sell B a book for 100$. The book is worth 90 for A and 110 for B. However, C comes along and wants to buy the book for 150 from A. A breaches the contract, and sells for 150. B gets compensated 10 dollars because that’s his full expectation interest of gain. A loses 10 from the 60 profit and is up 50. **Everybody is now better off than they originally would have been and nobody is worse off.
b) This is why Expectation is the default rule – Efficient Breaches are not Punished
Criticism
a) Above analysis excludes collateral parties who may be harmed by non-performance of the original contract
i. For example, those other dependent parties, not privy to the contract, who may have relied upon X buying the Widget 5000 to carry on their own business – College Bookstore example
b) Undermines strength of contractual relations by encouraging breaches and hurts economic predictability
c) Rests on the not certain assumption that the non-breaching party can “cover” his loss with liquidated damages
– In cases where liquidated damages are not enough –
d) SPECIFIC PERFORMANCE – Order of a court to force the breaching party to complete the contract by doing what they were supposed to do
– Done many times in land or real estate cases where compensation won’t be enough to replace the use of land or a home
– Court uses its power of EQUITY – Fairness – not a standard K remedy
e) As a matter of ethics, if you spot an efficient breach and you do not tell your client about the opportunity, you have completed legal malpractice
2. Reliance Interest – Puts the promisee back in the position they were before the contract was ever made
a) Court will look to see if the promisee has changed her position for the worst, due to the contract being made – worsening you endured because of contract
b) Goal is to move the promisee back to the position before the promise was ever made
c) Will use this instead of reliance when the expectation of the party is too speculative with no solid evidence or proper way to calculate
3. Restitution Interest – Put the Promisor (breaching party) back into the position he would have been had the contract never have been made
a) Courts look at the question of whether there has been a value given from the promisee to the promisor
b) The value has to be given back to the promisee from the promisor
B. Hypothetical based on Sullivan v. O’Connor
Doctors fee – 300 (all 3 visits)
Hospital Fees – 100 per operation (3)
Pain & Suffering – 3,000 per operation
Increase in Value of appearance if enhanced nose as promised – 20,000
Loss in value of actual appearance – 10,000
Expectation Interest – 20,000 +10,000+3,000+100 = 33,100
– You don’t pay for doctors fee because that was part of the bargain, you pay for 1 hospital fee because the agreement was for 2, and you pay for 1 pain & suffering because 2 was part of the bargain
Reliance Interest – 300+300+9,000+10,000 = 19,600
– You put them in position before contract was ever made – so you pay for doctors, hospitals, pain & suffering, and the loss.
Restitution – 300
– You put Promisor back in position before operation, so you strip any benefit he received from K.
C. Judicial Economy
a) The ability of courts to come to decisions
b) Not about perfect justice, but rather on what a court is able to do
c) Bright line rules – and that is what we compensate for since that is within their power
III. CONSIDERATION – The majority of agreements that qualify as legally enforceable contracts contain a bargained-for change in legal position between parties, valuable consideration. Only the presence of Valuable consideration on both sides of the bargain will make an executory bilateral contract fully enforceable from the moment of formation – Simply stated, consideration is the price for enforceability in the courts
TWO MODERN CONSIDERATION THEORIES
A. Benefit-Detriment Theory
a. The Traditional theory primarily used in 18th and 19th century (rarely used today)
b. A contract must be EITHER a benefit to the promisor, or a detriment to the promisee (having to do something, or not do something
Hamer v. Sidway – Uncle promised 5,000 to nephew if he would refrain from drinking, gambling, smoking, etc, till he was 21. Valid consideration because the boy suffered a detriment by refraining from participating in his legal rights. (The benefit to the uncle was not necessary because only 1 of the 2 is needed)
c. Traditionally, U.S. courts have averted ruling on contracts among family members – law has changed today and courts will hear large amount cases, or when lawyers were involved in making the documents
Bilateral Contract – Exchange of promises one side promises to do something and the
had the option not to go through with it if he chose
WHICH PROMISES ARE ENFORCEABLE?
1) Gifts – Gifts are not enforceable as contracts – No bargain or exchange – if you promise to give someone a watch, and then decide not to give it; not enforceable. If I promise to give you a watch and give it to you, I can’t take back next day
2) Peppercorn – Not enforceable as consideration – Something of trifling value is being used to give the illusion of consideration – an attempt to mask a gift – EX; I need to get rid of my Mercedes to avoid creditors who want to collect, so I say give me 10 bucks and I will give you the car
– Consideration must be more than a mere token payment
– More than an insignificant sum
3) Forbearance – Forbearance of a right to sue is valid consideration if the claim is valid – even if the claim is invalid and the person in good faith believed it to be valid than it would be valid consideration
Fiege v. Boehm – Boehm tells Fiege she won’t press charges for a child support proceeding if Fiege would pay for child support. Court upholds consideration even though Fiege later found out the baby wasn’t his child. Court rules that the K was made in “good faith” and “reasonable” because it was believed by both at the time. She benefits by getting money, his detriment is to pay the money
Restatement § 74 – Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not consideration unless The forbearing party believes the claim may be fairly determined to be valid
4) Illusory Promise – Not enforceable as consideration; An empty promise
– Consideration must exist on both sides of the K – promises must be mutually obligatory
– An agreement where one party has become bound but the other has not lacks mutuality
Ex; I promise to buy from a company “as many pounds of material as I wish and may want” – this is an illusory promise because I am still free to buy from anyone else or not buy at all
Strong v. Sheffield – Strong had sold Sheffield a business on credit and the payments were overdue. Sheffield’s wife (Δ) was asked to endorse the promissory note in which she promised to pay if for any reason the husband will not, she agrees, IN EXCHANGE for a forbearance of payment from Strong to not ask for the money immediately – Δ was seeking a promise to forbear but Strong promised to not collect the note “until such time that I want it” – “I won’t collect the note until I want to collect it” – This is an ILLUSORY PROMISE
– Court did not save this bilateral contract because what Δ was asking for was for forbearance and peace of mind – Strong’s promise did not give her what she bargained for and the peace of mind was essential to the bargain
5) Satisfactory Clauses – 2 Types
a) Commercial – Whether or not conditions have been satisfied in the contract will be based on REASONABLE PERSON STANDARD
– Based on a neutral objective 3rd person standard
b) Fancy, taste, or judgment – Court will decide based on whether or not the party making the clause made it in good faith
– Subjective judgment of the person in the K
– Where other consideration is valid, a satisfaction clause is not illusory
