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Contracts
University of California, Hastings School of Law
Lefstin, Jeffrey A.

Contract Law Outline
Prof. Jeffrey Lefstin
Spring 2012
 
 
 
Nature and History of Contract
 
–          Contracts are one part of the old notion of obligation law. The other part of obligation was tort law and contract was also seen as a part of tort law. Now contract law is independent.
o   Tort law – obligations imposed by law on everyone
o   Contract law – obligations created by agreement on contracting parties
–          Common law can refer to either judge created case law, or the system of jurisprudence.
–          Statutory law – the Uniform Commercial Code (U.C.C.).
o   Reflected actual practices
o   Covers sale of goods
o   Goal to have uniformity
o   It is law because it was adopted by the state legislature
–          Definition of contract: A contract is an exchange of a promise for a promise or a promise for a performance.
o   A promise involves future action.
o   Even though transactions might not involve explicit promises, there are almost always implied promises.
o   There must be an exchange to have a contract. You could promise to do something, but it is not a contract unless there is an exchange.
–          Shaheen v. Knight (1957)
o   Plaintiff, Shaheen sues a doctor after the doctor promised to sterilize him through an operation.
o   Having a child is not a harm. The plaintiff suffered no damages and is not entitled to a remedy.
–          Status v. Contract
–          Obligations were determined by who you are
o   Marriage relationship – community property and example of status obligation and not an explicit promise.
o   Malpractice involves duties growing out of the physician-patient status relationship; parent-child status relationship; husband-wife status relationship; attorney-client status relationship.
–          Contracts that are not enforced on the ground of public policy:
o   “immoral” i.e. gambling contracts are sometimes not enforced, even if gambling is legal by state law in the jurisdiction
o   Restraint of trade. i.e. price fixing agreements.
§  Ex. Contracts preventing former workers from working for competitor are enforceable in some states; however, these are not enforceable in California because of the emphasis placed on employee mobility.
o   Inalienability – What about selling your self into slavery? Courts are reluctant to consider the fairness/equality of an exchange. What about a contract to sell your kidney?
§  We may view certain things as inalienable; there shouldn’t be a market for certain things. This conclusion about inalienability depends on some underlying theory of jurisprudence or philosophy.
–          Covenant
o   requires a writing under seal.
–          Promises – tort law was expanded to cover misfeasance of promises. Assumpsit – a tort covering misfeasance.  Assumpsit comes from the Latin – to undertake.
o   At first assumpsit covered only misfeasance, but was expanded to cover promises not in writing and where there has not been performance. Assumpsit was expanded to cover informal executory promises (promise to do something in the future), even if the action of debt was available.
o   Debt covered some cases, but was subject to “wager of law” – 12 people swearing that you did not make the promise, allowed someone to escape liability.
o   What is the consequence? Increased opportunity for fraud and the Statutes of Frauds was developed, which required certain promises to be in writing. Also, consideration was developed as a test to determine what promises will be enforced and what promises will not be enforced.
 
Remedies for Breach of Contract
 
1)      The Three Damage Interests
a)      Reliance Interest
i)        Reliance interest à promisee lost $X. Promisee is $X poorer for relying on promise.  (detrimental reliance)
ii)      Both reliance and restitution interests are backward looking. Restitutions looks back at the promisor’s situation. Reliance interest looks back at the promisee’s situation.
b)      Restitution Interest
i)        Based on unjust enrichment of breaching promisor. Had a broad history and is in some sense broader than contract law (unjust enrichment).
ii)      Both reliance and restitution interests are backward looking. Restitutions looks back at the promisor’s situation. Reliance interest looks back at the promisee’s situation.
c)      Expectancy Interest – Restatement § 347 (Default Rule)
i)        Fuller and Perdue Article:
(1)   Psychic injury is not the basis: because law does not protect all broken promises or all psychic injuries. Also, the level of psychic harm is not measurable.
(2)   Will theory- that the law was giving force to the private law created by contracts/promises. The problem is that this doesn’t tell us what damages to award.
(3)   Economic explanation/justification.  A credit economy is dependant on promises. The Latin root of credit is believe; a credit economy blurs the line between what you have and what is promised to you. There is a market for this promise – the bond market. This rationale is circular – a promise is only valuable because the law enforces such promises. However, courts have enforced promises before the credit economy. So this explanation doesn’t hold up completely.
(4)   Best explanation for expectancy: The juristic explanation. Courts seek to promote reliance on agreements. Why? –  Enforcing agreements encourages people to invest in forward-looking enterprises.  Efficient use of resources: promotes voluntary exchanges and voluntary exchanges are the foundation of a capitalist economy, which allocates resources to the people who most value them. Why not simple award opportunity costs? Because opportunity costs are often difficult to establish – requires too much speculation. Expectancy is a good approximation of opportunity costs.
(5)   A defendant may willingly take the risk that he might not get sued, or that he might win at trail. So the potential cost (deterrence) should be greater to compensate for this uncertainty. Also, this encourages other party to rely on the agreement – i.e. it is not certain that the contract will be enforced, but if you do win then you get a kind of bonus. (Generally, damage awards should be compensatory, but Fuller and Perdue see a deterrence effect here.)
ii)      The damages equals = loss in value plus other loss minus cost avoided minus loss avoided
(1)   Loss in value is the à value of the promisor’s performance (difference between scarred and perfect hand in Hawkins)
(2)   Other loss à additional costs because the promisor didn’t perform (difference between scarred his useless hand, extra pain and suffering in Hawkins)
(3)   Loss avoided (ex. Purchased material in preparation for a contract. If the contract is breached, then the materials could be sold.)
iii)    Definitions
(1)   Essential Reliance: Cost of performing the promisee’s (NBP) own obligations under the contract. Cancels out under Restatement (if awarded under other losses you would be getting it twice.)
(2)   Incidental Reliance: Cost of attaining substitute performance Costs which are not related to your own performance under the contract.  Expenses that did not have to be made in order to perform your side of the deal. Damages include such items as transportation expenses, storage expenses, and other small but direct expenses associated with the breach and buyer’s attempts to cover for it. (Caused by but not flowing from)
(3)   Consequential Reliance: Costs, which are foreseeable as a result of breach (aka: costs that “flows from” the breach). Include the profits, which the buyer could have made by reselling the contracted-for goods had they been delivered. These profits must be proved with appropriate certainty, and must be shown to have been reasonably foreseeable at the time of the contract.
iv)    There is a distinction between reliance on pain and suffering and reliance on the (i.e. hand getting better – essential reliance (your cost of performance, notes example it was $20) and incidental reliance (example cost of not taking notes.) Under expectancy, essential reliance is not recoverable; but, you can recover inceidental reliance. However, under a reliance (the goal is to put you in the position you would have been in had the contract never been made) theory you can recover both essential and incidental reliance. 
v)      Hawkins v. McGee (1929)
(1)   Harry-hand case. Rule: Damages are based on the difference between what was promised and what was delivered.
(2)   Expectance – difference between perfect hand and useless hand (court ignores possible extra pain and suffering).
(3)   Difference between useless hand w/pain and suffering and useless hand without pain and suffering is “essential reliance” –
(4)   Difference between useless hand without pain and suffering and scarred hand with pain and suffering is “incidental reliance”
vi)    Nurse v. Barnes (1664)
(1)   Contract to use iron mills for six months for 10. But damages to stock laid in reached 500, so damages can be awarded at 500 and not limited to 10. Rule: The jury has the power to award special damages; those in ex

re able to ascertain with a reasonable degree of certainty. Damages are only available when they from naturally from the act complained of. Necessary expenses incurred in furtherance are recoverable. Absolute certainty is not required. Reasonable certainty is required.
(2)   1) An aggrieved party may not recover special damages (lost profits) unless such damages are definite and certain. 2) A party can only recover damages, which naturally flow from and are the result of the act complained of. 3) The breaching party is not liable for expenditures made by the non-breaching party before the contract was formed. One explanation for no pre-signing damages is that those pre-signing expenses couldn’t have been based on reliance. They took these actions after the contract was repudiated.  4) A party cannot recover for legal fees incurred in trying to obtain an injunction against the breaching party unless it was provided for at the time of the contract – such expenses are the risk that the non-breaching party takes. But the rule is based on the idea that after one has notice that a contract is not going to be performed any attempts to persuade is taken at your own risk 5) Salaries are recoverable only if they were hired specifically for the contract; otherwise they are like the storage costs and would have been an expense regardless of whether the contract was made or not. (But may be able to recover if you can show lost opportunity. i.e. that the employees would have been working on something else. Ongoing expenses are generally not recoverable.)
iv)    Mistletoe Express Service v. Locke (1988)
(1)   L entered into K with M for pickup & delivery service/ L made expenditures in reliance of K/  M cancelled K/  L then closed business/ M argues L should only recover lost profits since she was losing money, not making profit/  M argues L should not get damages -losing contract. Rule: Recovery may include recovery of investment in preparation for performance under the reliance interest. 1) Where one party to a contract makes expenditures in preparation for performance under a contract, the proper measure of damages for breach includes the recovery of her investment in order to return her to the position she would have enjoyed had the contract been performed. 2) As an alternative to expectation, the P can choose to recover any expenses she made in reliance on her contract.
 
c)      Avoidability
i)        Rockingham County v. Luten Bridge Co. (1929)
(1)   City K’s with bridge co./ council votes to rescind K/ bridge contractor keeps working. Rule: The American rule is that a plaintiff has no right to continue to pile up damages after they have been given notice that the other party intends to cancel the contract. Duty of avoidability/mitigation. One is expected to cease performance upon breach/notice of breach. The measure of P’s damages after notice is given = the amount sufficient to compensate the P for labor and materials expended and expense incurred in the partial performance of the contract before the breach + profit the P would have realized if the contract had been fully carried out.
ii)      Shirley Maclaine Parker v. Twentieth Century Fox Film Corp. (1970)
(1)   P contracted with D to perform in ‘bloomer girl’/ D cancelled film and offered P another role in ‘big man big country’ / D refused and sued for profits she would have made. Rule: In an employment contract one must seek alternative work, but one does not need to accept different or inferior work. Projected earnings from other employment opportunities will only offset damages if the employment is substantially similar to that which the employee has been deprived