Contract (Fall 2011)
M. J. Radin
Chapter 1: Introduction
A. Introduction
What is a contract?
REST definition: promise for promise
AgreementàConsent (assent), opportunity to do it (ie: read conditions)
Bargaining and/or Exchangeàquid pro quo
Promisingàexecutoryàforward-looking
K as “Legal infrastructure”
K and property as foundation, theoretical reason for why take K in 1L
Sources for K law & principles [!]
State Common Law: Mostly are States statutes right now; different jurisdictions
Restatement of Contracts (1st ,1932 +2nd,1982): ALI (American Law Institute); restate common law
— NOT binding law (no “governing”), the judges might choose by themselves; ADOPT §90
UCC (written by NCUSL, not the government; enacted by all the 50 states except for Louisiana; passed by Congress); Art. 2 (sales of goods)
–BINDING
CISG
Notes: if it is a sale of goods, UCC governs; if not, then CL, also might refer to Restatement for guidance
[B] “The Basis of Contract”: Cohen, The six justifications of contract law
Sanctity of promises theory (p.189) (=[R] K is a promise)
–Cons: not all promises shall be kept; not every promise is enforceable
–Pros: morally intuitive
Will theory: meeting of the minds; do with free will
— Cons: out of expectation, mind reading is difficult, too subjectiveà Solving method: objective theory
— Pros: Respect people’s freedom of choice / the right to exercise free will; enhances economic efficiency
Reliance theory: a) someone makes a promise explicitly/implicitly; b) someone else relies on it; c) suffers loss.
—Cos: 1) neither sufficient nor necessary: some injuries can’t be legally protected; other formalities are binding per se without injuries induced; 2) Contract laws allow “positive” or “constructive” remedy remedy not limited to injuries induced.
—Cons: objective and social; so long as reasonable people do rely on the contract under the circumstances
Equivalent theory: material fairness; common law did not go there
—Cons: insufficient and vague; Therefore, American legal system is very cautious in evaluating “fairness”
—Pros: morally intuitive and “fair” à an Aristotelian idea
Formalities theory: “formalism” means do according to rules; “formalities” means you need to be serious (e.g.: consideration; Writing / signature has been the most common way to enforce formality nowadays; yet the choice is just social convention)
Risk allocation theory: who is responsible for what; economic-based theory
—Cons: 1) men intended for a contract to be fulfilled, not breached; 2) Contract law does sometimes compel specific performance, rather than merely remedying unfulfilled actions
—Pros: accommodates uncertainties in the real world
Jurisprudential dilemmas
Theory v. practice: lots of contracts are carefully negotiated; yet still always surprises and unforeseen stuff
World “A” & “B”
Appellate cases v. “real life” (Q3: why this case in the book?)
Facts v. Law: In order to apply the law, we have to figure out the facts; this is not always easy. Facts are contested, and we must be careful to “state the facts”
Rules v. Discretions /Case-by-case judgment/Justice in individual cases
Formal v. informal procedures
[Note: (Crane) K: Promise that is legally enforceable; K liability is strict liability on the promise
One of K’s functions is to allocate risks among parties
K is not about fault at all, it is about performance.]
B. Roadmap of contract law
Sep. 7
“3 Boxes”
Box 1*
Box 2
Box3
Is there a K?
–Formation
–Enforceable
Are the K breached?
-Term in K; meaning
(Interpretation)
What is the remideies?
Specific performance
Damages
Most the time, 3 steps needed in K exam
* Box 1: if there is no K, there is still REMEDY. (Sec.90, Restitution)
LUCY v. ZEHMER [The joking farm sale case]
—Objective theory of K
Q1: What is the contract?
[MY] Lucy brothers (Plaintiff-appellant) sued the Zehmers (Appellee-Defendant) for the latter refused to carry out a specific performance of a contract based on which D had sold the land to P for a price of $50,000. D argues that the paper was written down as bluff and the whole process was as a joke. The Supreme Court of Appeals held that evidence showed that contract represented serious business transaction and good faith sale and purchase of farm, that no unusual circumstances existed in its making, and that purchasers were entitled to specific performance. T he decree reversed and the cause is remanded for the entry of a proper decree requiring the D to perform the contract.
CITATION:
n “We must look to the outward expression of a person as manifesting his intention rather than to his sevret and unexpressed intention”
n “The mental assent of the parties is not requisite for the formation of a contract.” [REST]
n “If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind”.
Normal remedy for breach of K:
—Specific performance: Historically, American Law prefers remedy over specific performance, since SP was historically under equity courts only. Now American legal system does NOT have a separate equity court; the use of SP is subjected to the discretion of the court
—Damages: *Expectation damages; Reliance damages; Restitution damages (“3 interests”)
“3 Interests”
Expectation interest: dominant; nothing invested, interest being in the position that would have resulted if the contract had been performed
Reliance interest: compensate the money which you give up for prepare to get the item; time/money invested; interest being in the position that would have been resulted if contract has not been made
— Pro: interest is impossible to calculate
Reliance works well if you could calculate the amount
Restitution interest: breaching party already benefited from non-breaching party’s expense
—Not only in K cases; failed K, delivered already, Restitution will happen
—Unjust enrichment
Note: can plead for both in alternative, but normally exclude each other
Equity: (historical meaning) Court of Equity, refer to when no remedy in law, case-by-case discretion; Maxims, “seek equity, do equity”; “cannot go to equity court with unclean hand”; 19 century, emerged, mixed courts
Equitable remedy: if the damage remedy is inadequate to take care of you, unique, e.g. land transfer
Fairness in K: not really cared by judges in common law cases, party autonomy; former equitable doctrines
—Keller v. Holderman (1863): buyer paid for a $15 watch with a check for $300. Michigan Supreme Court affirmed that the whole transaction was a frolic. Court may rule such agreements void based on equity;
—Reasonableness: if a joke is very obvious under the context, the party may not be held liable (Pepsi points and the Harrier)
Q2: what is the loser’s best argument? —Box 1 case
Capacity —Intoxication defense
Voidable contracts based on incapacity: matter of free will
a) Minor
b) Intoxication: [REST] Sec. 16 (p.31): narrowly, high standards for intoxication;
c) Mentally ill
Intent —Joking defense
Conflicts on p.6: “mental assent if not requisite” v. “mutual assent is essential”
— we could go externally…; look like an assent, then treat as assent
REST§2 :“manifestation of intention” (what is court based in this case)
—Comment: “manifestation of intention” adopts an external or objective standard for interpreting conduct; it means the external expression of intention as distinguished from undisclosed intention.
Objective theory of K (“as-if theory”)
CITATION: [Judge Learn Hand] “A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties… If it were proved by twenty Bishops that either party when he used the words intended sth else than the usual meaning which the law imposes on them, he would still be held, unless there were some mutual mistake or sth else of the sort.”
What things mean to the other people in the world
Pros: hard to know what is the well-understood meaning of a statement or conduct; what if both people have the same mistaken idea (exceptions), still be K
Confusion: facts (hard to determine free will) v. theory (freedom of will in mind) –99% of the judge would refer to objective theory (so does the Restatement), but subjective part still not away
“magic moment”: done at the time the minds (seemingly) meet; rescission
Classical K theory
K/no K dichotomy
Pro: gradually forming contract, is there a “magic moment” where minds meet and a contract is formed
More about the case:
Diagram: Seller (promisor; deliver farm)—— Buyer (promise; deliver 50,000)
Does vagueness of K implies incompleteness of K?
—If a K is too vague, a court could elect not to enforce it at all; but if the K is enforce, the omitted term soften have to be supplied from default terms (p12).
Does the K need to be writing?
—Not normally, but yes “for the sale of an interest in land” (p.12) [RULE]
Executory and remedy
Particularity: Appellant court viewed the fac
e of consideration can be understood as the common law method of distinguishing promises that are legally enforceable from those that aren’t.
(1) What is the primary reason the court in Hamer v. Sidway thought the Uncle’s promise to Nephew should be enforced?
A: the nephew’s giving up some of his rights by stop doing the required things constitutes a consideration
(2) Should it matter that both the interest of the Uncle and the interest of the Nephew had passed on to subsequent holders?
A: it does NOT matter; duty not easy to passed on; estate including the money (delegate)
(3) In Lakeland v. Columber, would Columber’s legal position be different if the employer had put its non-competition clause into his original employment contract?
A: Yes, it would be part of the contract that is no doubt binding upon the employee
(4) Would Columber’s legal position be different if the contract with the employer specified a term of 5 years and the employer presented the non-competition clause in year 3?
A: no consideration since there is no extension of the employment period
(5) Explain what exactly is the argument that the purported contract between the parties in Petroleum Refractionating v. Kendrick Oil was without consideration
A: refrain from selling to others is a valid consideration
Chapter 2: The Bargain Theory of Contract
Sep. 13
Box 1: does an enforceable K exist?
— Consideration [ON EXAM, always check to see if K is supported by CONSIDERATION FIRST!]
— Formation [offer v. acceptance, etc]
[CB] REST 2d §1: A contract is a promise or a 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.
n 1) Individual promises: different from Civil Law’s present agreement between parties
n 2) a promise does not become enforceable without law-recognizable results of legal duties and remedies
1) Consideration
Core of consideration theory is: to figure out which promises are enforceable, and which are not; “separate legal sheet from moral good”
Promise should be enforced by law, however, large number of promise could not be enforced, promises that are one side, e.g., gift-promise [CB: p.32, FN2]
2 ways of characterization/ 2 tests of enforceable promises
Benefit/Detriment theory (classical): detriment to the promisee OR benefit to the promisor —modified by REST
n [REST] 2d §79 [BB, p.97]: “if the requirement of consideration is met, there is no additional requirement of (a) again, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the promisee; or (b) equivalence in the values exchanged; or (c) ‘mutuality of obligation’.”
n Classical theory, 150-100 years ago, logical and deduction; people still use the theory even if the REST says no
n [PC] p. 462, 466
Bargain theory/bargain-exchange theory (new)
n [REST] 2d §71:
“1) To constitute consideration, a performance or a return promise must be bargained for
2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise
3) The performance may consist of (a) an act other than a promise, or (b) a forbearance, or (c) the creation, modification, or destruction of a legal relation…”
n Core: the crucial element in a bargain is exchange
n US: Bargain for exchange of promises; promise in return for a promise/performance
n The bargained for consideration can be “implied”: e.g. exclusive distributorship, requirement K (exclusive purchase), output K (exclusive sale), etc
Debate: whether the doctrine of consideration should be abolished [CB, p.51]
— Other thing besides consideration (e.g.: K under seal); other way of talking
[Dougherty v. Salt] Aunt Tillie: Advantage of formal K (17’)
