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Contracts
University of North Carolina School of Law
Baker, Scott A.

Contracts Outline: Baker
 
Introduction
 
Sources of contract law
Common law
Applies to all goods and services
Restatement (2nd) of Contracts
Applies to all goods and services
Uniform Commercial Code
Applies only to the sale of goods
Original = relevant edition
Actually law
Adopted in all states
Contract rights – the right to enforce promises
Layered upon property rights to create markets
2 functions of contract rights
(1) Enable sequential performance
Discourages opportunism by whoever moves 2nd in contract
i.e. renegotiation of contract after the fact
Allows relationship-specific investments (fancy stuff)
Granite counter-tops, etc.
High switching cost for builder if forced to find another buyer
Next owner may only want to pay for Formica
Allows credit exchanges and capital markets
i.e. insurance contracts
Exception – exchanges may still take place because of repeat dealings
Benefit of keeping word
Possibility of future dealings
(2) Default rules
Rules that govern unless otherwise specified
Why have default rules?
Cost a great deal to specify all rules in a contract
Satisfy the needs and desires of majority
UCC 2-305 – no price term specified
Default price term is reasonable price at the time of delivery
UCC 2-201 (State of Frauds) – no quantity term
Some promises must be in writing
Default quantity term is 0
Reasonable price can be determined, reasonable quantity cannot
 
Implied Contracts
Implied in Fact
Reasonable listener test – would a reasonable person in the same situation believe the parties’ actions created a contract?
Intent is the primary issue
Bailey v. West (1969)
Bailey sent bills to more than one person
Did he believe West alone had intent to pay?
No prior dealings between the two parties
Penalizes the idiosyncratic (stupid)
Involves 3rd party expectation
Facts are very important
What would have been the best outcome?
Bailey v. West
Bailey (horse farm owner) in best position to prevent mistaken boarding by checking with West
No oral or written words required
Can be implied by conduct?
Bailey v. West
Implied promise to pay – dropping off of horse at farm
Implied promise to board – taking of horse
Quasi contract
Prevents unjust enrichment
Results from a deficiency in striking a deal
Elements
(1) Must have actually received a benefit
(2) Must appreciate conferred benefit
Knowledge of benefit
Who provided benefit
(3) Acceptance and retention
(1) Court mimics market outcome in situations where the market cannot work
Law favors voluntary exchange
Should not be forced to exchange if you don’t want to
Bailey v. West – agreement could have easily been bargained for
Court only substitutes its judgment if voluntary exchange is not possible
Situations
Rescuing doctor
Can recover
Patient, if given the opportunity, would have accepted assistance
Bailey v. West
Bailey had no knowledge of whether West would have accepted the services
(2) Fairness
(3) Justice
 
Forward Contracts and Hedging
Stems from an uncertainty about future prices
Terms
Hedging – give up possible future upside gain in order to eliminate downside loss
Derivatives – value of contract is based on value of some other asset
Speculator – person betting on which direction a market will go
Provides liquidity
Futures contract – same as forward contract, but it has standardized terms
Can be traded
All futures contracts look exactly alike
UCC 2-615 – failure of a presupposed condition
Performance of contract has become commercially impracticable because of unforeseen, supervening circumstances not within the contemplation of the parties at the time of contracting
Emphasis – occurrence must have been unforeseeable
But how do you determine what is unforeseeable?
Bolin Farms v. American Cotton Shippers Association (1974)
Facts
Farmers had forward contract to sell cotton, but they wanted out because of an astronomical rise in cotton prices
Occurrence = astronomical rise in prices
Prior assumpt

nt of collateral?
If not, then the Walker-Thomas argument is bad
World 1 – clause enforceable
People get items they otherwise would not have
World 2 – clause unenforceable
Higher, universal interest rate to cover defaults
Helps people that are likely to default and hurts those likely to pay
Inability to signal financial stability via higher collateral
Does the court or legislature decide which terms in a contract are legal?
Hypo – mandatory employment contract requires arbitration of all disputes
Employee’s substantive argument
Old man must arbitrate in Miami
Lack of punitive damages
Obviously favors the employer
Employer’s substantive argument
Benefits of arbitration
Quicker recovery
Cheaper
Saved money can be distributed to other employees
Sliding scale – less naughty the bargaining process, the more unfair it can be
Remedies available to the court with unconscionability
Strike particular clause
Strike the entire contract
Do just about anything else
Monopolies
Monopolist imposes highest-profit price
No incentive for a monopolist to offer stuff no one wants
Non-salient terms = those terms not priced by the consumer
Completely 1-sided to the seller
Unconscionability does not turn on market structure but on salience
If most terms are priced by the consumer (salient), then unconscionability doctrine does not make sense
If most terms are unsalient, unconscionability is valid
 
The Consideration Requirement
 
Separates enforceable from unenforceable promises
Mutual inducement – key to consideration
Restatement 2nd of Contracts §71 – promises must be bargained for