Outline—Contracts (Madison)
I. Introduction (p.3-12)
A. What is a contract? A contract is an agreement enforceable by law.
1. Restatement § 1: Contract Defined:
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 a duty
2. Restatement § 2: Promise: Promisor; Promisee
a. Promise: Manifestation of intention to act / refrain from acting in a specified way, so as to justify a promisee understanding that a commitment has been made.
b. Note that beneficiary means someone who will benefit other than the promisee
3. Restatement § 3: Agreement Defined; Bargain Defined
a. An agreement is a manifestation of mutual assent on the part of two or more persons.
b. A bargain is an
i. Agreement to exchange promises
ii. Or to exchange a promise for a performance
iii. Or to exchange performances.
4. Restatement § 4: How a Promise May be Made
Orally, written, inferred from conduct
B. Contract law sources
1. Contract itself
2. Common law
Cases: Common Law
-Principles and customs that have accumulated over time.
-Courts look to past opinions to get their reasoning. Often, they are bound by cases if they are decided by a higher court.
-For Reference: Restatement (Second) of Contracts
-A restatement of the law as expressed in cases (the common law). It tries to distill all of the case law into statements, published by the American Legal Institute. Clarifies the law.
-Explains what the law is, what the cases have said.
-IS NOT a case, not an opinion with precedential value
-NOT a statute, does not bind courts/judges.
3. Statutes – Uniform Commercial Code (Article 2) — applies to goods only
-Uniform Commercial Code (UCC), especially:
-Article 1: “General provisions”
-Article 2: “Sales”/Transactions in goods
-UCC is a collection of rules established in 1940’s.
-Meant to be adopted in different states, so there would be common rules. Tried to recognize commercial reality—most people don’t do what they are supposed to be doing. Tries to accommodate what people actually do.
-UCC is not actually a statute. BUT, state legislatures have adapted UCC, and written it into statute.
4. Restatement – ALI publishes common law principles as most states recognize
5. Treatises – work by expert about what law is and should be
6. Treaty: UN Convention on Contracts for the International Sale of Goods (CISG)
C. Rules governing contracts
1. Immutable Rules – cannot change, principles such as the requirement to act in good faith, criminal law, UCC
2. Default Rules
a. Implicit rules around which parties can contract (majority of contract law)
-A will stipulates a special inheritance
-So FedEx can contract out of liability for damages to packages
b. Default rules can operate in two ways
i. Majoritarian: rule that majority of contracting parties want
-UCC provides several examples of this
-Allows you to save transaction costs, costs that would be necessary to stipulate everything
ii. Penalty: rule that people don’t want, get them to contract around. Often designed to elicit information.
3. Special contract
Explicit contract, clearly defines and settles reciprocal rights/obligations of parties (Shaheen – failed sterilization)
-Understanding Procedure: Shaheen v. Knight (Court of Common Pleas, PA, 1957) (p.3-12)
-Facts: Shaheen sued Knight, his physician, claiming that Knight contracted to make him sterile, after he got his wife pregnant, wanted money for unwanted child. Defendant claims that sterilization contract is against public policy.
-Holding: A doctor and his patient are at liberty to contract for a particular result. If that result is not obtained, patient has cause of action for a breach of contract. Court rejects ∆’s public policy argument (no unanimity of opinion against sterilization), but rules in favor of ∆ because there were no damages (healthy child), so awarding damages would be against public interest.
-Rejected public policy argument: no unanimity of opinion about sterilization.
-Rejected implied warranty of cure argument, since this isn’t what the plaintiff was asking. So, this argument was not relevant. If there is a contract, then the implied warranty is irrelevant.
-Damages are not appropriate because having another child is not a definable injury. We can’t possibly value children.
-Court may be doing a cost-benefit analysis: saying that in similar cases, the benefits (having the child) will outweigh the cost.
-If ∏ really didn’t want the child, could have put it up for adoption.
-What if there would have been birth defects?
-Health Care Warranties Today:
-PA Statute Title 40, §1301.606 (1975)
-“In the absence of a special contract in writing, a health care provider is neither a warrantor nor guarantor of a cure.”
-So Shaheen case would probably be tossed today.
-PA Supreme Court on Failed Sterilizations:
-Mason v. Western Penn. Hospital (1982) allows damages related to childbirth, but says:
-“In the light of this Commonwealth’s public policy, which recognizes the paramount importance of the family to society, we conclude that the benefits of joy, companionship, and affection which a normal, healthy child can provide must be deemed as a matter of law to outweigh the costs of raising that child.”
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d) (p. 61)
i. H can’t recover damages for losses he was willing to sustain (pain and suffering from operation) to get benefits of K. Damages are reduced by losses he would’ve sustained if K was performed (c). He can recover for additional pain and suffering.
ii. In ruling that the instructions given to the jury on damages were erroneous, the Court outlines the concept that damages are limited to an assessment of the difference between what the promisor should have provided the promisee and the actual result. Affirms the notion of expectation interests.
f. OR Use Hooker v. Roberts Cabinet Co. (cabinets) (p. 71) formula:
g. Lost profits (total projected revenues – total projected costs) + Cost of performance or costs incurred so far (materials purchased, wages paid) = Contract price – Costs avoided (Restatement!)
h. Efficient breach and expectation damages
i. If expectation damages are awarded, seller will breach only if cost of production is larger than buyer’s valuation (or if another buyer is willing to pay more)
ii. As production costs rise, social surplus declines and becomes zero where cost of production equals buyer’s valuation
(A) Social surplus is buyer’s valuation minus cost to produce
iii. When production cost exceeds valuation, social surplus is negative and society is worse off
2. Reliance Damages – Restatement § 349
a. Expenditures made in preparation for performance or in performance,
b. Minus any loss that he would have suffered in the event of performance
c. Sullivan v. O’Conner (nose job) (supp. p. 1)
i. Expectation damages excessive because MDs fees are disproportionately low, restitution would be too small à reliance damages. Awarded difference between current nose and original nose
ii. Rejects Hawkins reasoning
iii. Held that in breach of contract for a medical operation, ∏ can recover for worsening of condition and pain/suffering and mental distress involved in subsequent operations to correct injury.
iv. Court notes that this case differs from commercial cases. Expectation damages are more important in commercial cases because a primary function of contracts is to facilitate commercial transactions.
