Contracts Outline

CONTRACTS OUTLINE
Finkelstein, Fall 2009
 
 
Contract defined: An enforceable promise. Offer and acceptance (“manifestation of mutual assent”) in exchange for consideration. 
 
 
The Beautiful Idea of Contracts:
§ The idea that contracts are a good thing because parties enter into a contract by their own free will
§ Presumably, people know what they want, there parties regard themselves as better off than they were before the contract was made
§ Enforcing contracts will make parties better off or happier
§ Ex ante – before they enter into the contract, both parties would have wanted it to be enforceable
² If the contract was entered into voluntarily – they each preferred to have the contract
 
§ If the law’s approach to such cases is consistent and if we can assume that contracting parties are aware of the legal regimes in which they operate, does it matter what the law is?
² Probably not – they can contract out of it.
² Changes transaction costs
ØEvery line in the contract costs $
ØAlso increases the chance that the contract will fail
² What do we want to make cheaper for them by putting into the form of a default rule?
 
§ We are balancing freedom of contract against a variety of court concerns (protecting patients, morals, public policy)
 
 
 
Reaching an Agreement
 
Objective Theory of Assent
 
Cases:
Embry v. McKittrick
Lucy v. Zehmer
 
Provisions:
R§19
R§20
 
Objective Manifestation
§ 19th Century manifestation – a contract is a meeting of the minds
§ Epistemic interpretation of intention – the courts don’t have access to someone’s mind so we must take outward acts and words as evidence of intention
² Evidentiary approach – use outward acts to get at the real state of mind
² May take into account other evidence of what was in your mind – memo written after the fact
² Weakly objective
§ Ontological approach – another possible approach to intention – has to do with what is rather than what we know (epistemic) – we don’t really care about the inner stuff; what we take an intention to be is just the outer stuff
² Just care about what the person did
² Strongly objective
 
Misunderstandings
§ Conduct and expressed words are the standard. We don’t try to discern secret intentions.
§ Objective intent.
§ Reasonable person test: What would a reasonable person think in those circumstances, based on the other party’s behavior?
§ UNLESS: Party A has another reason to know Party B’s real intent.
§ The understanding of the more ignorant party governs. AKA, party who has greater reason to know the other party’s intent
 
 
 
 
 
 
 
 
Embry v. Hargadine, McKittrick Dry Goods Co.
St. Louis Court of Appeals, 1907
 
The point: We judge intent based on words and conduct, not secret intent.
 
§ Facts: Employee seeks a contract renewal. Employer says, “Go back to work, you’re all right.”
Take-aways:
§ Difference between meeting of minds and meeting of the words.
§ What they mean is what they say—not their secret intent, but their expressed, OBJECTIVE intent. 
§ Intent is determined by conduct and express declarations
§ The law will impute intent as the reasonable meaning of his words and acts.
 
INTENT IS DETERMINED BY OBJECTIVE REASONABLE MEANING, NOT SECRET INTENT
 
Lucy v. Zehmer
Supreme Court of Appeals of Virginia, 1954
 
Lucy: trying to buy land, serious.
Zehmer: bartender, owner of land, joking.
 
Holding:
§ They weren’t too drunk. 
§ If it looks like a contract (to a reasonable person) and quacks like a contract, it’s a contract.
 
The undisclosed intent is immaterial unless the other party knows the unreasonable meaning intended.
 
Restatement §19: Conduct as Manifestation of Intent
(2) Party must intend to engage in the conduct, and know/reason to know the other party will infer assent
(3) Exceptions: Fraud or mistake, when it looks like assent but wasn’t
 
Restatement §20: Misunderstanding
1: No assent when both parties have different meanings and
Neither knows the others’ meaning
Both know the others’ meaning
2: When there’s a differential of knowledge, the knowledge of the more ignorant party governs
 
 
 
Hypo: Assent and knowledge
 1. Zehmer is serious, Lucy is joking. Lucy later realizes he could try to hold Z to the contract. Can he?
NO. L wasn’t in a contracting state of mind.
 2. Lucy is serious, but knows Zehmer is joking. 
NO contract, because Zehmer’s state of mind governs.
 
Misunderstandings that happen in the course of a contract
§ Both parties believe they have entered into a contract (not like previous cases where one party thinks there is a contract and the other does not)
§ Raises a philosophical question about the reliability of language
§ Two types of judicially supplied gap-fillers:
² Default rules: refers to those legal rules that the parties can avoid or vary by means of an express clause that differs from the term a court will otherwise supply by default
² Immutable rules: rules that can’t be varied by consent and will override any express clause to the contrary
 
§ where neither party knows or has reason to know of the ambiguity or where both know or have reason to know, the ambiguity is given the meaning that each party intended it to have
§ if the parties have fundamentally different things in mind then there is n