CONTRACTS A
PROF. WHITE
FALL 2013
I. Introduction
A. What is Contract Law
1. Analyzes theories of obligation that require compensation
2. Examines what promises should be legally enforced—through compensation
3. What types of promises, if broken, should society compensate
B. Compensation v. Punishment
1. Contracts law differs from criminal law in that
a. Contract law = compensatory
b. Criminal Law = punitive
c. No punitive damages presumed in contract law
d. Legal obligation stems from a promise, not a societal duty
II. Definitions—Restatement (Second) of Contracts § § 1-3
A. Promise: a manifestation of intention to act or refrain from acting in a specified way so made as to justify a promisee in understanding that a commitment has been made.
B. Promisor: the person who makes/breaks the promise
C. Promisee: the person to whom the promise is made
D. Beneficiary: a person, other than the promisee, who is benefitted by the contract
E. Contract: a promise or set of promises that the law is willing to enforce by providing a remedy to the injured party if broken/breached.
F. Agreement: a manifestation of mutual assent on the part of two or more persons
G. Bargain: an agreement to exchange promises or to exchange a promise for a performance or to exchange performances
H. Defense: a means by which a party to a valid contract may avoid enforcement
III. How a Promise May be Made—Restatement (Second) of Contracts § 4
A. A promise may be stated in words either oral or written, or may be inferred wholly or partly from conduct.
IV. Elements of a Prima Facie Case for Breach of Contract
A. Mutual assent
B. Enforceability
C. Breach
V. Contract and Public Policy
A. Shaheen v. Knight
1. Π sued his doctor b/c doctor agreed to make him sterile. After operation Π’s wife had another child. Π sought to recover for the cost of the child’s care.
2. Court refused to grant Π remedy:
a. Π wanted to keep the child so there was no damage done
i. To allow damages would be to have Δ pay for the fun and affection which Π will have in rearing and educating his 5th child.
ii. if the Π did not want to keep there were other options such as adoption
iii. Δ could perform the operation again at no cost.
B. Nature of Contract Law
1. Contract only enforces contracts society thinks are worthy of enforcement
a. Does not enforce gifts
b. Society thinks business transactions are important so such contracts are readily enforced and there court tries to promote efficient commerce
2. Contract law does not punish the party in breach—just wants to compensate the other party and move on.
3. Contract law is based on consent and not social duty.
C. Contracts Unenforceable Due to Public Policy-Restatement of Contracts § 178-179
1. A contract or a term of an agreement is unenforceable on grounds of public policy if:
a. Legislation provides that it is unenforceable; or
b. The interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such contracts.
2. In weighing a public policy against enforcement of a term, the court considers:
a. The parties’ justified expectations
b. Any forfeiture that would result if enforcement were denied, and
c. Any special public interest in the enforcement of the particular term
3. In weighing a public policy against enforcement of a term, the court considers:
a. The strength of the policy as manifested by the legislature or judicial decisions
b. The likelihood that a refusal to enforce the term will further that policy
c. The seriousness of any misconduct involved and the extent to which it was deliberate, and
d. The directness of the connection between that misconduct and the term.
4. Sources of Policies Against Enforcement
a. A public policy against the enforcement of a contract or its terms may be derived by the court from:
(1) Legislation relevant to such a policy; or
(2) The need to protect some aspect of public welfare, as is the case for the judicial policies against:
(i). Restraint of trade (§ 186-188),
(ii). Impairment of family relations (§ 189-191), and
(iii). Interference with other protected interests (§ 192-196, 356).
VI. Restatement (Second) of Contracts and the Uniform Commercial Code
A. Restatement (Second) of Contracts
1. First Restatement published in 1932—Williston
2. Second Restatement started in 1962, completed 1979, published 1981—Farnsworth
3. Part of the reason for the revision was to harmonize restatement w/ UCC
4. Purpose = address uncertainty in the law by restating basic principles, tell lawyers and judges what the law is.
5. Not enacted law but is highly influential because of its drafting process and the scholars responsible for it.
6. Many courts adopt its provisions as the law
7. Restatement = majority rule (in most cases)
8. Covers all contracts not just those for sale of goods
B. Uniform Commercial Code
1. Only covers contracts for the sale of goods—excludes sale of land and employment contracts
2. Enacted as law in all 50 states—supersedes conflicting common law rules and is binding on state courts (all states except LA passed by 1964).
PART II THREE DAMAGE INTERESTS
I. Expectation Interest –General Measure of Damages, Benefit of Bargain
A. Attempts to put the promisee in the position in which she would have been in had the contract been performed.
B. Hawkins v. McGee—hairy hand case
1. The measure of damages is the difference between the promised performance and the performance the promisee actually received—the difference between a 100% perfect hand and a hairy hand
2. This difference is called loss in value in the general damages equation.
3. Π may also recover for any reasonably foreseeable incidental/ consequential damages.
C. General Measure of Damages—Restatement (Second) of Contracts § 347
1. Subject to the limitations stated in § § 350-353, the injured party has a right to damages based on his expectation interest as measured by:
a. The loss in value to him of the other party’s performance caused by its failure or deficiency, plus
b. Any other loss, including incidental or consequential loss, caused by the breach, minus
c. Any cost or other loss that he has avoided by not having to perform on the contract
EQUATION FOR GENERAL MEASURE OF DAMAGES
LOSS IN VALUE + OTHER LOSS – LOSS AVOIDED – COSTS AVOIDED
LOSS IN VALUE =
the value of the promised performance minus the value of any performance received
OTHER LOSS =
loss other than the performance caused by the breach; incidental and consequential damages, such as the cost of stopping shipment
LOSS AVOIDED =
expenses avoiding by not having to perform such as stopping construction
COSTS AVOIDED =
loss avoided or that could have been avoided by cover / salvage
SEE PRINT-OUTS FOR SAMPLE PROBLEMS AND ANSWERS
D. Tongish v. Thomas—Alternative Calculation of Expectation Damages
1. Tongish (Π) agreed to sell a Co-op sunflower seeds, which Co-op would then sell to another party for the same price plus a 55¢ per hundredweight handling fee. The market price for sunflower doubled and Π breached by selling the seeds to Thomas (Δ). The only profit Co-op stood to make was the handling fee.
2. Two formulations of expectation interest:
a. Loss in value + other loss – loss avoided – costs avoided
b. The difference between the market price at the time when the buyer learned of the breach and the contract price + incidental and consequential damages.
[market price – contract price] + other loss – loss avoided – co
t?
III. Default Limitations on Damages
A. Expectation damages = normal upper measure of damages
B. Default Limitations
1. Used when parties are silent as to extent of liability
2. parties can contract around them
3. incur more or less liability
4. Three limitations:
a. Foreseeability of harm
b. Certainty of harm
c. Avoidability of harm / duty to mitigate / cover
C. Foreseeability
1. How Foreseeability is Determined
a. measured at the time of contract formation
b. using an objective standard
i. It doesn’t matter if party did not actually foresee the harm
ii. Foreseeability is what was reasonably foreseeable at the time of contract formation.
c. Courts look to the terms of the contract
i. Did anything in the contract suggest that the party should be liable for extent of damages demanded by Π?
d. Also look to what is typical in the industry
e. If particular company is in a tough spot and is running really tightly w/ respect to supplies, it is not the promisor’s fault if their breach derails the whole operation—an emergency on your part doesn’t constitute an emergency on my part.
2. Two general areas of unforeseeable damages:
a. There is a lack of foreseeability when damages are much greater than the cost charged to perform the service.
b. Damages incurred before contract formation are not foreseeable and therefore not recoverable.
3. Purpose of foreseeability requirement
a. Contract obligations are freely assumed rather than imposed.
b. People would not freely assume responsibility for things that are not foreseeable.
c. Proof of unforeseeability can rebut presumption of foreseeability.
4. Extent of Liability
a. Foreseeability requirement limits the extent of liability.
b. Parties are free to further limit liability
i. Fed-Ex Express Disclaimer
ii. Purchasing “As-Is”
5. Hadley v. Baxendale—Majority Rule
a. Π sued for lost wages due to delay produced by Δ’s failure to send a broken mill shaft by a specified date. Due to the delay, Π’s entire factory had to shut down. Issue was whether it was foreseeable that the mill would shut down.
b. Rule:
i. When parties are silent, foreseeability creates a rebuttable presumption of the extent of liability
(A) If loss is foreseeable, party in breach is presumed to have assumed the risk of loss
(B) Unforeseeable consequential damages are not recoverable
6. Morrow v. First Nat’l Bank—Tacit Agreement Test / Minority Rule –rejects Restatement (Second) of Contracts § 351
a. Π reserved safety deposit box at bank (Δ) for $25, intending to store his $30,000+ coin collection there. The Δ was to notify Π when box became available. Δ failed to do so. As a result, Π’s continued to keep his coins at his house and were stolen. Π then discovered box had been available for some time. Π sued for value of coins.
b. Court found there was no tacit agreement based on the low cost to rent the security box compared to the Π’s expensive loss. Wouldn’t satisfy Hadley—therefore definitely won’t satisfy tacit agreement test.
