Contracts Outline Fall 2014: Kordana Don't be a jerk, fetishist and/or freakazoid ELEMENTS OF A CONTRACT 1. Mutual intent 2. Consideration (or promissory estoppel or material benefit) 3. Capacity 4. Sufficient definiteness 5. No fraudulent/against public policy 6. Not unconscionable K=win/win In remedies: talk about property and liability rule protection, Coase, and what are we doing around here, incentives and social waste ROADMAP FOR CONTRACT LAW I. Introduction to Implied in Fact Contracts and the Restitution Interest a. Bailey v. West (R.I, 1969) i. Bailey boarded a horse on his farm when ownership of said horse was in question. West would not pay; he did not own the horse. Bailey sued. Put in volunteer box=loses ii. Timeline: T0=horse is dropped off. T1=ownership clarified although the horse remains. (For some reason the parties testify in a non self-interested way – West says T0-T1 is two to three months and Bailey says one to two months. Kordana thinks the judge screwed up the timeline). iii. TC splits the baby, giving payment for a reasonable period of time. T1 matters to TC. iv. Court here does not care when T1 is and does not split the baby. b. Law of Agency: To what extent should principles be responsible for the actions of their agents? i. Even though the agent screwed up, the legal issue is between the principle and the third party. ii. West acts through agents but he is still liable for when his agent makes a mistake. Most agents would be judgement proof. iii. Need the third parties to trust agents. c. Least Cost Avoider: liability is imposed on the party that could have prevented damages from occurring at the lowest cost. i. KK agrees with Paolino’s outcome but for a different reason: Bailey was the least cost avoider – should have picked up the phone and clarified (‘lift your little pinkie finger dude’). d. Implied in Fact: Not written or oral but still real. i. Intent: Mutual intent is inferred based on the circumstances, which, according to the ordinary course of dealing and the common understanding of men, shows a mutual intent to contract. 1. If the promises of the parties are inferred from their acts or conduct, or from words that are not explicitly words of agreement, the contract is said to be implied in fact. ii. KK thinks Bailey was implied in fact (disagrees with Paolino). It is reasonable to think that you will get paid even when there is an ownership dispute. CONTRACTS OUTLINE Page 1 of 27 e. Implied in Law (aka Quasi Contract): Law of restitution/law of unjust enrichment – not a real contract, and not about mutual intent i. When one party is required to compensate another for a benefit conferred in order to avoid unjust enrichment. 1. The existence of a benefit does not automatically mean that you owe money - Officious intermeddler (squidgy man) ii. Three prongs P must show: 1. Benefit Conferred 2. Benefit Appreciated – knowledge of expectation to be paid 3. Benefit Accepted – D would be unjustly enriched if allowed to retain benefit without paying its value. iii. Bailey has a good case for quasi contract, but called a volunteer so put in a different box. II. Introduction to Contract Formation and the Objective Theory of Intent a. RST 2d: § 12: Capacity to Contract i. A person lacks capacity if he is unable to act in a reasonable manner and the other person has reason to know his condition ii. Voidability: power to void contract if no capacity b. RST 2d: § 16: Intoxicated Persons i. The test is whether the person who was so intoxicated as to be unable to understand the nature, purpose and effect of what he was doing. c. Lucy v. Zehmer (Va. 1954) i. D writes a contract to sell farm on a napkin, when P tries to enforce it, D claims he was drunk and only joking. ii. Issue: is a party bound if he acts like he assents to an agreement, even if he did not really mean it? iii. H/R: Yes. If a party to the contract has reasonable belief that the other party has the requisite intent to enter into the agreement when he does not, the contract is still enforceable. d. Anti-opportunitism rules: prevent those who have knowledge of lack of capacity or intoxication from exploiting that knowledge. e. Objective Theory of Contracts: pays attention to the facts a third party could observe. Important to look at outward and manifest intention rather than secret intention. i. Mutual assent. Mutual Assent is necessary for contract formation and is determined under the objective theory of intent – what a reasonable person to whom an expression is made would understand the expression to mean. Not about subjective intent or subjective interpretations ii. Rationale: protection of parties’ reasonable expectations for certainty in business transactions iii. Application: there is sufficient manifestation of assent whenever a party uses an expression that he knows (or has reason to know) the other party would reasonably interpret as an offer or acceptance and the other party does so interpret it. f. Reliance i. Enforce K that are supposed to be win-win because of reliance 1. Make investments 2. Change behaviour ii. Lucy tries to manufacture reliance by his actions about town the following day CONTRACTS OUTLINE Page 2 of 27 III. Introduction to Incomplete Contracts and the Role of the Courts a. Walker v. Keith i. Facts: Walker was a landlord who leased a piece of property with an option to renew. The option did not contain a fixed price, but rather that rent would be set at the time reflected by comparative business conditions. Parties could not agree down the line. ii. Issue: was the option to renew enforceable? iii. Holding: No, the renewal option was merely an unenforceable agreement to agree. iv. Kordana comments: 1. Strange that the court mentions the meeting of the minds (subjectivity) 2. Why is this court unwilling to fulfil its typical role in contract law which is to fill in gaps in contracts (which are inevitable)? b. Stability: We want future business transactions to be incentivised to have stability. i. It is a foreseeable possibility that if we renew the lease we need to talk about rent. This gap is not a remote possibility, but is foreseeable. ii. Least Cost Avoider: one reason Clay throws them out of his courtroom is that the parties have not “lifted their little pinkie fingers” to fill in the gap and say what rent is. 1. On page 5 in the judges words: “as a practical matter, courts will sometimes assert their right not to be imposed upon.” 2. Either say what rent is or come up with a formula, but if you “are going to be total lazy bastards get the hell out of my courtroom.” 3. Most judges will fill most gaps most of the time. 4. The judge in this case sees a gap that is so big he does not believe the parties intended to contract. c. Indefiniteness Doctrine: to be enforceable a contact must have a certain minimal level of definiteness, need to agree on certain crucial elements. i. An apparent bargain will not be enforced if it is found to be too indefinite: (1) its terms are so incomplete or uncertain that they show that the parties did not regard themselves as having completed a contract. (2) Even if it seems that the parties regarded themselves as having completed a contract, it is so indefinite that a court cannot determine its material terms with reasonable certainty or fashion an appropriate remedy for breach. ii. The mere fact that an agreement leaves gaps does not render it fatally indefinite; almost all contracts have gaps that the court can fill through the process of implication. iii. In regard to Walker: 1. If the parties attempt to define the price though a standard that is itself indefinite, the traditional approach is to refuse enforcement on the ground that in such cases it cannot be inferred that the parties indented a reasonable price. iv. Least cost avoider: listening to experts could fill the gap but that is costly. The parties could have figured this out by contracting more specifically. The parties are the least cost avoiders by covering the basics. Beyond basics (e.g. Canadian invasion) the judge would be the least cost avoider – it is expensive to contract over every possible future event. d. UCC § 2-305: Open Price Term i. On its face liberalises the enforcement of open price terms. Attentive to interests of businessmen ii. Can conclude a contract without price; default to reasonable price at time of delivery iii. As long as the parties intend to make a binding contract, their agreement to agree does not make contract too indefinite. CONTRACTS OUTLINE Page 3 of 27 IV. Introduction to Contractual performance and the Role of Fault. a. Jacob & Youngs v. Kent (NY 1921) i. Facts: in contract to build house D. requested Reading Pipe. A pipe of the same quality was installed instead. P would have to tear down substantial parts of the completed structure to replace pipes, so refused and sought final payment. Kent refused. P sues. ii. The mistake was trivial and innocent. The remedy is this case is liability rule protection and not property rule protection. Property rule protection (tear down the wall) will result in a lot of social waste, and there is no significant difference in the quality of the pipe. Liability rule protection just requires a cheque for the difference.