Ferrell – Fall 2013
Part I: Principles of Contractual Obligation
Underlying contract theory is idea that legal rules should provide assurance that an agreement should be honored. Given lapse in time between agreement and performance, possible that one of parties will regret deal and thus protection is necessary. Two Theoretical Grounds for Enforcing Promises:
Promise Principle: All promises are enforceable
Ex: Hurley: Doctor made no promise, therefore no contract.
Promises create expectations that should be enforced.
However, actually need to make a promise (Leonard v. Pepsico) People plan around wholly executory contracts and use them for risk allocation. Moral obligation to enforce promises.
Reliance + Promise and Benefit: Promise alone is never enough to create a contract. Ex: Atiyah: Criticizes Contracts as Promise principle
No real harm from disappointed expectations
In response to risk allocation argument, most contracts not wholly executory and can be enforced on other grounds anyway. Response: Economic activity would contract, efficiency lowered if no definite risk allocation could take place. Where liabilities are promised based, inevitably favors those who are more advantaged and better able to exercise free choice. Posner: Economic Analysis of the Law
Potential response to reliance argument
Sometimes desirable to breach contract because it will increase economic efficiency. If we require reliance, decreases economic activity and it creates incentive for opportunistic behavior. Damages (Contracts vs. Torts)
Contract law looks ex post, prospective looking
Expectation Damages: Put person in position they would have been had contract been enforced. Tort law looks ex ante, backward looking
Trying to restore the person to the position they would have been in before. Tort Law and Contract Law Merging?
Ex: Mutual Mistake – both parties mistaken about something in the contract. Ray v. Eurice Brothers: Unilateral mistake, not grounds for claiming something was an unenforceable contract. Similar to doctrine of negligence in torts, holding the party that makes the mistake liable.
A. Grounds for Enforcing Promises
Formal Bases for Consideration
Substantive Bases for Consideration
1. Evidentiary Purposes that a contract was intended.
2. Cautionary Distinguish between contracts and mere expressions of intent. 3. Informational Promisor knows he has made a serious commitment. 1. Law should not hold a person to a promise made gratuitously. Protects donor. 2. Flexibility Serves best interests of contract law as a whole and can be used to protect promisor from ill-advised promises.
Formality has three functions:
Evidentiary Formality provides evidence that a contract exists. DeLeo: Oral promise was given, did not appear to show consideration or reliance. Because no apparent consideration or reliance, and no formal contract stating otherwise, not enforceable. In absence of two, need formality to evidence an outward sign that there WAS a contract. Cautionary Formality forces the parties to slow down and think what they’re doing Channeling Simple and cheap test of enforceability. Signal that contract is good and enforceable. 2. Bargain
Restatement § 71: Requirement of Exchange; Types of Exchange Restatement § 81: Consideration as Motive or Inducing Cause To constitute consideration, performance or return promise must be bargained for. “Bargained-for” exchange can come in a number of forms:
Hamer: Consideration via forbearance
Earle: Giving up right to do something was consideration (right not to attend funeral) Duncan: Giving up right to sue.
Whitten: Not bargained for, only thing he received was something he didn’t ask for, no consideration. Caveats to consideration doctrine even when apparently bargained for: Whitten: Arguable exchange was bargained for, but unsavory conduct underlying contract influenced courts characterization of contract (Legal Realist...
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