Law & Economics Final Exam

Contracts

agreements/promises that create legal obligations that are enforceable in a court of law (mutually beneficial, voluntary)

3 Economic Functions of Contracts

economic exchange of goods & services, capitalization & investments, trade

(a) economic exchange of goods & services

agreement/signature, ex. buy something on credit

(b) Capitalization & Investments

ex. bank loan- agreement between lender + borrower - loan- invest in productive assets - economy grows

c) Trade

agreements with exporters/ importers

4 Main Essentials in a Contract (Contract Law)

mutual assent, legality of object, consideration, capacity of the parties

Mutual assent

In contract law, parties must (voluntarily/ mutual benefit) agree to the terms of the contract

Legality of the object

the carrying out of the terms of the contract must not force parties to perform something that is illegal

Consideration

“stuff of exchange” ex. a book is on sale

Capacity of the parties

parties involved must have the legal capacity to perform the terms of the contract as written

excludes: minors, intoxicated/ drugged people, those of unsound mind

3 main elements of consideration (i- iii)

offer, acceptance, stuff -of-exchange

i) Offer

lessor (landowner) apartment is available for $900

ii) Acceptance

lessee (tenant) ex. agrees to pay monthly rent of $900

iii) stuff- of- exchange

apartment + rent = consideration

Do promises constitute a contract?

yes, if those promises provide incentives for good behavior that benefits society at large ex. Hamer vs. Sidway

4 Institutions of Enforcement

Formal Law, First-party/ self-help enforcement, extra- legal enforcement, social ties

a) Formal Law

courts- enforceable civil court actions that judges enforce

b) First-party/ self-help enforcement

taking matters into your own hands

c) Extra-legal enforcement

hire someone to enforce the contract on your behalf

Social ties (cultural, familial, religious

effective and socially efficient- social ostracism, social sanctions, etc…

2 Reasons for a breach of Contract

Formation defenses, performance excuses

Formation defenses

cases in which something improper occurs in the formation/ creation of the contract

4 formation defenses

duress- forced to sign the contract as written

mistake- unilateral ( no breach) mutual mistake (breach allowed)

Fraud/ misrepresentation of facts- carrying out of the terms- no legality of object

Unconscionability- instances/ cases which is confusing/unclear ex. language, terms

Post vs Jones (won) ship was about to sink when 3 ships appeared save them: Duress

producer - producer negative externality

Yes

a) capacity of the parties (Jones)

b) no “price-gouge” principle

No

a) Kaldor Hicks compensation theory

b) decision discourages rescue mission

Sherwood vs. Walker (won): mistake, fraud

producer- producer negative externality

Yes

a) Unilateral mistake (Sherwood)

b) If sold for $80- lost profits for Walker

No

a) Kaldor Hicks Compensation theory

Williams (won) vs Walker- Thomas Furniture Com (illiterate and signed 13 contracts for furniture): Unconscionability

producer- consumer negative externality

Yes

a) Clause- unconscionability

language - confusing terms- unclear

b) Clause- decision discourages asymmetric info

No

a) $20- lost profits for Walker- Thomas Furniture Co.

b) Decision encourages moral hazard

3 types of performance excuses

impossibility- changes in legal rules, natural disasters

incompetence/incapacity- career ending injury

frustration of purpose- something that legally/ physically frustrates performance “Force Majeure”

2 types of Impossibility

changes in legal rules, natural disasters

Tsakirglou vs Noblee Thorl

producer- producer negative externality

Yes

a) Tsakirglou is the least- cost avoider

b) alternative routes

No

a) alternative routes- high transportation costs for Tsakirglou

b) Kaldor Hicks compensation theory

Remedies: Breach (2)

to discourage breach:

specific performance- courts order contracting parties to perform the terms of the contract as written; provided performance is neither impossible nor meaningless

fines/ compensatory money damages- courts award promises for what they have expected to receive if the contract had been carried out

4 types of Fines/ compensatory money damages

expectations money damages- courts award promises for what they expected to receive if contract happened

reliance - courts compensate promises for what they actually spent in relying on promise

restitution- reimbursement for victim for losses incurred

liquidated damage- contracting party write the nature and extent of damage if there is a breach

Neri vs RMC (won) - Expectations

depreciation of boat: consumer- producer negative externality

Yes

a) decision discourages breach and in the process promotes efficient contracting

b) Kaldor Hicks

No

a) $674 shadow price, judge is “ price maker”

b) Lawyer fees- RMC lost profits

Oklahoma (won) vs. Municipal Gas Co - Specific performance

producer- producer negative externality

Yes

a) decision promotes efficient contracting in future

b) Coase Theorem

No

a) 90- days lost profits for municipal gas co

b) Coase Theorem

Security Stove (won) vs ARE - Reliance

producer- producer negative externality

Yes

a) Decision discourages breach and promotes efficient contracting (future)

b) Kaldor Hicks comp. theory

No

a) $198.50 “shadow price” Judge is “price maker”

b) over-reliance- moral hazard of Security Stoves

Deitsch (won) vs Music Company

wedding reception: producer- consumer negative externality

Yes

a) Decision discourages breach and promises efficient enhancing (future)

b) Kaldor Hicks Compensation theory

No

a) Kaldor Hicks Compensation theory

2 Main Essentials of Torts (injury)

Reasonableness - people must adhere to a reasonable person standard; promote peace, stability; observes/understands

Causation: harm linkage - personal injury, damage to property, financial losses

2 Types of Torts

fault based- wrongdoer is liable if court thinks so

Non-fault based- wrongdoer is strictly liable for harm/damage

2 types of duties in Reasonableness

clear & unclear

2 Types of fault-based torts

Intentional (strict liability) - battery, conversion, malicious prosecution, false imprisonment

Unintentional (Negligence liability) -

4 types of Intentional fault-based torts

battery - takes right to be free from bodily harm

conversion - unauthorized use of someone’s property

Malicious prosecution - pursued in court (kangaroo court)

false imprisonment - interference with someone’s right to move freely

Why Strict Liability (3)

1) Internalization of negative externalities

2) courts believe that tortfeasors have “deep pockets”

3) courts believe that tortfeasors are least- cost avoiders

3 Types of negligence

simple negligence- not acting reasonable

contributory negligence- defendants can raise defenses to avoid the liability

comparative negligence- courts compare parties’ reasonableness shared responsibility

Winn Dixie Stores vs Benton (won) Simple negligence

producer- consumer negative externality

Yes

a) store was negligent

b) Decision encourages store to take precautions against future accidents

No

a) Credibility of the witness

b) Decision encourages moral hazard

Scott (won) vs ABC - Comparative negligence

producer- consumer negative externality

Yes

a) store was negligent

b) Decision encourages store to take precautions

No

a) $120,000 “shadow price” Judge is a price- maker

b) Decision encourages moral hazard

In Contract Law, special performance is always least cost solution to the problem of contract breach

False

Under Contract Law, bankruptcy is a legitimate excuse to contract breach because it makes it impossible for contracting parties to perform the contract as written

False

From Law and Economics point of view, contracts do not provide

contracting parties with a duty to act reasonably under the circumstances