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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
