Contracts I Professor Richard Carlson

1. Contracts IProfessor Richard Carlson Why, How & When Do Courts Enforce Promises?

2. What Is a “Contract?” And Why Should You Make One?

3. A Contract Is a Type of VoluntaryOf Exchange Between Parties • Exchange can make each party better off. • Reason: Each gets the thing they needed more than what they gave up. • Important premise: Exchange was voluntary. • Problem: Subsequent event or discovery may cause one party to regret.

4. What Do We Gain By Exchange? A Hypothetical Exchange • Farmer has cotton grown from 100 acres of land. • Mill owner has mill for turning cotton into thread. • Weaver has loom for turning thread into fabric. • Chemist has dye to color fabric. • Bank has lots of money. • Parties exchange respective resources to make clothing.

5. Contract: An Exchange Involving One or More Promises • Not all exchanges aresimultaneous. • If exchange can only takeplace over time, at least one promise is required. • Exchange involving a promise is a “contract.” • Examples: apartment lease, admission to a show, sale of goods “satisfaction guaranteed!” What “promise” do you get in exchange for your money?

6. Advantages of Using Promises:Our Hypothetical Exchange The farmer has land but not enough money for cotton seed or equipment. The mill owner pays the farmer in advance for all the cotton to be grown on the farmer’s land, and the farmer promises to deliver his cotton to the mill owner. The farmer now has money to plant, raise and harvest cotton—but the mill owner will expect delivery of all the farmer’s cotton. What if the market price for cotton goes up in the meantime?

7. Why Do Courts Enforce Contracts? Is It the Government’s Business Whether People Keep Their Promises?

8. Reasons to Be Wary Of Making The Government Responsible • Solving private disputes with courts is expensive. • Annual federal court budget: $5.5 billion. • Harris County clerk’s budget: $24 million. • Lawsuits cost parties their own time and money. • Will courts get it right? Some people enforce promises without lawyers and courts.

9. Reasons to Enforce Promises:The Problem of Going First • If exchange takes time, who goes first? • Person who goes first relies on other’ s promise. • What if second party fails to keep promise? Go on… Jump! I’ll be right behind!

10. Reasons to Enforce:Our Hypothetical Exchange • Will mill owner pay farmer in advance if farmer can renege and deliver cotton to someone else? • Having guaranteed supply of cottonencourages mill owner to invest in equipment and increase capacity. • Bank will lend to mill owner only if it knows it can enforce promise to repay with interest. • One party may later regret promise, but complex transactions are impossible without enforcement.

11. Problem: The Unequal Or Unfair Exchange • Exchange is selfish. • Might not be the bestexchange a party could have obtained. • Exchange might be very unequal or unfair. • Should a court ever excuse a promise? Seward’s Folly: Secretary Seward becomes laughingstock of an era by paying $7 million to Russia for a frozen wasteland--Alaska.

12. Unequal Exchange DueTo Different Bargaining Skill • One party’s better bargaining skill. • Better information about subject matter, market. • Control over supply or demand. • A need to exchange without delay. • Eccentric tastes. Prospective buyer demonstrates skill in negotiating for automobile.

13. Subsequent Event or Discovery Making Exchange Seem Unequal • Market price goesup; seller regrets. • Market price goesdown; buyer regrets. • Goods are not what buyer expected. • Subsequent event makes performance difficult for one or useless to the other. Jack trades a cow for some beans. Who got the better part of the deal?

14. If an Exchange Is “Unfair?”Is Everyone Really Better Off? • General rule: Contract law is not concerned with fairness of the exchange. • Importance of making promises reliable exceeds danger of inequality in exchange. • Are there exceptions? Is contract law blindto unfairness?

15. Caveat: Some One-Sided Transactions Are Not Contracts • Gifts • Inheritance • Theft • Coercion • Duress • None is a voluntaryexchange.

16. U.S. Naval Inst. v. Charter Communications How much must Berkley pay for sinking the Naval Institute’s hardback sales? p. 2

17. Contract & Breach:Fight Aboard the Red October • N. I. owns right to publish, grants Berkley right to print and sell paperback version • Promise: Berkley to sell not sooner than October. • Breach: Berkley ships early; stores begin sales Sept. 15. • Why did Berkley breach? Does it matter? Why is this man smiling?

18. Breach & Punishment?Possible Remedies for N.I. • N.I.’s first goal: Preliminary injunction. Outcome? • N.I’s second goal: ProfitBerkley reaped by breach. (profits on Sept. sales). • N.I.’s third goal: Profits N.I. would have earned on hardback sales but for early paperback sales. Time for the paddle?

19. HOLD THE PADDLE! Don’t Punish. Compensate! • “The purpose of damages for breach of contract is to compensate the injured party for the loss caused by the breach.” • Contract law does not punish • Does the “disgorgement” of Berkley’s profits constitute compensation or punishment? Do we forgive? Yes, if you make the other party whole.

20. Compensation v. PunishmentA Closer Look at Remedies • Why not punish people who break promises? • Is breach necessarily immoral? • Reasons people breach? Compare tort law. • Could breach be “efficient”? Is the breaching party evil?

21. Compensating the Injured PartyIn U.S. Naval Institute • Goal: Put injured party in position he would have occupied but for breach. • Issue: Where would N.I. be if Berkley had not allowed early paperback sales? • How did N.I. prove its loss? Are you persuaded? How many hardbacks would N.I. have sold?

22. 1. Buyer makes a contract with Otto Sales for the purchase of a particular car, and Buyer agrees he will return during the afternoon of the next day to pay for and take the car. The morning of the next day, Harry Hurry visits Sales, sees the same car, and realizes the car once belonged to his deceased father. Being sentimental, he offers Sales an extra $2,000 for the car. What should Sales do? 2. How do you explain Snepp v. U.S.? Problems

23. Alternative Forms Of Substitutional Relief Basic Math for Calculating Damages (And Appraising a Nose)

24. “Substitutional”Relief?Why Not Award the Real Thing? • Injunction ordering defendant to fulfill promise? • Preliminary injunction if time is of the essence? • Problem: Injunction may be too late or too difficult and expensive to supervise. • Solution: Money (in damages) for plaintiff to purchase a substitute for the broken promise. Not anxious to become defendant’s supervisor.

25. Three Possible GoalsAnd Three Measures of Damages • Expectation Interest: Put promisee in the position he would have occupied if promisor had kept his promise. Restatement § 347. • Reliance Interest: Put promisee in the position he would have occupied if he had not “relied” on the promise. Restatement § 349. • Restitution Interest: Require promisor to return the value of any benefit promisee gave to promisor. Restatement § 371.

26. Sullivan v. O’Connor What’s the value of a great nose?

27. Sullivan v. O’ConnorExpectation? Reliance? Restitution? What's the value of a great nose? Queen Nefertiti: The ancient world’s most famous nose p. 8

28. The Expectation InterestThe Value of the Promise • Goal: Award what she’d have had if promise fulfilled. • Promise: Shorter, less prominent, more pleasing nose. • Dollar Value: ($ ????) • Plus Consequential Damages: Pain and cost of extra surgery; damage to nose. A GREAT NOSE!

29. The Court’s Award of DamagesIn Sullivan v. O’Connor • Note: Why no tort claim? • What’s the usual measure of contract damages? • What was court’s method of measuring damages? • The jury’s award? Why not order to doctor to make the nose right?

30. Reliance Interest: Putting Her Back to Square One Goal: Compensate loss or cost caused by reliance on promise. Payment to doctor? To other providers? Pain & suffering for all operations. Loss in value of nose (“before” – “after” = $$$$). BEFORE AFTER What number of dollars represents the difference in value?

31. Reasons Not to AwardThe Expectation Interest? • A “strain on the imagination?” • Too large compared with contract price? • A “noncommercial” contract? • Risk to medical profession if expectation routinely enforced? • Unspoken concern: Did jury get it right?

32. The Third Measure:Restitution (Benefit Conferred) Goal: Return or reimburse things of value she gave to doctor. Return of fee paid to doctor? Fees to other medical providers? Hospital room & supplies? Pain and suffering? Is there restitution for pain and suffering?

33. Guggenheim v. CassoWhat Are Guggenheim’s Damages? January 1: Casso promises to deliver painting to Guggenheim on March 20; Guggenheim promises $5,000 ($500 down) “as long as the painting is satisfactory to me.” March 20: Trump trumps Guggenheim with $350T offer. What is value of the promise of one Casso painting? Guggenheim buys ticket, pays $500 to delivery service.

34. White v. Benkowski A dollar value for annoyance? p18, n. 1.

35. Is It About Annoyance? Or Is It About Water? • Promise: Access to water supply. • Breach: Intermittent shutoff (“reminding” Whites they were using too much water). • Damage: $10 compensatory damages (value of inconvenience?); but $2,000 punitive damages award reversed. • Alternative: (1) Value of promise? (2) Proof?