Contract Law From Trust to Promise to Contract (Harvard X) PDF

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Introduction What is a contract? Trust I have to trust you. Remember trust? Remember the stick figure falling over and being caught? I have to trust you. Trust is one of the things that make our world go around. It allows planning, and planning is coordination over time. It allows human activity to get off the ground. But how do we structure that trust? How do we build with it? Promise The way people make that commitment, the way they make the world go round, is to promise. Promising is this great human invention. We can plan, because we can know what to expect from each other, not just from moment to moment, as with the primitive trade, but over the long stretches of time. From moment to moment, it's understanding that allows us to work together. What allows us to coordinate our activities over long periods of time is trust. And promises, commitments, are the agents of trust. Promises are, in turn, of course, made up of speech, and understanding they assume speech, and understanding I promise is one of the things we say to each other to make things happen. Deadweight Loss Explanation: The deadweight loss is Amy's inability to eat her soup, and Alex's additional difficulty buttering his bread. Amy could have eaten her soup if she'd been able to find a spoon, but because she and Alex were unable to find each other in such a large space, the trade never occurred. Building Contracts through the Ladder of Trust Trust, Promise, Money, and Credit Trust gives us promising, and promising creates value. Another deadweight loss, if we cannot deal now - if we cannot deal just because you have no money just now. Except we can build on what we already know. Instead of promising me boots in winter, you promise me money in winter - and maybe a bit more money than if you paid me right now, in June. If I believe your promise, and you keep it, we are both happier. A deadweight loss has been avoided. It's called credit. And credit comes from the Latin word for "believe, trust." So look how tall we stand now. By reason of trust, we can climb past primitive trade. And the ladder we use is promise. And we can rise again over promise by climbing the ladder of money. And we can climb even higher above money by climbing the ladder of credit. But every step of the way was based on trust. From trust, to promise, to money, to credit. And now we stand very tall indeed. And so we arrive at contracts, which are at the very top of this ladder. Contracts allow us to avoid so many deadweight losses and to have a more effective society. Contracts are, with some exceptions we will come to, promises. Contracts are promises the government will stand behind. So contracts let us climb even higher. We can depend on people we don't know and maybe don't even trust, because contracts are promises the government will stand behind. And if we have a good government-- remember the painting I showed you earlier on, Buon Governo?-- we can make trades and go about our business, we can trust each other, as if we were friends, because the government stands behind our contracts and makes us act in a trustworthy way, as if we were friends, as if we trusted each other.

UNIT 1: Four Principles 1

Contracts (4 conditions to fulfil to be legally enforceable): 1. Intent to create legal relations (dinner with Portia) 2. Both sides are serious (silver watch, Pepsi) 3. Legal and moral (night driver) 4. Promises which are a bargain (not a gift) When promises which are exchanged for nothing, when there is no bargain, those are also not contracts. Bargains are the stuff of commerce. They're the stuff of productive interchanges. The courts will stand behind promises but only promises which are bargains. Second, if it's a bargain, the law doesn't care if it's a good bargain or a fair bargain, but just, is it a bargain at all? And the reason for that, of course, is that people ought to be able to make whatever bargains they want, and the law doesn't want to look over their shoulders. It wants to leave them free to decide as they wish what kind of a bargain they make. That, at least, is what you read in the books. because the nephew never promised that he wouldn't smoke, drink, swear, or gamble. The uncle promised that if the nephew didn't do those things, he would give him a quarter of a million dollars. But the nephew never promised anything. He did something, and that was enough to make a bargain. Examples: 1) Brother-in-law offering house is making a gift 2) Batsakis vs. Demotsis, borrowing money during the war and repaying it later. $25 vs $1000. He was taking a risk. And of course, that is something that many-- some might say most, maybe even all contracts about the future are about. They are about risk. 3) Post vs. Jones, admiralty jurisdiction governed by Federal Law. Admiralty Law. Rule of the ‘general average’. 4) Car accident 5) Alaska packers 6) Christmas shop manager

UNIT 2: Empty Bag One sided promises One side left completely open. If they decide to not buy at the price promised But if I don't want to, I won't and I can buy it elsewhere, or not buy any at all. So it's a completely one sided obligation. And a completely one sided obligation is not what our law looks at as a bargain. That means if you the little lumber mill decides well, I can sell my lumber now the price has gone up at $2.80, I'm not going to sell it to this big guy for less. You're free to do that. And why are you free to do that? Because I, the chain, am free not to buy from you if the price goes down. Because I, the big guy, have bound myself to nothing, made no commitment to you, your commitment to sell to me whatever I ask for at $2.50 is a commitment that's made in return for nothing. So you should be as free as I am. Sounds fair, sounds logical. This is similar to a promise to make a gift, which is not a bargain, and not something the government will stand behind. In a sense, I have made no promise to you and you've

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made a promise to me in return for an empty bag. Contracts (4 conditions to fulfil to be legally enforceable): 5. Intent to create legal relations (dinner with Portia) 6. Both sides are serious (silver watch, Pepsi) 7. Legal and moral (night driver) 8. Promises which are a bargain (not a gift) Empty Bags That doesn't sound like a bargain. It's something-- my promise-- for nothing. That looks a lot like the situation we just saw-- something for nothing, the empty bag. However, if you didn't make a promise about not showing the manuscript to anyone else for three months. The publisher wouldn't even take your novel. He won't even get to the point that maybe he'll look at it and maybe not. He wouldn't even take it in the door. Aren't you better off being able to make this commitment, make it in a way that the law will enforce, even though he makes no commitment to you? So we've got a bit of a dilemma here. In order to create a situation which is really in both sides' interest. Because there are no mutually binding promises, the law uses the phrase of there being a lack of mutuality. So here is a situation where both parties would be better off if the law recognized this as an enforceable contract. And was prepared to say that if a second or a third publisher decided to pick up the novel during that three months period, the first one could say, no no, I've got the right of first refusal here. You can't have it. And what you want is the law to step in, but it won't because of this lack of mutuality. And both sides are worse off. This is a reappearance of our old friend, the dead weight loss. Let's turn this into a real bargain. Lunch for the exclusivity. The word for that is an option. In return for lunch, you're going to give me a three months' option on this manuscript. And now we've got a bargain. Wall Street Journal: "Thank you very much for your submission. We get a great many submissions. We can only publish a very few of them, but we will consider it. Please do not submit it to anyone else for three days." Now, is there a bargain lurking there? What do you think? That's right, there is a bargain there. Because in that letter, they say, "we will consider it." That means they are binding themselves Wood versus Lucy, Lady Duff-Gordon The judge ruled that there was a real bargain here. She promised him the exclusive, and he promised to make the best efforts to commercialize her name. Now, of course, he had made no such promise. He never said such a thing at all. No matter, said the judge. It's implicit in the arrangement, because, after all, it would be an act of bad faith-- bad faith-for him, on one hand, to get Lucy to promise him an exclusive, and on the other hand, to be entirely free to do nothing, just to sit on it and tie her up without tying himself up. Therefore, what we will do as a court, we will assume that there is what is called good faith on both sides. Remember, that wasn't too much of a stretch, because Wood had made efforts, and he had sold some of her stuff. Her good faith spelled out in the contract, which she broke; his good faith not spelled out, not written down anywhere, but implicit-- that's the big word-implicit in the transaction. Well, what do you think? Was Wood's good faith implicit in the transaction?

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Judge Cardozo, the Alabama court in Webb v. McGowan said that McGowan's company had a moral obligation to Webb which was sufficient to turn what really wasn't a bargain into a bargain after all, that the consideration for McGowan's promise of a pension was the company's moral obligation to Webb. That is obviously a manipulation of the idea of bargain. Because at the time of the exchange, there was no exchange. Webb did what he did out of a sense of moral decency to save another man's life, and McGowan did what he did out of a sense of gratitude. But there was no bargain the way the law looks at it. There was no exchange. Nevertheless, the court just couldn't stand it, and they said that the fact that the services were rendered in the past didn't matter. I don't know how to explain it other than that the behavior of McGowan's company after he died was so repellent and was so out of line with how decent people behave that the court couldn't stand it and enforced the promise. But there was no bargain here. A rare case, but it does help to highlight these ideas of mutuality and bargain, even if only by contrast.

UNIT 3: Offer/ Acceptance Promises given for something The law goes further in that class and says, in order to be sure, this is serious business, that the parties are serious about it, and that it's worth our taking our time in court, and judges, and so on. It's best that the promise be part of a bargain. That is a promise given for something. Here are two straightforward examples. 1) I go into a store and pick up some goods. And I promise to pay for them. They've given me the goods. And I've given them my promise to pay. Fine-- a contract. 2) Or I go into an antique shop and see an old desk I like. I promise to buy it, to pay for it. And the shop owner promises to deliver it to my house next week. He's got to polish it up, and he doesn't have a delivery truck just now, and so on. For there to be a bargain, there has to be something exchanged, something given on each side. In the first case, the goods in the store paid for at the checkout counter. In that case, it's a promise for a performance. I take the goods then and there. Or it's a promise for a promise. Promise to pay for the desk and the promise to deliver the desk. Either way, there's an exchange. The person who initiates the exchange can set the terms of the exchange. That's what makes him the offeror. I offer the exchange. And the other side, who sometimes in law is called the offeree, he accepts. And he accepts either by accepting through making a promise of his own, or maybe by an actual performance. The way that the law of contracts puts it is the offeror is the master of the bargain. That sounds rather dramatic, but it's only common sense. How could it be otherwise? How could it be otherwise then that the bargain is whatever the person who initiates it proposes and what the person to whom it is proposed accepts? If the person accepts something else, then obviously, there's no bargain. And the idea that I would be bound just by walking into the store and offering something to then have to pay a great deal more is not the model of an exchange that we've been talking about.

Mirror Image Rule

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You get a bargain when the return of the offer, the acceptance, is the mirror image of the offer. That's the very simple idea that you can't bind a person to his promise, his offer promise, by saying, well, I'll give you something else than what you have promised.

Offeror is Master of the Bargain Euros for dollars example: $1.38 a euro, or $1.40 a euro, or $1.36 a euro? So what happens is you're sitting in front of the screen, and the screen for a particular says "1 euro for $1.38." You look at that for awhile, lets say 10 seconds, and you click "Accept." However, just before you've clicked, the price ticks up to $1.39. Can you still accept the $1.38?

Implicit that Acceptance Must Come in a Reasonable Time What I've illustrated then is the idea of the offeror as the master of the bargaining. And also, the acceptance must be the mirror image of the offer. So let's put the mirror there too. Why is that? That Is because a person should not be bound to a promise he's never made, not just freedom of contract, but freedom from contract. I've made a promise to buy this desk for $500. And the dealer replies, great, it's yours for $750. That's obviously not a completed deal. The light does not go on. I haven't promised to buy it from you for $750. And the fact that I've offered $500 doesn't mean that I am bound by whatever price you may decide upon. Similarly, implicitly-- and here we've got the word implicitly again-- when I said, I offer you $500 for the delivery of the desk, I meant within a reasonable time. And a year later is not a reasonable time. The next morning is. And I've said, if I have only up to the next morning, then after that, any delivery later than that is not the mirror image. It does not respect my situation of being the master of the bargain. It holds me to a promise I never made. Antique Dealer I really like that desk. How much is it? The dealer says, it's $500. Now, you should know I've switched the roles. You should know that if I say, oh, that's too much. I'll give you $300 for it. Then, obviously, we don't have a deal, because my acceptance is not the mirror image of his offer. So the light doesn't go on. But if I've said, I'll give you $300. And he comes back, and he says, OK, I'll do it at $300. Then we've got a deal. But if he comes back, and he says, no way. The price is $500. I, at that point, say, all right, I'll pay you $500. We've still got a deal.

Is it the original deal or a different deal? What happened? Do it in terms of the light switches. The current only flows when both switches are closed, in other words, when the offer and the acceptance mirror each other. The examples I've been giving you are examples of bargaining and offers and counteroffers. We've also seen-- and this is very important-- that the counteroffer takes the first offer or off the table. It makes the offeree the new offeror. And that means that the power of acceptance is in the hands of the original offeror, who's now that counter offeree. So to sum up, the acceptance only closes the circuit if it's the mirror image of the offer. Implicit in the offer is that the acceptance must come within a reasonable time. And therefore, if you wait a year, you haven't accepted the offer. It hasn't been the mirror image. If you waited five minutes for the purchase of the desk, implicitly, a $500 purchase in an antique store is the mirror image. But if you've rejected it, made a counteroffer, then the original offer is off the table. Why? Because the offeror should know where he stands. And if you've told them that you reject it, he ought to feel, OK, I'm free, I'm free to walk away. 5

Now I'll think of myself as a free person. And I may sell it to someone else. I may decide I want to keep it myself, take it home. But my offer is off the table, because the customer has rejected it, unless-- as we saw in the house example-- a secondary circuit was completed. The dealer has given me an option. And then, during the period of the option, he cannot withdraw his offer, because he has promised not to. And the promise not to withdraw an offer is itself a good promise, a contract.

UNIT 4: Law at the Margins Charitable Subscriptions - Part 1 pure geometry of making a contract: There's the idea of a bargain, the idea of offer and acceptance, and those are pretty clear. They provide the best way to start thinking about contracts. And they are all you have to know to see whether a contract has been formed. But this is law, and law has to do with life. Life is complicated. It doesn't always fit into these neat categories. Something should be done, that there has been some major unfairness, something that requires the law to step in. What happens in many of these charitable cases, is that the person who makes the promise has every intention of keeping that promise, of staying with his generous instinct. But then he dies or something happens, and it's left to his heirs, to his executors, to his estate to fulfill that promise. And the heirs, the executors, don't feel quite so generous. Because he didn't get anything in return, this was just a pure promise to make a gift. And as we've learned, a promise to make a gift is something that the law generally will not enforce. Courts began to look for ways to make these promises to make a gift enforceable.

Charitable Subscriptions - Part 2 At first, the courts just played around with the notion of bargain. They would say something like this, well, the donor promised to make his $10,000 donation. And the college said, we'll put your name on a plaque as one of our generous donors. And if it's really a lot of money, we may even name a professorship or a building after you. And so the courts could say, that college or that church or whatever, made a return promise. So here the court said that the promise is to put your name of a plaque or on a building, that's a return. So we have a bargain and therefore a contract. Trouble was, often the college or the church made no such promise. So the courts played around. And they said, well in all the discussions, there was an implicit promise. Remember implicit? The bag that was not really empty. There was an implicit promise. You might say it wasn't worth the paper it wasn't written on, but in these cases it was. And in fact, this implicit promise may just be something that the courts made up because they thought it was a better system. That if you put your name of a subscription list, sign it, you knew what you were doing. The college ought to be able to depend on that. So the courts would go out of our way to find something to make it enforceable. And this got to be so far fetched and so fanciful, that pretty soon people looked around at the way the cases had all come out. And they say, you know what? It turns out that if you make a promise, a charitable promise to make a gift, and you make it with enough solemnity, and it's clear enough, and you've really thought about it, we're not going to bother making up some kind of a fake return promise. We're not going to bother imagining that they had implicitly promised to put your name on a plaque or something of that sort. We'll just make a new rule. And courts can do that. Courts can make

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new rules. And the new rule was, if you've made the promise and you've made it with enough deliberation and formality, we're just going to enforce it. Even though there is no bargain. We're not going to play around and pretend there's a bargain, but we're going to enforce it anyway. Question - what factors might a court use to find that the scenario above formed an enforceable contract? Explanation As we have seen, courts were eager to find reasons to hold charitable subscriptions enforceable. In this scenario, the fact that the school had ...