Contract Law

Question 1

Contract

Answer 1

A contract is a specification of actions to be taken by the contracting parties under various conditions

(The actions typically pertain to the delivery of goods, performance of services, and payments of money and the conditions include uncertain contingencies, past actions of parties, and messages sent by them.)

Question 2

Complete Contract

Answer 2

A contract is complete when it accounts for every condition which can possibly be realized

Question 3

Incomplete Contract

Answer 3

A contract which is not complete is called incomplete

Question 4

Gaps (in a contract)

Answer 4

contingencies not accounted for in a contract are called gaps.

Question 5

Promisor

Answer 5

The party which makes a promise in a contract is called the promisor

Question 6

Promisee

Answer 6

The party which receives a promise in a contract is called the promisee

Question 7

The Bargain Theory

Answer 7

An early theory of contract enforcement which states: “A promise should be enforced if it was given as part of a bargain, otherwise it should not.”

Question 8

Components of an Enforceable Bargain: Offer

Answer 8

One side offers a contract

Question 9

Components of an Enforceable Bargain: Acceptance

Answer 9

The other side accepts the contract

Question 10

Components of an Enforceable Bargain: Consideration

Answer 10

The legal term for the thing the promisee gives the promisor to induce the promise

Question 11

Reciprocal Inducement

Answer 11

If the promisee gives consideration, we have reciprocal inducement, or an exchange between the two parties

Question 12

Expectation Damages

Answer 12

The remedy prescribed by the bargaining theory is damages which leave the promisee as well-off as if the promise had been kept.

Expectation damages would (i) internalize the externality imposed on the promisee by the promisor’s breach, (ii) result in efficient breach when negotations are impossible, and (iii) lead to the promisor investing efficiently in performance.

Question 13

Is the Bargain Theory efficient?

Answer 13

No, this theory leads to inefficiency (i) by failing to enforce promises which both sides would have wanted to be enforcedable when they were made, and (ii) by enforcing promises which should not be enforced.

Question 14

Breach of Contract

Answer 14

When a party fails to perform the action specified in a contract.

Question 15

Efficient Breach

Answer 15

Breach is efficient when the cost of performance to the promisor is greater than the promisee’s benefit.

Performance is efficient when the cost of performance to the promisor is less than the promisee’s benefit.

However, the promisor will choose to breach only when the promisor’s cost to perform exceeds their liability.

Question 16

Reliance

Answer 16

Actions which are value-enhancing to the promisee, conditional on the promisor’s performance

Question 17

Efficient Reliance

Answer 17

A reliance investment is efficient when the expected value of that investment is positive

Question 18

Two Approaches to Reliance Damages

Answer 18

Efficient Reliance Damages: In the view of Cooter and Ulen, damages should include only efficient reliance

Foreseeable Reliance: In practice, damages usually include foreseeable reliance

Question 19

Default Rules

Answer 19

Rules that tell the court what to do with gaps in a contract

Question 20

Default Rules: Majoritarian Default Rule

Answer 20

An attempt to will a gap with the terms that most parties would have agreed to.

Question 21

Default Rules: Efficient Default Rule

Answer 21

An attempt to fill a gap with the rule the parties would have wanted, had they thought to specify it. Such rules work well when gaps exist due to a high transaction cost of filling them, and not due to strategic omission.

Question 22

Default Rules: Penalty Default Rule

Answer 22

An attempt to fill a gap with a rule the parties would not have wanted in order to encourage the parties to disclose information and fill the gap with something efficient. Such rules may work well when gaps are left for strategic reasons.

Question 23

Default Rules: Immutable Rule

Answer 23

An immutable rule is like a default rule, but it can’t be negotiated around.