Contract Law Flashcards
Contract
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.)
Complete Contract
A contract is complete when it accounts for every condition which can possibly be realized
Incomplete Contract
A contract which is not complete is called incomplete
Gaps (in a contract)
contingencies not accounted for in a contract are called gaps.
Promisor
The party which makes a promise in a contract is called the promisor
Promisee
The party which receives a promise in a contract is called the promisee
The Bargain Theory
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.”
Components of an Enforceable Bargain: Offer
One side offers a contract
Components of an Enforceable Bargain: Acceptance
The other side accepts the contract
Components of an Enforceable Bargain: Consideration
The legal term for the thing the promisee gives the promisor to induce the promise
Reciprocal Inducement
If the promisee gives consideration, we have reciprocal inducement, or an exchange between the two parties
Expectation Damages
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.
Is the Bargain Theory efficient?
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.
Breach of Contract
When a party fails to perform the action specified in a contract.
Efficient Breach
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.
Reliance
Actions which are value-enhancing to the promisee, conditional on the promisor’s performance
Efficient Reliance
A reliance investment is efficient when the expected value of that investment is positive
Two Approaches to Reliance Damages
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
Default Rules
Rules that tell the court what to do with gaps in a contract
Default Rules: Majoritarian Default Rule
An attempt to will a gap with the terms that most parties would have agreed to.
Default Rules: Efficient Default Rule
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.
Default Rules: Penalty Default Rule
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.
Default Rules: Immutable Rule
An immutable rule is like a default rule, but it can’t be negotiated around.
