B. Making contracts

    Goal of efficient contracts: to increase the size of the economic pie, giving a gain to be divided between the parties.

    Aspects of contracts that we'll cover: 
    making contracts
    enforcing contracts
    interpreting contracts
    breaking contracts

    Making contracts -- types of contracts we'll consider
    1. bilateral contracts
    2. unilateral contracts
    3. implicit contracts

    1. Bilateral contracts

    express contract

    the straightforward case -- 2 parties make an explicit agreement

    Minneapolis and St. Louis Railway (p) v. Columbus Rolling Mill (d) 119 U.S. 149 (1886) --  clear offer and acceptance case

1. What are the facts of the case?
2. What did the court decide? (upheld decision for defendant--no contract)
3. We have the following conversation:
      Me: Will you mow my lawn on Saturday for $20?
      You: I will do it if it doesn't rain.
   Do we have a contract? Why or why not?
4. We have the following conversation:
       Me, Tuesday: I will sell you my 1987 Camry station for $2000. Let me know by Saturday.
       You, Wed: I will buy it for $1500
       Me, Thu: Sorry, that's not enough.
       You, Fri: OK, I'll take it for $2000.
   Have you accepted my original terms?
   Did you do so within the time frame granted by the defendant?
   Do we have a contract? Why or why not?
5. General: Why might the defendant have decided not to honor its original offer once the plaintiff tried to revert back to it?

    --contracts require "offer and acceptance"

    Has this ever happened to you?
    You travel abroad, go to a shop and bargain for an item, and say you want to shop around a bit more first
    The vendor keeps calling out lower prices as you leave.
    You return later, and the owner refuses to sell for price he offered the first time

    Note: parties must mutually agree to identical terms
    A counteroffer => 
    (i) rejection and 
    (ii) cancellation 
    of  the original offer

    Silence can be assent if that is deemed reasonable based on previous dealings (P103)

    acceptance is when mailed not when received
    allows earlier preparatory measures. (P103)

    Sherwood (p-buyer) v. Walker (d,app-seller). 66 mich. 568, 33 N.W. 919 (1887)

1. What are the facts of the case?
2. What was the condition of the cow at the time of sale?
3. Did either party know the condition of the cow at the time sale?
4. Why does the condition of the cow matter?
5. Why does lack of knowledge matter?
6. Suppose that the price of the cow was higher than usual for a barren cow but lower than usual for a breeder. Would that have influenced your decision if you had been the judge? Why? 
7. Who, in general, would be more likely to know the condition of the cow? Why?
8. Consider the following situation:
   I have a silent auction of some items that I inherited--it closes at noon. 
       You are an antique buyer, and recognize one that you place a small bid on.
       I have no idea that it's a genuine antique.
       At noon you return.
       As you approach the item, another buyer informs me that the item is a valuable antique.
       You demand the item at the bid you made.
   Do we have a contract?
   Why or why not?
9. What did the court decide? (reversed decision upholding the contract)

    "mutual mistake" invalidates a contract

    remains a controversial decision

    ? Do you think this encourages or discourages contract-making?

    ? Who had better access to information about the condition of the cow?

    ? How would you expect the price of the cow to be affected by the possibility that the cow might breed?
   "there was some evidence that Rose's sale price included her value if pregnant."  => should have been enforced. Possibly so even without evidence since owner is more likely to be knowledgeable. (P104)

    Other examples of mutual mistake:
    Baffles v. Wichelhaus 2 H. & C. 906, 159 End. Rep. 375 (Ex, 1864) -- two ships named Peerless (P104)
    Colfax Envelope Corp. v. Local No. 458-33m, 20 F.3d 750 (7th cir. 1994) -- printing press staffing dispute; contract found to be valid--ambiguous but not a mutual mistake; Posner opinion (P104)

    Hamer (p,note holder) v. Sidway (d) 124 N.Y. 538 (1891)

1. What are the facts of the case?
2. What does plaintiff request?
3. Why does defendant argue against honoring the claim?
4. What did the court decide? (reversed lower court and affirmed trial court that contract was valid)
5. Suppose an uncle made you the following offer when you turned 16: 
       Pay me $1 now. If you avoid drink and drugs until you are 21, I will pay you $5,000. 
       You agree and pay the $1, stick to the terms and return to collect at 21.
       Do you have a contract?
6. Suppose you had the same arrangement, but all you did was promise, no money changed hands
       Do you have a contract?
7. Suppose the terms of the offer were simply that you survive to age 21, which you manage to do.
       Do you have a contract?

    binding contracts require consideration: a benefit for the promisor or a cost for the promisee

consideration moves the promisee to a lower indifference curve     detrimental reliance = consideration (F158)     courts consider existence, not adequacy of consideration (P101)     Suppose the uncle had promised $5K for turning 21. Enforceable? No     goal: to limit litigation by excluding trivial promises and phony, vague or inadvertent contracts (P99)

    "[T]he requirement of consideration does not exist in property law." (F158)
    Perhaps because of other safeguards such as "under the statute of frauds, all transfers of property must be in writing." (F159)

    alternative: base binding contracts on formality to imply that "we intend this agreement to be enforceable." (F158)
    advantage: parties sometimes want simple promises to be enforceable--ex: donors for college facilities; enforceable promise allows earlier action

    summary: a valid contract requires
    (i) offer and acceptance without mutual mistake
        -- a "meeting of the minds" and
    (ii) consideration

    2. Unilateral contracts

    one-party contract
    promisor makes an offer

    Ex: a reward

    Broadnax (p) v. Ledbetter (d) , 99 S.W. 1111 (1907)

1. What are the facts of the case?
2. There is a $25K reward for information leading to the arrest of a criminal suspect.
       You provide information and request the reward money. The information leads to the arrest of the suspect.
       Do you have a contract?
3. You provide information. It leads to the arrest. You learn from  the news that the arrest occurred, and you then request the reward.
       Do you have a contract?
4. You provide information. It leads to the arrest. You learn fro the news that there was a $25K reward for the information you provided. You claim the reward.
       Do you have a contract?
5. Do you feel you should get the reward despite not knowing about it? (Is what you have done any less valuable because you did not know about the reward?)
6. Do you agree with the following statement: "it is difficult to see how the activities of people can be excited by offers of rewards of which they know nothing"?
7. What did the court decide? claim to a reward requires knowledge that it has been offered, and plaintiff didn't know of it.

    a unilateral contract requires
    (i) an offer and
    (ii) performance + knowledge of the offer

    If offers are enforceable without knowledge, will more lost goods be returned for any given reward?
    Posner doesn't think so (at least through 5th edition), but that is because he hasn't followed through the analysis. (F)
    If, in equilibrium, fewer were being returned, then the professional lookers would have more incentive to look, not less

    Will people be more or less willing to offer rewards? Why?
    Fewer <-- the cost of offering a given reward will be higher

    Net effect on the number of lost goods returned is uncertain.
    Not making the contract enforceable results in a form of price discrimination--but since the offerer cannot control the terms, it may or may not benefit him. (F)

    A lost item of value becomes a common property resource (F159)

    So what? What is the economic problem that we run into with common property resources?

    Rewards promote rent seeking
    Ex: 50% chance per independent searcher: searcher #2: AvProb = 37.5% but MargProb = 25%; the other 12.5% is a diversion from searcher #1.

    making offers enforceable without knowledge increases rent seeking and claims for rewards