IV. Contracts
    C. Enforcing contracts (cont'd.)

    fraud = deception
    Hidden in fine print on page three of your auto rental contract: "I agree to give everything I own to Hertz?"
    Contracts so complicated that consumers don't really know what they are signing.

    2 potential types of fraud involving information:

    Type 1: providing false information--always a fraud

    Ex: Harding v. Ja Laur Corp.
    related fraud cases:
    Love v. Elliott, 350 So. 2d 93 (Fla. App. 1977): Russell fraudulently got Mrs. Elliott, who was illiterate, to sign by her mark a deed conveying a much larger mineral interest in her property than she had agreed to sell. Russell then recorded his deed and sold his interest. The buyer was held to have good title, the court holding that a deed procured by fraud, unlike a forged deed, could be used to pass title to a bona fide purchaser.
    Cumberland Capital Corp. v. Robinette, 331 So. 2d 709 (Ala. App. 1976) On the other hand held that a signature procured by deceiving the grantor about what he was signing counted as a forgery.

    "The liar makes a positive investment in manufacturing and disseminating false information."
    "forbidding sellers to lie...save[s] the expense of the self-protective measures that buyers would have to take." (P111)
    Lying is "unlawful even if the buyer could unmask the lie at very low cost." (P113)
    market remedies exist: trade associations to correct individual seller misinformation; department stores to "inform consumers about the merits of particular goods." Problem with trade associations: free riding; no producer has an incentive to disclose negative info that pertains to all sellers; industries may be monopolies. (P112)
    "If one cigarette manufacturer advertises that smoking is good for your health, other cigarette manufacturers will have no incentive to disparage the claim." [counterexample: Ford and seatbelts] (P112)

    Type 2: withholding useful information--not usually a fraud

    case for disclosure: reduces information costs
    Stambovsky v. Ackley: "We do not want a system in which people who happen to have information highly relevant to the value of what they are selling... have an incentive to withhold it...." (F170)
    "The case for requiring disclosure is strongest when a product characteristic is not ascertainable by the consumer at low cost." infrequent purchases; not discernable; expensive.  (P113)
    Ex: some courts consider it a fraud to not disclose termite infestations (P111)
    Competitive market response to high information costs: Warranties: "a guaranty of results...makes the disclosure of information unnecessary." (P113)

    case against disclosure:
    protects the value of acquiring information that can be costly and useful
    Ex: Laidlaw (d,app,seller) v Organ (p,buyer), 15 U.S. 178 (1817).
    Organ received advance news about the Treaty of Ghent ending of the War of 1812 and bought tobacco in anticipation of end of blockade of New Orleans. Laidlaw tried to back out of tobacco contract. LA Supreme Ct said no. (P110)
    The argument for the court's position: Getting information is not free, and Organ's transaction helped move market toward new equilibrium. (P111)
    "If the Louisiana Supreme Court had ruled in favor of Laidlaw rather than Organ, and consistently followed the same rule in other cases, the result would have been less speculation and more unstable prices for agricultural commodities." (F170)
    Offset: Organ's victory induces rent seeking. (F169)
    There is no direct link between private and social benefit from information
    Anthony T. Kronman, "Mistake, Disclosure, Information, and the Law of Contracts, 7 J. Leg. Stud. 1, 9-18 (1978).

    Summary: 
    Fraud does not usually include failure to disclose information
    Efficiency => protect value-promoting information (Laidlaw v. Organ) but not wealth-shifting information (Stambovsky v. Ackley)
    Note regarding Stambovsky v. Ackley: Courts do not usually second-guess the subjective valuations of contracting parties.
    The fact that no 'rational' person would pay less for for the properties on account of these facts was irrelevant; the courts accepted the 'subjectivity' of values, a cornerstone of freedom of contract and modern economic theory. P265
    Ex: sanitarium covered under property

    b. situational monopoly

    exercise of ordinary monopoly power does not void a contract
    but abuse of monopoly circumstances linked to the bargaining situation can

    Alaska Packers Assn. (p) v. Domenico (d,app), 117 F. 99 (1902)

1. What are the facts of the case?
2. What did the court decide? reversed lower court and demanded decision in favor of defendant
   You are the superintendent.... 
3. Before leaving San Francisco, the workers seek twice the negotiated wage. You agree but refuse to pay the extra after you return. 
       Which wage would the court enforce? higher wage--competitive contracting
4. The workers insist on the higher wage only after reaching Alaska. After arguing briefly, you agree but later refuse to pay the extra.
       Which wage would the court enforce? lower wage--duress
5. The workers insist on the 100% wage increase in exchange for an 1/2 hour of work per day.
       Would the court enforce the revised contract? lower wage--duress despite consideration
6. On the return trip after the season, a storm threatens to wash away the entire catch. You ask the workers to help preserve the catch. The insist on double their season's wages to help, and you agree.
       Would the court enforce the salvage contract? yes--dire straits
7. The contract you offer the workers has several pre-specified conditions. The workers complain about the unfair terms but you refuse to negotiate them, claiming that the terms are standard for the industry. After the season, the workers sue for extra compensation because of the contract terms.
       Would the court support the suit? no--competitive contracting

    Notes re Alaska Packers:
    Famous case
    Defense based on lack of consideration, but illustrates duress
    Duress: dire straits caused by the opportunistic conduct of your contract partner
    Contracts negotiated under duress are not enforceable

    related case: Austin Instrument Inc. v. Loral Corp., 29 N.Y.2d 124, 272 N.E.2d 253 (1971): a firm obtained refund of a price increase, which it had agreed to pay under pressure, on grounds of economic duress. The "emergency" was the result of the supplier threatening to breach its contract if it did not get the higher price.

    Related situation:
    Necessity: dire straits, but not caused by the conduct of your contract partner
    Ex: saving a sinking ship (bilateral monopoly)

    Efficiency =>
    Charge ship owners the expected cost of rescue
    Pay the rescuer the value of the cargo (F154-5)
    --insurance schemes can do this
    the present legal rule "permits an admiralty court to rewrite a contract that is too favorable to one side." Lowers chance of sinking while bargaining. (F156)
    Posner gets this wrong--worries about "excessive" efforts when the efforts to rescue due to getting the full value are efficient. This is not like the patent race or the sunk treasure case, because if another rescuer is expected in ten minutes, the first one isn't going to be able to get a very high price. (F)

    Seemingly related to duress: form contracts
    contracts of adhesion - "take it or leave it contracts"
    Consumers retain choice between competing suppliers
    Form contracts reduce drafting costs, eliminate the problem of the firm having to control the employee who negotiates the individual contracts.
    The argument for freedom of contract holds in this case since the firm, in drafting the contract, will take account of benefits and losses to its customers. Anything that makes the terms of the deal more attractive to the customer will also increase the amount he is willing to pay.
    Even for a monopolist: The more unfavorable the contract is to the consumer, the lower the price the monopolist will be able to charge. Customers still have the alternative of not buying the good.
    Courts sometimes refuse to enforce the terms of form contracts on the grounds that they represent a sort of duress. These arguments suggest the courts are wrong.

    Williams (d,app) v. Walker-Thomas Furniture Co. (p), 350 E2d 445 (1965)

1. What are the facts of the case? installment payments were applied pro-rata across all items leased (in default on $514 stereo, but p sued to repossess $1,800 of items purchased since 1957)
2. What did the court decide? lower courts sided with p, remanded on appeal with instructions to consider whether contract is unconscionable
3. Suppose that the clause was standard in a form contract. Would you then consider it enforceable?
4. Suppose that the clause had been highlighted in the contract.
   Would you then consider it enforceable?
5. Suppose that Williams had acknowledged awareness and understanding of the clause.
   Would you then consider it enforceable?

    Contracts with unconscionable terms are not enforceable

    Unconscionable => an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.

    it's another case of "unequal bargaining power" but not in the context of temporary circumstances => it should be possible to shop around for a better deal

    related case: Weaver v. American Oil Co., 257 Ind. 458, 276 N.E.2d 144 (1971) a contract was found unenforceable in part on the basis of unequal bargaining power

    Controversial:
    From Walker v. Williams opinion: Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain.
    "Intrinsic fraud": fraud inferred from the grossly unfair terms of a contract

    What economic purpose could stringent repossession terms serve?
    (multiple items and no distribution to buyer of net proceeds from resale)
    Facilitates sales to consumers with bad credit and insufficient funds for a down payment
    If repossession "occurs early the seller sustains a windfall loss; he has received only a small part of the price, too little to cover both the depreciation of the good and the costs of repossession. (This assumes, but realistically, that the seller will not be able to collect the unpaid balance directly from the buyer, by suing him.) As long as competition among sellers of consumer goods is sufficiently vigorous to eliminate supracompetitive profits, limiting the windfall gains of late defaults would lead sellers to require larger down payments or higher initial installment payments, or charge higher prices, in order to protect themselves against windfall losses from early defaults." (P117)

    => "the broad interpretation of unconscionability... makes it more difficult for poor people to borrow, thus harming them ex ante though benefiting some of them ex post." (P117)

    D. Interpreting contracts

    Progress so far:
    --The parties have made a contract--offer, acceptance, consideration
    --The contract is a valid one, enforceable by the courts--the contract has acceptable parties, purpose and conditions

    Concern now:
    The parties have a dispute about the details of the contract and turn to the court to resolve a dispute about its interpretation

   Fundamental question: Why not just enforce the contract as it is written?

    Presumption: freedom of contract --> Pareto improving exchange
    --efficient contract terms create the largest potential gain for the contracting parties to divide up, so that's what we would expect the parties to achieve
    --the contract price should be tailored to the contract's terms--regarding quality of performance, allocation of risks, etc.

    Should efficiency or intentions govern how the court interprets contracts?
    --Ordinarily, intentions, since parties likely knew what they wanted better than the courts do. (P96)
    --Court interference with intentions will make parties write longer contracts, which is costly. (F)

    1. filling gaps in contracts

    (1) Implicit understandings

    Wood (p) v. Duff-Gordon (d), 222 N.E. 88 (1917) "contract for an exclusive dealership contains an implied condition that the dealer shall use his best efforts to sell the supplier's product." -- good example of implied terms; designer (P95n4) P=agent/distributor; D=creator of fashions

1. What are the facts of the case?
2. Does plaintiff believe that there is a contract?
3. Does defendant agree that there is a contract? Why not? no explicit promise of effort
4. If there is a contract, why would it restrict what defendant has been doing? plaintiff was given exclusive rights to attach her endorsement
5. Why does plaintiff claim that there is a contract despite the absence of any clause committing the plaintiff to actually perform any duties? promised to share profits 50/50 and to take steps to protect the creations (filings, etc.)
6. Why didn't plaintiff explicitly state in the contract the duties plaintiff would perform? excessive costs
7. Who won the case? Wood; lost at appellant level; appealed to state supreme court--received damages
8. So what will plaintiff have to do as a result?

    some gaps in contractual protection may be deliberate--the product of a tradeoff between the dangers of opportunism  and the direct and indirect costs (including the risk of error) of litigation vs. the contracting costs on the other." (P95)

   (2) unspecified adversities (P96)
    --allocation of risk

    Suydam (p,landlord) v. Jacskon (d,tenant,app) 54 N.Y. 450 (1873) illustrates initial rental agreements, with tenants liable

1. What are the facts of the case?
2. Does the lease say anything explicit about whether or not rent is due if the building becomes uninhabitable?
no
3. Why does plaintiff feel entitled to collect rent even though the lease doesn't say so? rent due under common law
4. What is the economic sense of making tenants responsible for ordinary repairs? lower cost avoider of damages since present on the property and owner can't trespass
5. Did the court decide tenant owed the rent or not?
yes--rent owed. an 1860 statute applied only to sudden loss

Under common law, tenants bore implicit liability for unspecified adversities

    Greenfield (p,lessor) v. Kolea (d,app,lessee) 475 Pa. 351 (1977) -- in this case, the appellant is listed second; the order remains the same as at the trial court level

1. What are the facts of the case?
2. Does the lease agreement specify whether rent is owed if premises become uninhabitable? no
3. Why does plaintiff feel entitled to collect rent anyway? implicit under common law
4. What did the court decide? plaintiff not entitled to the rent; court inferred that parties recognized that the value of the lease was in the building (for auto repairs), not the land
5. Does the court adhere to common law precedent in its opinion? no
6. How does the court justify its decision? times change: buildings often the item of value now, not the soil underneath
7. According to the court, what options exist for allocating risk in a contract?

    2 options for allocating risk:
    (i) specify in contract
    (ii) let court determine intent