IV. Contracts
    B. Making contracts (cont'd.)

    2. Unilateral contracts

    one-party contract
    promisor makes an offer

    Ex: a reward

    Broadnax v. Ledbetter, 99 S.W. 1111 (1907) -- claim to a reward requires knowledge that it has been offered

1. P: What are the facts of the case?
2. P: Why do you feel entitled to the reward?
3. D: Why do you wish to refuse to pay it?
4. P: Why to you feel you should get it despite not knowing about it? (Is what you have done any less valuable because you did not know about the reward?)
5. P: Do you agree with the court that "it is difficult to see how the activities of people can be excited by offers of rewards of which they know nothing"?
6. D: What did the court decide?

    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

    3. Implicit contracts

    contracts implied by law

    Cotnam v. Wisdom, 104 S.W. 164 (1907)
    Wisdom = P (doctor); Cotnam = D (administrator)

1. P: What are the facts of the case?
2. P: Why did you file this case?
3. D: Why do you wish to refuse to pay it?
4. P: What factors do you feel entitled to base your fees on?
5. P: How much did you charge the estate?
6. D: What range of fees did witnesses cite as reasonable or customary?
7. D: Did the court accept plaintiff's basis for fees in this case?
8. D: Why did the court refuse to consider the financial condition of the patient?
9. D: What did the court decide?

    implicit contracts allow providers of emergency services to collect "fair compensation" for "time, service, and skill."

    a "negative liability rule" (a Pigouvian subsidy). (F160)

    increases incentive for assistance during emergencies when bargaining is costly or impossible

    Current fashion: to base case on "unjust enrichment" (P135)

    Ordinarily must get permission, since "a property rule usually moves services to their highest-valued use more cheaply and reliably than a liability rule." (F160)
    "But now suppose that a man stands under my window, playing the violin beautifully, and when he has finished knocks on my door and demands a fee for his efforts. Though I enjoyed his playing I nonetheless refuse to pay anything for it. The court would deny the violinist's claim for a fee--however reasonable the fee might appear to be--on the ground that, although the violinist conferred a benefit on me (and not with the intent that it be gratuitous), he did so officiously. Translated from legal into economic terminology, this means he conferred an unbargained-for benefit in circumstances where the costs of a voluntary bargain would have been low. " (P136)

    IV. Contracts
    C. Enforcing contracts

    Recall that court enforcement is not always necessary

    Alternatives:
    (1) Reputation and desire for repeat dealings, etc.
    But, in order for reputation with third parties to be relevant, third parties must have some way of knowing which party to the contract failed to live up to his agreements.
    Places an advantage on small, closeknit societies.

    (2) Arbitration
    either after the fact with an arbitrator who has a good reputation, or
    by the parties agreeing on the arbitrator when they sign the contract--and making the fact public then
    Ex: former dominance of the diamond industry in NY by orthodox jews Who were forbidden by their religion from suing each other, but had good arbitration/reputation institutions.

    (3) Commitment
    Formally: posting a bond with a bonding agency that has a good reputation.
    Informally: giving hostages
    Public announcement of a joint project; if it later falls through, both parties look bad.
    Generally, making it possible for the other party to injure you--in a way which isn't profitable for them but available when you break the contract.

    The fundamental question then becomes: is the contract legally enforceable?
    The courts may say no for a variety of reasons

    1. Unacceptable parties
    2. Unacceptable purpose
    3. Unacceptable conditions

    1. Unacceptable parties

    Incapacity of contracting parties:

    Children: Ex: Bowling v. Sperry, 133 Ind.App. 692, 184 N.E.2d 901 (1962): a minor was allowed not only to disaffirm a contract (for purchasing a car) but to get his money back

    Mental incompetent: Ex: Heights Realty, LTD. v. Phillips, 106 N.M. 692, 749 P.2d 77 (1988): an exclusive listing contract between a mental incompetent and a broker was held invalid.

    2. Unacceptable purpose

    Contracts which impose costs on 3rd parties

    Ex: Goodier v. Hamilton 172 Wash. 60; 19 P.2d 392; (1933): refused to enforce payment of a "broker's fee" for locating an attorney that procured government authorization for a trucking service route: "Where, as in the case at bar, the agreement suggests the use of sinister and corrupt means for the accomplishment of the end desired, 'The law meets the suggestion of evil, and strikes down the contract from its inception.'"
    The court leaves the party where it finds them

Next day