Day 28 notes: IVD1-2, IVE1

    IV. Contracts
    D. Interpreting contracts
    1. filling gaps in contracts
   (2) Unforeseen and unprovided for events (cont'd.)

Per Greenfiel v. Kolea: [A]n allocation of risk can be accomplished in one of two ways. First, the parties could specifically provide for risk assumption with respect to certain possible contingencies. In the absence of an express recognition and assumption by the parties, the court is left with the task of determining what the parties would have done had the issue arisen in the contract negotiations.

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

    Efficiency guidelines: assign risk to the party who can
    (i) best spread (pool) the risk
    (ii) best control the risk (F)

"an efficient contract will usually assign the loss associated with something going wrong to the party with control over that particular something." (F162)
Commonly, that means the seller: Moral hazard and adverse selection push in same direction: the promisor usually knows risks better and can prevent them better

Ex: risks best controlled by the producer: Risk of strike, factory burning down
Contractors building houses: assigning risk to supplier is logical since supplier can spread risk more easily and prevent fires (F161)

    But not always:
    Ex: risks best controlled by the consumer due to moral hazard: Himalayan photographer. If he doesn't tell the photo labs that his six rolls of film cost thirty thousand dollars to get, they don't owe him thirty thousand when they lose the film.
    Without moral hazard, risk spreading considerations would => make photo lab liable.

    Ex: landlords and tenants: Assignment of risk from hazards has shifted over time.
    Early days, tenants: most of value was land, not buildings
        Buildings were simple and hazards best prevented by conduct of tenant

    Nowadays: landlords: buildings more valuable relative to land
        Many hazards are structural
        Consequence--tenants pay higher rent

stare decisis provides guidance but is not binding

In general: "If it is clear that the parties intend the seller to bear the risk...; contract law will...read..a warranty ino the contract of sale." (P113)

Some implicit contract terms are nonwaivable
Ex: nonwaivable warranty of habitability for apartments

    Disadvantage: Raises product price and reduces choice
        A consumer can shop for a guarantee, etc.
    Advantage: More predictable
        Lowers shopping costs and perhaps litigation costs

2. interpreting and modifying contract language

Morin Building Products v. Baystone Construction, 717 F. 2d 413 (1983) -- acceptable paint job (P95n3)

P: What are the facts of the case?

D: Why do you feel entitled to withhold payment of the full contract price to the plaintiff?

P: How do you respond to defendant's claim?

D: What 2 alternative standards are available to assess whether the contract has been performed or not?

P: Which do you think applies here? Why?

D: Do you agree with plaintiff on this point? Why not?

P: How can you justify rejecting the explicit contract clauses cited by defendant?

P: Would you have signed this contract if you taken these terms literally? Why not?

D: Why did you choose to use a form contract?
Either side: Anything further to add before letting the jury decide? (vote)
D: Does the court leave you with any options to improve your chances of prevailing in court in future contracts?

Contracts can contain ambiguous, conflicting or mistaken terms

Some general rules:

Ambiguity: interpreted according to trade practice.

    Morin v. Baystone: contrasts performance standards:
    "reasonable person" when functionality matters
    vs. "good faith" when aesthetics matter
    So "the reasonable person standard" is employed when the contract involves commercial quality, operative fitness, or mechanical utility which other knowledgeable persons can judge . . . The standard of good faith is employed when the contract involves personal aesthetics or fancy....

Mistake: the party in the best position to avoid it is responsible.
Ex: a problem in transmission, the party that chose the communication medium

IV. Contracts
E. Breaking contracts

    Progress so far:
    --The parties have made a contract--offer, acceptance, consideration
    --The contract is valid and enforceable--acceptable parties, purpose, and conditions
    --The clauses are understood--gaps filled, language clear

One final thing can go wrong: one party may want to break the contract = breach of contract

    The contract was presumably efficient when negotiated
    So what could prompt a contemplated break of contract?
    (1) less information was available or
    (2) circumstances were different
    when the contract was signed than when breach is contemplated

    goal: structure incentives to ensure only efficient breach of contract
    encourage efficient breach--a breach which makes the parties on net better off
    discourage inefficient breach--there was competition when the contract was signed but bilateral monopoly when breach is contemplated; avoid opportunistic breach

    Under the Coase theorem, efficient contracts are never breached even without enforcement.
    "As long as transaction costs are sufficiently low, contracts worth fulfilling will be fulfilled." (F163-4)
    Regardless of whether contracts are unenforceable or if specific performance is required. (F163)
    As usual, it is only because of transaction costs that breach of contract cases reach the courts

    2 issues to consider
    1. Economic analysis of breach of contract
    2. The law regarding breach of contract

Contract damages can get pretty messy. As Posner notes, "There are a bewildering variety of possibilities" (P118) -- we will focus on a few key ones

1. Economic analysis of breach of contract

Ex: You contract to go on a cruise following graduation
Pay for your reservation / Buy a bunch of travel gear / make reservations at various locations

a. Alternative outcomes

Before contract: a

Scenario 1: You have a great trip
Fulfill contract: f

Scenario 2: Right before departure, tour company cancels: you sue

    reliance damages: costs incurred in reliance on performance of the contract
    expectation damages: loss of the anticipated gain from the contract
    specific performance: mandatory performance on penalty of being held in contempt of court

	Outcome	Damages	Consumption point
(1)	No damages	0	b
(2)	Reliance damages	ab	a
(3)	Expectation damages	be	e
(4)	Specific performance	--	f

Which option ensures breach only if it is efficient?