Introduction to Contracts

Welcome to contracts. This is a class about enforcing promises. Now normally, when somebody makes a promise, it’s just their reputation, their honor, that keeps it. If somebody breaks their word, you might be upset with them but you don’t go running to a court of law. That is, the state won’t enforce the promise. If somebody promises you something, you assume maybe it’ll happen, maybe not, but you take the promise with a grain of salt because you know the promise isn’t enforceable, at least in a court of law.

Contracts is about when promises become legally enforceable. If I promise you my car, that’s just empty words. If you promise me some money, again, empty words. But if you promise me money in exchange for my promise of my car, and I promise you my car in exchange for your promise of some money, that’s when the magic happens; because by reaching that agreement, now our exchanged mutually induced promises, supported by consideration, that will be enforceable in a court of law. That’s contracts. Contracts questions make up a big chunk of the bar exam. Contracts is, of course, one of the major topics, which is why you’re listening to this.

Before we dive into the substantive material, let’s talk for a minute about how to think about contracts problems. I’m going to give you an overview of this course, but I want to note that this is kind of like a checklist for how to think about contracts issues. We’ll cover these topics in the same order you might walk through them in your head if you are scanning a problem and trying to keep track of a mental checklist for different issues.

Two Kinds of Contracts Issues

I’ll start by saying there are really only two kinds of contracts issues, and they’re tested on the bar exam in roughly equal proportion. These are, issues relating to the making of contracts, and issues relating to the breaking of contracts. So, let’s talk about each.

Issue 1: Making Contracts

First, making contracts. Basically, the first half of this course is about issues relating to making contracts or the barriers to making a contract enforceable. We’ll start by talking about the very basic structure of a contract, which is mutual assent and consideration. Then we’ll talk about ways to enforce a promise even when there is no mutual assent or consideration, specifically by looking to claims in equity, like restitution and reliance. Then we’ll talk about defenses to formation. These are arguments someone might make about a deal to suggest that it wasn’t formed properly.

Again, in this first half of the class, we’re talking about contract formation— what needs to be done right in order to enforce a deal. These could be arguments that somebody who’s trying to enforce a deal makes to suggest there’s no problem, or these could be arguments raised by someone who is trying to suggest, " Yes, indeed, Your Honor, there is a problem." Even though the contract has mutual assent and consideration, it was formed improperly and should not be enforced.

Barriers to Enforceability: Minority, Incapacity, Duress…

For example, minority and incapacity. If someone is a minor, meaning under 18, they can disavow a contract. Same thing for someone who lacks the capacity to understand the terms of a deal, so we’ll look at both of these issues. Then we’ll look at duress and undue influence. Suppose that Al has a gun to Bob’s head. While I do not care about any other aspect of contract formation ( mutual assent, consideration, the statute of frauds), if Al forces Bob to sign, that’s duress and that deal will never be enforceable in a court of law.

Undue Influence: "Duress Light"

We’ll also look at undue influence, which is like "duress light". If someone’s wrongly putting pressure on someone else, who’s unusually susceptible to that pressure, then courts are going to be unlikely to want to enforce that deal, which doesn’t represent the free will of two people striking a bargain.

Mistake, Misrepresentation

What if the parties to the deal made a mistake? Well, if it’s a material mistake and they wouldn’t have done the deal had they known about the mistake, then they can unwind the deal. The same goes if one of them misrepresented something really important about the deal, either on purpose ( that’s fraud) or unintentionally, and that causes the innocent party to, let’s say, agree to the deal they never would have agreed to otherwise had they known about the misrepresentation.

Unconscionability

That’s not all. Courts won’t enforce a deal if the terms are unconscionable, meaning they shock the conscience, or if the deal is illegal, or inconsistent with public policy, like a deal for the sale of drugs.

Statute of Frauds

Finally, if you manage to get through all of these issues, you also have the statute of frauds, which requires that some kinds of deals be written down and signed. That’s all about making an enforceable contract. All of those issues have to do with contract formation or defects in formation.

Framework for Questions of Contract Formation:

The general framework for this first half of the course, the general framework for a question about contract formation, is as follows: if A says to B, "We have a contract", B might say, "No, we don’t, because..." Here, B can just work his way down the list of issues we are going to deal with in the first half of this course: we don’t have a contract because there’s no mutual assent; we don’t have a contract because there’s no consideration;

we don’t have a contract because I lacked the capacity to enter into this contract; or I was a minor; or there was duress; or it was unconscionable; or it wasn’t written down, so the statute of frauds isn’t satisfied. These are all claims about the deal not being properly formed. The debate in these questions is about whether A and B have a deal and whether that deal should be enforceable.

Issue 2: Breaking Contracts

That’s the first half of the course, the rest of the course is about breaking a contract. We’ll assume that A and B have a deal, and the question for the second half of the class is, was the deal broken, and if so, then what? We will ask "Did somebody breach?" Well, whether somebody breached a contract depends on what they were supposed to do. So, what did the contract actually say? What was required?

Determining Breach Depends on How We Interpret the Contract

The first set of issues are about interpretation, because we need to look into the content of the contract. How do we interpret the words in the agreement? Can we rely on parol evidence? That is, if you and I have a written agreement for the sale of tennis balls, but we don’t specify the color—are they green tennis balls, yellow tennis balls?— will the court accept parol evidence, meaning evidence outside the writing of the agreement, to interpret the words tennis balls?

Interpretation Question: Are There Any Warranties Or Implied Terms?

And what if we say nothing about the quality of the tennis balls? Are there any warranties? What terms will be implied in the contract even if the parties say nothing? These are the key questions for contract interpretation, and they matter in this second half of the class because whether somebody has lived up to their obligations under the contract or not, that is to say, whether they have breached or not, will depend an awful lot on how we interpret the contract.

If Breach, What Happens? Major or Minor Breach?

Okay, so once we have a handle on how to interpret the words in a contract, we’ll ask "Do we have a breach?" If A and B have a deal, and it requires A to do something like, let’s say, paint B’s house, well, did A do it? If not, what are the consequences of A’s breach? So, what counts as a breach? Particularly we’ll distinguish between minor breaches and material breaches, and then we’ll ask whether the breach can be fixed or whether it’s in fact total, and you can now sue for damages.

Is There an Excuse for Non-Performance?

We’ll also ask if the defendant hasn’t performed, do they have an excuse for their non-performance? Like maybe a war broke out making it impossible for them to perform, or maybe they can perform but it no longer makes any sense, and they’re going to argue that there was a total frustration of their purpose on the contract. Okay, so if they’re in breach and there are no excuses, then we have to figure out how to remedy the breach. The last set of issues in the course are about remedies.

Primary Remedy: Expectation Damages

We’ll start by looking at the primary remedy in contract cases, which is expectation damages, where we try to put the non-breaching party in the situation they’d have been in if the contract had never been breached. Usually, that means giving them the difference between what they were promised, maybe the full contract price, and what they actually got.

Possible Remedy: Consequential Damages

If you get expectation damages, you might also get consequential damages—damages that flow not directly from this contract, but because the contract was breached, you suffered other losses, consequential losses.

The classic example of this is a shipping mistake. If you hire ACME shipping to ship something overnight and they accidentally send it by donkey, and it takes a month, you want the difference, of course, between what you paid for ( overnight shipping) and what you got (donkey shipping). But you might have other damages; maybe you couldn’t engage in lucrative deals for the month while you were waiting for that package in transit. Those are consequential damages, and they are recoverable in certain circumstances where they’re foreseeable, certain, and caused by the breach.

Other Types of Damages: Reliance and Restitution Damages

You don’t always get expectation damages, however, so we will also look at reliance damages and restitution damages— two other ways to measure your recovery. Reliance damages measure the extent of your reliance on the contract, and usually that just tracks your costs. Of course, you get reliance damages on reliance claims, promissory estoppel claims, but also in contract claims if expectation damages can’t be calculated. Restitution damages try to take back the unjust gains from the breaching party. Or in a restitution claim, restitution damages make the person who was unjustly enriched, pay.

Alternative Remedies: Damages Specified by Contract and Specific Performance

Finally, we look at two other options for remedies. If the parties specified ahead of time, right there in the contracts, the damages that they will suffer in the event of a breach, courts will sometimes enforce those liquidated damages, as long as they’re an actual estimate of damages and not a penalty or a threat to prevent someone from breaching the contract. Other times, when the thing being contracted for is rare or unique like land, courts say "Look, money damages aren’t good enough. Only the thing that is being contracted for will suffice." Then they will mandate specific performance. That is, they will require the non-performing party, the breaching party, to go ahead and perform the contract as promised. That’s the course.

Recap

We start with how to make a contract and all the hurdles one must overcome to make a deal enforceable: mutual assent, consideration, no defects, statute of frauds satisfied. Then we look at a separate set of questions around performance. What is required on this contract? What happened? Were there any excuses? And, finally, remedies— if we have a breach, how to make it right. With that, let’s get started.