Contracts 1.3 – Law and Equity
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Law and Equity

So we talked a lot about the UCC and the Restatement. Let me just say again, that the UCC Article 2, that we will be talking about in great length through this class focuses only for contracts for sale of goods.

What if you have a contract with someone to design a house. Is the design of that house, a contract for sale of goods? Law professors love putting fact patterns in final exams. Where there's a serious question as to whether or not the contract was for the sale of goods. We always want you to argue both sides.

Now, if you hired someone to design a house, is it a contract for the sale of goods? Well, one line of argument would be say, sure, the UCC Article 2 applies, because what you were contracting for were the plans that were going to be delivered. The actual physical paper that you're going to get that would then have commercial value to you when you went to a contractor to have your house built.

Another line of analysis would say, nope, absolutely not. You weren't paying for the value of the paper and the ink on it, you were paying for the brilliance of the designer, for the architects and the engineers. You were paying for their brain power and brain power is not a good and therefore the UCC should not apply.

Where would you go? Well, you would look to the common law of your State to make a determination as to whether or not the particular contract dispute, not involving goods has been addressed in a particular way. And then that way it will feel very much like tort law or other kinds of law, where you were mainly trying to deduce from common law iterations.

But you also have this thing called the Restatement Second of Contracts, by the way, we're in the second version of the Restatement, which refer to as the Restatement Second of Contracts. That Restatement is often helpful to understand how the law would be addressed in situations where there is not a contract for the sale of goods. So throughout the class, we're going to be talking both about the Uniform Commercial Code and the Restatement and its second version for contracts that don't involve the sale of goods.

Now I'm going to add a final layer of complexity to the study of contract law. So we talked about common law development of the law of commercial contracts. We talked about the restatements attempts to bring all of that law together in a coherent and concise fashion. And we talked about the uniform commercial codes attempts very successful efforts, I should say, to make certain kinds of contract law consistent among the 50 States.

Common Law v. Equity: Distinction

Common law: identifiable, but not flexible; equity: more discretionary, flexible, and quick

There's one layer that I need to add to that. And that's the necessary distinction that we will be talking about throughout this class between the common law and the law of equity. There's not a lot of focus on these two strains of law in our common law system, but it's incredibly important and it's particularly important in the study of contract law.

So we talk all the time about the common law, the common law and the easy explanation for the common law, as we just say sort of as a knee jerk response, it's judge made law, it's judge made law. But why is it common? Where does the common come from? Well, historically speaking, the common comes from the effort by the sovereign back in Britain to collect and understand all of the laws that were common amongst all of the jurisdictions in the realm. And the reason why this was important was that the courts that handled private disputes were not top down courts. They were not established by the sovereign and controlled by the sovereign, they were in fact local and the local magistrates answerable to local lords, barons, earls, etc, set up courts to resolve these disputes. And they were different. And each locality had a different way of handling different kinds of disputes, both substantively and procedurally.

So knowledge is power and knowledge of the laws is power and knowledge of how disputes are resolved is power. And the sovereign wanted to make sure that he had that knowledge. And so an effort was established to try and collect and understand what the rules of law, both substantive and procedural were throughout the realm. What was common to the British understanding of rules and what is fair procedurally? So there was an effort to identify what was common.

And after a long history of these individual regional, relatively independent courts, making rules as to the obligations, rules as to fair procedure, you can imagine how these became a jumble and aggregating them while difficult was done, but that jumble created a lot of intricacies. There were a lot of subtleties in the substantive rules, but perhaps more importantly, there was established over time, very rigorous and specific procedural rules.

So the hallmark of the common law was that it was identifiable. We identified what was common amongst all of our courts. So we could see it, we could understand it. We knew what it was, but it had a level of rigidity and complexity. It had a level of rigidity and complexity, not only in the substantive rules but in the procedure. This could lead to difficult circumstances where you have one dispute that has the same facts, but has different kinds of claims that were recognized in different ways in different courts.

And each one of those different courts had a different set of rules, procedural rules that you had to follow if you're trying to get the problem resolved. So it led to these situations where if you have one dispute, one set of facts, you might have to try different claims, different theories of recovery, different sets of rights in different courts using the same facts. So the common law its attributes were that it was identifiable, it was predictable. You knew exactly what the rules were, but they weren't flexible, they weren't responsive. They took a long time because of the various redundancies and complexities of the law.

So along with that establishment of the common law, there rose up courts of Chancery, courts of equity, same thing, different names they were often referred to as the courts of the King's conscience. And the object of these courts, these were top down courts, right? These were courts established by and controlled by the sovereign. The jurisdiction of these equity courts, the role and function of these equity courts was to be nimble, be less predictable, be more subject to discretion and judgment, and therefore not as predictable, but flexible and responsive and able to resolve disputes more quickly.

So on the one hand, we have common law, which is identifiable and predictable, but often requiring very cumbersome and lengthy procedural duties and on the other hand, rising up at the same time, we have courts of equity, Chancery courts, etc, which are not predictable, which are not reliable necessarily in their outcomes because they respond on a case by case basis to the particular facts of this case. Common law on one hand, identifiable, predictable, yet procedurally cumbersome, courts of equity or Chancery on the other side, nimble, responsive, but not as identifiable and predictable. We have both of these kinds of law aggregated today in one court system in most jurisdictions. So we have to talk about the common law and the law of equity at the same time.

When I talk to my students about the relationship between the common law and the law of equity, I often ask them to imagine our common law, all of our law as a big barrel. And when you look into that barrel, the first thing you'll see our big craggy rocks. And that barrel is pretty much filled to the top with these irregular hard to describe, hard to get your hand around rocks. And I say that is the common law. That is the judge made law. The case made law in our common law system.

And you can see that that barrel is full, it's full to the top of those rocks. But you can also see that there are lots of gaps that they don't fit together perfectly. They're not discs the size of the barrel that pile up and completely fill all of the barrel. There's gaps and there's cracks and the law is imperfectly filled by those rocks. Justice will not be done by just those rocks because there's too many things that can slide in and around and between those rocks.

And then I asked my students to imagine filling that barrel to the brim with water so that all of those gaps are filled, all of those crags are made perfect and the barrel is completely full now with rocks and water. That water is the law of equity and where the stones are heavy and ponderous and large, the water is aqueous spills, it's messy, but it tries to perfect the imperfections of those big craggy rocks. And that's a way to think about the relationship between the common law, judge made law and the law of equity. The law of equity is hard to get your hands on, slips through your fingers, it makes a mess, but it perfects the common law. Those rocks come first. And if there's ever a conflict between the common law rocks and the water of equity, common law prevails, but when you need it to perfect it, equity is there.

Now, why is this important to the study particularly of contract law? What you're going to be saying as we move forward in this course is that while at one time in our history, there were very specific and rigid common law rules, big solid rocks of contract common law. As we have developed as an economy, as we have gotten richer, those rocks have eroded. They have become more imperfect. They have been chiseled away by a philosophy of allowing sophisticated commercial actors to do what they need to do to get through their contractual arrangement.

The rules have eroded. Our ability to look with clarity and specificity at answering the questions I've mentioned to you before, is this agreement with the contract? Is this a contract that will be enforced? Are there any arguments against enforcing this contract? How will the contract be enforced? Those rules have eroded. They have gotten less specific, courts have taken more of a hands off approach, letting the economic actors resolve those questions on their own.

But what we also see is that as those big ponderous rocks of the common law of contracts have eroded, there has been an increase in determinations as to, well, is it fair under the circumstances to require these parties to perform? Is it fair to award damages or other remedies in these situations? Instead of looking at a large overarching set of rules, courts are more likely to respond to an equity and say, look, we know what the rules are, but in this particular circumstance, it just wouldn't be fair to allow a person to breach. It just wouldn't be fair to penalize someone for breaching, etc.

So throughout the course, we're going to be talking about this relationship between the common law of contracts, the law of equity as it relates to contracts and how those two strains of contract law have been made manifest both in the Restatement, the Uniform Commercial code and the various cases that we'll discuss.

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