Contracts Checklist

 

CONTRACT S TEPS  1) UCC ((Goo Goods) ds) o orr Com Common mon L Law? aw? 2) Is ther there e a pr promise omise? ? No pr promise omise = no Қ a. Mu Mutu tual al As Asse sent nt? ? · Manifestation of intent? Law imputes an intention corresponding to reasonable of his words and acts argument (cheaper to make Objective v.meaning Subjective Standard-efficiency idiosyncratic conform) + moral argument (rewarding careless party at expense of prudent party) b. Expr Express ess or im implie plied-in-fa d-in-fact ct (wo (words rds or c conduct onduct?) ?) c. Open Term erms/Inde s/Indefinit finite e Pr Promis omises es · Courts don’t want to write contracts for parties 1. If too too many indefinite indefinite terms, terms, no way promisee promisee could could reasonab reasonably ly  believe there was intent to promise. 2. Need to to be enough enough terms terms so so that court can award award a remedy remedy.. · Common Law approach: Agreements to agree are unenforceable absent an extrinsic reference point. · UCC Approach: 2-204: K doesn’t fail fail for indefiniteness if there is

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intent; 2-305: Open price terms- reasonable price at time of delivery; 2309: reasonable time · Indefinite terms meaning no contract intended but bu t benefit conferred? Quantum meruit-Corthell d. Inte Intent nt tto o Co Cont ntra ract ct 3) Can you enforce the promise (bargained-for or gratuitous)? a. Consideration R2§71: Performance or return promise must be bargained for o Bargain means promise/performance given in exchange of   promise Promises to make gifts are not enforceable o o

Adequacy of Consideration immaterial  performance/return promiseismet (RST 79)as long as the Performance includes act other than promise, forebearance, o and modification of legal right Whether forbearance was of benefit to promisee is o irrelevant; it is still “legal detriment.” 4) Is ther there e a rea reason son not to e enfor nforce ce the Қ? a. We want contracts contracts to to be made voluntari voluntarily ly by informe informed, d, rational rational parties. parties. Court Court won’t enforce if it finds: b. Un Unco cons nsci ciona onabi bili lity ty a. UCC 2-302

 

Official comment to 2-302 states purpose to prevent prevent suppression and unfair surprise surpris e by avoiding enforcement enforcement of uncon unconscionable scionable contracts made by parties pa rties who lacked equal bargaining power. power. But careful: Not unconscionable just because the inequality in bargaining power power results in an allocation of risks to the weaker party.

2. Need bo both: a. Procedural Procedural Unconscionab Unconscionabilit ility: y: Absence Absence of meaningful meaningful choice; fine print, legalistic language, disparity in  bargaining power, “take it or leave it”  b. Substantive Substantive Unconscionabi Unconscionability lity:: Unfair Unfair or unreasonable unreasonable term c. Dure Duress ss (no (nott a fr free ee and volun voluntary tary decis decision) ion) · R2 §175: Threat that induces assent with no reasonable alternative a. Inducem Inducement ent of of the cont contrac ractt bas based ed on that that thre threat. at.  b.  b. Reas Reasona onabl blee iindu nducem cement ent.. Applies to contracts and modifications Whether something is duress or not is relevant to the baseline-status quo. Duress changes baseline for the worse; reduces amount of  choices. Don’t use morality in determining baseline reduction; Common law may use subjective approach; did you (subjectively) reasonably (objective) have your will overborne-doesn’t make sense. Theory: Ex Ante: Parties would plausibly want freedom to renegotiate on basis of new information, but would prob. choose to prohibit renegotiation if no new information emerged; would simply be redistributive. Costs of negotiating redistribution would be deadweight loss, parties ex ante don’t do n’t want to reduce surplus. Circumstantial Duress/Situational monopolies: Duress claim to make contract voidable may not be merely based on the necessities of the  purported victim.-Duress claim must rest on the behavior of the promisee, not on the preexisting circumstances of the promisor. Want to maintain incentives to rescue, price signaling-only prob if  you have prob w/ current wealth distribution. d. Fraud (not an in inform formed ed de decisio cision) n) · Wi Will llfu full and N Neg egli lige gent nt R Rep eprres esen enta tati tion on:: · Misrepresentation of fact (and not just opinion) (§159) · Intent: must be either knowingly false or careless (claim w/out knowing) §162(1)) Good faith material misrep. counts o · Induced Assent (§167) – when it “substantially contributes” to the decision

 

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Justifiable Reliance (subjective test that considers youth, Spiess.) (§164(1)) · EXCEPTION (§169): Reliance on opinion can lead to Fraud if  if  special circumstances of trust and confidence, or expertise · Issues w/ subjective standard for justifiable reliance-hard to apply, reduces beneficial contracting for that party · Remedy for fraud is rescission; party may ratify or rescind contract once they know of fraud; if party then fails to seek rescission in timely manner or explicitly/implicitly affirms contract, loses option to void contract. Snyder Enterprises v. Ward: attempt to sell a car does not count coun t as affirmation because negotiations had not matured beyond infancy Concealment · Law starts with doctrine of caveat emptor (buyer’s risk) · Actions by word or conduct that conceals a fact amounts to fraudulent misrepresentation Obde · Still need other steps of fraud (induce assent + justifiable reliance) Failure to Disclose · Traditional common law (NY) rule: caveat emptor and no duty to disclose ·  New common law rule for limited duty to disclose: (CA/ Reed v. King) (R2 §161(b)) o There is a Mistake o As to a Basic Assumption of the Agreement R2 §152 Comment b: market valuations are not  basic assumptions And non-disclosure amounts to a failure to act in good faith o and fair dealing because the defect is latent (not easily discoverable) and the buyer is unlikely to know to ask  about it · Schwartz: If seller knows quality of what’s being sold, and buyer  knows the seller knows, no room for law enforcement. All sellers except those w/ worst quality disclose when buyer assumes the avg. price. -no need for disclosure rule in this situation. · If seller doesn’t know, know, but can find out, don’t want to mandate that seller has to tell you if they investigate because then seller will never investigate-seller assumes avg. quality q uality,, so would assume he sells for avg. price, would be avg. - investigation costs. 

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Duty to Read · Me Merrit Mus usic ic Se Serrvice: ice: Absent misrepresentation, fraud, duress, mistake, or another mitigating circumstance, contract will remain in force if party did not read or did not understand what he read. Law presumes that a person knows the content of a document that he executes and understands u nderstands at least the literal meaning of its terms.

 

Exception: St. John’s Episcopal Host. v. McAdoo: Court releases defendant from liability for contract he failed to understand on ground that enforcement would be unjust/inequitable-he was in hospital ER, hard to understand form, etc. · An apparent manifestation of assent will not operate to make a contract if the other party knows, or as a reasonable person should know, that the apparent acceptor does not intend what his words or  other acts ostensibly indicate. · Duty to read provides incentives for individuals to read and understand contracts before signing them; increases likelihood  parties will be informed and contracts reflect the will of parties pa rties and enhance value Specific Disclaimer of Fraud? · If general merger clause, can’t block evidence of fraud. If specific, Court holds the specific disclaimer language is sufficient to disclaim reliance on any oral representations by seller. Danann Unless SD itself is procured by fraud. o Point of SD in oral misrepresentation situations is to o o

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withdraw ability ofon low-level on  performance to lie behalf ofemployees company;paid sophisticated  business should understand that ( Danann) Is the Қ prohibited by law? · Watt atts v. Malat alates estta: Court enforces contract made for illegal  purposes believing it would deter illegal gambling; decision dec ision would not reduce quantity level, simply increase price bookies charge. · “In paro delicto” Court denies relief to both parties when underlying claim is illegal. Does contract violate public policy? · Controversial for judges to determine what conduct is socially acceptable and what is undesirable. Marvin v. Marvin: Recognizes near-marriage o relationship as implied contract. Hewitt v. Hewitt: Rejects Marvin ; courts should defer  o to legislature to declare public policy. · Creation of negative externalities from contracting may be best tackled by legislation. 5) What ar are e the TER TERMS MS of the cont contract ract and what what do they me mean? an? a. Identi Identifyin fying g tthe he Term erms s · Common Law Textualist 1. Four corners corners,, natural natural omissio omission, n, contradict contradict?-if ?-if no, no, add (See chart/outline) · Restatement/CA Contextualist: 1. No four corners, corners, natural natural omission omission,, contradict? contradict?-if -if no, no, add (see (see chart 

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UCC:and outline)

 

1. No four four corners, corners, certain certain inclusion, inclusion, is term term inconsi inconsistentstent-two two standards (Hunt Foods v. Snyder)? If no, add b. Inter Interpre preting ting tthe he Term erms s · Common Law Textualist: 1. Plain Meaning; Meaning; extrinsi extrinsicc evidence evidence can can be used to to explain explain ambiguity or vagueness (vagueness-which kind of chicken?) · Contextualist Common Law: Admit any extrinsic evidence, even if  unambiguous. Offered evidence is is relevant to prove a meaning to which the term is reasonably susceptible. (Pacific Gas, Trident) Trident) · UCC 2-202: Written Written terms can not be contradicted but can be “explained or supplemented by course of dealing or usage of trade.” 1. Different Different standa standards rds for contra contradict: dict: Royster Royster v. Southern Southern Concrete Concrete c. Merger Clause: · UAW: Court holds that a explicit integration clause embodied in merger  clause is conclusive and bars parol evidence unless there was fraud or if  the written agreement is incomplete on its face. · Williston V Viiew: if parties “provide in terms that the writing shall be a complete integration of their agreement...the expressed intent will w ill be effectuated.”

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Merger clause likely tobut conclude issue of whether the R ST §209is: completely agreement integrated, it is notthe conc conclusive. lusive. Ne New wY Yor ork k 4 Co Corrne ners rs Rule: ule: Merger clause means the agreement is  presumptively valid and complete on its face. · Merger clause may actually incentivize to include more in contract and write in standard English because they know extrinsic evidence less likely (or impossible if in NY) to be introduced. 6) What What is the the meani meaning ng of perf perform ormance ance?? a. Perfect Tender (UCC (UCC §2-601): §2-601): Buyer Buyer can reject reject goods for for any defect, defect, no matter  matter  how minor.  b. Substantial Substantial Perform Performance ance (R2 §241): §241): Permits Permits a party party to withhold withhold its its own  performance only when the defect materially impacts the essence of what was contracted for. for.

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If SP, SP, than diminution d iminution in value is proper standard for damages. da mages.

7) Who bear bearss the the risk risk of perfor performanc mance? e? a. Allocation Allocation of Risk Risk - rule is leave leave loss loss where where it lies, lies, Stees, comparative advantage, can best mitigate m itigate risk, properly compensated for being allocated the risk, parties can opt out of default if they want.  b. Stees: When a contracting party has expressly agreed to perform a task, it must do so regardless of what hardships may arise. c. Excu Excusi sing ng the the Pro Promi miso sor  r  · Impossibility: Destruction of specific item or person Taylor. Impossibility Doctrine (R2 §263) Destruction, Deterioration or Failure to Come Into Existence of Thing Necessary for Performance Party excused when Қ is for a particular, specific performance and that performance is unavailable due to destruction or death

 

8) What are are the remedies remedies for nonperformance nonperformance and and what does enforcement enforcement mean? mean? a. Damages · Expectation Default: Constraint that damages must be for a foreseeable injury and must be measurable with some certainty.

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Co Cost st of Co Comp mple leti tion on v. D Dim imun unit itio ion: n: 1. American American Standard Standard Rule: When the the breached breached clause clause is is central central to to agreement, there has not been “good-faith” substantial  performance. 2. Peevyhouse: Peevyhouse: Cost of of completi completion on grossly grossly dispro disproporti portionate onate to to diminution in value and the breach held to be incidental to main  purpose of contract, so diminution in value correct remedy. 3. Policy Policy Points: Points: Bad incenti incentives ves for promisorpromisor-can can point point to high high cost of completion and shirk duties; ex ante parties may have preferred cost of completion to incentivize more cost-effective c ost-effective compliance ( Jacobs),  Jacobs), contractor bears risk of CofC going up (Stees), CofC=restitution + market damages, bad if you don’t even get g et rest.

b. Spe Specif cific ic P Perf erfor orman mance ce · UCC 2-716 Approach: Specific performance may be decreed where the goods are unique or in other proper circumstances. Otherwise not available, even if in the contract. 1. Award when when good is is unique unique or market market is thin thin such such that expectation expectation damages will not compensate. (Sedmak-other proper  circumstances). 2. Don’t award when you you can cover cover,, just not at contract contract price price (Klein) · Schwartz Theory: Should be allowed to contract for it. Expectation as default but parties should be able to contract for SP. SP. 1. Monetary Monetary damages damages may may be undercompensat undercompensatory-i ory-incident ncidental, al, product product diff, early obsolescence, fear that cuz monetary $ hard to calculate would be better to have SP (unknown quantities in long term K) a. Also Also fear fear that that may be be hard hard to cover cover the the good at at breach. breach. 2. Request Request in spite spite of known known drawbacks drawbacks good indicati indication on market market $ under-compensatory 3. Courts Courts should should delegate delegate to promisee promiseess decision decision of best compensa compensatory tory remedy. 4. Argument Argument that that it is is not distri distributio butional=not nal=not true, have have to bribe bribe out. a. If both both rules rules available available,, buyer with given V gets gets same same gain from breach either way because EI sellers will lower P by  bribe amt and so EI increases by bribe amt (V-P). (V-P). 5. If seller seller can cover cover cheaper cheaper,, makes sense to have have SP. SP. c. Rel elia ianc nce eD Dam amage ages s · Can recover when expectation damages hard to prove. Put party where they before. next best option (in thick market, market, = market damages). · Generally disfavored; usually less $ than EI, induces too much reliance. d. Rest estitu itutio tion nD Dama amages ges

 

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Promisee upon breach has the option to forego any suit on the contract and claim only the reasonable value of his performance. · Quantum meruit; · Allowed for both breachers and non-breachers. e. Pu Puni niti tive ve D Dam amag ages es ·  Need independent tort · Reasons against: 1. Incentivizes Incentivizes too many many performan performances ces (can’t (can’t do efficient efficient breaches breaches)) 2. Induces Induces excessive excessive amt of precaution precautions: s: we want want effici efficient ent amount amount of   precautions so precaution=promisee’s expected losses from breach,  but if expected losses multiplied by penalty seller needs to take too many precautions in order to optimize gain. 3. Tests ests for revi reviewi ewing ng PD unpred unpredict ictabl able. e. · Reasons for: Emotional harm (not calculable), illicit pleasure (not reasonably certifiable), not every harmed party sues-would gross up to take amount of precautions as if everyone sued-bad idea, more people would sue 1. Attorney-fe Attorney-feee shifting shifting helpshelps->eff >efficient icient amount of precautio precautions ns cuz then everyone sues. f. Special Special pro blems inume measu measurin ring gers: expect ex ancy · proble Lo Lost stms Vol olum e Se Sell ller s:pectancy 2-70 2-708( 8(2) 2) 1. Majority Majority Rule: Rule: Burden Burden on manufact manufacturers urers to to show they they had capacit capacity y to make another sale. a. Problem: Problem: Competi Competitive tive market already already at profit profit maximizi maximizing ng  pnt  b. 2nd prob: prob: Hard Hard to to measure measure MR-MC MR-MC for each additi additional onal good, MC increases for each additional good. c. But in in monopoly monopoly cases; makes sense: sense: seller seller serves serves entire entire market, when market shrinks due to breach, loses profits. i. Vari arious ous counter counterar argume guments nts-se -seee note notess 2. Mino Minorrity Rul Rule: e: Diasonics: Burden on manufacturer to prove it had production capacity to make another sale, the sale would have

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 been profitable, and that it prob would have made 2nd sale. Da Dama mage ges sa as s tto oA Acc ccep epte ted dG Goo oods ds 1. UCC: 2-714 2-714 Vw - VA VA at time time of acceptance acceptance and place of  acceptance. a. Generally Generally held cost of repair is measurement measurement of diff. diff. i. But if inju injury ry unre unrepai pairab rable, le, the then n look look to to market market value. ii. Contract Contract price price often best estimate estimate of what market  price at time of acceptance will be. Ce Cert rtai aint nty yL Lim imiita tattio ion: n: 1. RST: RST: §352: Damages Damages are not recoverab recoverable le beyond beyond what what can be reasonably proven a. Requirement Requirement is whether whether there is a reasonable reasonable basis for a  jury or court’ cou rt’ss verdict.

 

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 b. If Expectation Expectation cannot be proven, proven, then reliance, reliance, then then restitution Fores oresee eeab abil ilit ity y Req equi uirrem emen entt 1. Common Common Law Approach: Approach: Breachin Breaching g party party liable liable for for damages damages “arising naturally” from the breach, meaning damages from breach reasonably supposed to be in contemplation of both parties at time of contract. a. Parties Parties can always always recover recover for for things things in the ordinary ordinary course  b. Partie Partiess can only only recove recoverr for speci special al and uniqu uniquee circumstances if other party was aware of the circumstances at the time of Қ 2. U.C.C Approach: Approach: UCC UCC §2-715 §2-715 Inciden Incidental tal + Consequential Consequential:: Consequential damages include (a) losses foreseeable to  breacher @ time of K which could not reasonably be  prevented by cover AND (b) injury to person pe rson / property from  breach of warranty 3. Informatio Information n forcing forcing default default;; if you fear fear breach breach bec because ause of  unforeseeable losses, may disclose loss from breach. Hadley 4. disclose, Pol Policy cy:: Ifeveryone no default and you assume would disclose when sellersinexpensive charged for to average  precaution=unraveling result, everyone ends e nds up disclosing anyway. 5. If expensive expensive to to disclose, disclose, buyers buyers may may not disclos disclose. e. Also Also,, buyer may may cover insurance cheaper (he knows V + insurance company knows P, seller only may know kno w P), and then not need to disclose to seller. 6. Reason for disclai disclaimer mer of foresee foreseeable able D: seller seller can’t can’t usually usually calculate consequential damages, and legal rules like “foreseeability” are generalizable so there is still risk of liability liability.. 7. Buyer has incenti incentive ve to disclos disclosee a higher higher valuati valuation on to induce induce  performance, but this is inefficient because it reduces efficient  breaches and incentivizes an inefficient ine fficient amount of performance (higher than buyer’ buyer ’s loss from breach).

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8. So parties parties even even more more tempted tempted to to disclaim disclaim consequen consequential tial damages. damages. a. Buyer may disclo disclose se to seller seller to “delet “delete” e” disclaime disclaimerr and then then seller may sell him insurance. i. Questi Question on as to to whethe whetherr selle sellerr is better better insu insurer rer or  or  third-party insurer is better insurer. insurer. Duty to Mitigate 1. UCC Approach: Approach: §2-704: §2-704: Seller authorized authorized to to complete complete if  commercially reasonable. a. “Comme “Commerci rciall ally y reasonab reasonable” le” if margin marginal al gain from from continuing is greater than marginal cost of continuing. i. Reduces Reduces damage damagess to breach breacher er at no cost cost to to other  other   party,, so it is what they would have bargained for ex  party ante. (maximizing surplus)

 

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 b. Commerciall Commercially y Reasonabl Reasonablee to continue continue if (Resale (Resale - Scrap Value) > (Cost - Cost incurred at breach) c. Comment Commentss to 2-704: 2-704: Put Put burden burden of proof proof on buye buyerr to prove prove why seller should have stopped. d. Continuing Continuing does not not make make sense sense when when resale resale value=scrap; value=scrap; like portrait or bridge cases (Luten). 2. Diff Diff Rules Rules for Indivi Individual duals: s: a. Law requir requires es wrongf wrongfully ully terminated terminated employee employee to to make make reasonable effort to secure other employment.  b. But the rejection rejection or failur failuree to seek seek out inferio inferiorr or differen differentt employment may not be used to mitigate damages i. No duty duty to miti mitigat gatee by taki taking ng job job that that coul could d hurt hurt reputation interest (Packer). Liquidated Dam amag age es 1. Fixed Fixed damag damagee award award in in case case of breach breach.. 2. Two branches branches to evaluate evaluate whether whether LDC is a penalty: penalty: 3. UCC §2-718 §2-718 authorizes authorizes both. LDC used used when expectation expectation interes interestt hard to calculate with reasonable certainty. a. Ex Ante Ante “Reas “Reasonab onable le in light light of the antici anticipat pated ed harm” harm” i. screwing Pro: Pro: Solve Solves s issue isthe suecalc. of unso unsophi phisti sticat cated ed parti parties es up of expectation. ii. Cons: 1. Party Party auton autonomy omy:: Sophist Sophistica icated ted part parties ies should be left to calculate their expec interest a. Why Why eval evaluat uatee the the LDC LDC term term if if we don’t evaluate others to see if they are fair to the parties? 2. If review review,, risk risk of judicial judicial error error in mistaki mistaking ng LDC as penalty. And even if judge is right, still expensive litigation costs. 3. Forces Forces cour courtt to eval. eval. buye buyer’ r’ss antici anticipate pated d harm, but may be hard for judge to figure out; may not understand buyer’s anticipated expectation interest (Lake River).  b. Ex Post Post “Reaso “Reasonab nable le in light light of the the actual actual harm” harm” i. Pro: Pro: Don’t Don’t want want to award award a windf windfall all and give give LDC LDC greater than expectation interest. 1. But sophi sophisti sticat cated ed partie partiess should should be be able able to set reasonable anticipated expectation interest. ii. Cons 1. Party Party auton autonomy omy:: Sophist Sophistica icated ted part parties ies should be left to calculate their expec interest (C+H Sugar: Court gives leeway

 

to sophisticated parties when actual harm hard to calculate even using ex post approach) 2. Usin Using g ex-p ex-pos ostt appr approa oach ch is is undercompensatory: if only get actual damages up to LDC and get LDC when actual harm>LDC, then avg. value of  enforcement of breach is below average harm. 3. Forces Forces cour courtt to eval. eval. buye buyer’ r’ss actual actual harm harm,,  but the whole point of LDC was that the  buyer’s V was hard to calculate, meaning  judge likely won’t figure it out o ut correctly. correctly. 4. Corps Corps are riskrisk-neut neutral ral;; shouldn shouldn’t ’t judge judge that that something is wrong because it is a windfall  because corps believe on average it will work out evenly over dist. of outcomes. 5. If review review,, risk risk of judicial judicial error error in mistaki mistaking ng LDC as penalty. And even if judge is right, still expensive litigation costs. c. Why Why LDC LDC are are goo good? d? i. If you you don’ don’tt know know V, V, can’t can’t use use expect expectati ation. on. ii. Insures Insures the the contract contract;; incentiv incentives es perform performance ance (even (even if it is a penalty) iii. Incentivize Incentivizess right amount of reliance reliance (parties (parties will will not rely over LDC, expectation interest may induce too much reliance) iv iv.. Tr Transact ansaction ion costs costs of contracting contracting LDC LDC may be < Litigation costs of figuring out expectation damages.

Main Policy Points: Contracts as Products: Markets not functioning correctly for consumer form contracts If contracts are like products, only issue is if market not functioning correctly. Seller won’t include include a kind of o f term (such as a warranty) if there is not enough willingness to pay for  that type of term If market functioning correctly then sellers will compete on that term, and an d if enough  people are willing to pay for a type of term they will include it. But if market not functioning correctly because people don’t read contracts, then o sellers aren’t incentivized to compete on the term and won’t improve terms to attract customers o In business to business transactions, market functions correctly and parties compete on terms, so if term is not available that means there was not enough willingness to pay for that term. In business to individual transactions, such as consumer form contracts, if  o consumers don’t read the contract (studies suggest that they are difficult to

 

read/understand) then they can’t make sellers compete on terms and the market may not accurately reflect consumers demand for certain terms. If sellers don’t compete on terms than the sellers won’t improve then. How to make market work correctly? co rrectly? Plain meaning laws; homogenous contracts so terms are apparent and consumers can comparison shop; sellers will have to compete on terms. · But what if enough consumers are shopping around (even if others are buying randomly) such that sellers still have to compete to attract the comparison shoppers? Then those who buy randomly will freeload off the comparison shoppers, sellers will have to compete on terms, and market may become efficiently competitive. 

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Arguments for homogeneous contracts and for legislative (and not judicial action) to correct non-competitive markets: Price variance in homogenous markets means the market is not o performing correctly-at competitive equilibrium Someone would only pay higher rate if they are not shopping. If contracts are required to be homogenous, consumers will be able to compare the important terms (in homogenous goods, it’s just 

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price), and shop around; market would begin to price itself correctively The reason you want be able to be read the contract is so that consumers can compare terms across sellers, so sellers would be forced to offer better terms because consumers could shop around. · This kind of change is more suited for legislature than the courts. If judge ruled against seller in a particular case, seller o not held to a particular standard, only knows that the terms he offered this time were not enforceable but not clear how to change his next contract. Social problem of non-competitive markets is better o solved by legislature, which can implement systemic change that will actually help to correct markets. Courts can generally make incremental, piecemeal, changes that are not sufficiently instructive for future contracts and won’t solve the uncompetitive market problem. · Contract lawsuits not the best vehicle for trying to deter nonno ncompetitive markets Market changes quickly o Establishing market power is very expensive in court; o experts witnesses expensive. That’s why damages treble in antitrust. This means that when stakes low people won’t

 

 bring suits based on market power, which reduces deterrent effect. o

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All the companies in a market may be offering the same term, but that does not necessarily nec essarily mean it is an oligopoly; those may the terms at the competitive equilibrium. equ ilibrium. Hard for Judge to determine whether the terms reflect a competitive or non-competitive market. Legislature better at dealing with non-competitive markets (i.e, creating homogenous contract rules so parties compete on price in Dodd-Frank mortgage loan law)

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BUT Bounded Rationality: Consumers exercise bounded rationality; will only consider salient terms such as price and will ignore other terms, so sellers will only have to compete on salient terms and will create low-quality other  terms in order to save costs so they can compete on salient terms such as price. This would limit the effectiveness of 

attempts to deter the use of inefficient non-salient terms by correcting market competition, whether by judges or  legislature. Creation of inefficient defaults will raise parties contracting costs without changing their   behavior as they just contract out of the default rule.

Firms are generally sophisticated and make welfare maximizing contracts; otherwise firms would not survive due to competition from profit maximizing firms and employees who make decisions that do not seek to maximize profit would not survive or be promoted within the firm. Do not need to respect the autonomy of businesses on moral grounds. Policy Argument for Interpretation of Ambiguous Terms: Textualist v. UCC/Contextualist Standard: Pro UCC/Contextualist Argument: Truth. If you think that chances of finding a correct answer a nswer are increasing based on amount of evidence you admit, then maybe willing to risk fraudulent claims and enforcement costs for the truth Accuracy is important from a autonomous perspective, because bec ause you want the courts to enforce the actual will of the parties. Accuracy is important from welfare-enhancing perspective. Because parties contract to maximize their welfare, welfare, if the court does not enforce enforce the accurate will of the parties the deal will not be welfare maximizing. Pro Textualist Argument:

 

Corporations are risk neutral in general. They assume that over the distribution of trial outcomes, their loss and benefit from court’s interpretations will come out to 0. Because they do not care ca re about risk of loss in any particular case because bec ause in aggregate their losses and gains from interpretation cancel out, companies will prefer a system with lower enforcement costs. The textualist approach lowers enforcement costs in comparison with a contextualist interpretation approach, because it limits the introduction of extrinsic evidence that increases the costs of litigation. With plain meaning approach, more cases will be dismissed in SJ. If the accuracy is extremely important to the company compan y in a particular case, such as a bet the company contract, then contextualist approach is better. But this is rarer. rarer. Creates incentive to write unambiguous terms; courts likely to be more accurate if terms are more unambiguous.

Policy Argument for Plain Meaning of Language: (Private v. Majority Language) Pro-UCC Approach: Judge Traynor: Not plausible that terms have a plain dictionary meaning Pro Textualist/Plain Meaning Approach: Plain meaning interpretation creates incentive for parties to write in standard English. Courts likely to be more accurate if contracts c ontracts written in standard English. If parties want to write in their own private language, they should be able to opt into that if the plain meaning approach were to become the default. Plain meaning rule reduces Strategic Behavior: Beh avior: If dispute arises, parties have incentive to introduce evidence that certain words have hav e meanings to their benefit, but if courts limited  plain meaning interpretation than parties will not be able a ble to support fraudulent interpretations with extrinsic evidence. Plain meaning rule would reduce the cost of contracting; most parties write most contracts in standard English, and would be less costly for the minority to opt out of a  plain meaning default than for the majority to opt out of a contextualist approach.

Problem with Course of Performance: Companies behaving amicably during performance or dealing may just be a result of the deviation from the contract being less expensive than litigation, but the parties may not have actually agreed that tha t contract was handled properly. Parties may have expected typical deviation and accounted for it in the contract  price. However, parties may depend on a contract term most when it protects them from a deviation that imposes great harm, and it would be wrong to use evidence of course of performance from when the harm was within the expected range of deviation devia tion to apply to situations in which the harm was great. Litigation only occurs in unusual circumstances such as a high cost deviation from the contract, so the course of dealing and performance when there is no litigation is not usef useful ul to dete determ rmin inee

part partie ies’ s’ pr pref efer eren ence cess in in unu unusu sual al ci circ rcum umst stan ance ces. s.