Contracts Class Notes 8/22/03




Why is Acme Mills in the book?  To show you some of the effects of our idea that we compensate the aggrieved party, and do that in terms of the aggrieved party’s expectation interest.  In this case, we put Acme Mills in the position it would have been in if the contract had been performed; no more and no less.  If we eliminate the restitution damages, we find that Acme Mills wasn’t actually harmed; in fact, they benefited from the non-performance.


What effect does this scheme have on the contract breaker, or someone considering breaking a promise?  This is going to influence their incentives.


There are other sanctions for breaking promises other than legal sanctions.  There is your business reputation.  There is the sanction of your own conscience.  But what we’re concerned about is what it means to make and break a contract.


Our law would be a lot different if you got shot for breaking a contract.  There would be a lot fewer contracts made, and it would take a lot longer to enforce them.


Market price


Another reason Acme Mills is in the book is to introduce the concept of market price.  This helps us translate a loss into dollars so the aggrieved party can collect the right amount of damages.  You look at the difference between market price and contract price.  The idea is that the buyer can replace the goods by buying them out on the market.  When you give the buyer the damages, the buyer can go out and get the goods and have everything he would have gotten if the contract were performed.


The buyer must show contract formation and breach and must show damages.


Proving contract is often easy.  Proving market price is easy for some things and more difficult for others.


One of the big jobs lawyers have is predicting what courts are likely to do.  In a situation of a contract breach like this, it can be easy to predict what will happen.  Other situations can be much iffier.


Laurin v. DeCarlolis


Here there were damages.


How were the purchasers hurt by the removal of the gravel from the lot?  How much does it reduce the value of the lot?  In this case, not at all.  But that’s not the standard by which the appeals court determines the losses.  The appeals court says the amount of the loss is the fair market value of the gravel.  It wasn’t the defendants’ to sell.  The plaintiff should have had the chance to remove and sell the gravel.


If the parties had agreed that the builder could sell the gravel, that’s cool.  But no such agreement has been made.  The gravel was kind of snatched.  You can find an injury to the purchasers, and they get compensated.


Compare this to Acme Mills, where it seems that the breach didn’t harm the plaintiff at all, and it fact it helped them.


We do not focus on the gain through breach of the defendant.


Closing = performance of a land or property contract


It takes time before contract formation and closing.  It’s a big ticket purchase, titles have to be checked, financing must be secured, and so on.


The tort of conversion is the civil equivalent to theft.  Suing for conversion is almost never worth the trouble and cost.


Since the contract had not been performed, the title was still in the builder’s name.  What the builder did wrong is that it broke its implicit promise not to take the gravel away.


UCC Article 2


How does UCC define “goods”?  They are things that are moveable at a particular time.  What about a house?  Well, you can move a house down the street on a big truck.


Property consists of things that are located at a particular place on the globe.


What does moveable mean?  Part of it is just understood.


There is a division in the way we think about various things.  For example:


-         Real property

-         Personal property


Real estate is the land.  You can take things from the land, but the location of the land is immoveable.  The use of the word moveable is a way to exclude real estate from Article 2.


What about the building?  We have a deeply embedded idea in our law that buildings are part of the real estate.  For example, the law building is real estate.  The wall tiles are real estate.  The ceiling tiles are real estate.  The chairs we’re sitting on are not real estate.  They are tangible personal property, and they can be governed by Article 2.


The desks that we’re writing on are right on the dividing line.  They’re bolted down, but we could take them away easier than the tile.  They’re known as fixtures.


We don’t need to know this right now, but we need to get an idea about the difference between real estate and goods.


When things get close to the line, it will get harder to predict what will happen in court.


On problem 1, Article 2 doesn’t apply.  Common law applies.


What kind of law applies?


Land – common law (judge-made law plus occasional statutes)

Services – common law (but there may be a lot of statutes, especially when the agreement is for employment)

Sales of goods – Article 2

The UCC doesn’t only apply to merchants.  It applies to consumer-to-consumer sales, too.  That’s not to say it doesn’t apply different standards to merchants.  But it doesn’t make “squiddley-squat” worth of difference whether either or both people are merchants.


Legal vocabulary is sometimes painful.  Can” can mean a lot of things.  It depends on the context.


The common law began in England and has a continuous history since 1066.  Civil law is derived from the ancient Roman law, and it is codified, statutory law as opposed to judge-made law.  This is more common on the Continent in Europe, in South America, and elsewhere in Asia and Africa except former Commonwealth countries.


In today’s world, it’s very hard to find an area where the common law governs without statutes interfering with it.  The bulk of the law is common law rather than statutes.


Say you take a car in to be fixed.  The mechanic will fix it and provide the parts for one price.  Then you’re buying goods and services at the same time.


The employment relationship is basically a common law relationship, but it’s governed by various statutes.  That can be true for other service contracts.


Just as you have to distinguish real estate contracts from goods contracts, you have to distinguish between goods contracts and services contracts.


Sometimes it’s easy to draw this line, and sometimes it’s fuzzy.  We can identify some contracts as clearly Article 2 contracts, and others are clearly not.


There has been a lot of litigation about this.  One test is the “predominant factor test”.  Which factor predominates?  In this case, the bill probably has an itemized list of parts and labor costs.  You could take the part that’s more expensive.


Another way to go at it is to bifurcate the contract: Article 2 applies to the goods, and common law applies to the services.  This might make the action on the contract unnecessarily complicated and expensive.


If you hire someone to build a house, a lot of the contract price will go for materials to build the house, while other costs will go towards the labor.  A contract like this is considered a services contract.  This has been well-litigated.  The Article 2 provisions don’t fit with a construction contract, especially in terms of remedies.


When the contractor goes to buy the materials to build a house, the sale will be governed by Article 2.


What about Fido and the four-year-old car?  Does Article 2 apply?  Yes.  These are both moveable goods.  It doesn’t make any difference that the parties are non-merchants and the sales are casual sales from one consumer to another.


What about selling stock?  Does Article 2 apply?  No.  That’s an investment security, which is specifically excluded from the definition of goods in Article 2.  Article 2 deals with moveable tangibles.  Intangibles are not covered by Article 2.


More on Wednesday.


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