Part I Course Introduction and Governing Law

Course Introduction

For lots of reasons, contract law is by far the best law school subject.... What other subject contains such a wealth of theory, doctrine, and substantive reasoning? What other subject focuses so clearly on essential components of economic and other organization in our society, namely private agreements and exchange transactions? What subject better exemplifies the power of general theory, the functions and limits of the common law, the rise of statutory law, the interaction of right and remedy, and the role of various legal actors in our system (including transactors, lawyers in their various roles, judges, and lawmakers)? Robert A. Hillman & Robert S. Summers, The Best Law School Subject, 21 Seattle U. L. Rev. 735, 735 (1998) (footnote omitted).

What is a Contract? ♦ “[A] promise or set of promises that the law will enforce.” EMP p. 1 ♦ “A promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” R2K § 1 ♦ “[T]he total legal obligation that results from the parties’ agreement as determined by [the UCC] as supplemented by any other applicable law.” UCC § (b)(11).

Holmes on Contract The only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass. Oliver W. Holmes, Jr., The Common Law 301 (1881).

Holmes’s statement has become the basis for an approach to contract law that allows a party to breach yet escape legal characterization as a wrongdoer. Such a party does not break a promise but rather exercises an option to fulfill one promise over another: the payment of damages, if any, rather than performance of the activity specified. As expressed by Justice Scalia: “Virtually every contract operates, not as a guarantee of particular future conduct, but as an assumption of liability in the event of nonperformance....” Or, in the words of Judge Posner: “In Holmes's vivid formulation, the obligation created by a contract is an obligation to perform or pay damages for nonperformance,... and if the second alternative remains, then, since it is an alternative, the obligation created by the contract is not impaired.” Barry E. Adler, Efficient Breach Theory Through the Looking Glass, 83 NYU L. Rev. 1679, 1685 (2008) (footnotes omitted).

Aspects of Contract  Agreement-in-Fact vs. Agreement-as-Expressed  Intent vs. Manifestation  Subjective vs. Objective vs. “Modified Objective”  Duties, Rights, and Remedies

Functions of Contract Law  Protecting Property Rights  Promoting Exchange  Promoting Equitable Distribution of Resources (?)

Assessing Contract Law  Positive: What does the case or statute say the law is?  Analytic: Why is the law is what it is?  How does the court or legislature explain it?  What (other) factors (help) explain it?  Normative: Should the law be what it is?

Nine Questions 1.What law governs the (proposed) transaction between or among the parties? 2.Did the parties form a contract – that is, a consensual agreement? ♦Did one party make an offer? ♦Did another party accept the offer? ♦Did the party who made the offer (the offeror) receive consideration?

Nine Questions 3.If the parties formed a contract, is it enforceable? The parties may have reached an agreement they think is binding, but it may not be because of some formation defense (e.g., incapacity, mistake) or because they failed to satisfy some formality (e.g., the statute of frauds). 4.If the parties failed to form an enforceable contract, does contract law afford them any alternative theories of relief?

Nine Questions 5.If there is an enforceable contract, what are its terms – i.e., what are the parties’ rights and obligations? 6.Has a party breached the contract? 7.Does the breaching party have a valid defense or excuse to or from its obligation to fully perform? 8.What remedy, if any, is available to the injured party? 9.What rights or obligations, if any, does one or more third party(-ies) have as a result of the contract?

Contract Remedies in a Nutshell 1.Expectation Damages: the difference between the value of the benefit the plaintiff reasonably expected and the value she actually received (a.k.a., benefit of the bargain damages). 2.Reliance Damages reimburse the plaintiff for any costs incurred in preparing to perform or performing her part of the contract (out-of-pocket damages). 3.Restitutionary Damages: require the defendant to disgorge any benefit received on account of the contract, in order to prevent unjust enrichment.

Contract Remedies in a Nutshell 4.Rescission: “Undo” the contract – i.e., return both parties to their pre-contractual situation. 5.Specific Performance: Order the defendant to perform as agreed. 6.Injunctive Relief: Order the defendant to do/refrain from doing a particular act. 7.Liquidated Damages: Enforce the remedy the parties agreed to when they first entered into their contract, provided that the agreed remedy is not unduly harsh.

Governing Law

Aspects of Governing Law  What: What is the subject of the transaction or dispute?  Where: What jurisdiction’s law governs the transaction or dispute?  How did the parties enter into or perform the transaction?  Who: Is one or more party to the contract subject to a particular body of law or subset of legal rules?  When did the parties enter into or perform the transaction?

SERVICES REAL PROPERTY PERSONAL PROPERTY

SERVICES REAL PROPERTY GOODS NON-GOODS

Scope of UCC Article 2  § 2-102: Article 2 governs transactions (other than those intended solely for security) in goods.  § 2-106(1): Article 2 governs present or future sales (passing title from the seller to the buyer for a price) of goods.

UCC § Unless the context otherwise requires, [Article 2] applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this division impair or repeal any statute regulating sales to consumers, farmers, or other specified classes of buyers.

UCC § 2-106(1) [U]nless the context otherwise requires “contract” and “agreement” are limited to those relating to the present or future sale of goods. “Contract for sale” includes both a present sale of goods and a contract to sell goods at a future time. A “sale” consists in the passing of title from the seller to the buyer for a price (Section 2-401). A “present sale” means a sale which is accomplished by the making of the contract.

UCC § 2-105(1) “Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in [§ 2-107].

UCC § (1)A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods … if they are to be severed by the seller …. (2)A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in Subsection (1) or of timber to be cut is a contract for the sale of goods … whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.

UCC § 9-102(41) “Fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law.

“Mixed” Contracts Courts determine whether UCC Article 2 governs a transaction or dispute involving a contract for goods and either non-goods personal property or services using one of two tests:  Predominant purpose  Gravamen of the action

UCC § 1-103(b) Unless displaced by the particular provisions of [the UCC], the principles of law and equity, including... The law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement [the UCC’s] provisions.

UCC § 2-104(1) “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

R2 Conflict of Laws § 188(1) [In the absence of an effective choice of law by the parties (see § 187), t]he rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which … has the most significant relationship to the transaction and the parties …. § 187§ 187

R2 Conflict of Laws § 187(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied … unless … (a)the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (b)application of the law of the chosen state would be contrary to a fundamental policy of a state … which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties. § 188§ 188

UCC § (a)Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties. (b)In the absence of an agreement effective under subsection (a), and except as provided in subsection (c), [this state’s UCC] applies to transactions bearing an appropriate relation to this state. ….

CISG art. 1 (1)This Convention applies to contracts of sale of goods between parties whose places of business are in different States: (a) when the States are Contracting States …. Contracting StatesContracting States (2)The fact that the parties have their places of business in different States is to be disregarded whenever this fact does not appear either from the contract or from any dealings between, or from information disclosed by, the parties at any time before or at the conclusion of the contract….

CISG art. 10 (a) if a party has more than one place of business, the place of business is that which has the closest relationship to the contract and its performance, having regard to the circumstances known to or contemplated by the parties at any time before or at the conclusion of the contract; (b)if a party does not have a place of business, reference is to be made to his habitual residence.

CISG art. 2(a) This Convention does not apply to sales of goods bought for personal, family or household use, unless the seller, at any time before or at the conclusion of the contract, neither knew nor ought to have known that the goods were bought for any such use ….

CISG art. 2(b)-(f) The CISG does not apply to sales: by auction; by auction; by authority of law; by authority of law; of stocks, shares, investment securities, negotiable instruments, or money; of stocks, shares, investment securities, negotiable instruments, or money; of ships, vessels, hovercraft, or aircraft; of ships, vessels, hovercraft, or aircraft; of electricity. of electricity.

CISG Art. 3(2) The CISG “does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labor or other services.”

CISG Art. 3(1) The CISG does apply to contracts “for the supply of goods to be manufactured or produced … unless the party who orders the goods undertakes to supply a substantial part of the materials necessary for such manufacture or production.”

Scope of the CISG: Recap The CISG generally applies to sales of goods between parties whose places of business or habitual residences are in two Contracting States, unless (a)either party doesn’t know or have reason to know that the other party’s place of business is in another country; (b) the buyer is purchasing the goods for personal, family, or household use and the seller knows or has reason to know the buyer’s intended use of the goods or the sale is excluded by Article 2(b)-(f); or (c) the seller is primarily supplying labor or other services, to which the goods provided are incidental.

Contracting Out of the CISG  Article 6 permits the parties to “exclude the application of [the CISG] or, subject to article 12, derogate from or vary the effect of any of its provisions.”  With one exception, U.S. courts have consistently required the parties to expressly disavow the CISG; simply choosing the domestic law of a jurisdiction will not suffice.

UETA’s Scope (§ 3) (a)Except as otherwise provided in Subsection (b), [UETA] applies to electronic records and electronic signatures relating to a transaction. (b)[UETA] does not apply to a transaction to the extent it is governed by: … (2) the Uniform Commercial Code, other than Sections and and Chapters 2 and 2A.

UETA’s Scope (§ 3) (c) [UETA] applies to an electronic record or electronic signature otherwise excluded from the application of this chapter under Subsection (b) when used for a transaction subject to a law other than those specified in Subsection (b). (d)A transaction subject to [UETA] is also subject to other applicable substantive law.

“Opting In” to UETA (§ 5) (b)[UETA] applies only to transactions between parties each of which has agreed to conduct transactions by electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct. (c)A party that agrees to conduct a transaction by electronic means may refuse to conduct other transactions by electronic means. The right granted by this division may not be waived by agreement.

15 U.S.C. § 7001(a) Notwithstanding any statute, regulation, or other rule of law …, with respect to any transaction in or affecting interstate or foreign commerce (1)a signature, contract, or other record … may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and (2)a contract … may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.

15 U.S.C. § 7002(a) A state statute, regulation, or other rule of law may modify, limit, or supersede [E-SIGN] with respect to state law only if such statute, regulation, or rule of law (1) constitutes an enactment or adoption of [UETA] …; or (2)(A) specifies... alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, if (i) such alternative procedures or requirements are consistent with this [Act] ….