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THE GUTS OF CONTRACTS

BY ANTHONY J. FEJFAR, ESQ., COIF

© COPYRIGHT 2004 BY ANTONY J. FEJFAR, ESQ., COIF

DISCLAIMER: THIS IS A HORNBOOK OF CONTRACT LAW.

IT IS INTENDED TO HELP LAW STUDENTS UNDERSTAND

THE GENERAL PRINCIPLES OF CONTRACT LAW, AND IS

WRITTEN FOR NO OTHER PURPOSE. IF YOU HAVE A

LEGAL PROBLEM INVOLVING A CONTRACT, PLEASE SEE

A LAWYER FOR PROFESSIONAL ADVICE.

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CHAPTER ONE

Many people, including law professors, think that contract law is the root

“law” upon which all other law is based. On the contrary, in the first instance, law

is based upon property law, not contract law. In order to get something in

exchange for something else in a barter transaction, one first must possess that

which one wishes to trade, and of course, be ready to possess that which one is

about to receive in the context of the trade.

If you have a widget that you wish to trade, you have the general sense that

you are going to get something in return for that widget. This involves a

negotiation. While in some cultures every transaction involves an explicit

negotiation, often in our culture, the formal price of a trade good, or product, is set

by the merchant, or seller, and seemingly is not subject to negotiation. Karl Marx

came up with the rather interesting idea that reality is based upon dialectical

materialism, i.e., that the fundamental exchange transaction of humanity is one

involving material goods.

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Now, one can rather readily see Marx only had it about half right. In fact if I

go into the store and buy a new computer for $1,000, which is the list price, and one

which reflects a fair price based upon natural law, then a material transaction will

take place where my $1,000 is exchanged for the computer, and that is the essence

of the transaction. But, what if somehow I am able to convince the seller to sell the

computer to me for $700, rather than $1,000, a price which is approximately $300

below the natural law price? In this sense and at this time, or soon thereafter,

another transaction takes place, a metaphysical one, one which we can denominate a

“substance exchange.”

When one walks out of the store with one’s new computer which one has

just gotten a great deal on, after a while, one begins to feel a little depressed, a little

sick to the stomach, maybe, just maybe, even a little guilty. In other words, one

begins to experience “buyer’s remorse.” Now, objectively speaking one should

not feel this way. After all, it’s a fair market economy, devil take the hindmost, and

all, but somehow this isn’t enough to make it work.

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Why? Because the seller of the computer, or his continuum, have more

substance than you, and after you have walked out, they begin to psychicly lean on

you for “ripping them off.” And so, through metaphysical force, a “substance

withdrawl” is made from the purchaser, often felt in the gut area of one’s body,

albiet, rarely consciously noticed. If the buyer has relatively little substance in his

or her body, as a metaphysical quiddity, then it is not unusual that the buyer will get

physically ill, catching a cold or the flu, thus enabling hae to recover the substance

through natural physical processes involving illness.

Now, this in some sense is empirical support for the idea of a natural law

price for goods and services, but from a Platonist or Aristotelian point of view it

seems obvious that there will always be a natural law “true” Platonist price for a

particular product, and/or a “real” Aristotelian price. This the interesting thing

about the market, for a given product, say the computer, the “true” or “ideal” price

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might be $1,100, while the “real” or “pragmatic” price might be $900. Half the

fun of trading professionally or as a hobby, on the commodities market, for

example, is to play off the natural law price in substance against the natural price in

form. Of course, there is also the natural law price in being, or equity, based upon

in quantum meruit.

Now, does this mean that the negotiation between buyer and seller is a

wasted effort? On the contrary, it is very much worth the effort. This is because

there is always at least three natural law prices involved, one based on substance,

one on form, and one on being. So, what happens in a typical contract? Well, first

there is the offer, by either the “buyer” or the “seller.” Some people think that it is

the seller or paradoxically enough the buyer, who always makes the first offer. But

in point of fact, it could be either. Or put another way, even if one were

conceptualized as the buyer, seeking to buy a dozen widgets for cash, in some sense

one could be alternatively conceptualized as the “seller” of your cash money.

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So, we have the offer first, say, “I’ll sell you 100 widgets for $100.” Then

the seller of the widgets has to decide what to do. Hae could accept the offer as, is,

and then an oral contract would be formed. Now, under some regimes, in order to

help ensure certainty, and in an attempt to cut down on cheating, or fraud, the

statute of frauds will require the contract to be in writing to be enforceable. So

let’s take a few moments and talk about the statute of frauds.

The statute of frauds, as noted above, provides that certain types of

transactions must be in writing to be enforceable. The general idea is that bigger,

or more important deals should be memorialized in writing to be enforceable. So,

for example, it would not be unusual for a statute to provide that any sale for goods

for a price of $500 or more, must be in writing to be enforceable.

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One other area where the statute of frauds comes into play, is for contracts

which have to be performed within certain time limitations. So, for example, the

general contract statute of frauds provides that: “Contracts not to be performed in

one year or less, are within the statute of frauds, and are therefore required to be in

writing to be enforceable.” Now, this is a somewhat tricky way of putting it, but

the general idea is that if the contract will necessarily take more than one year to

perform, then it must be in writing to be enforceable. In other words, short term

contracts which are oral, can be enforced by their terms, but long term contracts

must be placed in writing to be enforceable.

Now, if this weren’t enough, some states have a “lease term” statute of

frauds. In a lease term statute of frauds, the idea is that a lease which is of a

duration greater than one year, must be in writing to be enforceable. Now, you

might say, well, so what, this seems like just another application of the more

general contract statute of frauds. Such a surmise, however, would be incorrect.

In many instances the two statutes will produce a different result.

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Let us say that one signs a one year lease for a term on July 15, 2004. The

lease provides that it will run, that is occupancy will begin, on August 1, 2004, and

will end on July 31, 2005. Now, under a “lease term” statute of frauds, the lease

“term,” that is, the time in possession under the lease, would be exactly one year,

thus taking the lease out of the statute of frauds, and therefore allowing for the

enforcement of the lease as an oral lease.

On the other hand, with a general contracts statute of fraud, the time

period which is of interest is the time from the signing of the lease, until the last day

of possession under the term lease. In the case at hand, this would mean the lease

would have to be analyzed in terms of the executory period of the lease as a

contract, that is, the time remaining from the time of signing or execution until the

time of complete performance.

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In this case, the lease was signed on July 15, and then ran from August

1st, through the following year’s July 31st. Thus the time that the lease remains

executory is approximately one year and 15 days. Since the lease cannot be

performed, by its terms, in one year or less, it is subject to the statue of frauds, and

therefore, must be placed in writing in order to be enforceable.

Now, what then happens in a jurisdiction where both types of statute are

present? Rules of statutory construction provide that a more narrowly drawn

statute, that is a specialized statute, should be used instead of a broad statute of

general applicability. In the case at hand this would mean that the lease term

statute would prevail over the general contracts statue of frauds.

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CHAPTER TWO

Now in order to have a contract, there must be a “meeting of the minds,”

between the buyer and seller, and those terms essential to the enforcement of the

contract must be in writing. One of those terms, of course, is price. Now, the

price that one is paying is typically straightforward, but in some cases there is a

percentage clause that is involved, or other ways of calculating what the price is that

will be charged. This leads us to the concept of “consideratation.”

The idea of consideration is that each party to the contract must give

something in order for their to be consideration, and thus, for the contract to be

enforceable. Where consideration is lacking on one or both sides, typically we

have something like a gift. The promise of the giving of a gift in the future is

generally not enforceable at law as a contract. In some instances it may be

enforceable under the equitable doctrine of promissory estoppel where the party

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who receives the promise lacking in consideration, but who, nevertheless relies to

hae detriment on that promise. The classical example being a charitable

institution who receives a promise of the donation of a large amount of money and

in reliance thereon starts construction of a new building.

Now, in order for there to be consideration, the amount of consideration

involved does not have to be very large. So for example the classical statement is

that a “peppercorn” is enough consideration to support a contract. If you aware of

what a peppercorn is, then the definition of consideration becomes interesting. A

peppercorn is about the size of a bb, and is used in a hand pepper grinder to produce

pepper at the dinner table. The value of peppercorn is probably less than 1 penny.

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One last point dealing with consideration. A related concept is the concept

of “value” found in relation to real property recording statutes. In order for a

subsequent purchaser for “value” to take advantage of the protection of a recording

statute that person must have given “value” for the real estate. While many

students mistakenly think that “value” and consideration are indenticle concepts,

this is not quite true. For example, the extinction of a pre-existing debt is

sufficient for consideration under a contract, however, such extinction of a pre-

existing debt is not considered “value” for purposes of real estate recording

statutes.

Once the basic terms of price, parties, description of the goods, delivery date,

etc., are met, and a contract is formed, the question is whether it will always be

enforceable. Usually it will, and, under the Uniform Commercial Code, a judge is

even allowed to insert reasonable terms to the contract when a key term has been

left out. Even so, some contracts are not enforceable because they are

unconscionable in equity.

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Where a party is lacking full contractual autonomy then a court in equity

can intervene and rescind the contract or reform it’s terms. Full contractual

autonomy is lacking where the person in question had failed to read the contract,

particularly if the contract is full of legalese and is written in fine print; second,

where the person is lacking in sophistication or education, such that hae does not

really understand the terms of the contract; finally, where the person is at such a

disadvantage in terms of economic bargaining power that it is impossible to say that

there was a free and voluntary meeting of the minds. The presence of each factor

on it’s own is enough for a finding of unconscionability, however, it is fair to say

that the strongest case is present where piling on of all three factors can be

manifested.

Assuming that an enforceable contract is present, the question arises as to

what remedies are available to a non-breaching party when the other party to the

contract breaches the agreement. In the first instance, a party to a contract is

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required to attempt to mitigate damages. This means that if I contract for 100

widgets at a price of $100, or one dollar per widget, it the seller calls me at says that

hae cannot deliver the widgets, then I am required to try to “cover” my damages by

seeking an alternate supplier of widgets.

So, for example, if I am able to find another source of widgets for $100,

then absent some collateral expense damages, I have no cause of action against the

original seller. I was able to “cover” the deal and really suffered no damages at all.

On the other hand, if I spent $120 to get the widgets, then I am entitled to “cover”

damages of $20, that is, the $120 cover price, less the original contract price of

$100, thus leaving $20 in cover damages.

Conversely, if I am able to find another source of widgets for $80 per

hundred widgets, then it is apparent that I have no cause of action for breach of

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contract at all based upon cover damages. I start with the cover price of $80 and

then subtract the original price of $100, and am left with a cover amount of negative

$20, or in practical terms, no damages at all. (Since I am not at fault, I have no

obligation to pay the original seller the $20 difference. This is my good luck and I

get to pocket the benefit of the bargain.

Of course in order for there to be any damages at all, first there must be a

breach of contract, and, not just any breach will do. Traditionally, there must be a

“material” or “substantial” breach of contract in order for a cause of action to

accrue. If only a minor breach takes place, the non-breaching party is required to

perform fully regardless of the presence of the breach, and simply has to sue for any

damages for the immaterial or minor breach. As I have argued elsewhere,

however, it is my position that a minor breach of contract can, and should be

responded to proportionately by the non-breaching party in kind. So, if the seller

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only delivers 90 widgets rather than 100, with an original contract price of 100

widgets for $100 dollars, it only makes sense that I am required to pay the seller a

contract price which is proportional to the seller’s performance, based on the

original contract terms, in this case, $90 for 90 widgets.

Last but not least, is the issue of specific performance of a contract in

equity. Normally, one cannot receive a court ordered enforcement of a contract

unless there is no adequate remedy at law. So, if I can get a cover contract with a

third party and sue for any cover damages against my originally contracting party,

then this is the appropriate remedy. However, if cover is not possible, then specific

performance through a judicial order of the original contract is appropriate. Such

a remedy in equity is appropriate where the goods in question are non fungible, that

is , unique. So, for example, a classical example is that a painting by Rembrandt is

unique, and one who contracts to sell such a painting can be forced to go through

with the deal since no replacement is possible. Such a result is true in many

personal service contracts.

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Additionally, real property is considered unique. Thus, a buyer of real

property is always entitled to specific performance in equity. The converse is not

true, however. The seller is only receiving cash from the buyer, and it is patently

obvious that cash money is the quintessential example of something which is

fungible in nature. One hundred thousand dollars from buyer A is the same as

$100,000 from buyer B. Some courts will apply the “mutuality doctrine,” saying

that if the buyer is entitled to specific performance, then the seller should be as well.

In my judgment, such a result is unfortunate, given that the situation of the buyer

and the seller really are not reciprocal.

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