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Contract Law Principles
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Contract Law Principles
Contract Law Principles
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1
Question
What governs the law of contract historically?
Answer
The law of contract has been governed by common law made by judges, not by economic considerations.
2
Question
What is the definition of 'consideration' in contracts?
Answer
Consideration refers to something that is exchanged in a contract, such as promises, money, or goods.
3
Question
According to Cooter & Ulen, what is the remedy for breaking enforceable promises?
Answer
The remedy for breaking enforceable promises is typically determined by the principles of contract law, which may include expectation damages.
4
Question
What does the Bargaining Principle state about enforceability of promises?
Answer
A promise is legally enforceable if it is given by the promisor as part of a bargain to another party (promisee).
5
Question
What is the significance of offer, acceptance, and consideration in the Bargaining Principle?
Answer
The Bargain Principle sharpens the distinctions among offer, acceptance, and consideration.
6
Question
What is necessary for a contract to be binding?
Answer
An informal exchange of promises may be binding and legally valid, but some contracts, such as those dealing with land or domestic contracts, must be in writing.
7
Question
Who lacks the capacity to form contracts?
Answer
Animals, minor children, and mentally disabled individuals do not have the capacity to form contracts; contracts with them are considered void or voidable.
8
Question
What are the consequences of contracts that have illegal purposes?
Answer
Contracts cannot be for illegal purposes, such as hiring hit men or agreements to violate regulatory statutes.
9
Question
What is the role of contract law in enabling cooperation?
Answer
A purpose of contract law is to enable people to cooperate by converting games with non-cooperative solutions into games with cooperative solutions.
10
Question
What does the Nash Equilibrium refer to in contract theory?
Answer
The Nash Equilibrium in contract theory refers to a situation where both parties have no incentive to deviate from their chosen strategy, leading to stable outcomes.
11
Question
What is the purpose of default rules in contract law?
Answer
Default rules minimize transaction costs of negotiating contracts by providing efficient default terms and regulations.
12
Question
What are expectation damages?
Answer
Expectation damages are the amount which would have been received if the contract had been kept; they are the measure of damages if the contract is broken.
13
Question
What case established the primary Rule of Expectation Damages?
Answer
Hadley v. Baxendale established the primary Rule of Expectation Damages.
14
Question
What must be disclosed to recover expectation damages?
Answer
Only what is disclosed to the other party can be included in the recovery of damages.
15
Question
What is the formula for expectation damages?
Answer
The formula for expectation damages is D = x(1 - p), where D is the actual amount in damages, x is the cost, and p is the probability of breach.
16
Question
What is a 'moral hazard' in the context of insurance?
Answer
A moral hazard refers to the principal's inability to observe the effort or action applied by the agent, creating uncertainty about whether the contract will be performed.
17
Question
What is the Coase Theorem?
Answer
The Coase Theorem states that when transaction costs are zero, an efficient socially optimal use of resources results from private bargaining, regardless of the legal assignment of property rights.
18
Question
What are transaction costs?
Answer
Transaction costs are the costs of a bargain or exchange, which can derive from search costs, document costs, and enforcement costs.
19
Question
What happens when transaction costs are high enough to prevent bargaining?
Answer
When transaction costs are high, the efficient use of resources will depend on how property rights are assigned.
20
Question
What is the impact of imperfect information on contracts?
Answer
Imperfect information creates uncertainties and risks, leading parties to seek enforceable promises at the time they are made.
21
Question
What is reliance in contract law?
Answer
Reliance is a change in the promisee's position induced by the promise, which increases the benefit of performance and the cost of breach.
22
Question
What is efficient breach?
Answer
Efficient breach occurs when a party breaches a contract but does so to achieve a more valuable outcome, minimizing overall loss.
23
Question
What role do liquidated damages play in contracts?
Answer
Liquidated damages are pre-stipulated amounts for breach of contract that do not exceed the actual harm.
24
Question
What are penalty damages?
Answer
Penalty damages are stipulated amounts for breach of contract that exceed the actual harm; traditionally, they were not enforceable in common law courts.
25
Question
What are perfect expectation damages for breach?
Answer
Perfect expectation damages are damages awarded to a promisee that reflect the benefit they would have received from the contract, ensuring they are put in the same economic position as if the contract had been performed.
26
Question
How do perfect expectation damages affect Yvonne and Xavier in case of breach?
Answer
With perfect expectation damages, Yvonne bears none of the risk of breach, while Xavier bears all of it. This causes Yvonne to over-rely relative to the efficient reliance.
27
Question
What is the paradox of compensation?
Answer
The paradox of compensation refers to the situation where liability for perfect expectation damages gives efficient incentives to the promisor to take precautions against breach, but the promisee has no incentive to restrain her reliance.
28
Question
What is asymmetric information in the context of contracts?
Answer
Asymmetric information refers to situations where one party in a transaction possesses more or better information than the other, leading to potential legal defenses by the non-owner of private information to excuse contract performance.
29
Question
What are some examples of legal defenses related to asymmetric information?
Answer
Examples include fraud (private information not disclosed by lies), failure to disclose (no implied duty at common law), frustration of purpose, and mutual mistake.
30
Question
What is the significance of the case Laidlaw v. Organ?
Answer
In Laidlaw v. Organ, the case illustrates a scenario involving asymmetric information where the Battle of New Orleans occurred in 1814, and the Americans were unaware that the war had ended.