Econ 522 Economics of LawLogisticsLast Wednesday…Derogation of public policyDiscussion questionSlide 5Contracts based on faulty informationFraudWhat if you trick someone by withholding information?Duty to disclose under common lawSlide 11What if both parties were misinformed?Slide 13Another principle for allocating risks efficiently: uniting knowledge and controlMutual vs. Unilateral MistakeUnilateral mistakeUnilateral mistake: Laidlaw v Organ (U.S. Supreme Court, 1815)Unilateral mistake: productive versus redistributive informationSlide 18Vague contract terms“Shrink-wrap” licensesWhat if a party chose not to review the contract?Slide 23Contracts of adhesionWhat if you signed a contract that was dramatically unfair?Unconscionability: Williams v Walker-Thomas Furniture (CA Dist Ct, 1965)Slide 27Slide 28Slide 28Three broad types of remedy for breach of contractExpectation damagesReliance damagesOpportunity cost damagesExample: expectation, reliance, and opportunity cost damagesSlide 35Ranking damagesHawkins v McGee (“hairy hand case”)Slide 38Other court-ordered remediesSlide 40Expectation damages vs. specific performanceSlide 42Think about Peevyhouse in terms of penalty defaultsParty-designed remediesPenalty DamagesLiquidated damagesPenalty damagesPenalty clausesSlide 49Econ 522Economics of LawDan QuintFall 2011Lecture 132HW3 is online, due next Thursday (Nov 3)Second midterm is Wednesday Nov 9Cumulative – covers everything up to end of contract lawMore weight on more recent material (contracts)Logistics3Regulations/immutable rulesDerogation of public policyFormation defenses and performance excusesIncompetence (but not drunkenness)Duress and necessityImpossibility, and determining the efficient bearer of a riskToday: more ways to get out of a contract, and remedies for breachLast Wednesday…4Derogation of public policy5Old urban legend:A man bought a box of extremely rare and expensive cigars, and insured them against loss or damage.After smoking them, he filed an insurance claim, saying they had been destroyed in 20 separate small fires.The insurance company refused to pay, the man sued and won.But as he was leaving the courtroom, he was arrested on 20 counts of arson.Serious question:If the intent of a contract is clear, but different from the literal meaning, which should be enforced?Discussion question6Contracts based onbad information7Four doctrines for invalidating a contractFraudFailure to discloseFrustration of purposeMutual mistakeContracts based on faulty information8Fraud: one party was deliberately trickedFraudsource: http://www.wyff4.com/r/29030818/detail.html9Under the civil law, there is a duty to discloseIf you fail to supply information you should have, contract will be voided – failure to discloseLess so under the common lawSeller only has to share information about hidden dangers……not information that makes a product less valuable but not dangerousException: new products come with “implied warranty of fitness”Another exception: Obde v SchlemeyerWhat if you trick someone by withholding information?10Under common law, seller required to inform buyer about hidden safety risks, generally not other informationBut…Obde v Schlemeyer (1960)Seller knew building was infested with termites, did not tell buyerTermites should have been exterminated immediately to prevent further damageCourt in Obde imposed duty to discloseDuty to disclose under common law11Under common law, seller required to inform buyer about hidden safety risks, generally not other informationBut…Obde v Schlemeyer (1960)Seller knew building was infested with termites, did not tell buyerTermites should have been exterminated immediately to prevent further damageCourt in Obde imposed duty to discloseSome states require used car dealers to reveal major repairs done, sellers of homes to reveal certain types of defects…Duty to disclose under common law12Frustration of PurposeChange in circumstance made the original promise pointlessCoronation Cases“When a contingency makes performance pointless, assign liability to party who can bear risk at least cost”What if both parties were misinformed?13Frustration of PurposeChange in circumstance made the original promise pointlessCoronation Cases“When a contingency makes performance pointless, assign liability to party who can bear risk at least cost”What if both parties were misinformed?Mutual MistakeMutual mistake about factsCircumstances had already changed, but we didn’t knowLogger buys land with timber on it, but forest fire had wiped out the timber the week beforeMutual mistake about identityDisagreement over what was being sold14Hadley v Baxendale (miller and shipper)Hadley knew shipment was time-criticalBut Baxendale was deciding how to ship crankshaft (boat or train)A general principle about information: efficiency generally requires uniting knowledge and controlContracts that unite knowledge and control are generally efficient, should be upheldContracts that separate knowledge and control may be inefficient, should more often be set asideAnother principle for allocating risks efficiently: uniting knowledge and control15Mutual mistake: neither party had correct informationContract neither united nor separated knowledge and controlUnilateral mistake: one party has mistaken informationI know your car is a valuable antique, you think it’s worthlessYou sell it to me at a low priceContracts based on unilateral mistake are generally upheldMutual vs. Unilateral Mistake16Mutual mistake: neither party had correct informationContract neither united nor separated knowledge and controlUnilateral mistake: one party has mistaken informationI know your car is a valuable antique, you think it’s worthlessYou sell it to me at a low priceContracts based on unilateral mistake are generally upheldContracts based on unilateral mistake generally unite knowledge and controlAnd, enforcing them creates an incentive to gather informationUnilateral mistake17War of 1812: British blockaded port of New OrleansPrice of tobacco fell, since it couldn’t be exportedOrgan (tobacco buyer) learned the war was overImmediately negotiated with Laidlaw firm to buy a bunch of tobacco at the depressed wartime priceNext day, news broke the
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