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all right welcome back everybody we're going to get started with our next session it is my pleasure today to introduce Professor BAE who will be talking to you about contract law fundamentals professor BAE comes to us from the University of Hawaii and is a professor of law at the William s Richardson School of Law she joined the Law School in 1995 as acting associate dean and teaches contracts legal writing and advanced torts and insurance law she's also the co-director for the health law policy center professor Bay also holds a PhD in American Studies and Masters of Social Work she worked as a social worker with the elderly in the Hawaii community for 12 years professor BAE's awards include outstanding professor of the year for 1999 the 2000 Board of Regents excellence in Teaching Award the University of Hawaii's highest honor for teachers and the 2008 Hawaii women lawyers outstanding woman lawyer of the Year award please join me in welcoming professor bay [Applause] thank you for having me I've been teaching contract law for 25 years to first-year law students so I actually have to give a disclaimer that I'm really stuck in basic fundamental contract line you guys probably know tons tons more than me so it's all I'm sure will be review for most of you I wanted to start with the basics of contract law the main source of contract law is the common law and the common law is what we call judge-made law it has a wonderful history going back to the Roman Roman times and then all the way through England and it's judge-made in that case comes before the judges with facts and the judge declares the law and it evolves over time as new fact stories come to the tongue come to the court but the legislature that includes the federal government the state government are free to to intervene and to take over any aspect of contract law that they want to and and I'll give you a couple situations where that's happened the first is the Uniform Commercial Code and that involves the sale of goods there was a sense that Goods travel from state to state and there needed to be uniformity in the law and so the Uniform Commercial Code was promulgated by private parties and then they taken around state legislatures across the United States and 49 states adopted it so when you sell goods in the stream of Commerce you can pretty much predict what the law will be across jurisdictions because there's a uniformity in the law the one state holdout was of course Louisiana which has a Napoleonic Code tradition of French law tradition and so they rejected Commercial Code Article two but for the most part there's uniformity in the sale of goods the other kind of statutory law that typically comes up is consumer protection laws those are usually at practices that are offensive commercial entities taking advantage of consumers and so either federal or state law will intervene and and do something like the door-to-door salesmen Act which gives people a right to rescind or to door sales for a period for a couple days after the sale is made sometimes they're targeted at industries that are taking advantage so for example payday lending rent to own car sales because there used to be sharp practices in bait-and-switch so state legislators will target a particular industry because they need some regulation and you can always preempt the common law by having a state legislature federal government intervene and create a statutory scheme the other big statutory schemes that you're familiar with or procurement laws and that's where you need uniformity and you need an entire scheme you don't really want that ad hoc common law judging you want to have regulations that are predictable and uniform and regulate the entire start-to-finish of government contracting for example and so when you have a need to have a whole uniform scheme then it's not uncommon to have state legislatures or the federal government the federal acquisitions law for example come in and make new law that's and then become less dependent on the common law beyond my class in first-year contracts there's also a united the international law that now regulates a contract we live in a global world and so increasingly commerce is across across jurisdictions across nations and so more and more international law and United Nations conventions govern contract law in law school students take those as advanced class I'm going to talk about some common themes in contract law and I hope that as I go on with this talk you'll begin to see how they how they permeate contract line they probably have some of those principles grounded in your and your procurement codes as well the first is that contract law contains two different kinds of rules what we call immutable rules and default rules so there's a lot of rules in contract law offer an acceptance for example we have something called the mailbox rule that says that acceptance is effective when it's properly mailed rather than when it's received they're what you call default rules that means that the parties when they make their contract they can change those they can they can make an offer they can change the way that you have to accept an offer they can change the terms of a contract in any way they want so the default rules sit there and and supply terms when the parties haven't thought about something but they're free to the parties are free to change them the other kind of rule though is immutable rules and those are ones that can't be changed at all and that's because they really affect public policy and so those rules permeate contract law as fundamental core values some of those are the idea of efficient breach as a first-year law students come to law school with a lot of high morality that they has been instilled since they were children and one of the most important things is that you should keep your word Michelle Obama in her speech at the Democratic convention said your word is your bond and so it's not too long after law school starts that my students realized that contract law doesn't believe that contract law is really immoral and you're free to breach without judgment in contract law so long as you can make the other person whole and the idea of an efficient breach is that sometimes the world is better off if someone breaches a contract economically everybody can be made better off and I'll do this later with you when we talk about damages so it takes very little time frightening Li little time for my students to think about contract promises the law of contracts is something that you can freely break as so long as you can make the other person whole through a payment of damages we also follow something called the objective theory of contracts and the objective theory of contracts means that we don't really let people secret intent govern what the contract is about how the contract should be performed whether the contract was formed or not we usually judge people by a reasonable prudent person standard and so it's not the parties there used to be this expression meeting of the minds but that's no longer the principle it's really what would another person objectively think you meant by what you say or what you write in a contract the final important fundamental core value of contract law is good faith and fair dealing sometimes we tend to say it as one word good faith and fair dealing but really what it means is that you operate with good faith good intentions toward the other person and a contract will be interpreted as if you wanted the other person to succeed that you had a reasonable fair interpretation of the contract and that you're not there to outsmart or outwit the other party and fair dealing means that you treat them throughout the life of the contract with fairness and and and honor your trade practices your your uniform your trade usage your customs and practices in your field that that's all incorporated in what the expectations of the parties would be I can found students very early in contract law with this concept of consideration if you think about it you make tons of promises all through your life every day but not all of them thankfully are legally enforceable particularly the ones you make to your kids every day for goodness sake but contract law is a way to consider it the consideration doctrine is a way that we winnow or channel certain promises into the concept of contract contracts that are legally enforceable and it's a very simple definition of what consideration is it's a bargained for exchange that idea this idea of quid pro quo actually encompasses two fundamental principles one is that the one promise is sought for the other promise so something is sought in return for the other promise and that's a basis of promissory liability and the other word and there is exchange and what that triggers is the idea that something has to be legally sufficient whatever was exchanged has to be legally sufficient a lot of things fall out of this concept of consideration when you think about bargain for exchange the first is gift promises if a promise is one-sided you promise to give a gift generally they're not contractual I'm a fairly cynical and callous person and so I often think that if you know when you give or promised a gift you're really hoping for something in return but the truth is that you're really not bargaining for an exchange you're not trying to bind the other person to that and so gif promises fall out of this concept of consideration promises and recognition of past benefits also fall out because they're not they're not bargained for so somebody has done something good for you last year the idea that you would like to pay them back this year and make a promise to do so is not really legally binding because there's no bargained for exchange the big one that comes up in contract and commercial contracts is modifications of contracts if you modify a contract by assuming that you'll you'll take less for a project or you'll do more for a project there really has to be consideration on the other side they also have to give something otherwise they're under a pre-existing duty and the law generally says that modifications without consideration are not legally enforceable that in particular raises issues that that have not been that have not served contract law well and I'm going to give you a couple hypotheticals that's the way law students learn is through these stories so the first type of that achill is actually these are actual cases neighboring merchants have to pretend parking stalls and one merchant generally promises that the other may be used their parking stalls at night because they're they're closed in the daytime generally that's a gift promise there's no consideration if the other merchants not paying for the parking stalls and that wouldn't be really enforceable as a gift prong as a gift promised in the in the commercial context here's a second hypothetical you were you're a landlord you have a two-year contract with a tenant and this case actually happened in the depression and so times were really tough you're supposed to get a rent increase in the second year and the tenant comes and says you know I really can't afford a rent increase in the second year would you consider keeping the rent at the same as the first year and the court actually finds that the landlord did agree to this but in the end the landlord enforced the raise the the raise a $25.00 a month and the court said that's right because there was no consideration the tenant was already under an obligation to pay the rent and gave up nothing in return for an inn in essence it was a gratuitous promise to accept a lesser rent you can see that that would cause problems because you of all people with procurement know that during a contract you really want to be flexible want to be able to modify it as you want and and have that kind of freedom so the law the common law has evolved over the years and this is an example of how judge made laws so can be so effective so there's a wonderful case that I teach I love it because I used to work for the city so you know if you work for the city the most important thing that a mayor can do is make sure the garbage is picked up right I mean there's nothing more important than all the mayor's functions then then that garbage so this was a garbage man who had had 30 years of five-year fixed fee contracts with the city of Newport Rhode Island and the Rhode Island New Port Rhode Island had grown very predictably by a couple houses every year and so this fixed fee contract had gone on for every five years for many many years and suddenly Newport has a huge population growth and the the fixed fee contract is in like the second year and the city of Newport agrees to modify the contract and give the garbage collector more money because of the unexpected growth disgruntled taxpayers sue because after all that was a fixed fee contract the garbage man had assumed the risk of how how fast Newport would grow as part of the fixed fee and so they challenged it as lacking consideration and the court said well we're going to adopt a new rule in this case a more progressive rule that's more rational that says that you can modify a contract if you modify it in good faith if you have unexpected unexpected changes or circumstances that justify the modification and it's fair and reasonable and so this is an example of the common law evolving over time to adapt to different sensibilities of in different eras and that's one of the flexibilities of the common law is its nimbleness to to adapt to new situations statutes are kind of fixed and so I'm a fan of the common laws as having the judge made law having the potential to adapt and respond to people's needs at a given time one of the biggest things the common law did was in the 1900s early 1900s they recognized a completely new doctrine called promissory estoppel and so it captured promises that were not supported by consideration but nonetheless had caused someone to change their position and so promissory estoppel says that if you make a promise even if it's a gift promise that's generally not enforceable and someone reasonably and foreseeably relies on it to their detriment then that promise then becomes enforceable even without consideration this is an example of of Courts taking a making a whole new doctrine and gradually courts across the United States climb on board with it and common law evolves in this way Hawaii's case is really a wonderful case it's the story of a Honolulu Police Department officer sergeant Ravello and he he decides he wants to move to the Big Island to be a police officer so he a wonderful Honolulu police officer he he interviews for the job on the Big Island and he's offered a job but it's a probationary which means that he can be hired or fired at will for 90 days and so they could always fire him for those first 90 days so he prepares to move to the Big Island the first thing he does is give notice to the Honolulu Police Department pulls his kids out of private school his wife quits his job they get ready to pack up and move to the Hawaii to the Big Island and the Big Island reneged on the promise well remember he was going to be an at-will employee and so there's really not much that can be done with contract law to save him except that the Court recognizes this idea of promissory estoppel and they say that you know when you promised him a job on the Big Island even if it was just a probationary job that could be taken away from him at any time for the first ninety days he relied on it to his detriment by quitting his job and getting ready to move so the court recognized a cause of action in that case even though under the pure consideration doctrine he really wouldn't have been able to recover anything he doesn't get the job on the big island and he doesn't get his salary going forward but chances are he gets some of the moving expenses or the lost wages he suffered so it's a lesser kind of protection but a protection nonetheless and talked a little bit about the objective theory of contracts I don't know if you guys are Trekkies but when you think a star trek you think of Leonard Nimoy mr. Spock and he can do this amazing thing called a Vulcan mind-meld I'm not sure quite what it i but fortunately contract law doesn't require that we talk about formation of a contract we talk about meeting of the minds and that's that Vulcan mind-meld but the truth is that we don't require that contract law contracts get formed very informally they can get formed very casually and we're judging whether they're formed casually I mean objectively not not by what the parties truly meant but by what it looks like they meant a good example of a very informal contract implied by it without any words so let's say that I I want to take my kid to a babysitter and the babysitter says well I charge $10 an hour and the next day I show up with my kid they take the kid there's an employee implicitly I've agreed to attend dollar an hour contract even though we haven't done anything formally in fact we haven't even said I offer to to watch your child for $10 and I say well I accept implicitly just by the circumstances the law will imply a contract that can be quite dangerous for people who think that they want to get into a contract and they want all the bells and whistles and they want to know when they're bound and not bound generally unless you're very specific and and and disclaim that you're in a contract the law will imply a contract fairly easily and quickly so parties are often surprised by that getting back to the objective theory of contracts we judge people what a reasonable person and the other person's shoes would think or here so I have a wonderful case that my students learn of two old friends in a bar he's always wanted to buy the other guy's farm and the other guy hasn't always said no I'm not going to sell I'm gonna leave it to my kids well they get into a it's Christmas Eve drinking and the buyer challenges them I'll bet you wouldn't take fifty thousand and the other guy says well I bet you don't have fifty thousand then they go back and forth for about half an hour and ultimately they create on the back of a receipt they create a contract to sell the farm for fifty thousand dollars and the court enforces it because while one party thought they were joking the other party according to the court at least and the jury believed that it was contractual and so we judge people by this objective theory can be dangerous if you're if you've got secret intentions you your secret intentions won't matter contracts can generally as I said be informal another wonderful case I teach is some boss that's quite busy and he's it's Christmas and he's you know trying to trying to do his inventory and all that and his worker comes in says I want to raise and and the boss says well I just wanted him to get out of my office and go away but his response is you're okay go back to work and the court says well that to the worker that sounded like you were saying okay I agree to the raise and so the contract with the raises is honored and so it's the objective theory of contracts you have to be careful you have to be thinking what's the other person thinking it's sort of like dating and going steady we like to give people mixed feelings sometimes we're not quite ready to commit and you have to watch it you have to watch it because it's really what the other party would think where there's a few kinds of contracts where a certain formality is required there has to be written evidence with a signature of at least one party the person that doesn't want to be in the contract in certain kinds of contracts and we call this the statute of frauds the typical statute of frauds covers land transactions and those can be long term leases and easements as well we ask that there be written evidence signed by the party to be charged in other words the party that's trying to wiggle out of the contract we have to find his signature somewhere on something that approximates the terms of the contract doesn't have to be the contract itself has to be some evidence of the contract in writing contracts that can't be performed within a year of their making contracts that that are for over a year and to have to be have to have satisfy the statute of frauds and the sale of goods over five hundred dollars or more has to be has to have evidence in writing this is the statute of frauds it's been around since 1677 courts hate it they've hated it since 1677 legislatures enacted it our Hawaii legislature enacted it and courts have had 400 years to try and create exceptions to it and they've done remarkably well so it's riddled with exceptions there's actually judicial disdain because there their thinking is why should we let this technical requirement of a writing and a signature overcome obviously obviously made contracts and so they just have created tremendous exceptions to it so I don't even want to say that it's it's particularly viable in Hawaii because Hawaii in particular has had some real high anti statute of frauds cases even though it is on the books I'm going to talk a little bit about contract interpretation that's probably it be devil's all of you in procurement law right you take the time to write a wonderful contract and then what the heck does it mean in the middle of in the middle we generally judge things by the plain ordinary meaning of the people but the real danger in ambiguities is is whether we're going to entertain extrinsic evidence or oral evidence to explain it courts are generally fairly generous about allowing a testimony to explain what terms are in a contract and in Hawaii that's particularly so the other thing that that comes along with every contract is trade usage and course of performance the kinds of things that are customary in your field and how you've behaved toward one another in the in the contract those are all things that the court uses to explain what the terms are so there's a lot of tools in the toolkit to explain what a reasonable person would think this contract meant in this particular regard even if the contract itself is unclear another important doctrine in contract law is the parol Evidence Rule and that's a rule that says well if the parties bothered to write down something and they spent a lot of time and effort to make a writing how much oral testimony should we allow into court to contradict or add to it in other words what is the value or sanctity of the written document and there's so there's a tremendous policy tension about whether we should honor the writing or whether we should allow people to come into court and challenge the writing of a contract and and put on evidence that we really said or meant something different than was actually written on the on the on the contract page and the parole Evidence Rule basically says that if the parties made a document and they agreed to it and they made it completely integrated they tried to capture absolutely everything that they had agreed to then generally we won't upset that by allowing testimony to come in to change or alter the terms but we will allow to testimony to explain terms that's that ambiguity doctrine that we talked about and we might allow additional terms to come in if it's something that hadn't been written about in the contract the ambiguity doctrine and the Perl evidence document they really are at the heart of how important is the written document versus what the parties really meant ultimately the goal of the court is to find out what they really meant in their contract the problem is that the writing ought to be the best evidence of what they really meant and so there's a tension fundamental tension between letting in extrinsic evidence or letting the document stand for itself well my students love the part of the class that talks about policing the bargained and this is all the ways that people can outsmart other people you know there's people who are who are the con men in the world and then there's the suckers and and I hate to say it but I think I'm actually that gullible person that's going to have be taken advantage of so these cases are wonderful and funny and really quite cautionary so these are the doctrines that help us police the doc police the bargain the first is the capacity doctrines one is that you have to have you have to have the age to enter into a contract and in most states that's 18 so if you're a minor you can you can usually avoid contracts that you've made unless they're for something called necessaries things that you need to live or because a statute has enabled you or capacitated you if you will so for example in Hawaii minors can consent to mental health care they can get jobs at 16 certain things that they can do because the legislature has has recognized that they should be able to do that they're allowed to enter into contracts about reproductive health mental health those kinds of things but other than that they have to have pasady which means they have to be 18 the other doctrine that protects people is mental capacity you have to met a mental capacity but the law assumes that all adults do have mental capacity so there's quite a burden on a mentally incapacitated person to actually establish that they were mentally incompetent to enter into a contract the other doctrine is duress or business compulsion that requires that somebody showed that they had no realistic choice when they entered into a contract and it was the result of somebody else overreaching requires both things so usually in the commercial area that's where your another party drives a hard bargain perhaps for a settlement of a claim because they know that you're financially strapped and you have to you have to take pennies on the dollar because you're desperate generally we would call that duress if someone takes economic advantage of your dire straits in that way the next doctrine is misrepresentation and misrepresentation says that when you're entering into a contract you know usually that we regard contracts as arm's length negotiations I remember my brother had a car and he was leaving the island he asked me to sell it and it was this car that in the morning when you started it if you touch the brakes you could literally fly through the windshield I don't know what was wrong with the brakes but they just they just grabbed but within a quarter mile they would warm up and then it would be fine the rest of the day and so inevitably people would come to test drive the car in the afternoon and the car would run really wonderfully and I remember wondering should I tell these people you know in the morning and I realized that I did tell them you know the brakes are really tight in the morning but no and I don't think anything could have ever captured how how really bad they were so but generally you don't have to tell everybody everything when you're negotiating but you do have an obligation to tell the truth if people ask or if you state something and that's misrepresentation there's a few things you have a to speak about another thing that happens in the duty to speak area is that this is a good example of where the legislature can get involved so now in private real estate deals you have duties to disclose under real estate laws and that's an example of how the legislature decided that contract law wasn't responsive enough and so they create a statutory scheme where there's more duties to disclose in residential real estate unconscionability as a relatively new doctrine started in the 1960s in contract law and what that says is that sometimes a contract can be so onerous and unfair and the bargaining power can be so lopsided that we're gonna undo the contract within the contract or avoid the contract because it was made under such offensive or oppressive terms that's unconscionability courts acknowledge it but they're really reluctant because you know we make bad bargains all the time and it's not the courts job to undo just ordinary bad bargains another doctrine that protects you is undue influence and you know Hawaii has an abundance of these cases probably because we have such close Ohana right we have aunts and uncles and nieces and nephews and grandparents that are all taking advantage of each other and they all seem to be reported in the cases so I particularly think that Hawaii it's interesting how many reported cases on undue influence we have but generally that's where somebody uses their power of trust a confidential relationship to exact a bargain from people that was that's really unfair to that person and then the last doctrine is illegality or void is against public policy you know the legislature declares a lot of things illegal and you can't make a contract about them so for example if I made a contract to murder someone I couldn't go to court and say well they breach the contract they didn't murder the person the illegal contract you leave the parties where they fought you find them and they're there without a go remedy legislators all the time do that in Hawaii it's illegal to gamble gambling contracts would therefore be illegal but the legislature is really slow they're not nimble so we asked the courts to do a lot of work in this area so fertility contracts regarding adoption in vitro fertilization all those kinds of things that are kind of cutting edge organs organ transplants the legislature sometimes can't keep up with technology and all the ways that people might offend public policy and so we asked the courts to to respond to situations well I always tell my students you know breaching contracts and stuff like that isn't any fun unless there's money at the end and so I'm gonna spend a little bit of time on damages quick look at the timing here we're doing great so generally in contract law there's three kinds of money damages the first is expectation and that puts you ahead where you would have been if the contract had been for performed properly and in Hawaii we allow those as long as they're provable with reasonable certainty so if somebody breaches a contract that was for 10 years and you were gonna operate some business for 10 years you just have experts come into court and try to prove what the business loss would be over the 10 the 10-year contract and then monetize it back down to or capitalize it back down to present-day value of the contract so expectation damages is the norm in contract law but we also allow reliance damages we talked about that nura Velo reliance damages put you back sometimes you can't prove your damages with reasonable certainty and so reliance damages are usually very provable because they look back at how you were injured so they're often really easy to prove they're usually not as lucrative unfortunately and the last kind of amount of money damages would be restitutionary and that just asks well what's the other guy got that he was and it's unfair he has now in the performance of the contract as he does he have something that he hasn't that that I haven't been compensated for yet and so it looks in the other guy's pocket and says he should have to give that back as a result of the breach of the contract we have some limitations on damages so that's a dog sitting at home eating bonbons contract law says that damages have to be foreseeable at the time the contract was made so expecting you can't have your damages have to be captured when you were negotiating as a result a lot of damages that flow from a contract that were unexpected are often not compensable I already said we have to prove them with reasonable certainty and we have to avoid damages if we can we have an obligation to mitigate our damages we can't recover if we if we don't take steps to avoid or mitigate our damages hence the dog sitting there eating bonbons if you fired from your job for example you have to make reasonable steps to go find another job you can't just look at it as I'm gonna win this case and so I can sit home for the next year the law prefers bunny damages over specific performance we don't order people back to work as a general rule and when we talked about efficient beat breach contract law is not punitive there are no punitive damages in contract law you'd much rather if you're suing if you're in litigation you much rather find a tort somewhere because damages are a lot more lucrative if you're the plaintiff no punitive damages no emotional distress damages and the case in Hawaii I have a couple more minutes the case in Hawaii is Russ Fra cis does anyone remember Russ Francis so he was hired by KGMB and and abruptly fired and of course he was a sports figure and and it's embarrassing to lose your job it's embarrassing to be fired and it's embarrassing when you're a public figure like that one day you're on the news and the next there's all this gossip that you've lost your job so one of the things he sued for was emotional distress and the Hawaii Supreme Court said basically it's a job get over it there's no emotional distress related to contract law unless it's of a particular nature we're damn emotional damages are at stake and those are typically the mishandling of dead bodies I can't write this stuff I can't tell you how many times Funeral Homes lose the body or bury the wrong guy and and so those are the kinds of contracts really limited classifications of contracts where where you're where you're able to recover emotional distress I often will ask a question for my law students about well what if the photographer forgets to put film in your wedding your wedding pictures or something like that I suppose that would be of the kind where you might be able to get emotional distress but as a general rule there's no emotional distress damages contract law is not punitive that means you're liquidated damage clauses I'm sure that there are liquidated damage clauses and a lot of your contracts they have to approximate actual damages they can't be penalty clauses they can't be incentives or motivations to make people do perform other countries allow penalty clauses or hide liquidated damages but in the United States we don't I want to spend a second on an efficient breach and that is that let's say that your exterminator and you've got a job on one day to exterminate at somebody's house put a tent over it and then suddenly it has to be done that very day a big old school system says we want you to put tents over ours you can't do both of them and so you go to the small homeowner and you say well you know I've got this other job I want to do that instead because I'm gonna make a lot more money on it the law allows you to do that and you're gonna breach that contract with that small homeowner the only thing you're gonna have to do is pay for damages so if you quoted the the guy that you do the job for $10,000 and the only other person he can find to do it is 11,000 you have to pay him a thousand dollars but the world is going to be better off because somebody some other exterminator got a job and he's going to get paid $11,000 the homeowner is happy because he's going to have his house exterminated for $10,000 the price that you originally quoted and you're going to be really happy because now you've got a big old school system job and and so the world economically is better for all of that breaching and so that's why contract law is not punitive so that's it and I think I finished right on time right [Applause] thank you so much professor BAE we just we just love it when Professor BAE comes to talk with us because the stories are just fascinating so appreciate that so much and we we have that video so we can always look back on that we will be breaking our meeting back up at noon just in a few minutes for our special luncheon please could you clear your papers from the table place them under your chairs so the luncheon servers can get the tables ready for lunch also please remember to place your luncheon card that shows your food choice on to the table in front of you so the server's know which food choice to serve UITs found at the back of your nametag Mahalo see you at noon thank you so much [Music]