Recently I posted
this question as a status update on my Facebook wall:
A friend of mine posed this hypothetical question today.
What do you think (lawyers, law students, and non-lawyers alike)?
Three brothers (Adam, Bob, and Charlie) were talking. Bob
said: "Hey, guys. Why don't we take mom out to dinner for her birthday
next week? We'll split the tab evenly among the three brothers." Adam and
Charlie agree. Mom picks Applebee's, and the tab comes to $100 even--including
tip. Adam puts the entire bill on his credit card, and when they get to the
parking lot, Charlie gives Adam him his share--$34 in cash. Bob said:
"Hey, buddy, I don't have cash right now. I'll pay you later." Adam agrees.
One month later, Adam asks Bob for the money. Bob is offended, and says he'll
pay Adam when he can. After all, no time limit was specified.
Is there a contract here? If so, what are the terms and is
Bob in breach? Did Adam really give Bob a no-interest loan that could be repaid
in 100 years if Bob so chooses?
Several of my friends
offered their opinions and made some really good points.
Here’s how I’d answer
the question:
NOTE: For
simplicity’s sake (and because it’s the only way I can answer a Contracts question),
I’ll use the method of analysis for contracts problems taught to me by
Professor Richard Hagedorn.
The “picket fence,”
as we called it, seeks to answer such questions as: Is there a contract? If so,
what are the terms? Is anyone in breach? If so, what is the remedy?
First things first
What we’re really
asking here is this: Legally, does Bob owe Adam the money? If so, when?
We can all agree that
Bob would be a real jerk if he doesn’t pay up, but that’s not enough to make it
make a legally-binding contract out of a promise. People make and break
promises all the time, but it’s absurd to imagine all of those people in court.
A contract, then, is “a
promise or set of promises for the breach of which the law gives a remedy, or
the performance of which the law recognizes as a duty.”
Worth the paper it’s written on?
Most people think a
contract must be in writing, but this is not true. With some exceptions (such
as the transfer of real property), an oral contract is perfectly valid.
Says who?
In general, we’re
likely going to be governed by either the common law of contracts or the
state’s version of the Uniform Commercial Code (UCC). The UCC governs things
such as the sale of goods (“all things tangible, moveable at the time of
identification at the time of a contract for sale”) and commercial paper (such
as promissory notes).
While a meal was
shared, I would argue that the primary purpose of the agreement had nothing to
do with goods, so… the common law of contracts it is!
Idle promise or binding contract?
What makes a contract
a contract is this: the bargained-for-exchange
In other words,
you’ve got to have an offer, acceptance of the offer, AND consideration.
Consideration is the thing that is bargained-for. Consideration must have
legally-recognized value: It’s “a promise to do something one is not legally
required to do or to forebear from doing something one is legally capable of
doing.”
If I promise to go to
the movies with you on Saturday and you accept, it’s still not a contract. We
have my offer and your acceptance, but a trip to the movies with me has NO
economic or legal value… so this is merely a promise and not a contract.
If you offer me $50
to paint your house this weekend, and I accept the offer and the $50, I had
better show up and paint the house—or give your $50 back.
In our case, Adam
paid Bob’s share of the meal—something he wasn’t legally required to do—based
on Bob’s promise to pay him later. It sounds like we’ve got offer, accept, and
consideration here—a bargained-for exchange and therefore a contract.
Even if we’ve got a
contract, it’s possible that Bob hasn’t breached the contract—yet. We can’t
know if Bob has breached the terms of the contract if we don’t know what the
terms are.
What are the terms?
This is one place
where a written contract comes in very handy.
If I sign a one-year
lease that clearly states that I’ll owe $500 if I move out early, it’s hard for
me to argue that I don’t know what the terms of the contract are—or what the
penalty is if I breach it.
We know that Bob owes
Adam $34, but we don’t know when. Not only did the parties fail to put this in
writing, they never specified a time frame at all.
When the parties
don’t spell out a key term in their agreement, the court is forced to do it for
them. Because the court can’t look to a written contract to see when Adam can
expect Bob to pay him, the court will likely rely on the “reasonable, prudent
person” standard. In other words, what would a reasonable, prudent person in
this society think Adam can expect from Bob? How long is reasonable here?
Charlie paid Adam
back right away, and we’re only talking $34 dollars here. I think a reasonable,
prudent person would expect Bob to have coughed up the $34 before now (a month
later). The judge will likely rule that Bob has had plenty of time, and that
he’s therefore in breach.
Remedy
Adam wants his $34
back, of course, but can he get anything else?
It’s important to
remember that the goal of contract law is to put the aggrieved party in the
position that he would have been in had the breach not occurred. This means
that punitive damages are very rare in contract law—and there’s not a lot of
room for “pain and suffering” in a business transaction. (Contrast this with
the goal of tort law, of which the goal is to make the aggrieved party whole.)
Adam can reasonably
ask Bob to pay his court costs such as the filing fee, for example—because Adam
would not have had to take Bob to court if not for the breach. He can’t ask the
court to tack on $10,000 to compensate him for the many sleepless nights he’s
endured for having a deadbeat brother.
Note to bar exam takers: This is an extremely incomplete
answer for exam purposes. For example, I didn’t address conditions, defenses,
and excuses to performance—let alone the finer points of offer and acceptance. Plan
to do much better than this!
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