Contract law principles and applications

¶ … Legal Perspective- New York's leading decisions

Judge Hiram Grey in the Court of Appeals of New York adjudged the case of Lawrence v. Fox in the year 1859. The case was about Mr. Holly who lent $300 to Mr. Fox while stating that Holly owed $300 to Mr. Lawrence. Holly lent the money on the condition that Fox would repay it to Lawrence the very next day. What happened, however, was something totally different. Fox chose to ignore the verbal promise that he had made to Holly and did not bother to repay the money to Lawrence, following which Holly filed a case against Fox stating that he had broken his word. Fox argued that the oral word of a bystander could not be considered in a court of law as a binding testimony, and that fox's word to Holly that he would repay the money was not in fact supported by consideration. He also argued that there was no way that Lawrence could lay claim on the $300 because Lawrence was never in a contract with Fox himself. This point made by Fox grabbed the attention of the judge and this resulted in the formation of the doctrine that it was indeed possible for a third party to enforce a contract that had been made for him, for his own benefit. Thus the case Lawrence v. Fox became a classic case in contract law.

The traditional principle of trustees being liable or responsible to answering the beneficiaries was upheld in this case. The basis was the 'common law analysis' and Judge Gray was able to apply this to the case in an entirely new manner and able to reach the conclusion that a third party could hold a contract to a beneficiary. The ruling as such was way ahead of its time and up to the modern day has remained the basis for third party beneficiary law. In the case of HR Moch Inc. v. Rensselaer Water Co. Of 1928, the basis was the case of Lawrence v. Fox. The case adjudged by Benjamin N. Cardozo, was about a breach of contract between a warehouse and a water company for the city. The water company had contracted to supply the city with water for any number of uses, including that of dousing fire when the need arose. When there was a fire in the warehouse of HR Moch Inc., and the entire warehouse and goods were destroyed, the owner filed a case against the water company for breach of contract with the city whereby it had promised to supply the city with adequate water.

In this case, there was not enough water, he argued. The court, however, ruled that the warehouse owner could not quote the contract between the city and the water supply company. Therefore, the liability of third parties was limited and a certain limit was established. The idea of 'a trivial reward' was floated. The author when he quoted these two cases, referred to them as being the lower and the upper limits of any third party benefits. Whereas one granted the third party the benefit of a verbal contract, the other denied the liability of a third party to hold one liable against the other. This is what he meant when he referred to the two cases as bookends, one at a distance from the other, but both containing the same material.

Assignment 2- Management Perspective- Professional Liability to third parties

The question of professional liability without privity was one that became all important in the case of Ultramare Corp v. Touche, adjudged by Benjamin N. Cardozo. The case was about a money-lending agency, Ultramare, which lent money to Fred Stern & Co, against a financial statement of the company. Fred Stern then hired a firm of auditors, Touche, Niven and Co, to provide him with an auditing statement. Stern presented this statement to Ultramare, while Touche had no knowledge that a third party would appraise the statement provided by them. Stern had falsified his books, and therefore, the statement provided by Touche was wrong. When Stern finally defaulted on the payment of his loan to Ultramare and filed for bankruptcy, Touche was dragged to court for presenting a false statement of accounts. Justice Cardozo ruled that though Touche had in fact been negligent, no action be taken against them because there was a lack of privity. In other words, there was no contract between the two companies, and Touche was in no way answerable to Ultramares.

Another example of a similar kind is the case of Glanzer v. Shepard in which Judge Cardozo had played a major part. A bean seller who had retained a team of public weighers to weigh a particular shipment of beans demanded that the weighers produce a weight certificate to the buyers. The certificate was falsified and the buyers suffered a loss. The Court of Appeals initially analyzed the care between the parties not in privy with each other, and found that the weighers were in fact aware that the buyers would suffer a loss when the falsified certificate would be presented, and this made them responsible for their actions of falsification, though there was in fact no privity between the weighers and the buyers.

In the case of Credit Alliance Corp v. Arthur Anderson & Co, Credit Alliance, a financial services company, offered loans against a financial statement. A particular borrower hired Arthur Anderson & Co to prepare his finance statements. The firm did not do a thorough job and when the borrower filed for bankruptcy, it was sued by Credit Alliance saying that it knew that it was intended for borrowing money from their firm. Andersen and Co denied this, and the case was dismissed, stating that there was no privity between the two companies and Andersen was therefore not liable to answer for the actions of the borrower. These three cases gave rise to landmark decisions regarding professional liability without privity. In the Glanzer v. Shepard case, the court of appeals directed that some scope of care must be allotted to the public weighers, even though there was no privity between the two, because the weighers were in fact aware that the buyers would definitely suffer a loss on account of their actions. This case and similar ones were precursors to landmark judgments of the time and are still very important examples of misrepresentations by sheer absence of privity of contract between the parties.

In Rodin Properties- Shoremall v. Ullman, Shore Mall builders borrowed 49 million dollars from Rodin Investors. The firm Cushman and Wakefield appraised the financial situation and a loan was granted. When Shore Mall defaulted, Rodin appealed that C&W defaulted by breaking the contract to which Rodin was a beneficiary, and that the statement provided by them was falsified to a large extent. The Supreme Court ruled that C&W was not guilty of any crime. However, the appellate division reversed the Supreme Court ruling and found that C&W was in fact guilty of misrepresenting facts and stated that when a third party relies on the opinion of the firm providing facts based upon which the third party will take action, then the firm will be answerable for misrepresentation. The authors of this article make it clear that lenders must make a provision in any agreement to lend money that the third party will be held responsible for the actions of the borrower. This will not only give the lenders another avenue for appeal, but will also make the professionals making financial statements do a better job.

Assignment 3- Legal Perspective-Anticipatory Repudiation.

In the case of Hochster v. De La Tour of 1863, the question before the Court was 'breach of contract'. The parties involved were a courier and a traveler. The traveler had engaged the courier to accompany him on his travels, and after having signed a declaration, broke his word and said that he had changed his mind and would not want the courier along with him, and also did not offer him any sort of compensation. Judgment on the case was suspended for some time. The relationship between the two parties was compared to a marriage between a man and a woman; when a man makes a promise to a woman to marry her, and he marries some one else before that day, then it is a breach. Likewise, in a contract with a date in the future, the date has to be kept in mind and not breached.

The Court quoted similar cases as examples where there must not be a breach of promise. These were Lovelock v. Franklin, and Elderton v. Emmens. The Court stated that the breach of contract by the defendant must be dealt with as soon as possible because it is wrong of him to have broken the contract in the first place and the innocent must have justice dealt to him. The Court also gave the example of the case of Planche v. Colburn wherein the contract was between a publisher and an author. When the publication went out of the market, the author was still bound to complete his work for the 'Juvenile Library'. This was considered cruel, and the author needed to be compensated in a suitable manner for the breach of contract, wherein he was forced to write a work that would never be published. The Court held that there would be a measure of the damages suffered by a servant by a break in contract.

Assignment 4- Legal Perspective- Contract Damages and Contract Theory

Efficient Breach means that a break in contract would lead to a more efficient or effective purpose than what it was actually meant to perform in the first place. The contract damage rules would serve to promote this effective breach in a way that would add to the value. The three alternative rules that are used to determine the amount of damages in a breach of contract are the 'loss in value' that the person suffers as a result of the breach, as measured against the other's performance, the 'difference in value' whereby the person who has had the services delivered to him feels that it did not match up to his expectations, and the 'full value of the performance promised' whereby the innocent person who has had the contract broken will get the full value of the service that had been promised to him.

The rule for assessing accurately the damages has been described under Section 347(a) of the restatement of a contract. This rule states that the offended has a right to claim damages based on the value of all the profits or earnings that he would have benefited from had the contract not been breached. It includes all the profits and costs that had been part of the deal, and damages can be 'value based'. Total value can be described as the value in total that a person enjoys when a job is well done, and includes all the gains that would be associated with it, and surplus value is the excess value that a person enjoys after the completion of the performance, as a result of the contract that has been made between two parties. The 'surplus value concept' is based on economic theory. The author of the article is of the opinion that both 'restatement' and the 'surplus' based approaches are accurate assessors of damage caused by breach of contract.

According to the restatement formula, the value of the contract and the breached damage costs would cost less, and the surplus based approach meant that the surplus that would be awarded to the sufferer would make up for the damage suffered by him by the breach of contract. For example, in the Laredo Hides Co v. H&H Meat Co case, H&H broke the contract to sell hides to Laredo. Laredo compensated by buying from another seller and the values of both parties were the same. However, the costs accrued were different, and the restatement value did not work for him. The surplus formula did work and the difference in profits was considered the surplus and he was awarded the correct amount in damages.

Assignment 5-Management Perspective- The Duty to Mitigate

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Assignment 6- Legal Perspective- E-contracts Formation.

What are the legal foundations behind forming an e-contract? An e-contract is one that is entered into by electronic agents who have no prior knowledge of the other and have no clear identity of the other person. It is done through the Internet where anything can be bought or sold for a sum of money. However, the contracts that bind these sales are ruled by judgments made in the real world, and disputes are frequent. Econsumer.gov was created for this purpose and thirteen countries can air their disputes across the world through the Internet. It was in the year 2000 that 'e-sign' was started, whereby a legal framework would be made for e-commerce. The 'Uniform Electronic Transactions Act' (UETA) and the 'Online Dispute Resolution Act' (ODRA) also serve the purpose of providing legal foundations for the formation of an e-contract. The laws that govern e-contracts are based on these federal rules.

An 'automated e-contract' is one that is entered into by two e agents of two parties, without either or both of them being aware of the electronic agents that have agreed to the terms and conditions of the contract. A quasi-automated e-contract is one that is made between an individual and an electronic agent, when the individual is well aware that the e agent is making the contract with him. In an automated e-contract, the agreement is valid and binding and the receipt of the record of the transaction can be treated as being accepted and agreed to by the other party. In the quasi-automated e agreement, the person would be agreeing to the terms laid out by the e agent and accepting them. Both are valid and legally acceptable.