[MUSIC] So we've talked now about how parties make deals and how to figure out what's in those deals. And now we're going to narrow the field a bit and think about which promises are actually the subject of contract law. The realm of voluntary obligations is actually pretty enormous, most of us have lots of voluntarily assumed obligations, I think, that we don't think are legally enforceable and we don't think should be legally enforceable. What this means is that the set of promissory obligations is a lot bigger than legally enforceable contracts. So let's start with what's sort of the easiest case, and that promises that might be real. So for hundreds of years, common law courts have refused to enforce certain kinds of informally made deals, because they've been worried about fraud. The resulting doctrine is called the statute of frauds. And what it does is it require a writing or a written document in transfers of land and in sales of goods over a threshold dollar amount. In these cases, what the court says to the parties is look, if you're serious about this deal, you have to do something to show us your seriousness, we're not going to enforce your agreement to sell a house, if you didn't get it in writing. What's frustrating about this doctrine to students and scholars is that it draws a very bright line. It says, even when we have great evidence that the parties made a real oral contract, these are cases in which we won't enforce for failure of a written document. So this is a case where the rule might actually be a pretty bad fit for it's stated purpose, but the purpose itself, which is weeding out contracts that weren't actually made is pretty uncontroversial. Okay. So the court wants to avoid enforcing fake promises. Next up is social promises. Almost nowhere will courts be willing to get involved with social exchanges. Aside from more sort of philosophical justifications, there are costs to involving the state in private disputes. Costs to the state and also arguably costs to sort of the social fabric. So let's say for a minute that I'm going to a gathering at my sister's house and I write her a note that morning promising that I will be over early enough to help her make dinner, this is a promise. But let me assure you that contract law has zero interest in this promise, no matter how formally I write that note. Maybe my sister will levy informal interpersonal sanctions? But I certainly cannot be taken to small claims court if I wander in after the other guests have arrived, and find a frozen pizza thawing on the counter. Whatever you might say about my inconsiderate behavior, I surely didn't intend to be legally bound here. Contract law does not enforce this kind of purely social promise. Okay. So now we come to the most controversial constraint on contract enforcement. American contract law explicitly limits its jurisdiction to bargained-for exchanges, and this is called the doctrine of consideration. One way to understand this is to think about what I said at the start of this talk, that contract law is special, because every party to a contract is made better off by that contract. In a promise to give a gift, we have a recipient whose surely better off, but a gift giver who gets nothing, who, who is worse off. That promise to give a gift is unenforceable under the doctrine of consideration. Of course, thinking about this in terms of who's better off and who is worse off, doesn't obviously give us the answer, because it sure seems like if I choose to give money away it's because there's some measure of utility by which I'm better off with less money. I feel better, right, there's a warm glow. So a better way to think about what's going on here is that there's a line between promises we want people to be able to take back and those we want the law to get involved in. And one way to draw that line is to say well, what interest does the political system have in enforcing contracts? Is it to make people behave morally? Is it to regulate interpersonal relationships? No. It's essentially about commerce, about economic relationships, and one way to identify those contracts is by looking for true exchanges. We want to enforce deals in which each party is in it for what they're getting out of it. What this means that we enforce exchanges in bargains and notably we don't enforce gifts. Most of the time, it's very easy to find consideration. If I promised to sell my car to my neighbor for $10,000, we know that I'm giving my car because I want what the neighbor is offering. And that my neighbor is giving up the money, because what she wants is a car. But some times, things get messier. So let's take the famous 1891 case of Hamer v Sidway. In this case, an uncle was worried about his wayward adolescent nephew. Wishing to bring his nephew into line, the uncle declared that if the nephew would abstain from drinking, smoking and gambling, until he reached age 21, the uncle would reward with $5000. And lo and behold, the nephew stopped drinking and smoking and gambling for the next six years. Well, when the nephew brought a claim, the court had to figure out whether this is an exchange, or if it's just a gift with strings attached. An exchange is enforceful, and a gift with strings attached, is not. There's an argument here about whether the uncle really gets anything out of this deal, or whether the nephew really gives anything up. After all, surely the nephew is better off after six years of sobriety, even with out the money. But the court says no, this is not what matters. What matters, is, literally, the considerations. What motivated these parties? If their ascent is induced by the promise of the other party's performance, that's enough. We might think that the uncle doesn't get much out of his nephew's good behavior. But as long as he's paying money in order to get his nephew to perform, to abstain from drinking and gambling we're okay. What's troubling I think is that the bargain for exchange in Hamer v Sidway, sure doesn't feel like it's central to American economic life. On the other hand things like promises of a bonus for work for the employee has already promised to do, this kind of promise that sure feels like a valuable economic tool is going to run into consideration trouble. So take the following, a firm has employed someone who's near retirement age. The boss sends the employee a letter thanking her for her years of service and promising for the first time to pay her a bonus on retirement by way of recognition for her contribution to the firm. No strings attached. The boss writes this letter is legal proof of our agreement to pay you a retirement bonus, it's signed and let's say even say it was even notarized. So we have ample proof that the boss wanted this to be an legally enforceable agreement. The employee's very happy, she stays in her job looking forward in sort of a non-specific way to having a slightly more luxurious retirement. So we check now on a set. Did the boss agree to this deal? Yes. Did the employee? Certainly. Can we be sure that the boss intended it to be legally bound? Absolutely. So can she take this letter to court to enforce the contract? No. This contract is a promise, but it's not an exchange. And contract law is about bargains. The doctrine of consideration is unique to the common law. States that have modeled their own law of contracts on principles of established common and civil law traditions have uniformly chosen the civilian approach, declining to adopt a doctrine that's as complicated as it is infrequently applicable. [MUSIC]
