During the summer session at MIT, we were required to take the law and ethic session. Somehow, I missed the law session thus were asked to write a summary of the class by talking to participants. With the help of my dear classmates, I finished my report on time. Below is that report written in August, 2010.
On Wednesday we talked about two
main things: contracts and financial regulation.
He framed contracts as the "nicest" part of law. Contracts allow
consenting parties to bind themselves, and the law provides a framework that
allows this to take place. He discussed the necessary elements for a contract
to come into being. They are:
- "Meeting of the minds," i.e. both parties have to contemplate the
same exchange of duties. For instance, if you and I form a contract about
buying a car, my duty is to give you a regular stream of payments until the car
is paid off, and your duty is to deliver the car to my home tomorrow. There is
no contract unless we contemplate the same exchange of duties. Often, parties
will write down a contract so there is clear evidence that their minds met over
the provisions in the document. However, writing contracts down is not required
under U.S. law. You and I can contract by simple verbal agreement as long as
there is a meeting of the minds. Writing the contract down is useful only as
evidence to prove later that there was a meeting of the minds.
- Intent to bind. In addition to having a meeting of the minds, we must also
both intend to bind ourselves. The example he gave was the following. Suppose
you and I are walking along the riverfront and discuss a start-up we could form
after we finish the MFin. Suppose, serendipitously, we have exactly the same
vision for the start-up. We talk for an hour about exactly how it would work,
and we have no disagreement. Then we end the conversation. Do we have a
contract? No. Even though there was meeting of the minds about exactly what
each of us would do to form the start-up, it was "just talk" -- there
was no intent to bind, and hence no contract.
- Consideration. Both parties must provide or agree to provide something of
value to the other. In other words, contract law does not enforce promises to
give gifts. For instance, suppose you walk up to me and say, tomorrow I am
going to give you a Rolex watch. We both understand exactly what you mean, so
there is a meeting of the minds, and you have the intent to bind yourself, so
there is intend to bind. However, suppose tomorrow you change your mind. Can I
sue you for breach of contract? No, I cannot, because there is no contract. The
reason is that I did not give you any consideration. Contracts have to be
two-sided. If, instead, you had said, tomorrow I will give you a Rolex watch in
exchange for one dollar, and I said, I accept, then we would have a contract.
The consideration is one dollar. Even disproportionally small consideration is
usually considered valid by the courts.
- Competence. Each party must be reasonably believed by the other to have the
competence to make the contract. For instance, suppose you come across a FedEx
employee, and he takes you to his truck, and offers to sell you everything in
the truck for $500. Even though you reasonably believe him to be an employee of
FedEx (he has a badge and everything), you cannot have a valid contract with
him, because you cannot have reasonable belief that he has the privilege to
sell you all this stuff on behalf of FedEx. Now suppose you come across the
same FedEx employee and he offers to deliver your package for $30. If you
accept, you do have a contract, because you can reasonably believe that he has
the competence to form this contract on behalf of FedEx.
After we discussed forming contracts we discussed enforcement of contracts.
Basically, the key idea here is that contract enforcement is not very strict in
the United States. Usually, if I breach a contract, the courts will *not* order
"specific performance," which means that I carry out what I
contracted to do. If I make a contract with you to paint your house, and I
never show up, the courts will usually not order me to paint your house.
Instead, they will order me to pay cash damages. Cash damages are usually *not*
the entire value of whatever I promised to do. Suppose you are my landlord and
we sign a one-year lease with monthly payments of $800. After three months, I
leave and go to Hong Kong. Can you sue me for $800 * 9 months? No, usually not.
You have a "duty to mitigate," which in this case means you must try
to rent the apartment to someone else. You must show the court that you have
made reasonable efforts to mitigate. You can sue me only for the difference
between what we contracted ($800 * 9 months) and the amount you have recovered
by mitigation (renting the room to someone else). A lot of people in the class,
especially international students, thought this rule was silly: they thought it
was not strict enough. Elena mentioned that in Russia. The professor explained
that contract law in the U.S. has very mild default provisions. It allows
people to craft their own remedies. For instance, we might have signed a
contract that stipulated an "early departure fee" of $5000. In that
case, I would be required to pay you $5000 when I left for Hong Kong. But
contract law does not read this kind of penalty into the contract by default.
