Law Session Summary in Last Summer-Part I

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.