Sid DeLong on How Students Should Read Contracts Cases

The Five Questions: How Students Should Read Contracts Cases.
Sidney W. DeLong

Beginning law students are taught to “brief” assigned cases by making abbreviated summaries of the information that they are supposed to glean from an appellate opinion. A classic brief contains data about the decision (the court, the date, the citation) a short narrative of relevant facts; the legal issue on appeal; the rules or principles the appellate court applied to resolve that issue, and the conclusion, all of which is sometimes known by the acronym IRAC.

But IRAC is only the beginning. I want to suggest five additional questions that contracts students should add to their brief of every case. They should expect that the discussion of these questions will occupy most class time.

Icon of Divine Wisdom

At first, the answers to all five questions must come from the professor. But students should learn to answer the questions themselves because (Portentous “Ahem”) in the answers to these questions comes the Beginning of Wisdom in the Law.

1. Describe the Transaction. Most contracts cases arise from business or financial transactions that are complete mysteries to many students. Fully understanding an exchange transaction requires figuring out what each party gets out of it. The student must be able to “follow the money” as well as to understand the risks that each party faces in the deal. Without understanding both the financial and risk dimensions of a deal, it may be impossible to understand the interests at stake in the dispute.

Based on a typical contracts casebook, the professor should plan on giving a brief description of up to thirty types of transaction, including both at-will and long term employment contracts; services contracts; casualty and liability insurance contracts; contracts for the sale of goods; commodities contracts and hedge transactions; option contracts; a real estate purchase contract; a business franchise relational contract; a real estate agent’s contract; a loan commitment; a large scale construction contract; an exclusive agency contract; a barter agreement; a contract creating a security interest; a lawsuit settlement agreement; an accord and satisfaction of a claim; a requirements contract; the assignment of an executory contract; the delegation of a contract; negotiation of a negotiable instrument; a contract to make a will; a prenuptial agreement; a divorce settlement; a non-compete agreement; and a non-disclosure agreement. First year contracts cases involve all these transaction types and students who are mystified by the essence of such transactions cannot possibly understand the contract issues they raise or why the parties are disputing about them.

While all of these transactions are taught in upper division courses, most students do not take most of those courses. Down from the 90 credit hours of yesteryear, it is remarkable how little substantive law a modern student must learn in order to graduate. This puts extra pressure on the course in Contracts as the only place in law school where most students will learn anything at all about most of the business transactions that are fundamental to the economy. Contracts cases have by default become the vehicle for educating future lawyers about the basic forms of business transactions and the resulting legal relationships.

This introduction should address risk as an element of contract exchange. Understanding the risks inherent in each kind of deal will be a new experience for most law students. All transactions reallocate risks that the parties would otherwise bear, creating some risks and eliminating others. Even a simple forward sale of wheat at a fixed price allocates the risk of future price rises to the seller and of future price drops to the buyer. Sometimes such risk allocation is the entire rationale for the exchange.

2. Describe the Substantive and Procedural Legal Context. (Mostly Civil Procedure) A steady diet of trial and appellate judicial opinions teaches students how different legal processes work. Understanding an opinion requires understanding the “substantive” pre-trial context in which the dispute arose. The appeal may involve a claim of breach of contract but may arise from a lawsuit by or against a bankruptcy trustee, an executor of a decedent’s estate; the trustee of an express trust; a spouse in a divorce proceeding; a corporation or partnership; etc. Because I taught so many cases involving claims by or against decedent’s estates, I used to warn my students to brace themselves when they read about someone forming a contract because it was often a foreshadowing of their death.

Sid DeLong

As with novel commercial transactions, the professor must describe each of these legal contexts in order for the opinion to make sense. For example, when a bankruptcy trustee or the executor of an estate is sued on a contract made by the debtor or the decedent, who is standing in whose shoes? Who stands to gain or lose? That these questions will be answered in upper division courses in Wills and Trusts or Bankruptcy is of no use to the Contracts students, most of whom are studiously planning to avoid such courses.

Another important context question requires a description of the procedural posture of the case, a topic taught in all first-year courses. Is the opinion a trial court ruling on a motion for summary judgment? Is it a trial court’s findings of fact and conclusions of law? Is it an appeal of a final judgment? Is it an appeal of an interlocutory order? What is the standard of review? Without knowing the answers to those questions, it is impossible to know the legal significance of the disposition of the court’s ruling.

3. Who Are the Parties to This Lawsuit? This can be the most difficult of question to answer. Unlike torts cases, contracts disputes often involve parties other than the promisor and the promisee. Students must get familiar with the idea that contractual rights can pass from person to person.

Franklin Sidway, Executor of William E. Story’s Estate

The canonical Hamer v Sidway was not a claim by the nephew against the uncle for breach of contract. Instead, it was a claim by the nephew’s mother-in-law, as an alleged assignee of his breach of contract claim, against the executor of the uncle’s estate, representing the financial interests of his heirs.

In the unilateral/bilateral contract case of Davis v Jacoby, the Davises did not sue Rupert Whitehead (who lied about his will) or Blanche Whitehead (who was represented to have made a will in favor of Caro Davis). Both Rupert and Blanche were dead. The action was against the executor of Rupert’s estate, and it sought a constructive trust over his assets in the hands of Rupert’s nephews, who were to inherit the promised property under his true will.  

Most Contracts professors, because of the organization of contracts casebooks never get to the last chapter: third party beneficiaries, assignment and delegation. And the three-month course certainly does not reach agency and trust law. But these five concepts can be taught beautifully together. And if the contracts professor never teaches them, they will never be taught.

Lawrence v Fox is the first third party beneficiary case, still perfect in its simplicity. Holly owed Lawrence $300. Holly loaned $300 to Fox in return for Fox’s promise to pay $300 to Lawrence. When Fox failed to perform, Lawrence sued Fox and recovered on the theory that he was a third-party creditor beneficiary of Fox’s promise.

This “three-body problem” can be analyzed several different ways, to wit: 1. Holly received the Fox’s promise as agent for Lawrence and on his behalf. 2. Fox was Holly’s agent to pay Lawrence what his principal Holly owed. 3. Holly, as settlor of an express trust, gave the $300 to Fox to hold as trustee for the beneficiary Lawrence. 4. Holly assigned to Lawrence his contractual right to enforce Fox’s promise, akin to assigning Fox’s promissory note. 5 Lawrence enforced the promise as Holly’s collection agent. The opinion mentions several of these almost-but-not-quite third-party beneficiary theories.

4. What Made This a Close Case? Although this exact question is rarely raised in class, it should be raised in all of them, especially in the first semester. Every appellate decision worthy of inclusion in a casebook and extended classroom analysis must resolve a conflict of rules and principles on which reasonable minds will differ. The desire to learn doctrine and specific rules tempts students to pick a winning side, make a note of the rule announced, and move on. And this habit leads to a distorted view of the nature of the common law and of the job of a lawyer.

Some students will recognize that an issue is close only when the decision offends their intuitions or social sensibilities. They easily spot the conflict when the decision seems to treat one of the parties unjustly. Peevyhouse v Garland Coal Co. They are less able to see conflict when an opinion dealing with the identical legal issue does not raise their hackles. Groves v John Wunder & Co.  Students should be especially urged to articulate the “other side” of opinions that they accept enthusiastically. The truly sophisticated student can learn to see the potential for a Peevyhouse ruling after reading a Garland ruling.

There are no “easy” cases in a course in Contracts. Every resolution of a close case is problematic and potentially unstable so long as the underlying conflict of principle endures and so long as novel fact patterns emerge.

Icon of Human Wisdom

Students may come to realize that sometimes the judicial resolution of a values conflict is less a matter of making the best argument than winning a vote. In Wood v Lucy, for example, Cardozo’s “winning” opinion lost the total vote of the New York appellate judges at both levels of the appeal by a vote of eight to four. But the vote that counted favored Cardozo’s ruling. Prompted to look for reasons for so many judges to dissent from the winning opinion, students soon find its weak points.

5. How Will Clients and Lawyers Adapt to This Ruling? What lessons does this opinion teach to contracts lawyers about how to frame future contracts? What will the next contract of this sort look like? How will litigators read this case and how will they change their strategy in future cases because of it?

These questions are more emphasized in the class in Contracts than in other first year subjects because Contracts involve both transactions and litigation. Modern appellate courts assume that commercial lawyers will all read the opinion and adapt their future contracts accordingly.

Sometimes the probable adaptation to the ruling will be obvious. For example, if the court refuses to enforce a contractual provision that was not called to a consumer’s attention or that was in confusing language, sellers will redraft the language, make it more obvious, or may require their customers to initial it as part of the standardized contracting process.

Compliance with the court’s ruling may, however, be problematic. If the ruling imposes an unavoidable new cost on a seller in a highly price-competitive market, compliance with the ruling may increase the price of the goods that the consumer will pay, raising a policy question: Would consumers prefer this solution to the alternative?

Answering Question 5 introduces students to the modern, Instrumentalist view of private law, in which rules are valued not so much for reasons based on justice or natural law but instead because of how they induce parties to behave. Legal rules are intended to affect people’s behavior by creating incentives and disincentives that will be given effect by the courts when lawsuits are brought. This is one version of what students should learn as “policy analysis.”

It becomes the mark of increasing sophistication in a law student to try to predict how parties will adapt to or cope with a new rule, perhaps to work around it. The mode of prediction is not a matter of empirical research or social science. Instead, it is the exercise of a narrative or rhetorical skill. Students learn to tell familiar, stylized stories about this adaptation takes place. By this route, answering Question 5 also leads to the continuous rediscovery of the Law of Unintended Consequences, the great irony that haunts the instrumentalist approach to law.

That Law may lead budding cynics to make arguments about the futility of tinkering with the transactions and legal relationships that parties have created.  For example, some forms of unequal bargaining power appears to be like hydraulic pressure that cannot be eliminated by increasing formalities in one part of a closed system if the pressure simply reappears elsewhere. Economists frequently argue that the alternatives to the prohibited practice may prove to be more costly to the apparent beneficiaries of the ruling.

Of course, not just transactional lawyers but litigators will adapt to judicial rulings and here the prediction called for by Question 5 is much more reliable. Every student should be able to tell how the losing party’s lawyer will try the next such case, and how the winning party’s lawyer will counter that strategy. And that is truly “thinking like a lawyer.”