Contract Law and the Hand Formula

Louisiana Law Review Volume 75 | Number 1 Fall 2014 Contract Law and the Hand Formula Daniel P. O'Gorman Repository Citation Daniel P. O'Gorman, Contract Law and the Hand Formula , 75 La. L. Rev. (2014) Available at: http://digitalcommons.law.lsu.edu/lalrev/vol75/iss1/9 This Article is brought to you for free and open access by the Law Reviews and Journals at DigitalCommons @ LSU Law Center. It has been accepted for inclusion in Louisiana Law Review by an authorized administrator of DigitalCommons @ LSU Law Center. For more information, please contact sarah.buras@law.lsu.edu . Contract Law and the Hand Formula Daniel P. O’Gorman * ABSTRACT Contract law is largely about negligence. Through the use of a “reason to know” or “reason to believe” standard in many of the black letter rules in the Restatement (Second) of Contracts , contract liability can often be traced to a party’s failure to exercise reasonable care. The Restatement , however, fails to adequately explain when a person has reason to know or reason to believe something. In other words, despite being largely about careless behavior, contract law fails to adequately explain the standard of care expected of parties. Importantly, though, the Restatement at least makes clear that a person might have reason to know or reason to believe something even when a reasonable person would believe the probability of the fact’s existence (or future existence) is less than 50%, as long as the probability is sufficiently substantial. The Restatement does not, however, provide much guidance on when the probability should be considered sufficiently substantial. This Article proposes that negligence law’s Hand formula be applied to make this determination. INTRODUCTION Contract law is largely about negligence. 1 Through the direct and indirect use of a “reason to know” or “reason to believe” standard in many of the black letter rules in the Restatement (Second) of Contracts , contract liability can often be traced to a party’s failure to exercise reasonable care under the Copyright 2014, by DANIEL P. O’GORMAN. * Associate Professor, Barry University School of Law. J.D., cum laude , New York University, 1993. B.A., summa cum laude , University of Central Florida, 1990. Thanks to Samantha Castranova, Barry Law School Class of 2015, for her valuable research assistance. 1. This Article uses the word negligence in the sense of behavior that falls below an acceptable level of care, as opposed to referring to a tort claim of negligence. See JOHN L. DIAMOND, UNDERSTANDING TORTS 46 (5th ed. 2013) (explaining the two different senses in which negligence is used); see also BLACK’S LAW DICTIONARY 1133 (9th ed. 2009) (defining negligence as “[t]he failure to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation; any conduct that falls below the legal standard established to protect others against unreasonable risk of harm, except for conduct that is intentionally, wantonly, or willfully disregardful of others’ rights,” but also as “[a] tort grounded in this failure”). 128 LOUISIANA LAW REVIEW [Vol. 75 circumstances. 2 The Restatement , however, fails to adequately explain when a person has reason to know or reason to believe something. In other words, despite being largely about careless behavior, contract law fails to adequately explain the standard of care expected of parties. This Article proposes that negligence law’s Hand formula 3 be applied in contract law to determine whether a person has “reason to know” or “reason to believe” something. As will be shown, using the Hand formula explains the relevance of facts traditionally considered irrelevant under a contract-law analysis, but which intuitively seem relevant. Part I of this Article explains how contract law is largely about negligence. Part II discusses the Restatement ’s “reason to know” and “reason to believe” standard and shows that the Restatement fails to adequately explain it. Part III discusses negligence law’s famous Hand formula. Part IV maintains that the Hand formula should be used to determine when a party is negligent under contract law’s “reason to know” and “reason to believe” standard. Part V provides examples, through the use of well-known cases, of how the Hand formula would apply in cases involving the standard. I. CONTRACT LAW AS A LAW OF NEGLIGENCE Although a bargain might usually involve each party intentionally assuming obligations, 4 contract law, like tort law, 5 is 2. See RESTATEMENT (THIRD) OF TORTS: LIAB. FOR PHYSICAL & EMOTIONAL HARM § 3 (2010) (providing that “[a] person acts negligently if the person does not exercise reasonable care under all the circumstances”). “Reason to know” would presumably apply when asking if a person had reason to know the existence of a current or past fact. “Reason to believe” would presumably apply when asking if a person had reason to believe that some fact would arise in the future. The Restatement , however, creates confusion by referring to “reason to know” of a fact, “present or future.” See RESTATEMENT (SECOND) OF CONTRACTS § 19 cmt. b (1981). The Restatement uses the phrase “reason to understand” in Section 69 (acceptance by silence or exercise of dominion), but it is unclear whether such a standard differs in a meaningful way from “reason to know” or “reason to believe.” Id. § 69(1)(b). 3. See United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947) (setting forth a formula for determining whether a person’s conduct fell below the appropriate standard of care for purposes of determining negligence liability in tort). 4. See MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 98 (11th ed. 2003) (defining bargain as “an agreement between parties settling what each gives or receives in a transaction between them or what course of action or policy each pursues in respect to the other”). 2014] CONTRACT LAW AND THE HAND FORMULA 129 primarily about negligence. Such an assertion might be contrary to what is commonly assumed, 6 but a survey of contract law’s black letter rules reveals its truth. For example, one need look no further than Section 2 of the Restatement for confirmation that contract law is primarily about negligence. Section 2 defines promise (the most important term in contract law) 7 as “a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.” 8 A comment to Section 2 explains that the phrase “manifestation of intention” is used to make clear that a person need not intend to make a promise, provided she had “reason to believe” her words or actions would be interpreted as an intention to act or refrain from acting in a specified way. 9 Also, the promisee must be justified in understanding that a commitment has been made. 10 A promisee whose understanding is unjustified is at fault for having such an understanding and, in such a situation, the communication will not be considered a promise. Thus, the definition of promise incorporates a fault standard that applies to both the promisor and the promisee. 11 The word manifestation , with its “reason to believe” fault standard, is repeated in the Restatement ’s definition of agreement —“a manifestation of mutual assent on the part of two 5. See DIAMOND, supra note 1, at 46 (“[N]egligence, as a form of fault-based liability . . . continues to be the central basis for liability in most tort cases.”). 6. See Robert A. Hillman, Contract Lore , 27 J. CORP. L. 505, 510 (2002) (“The understood purpose of contract law is to facilitate people’s freely made private exchange transactions.”); CHARLES FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 2 (1981) (“Contract law ratifies and enforces our joint ventures . . . . [T]he law of contracts facilitates our disposing of [our] rights on terms that seem best to us.”); Patrick Atiyah, Contracts, Promises and the Law of Obligations , 94 L.Q. REV. 193 (1978), reprinted in A CONTRACTS ANTHOLOGY 78, 78 (Peter Linzer ed., 2d ed. 1995) (noting that contract law is usually considered to be based on voluntarily-assumed obligations). 7. See RESTATEMENT (SECOND) OF CONTRACTS § 1 (1981) (defining contract as “a promise or set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty”); see also FRIED, supra note 6, at 7–27 (arguing that contract law is primarily about the morality of promising). 8. RESTATEMENT (SECOND) OF CONTRACTS § 2 (1981) (emphasis added). 9. Id. § 2 cmt. b. 10. Id. § 2. 11. Id. (emphasis added). 130 LOUISIANA LAW REVIEW [Vol. 75 or more persons” 12 —with a comment to the definition noting that “[t]he word contains no implication of mental agreement.” 13 Because an agreement is necessary for the formation of a bargained-for exchange contract, the word manifestation is repeated again when stating the requirements for the formation of such a contract: “the formation of a contract requires . . . manifestation of mutual assent.” 14 A comment explains that manifestation is used to make clear that subjective intent to enter into a contract is unnecessary. 15 Another rule provides that “[t]he conduct of a party may manifest assent even though he does not in fact assent.” 16 The definition of bargain also incorporates a fault standard. The definition is “an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.” 17 By directly incorporating agreement and promise , the definition of bargain indirectly incorporates both the “reason to believe” standard and the “justify” standard. And the Restatement further implements a fault-based regime by directly using a “reason to know” standard (or, in one instance, “reason to understand”) 18 and by indirectly using a “reason to believe” standard through the use of the words manifestation , manifest , or manifested in numerous other...