Contract Law and the Hand Formula

Author:Daniel P. O'Gorman
Pages:126-174
SUMMARY

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... (see full summary)

 
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Louisiana Law Review
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Fall 2014
Contract Law and the Hand Formula
Daniel P. O'Gorman
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 Contract Law and the Hand Formula
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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
BLACKS LAW DICTIO NARY 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 formula3 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 confusio n 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-WEBSTERS 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”).

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