Contract Law and the Hand Formula

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.

Keywords: Contract law, negligence, contract liability, Hand formula

JEL Classification: K12, K40