ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Saturday, December 13, 2008

Contracts Panel at AALS Annual Meeting

Please plan to attend the Contracts Section's program and business meeting at the AALS Annual Meeting in sunny San Diego. The topic for this year's panel is "Immutable Rules and Contract Law."

Chosen from among those who the planning committee invited to submit a proposal and those who submitted a proposal in response to a general call for papers I posted to this web site and sent to the AALS Contracts listserv in September, this year's presenters are Kenneth Ayotte (Northwestern), Robert P. Bartlett, III (Georgia), and Tom Joo (UC-Davis), who will be speaking about the following topics:


Kenneth Ayotte & Patrick Bolton (Columbia-Business), "Optimal Property Rights in Financial Contracting"

In this paper we propose a theory of optimal property rights in a financial contracting setting.  Following recent contributions in the property law literature, we emphasize the distinction between contractual rights, that are only enforceable against the parties themselves, and property rights, that are also enforceable against third parties outside the contract. Our analysis starts with the following question: which contractual agreements should the law allow parties to enforce as property rights? Our proposed answer to this question is shaped by the overall objective of minimizing due diligence (reading) costs and investment distortions that follow from the inability of third-party lenders to costlessly observe pre-existing rights in a borrower’s property. Borrowers cannot reduce these costs without the law’s help, due to an inability to commit to protecting third-parties from redistribution. We find that the law should take a more restrictive approach to enforcing rights against third-parties when these rights are i) more costly for third-parties to discover, ii) more likely to redistribute value from third-parties, and iii) less likely to increase efficiency. We find that these qualitative principles are often reflected in observed legal rules, including the enforceability of negative covenants; fraudulent conveyance; corporate veil-piercing; and limits on assignability. In this paper we propose a theory of optimal property rights in a financial contracting setting.


Robert P. Bartlett, III & Victoria Plaut (Georgia-Psychology), "Blind Consent? A Social Psychological Investigation of Non-Readership of Click-Through Agreements"

Across two studies we aimed to measure empirically the extent of non-readership of clickthrough agreements (CTAs), identify the dominant social representations that exist about CTAs, and experimentally manipulate these representations in order to decrease automatic non-reading behavior. In our initial questionnaire study (Study 1), as predicted, the vast majority of participants reported not reading CTAs and the most prevalent social representations of CTAs contributing to non-readership included: they are too long and time-consuming, they are all the same, they give one no choice but to agree, they are not important, the companies are reputable, and they are irrelevant. Manipulating these representations on a simulated music web site (Study 2) revealed an increase in readership. The greatest effect on comprehension of CTA terms and rates of rejection came from manipulating the length representation. These results demonstrate support for the influence of social representations on CTA readership, provide evidence against the common "limited cognition" perspective on non-readership, and suggest that presenting CTAs in a shorter, more readable format can increase CTA readership and comprehension as well as shopping of CTA terms.

Joo_3 Tom Joo, "The Immutable Role of the Court in Contract Law"

It is routinely stated that the defining aspect of contract law is that parties control their obligations.  But in fact the most fundamental, and immutable, rule of contract law points in the opposite direction: every "contractual" arrangement of the parties is potentially subject to broad judicial review.  The law empowers courts to supply critical aspects of incomplete contracts.  This power is commonly described as the passive facilitation of the parties' intent.  But "contract law" includes the potential that a court, in some extreme cases, will abrogate party intent by rewriting or refusing to enforce agreements to which parties did agree. Moreover, even run-of-the-mill "contract law" cases often turn on questions as to which which the contracting parties' intent cannot be discerned. In such cases, the fundamental "objective theory" of contract holds that subjective agreement of the parties is not necessary, as long as a court believes parties' actions should be "objectively" interpreted to manifest consent.

Analyzing the legitimacy of this broad court power lies in recognizing the implicit policy judgments courts apply. This is made difficult by the fact that these judgments tend to be cloaked in rhetoric that invokes notions of consent.  For example, the "objective theory" consistently uses the term "consent" even while conceding that subjective agreement is unnecessary.  Recognizing courts' implicit policy judgments then demands an explanation of whether courts are qualified to make them.  Conservative market economics offers a theoretical explanation for the importance of the parties in contract -- their purportedly unique ability to value entitlements and trade them in utility-enhancing ways.  A realistic modern theory of contract must recognize that parties do not control contracts and thus requires a theoretical explanation for judicial role.

My argument also suggests that the discourse about mandatory and default rules in contract may incorrectly framed.  It assumes there are two kinds of rules: those that the parties can agree to change, and those that they may not.  Starting from the normative assumption that parties should presumably be able to change rules, and the descriptive assumption that they can change most rules, it asks for descriptive and normative explanations of exceptions.  But as a descriptive matter, true "default rules" may not exist in contract law.  That is, because courts always have the power to review any agreement, even an agreement to opt out of court review, there is no way for parties to make a self-enforcing commitment to opt out.

The program begins Friday, January 9, 2009, at 8:30 am in Marina Salon G, South Tower/Level 3, San Diego Marriott Hotel & Marina, and will be followed by a brief business meeting.  We hope to see you there.

[Keith A. Rowley]

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