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Editor: D. A. Jeremy Telman
Valparaiso Univ. Law School

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Tuesday, September 22, 2009

Contracts Law & Injustice

Justice

This year, more than any other year, my students are telling me that they hate contracts.  It's nothing personal, or at least I don't think it is.  That is, they don't dislike my course, but they find it frustrating because contracts law seems to be set up to protect the well-resourced and the knowledgeable.  Sure, they may be able to advise their clients on how to protect their legal interests, but only by adopting strategies designed to exploit the credulity, timidity and distraction of the weak.  This is not quite the message I've been intending to convey, but I can see how my students would have concluded that it is.

We started by discussing intent to be bound and a court's indifference to our actual, subjective intentions when we have manifested a different intention by signing a document or by clicking "I agree" on  a EULA that we do not read and are not really expected to read or to understand.  We also discussed the fact that even expectation damages will not really make a party whole because of the American rule which prevents recovery of attorneys' fees and court costs.  In addition, recovery will not make a party whole when damages are speculative, and in Lefkowitz, at least some of my students felt the court could have provided plaintiff with more of an opportunity to establish his damages with reasonable certainty.  

Still, I was taken aback when I asked a student if she was concerned about the disconnect between legal and moral norms evidenced in Mills v. Wyman.  She responded, "Yeah, but we've already learned that contracts law is not about justice."  Ouch.  

Perhaps contracts doctrine will win their love back when we cover excuses.

[Jeremy Telman]

Postscript: I've just been re-reading Judge Posner's opinion in Classic Cheesecake.  My students made uncomfortable by contracts law's moral neutrality will not enjoy tomorrow's class.

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Comments

Granted, I've only spent a few years playing in the law before I came to law school, and please correct me if I'm off base here. But the only place in law school and in practice I continue to hear the "American Rule" regarding attorneys fees, is in contracts. Every other area, civil rights, family law, torts, even criminal law, the losing side pays. Sometimes its statutory, sometimes it's in the form of "other" damages and costs. But it seems to me that the reason contract lawyers call it moral neutrality is because like you said, the more money you can pay your attorney, the more likely you are to come out on the up side in contract and business litigation, and no attorney in those two practice areas wants their client to take responsibility for their dodging contractual responsibility because inquiring customers might not want to do business with crooks.

Posted by: Daniel | Sep 22, 2009 7:07:55 PM

Dear Daniel,

The "American Rule" is by no means limited to contracts. Think for example of the classic common law torts practices that are based on contingency fees. The attorney hopes to recover a fee out of damages; she does not expect that the defendant will pay attorney's fees on top of damages. You are correct that there are fee-shifting statutes, and these are significant erosions of the American Rule but by no means do they eliminate the rule in contexts other than contracts. By the way, when I was in practice, we once won attorneys' fees in a contracts case, which was a real hoot! And it was upheld on appeal to the Second Circuit.

I view Posner's point about the moral neutrality of contracts law a bit differently. IF you breach a contract, you are legally obligated to make the other party whole -- except for attorneys' fees and court costs. The law does not care whether you breached because you are a "crook," as you put it, or because you simply faced competing business pressures and could not fulfill all of your contractual obligations. Contracts is a strict liability regime, so Posner says fault doesn't enter into it.

Posted by: Jeremy Telman | Sep 23, 2009 4:06:27 PM

At this point, I can definitely see why some of my classmates feel that contracts law is not about justice, but I don't necessarily agree. From the little that I know, I do feel that there are plenty of protections and remedies out there for the common person. A person can solicit legal advice before entering into binding agreements or to seek damages for a breach of an agreement.

But... the reality is that people do not want to take the time or pay the fee to seek such advice for x-reasons. If this is the case, what's the source of injustice? I enjoy living under rule of law where the aim is uniformity and at least can exercise my claim with the promise of a reasonable judgment. I've studied systems operating under rule by law which leads to real injustice or disproportionate justice- if that makes any sense.

Posted by: groansnclass | Sep 23, 2009 10:56:55 PM

Im not sure that Contract Law is morally neutral, nor that it is entirely a fault-less regime (See wonderful conference on Fault in Contract Law held at UChicago last year).

Regardless, I don't think Mills v Wyman is an example of the split between legal moral norms. The case fails, quite simply, because there was no benefit conferred on the promisor prior to or contemporaneous with his promise.

Contrast with Webb v McGowin, which is a total convergence of legal and moral norms (and taught, often times, along side Mills v Wyman). In fact, most scholars will use this as their flagship when discussing the doctrine of "moral obligation" (some call it promissory restitution but that doesn't make any sense because the underlying "restitution" would fail a restitution claim). There can be no other reason to enforce the promise in Webb than "justice."

Nonetheless, strict liability does not consider fault whether Posner says so or not.

Posted by: Jason | Sep 28, 2009 9:48:46 AM

Prof. Telman- would you like to clarify Posner's position? I understand that the clearest representation of his opinion is within "Let us never blame a contract breaker", which typically spins from Holmes to economics (I believe he even formulates an equation to represent a variety of costs to impost strict liability), however I am unfamiliar with its implementation in Classic Cheesecake past a cursory overview.

The one fault (pardon the pun) with his strict liability argument (as I understand it), arises in cases like Ricketts v. Scothorn, or general promissory estoppel cases. I believe the strict liability regime yields to a balancing of interests when § 90 is used. Perhaps I bought in to Gilmore and Corbin, but I think there is more merit towards a fault regime in the past and the future of contract, while the present has been the "superimposition" of objectivity and consideration.

Posted by: D. Marck | Sep 28, 2009 10:54:09 AM

First, let me say that it is really nice to have a discussion on the blog.

Second, I have to admit that I am not the best person to explicate Judge Posner, but I will give it a shot.

As to Jason's post, you are not alone in thinking there are plenty of people out there who do not share Judge Posner's views on fault in contract law. In fact, friend of the blog, Steven Feldman, just send me his article forthcoming in the Drake Law Review in which he shows the history of courts expressing their moral disapproval of intentional breach. More about that when I have time to read the article carefully. But I do take issue with what Jason says about Mills v. Wyman. You can certainly explain the case in terms of contracts doctrine, but the court itself says that Seth Wyman is held accountable in the forum of his conscience, not in the legal forum. The court clearly recognizes that Seth has broken a moral obligation but finds no legal basis for enforcing the obligation.

I do not think Judge Posner disagrees with you about strict liability -- that's his point: contracts is a strict liability regime and so fault is irrelevant.

D. Marck: I think Judge Posner wrote the Classic Cheesecake opinion while he was working on "Let Us Never Blame a Contract Breaker." In any case, there is considerable thematic overlap in the texts. In fact, in my view Classic Cheesecake was a no-brainer case and much of what Judge Posner has to say is beside the point.

He is saddled with an Indiana standard -- the SoF is overcome when there has been part performance and refusing to enforce the promise would result in "unjust and unconscionable injury and loss." Judge Posner traces the standard back to Justice Traynor but finds that the standard itself -- which he finds vague and redundant -- and the case law interpreting the standard provide little useful guidance. He concludes that the SoF is overcome when there is significant reliance -- reliance in excess of what we would usually require for promissory estoppel.

His critique of the standard is very interesting and pretty convincing. His formulation of the standard's real meaning is less satisfying, especially as it comes in a case in which, in my view, even ordinary reliance could not be shown, both because there was only a conditional promise and because reliance on such a promise could not possibly have been reasonable. Damages would also have been nearly impossible to prove.

In any case, after establishing his view of the standard and finding that Classic Cheesecake could not meet the standard, Judge Posner recapitulates his views that terms like "unconscionable" and "good faith" really have no place in contracts law and that all such rules are really just designed to prevent exploitation of the situational monopolies that arise in the contracts context. And our aversion to such exploitation of situational monopolies, says Posner, arises from concerns about lowering transactions costs and facilitating beneficial exchanges and not from concerns about morality.

Posted by: Jeremy Telman | Sep 28, 2009 3:09:25 PM

Thank you for the great response.

Just a question, dealing primarily with his "expansive" reliance doctrine. If we take reliance as it is normally implemented--§90/the primary theory of contractual obligation when there is a want of consideration--and then use that perspective when viewing Classic Cheesecake (the expansion to significant reliance), is he not taking a regime that could be considered fault-based and attempting to impose upon it strict liability? I understand that the SoF issue is such that courts are reluctant to find a contract without crossing a variety of evidentiary hurdles. However, an analysis into his line of thought regarding promissory estoppel in general is fairly intriguing, and in my opinion, would probably result in more questions than answers.

It seems to me (and I may be drastically off) that courts and scholars have used promissory estoppel as a means of protecting moral obligation, but in almost a negative manner (meaning that instead of saying the promisor is prima facie morally obligated to the promisee, they say that the promisee is due the promise because they created an obligation from their reasonable reliance). Thus the only possible way that he removes fault from this regime is by creating some quantification of reliance that meets a standardized level deemed "significant," and thus it creates obligation regardless of costs, intents, wants, or needs of either party. Inherently, Judge Posner raises the bar so high as to manifest a strict liability regime when there was none to begin with.

My criticism of this is primarily that the imposition is forced; it does not seem to be within the natural, organic nature of contract to continually raise the bar towards a strict liability regime within promissory estoppel. If we are to take the economic argument to heart (meaning that transaction, administrative, and information costs are minimized by strict liability), then how could he justify the imposition of a level of liability that was never founded historically within promissory estoppel? If the parties have no clue what reliance is, what it will be, or what it should should be (at least in quantified or economic terms), then does it not defeat the deterrence aspects of strict liability? Holmes' option theory of contract speaks to this greatly. We understand that as a party to the contract, we have the option of either performance or paying for the breach--there is a level of predictability with which the parties may contract. What pre-breach option is afforded a party when they have no clue what level of reliance is needed to be deemed significant and thus give way to strict liability? (What predictability does this regime give? Without predictability, the lowering of a variety of the listed costs becomes difficulty).

I may be way off, but it is a topic that I have struggled with when I read Posner and contract cases in general, so any clarification or comment would be greatly helpful. Thanks again.

Posted by: D. Marck | Sep 28, 2009 9:45:52 PM

This is a difficult question, especially since I am uncomfortable explaining Posner's positions, as I do not always share them. You have written a trenchant criticism of Posner's position from the perspective of someone who thinks that the promissory estoppel doctrine is about enforcing moral obligations. I agree that it is hard to consider the doctrine, especially the prong that requires that the promisor would expect that her promise would induce reliance, as free from some sort of moral ingredient.

Still, I think one can also view the doctrine as being purely and simply about evidence, especially in the SoF context. We think there was a contract here, but it is barred by the SoF. In this context, really serious reliance that is unequivocally referable to the alleged promise justifies our conclusion that there really was the kind of promise that would induce reasonable reliance. From this perspective, we just don't care about what motivated the promise. It might have been based on an innocent mistake of fact, on a miscommunication, or it might be a product of agency costs, intentional deception or the mysterious workings of Descartes' malin génie. Regardless of fault, liability follows.

Posted by: Jeremy Telman | Sep 29, 2009 4:19:42 AM

Prof. Tilman,

I too enjoy the dialog here.

I do not mean to explain Mills in terms of contract doctrine, in fact, I am explaining Mills in terms of Restitution or Equity (not Contract). Equity is, the court's moral conscience.

To enforce the promise in Mills would be to enforce a nudem pactum. As Farnsworth says, no society in history has every enforced a naked promise. That being said, I dont think that the failure to enforce naked promises means that contract law is devoid of morality.

Posner does not want to consider justice because it would be the injection of morality into contract law. Well, injustice under the Aristotelian tradition is the gain at the expense of another's loss. Contract law is filled with cases where promises are enforced to prevent an injustice or to enforce a moral obligation (assuming they are one in the same).

Bringing this back to Mills, a failure to enforce the promise does not create an injustice because the father did not gain from the innkeeper's care for the son. This is precisely why it fails the equity claim of restitution (there was no benefit conferred). Equity claims have the sole purpose of preventing injustice (or promoting morality).

So, I submit to you that had the court though the father had gained something at the innkeeper's loss, and therefore had a moral obligation to pay the innkeeper, they would have enforced the promise (See Webb v McGowin).

Posted by: Jason | Sep 29, 2009 7:23:56 AM

Jason, I read Mills v. Wyman differently. If we assume that the failure to enforce a moral obligation causes injustice, then the Mills court identifies an injustice. It is not the injustice of unjust enrichment addressed by restitution. It is the injustice of a broken promise. There appears to have been no dispute that Levi Wyman promised to pay Daniel Mills for his trouble and then failed to do so. You may not think this breach of a moral obligation rises to the level of an injustice but that does not appear to have been the court's view.

Posted by: Jeremy Telman | Sep 29, 2009 7:48:10 AM

Prof. Telman

First let me apologize for misspelling your name in my previous post. Secondly, I think at this point you and I are having fun at the expense of everyone who is reading this, but I'll continue to play nonetheless.

I agree that we disagree, but that wont stop me from trying to convince you to change your opinion :)

Going back to Lord Mansfield in Hawkes v Saunders where he held that "where a man is under a moral obligation, which no Court of Law or Equity can enforce, and promises, the honesty and rectitude of the thing is a consideration." Basically, that moral consideration could provide enforcement for an otherwise unenforceable promise.

Follow that through to Webb v McGowin, which impliedly refuses to follow Mills when the court says "some authorities hold that, for a moral obligation to support a subsequent promise to pay, there must have existed a prior legal or equitable obligation, which for some reason had become unenforceable, but for which the promisor was still morally bound." and then goes on to enforce McGowin's promise based upon a "moral obligation."

Both of these cases represent the law's willingness to enforce a promise that is considered a moral obligation.

Therefore, I do not give much stock to the court's throw-away comment in Mills re Wyman's "conscience." Either that or they were so entrenched in their formalist ways that they tossed the comment out there to pass their guilt on to Wyman.

Thanks for the banter.

Posted by: Jason | Sep 29, 2009 8:08:29 AM

Jason, this will be my last post on this point unless others want to get involved. I don't think we disagree about much except Mills. On that, the problem that I have with your position is that Mills v. Wyman is still good law. Look at the comments to R.2d s. 86(2), which is entirely consistent with Webb v. McGowin. It says that under current law, Seth Wyman might still be a cad, but he would not be liable to Daniel Mills.

Posted by: Jeremy Telman | Sep 29, 2009 8:36:37 AM

Prof. Telman-

With re: Mills, one distinction that I beg to present is the simple historical timeframe. Mills is closer to Hawkes than it would be Classic Cheesecake (for example) insofar as simple contract law evolution and, with regards to the English and Early-American precedent it was undoubtedly linked. With this in mind, I honestly believe that a 90 treatment is more apt than an 86 treatment, at least from a historical timeframe. Using the approach of Saunders and the fact that any form of Holmesian consideration/objective evidence was simply before this time and not developed, estoppel just seems to be the better of the doctrines, at least within its historical context. Would the court find liability here? Probably not. Reliance would probably not exist past the promise in-and-of-itself, therefore the analysis would promptly end there. However, such an analysis--at least in my opinion--would be closer contract doctrine than applying 86 and thus getting into restitution.

So in sum, I understand that 86 is a common pairing with Mills, but I can see viable alternatives that could potentially support the idea of a moral obligation regime via estoppel.

As far as morality within contract law, just to touch again on your students and their reactions towards the "strict liability" of contract, I'd recommend the article by Epstein entitled The Many Different Faces of Fault in Contract Law. I'm particularly interested in this quote, with which I end my reply:

"Of course the common law should minimize the risk of loss from certain transactions. Yet it cannot achieve that goal by adopting an unworkable formula that cannot live up to its grand aspirations, The use of more concrete situational standards achieves the desired result at far lower cost. In making these classifications, the distribution of anticipated benefits between the contractual parties serves as an effective proxy for choosing efficient rules."

Organic, to the point, and elsewhere in the article he acknowledges that fault has been implicit this entire time. Do I agree with him 100%? Not necessarily; however, I do find it far more influential than Posner's Holmesian rehash.

Posted by: D. Marck | Sep 29, 2009 9:24:42 AM

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