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Saturday, February 22, 2014

KCON9: First Saturday Morning Session

I had the pleasure of chairing a panel populated by four young scholars all writing on Behavior, Bargaining, Incentives and Contract.

ChingKenneth Ching went first with his paper on Justice and Harsh Results: Beyond Individualism and Collectivism in Contracts.  His paper focused on Cardozo's celebrated opinion in Jacob & Youngs v. Kent in which Cardozo held that, although Jacob & Youngs had not installed Reading pipes as called for in the contract, it had nonetheless substantially performed the contract by installing pipes of similar quality.  Professor Ching maintains that Cardozo was wrong on both the facts and the law in the case.  The contract in the case made clear that complete performance was a condition of payment, and the law was clear (then and now) that there can be no substantial performance of a condition.  Moreover, even if it were possible to substantially perform conditions, Jacob & Youngs did not do so, as Cardozo would have noted had he actually applied the test to the facts of the case.

The case is but a gateway to Professor Ching's larger point about collectivist and individualist approaches to contracts law.  Judge Cardozo's opinion seems to take a collectivist (or parternalist) approach to the doctrinal problems that the case raises.  That is, Cardozo thinks we are all better off if people aren't held to unreasonable terms that would require the destruction of a home to replace pipes with virtually identical pipes.  Judge McLaughlin's dissent seems to be more individualist, focusing on Kent's perspective and his right to insist on the contracts rights for which he had bargained.  Professor Ching's approach rejects both collectivist and individualist approaches.  He favors a Thomist approach that  tries to resolve conflict in line with reason and with the goal of promoting human flourishing.  Cardozo's opinion might be attractive from a Thomist perspective. Responding to a question, Professor Ching acknowledged that James Gordely, whose approach informs Professor Ching's, would find for Jacob & Youngs based on unconscionability.  Still, Professor Ching maintains, Judge Cardozo reached the wrong result because of his mischaracterization of the facts and the law.

VersteaNext up was Andrew Verstein who gave a (his first ever) Prezi presentation (which was super cool) on Ex Tempore Contracting.  His paper takes on a tradition that distinguishes between ex ante and ex post approaches to contracts interpretation.  In the former, the parties specify how the contract is to be interpreted ("use Reading pipes"), and in the latter, the parties delegate  interpretation to an adjudicator ("use merchantable pipes").  In the ex ante approach, the parties determine the meaning of the terms; in the ex post approach, some neutral third party (court or arbitrator) determines the meaning.  Ideally, parties decide between precise (ex ante) terms and vague (ex post) terms based on the costs and benefits of choosing specific terms in particular contexts.  Parties should draft to minimize the sum of ex ante  and ex post costs.   

But Professor Verstein contends that there is middle ground between before performance and after (alleged) breach.  Some contracts disputes can be resolved during performance.  The parties can specify that a particular third party will resolve disputes that arise during performance (ex tempore), and they can be resolved whether the terms are superficially vague or superficially precise.  The aim remains to reduce the costs of dispute resolution, and there are many situations in which it is most efficient for the parties to agree to ex tempore dispute resolution, especially in construction agreements.  Professor Verstein illustrates this point with the case of the Chinese Ertan Dam, a huge construction project.  All disputes relating to that dam were resolved within six months of the dam's completion.  This fact is attributable to the existence of netural expert panels (dipute boards) that addressed disputes as they arose and were able to sort out most disputes before the parties became too aggrieved.  Reviewing Florida dispute boards, Professor Verstein finds that 98% of disputes are resolved without further conflict and the cost is 10-50% of arbitration.  This is not really dispute resolution, Professor Verstein contends; it is ex tempore contracting.  And, it turns out, this happens a lot more often than we realize.

Professor Verstein's paper is forthcoming in the William & Mary Law Review and can be downloaded here.

EpsteinWendy Netter Epstein next presented her paper on Public Private Contracting and the Reciprocity Norm.  Professor Epstein's thesis is that in some public private contracts it is very difficult for the government to reduce agency costs by writing more detailed contracts.  Picking up on Professor Verstein's theme, Professor Epstein contends that in certain circumstances it is better to have less detailed contracts with mechanisms for ongoing dispute resolution during contract performance.  This approach is most appropriate where there is a shallow market (i.e., very few private contractors bid), a narrow application (e.g., private prisons) or a disempowered group of third-party beneficiaries (e.g., welfare recipients).  

While a lot of scholarship has focused on the need for more detailed contracts in this context so as to provide for strong oversight of private actors working in the public interest.  Professor Epstein suggests that the result has been to increase the size and complexity of government contracts.  However, this solution does not work well because, where there is no well-functioning market, the government cannot effectively moitor and discipline private contractors.  Moreover, one point of outsourcing is to promote innovation and creativity, and excessive government monitoring of private contractors undermines that aim.  Professor Epstein drawns on research in the behavioral sciences and contends that reciprocity norm, which rewards people for kind actions, constrains actors more powerfully than models based on rational actors would predict.  She thus thinks that strict enforcement mechanisms and sanctions regimes often undermine cooperation in the public private contracting context.  Governments might be better served by communicating their positive intentions towards private contractors by entering into looser contracts that would permit the parties to chart the course of the collaboration on an on-going basis as the project proceeds.

Zacks-webFinally, Eric Zacks presented a paper on The Moral Hazard of Contract Drafting.  One party to a contract can act opportunistically as an economic agent of the other party.   The agency relationship arises when one party asks the other party to draft the agreement.  That is a delegation of authority that would then be ratified upon acceptance.  The danger of agency costs arises in that there may be a disparity between the contract as conceived and the contact as written. 

There may be economic value in having one party be the contract preparer.  For example, that party might have greater experience and expertise in contract preparation.  But the drafter may write the contract is such a way as to enable it to take advantage of the other party after performance has begun.  Then the question arises whether the principal (the non-drafting party) is able to monitor the agent (the drafting party).  For example, in consumer contracts, it seems unlikely that non-drafting consumers would be capable of both foreseeing and monitoring the agency costs involved in allowing sellers to draft consumer contracts.  One solution is for the principal to hire an agent (e.g., a lawyer) to monitor the contract.  Or there might be outside monitoring services to prevent opportunistic behavior, such as regulatory agencies or courts, or statutory requirements that certain transactions be written in plain language.  

Courts are less likely to intervene when they think the principal (non-drafting party) is sophisticated and has the means to protect itself against opportunistic behavior by the agent (drafting party).  In the contractual context, we have more limited ways to discourage opportunistic behavior through incentives for good behavior.  

Those not satisfied with this summary of Professor Zacks' argument can download the entire thing here.

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