Thursday, January 9, 2014
Only one article this week:
But also a new book:
Contract Law and Contract Practice: Bridging the Gap Between Legal Reasoning and Commercial Expectation
By Catherine Mitchell
An oft-repeated assertion within contract law scholarship and cases is that a good contract law (or a good commercial contract law) will meet the needs and expectations of commercial contractors. Despite the prevalence of this statement, relatively little attention has been paid to why this should be the aim of contract law, how these 'commercial expectations' are identified and given substance, and what precise legal techniques might be adopted by courts to support the practices and expectations of business people. This book explores these neglected issues within contract law. It examines the idea of commercial expectation, identifying what expectations commercial contractors may have about the law and their business relationships (using empirical studies of contracting behaviour), and assesses the extent to which current contract law reflects these expectations. It considers whether supporting commercial expectations is a justifiable aim of the law according to three well-established theoretical approaches to contractual obligations: rights-based explanations, efficiency-based (or economic) explanations and the relational contract critique of the classical law. It explores the specific challenges presented to contract law by modern commercial relationships and the ways in which the general rules of contract law could be designed and applied in order to meet these challenges. Ultimately the book seeks to move contract law beyond a simple dichotomy between contextualist and formalist legal reasoning, to a more nuanced and responsive legal approach to the regulation of commercial agreements.
Catherine Mitchell is a Reader in Law at the University of Hull.
December 2013 308pp Hbk 9781849461214 RSP: £50 / €65
Discount Price: £40 / €52
Hart Publishing is delighted to offer you 20% discount.
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Friday, November 22, 2013
Our seventh guest blogger, Theresa Amato, is the executive director Citizen Works which she started with Ralph Nader in 2001. After earning her degrees from Harvard University and the New York University School of Law, where she was a Root-Tilden Scholar, Amato clerked in the Southern District of New York for the Honorable Robert W. Sweet. She was a consultant to the Lawyers Committee for Human Rights (Human Rights First) and wrote an influential human rights report on child canecutters in Haiti and the Dominican Republic. She then became the youngest litigator at Public Citizen Litigation Group, where she was the Director of the Freedom of Information Clearinghouse in Washington D.C. In 1993, Amato founded the nationally-recognized, Illinois-based Citizen Advocacy Center and served as its executive director for eight years. She currently serves as its Board President. Most recently, she has launched Fair Contracts.org to reform the fine print in standard form contracts. In 2009, The New Press (New York) published her book, Grand Illusion: The Myth of Voter Choice in a Two-Party Tyranny. She also appears prominently in the Sundance-selected and Academy Awards short-listed documentary “An Unreasonable Man.”
“Yes,” writes Professor Nancy S. Kim. “As strange as it may seem, under contract law you can legally bind yourself without knowing it.”
In her valuable book, Wrap Contracts, Foundations and Ramifications, Professor Kim does a service to all by explaining how courts enforce these online contracts “where consumers have no intent of entering into a contract.” She points out that “[t]he requirement of manifestation of consent seems to be subsumed in wrap contract cases with the issue of notice.” As a result, “the nondrafting party does not actually need to either receive notice or understand or intend the meaning attributed by the courts to a particular action.”
courts have constructed consent in an entirely unreasonable fashion by twisting doctrinal rules, conjuring up notice, inferring action from inaction, and blithely ignoring the central role of intent in contracts. They engage in this hocus pocus in order to enforce transactions that they believe provide a net benefit to society.
These “wrap contracts” consumers often unknowingly “agree” to may be buried in the hyperlinks and are not merely proprietary instructions for how to use the product or service. As Professor Kim explains, consumers are not only under affirmative obligations in these “wrap contracts,” they may be subject to a smorgasbord of rights-reducing language. Exclusive jurisdiction, forced arbitration, waived class actions, and the vendor’s one-way reserved rights to change the terms whenever it wants to are aggressive consumer rights reducers, often eviscerating decades of public policy and legal decisions that have afforded consumers their rights. In some cases, consumers are agreeing to muzzle themselves from complaining about the product or service. Fine print contracts may not only strip mine the legal rights of consumers, but they can also take or “steal” their property and privacy.
Thank you, Professor Kim for spelling it out for all to read. Not only do consumers not need a pen to sign on a dotted line, or in some cases even a button to click that one “agrees” to terms certainly not read, but “wrap contracts” take it even further. Consumers don’t even need to know they are agreeing, much less to what set of terms. Nonetheless, “wrap contracts,” now often “multi-wrap contracts,” as Professor Kim notes, “by their form, permit companies to impose more objectionable terms than paper contracts of adhesion.”
When people begin to understand how their rights are treated in the “wrap contract” rabbit hole, this offends sensibilities. For those not attuned to the “degradation of consent,” so aptly explained in Professor Margaret Jane Radin’s book Boilerplate, The Fine Print, Vanishing Rights, and The Rule of Law, this sort of contract peonage is not only unwelcome, it runs counter to everything the non-drafting parties think of as fair play.
Professor Kim’s use of the term “crook provisions” should not be understated and aligns with popular sentiment when consumers are fully informed of this state of affairs. Companies now grant themselves the right to “appropriate” -- once known otherwise as “stealing” or, charitably, “taking”-- from consumers for no payment. They then turn around and make a profit on what heretofore we would have considered the possessions of the consumer, e.g. their content, images, personal information and shopping habits.
As Professor Kim explains: “a crook provision anticipates no such offensive action by the consumer and has no direct relationship with the product or services offered by the company. It is simply an attempt to sneak an entitlement from the user without payment, either in terms of money or goodwill.” Indeed.
So where is the counteraction to this outright mugging of consumer rights and property? The ubiquity of these contracts has masked the reality of their potential to do serious harm to consumers such that consumers are not even aware of the magnitude of the problem.
For lack of a better term at the moment, I think we should nonetheless stop calling them “contracts” and start treating them as the equivalent of “online asbestos.” Like asbestos in its heyday, manufacturers and service providers use “wrap contracts” everywhere. They have properties that facilitate commerce but that does not mean that they are not toxic and dangerous for those exposed to them.
Moreover, like asbestos, some of the dangers will not necessarily emerge for decades when content thieves and data aggregators use consumer information to the detriment of the consumers. Perhaps due attention will be paid when the content providers, i.e. the consumers/users, begin to realize they cannot expunge those posts from their teens or more uncensored moments that now prevent them from getting hired or getting credit. Or perhaps regulators will begin to pay sufficient attention to the one-sided misappropriations when serious amounts of data are compromised by those with criminal intent (already it is happening) and with frequency for millions of users.
The question is, how long will it take for U.S. regulation and the courts to catch up to the need to ban or strictly limit the use of these offensive sword and crook provisions? For asbestos it took at least half a century, while manufacturers whined the whole way about regulation even as they knew for decades of its dangers much as “wrap contract” apologists do now. No, these “contracts” may not kill you, but they can make your life miserable and we would all breathe better if consumers were treated more fairly.
Professor Kim’s doctrinal adjustments (“a duty to draft reasonably; replacing blanket assents with specific assent; considering contract function when apply existing doctrinal rules, and reinvigorating unconscionability”) are a very solid start, though they are only a beginning. In some cases, such as replacing blanket assent with specific assents, the proposed remedy may only devolve into the Pavlovian clicking response now exercised by consumers with routine oblivion to the consequences, believing they have little choice if they want the product or service behind the click.
Courts should be helping consumers enforce their intent, not creating doctrinal chaos as Kim writes by reciting, “law that originates from the paper-based contracting world to this brave new digitally based world when they might be better off acknowledging the difference that contract form and function make to the reasonable expectations of the parties.” The courts have instead largely given corporations a judicial pass thus far and Professor Kim’s rebalancing of burdens (from the nondrafting party to the drafting party) is the least that they could begin to impose to adjust the invocation of the judicial force of the state.
I think we should be asking for much more on behalf of consumers and could take cues from other countries with more advanced notions of consumer protection and data privacy. Not only should legislators, regulators and courts protect consumers from exposure to online asbestos by outright banning, or at minimum reforming, many of these harmful provisions, but corporations who have taken rights from consumers should also be required to begin remediation efforts – immediately. These corporations can start by returning the misappropriated property and other stolen goods to their rightful owners.
[Posted, on Theresa Amato's behalf, by JT]
Thursday, November 21, 2013
This is the sixth in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our sixth guest blogger, Eric Zacks, is an Assistant Professor of Law at Wayne State University Law School.
Deciphering the Function of Form in Wrap Contracts
Form and function collide again and again in Professor Kim’s engaging Wrap Contracts. As Kim explains, the wrap contract’s form is deeply connected to its function, and her description and devastating critique of these varying forms illuminate the complexities of how we interact with, and are affected by, such contracts. She argues that the form ought to reflect the function of the wrap contract so that users better understand the nature of the contract. In this comment, I seek to address the ways form may already reflect function, albeit not in the manner that Kim necessarily would prefer.
As in industries utilizing paper consumer contracts, competition among businesses that employ wrap contracts demands that they develop a nuanced understanding of how the non-drafting parties and judges interact with contracts. For example, we should not be surprised by contracts that induce deference to the contract as written from the non-drafting parties. To that end, the prevalence of particular wrap contract features, such as the use of multiple hyperlinks to obtain the text of a license or lengthy and complex terms, are unsurprising because they make it more unlikely that non-drafters will try to (or actually) understand the content of the contract. Similarly, delivering the product prior to, or simultaneously with, the “execution” of the contract through the use of shrinkwrap or delaying the opportunity to review contract terms until the website user has sunk time and energy into filling out an order form, deter contract term detection or review and reflect drafters’ sophisticated understanding of individual decision-making processes.
Wrap contracts presumably also could be designed to make the adjudicator comfortable with enforcing the contract as written against the non-drafting party. The “click-through” on a website is a powerful device because it lends itself nicely to a particular counterfactual analysis that “but for” the click, the customer would not have been bound. Because the customer did click, adjudicators typically conclude that she should be held responsible for the terms of the contract. Importantly, this adjudicative response is triggered even though, as Kim notes, “adherents to these contracts to these contracts are typically oblivious to what they have done,” suggesting that the click triggers a psychological response similar to contracts with a more passive means of acceptance (such as simple disclosure of terms).
Kim’s metaphors of the shield, sword, and crook to explain the different functions of the wrap contracts (Chapter 5) also are helpful because they can help identify the underlying motivation for certain provisions. By understanding whether the primary function of the contract is to protect the drafting party (the “shield”), obtain better transaction terms (the “shield”), or seek benefits beyond the scope of the transaction (the “crook”), we may then speculate as to which form of a wrap contract makes sense from the drafter’s perspective.
If, however, the goal is to prevent the use of the software in a particular manner, then the form of contract as it appears to the adjudicator may be more important than a contract form that deters returns. Accordingly, the contract form may emphasize notice of the terms, if not outright acceptance. I suspect that a “click-through” box may help in this regard, although the blatancy of wrongful or inappropriate use, particularly of free software, may not require an additional volitional act on the part of the user (such as explicit assent to the contract) to convince an adjudicator to enforce the contract as written. The courts, as noted in Kim’s book, typically find notice of non-negotiated terms to be sufficient when such wrongful use has occurred.
Lastly, if the goal is to use the contract as a crook, then a contract that requires a more active acceptance of the contract terms (such as clicking “I agree”) may be preferable from the drafter’s perspective. By being able to point to the specific act of the click and a “better” assent, a drafting party may be better able to extract property rights unrelated to the transaction under adjudicative scrutiny. The extraction of the property rights by the drafting party may appear wrongful to the adjudicator, but counterfactual analysis surrounding the “explicit” assent to the contract may point to a different result.
With respect to the metaphors described above, I do question whether the distinction between shield and sword holds up sufficiently in many cases. License agreements containing shields and license agreements containing swords essentially provide the user with a restricted license, and the difference between the two types is a bit unclear. For example, Kim describes the restrictions on copying and transferring software discussed in ProCD, Inc. v. Zeidenberg as a shield and the restriction on reverse engineering discussed in Davidson & Associates v. Jung as a sword. As each can be described as a shield protecting the licensor from unfair or undesired business practices or a sword preventing the licensee from exercising certain rights, it may be simpler to divide the world of wrap contract provisions into defensive (those that manage business risks related to the license or transaction) and offensive (those that extract rights unrelated to the license or transaction). In any event, the specific categorization does not undercut Kim’s more significant conclusion that the use of shield and sword provisions has enabled the use of crook provisions.
It also would be interesting to know whether these different contract goals and functions do, as an empirical matter, affect the form chosen by the drafting party as described above. Of course, the judicial slide towards “notice that terms exist” as “consent” noted in Wrap Contracts could somewhat obviate the need for such planning, and the multiple goals of the drafting party also are not necessarily mutually exclusive. Wrap Contracts provides us with a welcome exploration into the connection between form and function in these ubiquitous contracts and suggests how understanding this connection can help us address problematic contracting practices in this still-developing context.
[Posted, on Eric Zacks' behalf, by JT]
This is the fifth in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our fifth guest blogger, Michael Rustad, is the Thomas F. Lambert, Jr. Professor of Law and Co-Director of the Intellectual Property Law Concentration at Suffolk University Law School.
Reforming Wrap Contracts
In her insightful new book, Nancy Kim contends that “wrap contracts” take the form of a traditional contract but constitute a “coercive contracting environment.” (Nancy S. Kim, Wrap Contracts: Foundations and Ramifications 1-3 (Oxford University Press, 2013)). Professor Kim contends that the problem with “wrap contracts” is “their aggressive terms.” (Id. at 4.) My Suffolk University Law School research team, focusing on contracting practices in social media websites, found strong empirical support for Professor Kim’s argument that wrap contracts are overly aggressive and in need of law reform. My own empirical work with a team at Suffolk University Law School has uncovered a growing number of social networking sites incorporating mandatory arbitration and anti-class action waivers. (Michael L. Rustad, Richard Buckingham, Diane D’Angelo, and Kathryn Durlacher, An Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service Agreements, 34 University of Arkansas Law Review 1 (2012) (Symposium Issue on ADR in Cyberspace)).
The most pernicious of the waivers are those against joining class actions. In our study of predispute mandatory arbitration agreements in social media wrap contracts, we found eleven of the thirty-seven arbitration clauses preclude consumers from initiating or joining class actions. Class action waivers have the practical effect of denying justice to a large number of consumers by divesting them of the right to join with other aggrieved social media users to pursue relief under state consumer law. Many of the first generation lawsuits against SNSs were class actions or collective proceedings because the damages for any one individual user were too small to make the lawsuit cost-justified. Immunity breeds irresponsibility in the information-age economy, where an increasing number of companies are divesting consumers of any civil recourse by including class action waivers in their terms of service.
The creators of SNS and other wrap contracts are overly aggressive about including anti-class action waivers, in large part, because the U.S. Supreme Court routinely upholds predispute mandatory arbitration clauses and anti-class action waivers. In a 5-4 decision, AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the U.S. Supreme Court held that the Federal Arbitration Act preempted California’s use of state unconscionability law to render class action waivers unenforceable. Let’s be clear about what Concepcion means for ordinary consumers. With these rulings, the Court is padlocking the courthouse door to elderly nursing home patients harmed by neglectful caretakers. Keep in mind that the typical nursing home resident or his caretaker has probably not even read the arbitration clause buried on page 20 or deeper into an admissions contract. What this means is that if your Mother or Grandmother suffers septic shock from decubitus ulcers caused by neglect, her estate will have no recovery because no lawyer in her right mind will take a case where mandatory arbitration and its running partner, class action waivers are in play. Trial lawyers do not take nursing home cases to arbitration because of the perception that arbitrators will give lower awards for non-economic damages and almost never award punitive damages. In my informal survey of attorneys specializing in nursing home neglect, I have been unable to find a single case where a trial lawyer represented a nursing home patient in arbitration. The Court’s decisions are, in effect, a federal takeover of arbitration, preventing the states and private plaintiffs from challenging one-sided and oppressive consumer arbitration clauses on grounds of unconscionability. When wrap contracts couple mandatory arbitration clauses with class-action waivers they essentially create a liability-free zone in cyberspace. Class action waivers preclude Internet users from filing a class action or even joining an existing one. This de facto immunity shields social networking sites from class actions for violations of privacy, contract, tort, or intellectual property rights that would otherwise be recognized in federal and state courts.
Social networking sites that combine mandatory arbitration with anti-class action waivers ensure that these powerful entities will not be accountable for failing to secure and safeguard their users' sensitive personally identifiable information. Social media sites can use the names, likenesses, and personal information of their users with impunity. Consumer class actions are often the only practical alternative in securing legal representation under the contingency fee system in cases where actual compensatory damages are small or nominal. Class actions enable litigants with slight monetary damages claims to combine actions in a representative action. Without class actions, social networking sites are effectively immunized from the judicial process and may continue unfair practices with impunity.
Professor Nancy Kim’s suggested law reform to police overly aggressive terms in webwraps would be to tip the doctrine of unconscionability on its head. Her proposed reform for webwraps would presume that these standard forms are unconscionable, except if validated by legislative decree or if there were meaningful alternatives in the marketplace. (Id. at 248). However, even a revivified unconscionability doctrine will be preempted by the U.S. Supreme Court’s current reading of the Federal Arbitration Act. (“FAA”). Congress must act to prohibit predispute mandatory arbitration and class action waivers in all types of wrap contracts. In the end, U.S. companies would benefit from mandatory terms constraining or cabining wrap contracts.
The golden age of the broad enforcement of U.S. style wrap contracts will end soon because of the increasingly flattened world where U.S. companies license content to European consumers. In Germany, consumers associations have successfully challenged the terms of CompuServe, AOL, and Microsoft: the first was subject to a default judgment; the other two agreed to a binding cease-and-desist declaration. All three American companies have entered into settlements in which they agreed to change their marketing practices. When it comes to consumer rights for wrap contracts, the U.S. is like Mars—and Europe is like Venus. Europe rejects freedom of contract in consumer transactions, recognizing that this is a legal fiction in non-negotiated standard form contracts. The European Commission takes the position that, even if a consumer assents to an abusive term, it is unenforceable as a matter of law, and European consumers, unlike their American counterparts, cannot be hauled into distant forums and be divested of mandatory consumer protection. Professor Kim has done a superb job in identifying the problem with wrap contracts, but her solution falls short of addressing problems such as predispute mandatory arbitration and anti-class action waivers.
[Posted, on Michael Rustad's behalf, by JT]
Wednesday, November 20, 2013
I’m thrilled to have the opportunity this week to engage with an outstanding line-up of scholars on the topic of wrap contracts. In today’s post, I will respond to posts by Ryan Calo and Miriam Cherry.
Miriam Cherry observes that wrap contracts raise much of the same issues raised by contracts of adhesion and my book canvasses those similarities. But they also raise different issues, primarily because their digital form makes it easier for companies to abuse and for consumers to ignore and also because courts don’t adequately recognize how form affects the behavior of both parties. The difference in form leads to a difference of degree so that it’s virtually impossible (pun intended) to engage in any online activity without agreeing to the terms of an unreadable wrap contract. My proposals aim to respond to the ways in which form affects perception to get us closer to the underlying objective of contract law – to fulfill the reasonable expectations of the parties. The form of wrap contracts raises issues that are unique to them and consequently, call for different solutions - solutions that respond to the problem of form.
Ryan Calo focuses on the role of technological design in contract formation and enforcement which is not surprising given his extensive expertise and research in this area regarding effective notice. The way that technological design of contracts affects parties’ behavior is underappreciated in the literature on contracts of adhesion. Calo observes that the potential for mischief through the use of standard terms is even worse than the examples I give in my book (this is a great relief since I am often accused of exaggerating the dangers of wrap contracts). As Calo notes here and elsewhere, the digital contracting environment has made it easier for companies to understand the consumer and so manipulate the consumer’s perceptions and behavior. I agree and would like to respond to his wish that I had addressed the argument made by Scott Peppet and others (who I’ll call “digital solutionists”) who claim that this very environment might aid the consumer and that increased digitalization could ameliorate the limits of freedom of contract. I agree with the first part, but disagree with the second. Greater access to information and the digital landscape may, in many cases, aid consumers who can research products, announce their “likes” and dislikes, and tweet their dissatisfaction to attract the customer service departments of large companies. This shouldn’t, however, influence the discussion regarding freedom of contract. There is a distinction to be made between the product or service that is the subject of the contract and the terms of the contract itself. The former is salient to consumers and they will often research that information before they act. For a variety of reasons, including cognitive biases but also tricky design employed by companies, the latter is not. Anyway, comparing terms does no good if the terms are all the same – it’s the old fiction about “shopping for terms” reincarnated in digital form.
Even assuming that the current state of affairs changes and there is awareness and competition for contract terms, the consumer is already inundated with too much information online. Are we really going to impose a requirement or an expectation that they read through online reviews or download an app simply in order to understand the contract terms? Even if the reviews exist (which they may not for some products or companies) and even if they are accurate (which they may not be), they add a layer of complexity to consumer transactions which may hamper effective decision-making and aggravate cognitive biases. How much research is a consumer expected to do simply to be able to buy a product, bank or communicate online? And is that something we want as a society – wouldn’t this negatively impact productivity, increase transaction costs for the consumer, and muck up the wheels of commerce (and isn’t this why we tolerate standard form contracts in the first place, to improve productivity, reduce transaction costs and grease the wheels of commerce)?
Drafting companies have all the power in the digital contracting environment – they have the bargaining power of old school drafters of adhesive contracts but they also have the power to present the terms in a multitude of ways. They decide whether and how to attract user attention. They determine whether to use clickwraps, browsewraps, multi-wraps, graphics or sounds. They exercise that power in a way that meets very minimal legal requirements of notice. The onus is on the consumer to ferret out terms, chase down hyperlinks, understand dense legalese and reconcile conflicting language. Are we going to require even more of consumers, expecting them to “go beyond” the contract by reading online contract reviews and downloading the “compare contracts” app (assuming one exists)? Maybe digitalization or augmented reality will make it easier for consumers to compare terms --but it will likely make it more complicated especially when those terms are constantly changing thanks to modification at will provisions. Doesn’t it make more sense to require the company to draft the terms so they are easy to find and understand? There’s more to say about the digital solutionist view but I will leave that for another forum. For now, my response is that the digital solutionist view is actually part of the problem, rather than the solution because it, like wrap contract doctrine, demands nothing from drafting companies and creates more work for consumers, exacerbating the lopsided balance of burdens that currently exists.
Tuesday, November 19, 2013
Wrap Contracts Symposium, Part IV: Juliet Moringiello on “Wrap” Terminology: Needlessly Confusing or Useful Analytical Tool?
This is the fourth in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our fourth guest blogger, Juliet Moringiello, is a Professor at Widener University School of Law, where she regularly teaches Property, Sales, Secured Transactions, and Bankruptcy, and has taught seminars on Cities in Crisis and Electronic Commerce. From 2004 – 2010, she was the co-author, with William L. Reynolds, of the annual survey of electronic contracting law published in The Business Lawyer.
Yes, we said it. As Prof. Nancy Kim notes in her terrific new book Wrap Contracts: Foundations and Ramifications, my co-author Bill Reynolds and I have argued that the use of the terms “clickwrap” and “browsewrap” to describe electronically-presented contract terms might be needlessly confusing, and that the terms themselves may even be irrelevant. Yet Nancy, whose work I admire tremendously, has not only embraced this wrap terminology, but has written an entire book about how wrap contracts are materially different from their paper standard-form predecessors. And I enthusiastically agreed to participate in this symposium so that I can sing the praises of this book and encourage ContractsProf readers to go right over to the Oxford University Press web site and buy the book. What gives?
Emerging business practices have long challenged contract doctrine. Contract rules that assumed two parties with equal bargaining power sitting down to hammer out a deal have evolved, both through statutory and case law, to adapt to a world in which parties transact by the use of non-negotiated standard-form terms. Are non-negotiated standard-form terms that are delivered electronically so different from their paper predecessors that they require a new set of rules? Nancy makes a convincing argument that they are, and her (spoiler alert!) ultimate prescriptions include the imposition of a duty to draft reasonably, a rejection of the doctrine of blanket assent in favor of a specific assent requirement, and a redefinition of the doctrine of unconscionability. Although she recognizes that contract doctrine continuously evolves to account for new business practices, Nancy convincingly argues that it is not evolving appropriately in the mass-market electronic contracting realm.
Why should the law treat electronically-presented standard-form contract terms differently from how it treats the same terms presented on paper? The main contribution of this book is its argument that form (and thus “wrap” form) matters tremendously. One of the reasons that Nancy offers to support her position is that the electronic form has altered the substance of standard-form contracts. Freed from the spatial constraints imposed by the paper form, purveyors of electronic terms can offer many more terms in a form contract than could their paper-world predecessors. As a result, consumers are being presented with voluminous and complex terms governing, among other things, data collection and property rights. As a result, according to Nancy, wrap contracts “by their form, permit companies to impose more objectionable terms than paper contracts of adhesion.” Wrap Contracts is filled with specific examples of such terms.
Although my co-author and I have argued in the past that courts are slowly getting electronic contracts right, most of the electronic contracting cases that result in published opinions involve challenges to choice of forum clauses. We read almost all of those opinions from 2004 through 2010, when we wrote the annual surveys of electronic contracting law for The Business Lawyer.The opinions never get to the substantive guts of the electronic standard terms; they can’t, because often their punch line is “you agreed to arbitration, so arbitration is where you are going to resolve these issues.” When one compares an electronic choice of law clause to the same clause on paper, it looks like an apples-to-apples comparison. The main difference appears to be the way the terms were transmitted, not the substance, so courts tend to analyze only whether the electronic terms are reasonably communicated to the non-drafting party. So long as the non-drafting party can access the terms via an arguably conspicuous link, the courts hold that there is sufficient notice and therefore assent. This judicial conflation of notice and assent is not unique to electronic contracting law, but Nancy argues that its application is inappropriate to wrap contracts because often individuals do not have any idea that they are entering into legally-binding agreements.
[Posted, on Juliet Moringiello's behalf, by JT]
Wrap Contracts Symposium, Part III: Woodrow Hartzog, Wrap Contracts as Mediators of Social Interaction
This is the third in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our third guest blogger is Woodrow Hartzog, an Assistant Professor at Samford University’s Cumberland School of Law and Affiliate Scholar at the Center for Internet and Society at Stanford Law School.
Professor Kim’s book is an extremely valuable addition to the literature. Kim adeptly distinguishes wrap contracts from traditional contracts. Perhaps more importantly, Kim distinguishes wraps from boilerplate paper contracts. In this review I will argue that Kim’s case for wrap exceptionalism could be taken even further for parties in highly interactive relationships, such as the relationship between social media and their users.
One of Kim’s most valuable contributions is her explication of how the form of wrap contracts accounts for their proliferation, content, and problematic legal treatment. The absence of any meaningful physical restraints on wrap contracts, like the available area on paper for text and the ceremony required to actually sign paper contracts, has resulted in a difference in kind from other contracts, not just a difference in magnitude.
Kim also focuses on the problematic content of wrap contracts. Kim’s thesis is that the form of wraps makes reading them so burdensome that problematic content is inevitable. Drafters can insert terms that are unfavorable to the adherent because they know that adherents will not read them. Kim develops a helpful taxonomy of shield, sword, and crook terms. These categories can be roughly described as limitations on liability for offered services (shield terms), terminations of rights held by the other party (sword terms), and appropriation of benefits unrelated to the consideration that is the subject of the transaction (crook terms).
I agree with Kim’s observations that both the form and content of wrap contracts make them substantially different than paper contracts, including paper boilerplate. But Kim may have left out an important variable in her case that wraps deserve exceptional legal treatment. Kim could better highlight the importance of the service being offered by the drafter of the wrap contract and the form that service takes. Many of the examples used by Kim involve standard commercial transactions such as Amazon or iTunes. But commercial websites are unlike other websites, notably the social web. Social media offer tools for social interaction and self-expression, which, until the Internet, have been largely boilerplate-free activities.
Social media wrap contracts differ from their commercial website counterparts in at least two important ways: 1) Social media are much more interactive than traditional websites. This interactivity is an opportunity for websites to obtain specific assent to terms; and 2) many social media wrap contracts include social behavior restrictions, such as community guidelines. These restrictions simultaneously cost and benefit adherents precisely because they are universally applied and non-negotiable.
Greater Interactivity Can Lead to Specific Assent
All websites are becoming more interactive, but few more so than social media. Users can utilize privacy settings, tag others, and click and drag in ways that communicate preferences to websites like never before. These user expressions and the design that enables them are ideal opportunities for meaningful assent. In many ways, website design can communicate messages to users more effectively than boilerplate ever could. For example, privacy settings often make it clear that “only friends” or authorized “followers” will have access to your information. If a website’s data access and use policy is also part of the wrap contract, should the settings or the wrap govern who can access user info?
Kim proposes that “drafting parties should receive specific assent to obtain rights belonging to the nondrafting party that are not directly created from the drafting party’s license or promise. In other words, sword and crook provisions…require specific assent but shield provisions do not.” (195) Assuming binding privacy policies generally operate to effectuate consent to a website’s collection and use of the adherent’s data, privacy settings would seem to be an effective way to obtain specific assent under Kim’s proposal.
Community Guidelines Benefit Contract Adherents Yet Also Leave Them in a Bind
Social media often require many commitments from their users. For example, Facebook requires its users to promise not to “provide any false personal information on Facebook,” “bully, intimidate, or harass any user” or “do anything unlawful, misleading, malicious, or discriminatory.” These kinds of terms make it virtually impossible to interact online without fear of breaching the required contract. Users can either hardly use the website or roll the dice and hope they don’t get caught.
Yet there is a dichotomy that makes these terms difficult to categorize. They are a cost to the user who must refrain from certain kind of otherwise permissible conduct, yet they are also a benefit to that same user because every other user also promised to refrain from the same antisocial or illegal behavior. Here, the uniform and non-negotiable nature of wraps is precisely what makes them attractive to users. These terms can be used to combat scourges like hate speech and revenge porn.
While Kim recognized that wrap contracts are beneficial because they facilitate mass transactions and minimize risk for drafters, she overlooked the benefits that wrap contracts can have when terms set rules for how Internet users interact with each other.
Given that social behavior restrictions simultaneously cost and benefit the adherent, it is unclear if Kim would subject these terms to additional scrutiny as “sword” or “crook” terms.
These observations are meant to support Kim’s proposals, not counter them. Kim rightly criticizes the current legal approach to wrap contracts. Her solutions wisely harness the elasticity of existing contract doctrine to right the ship. Social media vividly illustrate the problematic proliferation of wraps in unprecedented areas. Yet they also represent opportunities to effectuate Kim’s proposed solutions.
[Posted, on Woodrow Hartzog's behalf, by JT]
Monday, November 18, 2013
This is the second in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Our second guest blogger, Miriam A. Cherry, is a visiting professor at the University of Missouri School of Law and a tneured professor law at Saint Louis University.
The Duty to Draft Reasonably
Professor Nancy Kim’s “Wrap Contracts” is a foundational book, one that delves deeply into recent cases surrounding online contracting. Based on existing strands of contract theory, Prof. Kim expresses concern about the ways in which wrap contracts reinforce, and in many instances, amplify, one-sided contracting that may harm consumers in adhesion contracts. Pointing to a recent study, Kim notes that it would cost the average American Internet user the equivalent of $3,534 a year to read the privacy policies of each website that he or she visits.” (213) Noting that wrap contracts bear little similarity to the model of free assent that undergirds traditional contract theory, Kim sensibly argues for a more balanced model of drafting and enforcement.
Prof. Kim is not alone in calling for a more level playing field between businesses and consumers. Indeed, Margaret Jane Radin’s recent book, Boilerplate, contains a similar approach, and earlier work by legal academics, Todd Rakoff and Fredrich Kessler, provided what is now a well-understood and well-articulated argument against contracts of adhesion. The approach finds support in decades of writing by legal academics, ethicists, journalists, and consumer advocates, who have all voiced similar problems with the one-sided nature of adhesion contracts.
Granted, wrap contracts are different – and perhaps even more disturbing – than the original adhesion contracts that engendered them. But the fact remains that wrap contracts spring from - and build on – the same set of problematic assumptions that underlie adhesion contracts. Given that this literature is well-known, Prof. Kim faces a high hurdle to say something interesting and new.
The piece of Prof. Kim’s solution that most resonated was her idea of imposing a “duty to draft reasonably,” (176). Her solution would seem to be the converse of the current idea that consumers have a “duty to read.” Right now this is a one-sided duty without a corresponding responsibility on businesses posting wrap contracts or adhesion contracts. Some of the devices she describes in the book – how some online businesses have used wrap contracts as sword, shield, and crook (in instances where consumers are subject to overreaching behavior) reinforce the impression that Prof. Kim’s recommended intervention is needed. As such, imposing such a reasonableness requirement to make a wrap contracts enforceable seems eminently sensible. Prof. Kim’s book is timely, well-researched, and will play an important role in the debates about adhesion and wrap contracts that are sure to happen in years to come.
[Posted, on Miriam Cherry's behalf, by JT]
This is the first in a series of posts on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Today's contributor, Ryan Calo, is an assistant professor at the University of Washington School of Law and the Faculty Director of the Tech Policy Lab at the University of Washington. He previously served as a director at the Stanford Law School Center for Internet and Society (CIS) where he remains an Affiliate Scholar.
I am delighted to contribute to this online symposium around Nancy Kim’s new book, Wrap Contracts: Foundations and Recommendations. Even if you are closely familiar, as I am, with Kim’s previous work, I recommend picking up a copy; the author both synthesizes and meaningfully extends her important thinking on the evolving role of contracts in a digital world. The sophisticated practitioner, too, has something to gain, particularly from later parts of the book where Kim explores the origins and strategic uses of wrap contracts and makes recommendations that attorneys may one day encounter in a court opinion or Federal Trade Commission complaint.
Indeed, Kim is one of only a handful of legal scholars (another is Woodrow Hartzog, whom Kim mentions) who engage in a sustained way with the growing importance of interface design (i.e., the very look and feel of a website or digital product) on contemporary contract formation and enforcement. You see this, for instance, in her wonderful discussion of responsible drafting in Chapter 11. And while I cannot show causation, as opposed to correlation, I would note that the Federal Trade Commission has in recent years brought enforcement proceedings based in part on interface design, in one case hiring a human-computer interaction specialist to act as an expert witness.
What has most amazed me in my own examination of this space is the range of possibilities the digital environment offers. If there were one critical note I would sound about Kim’s otherwise substantively and methodologically comprehensive book, it is that she does not always countenance the full boundaries of consumer experience. Kim cites to Oren Bar-Gill (at page 83) for the proposition that the growing complexity of contracts hides their true costs from the imperfectly rational consumer. Kim also develops various scenarios in Chapter 10 meant to underscore the powerlessness consumers feel to address conflicts with web companies. But the prospect for mischief is worse still: As the short title of Bar-Gill’s book, Seduction By Contract, suggests, companies may leverage what they know about consumer psychology to design purposefully disadvantageous terms. I would (and do) go further in forthcoming work, arguing that firms increasingly control every aspect of their interaction with consumers. We should expect this control, coupled with the firms’ meticulous knowledge of consumers and their economic incentive to maximize profit, to lead to a wider variety of digital abuses than Kim acknowledges. Contract becomes not a just a shield against liability here but, in a few instances, a species of license for ethically questionable business practices.
Similar criticisms could focus on Kim’s pessimistic assessment of the potential prospective advantages that a more mediated world might have for consumers. Kim explores how a better understanding of design can improve disclosure and contract in an online environment. I certainly agree, as Kim notes, that the digital nature of contemporary commerce could result in enhanced disclosure, and maybe even drag notice beyond inscrutable prose and into the twenty-first century. But what I expected and did not see—what I hope still to see from Kim—is a response to the work of Scott Peppet. Peppet argues that increased digitalization could, if anything, strengthen the traditional understanding of freedom of contract by conferring on consumers radical new tools of evaluation and comparison. I would want to understand why the dangerous ascendance of wrap contracts is not substantially offset by other digital developments that empower consumers. (Eric Goldman recently made this comment about my work, so it is top of mind).
To summarize: Kim’s is a rich and engaging book that I would recommend to anyone who is intellectually curious about consumer contracts or whose professional life in some way depends on them. I learned a lot and agree with many of Kim’s recommendations. By way of critique, I would say only that Kim’s book does not answer every single fascinating question about digital contract. Perhaps no book could, nor would I necessarily want hers to. Then I would not so eagerly anticipate Kim’s future work.
[Posted, on Ryan Calo's behalf, by JT]
Sunday, November 17, 2013
The symposium marks the publication of Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). Next wek, this blog will publish posts by experts from around the country commenting on Nancy's work. Here is Oxford's bullet point summary of the book's virtues:
- Explains why wrap contracts were created, how they have developed, and what this means for society
- Uses hypotheticals, cases, and real world examples
- Discusses court decisions with summary critiques
- Provides doctrinal solutions grounded in law and policy
- Defines and distinguishes different types of contract terms
- Includes actual wrap contract terms, flow charts, checklists and other visual aids to explain legal concepts
The following people will be adding their own thoughts and comments on the blog next week:
Ryan Calo is an assistant professor at the University of Washington School of Law. He researches the intersection of law and emerging technology, with an emphasis on robotics and the Internet. His work on drones, driverless cars, privacy, and other topics has appeared in law reviews and major news outlets, including the New York Times, the Wall Street Journal, and National Public Radio. Professor Calo has also testified before the full Judiciary Committee of the United States Senate.
Professor Calo serves on numerous advisory boards, including the Electronic Privacy Information Center (EPIC), the Electronic Frontier Foundation (EFF), the Future of Privacy Forum, and National Robotics Week. Professor Calo co-chairs the Robotics and Artificial Intelligence committee of the American Bar Association and is a member of the Executive Committee of the American Association of Law Schools (AALS) Section on Internet and Computer Law.
Professor Calo previously served as a director at the Stanford Law School Center for Internet and Society (CIS) where he remains an Affiliate Scholar. He also worked as an associate in the Washington, D.C. office of Covington & Burling LLP and clerked for the Honorable R. Guy Cole on the U.S. Court of Appeals for the Sixth Circuit. Prior to law school at the University of Michigan, Professor Calo investigated allegations of police misconduct in New York City.
Miriam A. Cherry is a visiting professor at the University of Missouri School of Law and a tneured professor law at Saint Louis University. Her scholarship is interdisciplinary and focuses on the intersection of technology and globalization with business, contract and employment law topics. In her recent work, Professor Cherry analyzes crowdfunding, markets for corporate social responsibility, virtual work and social entrepreneurship. Her articles will appear or have appeared in the Northwestern Law Review, Minnesota Law Review, Washington Law Review, Illinois Law Review,Georgia Law Review, Alabama Law Review, Maryland Law Review, and the Tulane Law Review, and U.C. Davis Law Review, among others.
Professor Cherry attended Dartmouth College and Harvard Law School, where she was a research assistant to Professor Martha Minow, the present dean. After graduation from law school, she clerked for Justice Roderick Ireland of the Supreme Judicial Court of Massachusetts and then for Judge Gerald Heaney of the U. S. Court of Appeals for the Eighth Circuit. In 2001, a transition to the private sector took Professor Cherry to the Boston firm of Foley Hoag LLP, where she practiced corporate law with an emphasis on mergers and acquisitions, securities compliance filings, venture capital and private debt financing. She was also associated with the firm of Berman, DeValerio & Pease, where she was involved in litigating several accounting fraud cases including those against former telecom giant WorldCom and Symbol Technologies, which resulted in a $139 million settlement.
Professor Cherry has been on the faculty or visited at a number of law schools, including the University of Georgia, University of the Pacific-McGeorge School of Law and Cumberland School of Law. In 2008, she was elected a member of the American Law Institute.
You can read some of Professor Cherry's scholarship on SSRN.
Woodrow Hartzog is an Assistant Professor at Samford University's Cumberland School of Law, which he has taught since 2011. Professor Hartzog writes in the area of privacy law, online communication, human-computer interaction, robotics, and contracts. His work has been or is scheduled to be published in scholarly publications such as the Columbia Law Review, California Law Review, and Michigan Law Review and popular publications such as The Atlantic and The Nation.
Before joining the faculty at Cumberland, Professor Hartzog worked as a trademark attorney at the United States Patent and Trademark Office in Alexandria, Virginia and as an associate attorney at Burr & Forman LLP in Birmingham, Alabama. He has also served as a clerk for the Electronic Privacy Information Center in Washington D.C. and was a Roy H. Park Fellow at the School of Journalism and Mass Communication at the University of North Carolina at Chapel Hill.
Professor Hartzog holds a Ph.D. in mass communication from the University of North Carolina at Chapel Hill, an LL.M. in intellectual property from the George Washington University Law School, a J.D. from the Cumberland School of Law at Samford University, and a B.A. from Samford University. He is an Affiliate Scholar at the Center for Internet and Society at Stanford Law School.
Recent and Forthcoming publications include:
Juliet Moringiello is a Professor at Widener University School of Law, where she regularly teaches Property, Sales, Secured Transactions, and Bankruptcy, and has taught seminars on Cities in Crisis and Electronic Commerce. From 2004 – 2010, she was the co-author, with William L. Reynolds, of the annual survey of electronic contracting law published in The Business Lawyer. She has recently published articles in the Maryland Law Review, the Wisconsin Law Review, the Fordham Law Review, and the Tulane Law Review. Prof. Moringiello has held several leadership positions in the American Bar Association Business Law Section, most recently in its Cyberspace Law Committee, and she is co-chair of the Uniform Commercial Code Committee of the Pennsylvania Bar Association Business Law Section.
Recent Publications Include:
- From Lord Coke to Internet Privacy: The Past, Present and Future of the Law of Electronic Contracting, 72 Maryland Law Review 452 (2013) (co-authored w/ William L Reynolds).
- (Mis)use of State Law in Bankruptcy: The Hanging Paragraph Story, 2012 Wisconsin Law Review 963 (2012).
- Specific Authorization to File Under Chapter 9: Lessons from Harrisburg, 32 California Bankruptcy Journal 237 (2012).
- Mortgage Modification, Equitable Subordination, and the Honest But Unfortunate Creditor, 79 Fordham L. Rev. 1599 (2011)
Recent Publications Include:
- SOFTWARE LICENSES: PRINCIPLES & PRACTICAL STRATEGIES (Oxford University Press, 2d ed., forthcoming 2013 )
- GLOBAL INTERNET LAW (HORNBOOK SERIES) (forthcoming 2013 )
- GLOBAL INTERNET LAW IN A NUTSHELL (2d ed., 2013)
- The Myth of A Value-Free Injury Law: Constitutive Injury Law as a Cultural Battleground, 107 NW. U. L. REV. (forthcoming 2013) (Book Review Esay of Marshall Shapo's An Injury Constitution, Oxford University Press 2012)
- Twenty-First Century Tort Theories: The Internalist/Externalist Debate, 88 INDIANA L.J. 419 (2013) (Fall 2012, Special Symposium Issue on Civil Recourse & Twenty-First Century Tort Theories with Posner, Calabresi, Goldberg, Zipursky, Chamallas and Robinette)
- Restorative Justice to Supplement Deterrence-Based Punishment: An Empirical Study and Theoretical Reconceptualization of the EPA's Power Plant Enforcement Initiative, 2000-2011, 65 OKLA. L. REV. 427 (2013)
Eric Zacks is an assistant professor of law at Wayne State University Law School. His recent scholarship focuses on the relevance of behavioral sciences to contract formation, breach, and enforcement. His work has been published in the University of Cincinnati Law Review, the University of Pennsylvania Journal of Business Law, and the Penn State Law Review, and his forthcoming article, Shame, Regret, and Contract Design, will be published in the Marquette Law Review.
In 2012 and 2013, Professor Zacks was voted Professor of the Year by the second- and third-year law students at Wayne. He teaches a variety of business law courses, including Corporate Finance, Mergers and Acquisitions, Securities Regulation, and Corporations, as well as a first-year Contracts course.
Prior to joining Wayne State, Professor Zacks was a partner in the corporate and securities department of Honigman Miller Schwartz and Cohn LLP, a Detroit law firm, with a practice focus on complex acquisitions and divestitures, debt and equity financings, and other aspects of corporate transactions. He received his J.D., magna cum laude, from Harvard Law School and his B.A., with high distinction, from the University of Michigan.
Recent Publications Include:
- "Shame, Regret, and Contract Design," 97 Marq. L. Rev. __ (forthcoming, 2013)
- "Contracting Blame," 15 U. Pa. J. Bus. L.. 169 (2012)
- "Unstacking the Deck? Contract Manipulation and Credit Card Accountability,"78 U. Cin. L. Rev. 1471 (2011)
- "Dismissing the Class: A Practical Approach to the Class Action Restriction on the Legal Services Corporation," 110 Penn St. L. Rev. 1 (2005) (with Joshua D. Blank) reprinted in Class Action Litigation and Limitations (Icfai University Press, 2008).
Wednesday, October 30, 2013
A contract dispute powers A Man of Property, the first volume of John Galsworthy's The Forsyte Saga, to its conclusion. Now, I admit, the synopsis that follows is not based on the novels, which I have not read. It is based on the 2002/2003 television mini-series. I will happily stand corrected if any Galsworthy fans want to point out discrepancies between the film and novel accounts of the contracts case.
Soames Forsyte loved his wife Irene, but he wanted to possess her, and she only consented to marry him. Difficulties arose when Irene took an interest in a young architect, Bosinney, who was to wed Soames's second cousin (I believe), June.
Soames, unaware at this point of the connection between Bosinney & Irene, decides to build a country home to get Irene away from the distractions of London -- in particular he means to separate her from June. Meanwhile, Bosinney and Irene become lovers, and at the same time, rather unwisely, Bosinney keeps raising the contract price for the home he builds for Soames.
Bosinney and Irene finally push Soames beyond all endurance, and he decides to sue Bosinney for breach of contract because Bosinney has exceeded the agreed-upon, adjusted contract price for the house. Bosinney is in a bad spot. He can't afford to pay Soames for the extra costs -- they approach Bosinney's annual income. Nor can he afford to have a breach of contract claim hanging over him in connection with his first major project. Indeed, based on the success of his first project, other well-bred Englishmen are beginning to approach him as potential clients, but when they learn of his dispute with Soames, all is put on hold.
From the outset, one senses that Soames has Bosinney cornered and will destroy him. Bosinney believes, rather absurdly, that he can win the case, but Soames is a solicitor and he can hire the best trial lawyer in London. Bosinney hasn't a chance. Perhaps it's all for the best then when he is run over by a carriage and killed just before the case is lost. Soames ends up selling the house to his Uncle. The sale price might give us a better sense of the extent of the legal injustice wrought in Forsyte v. Bosinney.
Friday, October 18, 2013
Reconstructing Contracts: The Contracts Scholarship of Douglas Baird
A panel of leading scholars discuss Douglas Baird's pathbreaking work on Contract Law published in his new book "Reconstructing Contracts."
- Avery Katz, Vice Dean and Milton Handler Professor of Law, Columbia Law School
- Stewart Macaulay, Malcolm Pitman Sharp Professor & Theodore W. Brazeau Professor, University of Wisconsin Madison Law School
- Ariel Porat, The Alain Poher Chair in Private Law, Faculty of Law, Tel Avivi University
Moderated by Omri Ben-Shahar, Leo and Eileen Herzel Professor of Law and Economics and Kearney Director of the Coase-Sandor Institute for Law & Economics, University of Chicago Law School
Lunch will be provided.
Monday, October 7, 2013
One of my students, Maison Haines (pictured) gave herself a practice exam by writing up a summary of the contracts issues in Disney's film, The Little Mermaid. Indeed, there is much of value to be learned from the exercise, some of which relates to defenses and so was beyond Maison's contracts education at this point. Still, I have used her essay as a point of departure for this post.
Maison summarizes the plot as follows:
Ariel, a hopeless romantic mermaid, defies her father by constantly going to the . She dreams of living on land and how wonderful it would be. . . . One night, she notices bright lights in the sky, so she once again wanders to the surface to investigate. She swims upon a ship with none other than Prince Eric aboard it. She notices the dapper prince right away because he is handsome and is playing the snarfflak [flute]. She falls in love immediately. . . . Meanwhile, the wicked witch Ursula is keeping a close eye on King Triton’s youngest daughter. Ursula is looking to get revenge on King Triton, and what better way than through his curious, love-struck daughter. Ursula proposes an offer to Ariel, which is really where our story begins.
The wicked witch offers to turn Ariel into a human for three days. Ursula tells Ariel about how she can be with her prince, fall in love, and live happily ever after. Ursula tells Ariel she can remain a human forever if she makes Eric fall in love with her. He has to prove his true love for her by kissing her before “the sun sets on the third day.” The only thing Ursula wants in payment is Ariel’s voice. . . . Next, Ariel signs on the dotted line, loses her voice to the sea witch, and makes her way to the surface of the water where she will live for the next three days.
Now, as it turns out, our blog is not the first blawg to consider the contractual issues in Disney's The Little Princess. Findlaw's Legal Grounds blog posted on the subject back in August and The Utter Meaninglessness of Everything (Meaninglessness) blog did so back in 2008. There is considerable overlap among the posts.
All noticed, for example that Ariel's contract with Ursula should have been voidable, because Ariel was an infant (under 18) when she signed it. Maison expressed outrage that the whole plot of the movie is now implausible to her because the infancy doctrine precludes most of it. Never fear! We don't actually know whether the infancy rule applies under the sea.
In addition, Ariel also has a strong argument that Ursula did not act in good faith. She interfers in various ways with Ariel's attempts to get Eric to kiss her, sending her eels to interrupt a kiss and ultimately seducing Eric herself with the help of Ariel's purloined voice and a bit of magic. Once again thought, it may be asking a bit too much to apply these concepts to the watery realms inhabited by the parties to this agreement. After all, can one really make a straight-faced claim that Ursula the Sea Witch did not perform her contract in good faith? She's a sea witch. If you want a fair deal, try Glinda.
Legal Grounds thinks the contract may be void for vagueness, as the key term "true love's kiss" is unclear. I'm not sure I buy that one, as the parties do not seem to be in any doubt. It's a Disney movie, after all, so the ingredients for true love's kiss are: prince, two-legs, pulse (functioning neurons optional).
Meaninglesness suggests that Ariel's father, King Triton, could have declared the contract void as contrary to public policy, which seems about right, except that I'm not entirely comfortable with empowering the executive with authority to avoid commercial contracts involving family members. I think, under the sea, an Article Trident judge ought to make that call.
But getting back to Maison's take on all this, she points out that, after Triton's failed attempt to avoid the contract by blowing it up with his Trident, the contract was effectively modified. Triton offers himself up in Ariel's place in Ursula's collection of unfortunate souls. His agreement with Ursula is made in consideration of Ursula's promise to free Ariel. But Ursula is now no mere sea witch, she is the ruler of the seas, and things don't look so great for Ariel and Eric. Fortunately, the happy couple is able to impale Ursula, disembowel her and then ride the stream of entrails into calmer and more familiar seas. Or that's how I remember it. I haven't watched the movie in a while.
The Hans Christian Anderson story on which the movie is based is similar but much, much stranger. In Anderson's version (memorialized in the statute above right), the sea witch is even more grotesque than in the movie, and here is what she offers the little mermaid:
I will mix you a potion. Drink it tomorrow morning before the sun rises, while you are sitting on the beach. Your tail will divide and shrink, until it becomes what human beings call 'pretty legs.' It will hurt; it will feel as if a sword were going through your body. All who see you will say that you are the most beautiful human child they have ever seen. You will walk more gracefully than any dancer; but every time your foot touches the ground it will feel as though you were walking on knives so sharp that your blood must flow. If you are willing to suffer all this, then I can help you.
Some deal! The little mermaid takes the deal because she is after an immortal soul. If she fails to make the prince so love her "that he forgets both his father and mother, because his every thought concerns only you, and he orders the priest to take his right hand and place it in yours, so that you become man and wife" (less ambiguity about the promise here!), she will immediately become foam on the ocean.
In Anderson's version, the little mermaid fails to fulfill her end of the bargain, as the prince falls in love with a beautiful princess. This time, it is the little mermaid's sisters (rather than her father) who offer up a modification of the contract with the sea witch. They trade their hair for a knife that the little mermaid is to use to kill the prince, but . . . ah, I don't want to spoil the ending for you.
Wednesday, September 11, 2013
This post will conclude our sympoium on the contracts scholarship of Stewart Macaulay. Professor Macaulay has asked us to thank all those who participated in the discussion of his work both on the blog and in the book, Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical (Jean Braucher, John Kidwell, and William C. Whitford, eds., Hart Publishing 2013).
We add our own thanks to Jean Braucher, who put the symposium together for us, and to all of our participants, whom we name below with links to their posts:
And here are links to the introduction to the symposium and the biographies of our contributors:
Thursday, September 5, 2013
This is the eighth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Doctrines of Last Resort
Last week I had occasion to re-read “The Path of the Law” by Oliver Wendell Holmes Jr., and I was reminded of my many discussions about contract law with Stewart Macaulay (pictured, below left). During my time teaching at Wisconsin, the Contracts professors held weekly lunches to discuss the materials we were covering in class. These discussions would often turn to the fundamental question that Stewart began to wrestle with in his famous study “Non-Contractual Relations in Business” and that has fascinated him ever since, namely, “What good is contract law?”
In “The Path of the Law,” Holmes offered a well-known and provocative perspective on this question: the purpose of law is to constrain “the bad man.” Whether Holmes actually believed that one who “want[s] to know the law and nothing else … must look at it as a bad man” is the subject of some dispute, but the bad man has become an important starting point for thinking about law for generations of law students and remains a powerful image for legal scholars.
In “Non-Contractual Relations in Business” – and in our lunchtime discussions – Stewart didn’t seem to have much faith in law to constrain the bad man. Mark Suchman deftly summarized the core insight of Stewart’s most famous work: “Legal doctrine and legal recourse often matter very little . . . since most transactions are governed, in practice, by informal community norms, enforced by informal social sanctions.” On more than one occasion, therefore, I pressed Stewart on whether his emphasis on the impotence of contract law undermined our teaching of the course to first-year law students.
But the point for Stewart was never that contract law is irrelevant, only that it is sometimes overemphasized by legal scholars, particularly legal scholars who rely on highly reductionist theories of human behavior. Indeed, in his more recent article, “The Real and the Paper Deal,” Stewart observes, “doctrine can matter.” In my contribution to the book, I focus on a collection of legal doctrines, which I call the “doctrines of last resort,” and I argue that these doctrines matter because they facilitate contract formation.
The doctrines of good faith and fair dealing, fiduciary duty, and unjust enrichment are doctrines of last resort because they are activated only when all other potentially applicable commands from constitutions, statutes, regulations, ordinances, common law decisions and contracts have been exhausted. In these circumstances – where positive law and private ordering are otherwise incomplete – contracting parties rely heavily on informal social sanctions to protect against opportunism, but the doctrines of last resort reinforce these social sanctions. Rather than regulating all of the deviations and adjustments that are common in contractual relationships, doctrines of last resort constrain extreme deviations from social norms, reinforcing agreements precisely in those contexts where informal social sanctions are weakest.
In my essay, I introduce the notion of “boundary enforcement,” arguing that the doctrines of last resort are united by a similar objective: the establishment of boundaries on self-interested behavior to mitigate opportunism. This concept is developed further in my working paper (with Jordan Lee) entitled Discretion, which focuses on the role of the duty of loyalty. Two insights about boundary enforcement are crucial to that paper and not limited to fiduciary law. First, “boundary enforcement” suggests that courts should respect the reasonable exercise of private decision making within the boundaries established by the doctrines of last resort. In contract law, for example, courts should generally respect the deals struck by the parties, even if the courts would have struck a different deal. Second, when boundaries are not established by the contracting parties, courts often turn to industry customs and social norms to establish the limits of self-interested behavior, and this is a sensible way to meet the reasonable expectations of the parties. By establishing the boundaries of opportunism in this way, the doctrines of last resort not only constrain the bad man, but embolden private parties to form contractual relationships, thus servicing another important value in law: the promotion of entrepreneurial action.
[Posted, on Gordon Smith's behalf, by JT]
Wednesday, September 4, 2013
This is the seventh in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Peter Linzer is a Professor of Law at the University of Houston Law Center.
Contracts of Adhesion: An Oxymoron?
Contracts of adhesion are a big topic this year, what with Peggy Radin’s Boilerplate, Oren Bar-Gill’s Seduction By Contract and the ALI’s new Restatement Third of Consumer Contracts. I’ve been focusing on the notion of adhesion, so my view of the fine book that Jean Braucher, Bill Whitford and the late John Kidwell have put together in honor of Stewart Macaulay (pictured below left) is tilted in that direction. Macaulay’s 1963 American Sociologicaly Review article referred to non-contractual relations in business, and many of the essays in the Festschrift (Stewart probably finds the term pretentious, but it surely is a celebration of him and his work) are about business contracts. But only three years later, Macaulay wrote Private Legislation and the Duty to Read – Business Run by IBM Machine, the Law of Contract and Credit Cards, 19 Vand. L. Rev. 1051 (1966), which is excerpted in the book.
The reference to IBM machines must sound quaint to younger readers, but like early Kurt Vonnegut stories (“Epicac”) and novels (Player Piano) that saw the problems of technology and people in an era of vacuum tubes, it still rings true. Most of the Vanderbilt article deals with businesses, but in a footnote Macaualay cited Lawrence Friedman’s discussion of how discrete areas such as labor law and occupational licensing have been spun off from general contract jurisprudence, and made reference to his own discussion of automobile franchising. (It’s note 5 on page 22 in the book, and note 18 in the Vanderbilt article.) In a fairly short discussion of consumers, Macaulay considered both case-by-case policing and legislationve regulation of standard terms, as in fire insurance contracts, and didn’t go much beyond that. But in an article not included in the book, but with the happy short title of Bambi Meets Godzilla, 26 Houston L. Rev. 575 (1989), he looked at consumer and deceptive trade practices laws and showed how they should be an integral part of the Contracts course, even though they had frequently been distorted into windfalls for well-informed consumers (often lawyers), rather than as weapons of defense for the little guy.
Others in the book have built on Macaulay (and Ian Macneil) to suggest that consumer transactions should be treated as a separate form of contract law. Bob Scott, whom Bob Gordon seems to describe, with respect, as a neo-formalist relationalist, has put forth a strong argument in that a hands-off policy makes no sense with consumer transactions, even if it does when sophisticated businesses are dealing with each other, while Ethan Leib has argued strongly that relationalists should “fragment consumer form contracts into its own sphere for treatment with the reasonable expectations approach,” but that this will require even more fragmented empirical research “to be useful to courts and regulators.” Ethan Leib, What is the Relational Theory of Consumer Form Contract? Chapter 9, at 284). Chuck Knapp, who has written frequently on adhesion problems, shows in his Is There a ‘Duty to Read’? (Chapter 11), how courts have or should have distinguished consumer transactions, and argues that what he calls a “presumption of knowing assent” should not preclude scrutiny of contracts of adhesion.
I think, however, that the real issue is whether we should treat adhesion contracts as part of contract law at all. I started teaching forty years ago, and from the beginning I had my doubts about the lines among the basic topics of private law: tort, contract and property, or even about how private private law was, and Peggy’s book in particular has led me to doubt that we should call any legal document a contract when it involves no real agreement, no negotiation or bargaining, little understanding of terms by the non-dominant party and no opportunity to change terms, except by walking away. In a previous blog, about Boilerplate, I pointed to the removal of products liability from the law of negligence. There, I pointed out that before the great 1914 Cardozo opinion in MacPherson v. Buick Motor Co., liability for a defective product was based on contract, while the expansion of liability away from the proof of negligence came from the use of implied warranties, which are sort of contractual, until Roger Traynor spoke of strict liability in a res ipsa loquitur case and, half a generation later, the Restatement of Torts Second § 402A took us off to the races.
This is hardly the place to review the immense body of writing about adhesion contracts, but I would like to point out that much of the apology for the dominant party imposing terms seems really to treat the issue as a matter of property law – “It’s my widget (or software) and I can set any terms for your license [a property term] to use it.” In effect, a no trespassing sign. That’s all right, I suppose, but it isn’t contract, and it should be judged by whether an owner of a thing owes a public duty to treat those who wish to use it with some degree of fairness, ultimately a matter of public law, like antitrust.
None of this answers the question of how to deal with what Knapp calls “individual contracts,” not just consumer deals, but franchise, employment and at least some professional service contracts (lawyers, brokers, etc.). We know, as both Stewart Macaulay and Jean Braucher have shown us, that individualized review through litigation, even with a presumption in favor of the little guy, is economically unfeasible in most circumstance, especially with the Supreme Court’s rigid imposition of the Federal Arbitration Act to favor pre-dispute arbitration clauses in contracts of adhesion. Bob Scott points to the European Union’s regulation of consumer contracts through a Council Directive imposing strong rules favoring the consumer, but the EU member states seem more amenable to a regulatory regime than we have been in recent years, though our former colleague and friend, Senator Elizabeth Warren’s Consumer Financial Protection Bureau has begun to make headway.
I think, and have written before, that legislation or administrative regulation forbidding specific terms in various individual adhesion transactions (examples could include choice of a distant forum, mandatory arbitration, limits on consequential damages, waiver of jury trials) is probably the best way. It is an appropriate area for state legislature, and more important, Congressional intervention, particularly because this issue has almost nothing to do with freedom of contract.
In fact, it has almost nothing to do with contract.
[Posted, on Peter Linzer's behalf, by JT]
Tuesday, September 3, 2013
We continue our online symposium inspired by Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical (Jean Braucher, John Kidwell, and William C. Whitford, eds., Hart Publishing 2013) with two more posts this week.
Peter Linzer is a Professor of Law at the University of Houston Law Center, where he has taught since 1984. Before going into teaching, Professor Linzer practiced law both as a Wall Street lawyer and as an Assistant Corporation Counsel for the City of New York. Professor Linzer is a member of the American Law Institute. Professor Linzer has served as the Chair of the Contracts Section of the Association of American Law Schools and is a Board Certified civil appellate specialist. He served for nearly a decade on the Pattern Jury Charge Committee of the State Bar of Texas. His principal academic subjects include Contracts; Constitutional Law; Equal Protection; First Amendment; International Contracting; Transactional Clinic; Contract Negotiation and Drafting; Introduction to American Law (for foreign LL. M. candidates); and Torts. Working with experienced practitioners, he pioneered a transactional course in international contracting that sees students negotiate and draft documents in simulated international deals.
Gordon Smith is Associate Dean and Glen L. Farr Professor of Law at BYU's Reuben Clark Law School. Professor Smith's research focuses on corporate and securities law, with particular emphases on Delaware corporate law and entrepreneurial finance. His work has appeared in many top law reviews, and he has co-authored a popular casebook, Business Organizations: Cases, Problems & Case Studies, with Professor Cynthia Williams of the University of Illinois Law School.
Prior to joining the BYU law faculty, Professor Smith taught law at the University of Wisconsin, where he served as Associate Director of the Initiative for Studies in Technology Entrepreneurship (InSiTE). He also taught at Lewis & Clark Law School and has been a visiting professor of law at Vanderbilt University, Arizona State University and Washington University. He has taught courses at universities in Australia, China, England, Finland, France, Germany, and Hong Kong.
Before entering academe, Professor Smith clerked for Judge W. Eugene Davis in the United States Court of Appeals for the Fifth Circuit and was an associate in the Delaware office of the international law firm Skadden, Arps, Slate, Meagher & Flom.
Some of Professor Smith's publications can be found here.
Wednesday, August 28, 2013
This is the sixth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University's Beasley School of Law.
Although Stewart Macaulay’s contributions to the literature on relational contracting cannot be overstated—for practical purposes, he invented the field—its insights have been absent from an equally important body of literature that also looks at contracts in action: That of bankruptcy reorganization.
At first glance, the reasons for the disconnect may seem obvious. Relational contracting is concerned with, well, ongoing relationships. Bankruptcy reorganization, by contrast, implies the termination or fundamental alteration of those relationships. Relational contracting imagines a world in which formal law is subordinate to actual custom and practice. Bankruptcy reorganization, again in contrast, is sometimes said to be the “acid test” for the enforceability (or not) of contracts, where there will be pressure to use special (formal) legal powers to avoid or break those that are burdensome to the debtor and less than “perfect” (in both UCC Article 9 and more general respects) in order to increase recoveries for creditors whose contracts do pass muster.
And, yet it seems to me that relational contracting literature has much to offer those who think about bankruptcy reorganization, and corporate reorganization generally (that is, outside of a formal bankruptcy process).
Corporate reorganization is usually the response to a cascade of actual or potential contractual breakdowns—general financial default. In most cases, it would seem that practice follows Macaulay’s observations: creditors do not race to court to enforce broken debt contracts. Instead, as I have discussed elsewhere, the parties—the debtor and its major creditors—usually jawbone. Sometimes (most times, I would venture) they renegotiate the contracts and go on about life. While the original debt contracts may have provided all sorts of elaborate remedies for the creditor, she will ignore them if she receives a satisfactory substitute promise not contemplated by the original agreements.
When that doesn’t work, whether because some of the debtor’s creditors hold out, or the debtor’s management can’t get its act together, or the debtor defaults on the substitute promises, a formal bankruptcy filing under chapter 11 may ensue. Chapter 11 creates a complex environment in which both formal law and informal relationships have high salience. Chapter 11 can be seen as a form of institutional “braiding,” to paraphrase Gilson, Sabel and Scott, in which courts, markets, communities and legislatures (Congress), weave together sets of protocols for rewriting en masse the corporate debtor’s debt (and other) contracts. Relational contracting is vital to the effectiveness of these protocols, even as the larger environment that uses and creates these protocols is undergoing major change. Consider three examples.
First, there is the relational contract among the corporate debtor and its many stakeholders. When Congress enacted chapter 11 in 1978, it probably had an intuitive sense of the relationships it wanted to preserve: Those between workers, managers and corporate stakeholders. Thus, unlike prior law, chapter 11 presumed that management would remain in possession and control of the debtor while it formulated a reorganization plan that would keep the debtor a going concern (and thus its basic relationships intact). If the plan gained sufficient support (evidenced by creditor voting as well as a number of other formal criteria) it could be confirmed by the bankruptcy court. If not, a trustee might replace management and/or the debtor would be liquidated (thus likely terminating the relational contract).
In order to reach a consensual plan, a significant amount of bargaining would have to occur. Reorganization is, per Galanter, a “litigotiation”: constant bargaining on courthouse steps (virtual or actual). A lawyer I knew once referred to chapter 11 as “New York’s largest floating craps game.” This, in turn, bespeaks a second example of relational contracting in chapter 11: that among the lawyers who manage the process.
An important goal of the 1978 Bankruptcy Code (which is still in effect) was to remove the stigma associated with bankruptcy practice. Large law firms were quick to recognize that this practice could be lucrative. A sophisticated bar of bankruptcy practitioners in high profile cases emerged in New York and Delaware. This community creates bargaining networks in which repeat players seem to have both a strong sense of formal (e.g., bankruptcy and commercial) law and the capacity and temperament to compromise in order to produce a plan if possible, and to resolve the case otherwise (e.g., through liquidation) if not.
Yet, even as Congress may have imagined that reorganization would preserve a certain class of long-term relationships involving the corporate debtor and its stakeholders, change was afoot. At about the time the current Bankruptcy Code was coming into force, a market in “claims trading” was beginning to develop. “Claims trading” is the practice whereby “distress investors” (often private equity or hedge funds) will purchase claims against debtors.
You might wonder why anyone would want to purchase defaulted debt. The answer, in most cases, is to make money, either on the spread between what the claims trader buys the claim for and what it ends up being worth in the bankruptcy, or because the trader ends up with a controlling position in the debtor’s bankruptcy (as noted above, claimants often get to vote on the chapter 11 plan).
Claims trading began as an obscure corner of chapter 11, but has now become very important. Billions of dollars in claims trade regularly. It seems safe to say that professional claims traders take significant positions in most large corporate reorganizations.
What does claims trading have to do with relational contracting? The world of distress investors is small, insular and bespoke, a club of sophisticated players in what I have characterized elsewhere as an unregulated secondary securities market. While little is known about the actual contracting (or extra-contractual, promissory) practices of claims traders, it would appear that they are by and large repeat players. Their relationships increasingly influence the formal and informal contracts that determine the outcome of the chapter 11 process.
This transformation bespeaks a third example of relational contracting in reorganization: professional distress investors bound by complex ties, tensions, and loyalties in contracts of varying degrees of formality. Increasingly, and to some disturbingly, the incentives of this group are to dismantle or auction the debtor rather than to reorganize it internally, as Congress seems to have envisioned in 1978. The relational contract of distress investors effectively replaces the relational contract of the debtor, its employees, and other stakeholders.
This third relational contract also suggests that lawyers may play an increasingly subordinate role, executing investors’ strategies, but not necessarily devising or negotiating them. That many claims traders were once bankruptcy lawyers may in part explain this shift: even if they have become “clients,” distress investors often know as much formal (and informal) law as their lawyers.
The relational contract in reorganization is, like all other contracting environments, neither purely formal nor purely informal. That this literature has not influenced the large—and frequently “contractual”—literature on reorganization is not a knock on Macaulay’s contribution or the subject of this Symposium, Revisiting the Contracts Scholarship of Stewart Macaulay: On the Empirical and the Lyrical.
Rather, my goal here is to suggest ways to use his work, and that of the excellent contributions to Revisiting, in a related and important context. Although Stewart Macaulay’s work has not yet been formally introduced to the world of corporate reorganization, it seems to me it could be the basis of a beautiful relationship.
[Posted, on Jonathan Lipson's behalf, by JT]
Tuesday, August 27, 2013
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This is the fifth in a series of posts in our online symposium on the Contracts Scholarship of Stewart Macaulay. More about the online symposium can be found here. More information about this week's guest bloggers can be found here.
Gillian K. Hadfield is the Richard L. and Antoinette Schamoi Kirtland professor of law and professor of economics at the University of Southern California.
Maybe Contract Law Isn't Dead After All
In 1963 Stewart Macaulay asked: what good is contract law? His interviews with business(men) in a range of companies—including giants like General Electric, S.C. Johnson and Harley-Davidson—suggested the answer was “not much.” He was repeatedly told that in practice, formal contracts were rarely drawn up for transactions (and that the boilerplate purchase orders and acknowledgements that might be exchanged weren’t really even seen as “contracts”.) Any formal contracts that did come into existence were largely ignored, almost never pulled out of the drawer to help resolve transactional problems that might occur along the way. And the idea of litigating, or even threatening to litigate, to resolve a dispute was dismissed almost entirely.
A dramatic set of findings. They earned Stewart (pictured), in Grant Gilmore’s famous formulation, the title of “Lord High Executioner” of contract law, sounding the death knell of lawyers’ taken-for-granted assumption that they were essential to doing business. Economists—introduced to the article fifteen years after it was published in two of the seminal papers in transaction cost economics, Klein, Crawford and Alchian (1978) and Williamson (1979)—were energized. A great flood of work, much of it game-theoretic, soon followed to explain the puzzle of how business deals were held together without law. Soon we had a standard distinction in the economics literature: between formal—court-enforceable—contracts and informal ones—those enforced only by threats of the loss of a valuable long-term relationship or reputational standing.
Given how important Macaulay’s work has been to economists, my co-author Iva Bozovic and I were surprised to find out that almost no-one has attempted to replicate Stewart’s self-styled “preliminary study.” So we decided to try. So much had changed in industry since the early 1960s when Stewart did his research (Mad Men anyone?) we wondered whether contract law still was as irrelevant to contracting as it seemed to be back then. We were particularly interested in the impact of a much more innovation-oriented economy on contracting. And it was hard to predict how Macaulay’s findings might carry over. On the one hand, in relationships that are focused on innovation—think collaboration between Facebook and Skype to integrate video chat and social networking, for example—so much is changing so rapidly that often the parties don’t have much of a clue how their relationship is going to develop. That implies it’s really hard to write complete contracts that can be easily enforced in court. On the other hand, there is so much novelty that there is almost no time for industry standards to stabilize giving parties guidance about how gaps in contracts are to be filled in. This is a part of Macaulay’s findings often overlooked among economists (although it is dear to the heart of law and society folks): in Macaulay’s study, the parties didn’t need well-drafted contracts because they had well-established industry norms to look to for guidance on how problems should be dealt with. Breach of those norms was bad for business in a stable environment with lots of alternative contracting partners.
So if parties to high-velocity innovative business relationships don’t have established industry norms to look to and it’s so hard to write relatively complete court-enforceable contracts, what do they do?
We set out to study this question by interviewing companies in the San Francisco Bay Area and Los Angeles about their use of contracts. We first asked our respondents—all of whom were senior level executives, almost all of whom were not lawyers—whether they considered their business to be innovative in any way. Perhaps surprisingly, in our initial random sample of firms, many answered “no”. We then supplemented our sample with firms we were pretty sure were innovative. In the end we spoke with 30 companies—12 who identified as ‘not innovative’ and 18 who identified as ‘innovative.’ We asked the innovators to talk to us about a relationship with another firm that was important to them for innovation. We asked the non-innovators to talk to us about a relationship with another firm that was important to them for business success.
Here’s what we found out. The non-innovators told us essentially what Macaulay’s respondents told him: we don’t draft formal contracts, we ignore any that do get drafted, and we never look to litigation as a threat or source of enforcement. The fascinating twist was from the innovators; only one of Macaulay’s findings held up. Yes, we spend a lot of time and lawyer money on drafting formal contracts. Yes, we haul the contracts out of the drawer to consult when trying to resolve transactional problems along the way. BUT: no, we never look to litigation as a threat or source of enforcement. This isn’t because they settle their disputes in the shadow of the law. It is because a litigation threat is just not credible: it’s too expensive, takes too long, is too unpredictable and kills precious reputation.
Our sample, like Macaulay’s “preliminary study,” is small. It’s not necessarily representative. But, like Macaulay, we have unearthed a fascinating puzzle: why draft and consult formal contracts if you have no expectation of ever enforcing contracts in court? According to the relational contracting literature that economists produced in response to Macaulay’s puzzle (if not contract, then what?), the only reason to write a formal contract is to get the benefit of formal court enforcement.
Our answer, drawing on work I’ve done with Barry Weingast (see here and here) about the function of law, is that formal contracting serves to coordinate beliefs about what constitutes a breach of a highly ambiguous set of obligations. This makes relational enforcement mechanisms—loss of a valuable relationship, bad reputation—more effective than they would have been in the absence of a shared template for interpreting events. We call this scaffolding: formal contract law and reasoning—implemented by lawyers who share similar interpretation methods and materials that are common knowledge among them—helps to span the (large) gaps in relational mechanisms that arise when ambiguity is high. It’s not that formal legal reasoning from a formal contract to decide whether a contracting partner is in “breach” is open-and-shut in these settings—there’s still lots of ambiguity to go around. But our point is that the extent of ambiguity when the parties have at least designated a common methodology for classifying conduct as breach or not is much less than it would be otherwise. We think the reason law gets singled out to play this role is because it is, as my work with Weingast emphasizes, expressly designed to perform this kind of an ambiguity-reducing and coordinating role—with its emphasis on comprehensive coverage, clarity and the presence of an authoritative steward (eg. courts) that is recognized as the final word on interpretation.
Our paper (which we wanted to work on more after the conference so it does not appear in the book whose publication this Symposium celebrates) provides lots of quotes from the businesspeople with whom we talked to support our analysis. It’s hardly the last word on the subject—there’s that “preliminary” again—but it moves our understanding of the role of contract law a little further down the field on which Stewart first called the game—what good is contract law? Our answer: quite a bit actually, even if almost nobody plans on going to court.
[Posted, on Gillian Hadfield's behalf, by JT]